FORM 10-K
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
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:
Common Stock The Nasdaq SmallCap Market
Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] 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 March 1, 1997 was $15,725,773. The number of shares of common
stock outstanding at such date was 19,886,443 shares. An additional
1,005,000 shares were deemed outstanding at such date pursuant to presently
exercisable options.
<PAGE>
HANOVER GOLD COMPANY, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
SAFE HARBOR STATEMENT
GLOSSARY OF SIGNIFICANT MINING TERMS
PART I
Item 1: Business 1
Item 2: Properties 8
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for Registrant's Common Equity
and Related Stockholder Matters 11
Item 6: Selected Financial Data 12
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 8: Financial Statements and Supplementary Data 15
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 15
PART III
Item 10: Directors and Executive Officers of the Registrant 16
Item 11: Executive Compensation 19
Item 12: Security Ownership of Certain Beneficial
Owners and Management 22
Item 13: Certain Relationships and Related Transactions 24
PART IV
Item 14: Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 26
SIGNATURES
<PAGE>
Safe Harbor Statement
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995, which
involve risks and uncertainties. Potential risks and uncertainties include,
without limitation, the likelihood of continued losses from operations
pending development of the Company's Alder Gulch mining properties in
southwestern Montana, the need to obtain significant additional financing in
order to develop the properties, risks associated with the mining industry
generally, environmental risks associated with mining, the absence of
established proven or probable reserves on the Alder Gulch properties, and
other factors that may affect future results as described below.
The Company has had no significant revenue from mining operations, has
experienced losses from operations for each of the last five years and, at
December 31, 1996, had negative working capital. This trend is expected to
continue for the next two to three years, and, possibly, longer, and is
expected to reverse only if, as and when gold is produced from the Company's
mining properties. The Company has not yet commissioned a feasibility study
to determine whether large-scale mining of its Alder Gulch properties is
warranted, and will not do so until further exploration has been conducted.
If large-scale mining is determined to be warranted, the Company will need
significant additional funds to construct mining facilities. Although
management of the Company believes such funds could be obtained from several
sources, including additional sales of its common stock, bank borrowings or a
joint development or similar arrangements with another mining company, no
assurance can be given that such funds will in fact be obtained. As the
financial statements included in this report make clear, the Company's
ability to continue as a going concern is predicated on management's ability
to obtain additional funds and correct these deficiencies.
The Company's business is subject to extensive federal, state and local
governmental controls and regulations, including regulation of mining and
exploration operations, discharge of materials into the environment,
disturbance of land, reclamation of disturbed lands, threatened or endangered
species, and other environmental or ecological matters. Generally,
compliance with these regulations requires the Company to obtain permits
issued by federal, state and local regulatory agencies. Certain permits
require periodic renewal or review of their conditions. Although the Company
believes it is currently in compliance with all such permitting requirements,
it cannot predict whether it will be able to obtain and maintain all permits
needed for anticipated future mining operations. Compliance requirements for
new mines and mills may require substantial additional control measures that
could materially affect the cost of proposed operations or delay the
commencement of such operations.
The Company is subject to all of the risks inherent in the mining industry,
including environmental hazards, industrial accidents, labor disputes,
unusual or unexpected geologic formations, cave-ins, flooding and periodic
interruptions due to inclement weather. These risks could result in damage
to, or destruction of, mineral properties and production facilities, personal
injury, environmental damage, delays, monetary losses and legal liability.
Although the Company maintains or can be expected to maintain insurance
within ranges of coverage consistent with industry practice, no assurance can
be given that such insurance will be available at economically feasible
premiums. Insurance against environmental risks (including pollution or
other hazards resulting from the disposal of waste products generated from
exploration and production activities) is not generally available to the
Company or other companies in the mining industry. Were the Company
subjected to environmental liabilities, the payment of such liabilities would
reduce the funds available to the Company.
The Company's operations are significantly influenced by the prices of gold.
Gold prices fluctuate widely and are affected by numerous factors beyond the
Company's control, such as inflation, the strength of the United States
dollar and foreign currencies, global and regional demand, and the political
and economic conditions of major gold producing countries throughout the
world.
The Company has not yet established either proven or probable reserves on the
Alder Gulch mining properties and no assurance can be given that any reserves
will be established on the properties. Although the Company believes, based
on engineering and geological studies which have been completed, that
significant reserves exist on the properties, it has not undertaken a
significant evaluation of the properties nor commissioned the preparation of
an independent reserve report.
<PAGE>
Glossary of Significant Mining Terms
Certain terms used throughout this report re defined below.
Ag. silver.
Au. gold.
AuEq. Gold equivalent, being a measurement of gold and silver on a
combined basis calculated to reflect the price and recovery differentials
between the two metals.
alluvial. Adjectivally used to identify minerals deposited over time by
moving water.
Archean. An era in geologic time 3.4 billion years ago.
basement or bedrock. Solid rock underlying an alluvial deposit.
deposit. A mineral deposit or mineralized material is a mineralized
underground body which has been intersected by sufficient closely-spaced
drill holes or underground sampling to support sufficient tonnage and average
grade(s) of metal(s) to warrant further exploration or development
activities. A deposit does not qualify as a commercially minable ore body
(reserves) under standards promulgated by the Securities and Exchange
Commission until a final, comprehensive economic, technical and legal
feasibility study based upon test results has been concluded.
development stage. Activities related to the preparation of a
commercially minable deposit for extraction.
exploration stage. Activities such as drilling, bulk sampling, assaying
and surveying related to the search for minable deposits.
fault or faulting. A fracture in the earth's crust accompanied by a
displacement of one side of the fracture with respect to the other and in a
direction parallel to the fracture.
grade. A term used to assign value to reserves, such as ounces per ton
or carats per ton.
heap leaching. A gold extraction process involving the percolation of
cyanide solution through crushed ore heaped on an impervious pad or base.
igneous. Rocks formed by the cooling and solidifying of magna or lava.
intrusive. Rock which while molten penetrated into or between other
rocks, but solidified before reaching the surface.
lode mining. The extraction of ore from a deposit occurring in place
within definite boundaries separating it from the adjoining rocks
magnetic surveying. A mineral exploration technique which employs a
magnetometer to measure the magnetic intensity of an area to determine
possible mineralization.
mineralization. The presence of minerals in a specific area or
geological formation.
ore. A natural aggregate of one or more minerals which, at a specified
time and place, may be mined and sold at a profit or from which some part may
be profitably separated.
overburden. Waste rock and other materials which must be removed from
the surface in order to mine underlying mineralization.
placer mining. The extraction of ore from sediment rich in concentrated
mineralization due to the high specific gravity of the mineralization.
polymetallic. Adjectivally used to describe a deposit or formation
containing many minerals.
production stage. Activities related to the actual exploitation or
extraction of a mineral deposit.
reserves. That part of a mineral deposit which could be economically
and legally extracted or produced at the time of determination. Reserves are
subcategorized as either PROVEN (MEASURED) RESERVES, for which (a) quantity
is computed from dimensions revealed in outcrops, trenches, workings or drill
holes, and grade and/or quality are computed from the results of detailed
sampling, and (b) the sites for inspection, sampling and measurement are
spaced so closely and geologic character is so well defined that size, shape,
depth and mineral content are well-established; or PROBABLE (INDICATED)
RESERVES, for which quantity and grade and/or quality are computed from
information similar to that used for proven (measured) reserves, yet the
sites for inspection, sampling and measurement are farther apart.
shear zone. A tabular zone of rock which has been crushed and
fragmented by parallel fractures due to "shearing" along a fault or zone of
weakness. Shear zones can be mineralized with ore-forming solutions.
schists. A strongly foliated crystalline rock which readily splits into
sheets or slabs as a result of the planar alignment of the constituent
crystals.
trend. The directional line of a rock bed or formation.
volcanic or volcanogenic rock. Rock composed of clasts or pieces that
are of volcanic composition.
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<PAGE>
PART I
Item 1. Business.
GENERAL DEVELOPMENT OF BUSINESS. Hanover Gold Company, Inc. (the "Company")
was organized as a Delaware corporation in 1984 and is in the business of
acquiring and maintaining gold mining properties in the Alder Gulch area of
the Virginia City Mining District in southwestern Montana for exploration and
future development.
The Company has no established proven or probable reserves. However,
compilations of data derived from the Company's exploration activities in
1995 and 1996, and data collected earlier by Kennecott Exploration Company,
support Kennecott's previous estimate of a potential mineralized gold deposit
on the properties of approximately 26 million tons, having an average grade
of .0615 ounces per ton. A mineralized deposit is a mineralized body which
has been delineated by appropriate drilling or underground sampling to
support estimates of tonnage and average mineral grade. Such a deposit does
not qualify as a reserve until a comprehensive evaluation based upon unit
cost, grade, recovery and other factors has been conducted, and the economic
feasibility of exploiting the deposit has been determined. The Company has
not yet undertaken such a comprehensive evaluation.
The Company's mining assets comprise 482 contiguous claims and one state
mining lease, all located in the Alder Gulch area. The Company acquired
these claims beginning in 1990 through its acquisition of Hanover
International Limited ("Hanover International"); through a series of
subsequent subleasing and option agreements with Hanover Resources, Inc.
("Hanover Resources") and Group S Limited ("Group S"), each of which was
affiliated with the Company; and through other subleasing and option
agreements with nonaffiliated third parties. As is disclosed elsewhere in
this report, Hanover Resources and Group S were merged into the Company
effective as of September 12, 1996, in exchange for 2,270,486 shares of the
Company's common stock. An additional 3,625,000 shares of common stock were
also issued to the stockholders of Hanover Resources in the transaction, in
exchange for the same number of shares of common stock of the Company then
held by Hanover Resources; the shares held by Hanover Resources were then
canceled. See the section of this report entitled "Narrative Description of
Business-Proposed Merger of Affiliated Companies."
Approximately half of the Company's mining claims are leased claims coupled
with purchase options. The Company does not own these claims outright, but
instead pays rentals and royalties to the underlying landowner-lessors for
the right to conduct mining activities; these payments in most cases are
credited toward the purchase price of the claims under the purchase option
provisions of the leases. If such payments are made, as is expected, the
Company will acquire ownership of the mining claims, and in some instances
the entire real property interest of the landowner-lessor. Conversely, if
such payments are not made, the Company's interest in the claims will revert
to the respective landowners. The Company's obligations pursuant to these
leases and purchase options were $8,469,000 at December 31, 1996, of which
$1,358,000 is payable in 1997, $1,458,000 is payable in 1998, $1,804,000 is
payable in 1999, $2,312,00 is payable in 2000, $902,000 is payable in 2001
and $635,000 is payable thereafter. Production royalty obligations with
respect to these claims, which become payable once minerals are produced from
the claims, range from 0.5% to 5% of net smelter returns. See the section of
this report entitled "Narrative Description of Business-Consolidation of
Claims in the Alder Gulch Area" and Note 3 to the Financial Statements.
The Company has been engaged in exploration and limited development
activities in the Alder Gulch area more or less continuously since 1992.
During that year, interests in the Kearsarge group of claims, comprising 34
claims held by Hanover Resources, and 201 mining claims held by Group S were
contributed to a joint venture; the joint venture, in turn, entered into a
mining venture agreement with Kennecott pursuant to which Kennecott was to
have received a 51% interest in the claims and certain options rights, and in
return would conduct a $5,700,000 multi-year work program and pay interim
rentals and royalty obligations to the various landholders from whom the
Company, Hanover Resources and Group S leased their claims. Kennecott
withdrew from the mining venture in March of 1995, when it was unable to
acquire additional claims in the Alder Gulch area believed necessary to
support a large-scale mining development.
Exploration and development activities in the Alder Gulch area have consisted
of some underground development, diamond drilling, mapping and sampling,
lithologic logging of the drill holes, metallurgical testing and assaying.
No mining or milling activities have occurred since 1995. Subsequent to
Kennecott's withdrawal from the mining venture, all such activities have been
funded by the Company. See the section of this report entitled "Properties."
As of December 31, 1996, the Company had expended $2,294,236 to conduct
exploration and limited development activities on the Alder Gulch properties,
and $8,210,816 in payments to the landowner-lessors of its mining properties.
These expenditures, which aggregate $10,505,052, have been capitalized and
will be depleted using the estimated recoverable units method at such time as
the properties are placed into production. See the section of this report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Summary of Accounting Policies and Note 3 to
the Company's Financial Statements for the year ended December 31, 1996.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. The Company is solely engaged
in mining, which is a single industry segment.
NARRATIVE DESCRIPTION OF BUSINESS. The Company's activities in 1996 were
dominated by the Degerstrom financing transaction and a related restructuring
of the Company's management, the formulation and consummation of a plan to
merge Hanover Resources and Group S into the Company, the consolidation of
other claims and interests in the Alder Gulch area, and the compilation of
existing geologic and other data from the Alder Gulch claims. These
activities are described below in further detail.
DEGERSTROM GROUP FINANCING AND MANAGEMENT RESTRUCTURING. As previously
reported, the Company entered into a securities purchase agreement with Neal
A. Degerstrom in June of 1995 in order to provide the Company with funds
sufficient to meet its obligations to the landowner-lessors of the Company's
Alder Gulch mining claims. Pursuant to the agreement, as amended, the
Company issued and sold 6,000,000 shares of common stock to Mr. Degerstrom
and associated persons over a seventeen-month period commencing in June of
1995, at prices ranging from $0.35 per share to $1.00 per share.
The securities purchase agreement also gave Mr. Degerstrom the conditional
right to nominate three members for election to the Company's board of
directors and to appoint a new president. Mr. Degerstrom exercised his
director nomination rights at meetings of the board of directors of the
Company held on August 17, 1995 and September 13, 1995, at which times he,
James A. Fish and F. D. Owsley were elected to the seven-person board of
directors. The presidential appointment rights were exercised at a meeting
of the board of directors held on March 3, 1996, at which time Mr. Fish was
appointed to succeed Fred R. Schmid; Mr. Fish was also appointed to succeed
Mr. Schmid as chairman in May of 1996. The nomination and appointment rights
granted to Mr. Degerstrom will continue to be exercised so long as he and his
associated purchasers collectively own at least fifteen percent (15%) of the
Company's outstanding common stock. The Company and its board of directors
have agreed to take such action as is appropriate and consistent with their
powers to ensure that such rights can be exercised.
According to a Schedule 13D, as amended, filed by Mr. Degerstrom and
associated purchasers as a group, Mr. Degerstrom has disclaimed beneficial
ownership of the shares owned by such associated persons (other than shares
owned by N. A. Degerstrom, Inc., a corporation controlled by Mr. Degerstrom)
and such associated persons have disclaimed beneficial ownership of the
shares owned by Mr. Degerstrom and N. A. Degerstrom, Inc.
MERGER OF AFFILIATED COMPANIES. The boards of directors and stockholders of
the Company, Hanover Resources and Group S approved a plan of merger,
effective September 12, 1996, pursuant to which Hanover Resources and Group S
have been merged into the Company in exchange for the issuance of
2,270,486 shares of common stock to the stockholders of Hanover Resources and
Group S, and the distribution to Hanover Resources' stockholders of 3,625,000
additional shares of common stock in exchange for the same number of shares
of Common Stock then held by Hanover Resources. Under the terms of the
merger agreement, the Company issued 1,271,110 shares of common stock to
acquire Hanover Resources (the Company actually issued 4,896,110 shares to
the Hanover Resources stockholders, of which 3,625,000 shares were
simultaneously exchanged for the same number of shares of common stock then
held by Hanover Resources, which shares were then canceled), and issued
999,376 shares to acquire Group S, taking into account a 193,220 share
adjustment to repay loans made by the Company to Group S. A total of
2,270,486 new shares of common stock were issued in the transaction, which
represented approximately 11% of the Company's outstanding common stock as of
the effective date of the merger.
The number of shares issued in the merger was determined and approved by the
boards of directors of each company, and was based on the amount each company
had invested to acquire and maintain its properties, the estimated mineral
values of the properties held by each company, and (in the case of Hanover
Resources) its existing ownership of 3,625,000 shares of the Company's common
stock. These amounts and values, once determined, were then correlated to
presumed market values for the common stock of $3.00 per share and $1.50 per
share, which approximated the market values of the stock during the period of
the Kennecott mining venture and immediately prior to Kennecott's withdrawal
from the mining venture in March of 1995, respectively.
As part of the merger, all inter-company balances were eliminated and various
mining sublease and option agreements between or among the three companies
were terminated. As a consequence of the merger, the Company assumed ongoing
rental and royalty obligations with respect to Hanover Resources' and Group
S's mining claims. As previously noted in this report, the Company's rental
and royalty obligations to the landowner-lessors were approximately
$8,469,000 as of December 31, 1996, of which approximately $3,910,000 was
formerly attributable to Hanover Resources' claims and approximately
$3,050,000 was formerly attributable to Group S's claims. As described below
under "-Consolidation of Claims in the Alder Gulch Area," the Company reached
an agreement with one such landowner-lessor in April of 1996, which reduced
the amount of Group S's obligation by approximately $3,000,000, in exchange
for the forgiveness of certain indebtedness, the issuance of shares of the
Company's common stock, and the assignment of an unusable ore processing
facility and other mining equipment. See Note 3 to the Financial Statements.
The Company has accounted for the merger of Hanover Resources and Group S as
a combination of entities under common control similar to a pooling of
interests. Accordingly, the financial statements of the Company give
retroactive effect to these acquisitions, as if Hanover Resources, Group S
and the Company had always operated as a single entity. The assets of
Hanover Resources and Group S have been recorded at cost, and no value has
been ascribed to good will.
The boards of directors of the Company, Hanover Resources and Group S
approved the proposed merger for a variety of reasons, the principal reason
being to consolidate the mining properties of the three companies under a
single entity so that the Company can move forward in a simple,
straightforward manner with continued exploration and development. Although
the constituent companies' mining claims are contiguous, the terms of the
related party transactions through which they were controlled would have made
it difficult, in management's opinion, to proceed with any comprehensive
financing or mine development plan.
CONSOLIDATION OF CLAIMS IN THE ALDER GULCH AREA. The Company has made
substantial progress in its efforts to consolidate the mining claims
belonging to nonaffiliated entities in the Alder Gulch area since June of
1995. These efforts are described below.
ADDITIONAL ALDER GULCH CLAIMS. In early February of 1996, the Company
announced that it had acquired the remaining 20% interest which it did not
previously own in seven patented and one unpatented mining claim in the Apex
claims area of the Alder Gulch from a nonaffiliate for $90,000, and that it
had also entered into an agreement to acquire a 0.5% gross overriding royalty
interest burdening the Company's Kearsarge group of claims held by another
nonaffiliate in exchange for 5,000 shares of common stock and options to
acquire an additional 5,000 shares, exercisable on or before November 1, 1997
at the price of $2.50 per share. The Company also agreed that, if, during
the period ending November 1, 1997, the average bid price of the common stock
did not exceed $4.00 per share, it would issue the nonaffiliate additional
shares in an amount determined by reference to the market value of the common
stock at such date. Had the number of such shares been determined at March
1, 1997, the Company would have been obligated to issue the nonaffiliate
approximately 1,390 additional shares.
In August of 1996, the Company entered into an agreement to acquire an
additional patented claim in the Alder Gulch area from a nonaffiliate for
$210,000. The Company's obligations under this agreement are payable in
quarterly installments of $9,250 each through October 1, 2001.
AGREEMENT TO ACQUIRE EASTON-PACIFIC. The Company announced on March 10, 1997
that it had entered into an agreement, dated March 7, 1997, with Easton-
Pacific and Riverside Mining Company ("Easton-Pacific") for the acquisition
of all of the issued and outstanding shares of capital stock of Easton-
Pacific in exchange for 7,000,000 shares of the Company's common stock,
following which Easton-Pacific will become a wholly-owned subsidiary of the
Company. Easton-Pacific has advised the Company that it owns or controls 36
patented and 137 unpatented mining claims in the Brown Gulch area, in a
claims block that is contiguous to the Company's claims block, and an
interest in an additional 35 patented and 58 unpatented claims near Norris
and Pony, Montana, some 35 miles northwest of Browns Gulch.
The common stock of the Company to be issued to the holders of Easton-
Pacific's capital stock in the transaction will be included in an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") and will generally be freely transferable following such
issuance. Certain affiliates of Easton-Pacific will be required to enter
into lock-up agreements as part of the transaction, however, prohibiting the
resale of any shares of common stock received in the transaction for a period
of six months and limiting the number of shares that may be resold during the
ensuing twelve-month period. The agreement also provides that Richard J.
Fisher, Easton-Pacific's current president, will be appointed to the board of
directors of the Company at closing.
It is expected that the transaction will close no later than June 30, 1997.
Closing is specifically conditioned on:
the approval by the board of directors of the Company of definitive
transaction documents; the filing by the Company of an effective registration
statement under the Securities Act (which registration statement may take the
form of a post-effective amendment to its current registration statement)
with respect to the shares of common stock to be issued by the Company in the
transaction; the approval of the transaction by the Company's stockholders in
accordance with proposed requirements of the Nasdaq Stock Market; the
approval of the transaction by the shareholders of Easton-Pacific; and the
delivery of the opinion of counsel to the effect that the transaction will be
tax free to Easton-Pacific and its shareholders.
As part of the transaction, N. A. Degerstrom ("Degerstrom"), an affiliate of
the Company, has guaranteed payment of the Company's obligations to the
landowner-lessees of its mining claims for a period of eighteen-months, or
until August 7, 1998, up to an amount of $2,891,210; such guaranty will take
effect in the event the Company is unable, for any reason, to meet such
obligations. As consideration for such guarantee, the Company's board of
directors on March 10, 1997 approved the grant of options to Degerstrom to
purchase up to 2,312,968 shares of common stock of the Company, which options
are exercisable at the price of $1.25 per share for a period of three years
from the date of grant. Payments made by Degerstrom pursuant to the
guarantee, if any, will be credited toward the exercise of such options.
It is anticipated that the transaction will be accounted for by the Company
as a purchase of assets as opposed to a pooling of interests.
The Company had previously announced, in February of 1996, that it had
entered into a letter of intent with Easton-Pacific contemplating a possible
merger of Easton-Pacific into the Company in exchange for 14,368,713 shares
of the Company's common stock. That letter of intent expired in July of
1996, although representatives of the Company and Easton-Pacific continued to
discuss the possibility of combining their respective mining properties.
These discussions lead to the agreement that was signed on March 7th.
ACQUISITION OF CLAIMS FROM TABOR RESOURCES; LITIGATION WITH TABOR. Effective
March 25, 1996, the Company entered into an asset purchase agreement with
Tabor Resources Corporation, a Minnesota corporation, for the purchase of ten
patented mining claims, 120 unpatented mining claims, and one state mining
lease, covering properties located in the Alder Gulch area. The Company
issued Tabor 525,000 shares of common stock in the transaction and 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 did not
exceed $2.00 per share for a consecutive 30-day period prior to April of
1998, it would issue Tabor such number of additional shares as was necessary
to raise the aggregate market value of the shares then owned by Tabor to
$2.00.
As part of the transaction, the Company also agreed to prepare and file a
registration statement under the Securities Act covering the shares issued to
Tabor, cause such registration statement to be declared effective within six
months of the effective date of the agreement, and thereafter maintain the
registration statement in effect for a period of eighteen months to enable
Tabor to resell the shares (and to enable other selling stockholders to sell
additional shares of common stock also covered by the registration statement)
should it so choose. In addition, the Company granted Tabor certain piggy-
back registration rights under the Securities Act, the effect of which is to
enable Tabor to include any shares remaining unsold following the termination
of effectiveness of the registration statement described above in any
registration statement subsequently filed by the Company relating to
securities to be sold for the account of the Company or for the accounts of
any of its affiliates.
The agreement between the Company and Tabor further provided that, pending
effectiveness of the registration statement, conveyancing documents covering
the claims sold to the Company and certificates evidencing 400,000 of the
525,000 shares issued to Tabor were to be held in escrow. The agreement
further provided that, in the event the registration statement was not
declared effective within six months of closing, such documents and
certificates, at Tabor's election, would be returned to the respective
parties and the transaction would be deemed to have been rescinded.
The registration statement required to be filed by the Company was declared
effective by the Securities and Exchange Commission on September 3, 1996.
Shortly following the effective date, and despite the Company's compliance
with all of the terms and conditions of its agreement with Tabor, Tabor
informed the Company that it was withholding authorization to release the
conveyancing documents and the share certificates from escrow. As a
consequence, the Company initiated an action against Tabor in United States
District Court for the Eastern District of Washington (Case No. CS-96-663-
FVS) on October 4, 1996 for breach of contract and injunctive relief.
Subsequently, Tabor filed counterclaims against the Company alleging
violations of the registration and antifraud provisions of federal securities
law. The Company believes such claims are without merit and expects that it
will prevail in the action and obtain title to the mining claims and lease
that are the subject of the transaction.
RESTRUCTURING OF CERTAIN RENTAL AND ROYALTY OBLIGATIONS. As previously
noted, the Company does not own all of its Alder Gulch mining claims
outright, but instead leases some of the claims from various landowner-
lessors to whom it pays rentals and in exchange for the right to conduct
mining activities. As is previously noted in this report, at December 31,
1996, these rental obligations aggregated approximately $8,469,000, of which
$1,358,000 is payable in 1997, $1,458,000 is payable in 1998, $1,804,000 is
payable in 1999, $2,312,00 is payable in 2000, $902,000 is payable in 2001
and $635,000 is payable thereafter. Production royalty obligations with
respect to these claims, which become payable once minerals are produced from
the claims, range from 0.5% to 5%.
Since late 1995, management of the Company has made a concerted effort to
renegotiate the terms of certain of these leases to reduce the Company's
future cash requirements and, more importantly, to lessen the production
royalty obligations and thereby make the claims more attractive to a joint
venture or other development partner. Effective March 26, 1996, Group S
(which was subsequently merged with and into the Company) entered into an
agreement with Roy Moen and an affiliated entity, Moen Builders, Inc.
(hereinafter collectively referred to as "Moen"), amending the terms of an
October 1991 lease and option agreement covering 201 mining claims in the
Alder Gulch area. Under the terms of the former agreement, Group S was
obligated to pay Moen aggregate rentals and other costs of $7,581,764 over a
period of seven years, of which $4,150,000 was payable during a three year
period beginning in 2001. ($1,181,764 of Group S's rental obligations to Moen
had been paid as of December 31, 1995. $550,000 of this amount was advanced
by the Company on Group S's behalf, as a consequence of which Group S
received 193,220 less shares of common stock of the Company than it otherwise
would have received in the merger of the Company, Hanover Resources and Group
S described elsewhere in this report.) In addition, once the claims were
placed into production Group S was also obligated to pay Moen a landowner's
production royalty (essentially a royalty equal to the sales price of the
minerals produced, less smelting charges) of up to 5% if the price of gold
was $425 per ounce or higher, declining to 1% in the event 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 in the event
Group S was unable to meet its obligations.
The amended agreement reduces the Company'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, which commenced October 16, 1996 and ends
September 1, 2002. The amended 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, the Company 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, totalling approximately
$2,850,000 as of March 1, 1997, have been made.
In consideration of the agreed reductions in the Company's rental and royalty
obligations to Moen, 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 an additional 200,000 shares. The Company also agreed
to prepare and file a registration statement under the Securities Act
covering the shares and options, and to maintain such registration statement
in effect for a period of one year so that Moen may resell the shares and
options should he so choose. As previously noted in this report, such
registration statement was declared effective on September 3, 1996.
As further consideration for the agreed reductions, the Company forgave
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 also transferred two mine
trucks to Moen, having a book value at December 31, 1995 of $43,183, and
caused 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 is disclosed elsewhere in this report and in Note 5 to the Consolidated
Financial Statements, 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, transferred certain equipment maintained at a
Degerstrom-operated milling facility near Soda Springs, Idaho to Moen. Such
equipment was estimated by Degerstrom to have a fair market value of
approximately $30,000; the Company has compensated N. A. Degerstrom, Inc. for
such value.
COMPILATION OF GEOLOGIC AND OTHER DATA. During 1996 the Company completed a
compilation of the geologic and other data generated by it and Kennecott, and
a preliminary metallurgical study of the ores derived from previous
exploration and development activities. Also, during October of 1996 the
Company continued exploration activities in the Alder Gulch area by drilling
four diamond drill holes on the Kearsarge-Apex shear zone. The results of
these activities are set forth in the section of this report entitled
"Properties."
OTHER ACTIVITIES. The Company continually evaluates other precious metals
mining opportunities for possible acquisition or joint venture, and from
time-to-time engages in exploratory discussions regarding such opportunities.
As of the date of this report, the Company has no agreement, understanding or
arrangement with any person regarding the acquisition of mining properties
outside the Alder Gulch area.
EXECUTIVE OFFICES AND EMPLOYEES. The Company's principal executive offices
are located in a 1,850-square foot facility at 1000 Northwest Boulevard,
Suite 100, Coeur d'Alene, Idaho 83814. In addition, the Company leases a
small exploration office in Helena, Montana. At March 1, 1997, the Company
employed two full-time and two part-time management, finance and
administrative employees.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The Company is not engaged in foreign operations.
MINING, ENVIRONMENTAL AND OTHER MATTERS PERTAINING TO PROPERTIES.
OVERVIEW. The Company, like other mining companies doing business in the
United States, is subject to a variety of federal, state and local statutes,
rules and regulations designed to protect the quality of the air and water in
the vicinity of its mining operations. These include "permitting" or pre-
operating approval requirements designed to ensure the environmental
integrity of a proposed mining facility, operating requirements designed to
mitigate the effects of discharges into the environment during mining
operations, and reclamation or post-operation requirements designed to
remediate the lands effected by a mining facility once commercial mining
operations have ceased.
Federal legislation and implementing regulations adopted and administered by
the Environmental Protection Agency, the Forest Service, the Bureau of Land
Management, the Fish and Wildlife Service, the Army Corps of Engineers and
other agencies--in particular, legislation such as the federal Clean Water
Act, the Clean Air Act, the National Environmental Policy Act and the
Comprehensive Environmental Response, Compensation and Liability Act--have a
direct bearing on domestic mining operations. These federal initiatives are
often administered and enforced through state agencies operating under
parallel state statutes and regulations. The Company's Alder Gulch
properties are located in Montana, which, despite its history as a major
mining area, has in the last decade gradually limited mine development as
tourism and environmental concerns have assumed greater economic and
political importance. Although mines continue to be approved for development
in the state, the cost and uncertainty associated with the permitting process
have resulted in fewer mining applications and higher operating costs for
those mining companies seeking to do business in the state. These laws are
briefly discussed below.
THE CLEAN WATER ACT. The federal Clean Water Act is the principal federal
environmental protection law regulating mining operations. The Act imposes
limitations on waste water discharges into waters of the United States,
including discharges from point sources such as mine facilities. In order to
comply with the Clean Water Act, the Company will be required to obtain one
or more permits which will control the level of effluent discharges from its
proposed mining and processing operations.
THE CLEAN AIR ACT. The federal Clean Air Act limits the ambient air
discharge of certain materials deemed to be hazardous and establishes a
federal air quality permitting program for such discharges. Hazardous
materials are defined in enabling regulations adopted under the Act to
include various metals and cyanide, the latter of which is used in heap leach
recovery processes. The Act also imposes limits on the level of particulate
matter generated from mining operations, which may require the Company to
adopt dust control techniques in all phases of mining.
THE NATIONAL ENVIRONMENTAL POLICY ACT. The National Environmental Policy Act
("NEPA") requires all governmental agencies to consider the impact on the
human environment of major federal actions as therein defined. Because the
Company's Alder Gulch mining properties are located on federal lands, mining
operations on those lands will likely be conditioned on the preparation,
review and approval of an environmental impact statement outlining in detail
the environmental effects of such operations and the Company's efforts to
ameliorate such effects.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT.
The federal Comprehensive Environmental, Response, Compensation and Liability
Act ("CERCLA")imposes clean-up and reclamation responsibilities with respect
to unlawful discharges into the environment, and establishes significant
criminal and civil penalties against those persons who are primarily
responsible for such discharges.
MONTANA ENVIRONMENTAL LAWS AND REGULATIONS. Montana has adopted counterparts
to NEPA and CERCLA, being the Environmental Policy Act and the Metal Mine
Reclamation Act, both of which are administered by the Department of Lands.
The state has also adopted the Air Quality Act and Water Quality Act, which
parallel to a large extent the provisions of the Clean Air Act and Clean
Water Act; these statutes are administered through various bureaus of the
Department of Environmental Quality.
A Montana citizen's initiative known as I-122, which sought to impose more
stringent point source discharge limitations on operations affecting
Montana's streams and rivers, was defeated during the 1996 general election.
Had the 1996 initiative been approved, the operators of new metals mines in
Montana would have been required to remove specified levels of carcinogens,
toxins, metals and nutrients produced from mining operations before
discharging them into a river or stream. Under current law, untreated wastes
are discharged into specified "mixing zones" of a river or stream, and are
thereby diluted to ostensibly safe levels; these mixing zones are required to
be continuously monitored to ensure that contaminants do not exceed these
levels.
No assurance can be given that proponents of the initiative will not seek to
reintroduce the measure in the future. It is not presently known whether the
initiative, if reintroduced and approved, would materially affect the
Company's proposed operations in the Alder Gulch.
THE COMPANY'S PERMITTING STATUS. Gold was first discovered in the Alder
Gulch area in 1863, and extensive mining activities in the area continued
until the 1940s, when production from conventional mining processes dwindled.
As a consequence of these activities, the Company believes it will experience
less difficulty in obtaining permits for large scale mining development than
would be the case were it seeking to develop an area that had no history of
mining operations. The Company has obtained certain permits and approvals in
conjunction with the limited exploration and minor development activities
conducted on the Alder Gulch properties from 1993 to 1996, and believes that
it will meet existing criteria for additional permits and approvals necessary
to large scale development.
Nonetheless, substantial planning will be required of the Company in order to
comply with the requirements of existing laws and regulations, and no
assurance can be given that any proposed plans to conduct large scale
development of the Alder Gulch properties will be timely realized. Extensive
data regarding the effect of any such development on the air water quality of
the area is being collected and analyzed at significant cost to the Company,
and will be presented to the various regulatory agencies in the future, in
the form of a mine development and reclamation plan. These agencies will
then review and evaluate the plan, and are free to reject it or impose
additional requirements which could increase the cost of development to a
level beyond that deemed economically feasible. The Company may encounter
opposition from local environmental groups and organizations once its
development plans are presented to the regulatory authorities and made
available for public comment.
Item 2. Properties.
THE ALDER GULCH PROPERTIES. The Company's mining properties are located in
the historic Alder Gulch area of the Virginia City Mining District in
southwestern Montana, approximately 50 miles southeast of Butte, Montana.
Gold was first discovered in the area in 1863. An estimated 2.5 million to
10 million ounces of gold have been produced from placer operations in the
Alder Gulch that extended from the townsite of Summit 15 miles downstream to
the town of Alder, Montana. Gold has also been produced from lode mines in
the area since the late nineteenth century, although reliable production
records are not available. The Company believes the historical mining
activity and the geology of the district are indicative of large gold-bearing
mineral systems, and that the area has a very high potential for additional
discovery.
At December 31, 1996, the Company's properties consisted of 482 contiguous
mining claims and one state mining lease covering an area of approximately
15.4 square miles. The topography of the area is mountainous, however the
properties are seasonally accessible by road.
Mineralization on the Company's claims is hosted by Archean metamorphic
rocks. These rocks have been subjected to one or more metamorphic events and
subsequent orogenic folding and faulting. The Kearsarge-Apex mineralization
occurs within a major shear zone cutting carbonate facies iron formation.
Data compiled by the Company indicate that this mineralization is
disseminated in the iron formation and irregularly distributed as high grade
gold zones within the shear. Gold is associated with quartz, iron carbonate,
green mica, biotite, garnet, graphite and pyrite. Post-metamorphic
hydrothermal alteration indicates the possibility of additional types of
mineralization in the area. Mineralization is disrupted by high and low
angle post-mineral faulting.
Archean-aged gold deposits in shear zones and iron formation are noted for
their prolific gold production. Production from similar types of deposits
accounted for approximately 20% of world production in 1995.
HISTORICAL EXPLORATION ACTIVITIES ON THE PROPERTIES. During 1993 and 1994
Kennecott conducted a surface drilling program on the Company's Alder Gulch
claims and the adjoining claims owned by Group S. Eight diamond drill core
holes were drilled to test the Big Vein and the Kearsarge Vein. These holes
encountered significant mineralization. During 1994 and 1995 the Company
drove approximately 3,000 feet of lateral and cross cut workings in the
Kearsarge and Apex mines, and drilled 23 diamond drill holes along and
between the Big Vein and the Kearsarge Vein to evaluate and extend the
mineralization encountered by Kennecott's drilling. This was supplemented by
the drilling of four additional diamond drill holes along the Kearsarge-Apex
shear zone in October of 1996.
Information compiled by the Company during 1996 included the results of
mapping and sampling of the workings, lithologic logging of all underground
drill holes, and splitting and assaying previously unassayed intervals of the
holes. 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 deepest hole ends in mineralization.
Mineralization is open in all directions, particularly to depth. The
following table sets forth information concerning drill holes representative
of the grades and thickness encountered at the Kearsarge-Apex shear zone.
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 along strike and dip. Additional drilling, however, will be
required to detail the configuration of the mineralization and to define its
limits in three dimensions. For this reason, this mineralization is not
considered a reserve. The size of the mineralized deposit to an average
depth of 500 feet below the surface is estimated to be 6,000,000 tons with an
average grade of .083 ounces of gold per ton. The thickness and grade of
mineralization, combined with metallurgical studies indicate that open pit
mining and a gravity processing system followed by carbon-in-leach milling
would be effective and efficient methods for extracting the resource.
FUTURE EXPLORATION ACTIVITIES. The Company expects to conduct further
exploration activities on the Alder Gulch properties during 1997, but has not
yet established an exploration budget. The amount expended in 1997 will
depend, among other things, on the Company's ability to negotiate a joint
development or other arrangement with another mining company during the year,
and on the Company's cash position during the year. Any such exploration
activities are expected to include a continuation of surface geologic mapping
and sampling, and additional diamond core drilling on the Kearsarge and Apex
claims to define further the extent and grade of mineralization on these
prospects. These activities will likely be supplemented by core drilling on
other targets on the Company's claims, to the extent funds are available.
The Company has received expressions of interest from a number of North
American mining companies regarding a joint venture or other economic
arrangement to develop the Alder Gulch mining properties. The Company has
entered into discussions with representatives of these companies and believes
such an arrangement could be concluded during the next twelve months.
Item 3. Legal Proceedings.
As previously noted in this report, in the section entitled "Business-
Consolidation of Claims in the Alder Gulch Area," the Company initiated an
action against Tabor in United States District Court for the Eastern District
of Washington (Case No. CS-96-663-FVS) on October 4, 1996 for breach of
contract and injunctive relief based on Tabor's breach of the terms of a
March 25, 1996 asset purchase agreement with the Company. Subsequently,
Tabor filed counterclaims against the Company alleging violations of the
registration and antifraud provisions of federal securities law. The Company
believes such counterclaims are without merit and expects that it will
prevail in the action to obtain title to the mining claims and lease that are
the subject of the asset purchase agreement.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1996.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
MARKET INFORMATION. The common stock of the Company is traded on the Nasdaq
SmallCap Market under the symbol "HVGO". The following table sets out the
high and low prices per share for the common stock for 1996 and 1995, as
reported by Nasdaq. The prices reported reflect inter-dealer prices, without
regard to retail mark-ups, mark-downs or commissions, and do not necessarily
reflect actual transactions. High and low sales prices are shown for all
quarters.
1996 1995
High Low High Low
---- --- ---- ---
First Quarter $ 2-3/8 $ 1-5/16 $ 1-5/8 $ 1/4
Second Quarter $ 2-7/8 $ 1-3/8 $ 3-1/16 $ 5/16
Third Quarter $ 1-11/16 $ 1 $ 2-1/2 $ 1-3/16
Fourth Quarter $ 1-11/16 $ 1-1/8 $ 2 $ 3/4
HOLDERS. The number of stockholders of record on March 1, 1997 was
approximately 260. Based on mailings made in connection with the 1996
special meeting of the Company's stockholders, the Company believes the
shares held of record by such stockholders are beneficially owned by
approximately 2,000 persons.
DIVIDENDS. The Company has declared no cash or stock dividends on its common
stock since inception and does not anticipate declaring or paying cash or
stock dividends in the future.
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<PAGE>
Item 6. Selected Financial Data.
The selected financial data set forth below has been derived from, and should
be read in conjunction with the Company's financial statements and the notes
thereto, and Item 7 of this report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
financial data for the year ended December 31, 1996 have been derived from
the Company's financial statements appearing elsewhere in this report, which
have been audited by BDO Seidman LLP, Spokane, Washington. The selected
financial data for the four 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>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Summary of Balance Sheets:
Working capital (deficit) $ (49,331) $ 428,469 $ 31,422 $1,815,006 $ 259,171
Current assets 203,722 894,229 1,029,081 3,052,439 395,078
Total assets 10,806,150 8,441,690 8,646,755 7,962,755 3,231,756
Current liabilities 253,053 465,760 997,659 1,237,433 135,907
Long-term obligation 194,065 0 0 0 690,366
Total liabilities 447,118 465,760 1,267,789 1,487,433 826,273
Stockholders' equity 10,359,032 7,975,930 7,378,966 6,475,322 2,405,483
Summary of Statements of Operations:
Revenues (1) 3,510 499,299 216,418 0 135,262
Net loss (2) (1,328,327) (2,329,190) (1,362,954) (256,769) (314,878)
Net loss per share (.08) (0.20) (0.14) (0.03) (0.06)
____________________
(1) Cumulative revenues for the period from inception (May 2, 1990) through December 31, 1996
were $1,151,958.
(2) Cumulative losses for the period from inception (May 2, 1990) through December 31, 1996
were $5,913,098.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW. 1996 was a year of slow but sustained progress for the Company.
During the year, the Company substantially completed its objective of
consolidating the mining properties in the Alder Gulch area, both by
acquiring additional claims and interests from nonaffiliated parties and by
completing the merger of its Hanover Resources and Group S affiliates into
the Company. Toward the end of the year, the Company also was able to renew
drilling activities on the properties. These activities have enhanced the
Company's knowledge and understanding of the properties, and have contributed
to its ongoing geological and metallurgical evaluation. Although management
continues to believe the properties lend themselves to large-scale
development, the Company does not as of the date of this report have the cash
resources necessary for development nor a development agreement with any
major mining company.
The Company had hoped to conclude negotiations during the year for the
acquisition of significant additional mining claims and interests contiguous
to those of the Company held by Easton-Pacific, but was unable to do so owing
to substantial differences of opinion concerning the value of Easton-
Pacific's assets and uncertainty regarding possible environmental liabilities
associated with certain of those assets. As is disclosed elsewhere in this
report, however, the Company and Easton-Pacific were able to resolve these
differences and have entered into an agreement, dated March 7, 1997, pursuant
to which the Company will acquire all of the outstanding capital stock of
Easton-Pacific, whereupon Easton-Pacific will become a wholly-owned
subsidiary of the Company. The transaction with Easton-Pacific is subject to
approval by the Company's and Easton-Pacific's stockholders, and is expected
to close on or about June 30, 1997.
The Company continued to be supported during the year with equity capital
from the investor group formed in 1995 and lead by Neal A. Degerstrom, an
affiliate of the Company, and with equity capital derived late in the year
from the public sale of 1,000,000 shares of its common stock at the price of
$1.25 per share. The Company intends to issue additional shares of its
common stock to the public during 1997 in order to meet its ongoing
obligations to the landowner-lessors of the various mining claims it leases,
and to provide working capital for continued exploration of its Alder Gulch
properties. The number of shares to be issued in such offering and the price
at which they will be offered have not been determined as of the date of this
report.
The Company continues to receive 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, however, and is presently
discussing such possibilities with representatives of these companies. The
Company previously reported that such an arrangement would be negotiated and
concluded during 1996, however the uncertainty within the mining industry
resulting from the Montana clean water citizens initiative prevented this
from happening. Management of the Company has now revised its estimate and
believes such an arrangement can be negotiated and concluded during 1997.
This estimate is predicated on the occurrence of certain events during 1997,
including continued favorable results from exploration activities conducted
on the Alder Gulch properties, prevailing prices for gold and continued
progress in the Company's efforts to consolidate additional claims and
interests in the area.
Results of Operations.
1996 COMPARED TO 1995. During the year ended December 31, 1996, the Company
realized revenues of approximately $3,500 resulting from the sale of carbon
product stockpiled at the Company's inactive mine. During the year ended
December 31, 1995, the Company had revenues of approximately $499,000
comprised of $249,000 from the sale of refined gold and $250,000 from an
option payment under the Kennecott mining venture. The Company's mining
operations were suspended in March 1995 due to a lack of funds following
Kennecott's withdrawal from the mining venture. Milling operations were
suspended in April 1995.
Operating expenses decreased to $1,312,000 for the year ended December 31,
1996 from $2,826,000 for the year ended December 31, 1995 (54%). The overall
decrease was primarily due to the suspension of mining and milling activities
in 1995. As a result, there were no costs of goods mined in 1996 as compared
to $1,077,000 in 1995. Additionally, in 1995 the Company wrote down the
carrying value of its note receivable due from the related party mill
operator by $780,000 to reflect the receivable's estimated net realizable
value. General and administrative expenses increased to $1,285,000 in 1996
from $931,000 in 1995. The increase in general and administrative expenses
was primarily due to a $100,000 increase in salaries and payroll costs
associated with officers and personnel hired during 1996, professional fees
incurred in 1996 in connection with the Company's acquisition of Hanover
Resources and Group S of approximately $80,000, and an increase in facility
related expenses of approximately $50,000 due to the Company's establishment
of its Coeur d'Alene headquarters. Primarily as a result of the foregoing
factors, the Company recognized a net loss of $1,328,000 in 1996 versus a net
loss of $2,329,000 in 1995.
1995 COMPARED TO 1994. During the year ended December 31, 1995, the
Company's revenues increased to $499,000 from $216,000 for the year ended
December 31, 1994 (131%). The increase was due, in part, to the receipt of
$250,000 from an option payment under the Kennecott mining venture in 1995.
The Company's revenues from the sale of refined gold increased to $249,000 in
1995 from $216,000 in 1994 primarily as a result of volume increases. As
previously noted, the Company suspended its mining and milling activities in
March and April 1995, respectively.
Cost of goods mined increased to $1,076,000 in 1995 from $911,000 in 1994
(18%) due to an increase in production. In 1995, the Company wrote down the
carrying value of its note receivable due from the related party mill
operator by $780,000 to reflect the receivable's estimated net realizable
value. General and administrative expenses increased to $931,000 in 1995
versus $738,000 in 1994 (26%) primarily as a result of increases in officers'
salaries, printing expense and insurance. Interest income decreased to
$30,000 in 1995 from $98,000 in 1994 (69%) primarily due to lower levels of
invested funds. Primarily as a result of the foregoing factors, the Company
recognized a net loss of $2,329,000 in 1995 versus a net loss of $1,362,000
in 1994.
Liquidity and Capital Resources.
The Company has been in the development stage since its inception. At
December 31, 1996, the Company had no recurring sources of revenue, had
incurred operating losses since its inception and had negative working
capital. Additionally, as a consequence of Kennecott's withdrawal from the
mining venture in March of 1995, the Company assumed full responsibility for
certain landowner rental and royalty obligations on its Alder Gulch mining
claims. At December 31, 1996 the rental and royalty obligations payable in
1997 totalled $1,358,000. These conditions give rise to substantial doubt
about the Company's ability to continue as a going concern. Accordingly, the
Company's independent certified public accountants modified their report,
dated March 7, 1997, on the Company's December 31, 1996 financial statements
to include an explanatory paragraph relative to a going concern uncertainty.
Management believes the Company will meet its 1997 obligations using existing
funds and funds to be derived from the anticipated sale of additional shares
of its common stock. 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 properties, it may
continue to experience a shortage of working capital.
The Company has incurred aggregate losses of $5,913,098 from inception
through December 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 through 1995 in consolidating the various claims and
interests in the area. Although the Company has been able to conduct
exploration and limited development activities on the properties, primarily
as the result of its former arrangement with Kennecott and, to a lesser
extent, as the result of exploration and evaluation work performed by the
Company during 1995 and 1996, significant additional work must be undertaken
to determine whether the properties support large-scale mining operations.
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, but has not yet concluded such an
arrangement. Management of the Company now believes such an arrangement can
be concluded during 1997.
As discussed elsewhere in this report, the Company restructured its
management in late 1995 and early 1996, and took a number of significant
steps to consolidate the Alder Gulch mining properties. 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 1997, 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.
At December 31, 1996, the Company had a deferred tax asset of approximately
@,070,000. A valuation allowance equal to this amount has been established.
Management of the Company cannot determine that it is more likely than not
that the Company will realize the benefits from these deferred tax assets.
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 1997 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.
Cash flows for the Company for each of the years in the three year period
ended December 31, 1996 were as follows:
YEAR ENDED DECEMBER 31, 1996. Operating activities of the Company used
$1,513,000, primarily as a result of the 1996 net loss of $1,328,000 and a
decrease in accounts payable of $215,000. $1,347,000 was used in investing
activities, primarily as a result of payments made in relation to the
Company's mineral properties. The Company generated $2,229,000 from
financing activities, primarily as a result of funds received through the
sale of common stock. As a result of the foregoing, the Company's cash
position decreased by $638,000 to $96,000 at December 31, 1996.
YEAR ENDED DECEMBER 31, 1995. Operating activities of the Company used
$1,628,000, primarily as a result of the 1995 net loss of $2,329,000,
adjusted for noncash expenses of $200,000 in marketing fees received in
exchange for common stock and a $780,000 write down in the carrying value of
a note receivable, and a decrease of $423,000 in accrued expenses. $822,000
was used in investing activities, primarily as a result of payments made in
relation to the Company's mineral properties. The Company generated
$2,463,000 from financing activities, primarily as a result of funds received
through the sale of common stock. As a result of the foregoing, the
Company's cash position increased by $11,000 to $734,000 at December 31,
1995.
YEAR ENDED DECEMBER 31, 1994. Operating activities of the Company used
$1,779,000, primarily as a result of the 1994 net loss of $1,362,000, an
increase in inventory and prepaid expenses of $225,000 and a decrease of
$254,000 in accrued expenses. $2,694,000 was used in investing activities,
primarily as a result of payments of $1,591,000 made in relation to the
Company's mineral properties and $972,000 advanced to a related party under a
note receivable. The Company generated $2,225,000 from financing activities,
primarily as a result of funds received through the sale of common stock. As
a result of the foregoing, the Company's cash position decreased by
$2,248,000 to $723,000 at December 31, 1994.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company for the year ended December 31, 1996
included elsewhere in this report have been audited by BDO Seidman LLP,
Spokane, Washington. An index to such financial statements appears at page
28 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Effective January 14, 1997, the Company replaced Zeller Weiss & Kahn with BDO
Seidman LLP, Spokane, Washington as the Company's independent public
accountants. This change was made in conjunction with the restructuring of
the Company's management and the relocation of its executive offices to Coeur
d'Alene, Idaho, which is near Spokane, in early 1996. The change was
formally approved by the board of directors, upon the recommendation of the
audit committee of the board, in June of 1996, and such approval was ratified
by the stockholders of the Company at a special meeting held on July 31,
1996.
During the years ended December 31, 1995, 1994 and 1993, Zeller Weiss &
Kahn's reports on the financial statements of the Company contained no
adverse opinion or disclaimer of opinion, or were qualified or modified as to
uncertainty, audit scope or accounting principles. During such periods,
there were no disagreements with Zeller Weiss & Kahn on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
such firm, would have caused them to make reference to the subject matter of
such disagreement in their reports on such financial statements.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS; OTHER KEY INDIVIDUALS. The names, ages,
business experience (for at least the past five years) and positions of the
directors, executive officers and other key individuals of the Company as of
March 1, 1997 are set out below. The Company's board of directors consists
of seven members. All directors serve until the next annual meeting of the
Company's stockholders or until their successors are elected and qualified.
Executive officers of the Company are appointed by the board of directors.
As is disclosed elsewhere in this report, in the section entitled "Business-
Degerstrom Group Financing and Management Restructuring," Mr. Degerstrom,
Mr. Fish and Mr. Owsley were each appointed to the board of directors in
September of 1995 and Mr. Fish was elected president of the Company in March
of 1996, all pursuant to the terms of a securities purchase agreement between
the Company and Mr. Degerstrom. Mr. Fish was subsequently elected chairman
of the board of directors in May of 1996.
Name Age Position
---- --- --------
James A. Fish 66 Chairman, President and Chief
Executive Officer
Neal A. Degerstrom 72 Director
Pierre Gousseland 75 Director
F.D. Owsley 64 Director
Fred R. Schmid 63 Director
Laurence Steinbaum 73 Director
Nicholas S. Young 48 Director
Frank D. Duval (1) 61 Chief Operating Officer (de facto)
William Neal (2) 44 Exploration Manager
____________________
(1) Mr. Duval has not been elected an executive officer of the Company, but
may be deemed to be an executive officer by virtue of his activities on
behalf of the Company.
(2) Mr. Neal is not an executive officer of the Company.
BIOGRAPHIES OF DIRECTORS, EXECUTIVE OFFICERS AND KEY INDIVIDUALS.
JAMES A. Fish. Mr. Fish was appointed a director of the Company in September
of 1995, President in March of 1996 and Chairman and Chief Executive Officer
in May of 1996. He is also Vice President and General Counsel for N.
A. Degerstrom, Inc., positions he has held since September of 1987. Prior to
that, he was in private law practice with the firm of Winston & Cashatt in
Spokane from 1980 through 1987, and at the firm of Fish, Schultz & Tombari
from 1962 through 1980. Mr. Fish was employed as superintendent at S&F
Construction from 1955 through 1962. He received a bachelor of arts degree
in geology from Berea College in Kentucky in 1952 and a law degree from
Gonzaga University School of Law in 1962.
NEAL A. DEGERSTROM. Mr. Degerstrom was appointed a director of the Company
in September of 1995. He is President of N. A. Degerstrom, Inc., Spokane,
Washington, a privately-held company which has been engaged in railroad,
heavy highway, bridge and dam construction, large open pit mining and
worldwide mineral exploration since 1904, and prior to that was the managing
partner of N. A. Degerstrom Company, the predecessor in interest to N. A.
Degerstrom, Inc. Mr. Degerstrom has been a member of the Advisory Board of
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 and the Society of Mining Engineers, and a trustee of
the Northwest Mining Association. He received a Civil Engineering degree
from Washington State University in 1949.
PIERRE GOUSSELAND. Mr. Gousseland has been a director of the Company since
July of 1992, and is also currently a director of SIRE, Latin-American Gold
Company, Royal Gold, Inc., Guyanor Resources S.A. and Golden Star Resources
Ltd. 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. Mr. Owsley was appointed a director of the Company in
September of 1995. He was formerly employed by ASARCO as General Manager of
its Northwest Mining Department and was responsible for the company's silver
mining operations in the Coeur d'Alene Mining District and its lead-zinc and
silver-copper mines in Colorado and Montana. Mr. Owsley spent 34 years with
ASARCO in various mining positions with the company before his retirement in
1993. He graduated from Montana School of Mines with a bachelor of sciences
degree in mining engineering in 1955 and has received honorary degrees from
the Montana College of Mineral Science and Technology.
FRED R. SCHMID. Mr. Schmid was Chairman of the Board and President of the
Company from September of 1990 through May of 1996 and March of 1996,
respectively, and of Hanover International, Inc. since its inception. He was
also Chairman of the Board and President of Hanover Resource and Group S,
both of which were merged into the Company in August of 1996. Since 1972 he
has been Chairman of the Board, Chief Executive Officer and President of The
Hanover Group, Inc., a privately held company he founded, which is engaged in
investing in natural resource properties. Prior to becoming involved in the
Company and its affiliates, Mr. Schmid was President of National Equipment
Rental, Inc., which was engaged in equipment leasing and financing. Prior to
then, he was employed by IBM in various marketing, manufacturing and research
functions. Mr. Schmid graduated from New York University with a bachelor of
sciences degree in industrial engineering in 1963.
LAURENCE STEINBAUM. Mr. Steinbaum has been a director of the Company since
December of 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 sciences degree and
completed courses toward a Masters Degree at New York University's School of
Social Sciences.
NICHOLAS S. YOUNG. Mr. Young has been a director of the Company, Hanover
International, Inc. and Hanover Resources since October of 1990. From
October 1990 through December 1994, he was co-chairman of the Company's Board
of Advisors. He is presently a director of Spencer Stuart, a privately-held
executive search firm headquartered in New York City. Since July of 1992,
Mr. Young has served as President of TriCoastal Steel Corp. and as a Vice
President of Citibank, where he founded and managed the Global Gold Business
Department, which provided corporate financing and investment banking
services to governments, corporations and private investors using gold as the
medium of exchange. Prior to joining Citibank, Mr. Young held various sales,
marketing, trading and management positions with AMAX, Kennecott and Hudson
Bay Mining Company. He attended Franconia College and Harvard Business and
Management School.
FRANK D. DUVAL. Mr. Duval presently serves in an ex officio capacity as
acting chief operating officer of the Company and exercises responsibility
with respect to the Company's day-to-day operations. He is also presently
the president and a director of Midnite Mines, Inc., based in Spokane,
Washington. From 1974 until his resignation in 1987, Mr. Duval served in
various capacities as a director or executive officer of Pegasus Gold Inc., a
major North American mining company, which he founded. He is also a co-
founder and principal shareholder of Montana Reserves Company, a privately-
held mining company which, until operations were curtailed in 1995, was a
joint venture partner with Noranda Minerals Corp. in a large copper and
silver project located in Sanders and Lincoln counties, Montana. Mr. Duval
has been engaged in the mining business in various capacities for over 30
years.
In 1991, Star Phoenix Mining Company, an Idaho corporation with which Mr.
Duval was affiliated as its 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 mining properties in the
Coeur d'Alene Mining District that 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, a creditor of Star Phoenix brought suit against Mr. Duval
predicated on the guaranty, and obtained judgment against Mr. Duval which has
not yet been fully satisfied and is presently the subject of further court
review.
WAYNE SCHOONMAKER. Mr. Schoonmaker was appointed Secretary, Treasurer and
Principal Accounting Officer of the Company effective as of January of 1996,
succeeding Stephen J. Schmid. From 1981 until 1993, he was Financial Manager
of the Northwest Mining Department of ASARCO, and from 1978 until 1991, was
Chief Accountant at ASARCO's Troy Unit in Montana, where he was responsible
for the installation and implementation of the accounting system for the
start-up Troy mine. From July of 1978 through December of 1978, Mr.
Schoonmaker was Assistant Treasurer of the Bunker Hill Company, and from 1964
to 1978, was Assistant Corporate Secretary of Hecla Mining Company.
Mr. Schoonmaker received a bachelor of sciences degree in accounting from the
University of Montana in 1962 and masters degree in business administration
from the University of Idaho in 1987.
WILLIAM NEAL. Mr. Neal has been associated with the Company as its
Exploration Manager since November of 1996. From 1987 until joining the
Company, he served as a senior geologist with Battle Mountain Gold Company in
its domestic exploration group. Prior to that, he worked as a geologist for
Chevron Resources and as a consultant to First Miss Corporation. Mr. Neal
has over eighteen years' experience in mineral exploration, primarily in the
western United States. He received a bachelor of sciences degree in geology
from Colorado State University in 1977 and a master of science degree in
geology from Washington State University in 1987.
SECTION 16(A) REPORTING OBLIGATIONS. Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission (the "Commission"). Such persons are required by
Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of copies of reports made pursuant to
Section 16(a) of the Exchange Act and related regulations, the Company
believes that during the year ended December 31, 1996, Messrs. Fish,
Degerstrom, Gousseland, Schmid, Steinbaum, Young and Duval were each
delinquent in filing reports on Form 4, and that Mr. Schoonmaker was
delinquent in filing a report on Form 3.
Item 11. Executive Compensation.
SUMMARY COMPENSATION TABLE. The following table discloses compensation
received by the Company's current and former president and chief executive
officer for the years ended December 31, 1996, 1995 and 1994. No other
executive officer's salary and bonus exceeded $100,000 in any of these years.
Annual Compensation
Other
Executive Annual
Officer Year Salary Bonus Compensation
- ------- ---- ------ ----- ------------
James A. Fish (1) 1996 $90,000 $ 0 $ 0
President and Chief 1995 0 0 0
Executive Officer 1994 0 0 0
Fred R. Schmid
Former President and 1996 0 90,000 (2)
Chief Executive 1995 137,435 0 0
Officer 1994 126,445 150,000 (3) 0
________________
(1) Mr. Fish succeeded Fred R. Schmid as president and chief executive
officer of the Company effective March of 1996. Mr. Fish's annual
salary is payable each month in the form of $3,750 in cash and $3,750 in
restricted shares of common stock based on 60% of the average of the
"asked" market prices of the common stock as reported on the Nasdaq
SmallCap Market during the preceding calendar month.
(2) Consists of compensation paid to Mr. Schmid pursuant to the terms of a
consulting agreement entered into in March of 1996. Such agreement
terminated effective December 31, 1996.
(3) Consists of a bonus awarded to Mr. Schmid in 1994 for his services in
raising the initial working capital for the Company and completing its
public financing.
<TABLE>
<CAPTION>
Long-Term Compensation
Dollar Value Securities All Other
Executive of Restricted Underlying LTIP Compen-
Officer Year Stock Awards Options/SARS Payouts sation
- ------- ---- ------------ ------------ ------- ----------
<S> <C> <C> <C> <C> <C>
James A. Fish (1) 1996 $ 0 $ 0 $ 0 $ 0
President and Chief 1995 0 0 0 0
Executive Officer 1994 0 0 0 0
Fred R. Schmid 1996 0 0 0 0
Former President and 1995 0 0 0 0
Chief Executive 1994 0 0 0 0
Officer
</TABLE>
OVERALL COMPENSATION POLICY. Salary compensation of the Company's executive
officers is determined by the board of directors and by a compensation
committee of the board, which is responsible for considering specific
information and making recommendations to the full board. The compensation
committee is comprised of two outside directors appointed annually by the
Company's board of directors and presently comprises Mr. Gousseland and
Mr. Steinbaum. In considering and recommending executive compensation, the
compensation committee reviews factors such as individual executive
compensation, corporate performance, stock price appreciation and the total
return to stockholders. The committee also considers executive compensation
levels within a peer group of publicly-held North American gold-mining
companies and, at least historically, takes into account the views of the
Company's chief executive officer.
The objectives of the Company's total executive compensation package 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 stockholder interests through stock option plans, and to
provide a compensation package that recognizes an executive's individual
results and contributions to the Company's overall business objectives.
SALARY. The key elements of the Company's executive compensation consists of
salary and incentive stock options. The compensation committee of the board
acts on salary levels of officers and the stock plan committee of the board
acts on employee stock option awards. Together, these committees design an
overall compensation package for each executive.
Salaries for executive officers are determined by evaluating the
responsibilities of the position held and the experience of the individual,
and by reference to the market for executive talent, the latter of which
provides a comparison of salaries for comparable positions at other gold-
mining companies. The salary levels of the chief executive officer and other
executive officers of the Company for the following calendar year are
generally established by the board of directors at its December meeting or at
a later special meeting of the board. Specific individual performance and
overall corporate or business segment performance are reviewed in determining
the compensation level 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 the Company's stockholders, employees, the
public and government regulators. In evaluating the performance and setting
the compensation of the chief executive officer and the other executive
officers of the Company, the compensation committee, board of directors and
stock option plan committee have traditionally maintained salary compensation
at levels below those of other companies within the Company's peer group; in
order to compensate for these lower salaries, the chief executive officer and
other executive officers of the Company have historically been granted
performance incentives in the form of incentive stock options.
CASH BONUSES. From time to time, the board of directors and the compensation
committee may approve cash bonuses to executives and key employees, based on
outstanding achievement in the performance of their respective duties.
During 1994 the compensation committee recommended to the board, and the
board authorized and approved, the payment to Fred R. Schmid of 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 cash bonuses were
awarded in 1996.
STOCK OPTIONS. The Company currently maintains one stock option plan, the
1995 Stock Option Plan. The plan provides for the issuance of incentive
stock options intended to qualify under Section 422A of the Internal Revenue
Code of 1986, as amended (the "Code"), and options that are not qualified
under the Code. Key individuals of the Company and its subsidiaries,
including officers and directors who are also employees, are eligible to
receive grants of options under the plan. All options are exercisable at
prices equivalent to the mean of the high and low sales prices of the Common
Stock, as reported by the Nasdaq SmallCap Market as of the date of grant. As
of the date of this report, options for 800,000 shares of Common Stock had
been granted, and options for 3,200,000 additional shares were available for
grant, under the 1995 Stock Option Plan. 250,000 of such options had been
issued to Fred R. Schmid; these options are exercisable by Mr. Schmid at the
price of $1.60 per share through the end of the year 2000. None of the other
named executive officers had been granted options pursuant to the 1995 Stock
Option Plan as of the date of this report.
The Company's 1995 Stock Option Plan is jointly administered by the stock
option plan committee and by the board. The primary function of the stock
option plan committee is to review and evaluate the fairness of the
recommendations of management concerning proposed grants of options to
directors and executive officers of the Company. The primary function of the
board in such matters is to consider the recommendations of the stock option
plan committee and to authorize proposed grants of options to such persons.
Stockholder approval of the 1995 Stock Option Plan was obtained at the 1996
special meeting of shareholders for the purposes of qualifying the plan
pursuant to Rule 16b-3 promulgated under the Securities Exchange Act of 1934
(the "Exchange Act").
OPTIONS GRANTED IN 1996. No options were granted during the year ended
December 31, 1996 to the named executive officers of the Company.
OPTION EXERCISES AND OPTION VALUES. No options were exercised during the
year ended December 31, 1996 by the named executive officer of the Company.
EMPLOYMENT CONTRACTS AND AGREEMENTS.
AGREEMENTS WITH 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, as amended, provided for a base salary of $125,000 in
the first year, a salary of $137,000 in the second year and a salary of
$150,000 for the third year, payable in equal monthly installments. In
addition to salary, Mr. Schmid was entitled to receive cost-of-living
increase based upon increases in the applicable consumer price index. The
agreement also provided Mr. Schmid with a 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 of 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, who was appointed in
March of 1996. Mr. Schmid has subsequently been engaged as a consultant to
the Company, for which he is paid a fee of $7,500 a month through
December 31, 1996. Mr. Schmid retained his stock options and rights under
the 1995 Stock Option Plan, and, as previously noted in this report, is
entitled to purchase up to 250,000 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 any criminal or deliberately fraudulent acts
resulting in actual damages to the Company.
AGREEMENT WITH STEPHEN J. SCHMID. On September 5, 1995, the Company entered
into an employment agreement with Stephen J. Schmid, the Company's vice
president, treasurer and secretary, providing for certain payments to Mr.
Schmid in the event a "change in control" of the Company, as defined in the
agreement, were to occur. Were such a "change in control" event to occur,
the Company was obligated to continue Mr. Schmid's employment for a period of
24 months thereafter at an annual base salary essentially equal to
Mr. Schmid's base salary immediately before the change in control event,
unless Mr. Schmid elected to terminate the agreement after 12 months. In
addition, Mr. Schmid was entitled to terminate the agreement and to continue
to receive a salary for the balance of the 24 month period, provided such
termination was for "good reason".
In January of 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 following the filing of the Company's annual report on Form 10-K for
the year ended December 31, 1995. Mr. Schmid has been engaged as a
consultant for the Company since January 1, 1996, for which he is paid a fee
of $5,500 per month through September 30, 1996, reduced by any compensation
he may earn from new employment during the period from April 1, 1996 through
September 30, 1996. Mr. Schmid retained his stock options and rights under
the 1995 Stock Option Plan to purchase up to 175,000 shares of common stock
of the Company for $1.60 per share exercisable 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 any criminal or
deliberately fraudulent acts resulting in actual damages to the Company.
[The balance of this page has been intentionally left blank.]
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
BENEFICIAL OWNERSHIP TABLE. The following table sets forth as of March 1,
1997 the names of, and number of shares beneficially owned by, persons known
to the Company to own more than five percent (5%) of the Company's common
stock; the names of, and number of shares beneficially owned by each director
and executive officer of the Company; and the number of shares beneficially
owned by, of all directors and executive officers as a group. At such date,
the number of shares of common stock of the Company outstanding and deemed
outstanding pursuant to presently exercisable options was 20,891,443.
Amount and Nature of
Beneficial Ownership
(all direct unless Percent
Name of Owner otherwise noted) of Class
- ------------- ------------------- --------
James A. Fish (1), (2) 151,421 0.7%
Neal A. Degerstrom (1), (3) 6,000,000 28.7%
Pierre Gousseland (1), (4) 190,017 0.9%
F. D. Owsley (1), (5) 29,000 0.1%
Fred R. Schmid (1), (6) 3,397,092 16.3%
Laurence Steinbaum (1), (7) 447,856 2.1%
Nicholas S. Young (1), (8) 719,307 3.4%
Duval Family Trust (9) 1,311,571 6.3%
All Directors and Executive
Officers as a Group
(9 persons) (10) 10,802,693 51.7%
____________________
(1) Director of the Company.
(2) Mr. Fish is Chairman, President and Chief Executive Officer of the
Company. The shares attributed to Mr. Fish include 103,000 shares
acquired pursuant to the securities purchase agreement described in
footnote 3, below. Such shares are also attributed to Neal A.
Degerstrom in the foregoing table.
(3) The foregoing table attributes to Mr. Degerstrom all of the shares of
the Company purchased by Mr. Degerstrom and his permitted assigns
pursuant to the securities purchase agreement between the Company and
Mr. Degerstrom dated as of June 1, 1995, as amended. Although all
shares purchased by Mr. Degerstrom and his assigns are shown in the
table above as beneficially owned by Mr. Degerstrom, a Schedule 13D
dated June 20, 1995, as amended through the date of this report, filed
by Mr. Degerstrom and others states that 2,663,200 of such shares have
been registered in Mr. Degerstrom's and his company's own name as of the
date of this report, representing approximately 12.8% of the common
stock outstanding or deemed outstanding at such date. The Schedule 13D
filed by Mr. Degerstrom and his permitted assigns also states that none
of the persons 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. On March 10, 1997, the board of directors of the
Company granted Mr. Degerstrom options to purchase up to 2,312,968
shares of common stock as consideration for his guarantee of certain
obligations in connection with the Company's agreement to acquire
Easton-Pacific (See Item 1 of this report and, in particular, the
subsection entitled "Narrative Description of Business-Agreement to
Acquire Easton-Pacific"). Such options are exercisable by Mr.
Degerstrom at the price of $1.25 per share over a three-year period
commencing with the date of grant. After giving effect to such options,
the number of shares of common stock of the Company beneficially owned
by Mr. Degerstrom at March 10, 1997 was 4,976,168 shares, or
approximately 21.4% of the common stock then outstanding or deemed
outstanding.
(4) Includes 100,000 shares issuable pursuant to presently exercisable
options granted under the Company's 1995 Stock Option Plan.
(5) The shares attributed to Mr. Owsley were acquired pursuant to the
securities purchase agreement described in footnote 3, above, and have
also been attributed to Mr. Degerstrom in the foregoing table.
(6) Includes 425,000 shares issuable to Mr. Schmid and his son, Stephen
Schmid, pursuant to the Company's 1995 Stock Option Plan. In addition,
members of Mr. Schmid's family beneficially own an additional 2,514,136
shares issued upon the merger of Hanover Resources and Group S into the
Company, which, when combined with Mr. Schmid's shareholdings, represent
approximately 16% of the outstanding common stock as of the date of this
report. Mr. Schmid disclaims beneficial ownership of the shares owned
by members of his family.
(7) Includes 125,000 shares issuable pursuant to presently exercisable
options granted under the Company's 1995 Stock Option Plan and 5,000
shares owned beneficially and of record by Mr. Steinbaum's spouse.
(8) Includes 150,000 shares issuable pursuant to presently exercisable
options granted under the Company's 1995 Stock Option Plan.
(9) Frank D. Duval, who is affiliated with the Duval Family Trust, has not
been elected to office as an executive officer or director of the
Company, but by virtue of his activities in the name and on behalf of
the Company may be deemed to be an affiliate of the Company. According
to the Schedule 13D filed by Mr. Degerstrom (see footnote 3, above) on
behalf of Mr. Duval and others, Mr. Degerstrom and Mr. Duval have an
understanding pursuant to which Mr. Duval may purchase up to one-half of
the shares acquired by Mr. Degerstrom and N.A. Degerstrom, Inc. under
the securities purchase agreement dated June 1, 1995, as amended,
between the Company and Mr. Degerstrom, at a price equal to the price
paid by Mr. Degerstrom or N. A. Degerstrom, Inc. for such shares. Such
understanding has not been memorialized by agreement or other writing as
of the date of this report. Mr. Duval's rights to acquire these shares
were assigned in 1996 to a trust established for the benefit of Mr.
Duval's family.
In addition to the shares attributed to the Duval Family Trust in the
foregoing table, Frank D. Duval owns 100 shares which were acquired by
him in an open market transaction. These shares have not been assigned
to the trust.
(10) See footnotes 2, 3, 5 and 9, above.
LOCK-UP AGREEMENTS. As consideration for the registration under the
Securities Act of 1933, as amended (the "Securities Act") of shares of common
stock offered for resale by certain stockholders of the Company, such
stockholders, consisting of the Company's directors, all of the members of
the Schmid family and all of the members of the Degerstrom group of
stockholders, entered into lock-up agreements with the Company limiting the
number of shares each may resell while the registration statement is
effective.
The lock-up agreements provide, generally, that no such selling stockholder
may resell any of such shares during a six month period following the
effective date of the registration statement (or until March 3, 1997), and
that thereafter, during each of two successive six month periods, such
persons will sell no more 15% of their shares, resulting in total sales by
each such person of no more than 30% of their shares during the eighteen
month period the registration statement is effective. The foregoing
notwithstanding, such persons may, during such eighteen month period,
transfer any number of his or her shares to the such person's children or
relatives, by gift or otherwise, and may also transfer any number of shares
in a private sale, provided, in each case, that any such shares shall
continue to be subject to the restrictions set forth in the lock-up
agreement. As used in the agreement, the term "private sale" is be defined
to mean any non-public sale effected by the selling stockholder and the
purchaser of such selling stockholder's shares, without the assistance or
intervention of a securities broker or dealer, which occurs outside the
medium of the Nasdaq SmallCap Market or any other securities exchange or
secondary market on which shares of the Company's common stock are traded or
prices therefor are quoted. The lock-up agreements further provide that,
prior to the expiration of the registration statement, the Company will
undertake at its sole cost and expense either to amend the registration
statement or file a new registration statement to include any additional
shares each selling stockholder desires to register for resale under the
Securities Act. In addition, the lock-up agreements provide that, in the
event a selling stockholder who is also a director or executive officer of
the Company ceases to be affiliated with the Company in such capacities, he
shall be free of the lock-up restrictions, provided, however, that if such
selling stockholder offers any shares for sale for a period of six months
thereafter, he shall first direct such offer to the Company, and to the
Degerstrom group of stockholders and the other directors and executive
officers of the Company, which shall have a ten-day right of first refusal to
purchase the same.
Item 13. Certain Relationships and Related Transactions.
TRANSACTIONS WITH HANOVER RESOURCES AND GROUP S. As previously discussed in
this report, the boards of directors and stockholders of the Company, Hanover
Resources and Group S approved a plan of merger, effective September 12,
1996, pursuant to which Hanover Resources and Group S have been merged into
the Company in exchange for the issuance of 2,270,486 shares of common stock
to the stockholders of Hanover Resources and Group S, and the distribution to
Hanover Resources' stockholders of 3,625,000 additional shares of common
stock held by Hanover Resources.
Under the terms of the merger agreement, the Company issued 1,271,110 shares
of common stock to acquire Hanover Resources (the Company actually issued
4,896,110 shares to the Hanover Resources stockholders, of which 3,625,000
shares were simultaneously exchanged for the same number of shares of common
stock then held by Hanover Resources, which shares were then canceled), and
issued 999,376 shares to acquire Group S, taking into account a 193,220 share
adjustment to repay loans made by the Company to Group S. A total of
2,270,486 new shares of common stock were issued in the transaction, which
represented approximately 11% of the Company's outstanding common stock as of
the effective date of the merger.
The board of directors of the Company approved the proposed merger and the
resulting consolidation of the mining claims of the three companies without
the benefit of an opinion as to fairness from an independent investment
banking or mining engineering firm. Instead, the Company relied on the
results of previous exploration work undertaken on the properties by
Kennecott, which work resulted in a finding that tentatively quantified the
mineralized gold deposits existing on the claims held by each of the Company,
Hanover Resources and Group S. Laurence Steinbaum, Nicholas S. Young,
Stephen J. Schmid and Fred R. Schmid were stockholders of Hanover Resources,
and Nicholas S. Young, Stephen J. Schmid and Fred R. Schmid were directors
and executive officers of Hanover Resources. Pierre Gousseland, Laurence
Steinbaum, Nicholas S. Young, Stephen J. Schmid and Fred R. Schmid were
stockholders of Group S, and Fred R. Schmid and Stephen J. Schmid were also
directors and executive officers of Group S.
TRANSACTIONS WITH FRED R. SCHMID. As of December 31, 1995, $75,282 remained
payable to Fred R. Schmid as accrued salary, net of advances received from
Hanover Resources and Group S as a result of the merger of these companies
into the Company. This obligation to Mr. Schmid was canceled during the
second quarter of 1996.
TRANSACTIONS WITH NEAL A. DEGERSTROM AND THE DEGERSTROM GROUP OF INVESTORS.
As previously discussed in this report, the Company entered into a securities
purchase agreement with Neal A. Degerstrom in June of 1995 in order to
provide the Company with funds sufficient to meet its obligations to the
landowner-lessors of the Company's Alder Gulch mining claims. The Company
has issued and sold 6,000,000 shares of common stock pursuant to the
agreement to Mr. Degerstrom and associated persons as of the date of this
report, at prices ranging from $0.35 per share to $1.00 per share. The
original securities purchase agreement was entered into between the Company
and Mr. Degerstrom prior to Mr. Degerstrom's affiliation with the Company,
and may therefore be deemed to be an arms-length transaction. Subsequent
amendments to the purchase agreement, which had the effect of increasing the
number of shares available for purchase by Mr. Degerstrom and associated
persons, were negotiated and concluded after Mr. Degerstrom became affiliated
with the Company, however, and may not be deemed to be arms-length
transactions. All such amendments were approved on behalf of the Company by
a disinterested majority of its directors.
[The balance of this page has been intentionally left blank.]
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Exhibits. The following exhibits are filed as part of this report. Exhibits
previously filed are incorporated by reference, as noted.
Exhibit No. Exhibit
- ----------- -------
3.1 Articles of Incorporation of the registrant. Filed as an
exhibit to the registrant's registration statement on
Form S-1 (Commission File No. 33-38745) and incorporated
by reference herein.
3.2 Bylaws of registrant. Filed as an exhibit to the
registrant's registration statement on Form S-1
(Commission File No. 33-38745) and incorporated by
reference herein.
10.1 Claim Option Agreement dated December 20, 1990 between
the registrant and Hanover Resources, Inc. Filed as an
exhibit to the registrant's registration statement on
Form S-1 (Commission File No. 33-38745) and incorporated
by reference herein.
10.2 Mineral Sublease Agreement dated August 31, 1993 between
the registrant and Group S Limited. Filed as an exhibit
to the registrant's annual report on Form 10-K for the
year ended December 31, 1993, and incorporated by
reference herein.
10.3 Assignment of Lease and Option to Purchase dated
November 15, 1993 between the registrant and John Mangus.
Filed as an Exhibit to the registrant's annual report on
Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein.
10.4 Amendment No. 1, dated December 3, 1993, to Claim Option
Agreement dated December 20, 1990 between the registrant
and Hanover Resources, Inc. Filed as an exhibit to the
registrant's annual report on Form 10-K for the year
ended December 31, 1993, and incorporated by reference
herein.
10.5 Amendment No. 1, dated December 3, 1993, to Assignment
and Mineral Sublease Agreement dated February 20, 1992
between the registrant and Hanover Resources, Inc. Filed
as an exhibit to the registrant's annual report on
Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein.
10.6 Assignment Agreement between the registrant and Hanover
Resources, Inc. Filed as an exhibit to the registrant's
registration statement on Form S-1 (Commission File No.
33-38745) and incorporated by reference herein.
10.7 Securities Purchase Agreement dated June 1, 1995, as
amended, between the registrant and Neal A. Degerstrom.
Filed as Exhibit 10.7 to the registrant's annual report
on Form 10-K for the year ended December 31, 1995 and
incorporated by reference herein.
10.8 Consulting Agreement dated as of January 29, 1996 between
the registrant and Fred R. Schmid. Filed as Exhibit 10.8
to the registrant's annual report on Form 10-K for the
year ended December 31, 1995 and incorporated by
reference herein.
10.9 Consulting Agreement dated as of January 29, 1996 between
the registrant and Stephen J. Schmid. Filed as Exhibit
10.9 to the registrant's annual report on Form 10-K for
the year ended December 31, 1995 and incorporated by
reference herein.
10.10 Asset Purchase Agreement dated March 25, 1996 between the
registration and Tabor Resources Corporation. Filed as
Exhibit 10.10 to the registrant's annual report on Form
10-K for the year ended December 31, 1995 and
incorporated by reference herein.
10.11 Agreement and Amendment to Mining Lease and Option to
Purchase dated March 26, 1996 between the registrant and
Roy A. and Marlene Moen and Moen Builders, Inc. Filed as
Exhibit 10.11 to the registrant's annual report on Form
10-K for the year ended December 31, 1995 and
incorporated by reference herein.
27.1 Financial Data Schedule. Filed herewith.
99.1 Opinion of Zeller Weiss & Kahn dated March 29, 1996
concerning the financial statements of the registrant for
the years ended December 31, 1995 and 1994, and for the
period from inception (May 2, 1990) through December 31,
1995. Filed as part of the financial statements of the
registrant included in the registrant's registration
statement on Form S-1 dated September 3, 1996 (Commission
File No. 33-3882).
99.2 Opinion of Grossman Tuchman & Shah LLP dated May 16, 1996
concerning the financial statements of Hanover Resources,
Inc. and Group S Limited for the years ended December 31,
1995 and 1994. Filed as part of the financial statements
of the registrant included in the registrant's
registration statement on Form S-1 dated September 3,
1996 (Commission File No. 33-3882).
FINANCIAL STATEMENTS. An index to the financial statements included in this
report appears at page 28. The financial statements and supplementary data
appear at pages 29 through 50 of this report.
REPORTS ON FORM 8-K. No current reports on Form 8-K were filed by the
Company during the fourth quarter of 1996.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Item Page
- ---- ----
Report of Independent Certified Public Accountants 29
Financial Statements:
Balance Sheets 31
Statements of Loss 33
Statements of Changes in Stockholders' Equity 34
Statements of Cash Flows 37
Notes to Financial Statements 41
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Hanover Gold Company, Inc.
Spokane, Washington
We have audited the accompanying balance sheet of Hanover Gold Company, Inc.
as of December 31, 1996, and the related statements of loss, changes in
stockholders' equity and cash flows for the year then ended. We have also
audited the statements of loss, stockholders' equity and cash flows for the
period from inception (May 2, 1990) through December 31, 1996, except that we
did not audit these financial statements for the period from inception (May
2, 1990) through December 31, 1995; those statements were audited by other
auditors whose report dated March 29, 1996, expressed an unqualified opinion
on those statements. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
The financial statements give retroactive effect to the mergers of Hanover
Resources, Inc. and Group S Limited which have been accounted for as a
combination of entities under common control as described in Note 2 to the
financial statements. We did not audit the balance sheets of Hanover
Resources, Inc. and Group S Limited as of December 31, 1995 or the related
statements of loss, changes in stockholders' equity and cash flows for the
years ended December 31, 1995 and 1994 and from inception through December
31, 1995, which statements reflect total assets of $1,750,260 at December 31,
1995 and total revenues of $0, $0 and $432,730 for the years ended December
31, 1995 and 1994 and for the period from inception (May 2, 1990) through
December 31, 1995. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
the amounts included for Hanover Gold Company, Inc., Hanover Resources, Inc.,
and Group S Limited for the period from date of inception (May 2, 1990)
through December 31, 1995, is based solely on the reports of the other
auditors.
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 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, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Hanover Gold Company, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 and the period
from inception (May 2, 1990) through December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has no recurring source of revenue, has
incurred losses since inception and, at December 31, 1996, has negative
working capital. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman LLP
Spokane, Washington
March 7, 1997
<PAGE>
HANOVER GOLD COMPANY, INC.
Balance Sheets
December 31, 1996 1995
- ------------ ---- ----
Assets (Note 1)
Current Assets:
Cash and cash equivalents $ 96,353 $ 734,982
Supplies inventory 10,000 29,494
Prepaid expenses and
other current assets 97,369 129,753
---------- ---------
Total current assets 203,722 894,229
Fixed Assets:
Mineral properties, net (Note 3) 10,490,822 7,044,705
Furniture and equipment, net of
accumulated depreciation
of $63,076 and $47,675 88,182 102,819
Other assets:
Note receivable (Note 4) - 89,298
Note receivable from a related
party (Note 7) - 220,000
Other assets 23,424 19,924
Due from shareholder - 70,715
---------- ---------
$10,806,150 $8,441,690
========== =========
<PAGE>
HANOVER GOLD COMPANY, INC.
Balance Sheets
December 31, 1996 1995
- ------------ ---- ----
Liabilities and Stockholders' Equity
(Note 1)
Current Liabilities:
Accounts payable $ 70,136 $ 284,874
Note payable to shareholder
(Note 7) 73,405 50,000
Accrued payroll and payroll taxes 85,859 130,886
Current portion of long-term debt
(Note 5) 23,653 -
---------- ----------
Total current liabilities 253,053 465,760
Long-term debt, less current portion
(Note 5) 194,065 -
---------- ----------
Total liabilities 447,118 465,760
---------- ----------
Commitments and contingencies
(Notes 3, 8, 9 and 11)
Stockholders' equity: (Notes 7, 9 and 10)
Preferred stock, $.001 par value;
shares authorized 2,000,000,
no shares outstanding - -
Common stock, $.0001 par value; shares
authorized 48,000,000; outstanding
19,843,022 and 15,920,164 1,984 1,592
Additional paid-in capital 16,270,146 12,559,109
Deficit accumulated during
the development stage (5,913,098) (4,584,771)
---------- ----------
Total stockholders' equity 10,359,032 7,975,930
---------- ----------
$10,806,150 $ 8,441,690
========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Statements of Loss
<TABLE>
<CAPTION>
Cumulative
Amounts from
Date of Inception Year Ended December 31,
(May 2, 1990) through -----------------------
December 31, 1996 1996 1995 1994
--------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Revenues (Note 2) $1,151,958 $ 3,510 $ 499,299 $ 216,418
--------- ---------- ---------- ----------
Operating expenses:
Cost of goods mined 1,987,483 - 1,076,668 910,815
Depreciation and amortization 98,281 26,722 38,229 28,415
Provision for bad debt (Note 7) 779,921 - 779,921 -
General and administrative (Note 7) 4,226,794 1,284,915 930,982 738,350
--------- ---------- ---------- ----------
Total operating expense 7,092,479 1,311,637 2,825,800 1,677,580
--------- ---------- ---------- ----------
Operating loss (5,940,521) (1,308,127) (2,326,501) (1,461,162)
Other income (expense):
Interest income (expense), net 58,711 (20,200) 29,820 98,208
Loss on sale of equipment (31,288) - (32,509) -
--------- ---------- ---------- ----------
Total other income (expense) 27,423 (20,200) (2,689) 98,208
--------- ---------- ---------- ----------
Net loss (Note 2) $(5,913,098) $(1,328,327) $(2,329,190) $(1,362,954)
========= ========== ========== ==========
Net loss per share $ (0.08) $ (0.20) $ (0.14)
========= ========== ========== ==========
Weighted average shares outstanding 17,418,318 11,931,835 9,411,226
========= ========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Statements of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
From the Date of Inception During the
May 2, 1990) through Common Stock Paid in Subscription Development
December 31, 1996 Shares Amount Capital Receivable Stage Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash ($0.53
per share) 752,562 $ 75 $ 402,425 $ - $ - $ 402,500
Issuance of common
stock for cash
($0.07 per share) 86,250 9 6,009 - - 6,018
Cash contributed
to capital - - 5,000 - - 5,000
Net loss - - - - (141,114) (141,114)
--------- --- --------- ------ ------- -------
Balance,
December 31, 1990 838,812 84 413,434 - (141,114) 272,404
Issuance of common stock
to directors
($.0001 per share) 200,000 20 - - - 20
Issuance of common stock
for claims and
engineering costs
($2.50 per share) 229,007 23 572,496 - - 572,519
Issuance of common stock
for cash
($0.06 per share) 2,957,506 296 166,374 - - 166,670
Issuance of common stock
for cash
($0.42 per share) 268,586 27 113,723 - - 113,750
Exercise of stock
purchase warrants
($.60 per share) 74,400 7 44,633 - - 44,640
Exercise of stock
purchase warrants
($1.25 per share) 111,500 11 139,363 - - 139,374
Cash contributed
to capital - - 73,850 - - 73,850
Net loss - - - - (179,866) (179,866)
--------- --- --------- ------ ------- --------
Balance,
December 31, 1991 4,679,811 468 1,523,873 - (320,980) 1,203,361
Issuance of common
stock for cash
($2.00 per share) 712,500 71 1,424,929 - - 1,425,000
Issuance of common
stock for cash
($0.18 per share) 218,537 22 39,978 - - 40,000
Exercise of stock
purchase warrants
($1.25 per share) 41,600 4 51,996 - - 52,000
Net loss - - - - (314,878) (314,878)
--------- --- --------- ------ ------- -------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Statements of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
From the Date of Inception During the
May 2, 1990) through Common Stock Paid in Subscription Development
December 31, 1996 Shares Amount Capital Receivable Stage Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1992 5,652,448 565 3,040,776 - (635,858) 2,405,483
Issuance of common
stock for interest
in mineral property
($1.50 per share) 150,000 15 224,985 - - 225,000
Issuance of common stock
to officer for cash
($0.01 per share) 127,165 13 737 - - 750
Exercise of stock
purchase warrants
($1.60 per share) 3,061,703 306 4,749,912 (649,360) - 4,100,858
Net loss - - - - (256,769) (256,769)
--------- ---- --------- -------- ------- ---------
Balance,
December 31, 1993 8,991,316 899 8,016,410 (649,360) (892,627) 6,475,322
Exercise of stock
purchase warrants
($1.60 per share) 1,328,897 133 2,126,102 - - 2,126,235
Cancellation of
subscribed shares
($1.60 per share) (250,000) (25) (399,975) 400,000 - -
Cash contributed
to capital - - 98,393 - - 98,393
Net loss - - - - (1,362,954) (1,362,954)
--------- ---- --------- -------- --------- ---------
Balance,
December 31, 1994 10,070,213 1,007 9,840,930 (249,360) (2,255,581) 7,336,996
Issuance of common
stock for cash
($.35 per share) 2,142,856 214 749,786 - - 750,000
Issuance of common
stock for cash
($.35 per share) 714,286 71 249,929 - - 250,000
Issuance of common
stock for cash
($1.00 per share) 200,000 20 199,980 - - 200,000
Issuance of common stock
in satisfaction of
vendor obligations
($1.06 per share) 69,679 7 74,089 - - 74,096
Issuance of common stock
in satisfaction of
vendor obligations
($1.00 per share) 200,000 20 199,980 - - 200,000
Issuance of common
stock for cash
($1.00 per share) 1,000,000 100 999,900 - - 1,000,000
Issuance of common
stock to officer 197,835 20 - - - 20
Issuance of common stock
pursuant to
convertible debt 1,348,295 135 281,313 - - 281,448
Cash received for
subscribed shares - - - 249,360 - 249,360
Repurchase of previously
issued shares
($1.60 per share) (23,000) (2) (36,798) - - (36,800)
Net loss - - - - (2,329,190) (2,329,190)
--------- ---- --------- -------- --------- ---------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Statements of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
From the Date of Inception During the
May 2, 1990) through Common Stock Paid in Subscription Development
December 31, 1996 Shares Amount Capital Receivable Stage Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 15,920,164 1,592 12,559,109 - (4,584,771) 7,975,930
Issuance of common
stock for mineral
property rights
($4.00 per share) 5,000 1 19,999 - - 20,000
Issuance of common
stock for mineral
property rights
($2.00 per share) 525,000 52 1,049,948 - - 1,050,000
Issuance of common
stock for mineral
property rights
($1.56 per share) 250,000 25 389,975 - - 390,000
Issuance of common
stock for cash
($0.50 per share) 2,142,858 214 1,071,215 - - 1,071,429
Issuance of common
stock for cash,
net of issuance
costs of $70,000
($1.25 per share) 1,000,000 100 1,179,900 - - 1,180,000
Net loss - - - - (1,328,327) (1,328,327)
--------- ---- --------- -------- --------- ---------
Balance,
December 31, 1996 19,843,022 $1,984 $16,270,146 $ - $(5,913,098) $10,359,032
========== ===== ========== ======== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Statements of Cash Flow
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Date of Inception
(May 2, 1990)
through
December 31, Year Ended December 31,
1996 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,913,098) $(1,328,327) $(2,329,190) $(1,362,954)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Loss on sale of equipment 32,509 - 32,509 -
Depreciation and depletion 98,231 26,722 38,229 28,415
Common stock issued for public
relations fees 200,000 - 200,000 -
Common stock issued to officer
and directors 40 - 20 -
Write-off of note receivable 779,921 - 779,921 -
Changes in operating assets
and liabilities:
(Increase) decrease in
supplies inventory (10,000) 19,494 151,744 (110,799)
(Increase) decrease in
prepaid expenses (97,369) 32,384 (5,057) (113,557)
(Increase) decrease in
other assets (23,424) (3,500) (269) (255)
Increase (decrease) in
accounts payable 144,232 (214,738) (73,090) 34,535
Increase (decrease) in
accrued expenses 152,137 (45,027) (423,395) (254,179)
---------- --------- --------- ---------
Net cash used in
operating activities (4,636,821) (1,512,992) (1,628,578) (1,778,794)
---------- --------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of equipment 15,326 - 13,871 -
Net repayments (advances) under
shareholder advances - 70,715 1,085 (51,440)
Repayments (advances) under
notes receivable (1,089,219) - 38,021 (972,794)
Purchase of furniture
and equipment (286,195) (78,262) (40,614) (77,980)
Additions to mineral properties (7,608,113) (1,346,696) (834,510) (1,591,334)
---------- --------- --------- ---------
Net cash used in
investing activities (8,968,201) (1,354,243) (822,147) (2,693,548)
---------- --------- --------- ---------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Statements of Cash Flow
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Date of Inception
(May 2, 1990)
through
December 31, Year Ended December 31,
1996 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Borrowings under note
payable to shareholder 73,405 23,405 50,000 -
Proceeds from sale of
common stock 13,069,225 2,251,429 2,200,000 2,126,235
Proceeds from issuance of
convertible debt 215,170 - - -
Repayment of long-term debt (46,228) (46,228) - -
Collection of subscription
receivable 249,360 - 249,360 -
Repurchase and retirement of
common stock (36,800) - (36,800) -
Capital contributions 177,243 - - 98,393
--------- -------- ------- -------
Net cash provided by
financing activities 13,701,375 2,228,606 2,462,560 2,224,628
---------- --------- --------- ---------
Net increase (decrease) in cash 96,353 (638,629) 11,835 (2,247,714)
CASH AND CASH EQUIVALENTS,
beginning of period - 734,982 723,147 2,970,861
---------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 96,353 $ 96,353 $ 734,982 $ 723,147
========= ========= ======== ========
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 24,045 $ 23,181 $ 864 $ -
Income taxes $ - $ - $ - $ -
Supplemental schedule of
non-cash investing and
financing activities (Note 10)
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
HANOVER GOLD COMPANY, INC.
Summary of Accounting Principals
NATURE OF BUSINESS Hanover Gold Company, Inc. ("Hanover" or the "Company")
is a development stage enterprise principally engaged in
acquiring and maintaining gold mining properties in
southwestern Montana for exploration and future
development. The Company, which is the successor company
to an entity incorporated in the state of Delaware in
1984, commenced its operations in May 1990.
In 1996, the Company acquired all of the issued and
outstanding shares of Group S Limited ("Group S") and
Hanover Resources, Inc. ("Resources"). As the
controlling shareholders of Group S and Resources were
also shareholders and officers of Hanover, the
acquisitions were accounted for as a combination of
entities under common control similar to a pooling of
interests. Accordingly, the accounts of Group S and
Resources were recorded at their historical bases and
their operations and cash flows have been included in
Hanover's financial statements as if the acquisitions had
occurred on May 2, 1990. (See Note 2.)
CASH EQUIVALENTS For the purpose of the balance sheets and statements of
cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three
months or less to be a cash equivalent. Financial
instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash
equivalents. Cash and cash equivalents consist of funds
deposited with various high credit quality financial
institutions.
FURNITURE AND Furniture and equipment are carried at cost.
EQUIPMENT Depreciation is computed by the straight-line method over
the estimated useful lives of the related assets which
range from five to seven years.
MINERAL PROPERTIES Development costs, including those minimum advance
royalty payments which provide the Company the right of
tenure but are not recoupable from future production,
relating to mineral properties are capitalized until such
time as the mineral properties will be brought into
production. Once production has been achieved,
development costs are amortized over the estimated life
of the ore body. If the property is sold or abandoned,
these costs are written off to current period expense.
The carrying values of mineral properties and related
deferred expenditures are reviewed on a regular basis
and, where necessary, are written down to the estimated
recoverable amount.
General exploration costs are expensed in the period they
are incurred. Exploration costs incurred on specific
properties having identified mineralization are
capitalized.
NET LOSS PER Net loss per share amounts are based on the weighted
SHARE average number of shares of common stock outstanding
during each period. Common stock equivalents have been
excluded from net loss per share calculations for all
periods presented because they would be anti-dilutive.
INCOME TAXES Income taxes are provided based on the liability method
of accounting pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this approach, deferred income
taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of
assets and liabilities and their financial reporting
amounts at each year end. A valuation allowance is
recorded against deferred tax assets whose realization is
not more likely than not.
MANAGEMENT'S The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported assets and liabilities and disclosures of
contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
FAIR VALUE OF The carrying amounts reported in the balance sheets as of
FINANCIAL December 31, 1996 for cash equivalents, accounts payable
INSTRUMENTS and accrued expenses approximate fair value because of
the immediate or short-term maturity of these financial
instruments. The fair value of long-term debt
approximates its carrying value as the stated or
discounted rates of the debt reflect recent market
conditions.
STOCK BASED Statement of Financial Accounting Standards No. 123,
COMPENSATION "Accounting for Stock-Based Compensation," encourages,
but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations and to furnish the pro forma disclosures
required under SFAS No. 123, if material. Accordingly,
compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
<PAGE>
HANOVER GOLD COMPANY, INC.
Notes to Financial Statements
1. Development The Company has been in the development stage since its
Stage inception. The Company has no recurring source of
Operations revenue, has incurred operating losses since inception
and Going and, at December 31, 1996, has negative working capital.
Concern These conditions raise substantial doubt as to the
Company's ability to continue as a going concern.
Management of the Company has undertaken certain actions
to address these conditions. These actions include
proposed public and private offerings of the Company's
common stock, negotiating amendments to obligations on
the Company's mineral properties, and an active search
for a joint venture partner to provide the funding
necessary to bring the mineral properties into
production. The financial statements do not contain any
adjustments which might be necessary if the Company is
unable to continue as a going concern.
2. Business In September 1996, the Company acquired all of the
Combination issued and outstanding shares of common stock of Group S
Limited ("Group S") and Hanover Resources, Inc.
("Resources") in exchange for 2,957,506 and 2,937,971
shares of the Company's common stock. In connection with
the acquisitions, 3,625,000 shares of the Company's
common stock held by Resources were canceled. Group S
and Resources both held mining claims and interests
contiguous to those of the Company. As certain of the
Company's shareholders, officers and directors controlled
Group S and Resources, the acquisitions were accounted
for as a combination of entities under common control
similar to a pooling of interests. Accordingly, the
financial statements give retroactive effect to these
acquisitions, as if the companies had always operated as
a single entity.
Separate results of operations for the combining entities
for each of the three years in the period ended December
31, 1996 and for the period from inception (May 2, 1990)
through December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Period from Date of
Inception (May 2, 1990)
through
December 31, Year ended December 31,
1996 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hanover $ 719,228 $ 3,510 $ 499,299 $ 216,418
Resources 432,730 - - -
Group S - - - -
--------- ---------- ---------- ----------
$1,151,958 $ 3,510 $ 499,299 $ 216,418
========= ========== ========== ==========
NET LOSS:
Hanover $(5,325,590) $(1,324,309) $(2,193,569) $(1,127,973)
Resources (563,924) (1,970) (125,178) (231,052)
Group S (23,584) (2,048) (10,443) (3,929)
---------- ---------- ---------- ----------
$(5,913,098) $(1,328,327) $(2,329,190) $(1,362,954)
========= ========= ========= =========
</TABLE>
3. Mineral At December 31, 1996 and 1995, the Company had
Property capitalized $10,490,822 and $7,044,705, net of
accumulated depletion of $14,230, representing amounts
paid to acquire property rights and for services rendered
in the exploration, drilling, sampling, engineering and
other related technical services toward the evaluation
and development of the Alder Gulch group of claims in
Montana's Virginia City district.
In 1990, the Company entered into an agreement (the
"Kearsarge Agreement") pursuant to which the Company
acquired the rights to lease certain patented and
unpatented mineral claims in the Alder Gulch area. In
accordance with the terms of the Kearsarge Agreement, the
Company is required to make minimum annual lease payments
to the lessor and the sublessor and has granted the
lessor a 5% net smelter return royalty in future
production. The Company also granted the lessor the
right to purchase 171,000 shares of the Company's common
stock at $3.00 per share through May 1995 and an
additional 500,000 shares at $10.00 per share through May
1997. The Company may terminate the Kearsarge Agreement
at any time prior to its expiration in 2001. The
Kearsarge Agreement also contains a purchase option which
grants the Company the right to acquire the leased
property. The option price, which is equal to $7,000,000
less a credit for annual lease payments made, was
$3,910,000 at December 31, 1996.
In 1991, the Company entered into a lease agreement (the
"Moen Agreement") pursuant to which the Company obtained
the right to lease certain patented and unpatented claims
in the Alder Gulch area. The Moen Agreement, which was
amended in March 1996, expires in 2002, requires annual
lease payments, may be terminated by the Company at any
time upon written notice, and provides for a net smelter
return royalty of up to 2.5% for periods in which the
price of gold exceeds $425 per ounce and 1% for all other
periods. The Moen Agreement contains a purchase option
which grants the Company the right to acquire the leased
property. The option price, which is equal to $3,400,000
less a credit for annual rental payments made, at
December 31, 1996 was $3,050,000. In consideration for
amending the Moen Agreement, the lessor received 250,000
shares of the Company's common stock, an option to
purchase an additional 200,000 shares of the Company's
common stock at a price of $2.00 per share through March
1999, forgiveness of $89,000 owed to the Company by the
seller, equipment with a fair value of approximately
$62,000 and the transfer of certain milling assets and
land held by a related party which was previously
encumbered by a note payable to the Company.
In 1993, the Company entered into an agreement with a
third party (the "Magnus Agreement") pursuant to which
the Company was assigned the mining rights to certain
patented claims. The Magnus Agreement, which the Company
may terminate at any time, requires annual lease payments
through 1999 and contains an option granting the Company
the right to acquire the leased properties. The option
price, which is equal to $1,650,000 less a credit for the
amount by which the annual lease payment exceeds $25,000,
was $1,150,000 at December 31, 1996. The Magnus
Agreement also provides for the grant of a 5% net smelter
return royalty on future production.
In November 1995, the Company entered into an agreement
(the "Goodridge Agreement") to acquire a 0.5% gross
overriding royalty interest burdening certain of the
Company's claims. Pursuant to terms of the Goodridge
Agreement, the Company issued to the seller 5,000 shares
of its common stock and granted the seller an option to
acquire up to an additional 5,000 shares of the Company's
common stock at $2.50 per share prior to November 1,
1997. The Goodridge Agreement provides that, should the
fair value of the Company's common stock not exceed $4.00
per share prior to November 1, 1997, the Company will
issue to the seller additional shares of common stock to
raise the aggregate market value of the shares held by
the seller to $20,000.
In November 1995, the Company entered into an agreement
(the "Gustafson Agreement") whereby the Company obtained
the right to lease a certain patented claim in the Alder
Gulch area. The Gustafson Agreement requires annual
lease payments of $2,500 through 2015, may be terminated
by the Company at any time upon 30 days written notice,
and provides for a 3% net smelter return royalty to the
lessor.
In February 1996, the Company entered into an agreement
(the "Carver Agreement") to acquire certain patented and
unpatented claims in the Alder Gulch area. Pursuant to
terms of the Carver Agreement, the Company paid the
seller $20,000 at closing and will pay the remaining
$70,000 in annual installments of $20,000 through 1999
and $10,000 in 2000. See Note 5.
In March 1996, the Company entered into an agreement (the
"Tabor Agreement") to purchase certain patented and
unpatented mining claims in the Alder Gulch area in
exchange for 525,000 shares of the Company's common
stock. The Tabor Agreement requires that, should the
fair value of the Company's common stock fail to achieve
a $2.00 per share price for a thirty consecutive day
period prior to April 1998, the Company will issue
additional shares of its common stock to the seller to
raise the aggregate market value of the shares held by
the seller to $2.00. The Tabor Agreement is currently in
dispute as the Company has sued the seller for failure to
convey the property documents and the seller has
countersued the Company. The Company has been advised by
its counsel that it is probable that the Company will
prevail in the action and obtain title to the purchased
mining claims.
In August 1996, the Company entered into an agreement
(the "Collins Agreement") to purchase a patented claim
covering certain property in the Alder Gulch area for
$210,000. Pursuant to terms of the Collins Agreement,
the Company paid $25,000 to the seller at closing and
will pay the remaining $185,000 in quarterly
installments, together with interest at 8%, through 2001.
At December 31, 1996, future annual land payments
required pursuant to the Company's various property
agreements previously described were as follows:
Year Ending December 31, Amount
-----------------------------------------
1997 $1,358,000
1998 1,458,000
1999 1,804,000
2000 2,312,000
2001 902,000
Thereafter 635,000
-----------------------------------------
$8,469,000
=========
4. Notes In 1993, the Company advanced $100,000 to a third party
Receivable entity pursuant to terms of a promissory note. The note
was to be repaid from proceeds of milling activities to
be undertaken by the party. After receiving principal
repayments of approximately $3,000 in 1995 and $8,000 in
1994, the remaining unpaid balance of approximately
$89,000 was forgiven in 1996 as part of the Company's
consideration for amending the Moen Agreement. (See
Note 3.)
5. Long-Term Long-term debt consists of the following:
Debt
December 31, 1996 1995
- --------------------------------------------------------------------
8% Note payable to an individual,
due in quarterly installments of
$9,250 plus interest, maturing
October 2001 $174,336 $ -
Noninterest bearing note payable
to an individual, due in annual
installments of $20,000 through
1999 and $10,000 in 2000,
discounted at 8% (Note 3) 43,382 -
------- -----
217,718 -
Less current portion 23,653 -
------- -----
Long-term debt, less current portion $194,065 $ -
======= =====
Scheduled long-term maturities at December 31, 1996 are as follows:
Year Ending December 31, Amount
-------------------------------------------------
1997 $ 23,653
1998 50,193
1999 54,351
2000 48,840
2001 40,681
--------
$ 217,718
========
6. Income Taxes At December 31, 1996 and 1995, the Company had deferred
tax assets of approximately $2,070,000 and $1,570,000
principally arising from net operating loss carryforwards
for income tax purposes. As management of the Company
cannot determine if it is more likely than not that the
Company will receive the benefit of this asset, a
valuation allowance equal to the deferred tax asset has
been established at both December 31, 1996 and 1995.
At December 31, 1996, the Company has net operating loss
carryforwards totalling approximately $5,400,000 which
expire in the years 2005 through 2021.
7. Related Party In 1994 and 1995, the Company advanced $1,222,000 and
Transactions $373,000 pursuant to terms of a note receivable to an
entity partially owned by a shareholder for purposes of
refurbishing and operating milling facilities located
near the Company's mineral properties. The related party
entity was to repay the advances based on the flow of ore
processed at the mill. The Company recovered
approximately $595,000 of the advances through 1995, at
which time milling operations ceased. In 1995, the
Company wrote down the carrying value of the note
receivable by approximately $780,000. In 1996, as part
of the Company's negotiations on the Moen Agreement (See
Note 3), the milling facilities were transferred,
together with the Company's secured interest therein, to
a third party.
In 1995, the Company entered into an agreement, as
amended, (collectively, the "Stock Purchase Agreement")
with a group of individuals whereby the Company granted
the group the right to purchase up to 6,000,000 shares of
the Company's common stock and the right to appoint
certain officers and directors of the Company. Shares
subject to terms of the Stock Purchase Agreement, of
which 3,857,142 and 2,142,858 were purchased in 1995 and
1996, were as follows:
Per Share Total
Shares Purchase Price Consideration
-------------------------------------------------
2,857,142 $ 0.35 $1,000,000
2,142,858 0.50 1,071,050
1,000,000 1.00 1,000,000
-------------------------------------------------
6,000,000 $3,071,050
=================================================
In December 1996 and 1995, the Company received advances
from certain shareholders of $298,405 and $50,000 and
made repayments on those advances of $275,000 and $0 plus
interest at 9%. At December 31, 1996 and 1995, the
Company owed these shareholders $73,405 and $50,000,
respectively.
From 1990 through 1995, the Company paid $2,400 for
annual rent of office space leased from a significant
shareholder.
During 1996, the Company paid $65,438 for sampling and
assaying services to a company controlled by a
stockholder and purchased equipment for $30,000 from this
same entity.
During 1996, the Company paid $90,000 and $49,500 in
consulting fees to two stockholders.
During 1991, the Company borrowed $215,170 from certain
shareholders pursuant to the terms of a 10% convertible
promissory note. During 1995, the shareholders elected
to convert the amount owed them, including accrued
interest of $66,278, into 1,348,295 shares of the
Company's common stock.
8. Commitment The Company leases its corporate office space pursuant to
and a lease which expires in 1997. At December 31, 1996, the
Contingencies Company's remaining commitment under the lease was
$20,000. Rent expense for the years ended December 31,
1996, 1995 and 1994 was approximately $28,000, $20,000
and $20,000.
The Company is currently receiving consulting services
from an individual for no cost. This individual has an
agreement, which has not been memorialized in writing,
with a significant shareholder of the Company pursuant to
which the consultant is entitled to acquire one half of
the shares of the Company's common stock held by the
shareholder at the same price the shareholder acquired
the shares. At December 31, 1996, approximately
1,312,000 shares, ranging in a per share price from $0.35
to $1.00, were encompassed by this agreement. Upon sale
of the shares from the shareholder to the consultant, the
Company will recognize consulting expense in the period
of share acquisition in an amount equal to the number of
shares purchased times the excess of the market value of
the shares over the acquisition price.
9. Stock Plan The Company has a stock plan ("the 1995 Plan") under
which eligible employees and directors of the Company
may be granted stock options, stock appreciation rights
or restricted stock. Pursuant to terms of the 1995 Plan,
the total number of shares of stock subject to issuance
may not exceed 4,000,000. Grants of options,
appreciation rights and restricted stock are based
solely on the discretion of the Board of Directors at
exercises prices at least equal to the fair value of the
stock on the date of grant. During 1995, the Company
granted options to certain directors to acquire 800,000
shares at a per share option price of $1.60 (the
estimated fair value of the shares on the date of grant).
The options expire in 2000. There were no grants made
during 1996.
COMMON STOCK WARRANTS
In 1990, the Company issued common stock warrants
granting rights to purchase up to 150,000 shares of the
Company's common stock at $0.60 per share through
September 1991. Warrants to purchase 74,400 shares of
common stock were exercised in 1991.
In 1991, the Company issued common stock warrants
granting rights to purchase up to 4,572,500 shares of the
Company's common stock at $1.25 per share through August
1992 and at $1.60 per share from September 1992 through
March 1994. Warrants to purchase 111,500 and 41,600
shares of the Company's common stock at $1.25 per share
were exercised in 1991 and 1992. Warrants to purchase
3,061,703 and 1,328,897 shares of the Company's common
stock at $1.60 per share were exercised in 1993 and 1994.
10. Supplemental Supplemental schedule of non cash investing and financing
Disclosures activities:
of Cash Flow
Information
<TABLE>
<CAPTION>
Cumulative
Amounts from
Date of Inception
(May 2, 1990)
through
December 31, December 31,
1996 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mineral property rights
acquired in exchange for:
Issuance of common stock $1,460,000 $1,460,000 $ - $ -
Issuance of long-term debt 263,946 263,946 - -
Note receivables 309,298 309,298 - -
Fixed assets 66,177 66,177 281,448 -
Issuance of shares of common
stock in satisfaction of
vendor obligations 74,096 - 74,096 -
Conversion of notes payable
and accrued interest
to common stock 281,448 - 281,448 -
========= ========= ======== ====
</TABLE>
11. Subsequent On March 7, 1997, the Company entered into an agreement
Event to acquire all of the issued and outstanding shares of
common stock of an entity which owns certain mineral
claims contiguous to those of the Company in exchange for
7,000,000 shares of the Company's common stock. Pursuant
to terms of the agreement, the acquisition, which is to
occur prior to June 30, 1997, is contingent on certain
matters, including both companies obtaining shareholders
and board of directors approval and Hanover securing a
guaranty from a principal shareholder covering its
obligations under mineral agreements through June 30,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HANOVER GOLD COMPANY, INC.
By: /s/ James A. Fish
--------------------------------
its President and
Chief Executive Officer
Date: March 4, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Neal A. Degerstrom By: /s/ Wayne Schoonmaker
------------------------- -------------------------
a Director its Principal Financial
and Accounting Officer
Date: March 4, 1997 Date: March 18, 1997
By: /s/ Pierre Gousseland By: /s/ Laurence Steinbaum
------------------------- -------------------------
a Director a Director
Date: March 17, 1997 Date: March 18, 1997
By: /s/ F. D. Owsley By: /s/ Nicholas S. Young
------------------------- -------------------------
a Director a Director
Date: March 12, 1997 Date: March 18, 1997
By: /s/ Fred R. Schmid
-------------------------
a Director
Date: March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the
financial statements of Hanover Gold Company, Inc. as of December 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 96,353
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,000
<CURRENT-ASSETS> 203,722
<PP&E> 151,258
<DEPRECIATION> 63,076
<TOTAL-ASSETS> 10,806,150
<CURRENT-LIABILITIES> 253,053
<BONDS> 0
0
0
<COMMON> 1,984
<OTHER-SE> 10,357,048
<TOTAL-LIABILITY-AND-EQUITY> 10,806,150
<SALES> 3,510
<TOTAL-REVENUES> 3,510
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,311,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,200
<INCOME-PRETAX> (1,328,327)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,328,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,328,327)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
