<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 0-23022
HANOVER GOLD COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2740461
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
15102 E. Indiana Ave.
Spokane, Washington 99216-1814
(Address of principal executive offices)
Registrant's telephone number, including area code: (509) 891- 8817
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock The OTC - Bulletin Board
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, 1999 was $681,356. The
number of shares of common stock outstanding at such date was
9,353,533 shares. An additional 3,472,398 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, 1998
TABLE OF CONTENTS
Page
SAFE HARBOR STATEMENT (ii)
GLOSSARY OF SIGNIFICANT MINING TERMS (iii)
PART I
Item 1: Business 1
Item 2: Properties 4
Map of Property 8
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5: Market for Registrant's Common
Equity and Related Stockholder Matters 9
Item 6: Selected Financial Data 10
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8: Financial Statements and Supplementary Data 14
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
Item 10: Directors and Executive
Officers of the Registrant 14
Item 11: Executive Compensation 14
Item 12: Security Ownership of Certain Beneficial
Owners and Management 14
Item 13: Certain Relationships and Related Transactions 15
PART IV
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 15
Index to Financials 17
Signatures F/S - 16
(i)
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SAFE HARBOR STATEMENT
This report contains both historical and prospective statements
concerning the Company and its operations. Historical statements are
based on events that have already happened; examples include the
reported financial and operating results, descriptions of pending and
completed transactions, and management and compensation matters.
Prospective statements, on the other hand, are based on events that
are reasonably expected to happen in the future; examples include the
timing of projected operations, the likely effect or resolution of
known contingencies or other foreseeable events, and projected
operating results.
Prospective statements (which are known as "forward-looking
statements" under the Private Securities Litigation Reform Act of
1995) may or may not prove true with the passage of time because of
future risks and uncertainties. The Company cannot predict what
factors might cause actual results to differ materially from those
indicated by prospective statements. The risks and uncertainties
associated with prospective statements contained in this report
include, among others, the following:
THE LIKELIHOOD OF CONTINUED LOSSES FROM OPERATIONS. The Company
has no significant revenue from mining operations, has incurred
losses from operations in each of the last six years, and at December
31, 1998 had negative working capital. These factors have caused the
Company's 1998 consolidated financial statements to include an
explanatory paragraph related to a going concern uncertainty. This
trend is expected to continue for at least the next three years and
will reverse itself only if, and when gold is produced from the
Company's mining properties.
NO PROVEN OR PROBABLE RESERVES. The Company must undertake
significant additional exploration and evaluation of its mining
properties before proven or probable reserves can be delineated, and
no assurance can be given that any reserves will be delineated. The
engineering and geological studies which have been completed, and
which lead the Company to believe that significant reserves exist,
are insufficient to establish reserves under accepted mining
practices.
THE NEED FOR SIGNIFICANT ADDITIONAL FINANCING. The Company needs
additional financing to hold its mining properties, explore and
evaluate them further, and, if warranted, put them into production.
The Company believes this financing can only come from additional
sales of common stock, from bank or other borrowings or,
alternatively, as the result of joint development with another mining
company. The Company has no commitment for bank financing or for the
underwriting of additional stock however, and it is not a party to
any agreement or arrangement providing for joint development. Whether
and to what extent financing can be obtained will depend on a number
of factors, not the least of which is the price 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, the political and economic conditions of major gold producing
countries throughout the world, and the policies of various Central
Banks regarding the purchase, sale, or lease of gold. As of March 1,
1999, world gold prices were approximately $286.40 per ounce, a
reduction of approximately 19% from prices two years ago.
ABANDONMENT OF CERTAIN MINING INTERESTS. In November of 1998
Montana passed an Initiative, I-137, which bans new and expanded open
pit mining operations from using cyanide in the extraction of gold
and silver. The placement of the initiative on Montana's ballot
primarily gave rise to management's decision to forego the
rental/royalty payments due on three of its Alder Gulch leases
September and October 1998. The passage of I-137 and the breakup of
the Company's land holdings, as a result of having lost the Alder
Gulch leases, are, in addition to the low price for gold, factors
that will continue to impact the Company's ability to obtain
financing to hold, explore, and, further evaluate its properties.
RISKS AND CONTINGENCIES ASSOCIATED WITH THE MINING INDUSTRY
GENERALLY. The Company is subject to all of the risks inherent in
the mining industry, including environmental risks, fluctuating
metals prices, administrative and legislative changes to existing
laws, rules and regulations governing mining activities, 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. Were the Company unable
to fund fully the cost of remedying an environmental problem, it
might be required to suspend operations or enter into interim
compliance measures pending completion of remedial activities.
(ii)
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Glossary of Significant Mining Terms
Certain terms used throughout this report are 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 geological 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
commercial 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.
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.
mineralization. The presence of minerals in a specific area or
geological formation.
ore. A natural aggregate of one or more minerals which,
at a specific 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.
production stage. Activities related to the actual exploitation
or extraction of 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.
(iii)
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS. The Company is an exploration stage
mining company organized under Delaware law in 1984. The Company
holds significant mining properties in the historic Virginia City
Mining District of southwestern Montana. These properties presently
comprise 361 claims and one state mining lease; 291 of these claims
are located in the Virginia City district. The balance of the claims
are located at Norris and Pony, Montana, some 35 miles away. The
Company acquired these claims and lease, and approximately 300 other
claims and several state leases primarily in the Alder Gulch area,
beginning in 1990, through a series of subleasing and option
agreements with affiliated and non-affiliated parties, and through
the merger of affiliated and non-affiliated companies in exchange for
stock.
In September and October 1998 the Company elected not to pay
rental/royalties to three landowner-lessors of 239 claims in the
Alder Gulch area for reasons associated with the uncertainty of ever
being able to put the Company's properties into production and the
high cost of maintaining the leases. The uncertainty arose when an
initiative, I-137, was placed on Montana's November 1998 ballot. The
initiative, which was passed into law in November 1998, precludes new
or expanded open pit mining operations from using cyanide in the
process of extracting gold and silver.
Although the leases for the Alder Gulch claims have been
terminated, the Company has been negotiating with the principal
landowners to reestablish the respective leases on terms more
equitable to the Company. As a result of the termination, the Company
relinquished its rights to the leased claims and consequently wrote-
off the carrying value of mineral interests having a book value of
approximately $12,000,000 in 1998.
The Company has been engaged in exploration and limited development
activities primarily in the Alder Gulch area more or less
continuously since 1992. These activities have consisted of some
underground development, diamond drilling, mapping and sampling,
lithologic logging of the drill holes, metallurgical testing,
assaying, and aerial surveying. No mining or milling activities have
occurred since 1995.
Since 1995 the Company has pursued a strategy of acquiring
additional mining claims in the Virginia City district and
renegotiating the terms under which certain of the claims were
previously acquired, all in an effort to consolidate its land
position in order to facilitate continued exploration and development
and make its holdings more attractive to potential development
partners. A significant component of this strategy was the 1997
merger of Easton-Pacific and Riverside Mining Company ("Easton
Pacific") into the Company, pursuant to which the Company acquired
two state leases, 40 patented claims and 149 unpatented claims in the
district, and an additional 39 patented claims and 65 unpatented
claims located near Norris and Pony, Montana.
The Company has no established proven or probable reserves,
although exploration activities on the combined Alder Gulch and
Easton Pacific properties conducted by it and others support the
existence of a potential, significant mineralized gold deposit or
deposits. (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. A mineralized
deposit does not qualify as a reserve until a comprehensive
evaluation has been completed and the economic feasibility of
exploiting the deposit has been determined.) The Company has not yet
undertaken a comprehensive evaluation of its Easton Pacific
properties and probably will not do so unless I-137 is reversed, the
leases for the Alder Gulch claims are renegotiated on terms
substantially more favorable to the Company, and the price of gold
improves. Without the occurrence of these changes, the Company does
not foresee that it will be able to negotiate a financing arrangement
with another mining company to explore, evaluate, and, if warranted,
develop its properties. As a result of these conditions and the
continued depressed price level of gold, during 1998 the Company
wrote-down the carrying value of property acquired in the Easton-
Pacific acquisition by $2,300,000.
The Company's principal executive offices are located at 15102 E
Indiana Ave, Spokane, WA 99216, and its telephone number is (509) 891-
8817. The Company also maintains a web site at http://www.hanovergold.
com where additional information can be obtained.
As of December 31, 1998, the Company had expended $2,860,269 to
conduct exploration and limited development activities on the Alder
Gulch and Easton-Pacific properties and $14,025,737 in payments to
the landowner-lessors of its mining properties. These expenditures,
which aggregate $16,886,006, have been capitalized, subject to
depletion using the estimated recoverable units method at such time
as the properties are placed into production. However, as of December
31, 1998 $14,155,672 of these costs have been written off. 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 to the Company's Financial Statements for the
year ended December 31, 1998.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. At present, the
Company is solely engaged in the exploration of mineral properties,
which is a single industry segment.
NARRATIVE DESCRIPTION OF BUSINESS. The Company is an exploration
stage mining company. It does not own an operating mine and has no
other revenue-producing mining activities. Moreover, it is not
expected to commence mining activities, at least with respect to its
properties in the Virginia City Mining District, until the following
events have occurred: significant additional exploration activities
on the Company's properties have been completed; a determination has
been made that the properties contain a commercially minable ore
body; all required mining and environmental permitting applications
have been approved; a comprehensive feasibility study of proposed
mining operations has been prepared; and financing of the mine has
been obtained. None of these events are likely to occur unless the
Company gains the assurance that it will be able, in the long term,
to use cyanide in its extraction processes, the price of gold
increases, the Alder Gulch leases are renegotiated with terms more
equitable to the Company, or a joint development arrangement is made
with a major mining company.
BUSINESS STRATEGY. The Company's efforts, at least since 1995,
have been primarily directed toward acquiring mining claims and
interests in the Alder Gulch area of the district in an effort to
consolidate its land position, facilitate continued exploration and
development, and make the area more attractive to potential
development partners. During 1995 and 1996, Hanover added
approximately 353 mining claims to its holdings in the Alder Gulch
area, including those claims it acquired through the 1996 merger of
two affiliated corporations. In 1997, it added approximately 189
additional claims in the Browns Gulch, Hungry Hollow and Barton Gulch
areas of the district (and another 104 claims located outside the
district) through the merger of Easton Pacific; these properties
formed a contiguous claim block adjacent to the west side of the
Company's properties in the Alder Gulch area of the district. During
1998, the Company stopped making lease payments on mineral properties
in the Alder Gulch area. As a result, the mineral property rights
associated with 239 claims were deeded back to the original property
owners. 130 additional claims were deeded back to Tabor Resources
when the Eastern Division of the U.S. District Court for Washington
granted the Company's motion to dismiss its suit against Tabor.
Although the Company still controls a significant portion of the
Virginia City Mining District it believes that it is highly unlikely
that it will be able to attract the interest of a major mining
partner capable of financing additional exploration and development
of the claims unless the price of gold improves significantly, the
ban against cyanide in the State of Montana is lifted and the Company
is successful in renegotiating leases for the Alder Gulch claims
under more equitable terms. Because of the growing number of
restrictions being imposed on mining in the State of Montana,
management is investigating other mining opportunities in areas less
adversarial to the mining industry.
In May 1998, the Board of Directors and the shareholders of the
Company authorized a one for four reverse stock split. This reverse
stock split was performed by the Company granting to all stockholders
as of the date of record one share of common stock to replace every
four shares of stock currently outstanding. All references in this
report, unless otherwise noted, referring to the number of shares,
share prices, per share amounts, options and warrants have been
adjusted retroactively for the effect of this reverse stock split.
MANAGEMENT AND FINANCING MATTERS. Until 1996, the Company's
activities were conducted from offices located in Roslyn, New York,
near New York City. In early 1996, the Company moved its offices to
Coeur d'Alene, Idaho and restructured its management, all in
conjunction with an investment by a group of Spokane, Washington
investors, led by Neal A. Degerstrom, that enabled the Company to
meet its rental and royalty obligations to the landowner-lessors of
its mining claims. These investments were made pursuant to the terms
of a securities purchase agreement between the Company and Mr.
Degerstrom dated June 1, 1995, as amended, pursuant to which the
company issued and sold 1,500,000 shares of common stock to Mr.
Degerstrom and associated persons over a seventeen-month period, at
prices ranging from $1.40 per share to $4.00 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 in August and September
of 1995, and the presidential appointment rights were exercised at a
meeting of the board of directors held in March 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.
Mr. Degerstrom and these other individuals held approximately 46.9%
of the outstanding shares of common stock as of March 1, 1999, and
also held stock options, which, if exercised, would increase their
combined ownership of the Company to approximately 52%. Among these
are options granted to Mr. Degerstrom in March of 1997 in connection
with the then pending Easton Pacific merger transaction, as
consideration for his guarantee of certain of the Company's
obligations to the landowner-lessors of its mining claims. Mr.
Degerstrom's guarantee was initially limited to $2,891,210, which
amount approximated the Company's obligations to these landowner-
lessors during the period of the guaranty, for which he received
three-year options to purchase 578,242 shares of common stock shares
at the price of $5.00 per share. Effective April 29, 1997, Mr.
Degerstrom assigned two-thirds of the options equally to two Hobart
Teneff and Raymond A Hanson, each of whom undertook to guarantee
one-third of the amount Mr. Degerstrom was required to pay the
Company during the term of his guarantee. Mr. Hanson is President of
the Company and Mr. Teneff is a consultant to and affiliate of the
Company.
Mr. Degerstrom, Mr. Hanson, and Mr. Teneff made payments in the
aggregate of $1,125,000 through August 1998, (the date the guaranty
expired) and exercised options for 225,000 shares of common stock.
In large part due to the depressed price for gold and the Company's
inability to procure a joint venture partner, the bid price for the
Company's stock fell out of compliance with Nasdaq's requirements and
as a result the Company was delisted from Nasdaq's SmallCap Market
December 4, 1998.
The decline in the price for the Company's common stock has
prevented the Company from selling its common stock other than to
affiliates of the Company including Mr. Degerstrom, Mr. Hanson, and
Mr. Teneff. In connection with the sale of 866,666 shares of common
stock made October through December 1998 these affiliates were
granted 5-year warrants for one and one half times the number of
shares purchased exercisable at $0.50 per share. In addition to
purchasing shares, Mr. Degerstrom, Mr. Hanson, and Mr. Teneff have
made loans to the Company for which they have each received warrants
for 120,000 shares of common stock exercisable at $0.25 per share.
The Company does not know if it will be able to continue to borrow
from or sell additional shares of common stock to its affiliates. To
conserve capital, the Company has moved its office to the office of
its President in Spokane, Washington, closed the exploration office
in Helena and eliminated staff. The Company's rent and Mr. Hanson's
annual compensation for serving as President will be paid quarterly
with stock options.
THE EASTON PACIFIC MERGER. The merger of Easton Pacific with and
into the Company was concluded in late September of 1997, following
approval by the shareholders of each company. The Company issued
1,750,000 shares of its common stock, then valued at approximately
$6.16 million, in the merger, upon the conversion of and in exchange
for the outstanding capital stock of Easton Pacific. Each Easton
Pacific shareholder received 1.68 shares of common stock for each
share of Easton-Pacific capital stock registered in such
shareholder's name. Fractional shares were rounded to the nearest
whole share of common stock into which the Easton Pacific capital
stock was converted.
The Company has accounted for the merger as a purchase of assets,
as opposed to a pooling of interests. Under purchase accounting,
Easton Pacific's assets and liabilities were recorded at the current
fair values. The increased value assigned to Easton Pacific's assets
will be depleted over assigned periods of estimated future benefit.
This depletion will have the effect of depressing any future earnings
the Company may have during such periods.
HISTORICAL EXPLORATION AND DEVELOPMENT ACTIVITIES. The Company has
been engaged in exploration and limited development activities in the
Alder Gulch area more or less continuously since 1992. During 1992,
interests in certain claims then held by affiliated corporations were
contributed to a joint venture that, in turn, entered into a mining
venture agreement with Kennecott. Under the terms of this mining
venture, Kennecott was to have received an interest in the claims and
certain options and other rights, in exchange for which it was to
have conducted a multi-year work program and paid interim rentals and
royalty obligations to the landowner-lessors of Hanover's 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 large scale development.
The Company's exploration and development activities in the
Virginia City district have consisted of some underground
development, diamond drilling, mapping and sampling, lithologic
logging of the drill holes, metallurgical testing and assaying and
aerial surveying. In 1998 the Company furthered its exploration of
the Alder Gulch and Easton Pacific properties by drilling certain
target areas of known mineralization. One half of the cost for
drilling services performed by N. A. Degerstrom, Inc., has been paid
for with 193,067 shares of the Company's common stock, valued at
$0.59 per share, and five year stock warrants for 386,134 shares of
common stock exercisable at a price of $0.50 per share. Neal A.
Degerstrom, an affiliate of the Company, is the owner of N. A.
Degerstrom, Inc.
No mining or milling activities have occurred since Kennecott's
withdrawal from the mining venture. All subsequent exploration
activities have been funded by the Company from sales of its common
stock.
CURRENT WORK PLAN. The Company has no plans to explore its
properties during 1999 and intends to drop additional unpatented
claims in the Virginia City Mining District. With the passing of I-
137, the Company made the decision to maintain its properties on a
stand-by basis and at minimal cost. The Company does not foresee that
it will commence further exploration of the properties unless I-137
is reversed, the price of gold significantly improves, the Company is
able to renegotiate the Alder Gulch leases with terms significantly more
equitable to the Company, or the Company is able to arrange a
cooperative effort with a major mining company to finance the
exploration, evaluation, and, if warranted, development of the
properties. The interest and number of those companies with which
management has had discussions regarding a possible joint venture
have dwindled, due in large part to, the stagnant price for gold and
the uncertainty of being able to bring a mine into production in the
State of Montana.
ITEM 2. PROPERTIES.
THE EASTON-PACIFIC PROPERTIES.
OVERVIEW. The Company's Easton-Pacific properties within the
Virginia City Mining District cover the upper part of Brown's Gulch,
Hungry Hallow, and Barton Gulch and consist of 42 patented and 117
unpatented mining claims and one state lease. Another 38 patented
and 25 unpatented claims are located near Pony and Norris, Montana.
The claims were acquired in September 1997 through the merger of
Easton Pacific into the Company. In addition to the significant placer
production that came from Alder Gulch, gold has been produced from lode
mines located on the Alder Gulch and Easton-Pacific properties since
the late nineteenth century, although reliable production records are
not available. The Company believes the historical mining activities
and the geology of the District are indicative of large gold-bearing
mineral systems, and that the district has a very high potential for
additional discovery. At December 31, 1998 the Company's properties in
the Virginia City Mining District consisted of 298 mining claims and one
state mining lease covering an area approximately 11 square miles.
The topography is mountainous, although the properties are seasonally
accessible by road.
The Company's properties in the Virginia City Mining District are
more particularly identified on the map which appears at page 8 of
this report.
THE NATURE OF HANOVER'S INTEREST IN THE PROPERTIES. The Company
owns nearly all of its 361 mining claims outright and pays rentals
and royalties to the underlying landowner-lessors for the right to
conduct mining activities on a relatively small number of claims it
does not own. These payments in most cases are credited toward the
purchase price of the claims under the purchase option provision of
the leases. The Company's obligations pursuant to these leases and
purchase options were $329,500 at December 31, 1998, of which $13,500
is payable in 1999, and $316,000 is payable thereafter. Production
royalty obligations with respect to these claims, which become
payable once minerals are produced from the claims, range from 5% to
7% of net smelter returns.
The costs of maintaining the Company's mining properties has been
borne exclusively by the Company since March of 1995, when Kennecott
terminated its mining venture agreement with the Company. This cost
has been substantial; during the four-year period ended December 31,
1998, the Company has expended approximately $4,435,815 just to meet
its rental and royalty obligations to the landowner-lessors of the
properties. In addition, the Company has spent another $5,517,005
during these four years to support its operations and conduct limited
exploration work, apart from the amounts required to maintain its
properties. Substantially all of the rental/royalty payments have
been made to landowner-lessors of the Alder Gulch claims. The Company
has eliminated substantially all of its landowner-lessor obligations
as a result of its Alder Gulch leases having been terminated.
HISTORICAL MINING ACTIVITIES. Historic mines on the Easton Pacific
mining properties include the Easton, Pacific, High Up, Irene,
Marietta, Metallic, and Little Lode mines. The Easton mine was at one
time the largest historic lode producer in the Virginia City Mining
District, with recorded production of approximately 50,000 ounces of
gold and over one million ounces of silver.
The Easton mine was discovered in 1873 and operated until 1914. Ore
was mined from multiple high-angle quartz veins carrying auriferous
pyrite, galena, sphalerite, and chalcophyrite, with minor
tetrahedrite, argenite, gold tellurides, and stibnite. The ore was
processed by a ten stamp mill with a cyanide circuit. The mine closed
in 1914 due to litigation over ownership, not lack of ore.
The US Grant mining company entered into an agreement with the
original Easton mine owners in 1947, and for two years thereafter
drove a new 4,200-foot tunnel at the 600-foot level. No significant
ore was produced as a result of these efforts. The Pacific mine was
discovered in 1871 and was originally mined in the early years of the
district. Ore was mined from a small open pit at the mine site from
1960 to 1976. The exploration work that has been done on the Easton
Pacific properties since then has been concentrated in the Pacific
pit area.
The High Up and Irene mines were worked periodically from the 1870s
to 1941. The mine workings are now inaccessible; as a consequence,
assessments of mineral potential have been based on historic records
and maps. These records indicate that the mines produced between
10,000 and 15,000 ounces of gold, at an average grade of nearly 0.5
ounces per ton. Silver was also produced from the mines, at a ratio
eight times that of gold production. A 1913 mine report describes
the ore body of the High Up mine as a shear zone with good gold
grades in quartz veins and in adjacent fault clay and breccia.
According to a 1941 report, the High-Up vein is 3.5 ft wide. It was
sampled every 5 feet for 900 feet of strike and returned an average
grade of 0.677 opt. Au.
In November of 1988, Easton Pacific and Riverside Mining Company
entered into a joint operation agreement with BHP-Utah International,
Inc. ("BHP Utah") providing for the exploration and, if warranted,
development of the Easton-Pacific claims in the Virginia City Mining
District. Under the agreement, BHP Utah was to have expended
approximately $1.6 million over a four-year period to conduct
exploration work, and was to have made annual payments to the company
totaling approximately $340,000, increasing to $350,000 per year at
the end of the period. In return for these expenditures, BHP Utah was
to have received interests in Easton Pacific's properties ranging
from 40% to 60%, plus the option to increase its interests by an
additional 20% by paying the company an additional $3 million. The
joint operation agreement was terminated by BHP Utah in November of
1989, following the completion of its obligations to Easton Pacific
for the prior year. Beginning in mid-1994, the company entered into
discussions with Kennecott regarding a mining venture agreement for
the exploration and possible development of the company's properties.
No agreement was reached. As a consequence, Kennecott later
terminated its 1994 mining venture agreement with the Company
covering its Alder Gulch properties.
GEOLOGY OF THE EASTON-PACIFIC PROPERTIES. Pacific mine
mineralization is hosted by a breccia body at the intersection of two
regional faults. The breccia is silicified, pyritic, and strongly
argillized. Higher grade Au-Ag mineralization occurs in quartz-
sulfide veins. The Company's geologists relogged all core and chips
from the Pacific drilling and trenched across 500 feet of strike to
better define the extent and continuity of mineralization. The
mineralization is open in all directions.
The following table sets forth information concerning drill results
of the Company's 1998 Exploration program.
<TABLE>
<CAPTION>
Hole # Length(ft) Au(opt) Ag(opt) From To(ft) Meters Au(g/t) Ag(g/t)
- ------ --------- ------ ------ --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Roughrider target
98-1 15 0.049 0.08 221 236 4.6 1.7 2.6 core
includes 5 0.109 0.09 221 226 1.5 3.7 3.1 core
High Up target
98-2 30 0.044 0.61 41 71 9.1 1.5 20.9 core
includes 4 0.151 2.49 61 65 1.2 5.2 85.2 core
98-4 26 0.079 1.26 291.5 317.5 7.9 2.7 43.1 core
includes 10 0.155 2.95 296 306 3.0 5.3 101.2 core
98-6 4.5 0.019 0.13 134 138.5 1.4 0.6 4.6 core
6 0.011 0.11 231 237 1.8 0.4 3.7 core
98-8 36.5 0.042 0.57 228 264.5 11.1 1.4 19.6 core
includes 9.5 0.114 1.87 245.5 255 2.9 3.9 64.1 core
Pacific Pit targets
98-3 47 0.060 1.01 120 167 14.3 2.1 34.7 core
includes 17 0.105 1.60 142 159 5.2 3.6 54.7 core
98-5 146.5 0.074 1.30 182 328.5 44.7 2.5 44.7 core
includes 44 0.192 3.52 182 226 13.4 6.6 120.7 core
which has 4.5 0.699 12.05 187 191.5 1.4 24.0 413.0 core
98-7 7.7 0.102 0.71 119.3 127 2.3 3.5 24.4 core
and 4 0.103 0.76 163 167 1.2 3.5 25.9 core
and 17.6 0.067 0.95 410.4 428 5.4 2.3 32.4 core
98-9 6 0.055 1.05 245 251 1.8 1.9 36.0 core
98-12 5 0.047 2.69 82 87 1.5 1.6 92.3 core
and 5 0.021 0.06 107 112 1.5 0.7 2.0 core
98-17 47 0.037 0.67 101 148 14.3 1.3 23.1 core
includes 10.5 0.099 1.64 121 131.5 3.2 3.4 56.3 core
and 19 0.027 1.77 205 224 5.8 0.9 60.7 core
includes 4 0.070 7.01 205 209 1.2 2.4 240.3 core
98-18 4 0.056 2.09 153 157 1.2 1.9 71.5 core
and 6.5 0.169 10.58 203.5 210 2.0 5.8 362.7 core
and 1.5 0.063 2.23 344.5 346 0.5 2.2 76.4 core
98-19 5 0.029 0.76 74 79 1.5 1.0 25.9 core
and 7 0.034 1.32 161 168 2.1 1.2 45.3 core
98-20 No significant assays No significant assays core
Easton Mine target
98-10 30.3 0.030 1.08 230 260.3 9.2 1.0 37.1 core
98-11 6.5 0.016 1.36 60 66.5 2.0 0.5 46.5 core
98-13 10 0.044 0.75 294.5 304.5 3.0 1.5 25.7 core
includes 3 0.120 1.86 294.5 297.5 0.9 4.1 63.6 core
and 5 0.041 0.04 695.5 700.5 1.5 1.4 1.4 core
and 10.5 0.011 0.53 721.5 732 3.2 0.4 18.1 core
and 5.5 0.022 0.36 752 757.5 1.7 0.7 12.3 core
98-14 16 0.024 0.46 524 540 4.9 0.8 15.8 core
Skid Row target
98-15 No significant assays No significant assays core
98-16 No significant assays No significant assays core
</TABLE>
In 1997 independent consulting geologists Dr. Tom Henricksen and
Dr. Roger Steininger were individually commissioned to write a
report evaluating the Virginia City, Mining District. The reports
written by Dr. Steininger and Dr. Henricksen are on file with the
Securities and Exchange Commission.
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 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.
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 limitations on the level of
particulate matter generated from mining operations, and the
Company may be required to adopt dust control techniques in all
phases of mining in order to comply with these limitations.
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 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.
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 would 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 and
Easton Pacific properties from 1993 through 1999, and believes that
it could meet existing criteria for additional permits and
approvals necessary to large-scale development at its properties.
Nonetheless, substantial planning will be required if the Company
is to meet the requirements of existing laws and regulations, and
no assurance can be given that any proposed plans to conduct large
scale development of the properties will be timely realized. Data
regarding the effect of any such development on the water quality
of the area has been collected and analyzed at significant cost to
the company, and may 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 could encounter
opposition from local environmental groups and organizations if its
development plans were to be presented to the regulatory
authorities and made available for public comment.
Unless I-137 is reversed, the Company does not intend to conduct
further studies necessary to the obtaining of permits.
[The balance of this page has been intentionally left blank.]
7
<PAGE>
MAP OF THE COMPANY'S PROPERTIES IN THE VIRGINIA CITY MINING
DISTRICT.
Location map showing where within the Virginia City Mining
District, Madison County, Montana, the Hanover Gold controlled
claim block of properties is located as of December 31, 1998,
including townships and sections, streams, and selected mine
locations.
[The balance of this page has been intentionally left blank.]
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
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 131,250 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 $8.00 per share for a consecutive 30-
day period prior to April 19 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 $8.00.
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 100,000 of the 131,250 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 SEC 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 deposed the principal witnesses in this matter in mid-
1997 and expected to file motions thereafter seeking summary
judgment in its favor on its breach of contract claims against
Tabor, specific performance of Tabor's obligations, and dismissal
of Tabor's counterclaims. Subsequent to these depositions,
however, and in the wake of declining world gold prices--and a
commensurate decrease in the market price of the Company's common
stock which would have required the Company to issue Tabor
significantly more shares of common stock under the agreement had
it not been breached--Tabor recanted its position and sought to
compel the Company to proceed with the transaction according to the
original terms of the agreement. The Company, in turn, filed a
motion seeking to rescind the agreement in its entirety. In the
first quarter of 1998 the Court granted the Company's motion and
dismissed the case. Consequently all of the shares issued to Tabor
have been cancelled and the Company's rights in the claims have
been reconveyed to Tabor.
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 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION. The common stock of the Company was traded on
the Nasdaq SmallCap Market under the symbol "HVGO" until December
4, 1998 when it was delisted and commenced to be quoted on the OTC
Bulletin Board under the same symbol. The following table sets out
the high and low prices per share for the common stock for 1998 and
1997, as reported by Nasdaq and the OTC Bulletin Board. The prices
reported reflect inter-dealer prices, without regard to retail mark-
ups, markdowns, or commissions, and do not necessarily reflect
actual transactions. High and low sales prices are shown for all
quarters.
<TABLE>
<CAPTION>
1998 1997 <F1>
------ ----------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter <F1> $2.252 $1.500 $ 6.50 $ 4.252
Second Quarter <F1> $2.376 $0.969 $ 6.00 $ 3.124
Third Quarter $1.500 $0.375 $ 4.50 $ 2.752
Fourth Quarter $0.469 $0.160 $ 4.00 $ 1.252
- -------------------------------------------
<FN>
<FN1> post reverse one for four stock split
</FN>
</TABLE>
HOLDERS. The number of stockholders of record on March 1, 1999 was
approximately 400. Based on mailings made in connection with the
1998 annual meeting of the Company's stockholders, the Company
believes the shares held of record by the Company's stockholders
are beneficially owned by approximately 1,600 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.
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 five years ended December 31, 1998 have been derived from
the Company's consolidated financial statements appearing elsewhere
in this report, which have been audited by BDO Seidman, LLP for
1996 to current, and Zeller Weiss & Kahn, Mountainside, New Jersey,
for the preceding years.
The selected financial data should be read in conjunction with and
is qualified by such financial statements and the notes thereto.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Summary of Balance Sheets:
Working capital (deficit) $(395,402) $(289,024) $(49,331) $ 428,469 $ 31,422
Current assets 109,662 282,782 203,722 894,229 1,029,081
Total assets 2,975,377 17,626,089 10,806,150 8,441,690 8,646,755
Current liabilities 505,064 571,806 253,053 465,760 997,659
Long-term obligation 0 148,515 194,065 0 0
Total liabilities 505,064 720,321 447,118 465,760 1,267,789
Stockholders' equity 2,470,313 16,905,768 10,359,032 7,975,930 7,378,966
Summary of Statements
of Operations:
Revenues <F1> 0 0 3,510 499,299 216,418
Net loss <F2> (16,134,840) (1,788,249) (1,328,327) (2,329,190) (1,362,954)
Net loss per share (2.13) (0.32) (0.31) (0.80) (0.56)
- -------------------------------------------------------
<FN>
<FN1> Cumulative revenues for the period from inception (May 2, 1990)
through December 31, 1998 were $1,151,958.
<FN2> Cumulative losses for the period from inception (May 2, 1990)
through December 31, 1998 were $23,836,187.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW. September through December 1998 the Company failed to
make rental/royalty payments aggregating $469,300 to three
landowner-lessors of certain Alder Gulch claims. As a result the
leases for the claims have been terminated and the Company's
rental/royalty obligations have been reduced by $1,863,000 for
1999, by $3,274,500 for 2000 and by $1,237,000 thereafter. The
Company's decision to forego making the lease payments was prompted
in large part by I-137 being placed on Montana's November 1998
ballot. Management believes that, should the Company ever be in a
position to put its Virginia City properties into production,
cyanide will be a vital component in the low cost recovery of gold.
Management is not aware of a cost equivalent substitute for cyanide
in the extraction of gold and unless the restriction against its
use is lifted there is no economic incentive for the Company to
further explore its properties with the objective to putting its
properties into production.
On May 5, 1998, the date of the Annual Shareholder's Meeting, the
shareholders of the Company approved a one for four reverse stock
split of the Company's common stock. The action was taken in an
effort to bolster the trading price of the Company's common stock
to a level at or above that required for the Company to maintain
its listing on the Nasdaq SmallCap Market. In August of 1997 Nasdaq
had implemented new criteria requiring all Nasdaq SmallCap Market
listed stocks to maintain a $1.00 bid price for their shares. The
market prices for the Company's stock had steadily declined from
$5.00 per share at May 6, 1997 to $0.22 at December 4, 1998 largely
as a consequence of the significant drop in the world gold prices.
Unable to maintain a $1.00 bid price for its shares, on December 4,
1998 the Company was delisted from the Nasdaq SmallCap Market and
commenced to be quoted on the OTC Bulletin Board, a regulated
electronic quotation service that displays real-time quotes, last
sale prices, and volume information in the over-the-counter equity
securities. Since being delisted the market price for the Company's
stock has declined 44% to $0.1250 per share at March 1, 1999.
From March through May 1998 the Company sold 619,098 shares of
its common stock at between $1.00 and $2.12 per share. 208,500
shares were sold during August 1998 at $0.72 per share. 150,000
shares were sold September 1998 for $0.50 per share. 466,666 shares
were sold October 1998 for $0.38 per share and 400,000 shares were
sold November 1998 for $0.25 per share. All of the shares were sold
to affiliates of the Company. The declining prices at which the
Company has been able to sell its shares reflects a corresponding
decline in the market value of the Company's common stock as
reported on the Nasdaq SmallCap Market for the period in which the
sales were made. Five-year warrants for 1,300,000 shares were
granted in the aggregate to three affiliates of the Company in
connection with the sale of shares in October and November. The
options are exercisable at a price of $0.50 per share. In January
1999 three of the affiliates collectively loaned $45,000 to the
Company in exchange for demand promissory notes bearing interest at
a rate equal to the prime rate of interest from time to time
offered by Bank of America, NA plus two percent, and 5-year options
for 360,000 shares of common stock in the aggregate exercisable at
$0.25 per share. Also in January, one of the affiliates purchased
200,000 shares of common stock for $0.25 per share and received a
five-year option for 300,000 shares exercisable at $0.50 per share.
The Company does not know how long it will be able to borrow from
or sell equity to its affiliates and can give no assurance that it
will be able to finance its obligations for the balance of 1999 and
thereafter.
In order to reduce costs, in October 1998 the Company relocated
its offices from Coeur d'Alene, Idaho to the Spokane, Washington
offices of the Company's President, Raymond A. Hanson. In lieu of
receiving $90,000 annual compensation and $10,000 for rent, Mr.
Hanson will receive options for, respectively, 200,000 and 20,000
shares of common stock exercisable at a price of $0.50 per share.
Other cost cutting measures taken by the Company include the
closure of the Company's Montana office, the cutting of staff, and
the relinquishment of claims.
Because of the depressed price for gold, mining companies in
general have curtailed exploration activities in favor of pursuing
properties with known reserves or production in areas conducive to
mining activity. Consequently the Company has been unable to
negotiate a joint financing arrangement with another company. The
Company believes that it will only be successful in negotiating a
joint venture or other financing arrangement if the price of gold
increases, the ban against the use of cyanide is lifted, and the
Company is able to reconsolidate the district by renegotiating
leases with the landowners of the Alder Gulch claims on more
reasonable terms.
RESULTS OF OPERATIONS.
1998 COMPARED TO 1997. During the years ended December 31, 1998
and December 31, 1997, the Company realized no revenues.
Operating expenses increased to $15,411,000 for the year ended
December 31, 1998 form $989,000 for the year ended December 31,
1997. This increase in operating expenses of $14,422,000 was
primarily the result of $14,312,000 in write-downs of mineral
properties. Exclusive of the write-down of mineral properties,
operating expenses increased to $1,100,000 in 1998 from $989,000 in
1997. This increase of $110,000 or 11% was primarily due to a
charge of $174,300 for the cost of options granted to directors.
Other expense items decreased as a result of completing the
relocation of corporate headquarters and change in management.
In addition there was a decrease in expenses of approximately
$76,000 or 10%, primarily as the result of a decrease in the
amortization associated with the guaranty fee representing the cost
of a shareholder's guarantee relative to the Company's payments of
mineral property obligations.
1997 COMPARED TO 1996. During the year ended December 31, 1997,
the Company realized no revenues. During the year ended December
31, 1996, the Company had revenues of approximately $3,500
resulting from the sale of carbon product stockpiled at the
Company's inactive mine.
Operating expenses decreased to $989,000 for the year ended
December 31, 1997 from $1,312,000 for the year ended December 31,
1996. This decrease of $323,000 or 25% was primarily as a result of
a $109,000 reduction in consulting fees and a $66,000 reduction in
legal fees.
Other expense increased to $799,000 for the year ended December
31, 1997 from $20,000 for the year ended December 31, 1996. This
increase of $779,000 was primarily the result of the costs incurred
associated with the guaranty fee representing a shareholder's
guarantee relative to the Company's payments of mineral property
obligations acquired during the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES. The Company is an exploration
stage mining company and for financial reporting purposes has been
categorized as a development stage company since its inception. At
December 31, 1998, it had no recurring sources of revenue and
negative working capital. The Company has incurred losses and
experienced negative cash flows from operations in every year since
its inception. 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 pertaining to its Alder Gulch mining claims. As
a result of the termination of three of its leases in September and
October of 1998 the Company's rental/royalty payments were reduced
by $469,300 in 1998, by $1,863,000 in 1999, and by $3,274,500 in
2000. The Company has taken a $14,312,000 write down to reflect the
loss of its investment in the claims and asset impairment as of
December 31, 1998.
On April 30, 1997 the Company entered into a reorganization
agreement with Easton-Pacific to acquire all of the issued and
outstanding shares of the capital stock of Easton Pacific in
exchange for 1,750,000 shares of the Company's common stock. On
September 30, 1997 Easton Pacific was effectively merged into the
Company pursuant to the shareholders of both companies approving
the merger and the filing of articles of merger with the
secretaries of state of Delaware and Montana. Allowing for lock-up
periods and absence of sufficient trading volume, the fair market
value of the Company's shares issued to acquire Easton Pacific,
including direct acquisition costs of $60,500, was determined to be
$4,787,000. Easton Pacific's annual rental obligations for 1999 and
2000 total approximately $22,000.
Due to the Company's lack of revenues and negative working
capital, the Company's independent certified public accountants
included a paragraph in the Company's 1998 financial statements
relative to a going concern uncertainty. The Company has financed
its obligations for 1998 by selling 2,044,264 shares of its common
stock to certain affiliates of the Company. 619,098 shares were
sold between March 12, 1998 and May 26, 1998 for between $1.00 and
$2.12 per share. 825,166 shares were sold between August 6, 1998
and October 20, 1998 for between $0.72 and $0.38 per share and
400,000 shares were sold November 16, 1998 for $0.25 per share.
The declining prices at which the Company has been able to sell
its shares has corresponded with the decline in the market value of
the Company's common stock as reported on the Nasdaq SmallCap
Market during the period the shares were offered for sale. Although
market prices for the Company's stock tend to fluctuate they have
overall declined from $1.25 per share at May 6, 1997 ($5.00 post
recapitalization) to $0.125 per share at March 1, 1999, largely as
a consequence of the significant drop in world gold prices and I-
137.
Although the Company expects to meet its 1999 obligations using
borrowed funds and funds from the sale of shares of common stock,
due to the declining price for the Company's stock, the expiration
of the Degerstrom guaranty in September 1998, and the Company's
inability to acquire a joint venture partner, the Company can give
no assurance that it will be able to finance its obligations for
the balance of 1999 and thereafter. Because the Company has not
been financially able to explore and develop its properties to the
extent necessary to commence a commercial mining operation, it has
incurred aggregate losses of $23,836,187 from its inception through
December 31, 1998. Unless the Company is able to borrow or sell
shares of its common stock it will continue to experience a
shortage of working capital.
The Company's inability to advance its properties to the
commercial production stage is attributable to a number of factors,
including Kennecott's unexpected withdrawal from the mining venture
in 1995, the Company's lack of success through 1995 in
consolidating the various claims and interests in the area, the
decline in the price of gold, and the ban against the use of
cyanide in the State of Montana.
As previously reported, nearly all of the Company's Alder Gulch
claims were leased claims coupled with options to purchase. The
Company did not own these claims outright, but instead paid rentals
and royalties to the underlying landowner-lessors for the right to
conduct mining activities. The Company elected not to pay rentals
and royalties of $233,800 (September 1998) and $218,000 (October
1998) to three landowner-lessors of the Alder Gulch mining claims
pending the outcome of Montana's Initiative 137. On November 3,
1998 I-137 was passed into law. Having failed to make its rental
and royalty payments the Company received default notices for each
of the payments withheld under the three Alder Gulch leases.
Although the Company was provided, in each instance, 30 days in
which to pay the delinquent rentals and royalties and thereby cure
the defaults, the Company declined to make such payments, primarily
as a result of I-137's passage. The leases have reverted to the
landowners and the Company has taken a loss of $14,312,000 due to
the write down of assets in the fourth quarter. Despite the loss of
the leases the Company is negotiating with two of the landowners of
the Alder Gulch claims to reinstate and restructure the leases on
more reasonable terms. Whether the Company is or is not successful
in reacquiring the leases, significant additional work must be
undertaken to determine whether the Company's properties will
support commercial mining operations. Unless the price of gold
increases and I-137 is reversed, the Company does not foresee that
it will undertake further exploration of its properties with the
objective to determining a commercial ore body or bodies.
At December 31, 1998, the Company had a net deferred tax asset of
approximately $7,500,000. A valuation allowance equal to this
amount has been established, as management cannot determine that
more likely than not the Company will realize the benefits from
these deferred tax assets.
Cash flows for the Company for each of the years in the three-
year period ended December 31, 1998 were as follows:
YEAR ENDED DECEMBER 31, 1998. Operating activities of the Company
used $741,000, primarily as a result of the 1998 net loss of
$1,823,000, before the effect of the $14,312,000 loss on the write-
down of mineral properties. $1,054,000 was used in investing
activities, primarily as a result of payments made in relation to
the Company's mineral properties. The Company generated $1,644,444
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 $151,000 to $29,000 at
December 31, 1998.
YEAR ENDED DECEMBER 31, 1997. Operating activities of the Company
used $920,000, primarily as a result of the 1997 net loss of
$1,788,000, offset by amortization of $768,585 of deferred guaranty
fee. $1,785,519 was used in investing activities, primarily as a
result of payments of $1,725,000 made in relation to the Company's
mineral properties. The Company generated $2,790,000 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 $84,000 to $180,000 at
December 31, 1997.
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.
$1,354,000 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.
The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium
(year 2000) approaches. The "year 2000" problem is pervasive and
complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. As the Company's hardware and
software consist of recently purchased year 2000 compliant products
and the Company is continuing to address the issue throughout the
year, the year 2000 problem is not anticipated to have a
significant impact on the Company's operations.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS No.
131"), Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, establishes standards for the
new way that public enterprises report information about operating
segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and
major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and
in assessing performance. As the Company operates within one
segment, the adoption of SFAS No. 131 by the Company in 1998, did
not have a significant impact on the Company's financial position.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 ("SFAS No.
132") Employer's Disclosures about Pensions and other Post-
retirement Benefits, which standardizes the disclosure requirements
for pension and other post-retirement Benefits. The adoption of
SFAS No. 132 did not materially impact the Company's current
disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance
sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i)
the changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk or (ii) the earnings effect of
the hedged forecasted transaction. For a derivative not designated
as a hedging instrument, the gain or loss is recognized as income
in the period of change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Based on
its current and planned future activities relative to derivative
instruments, the Company believes that the adoption of SFAS No. 133
on January 1, 2000 will not have a significant effect on its
financial statements.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134 ("SFAS No.
134") Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, which effectively changes the way mortgage
banking firms account for certain securities and other interests
they retain after securitizing mortgage loans that were held for
sale. The adoption of SFAS No. 134 is not expected to have a
material impact on the Company's financial position.
In February 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 135 ("SFAS No.
135") Rescission of Financial Accounting Standards Board No. 75
("SFAS No. 75") and Technical Corrections. SFAS No. 135 rescinds
SFAS No. 75 and amends Statement of Financial Accounting Standards
Board No. 35. SFAS No. 135 also amends other existing authorative
literature to make various technical corrections, clarify meanings,
or describe applicability under changed conditions. SFAS No. 135 is
effective for financial statements issued for fiscal years ending
after February 15, 1999. The Company believes that the adoption of
SFAS No. 135 will not have a significant effect on its financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company for the years ended December
31, 1998, 1997, and 1996 included elsewhere in this report have been
audited by BDO Seidman, LLP, Spokane, Washington. An index to such
financial statements appears at Page 17 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 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information requested by this item is contained in the
registrant's proxy statement filed under the Securities Act in
connection with its 1998 annual meeting of stockholders, and is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information requested by this item is contained in the
registrant's proxy statement filed under the Securities Act in
connection with its 1998 annual meeting of stockholders, and is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information requested by this item is contained in the
registrant's proxy statement filed under the Securities Act in
connection with its 1998 annual meeting of stockholders, and is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this item is contained in the
registrant's proxy statement filed under the Securities Act in
connection with its 1998 annual meeting of stockholders, and is
incorporated by reference herein.
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.
5.1 Opinion of Randall & Danskin, P.S. regarding legality of
securities offered. Filed as Exhibit 5.1 to the
registration statement on Form S-1 (Commission File No.
33-29361) 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 Magnus. 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
registrant 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.
10.12 Amendment to Asset Purchase Agreement dated April 19,
1996 between the registrant and Tabor Resources Corporation. Filed
as Exhibit 10.12 to the registrant's quarterly report on Form 10-Q
for the three month period ended March 31, 1996 and incorporated by
reference herein.
10.13 Form of Lock-Up Agreement between the registrant and
certain Selling Stockholders. Previously filed as and Exhibit
10.13 to the registrant's statement on Form S-1 (Commission File
No. 33-3882) and incorporated by reference herein.
10.14 Form of Lock-Up Agreement between the registrant and
certain shareholders of Easton-Pacific and Riverside Mining
Company. Filed as Exhibit C to the Agreement and Plan of
Reorganization included in the registrant's registration statement
on Form S-1 (Commission File No. 33-29361) and incorporated by
reference herein.
10.15 Steininger Report on Evaluation of the Virginia City
Properties dated July 6, 1997. Filed as Exhibit 10.15 to the
registrant's annual report on Form 10-K for the year ended December
31, 1997 and incorporated by reference herein.
10.16 Henricksen Report on Virginia City Mining District dated
May 1997. Filed as Exhibit 10.16 to the registrant's annual report
on Form 10-K for the year ended December 31, 1997 and incorporated
by reference herein.
23.8 Consent of Tom Henricksen. Filed as Exhibit 23.8 to the
registrant's annual report on Form 10-K for the year ended December
31, 1997 and incorporated by reference herein.
23.9 Consent of Roger Steininger. Filed as Exhibit 23.9 to the
registrant's annual report on Form 10-K for the year ended December
31, 1997 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 (Commission File No. 33-3882)
and incorporated by reference herein.
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
(Commission File No. 33-3882) and incorporated by reference herein.
FINANCIAL STATEMENTS. An index to the financial statements
included in this report appears at page 17. The financial
statements and supplementary data appears at page F/S-2 through F/S-
15 of this report.
REPORTS ON FORM 8-K.
A report on Form 8-K disclosing the resignation of James A.
Fish and the appointment of Raymond A. Hanson as President and CEO
was filed by the registrant on October 6, 1998.
A report on From 8-K disclosing the receipt of default notices
for non payment of rental/royalties due on leaseholds of Alder
Gulch claims was filed by the registrant on October 27, 1998.
[The balance of this page has been intentionally left blank.]
16
<PAGE>
HANOVER GOLD COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F/S-1
Financial Statements:
Balance Sheets as of December 31, 1998
and December 31, 1997 F/S-2
Statements of Loss for the Years Ended December 31,
1998, 1997, 1996, and for the period from
inception (May 2, 1990) to December 31, 1998 F/S-3
Statements of Changes in Stockholders' Equity
for the period from inception (May 2, 1990)
to December 31, 1998 F/S-4
Statements of Cash Flow for the Years Ended
December 31, 1998, 1997, 1996, and for the period
from inception (May 2, 1990) to December 31, 1998 F/S-8
Summary of Accounting Policies F/S-9
Notes to Financial Statements F/S-10
Signatures F/S-16
[The balance of this page has been intentionally left blank.]
19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hanover Gold Company, Inc.
Spokane, Washington
We have audited the accompanying balance sheets of Hanover Gold
Company, Inc. as of December 31, 1998 and 1997, and the related
statements of loss, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998.
We have also audited the statements of loss, stockholders' equity
and cash flows for the period from inception (May 2, 1990) through
December 31, 1998, 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
audits. The financial statements give retroactive effect to the
mergers of Hanover Gold Company, Inc., 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 statements of loss,
changes in stockholder's equity and cash flows of Hanover
Resources, Inc. and Group S Limited for the year ended December 31,
1995 and for the period from inception (May 2, 1990) through
December 31, 1995, which statements reflect total revenues of
$432,730 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 audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, based on our audits 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 and the period from
inception (May 2, 1990) through December 31, 1998, 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, 1998, 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.
/s/ BDO Seidman, LLP
March 5, 1998
F/S-1
<PAGE>
HANOVER GOLD COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (NOTE 1)
December 31, 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 28,632 $ 180,083
Prepaid expenses and other
current assets 81,030 102,699
- ------------------------------------------------------------------
Total current assets 109,662 282,782
FIXED ASSETS:
Furniture and equipment,
net of Accumulated
depreciation of $130,510
and $110,358 97,539 134,069
Mineral properties,
net (Note 3) 2,730,334 17,185,244
OTHER ASSETS:
Other assets 37,842 23,994
- ------------------------------------------------------------------
TOTAL ASSETS $2,975,377 $ 17,626,089
==================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY (Note 1)
CURRENT LIABILITIES:
Accounts payable $ 37,393 $ 40,887
Notes payable to
shareholders (Note 5) 428,491 320,405
Accrued payroll and
payroll taxes 13,068 58,803
Other accrued expenses 15,590 74,008
Current portion of
long-term debt 10,522 77,703
- ------------------------------------------------------------------
Total current liabilities 505,064 571,806
LONG-TERM DEBT, LESS
CURRENT PORTION - 148,515
- ------------------------------------------------------------------
Total liabilities 505,064 720,321
- ------------------------------------------------------------------
COMMITMENTS AND
CONTINGENCIES (Notes 3, 5, 6, and 7)
STOCKHOLDERS' EQUITY:
(Notes 5, 6, and 7)
Preferred stock, $0.001 par value;
shares authorized 2,000,000,
no shares outstanding - -
Common Stock, $0.0001 par value,
shares authorized 48,000,000;
issued and outstanding
9,353,533 and 7,357,087
shares respectively 935 736
Additional paid-in capital 26,308,712 24,606,379
Deficit accumulated during the
development stage (23,836,187) (7,701,347)
Treasury stock, at
cost (19,668 shares) (3,147) -
- ------------------------------------------------------------------
Total Stockholders equity 2,470,313 16,905,768
- ------------------------------------------------------------------
$ 2,975,377 $ 17,626,089
</TABLE>
------------------------------------------------
See accompanying summary of accounting policies and notes to
financial statements.
F/S-2
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, 1998 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES (Note 2) $ 1,151,958 $ - $ - $ 3,510
- ---------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of goods mined 1,987,483 - - -
Depreciation and
amortization 162,759 35,995 28,483 26,722
Provision for bad
debt (Note 5) 779,921 - - -
Abandonment of mining
interests (Note 3) 12,012,050 12,012,050 - -
Write-down of mineral
property (Note 3) 2,300,000 2,300,000 - -
General and administrative
expenses (Note 5) 6,249,772 1,063,579 960,619 1,284,915
- ---------------------------------------------------------------------------
Total operating expenses 23,491,985 15,411,624 989,102 1,311,637
- ---------------------------------------------------------------------------
OPERATING LOSS (22,340,027) (15,411,624) (989,102) (1,308,127)
OTHER INCOME (EXPENSE):
Amortization of guaranty
Fee (Note 7) (1,457,170) (688,585) (768,585) -
Interest income
(expense), net 2,025 (30,120) (26,566) (20,200)
Loss on sale of equipment (41,015) (4,511) (3,996) -
- ---------------------------------------------------------------------------
Total other
income (expense) (1,496,160) (723,216) (799,147) (20,200)
- ---------------------------------------------------------------------------
Net loss (Note 2) $(23,836,187)$(16,134,840)$(1,788,249)$(1,328,327)
===========================================================================
Net loss per share ($2.13) ($0.32) ($0.31)
Weighted average common
shares outstanding 7,582,950 5,539,610 4,354,580
</TABLE>
- ---------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
[The balance of this page has been intentionally left blank.]
F/S-3
HANOVER GOLD COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION (MAY 2, 1990) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated Stock-
Common Stock Additional During the holders'
------------- Paid in Subscription Treasury Development Equity
Shares Amount Capital Receivable Stock Stage Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash ($2.12/share) 188,141 $ 19 $402,481 $ - $ - $ - $402,500
Issuance of common stock
for cash ($0.28/share) 21,562 2 6,016 - - - 6,018
Cash contributed to capital - - 5,000 - - - 5,000
Net loss - - - - - (141,114) (141,114)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1990 209,703 21 413,497 - - (141,114) 272,404
Issuance of common stock to
directors ($0.0004/share) 50,000 5 15 - - - 20
Issuance of common stock for
claims and Engineering
costs ($10.00/share) 57,252 6 572,513 - - - 572,519
Issuance of common stock
or cash ($0.24/share) 739,377 74 166,596 - - - 166,670
Issuance of common stock
or cash ($1.68/share) 67,146 6 113,744 - - - 113,750
Exercise of stock purchase
Warrants ($2.40/share) 18,600 2 44,638 - - - 44,640
Exercise of stock purchase
warrants ($5.00/share) 27,875 3 139,371 - - - 139,374
Cash contributed to capital - - 73,850 - - - 73,850
Net loss - - - - - (179,866) (179,866)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1991 1,169,953 117 1,524,224 - - (320,980) 1,203,361
Issuance of common stock
for cash ($8.00/share) 178,125 18 1,424,982 - - - 1,425,000
Issuance of common stock
for cash ($0.72/share) 54,634 5 39,995 - - - 40,000
Exercise of stock purchase
warrants ($5.00/share) 10,400 1 51,999 - - - 52,000
Net loss - - - - - (314,878) (314,878)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1992 1,413,112 141 3,041,200 - - (635,858) 2,405,483
Issuance of common stock for
interest in mineral
property ($6.00/share) 37,500 4 224,996 - - - 225,000
Issuance of common stock to
officer ($0.04/share) 31,791 3 747 - - - 750
Exercise of stock purchase
Warrants ($6.40/share) 765,426 77 4,750,141 (649,360) - - 4,100,858
Net loss - - - - - (256,769) (256,769)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993 2,247,829 225 8,017,084 (649,360) - (892,627) 6,475,322
Exercise of stock purchase
warrants ($6.40/share) 332,224 33 2,126,202 - - - 2,126,235
Cancellation of subscribed
shares ($6.40/share) (62,500) (6) (399,994) 400,000 - - -
Cash contributed to capital - - 98,393 - - - 98,393
Net loss - - - - - (1,362,954)(1,362,954)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 2,517,553 $252$9,841,685$(249,360) $ -$(2,255,581)$7,336,996
</TABLE>
To Be Continued Next Page F/S - 4
<PAGE>
HANOVER GOLD COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION (MAY 2, 1990) THROUGH DECEMBER 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Stock-
Common Stock Additional During the holders'
------------- Paid in Subscription Treasury Development Equity
Shares Amount Capital Receivable Stock Stage Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 2,517,553 $252 $9,841,685 $(249,360) $ - $(2,255,581) $7,336,996
Issuance of common stock
for cash ($1.40/share) 535,714 53 749,947 - - - 750,000
Issuance of common stock
for cash ($1.40/share) 178,571 18 249,982 - - - 250,000
Issuance of common stock
for cash ($4.00/share) 50,000 5 199,995 - - - 200,000
Issuance of common stock in
Satisfaction of vendor
obligations ($4.24/share) 17,420 2 74,094 - - - 74,096
Issuance of common stock in
satisfaction of vendor
obligations ($4.00/share) 50,000 5 199,995 - - - 200,000
Issuance of common stock
for cash ($4.00/share) 250,000 25 999,975 - - - 1,000,000
Issuance of common stock to
officer at no cost 49,459 5 15 - - - 20
Issuance of common stock
pursuant to convertible
debt 337,074 34 281,414 - - - 281,448
Cash received for subscribed
shares - - - 249,360 - - 249,360
Repurchase of previously issued
shares ($6.40/share) (5,750) (1) (36,799) - - - (36,800)
Net loss - - - - - (2,329,190)(2,329,190)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 3,980,041 398 12,560,303 - - (4,584,771) 7,975,930
Issuance of common stock for
mineral property
rights ($16.00/share) 1,250 - 20,000 - - - 20,000
Issuance of common stock for
mineral property rights
($8.00/share) 131,250 13 1,049,987 - - - 1,050,000
Issuance of common stock for
mineral property rights
($6.24/share) 62,500 6 389,994 - - - 390,000
Issuance of common stock
for cash ($2.00/share) 535,715 54 1,071,375 - - - 1,071,429
Issuance of common stock
for cash, net Or issuance
costs of $70,000
($5.00/share) 250,000 25 1,179,975 - - - 1,180,000
Net loss - - - - - (1,328,327)(1,328,327)
- -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 4,960,756 $ 496$16,271,634 $ - $ -$(5,913,098)$10,359,032
</TABLE>
To Be Continued Next Page
F/S - 5
<PAGE>
HANOVER GOLD COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION (MAY 2, 1990) THROUGH DECEMBER 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Stock-
Common Stock Additional During the holders'
------------- Paid in Subscription Treasury Development Equity
Shares Amount Capital Receivable Stock Stage Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 4,960,756 $496 $16,271,634 $ - $ - $(5,913,098) $10,359,032
Issuance of common stock
for services
rendered ($3.80/share) 10,855 1 41,249 - - - 41,250
Grant of option to director
as compensation for loan
guaranty (Note 7) - - 1,457,170 - - - 1,457,170
Deferred guaranty fee, subject
to grant exercise (Note 7) - - (688,585) - - - (688,585)
Issuance of common stock
for cash ($5.00/share) 284,750 28 1,423,722 - - - 1,423,750
Issuance of common stock
for an acquisition of
Easton-Pacific (Note 2) 1,750,000 175 4,726,225 - - - 4,726,400
Issuance of common stock
for cash ($2.00/share) 125,000 13 249,987 - - - 250,000
Issuance of common stock for
cash ($5.00/share) (Note 7) 225,000 23 1,124,977 - - - 1,125,000
Issuance of common stock for
mineral property rights 726 - - - - - -
Net loss - - - - - (1,788,249)(1,788,249)
- -------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 7,357,087 736 24,606,379 - - (7,701,347) 16,905,768
Issuance of common stock for
services rendered
($2.28/share) 19,668 1 44,999 - - - 45,000
Amortization of deferred
guaranty fee, subject
to grant exercise - - 688,585 - - - 688,585
Issuance of common stock
for cash ($2.00/share) 65,000 6 129,993 - - - 129,999
Issuance of common stock
for cash ($1.80/share) 90,833 9 163,491 - - - 163,500
Issuance of common stock
for cash ($1.60/share) 37,500 3 59,997 - - - 60,000
Cancellation of common
stock issued for property
rights ($8.00/share) (131,250) (13) (1,049,987) - - - (1,050,000)
Issuance of common stock
for cash ($2.12/share) 216,014 21 457,929 - - - 457,950
Issuance of common stock
for cash ($1.00/share) 300,000 30 299,970 - - - 300,000
Other 116 - - - - - -
Issuance of common stock
for cash ($0.72/share) 208,500 21 150,099 - - - 150,120
Issuance of common stock
for cash ($0.50/share) 150,000 $ 15 $ 74,985 $ - $ - $ - $ 75,000
</TABLE>
To Be Continued Next Page F/S - 6
<PAGE>
HANOVER GOLD COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION (MAY 2, 1990) THROUGH DECEMBER 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Stock-
Common Stock Additional During the holders'
------------- Paid in Subscription Treasury Development Equity
Shares Amount Capital Receivable Stock Stage Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
and options for cash
($0.38/share) 466,666 $ 47 $174,953 $ - $ - $ - $175,000
Issuance of common stock
and options
for cash ($0.25/share) 400,000 40 99,960 - - - 100,000
Issuance of common stock
and options for services
rendered ($0.59/share) 193,067 19 115,544 - - - 115,563
Options issued for
accounts payable - - 50,000 - - - 50,000
Options issued for
services - - 238,668 - - - 238,668
Options exchanged for
shares of common stock (19,668) - 3,147 - (3,147) - -
Net loss - - - - -(16,134,840)(16,134,840)
- ------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 9,353,533 $935 $26,308,712 $ - $(3,147)$(23,836,187)$2,470,313
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
[The balance of this page has been intentionally left blank.]
F/S -7
<PAGE>
HANOVER GOLD COMPANY, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
From Date of Inception Year Ended December 31,
(May 2, 1990) through --------------------------
December 31, 1998 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $(23,836,187)$(16,134,840)$(1,788,249)$(1,328,327)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Loss on sale of equipment 41,014 4,510 3,996 -
Abandonment of
mining interests 12,012,050 12,012,050 - -
Write-down of mineral
properties 2,300,000 2,300,000 - -
Depreciation and depletion 162,759 35,995 28,483 26,722
Common stock and options
issued for services 643,667 402,377 41,250 -
Amortization of deferred
guaranty fee 1,457,170 688,585 768,585 -
Write-off of note receivable 779,921 - - -
Changes in operating assets
and liabilities, Excluding
effect of Easton acquisition:
(Increase) decrease in
supplies inventory - - 10,000 19,494
(Increase) decrease in
prepaid expenses (53,443) 21,669 22,255 32,384
(Increase) decrease in
other assets (37,842) (13,848) (570) (3,500)
Increase (decrease) in
accounts payable 108,774 (3,494) (31,964) (214,738)
Increase (decrease) in
accrued expenses 123,746 (54,153) 25,761 (45,027)
- -------------------------------------------------------------------------------
Net cash used in
operating activities (6,298,371) (741,149) (920,453) (1,512,992)
- -------------------------------------------------------------------------------
Investing activities:
Proceeds from sale
of equipment 27,901 325 12,300 -
Net repayment under
shareholder advances - - - 70,715
Repayments (advances)
under notes receivable (1,089,219) - - -
Purchase of furniture
and equipment (363,613) (4,300) (73,118) (78,262)
Additions to
mineral properties (10,383,585) (1,050,771)(1,724,701) (1,346,696)
- -------------------------------------------------------------------------------
Net cash used in
investing activities (11,808,516) (1,054,746)(1,785,519) (1,354,243)
- -------------------------------------------------------------------------------
Financing activities:
Borrowings under note
payable to shareholder 73,405 - - 23,405
Proceeds from sale of
common stock 17,479,545 1,611,570 2,798,750 2,251,429
Proceeds from issuance
of convertible debt 215,170 - - -
Proceeds from issuance
of long term debt 45,000 - 45,000 -
Repayment of
long-term debt (172,343) (72,065) (54,048) (46,228)
Proceeds from
related party 108,086 108,086 - -
Collection of subscription
receivable 249,360 - - -
Repurchase of common stock (39,947) (3,147) - -
Capital contributions 177,243 - - -
- -------------------------------------------------------------------------------
Net cash provided by
financing activities 18,135,519 1,644,444 2,789,702 2,228,606
- -------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 28,632 (151,451) 83,730 (638,629)
Cash and cash equivalents,
beginning of period - 180,083 96,353 734,982
- -------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 28,632 $ 28,632 $ 180,083 $ 96,353
===============================================================================
Supplemental disclosure of
cash flow information:
Cash paid during
the year for:
Interest $ 101,181 $ 42,068 $ 35,068 $ 23,181
Income taxes $ - $ - $ - $ -
</TABLE>
Supplemental schedule of non-cash investing and financing activities (Note 8)
------------------------------------------------------
See accompanying summary of accounting policies
and notes to financial statements.
F/S-8
HANOVER GOLD COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES
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.
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
EQUIPMENT Furniture and equipment are carried at cost.
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 Mineral properties include the cost of
property acquired. These costs will be amortized
against subsequent revenues, or charged to
operations at the time the related property is
determined to have an impairment of value.
In accordance with the provisions of
Statements of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to
be Disposed of", management of the Company reviews
the carrying value of its mineral properties on a
regular basis. Estimated undiscounted future cash
flow from the mineral properties are compared with
the current carrying value. Reductions to the
carrying value are recorded to the extent the net
book value of the property exceeds the estimate of
future discounted cash flow.
NET LOSS PER SHARE SFAS No. 128 requires dual presentation of
basic EPS and diluted EPS on the face of all
income statements issued after December 15, 1997
for all entities with complex capital structures.
Basic EPS is computed as net income divided by the
weighted average number of common shares
outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from
common shares issuable through stock options,
warrants, and other convertible securities. As
the Company's stock options and warrants are
antidilutive for all periods presented only basic
EPS is presented. At December 31, 1998 and
December 31, 1997 outstanding options and warrants
to purchase 3,472,398 and 633,243 shares of the
Company's common stock were not included in the
computation of diluted EPS as their effect would
be antidilutive.
INCOME TAXES Income taxes are provided based on the
liability method of accounting pursuant to 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 if management
does not believe the Company has met the "more
likely than not" standard imposed by SFAS No. 109
to allow recognition of such an asset.
MANAGEMENT'S
ESTIMATES The preparation of financial statements in
conformity 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 FINANCIAL
INSTRUMENTS The carrying amounts reported in the balance
sheets as of December 31, 1998 and 1997 for cash
equivalents, accounts payable 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. The fair value of notes payable to
stockholders cannot be determined.
F/S-9
STOCK BASED
COMPENSATION Statement of Financial Accounting Standards
SFAS No. 123 ("SFAS No.123"), Accounting for Stock-
Based Compensation, encourages, but does not
require, companies to record compensation cost for
stock-based employee compensation plans at fair
value. The Company has chosen to continue 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.
HANOVER GOLD COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE
OPERATIONS AND
GOING CONCERN The Company has been in the development
stage since its inception. The Company has no
recurring source of revenue, has incurred
operating losses since inception and, at December
31, 1998 has negative working capital.
Additionally, in response to continued depressed
gold price, and the impact of the Montana
Initiative 137 (which limits the use of the
Cyanide Heap Leach process and is currently being
litigated in the Montana judicial system), during
1998 the Company abandoned a significant portion
of its mining interests in Montana and recognized
a write-down in the carrying value of remaining
capitalized mineral properties. 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 negotiations with the owners of the leased
properties which the Company abandoned to enter
into new agreements with terms more favorable to
the Company, searching for joint venture partners
to provide the necessary funding for the Company's
project and reducing corporate activities and
expenses. To the extent additional funds are
required, the Company will attempt to raise these
funds through additional borrowings or extensions
on shareholder debt or through future sales of
shares of its common stock. To date, the Company
has contracted with a consultant to assist with
the various fund raising alternatives. There can
be no assurances that the Company will be successful
in executing these actions. 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
COMBINATION In September 1996, the Company acquired all of the issued
and outstanding shares of common stock of Group S
Limited ("Group S") and Hanover Resources, Inc.
("Resources") in exchange for 739,377 and 734,493
shares of the Company's common stock. In
connection with the acquisitions, 906,250 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.
On September 30, 1997, the Company
acquired all of the outstanding shares of Easton-
Pacific and Riverside Mining Company ("Easton"),
an inactive mining company holding mineral claims
contiguous to those of the Company, in exchange
for 1,750,000 shares of the Company's common
stock. The acquisition of Easton has been
accounted for using the purchase method of
accounting, and accordingly, the accounts of
Easton have been reflected in the financial
statements from the date of acquisition. The
purchase price of $4,787,000 (which includes
transaction costs of approximately $60,000) has
been allocated to the assets purchased and the
liabilities assumed based upon their estimated
fair value at the date of acquisition.
The following table presents
summarized unaudited pro forma results of
operations for 1997 and 1996 as if the Easton
acquisition had occurred at the beginning of each
year. These pro forma results are provided for
comparative purposes only and do not purport to be
indicative of the results which would have been
obtained if the acquisition had been effected on
those dates or of future results of operations.
F/S - 10
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Revenues $ - $ 54,275
Net loss $ (1,869,563) $ (1,408,960)
Net loss per share $ (0.28) $ (0.06)
==========================================================
</TABLE>
3. MINERAL PROPERTIES
Mineral properties represents 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
Mining District.
The Company's investment in mineral properties
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------
<S> <C> <C>
Mining properties $ 2,730,334 $ 14,803,488
Deferred exploration
Expenditures - 2,395,986
Accumulated
depreciation - (14,230)
- ---------------------------------------------------------
$ 2,730,334 $ 17,185,244
=========================================================
</TABLE>
During the fourth quarter of 1998, primarily in
response to the passage of Montana Initiative 137,
the Company abandoned its rights to a substantial
portion of its mineral claims. In connection with
the abandonment, the Company wrote-off $11,855,672
of capitalized mining costs pertaining to these
claims. In connection with the abandonment of
these mineral properties, the Company performed an
evaluation of the net realizable value of the
remaining mineral properties held by the Company.
As a result of this evaluation, the Company wrote-
off $2,300,000 to approximate the remaining
estimated carrying value of this property.
Additionally, during fourth quarter of 1998 the
Company settled litigation involving a 1996
conveyance of mineral interest. In exchange for
the release of its rights to the mineral interest,
the Company received and retired 131,250 shares of
its common stock originally issued to acquire the
rights. Finally, during the fourth quarter of
1998, the Company deeded back to the seller two
properties in satisfaction of unpaid note payable
balances of $143,632.
4. INCOME TAXES At December 31, 1998 and 1997, the Company had deferred
tax assets of approximately $7,500,000 and
$2,500,000 principally arising from net operating
loss carryforwards for income tax purposes. At
December 31, 1998 the Company had a deferred tax
liability of $920,000 arising from the tax
treatment in reporting the carrying value of the
Company's mineral property acquired from Easton.
As management of the Company cannot determine if
it is more likely than not that the Company will
realize the benefit of the net deferred tax asset,
a valuation allowance equal to the net deferred
tax asset of $6,580,000 and $732,000 has been
established at both December 31, 1998 and 1997.
At December 31, 1998, the Company has net
operating loss carryforwards totaling
approximately $19,290,000 which expire in the
years 2005 through 2012. The use of approximately
$200,000 of these carryforwards is subject to
limitations imposed by the Internal Revenue Code.
5. 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, the milling
facilities were transferred together with the
Company's secured interest therein, to a third party.
F/S - 11
In 1995, the Company entered into an agreement, as
amended, (collectively, the "Stock Purchase
Agreement") with Mr. N. A. Degerstrom and
associates whereby the Company granted the group
the right to purchase up to 1,500,000 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 714,475 and 535,525
were purchased in 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
Per Share Total
Shares Purchase Price Consideration
- --------------------------------------------
<S> <C> <C>
714,475 $ 1.40 $ 1,000,000
535,525 $ 2.00 $ 1,071,050
250,000 $ 4.00 $ 1,000,000
- --------------------------------------------
1,500,000 $ 3,071,050
=============================================
</TABLE>
In December 1996 and 1995, the Company received
aggregate advances from Mr. Degerstrom and Mr.
Steinbaum, a former director, of $298,405 and
$50,000, respectively, and made repayments on
those advances of $275,000 in 1996 plus interest
at 9%. During 1998, the Company received an
additional $108,086 from Mr. Degerstrom. At
December 31, 1998 and 1997, the Company owed Mr.
Degerstrom $181,491 and $73,405.
From 1990 through 1995, the Company paid $2,400
for annual rent of office space leased from Mr.
Schmid, a significant shareholder.
During 1996, the Company paid $65,438 for sampling
and assaying services to a company controlled by
Mr. Degerstrom and purchased equipment for $30,000
from this same entity. During 1997, the Company
paid $3,067 to the same company for surveying
services. During 1998, the Company paid this same
company $129,279 and issued 193,067 shares of
common stock for drilling and assaying services.
During 1996, the Company paid $90,000 and $49,500
in consulting fees to Mr. Fred Schmid and Mr.
Steven Schmid, significant shareholders and former
officers.
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.
As part of its acquisition of Easton-Pacific in
1997 (Note 2), the Company assumed a $247,000 note
payable to Mr. Nierengarten, an officer of Easton-
Pacific. The note has a stated interest rate of
12% and is due on demand.
6. COMMITMENT AND
CONTINGENCIES The Company leases its corporate office space on a
month-to-month basis. Rent expense for the years
ended December 31, 1998, 1997, and 1996 was
approximately $22,000, $28,000 and $28,000.
The Company's Board of Directors authorized a
verbal agreement with the Company's chief
executive officer and major stockholder, Mr.
Hanson, to pay his salary in options for the
purchase of shares of the Company's common stock.
In addition, the Company leases office space from
this same stockholder at an annual rate of
$10,000, which is paid in options to purchase
shares of the Company's common stock.
7. STOCKHOLDERS' REVERSE STOCK SPLIT
EQUITY
In May 1998, the Board of Directors
authorized a 1 for 4 reverse stock split. This
reverse stock split was performed by the Company
granting to all stockholders as of the date of
record one share of common stock to replace every
four shares of stock currently outstanding. All
references in the financial statements referring
to the number of shares, share prices, per share
amounts, options and warrants have been adjusted
retroactively for the effect of this reverse stock
split.
F/S - 12
COMMON STOCK WARRANTS
In 1990, the Company issued common stock warrants
granting rights to purchase up to 37,500 shares of
the Company's common stock at $2.40 per share
through September 1991. Warrants to purchase
18,600 shares of common stock were exercised in
1991.
In 1991, the Company issued common stock warrants
granting rights to purchase up to 1,143,125 shares
of the Company's common stock at $5.00 per share
through August 1992 and at $6.40 per share from
September 1992 through March 1994. Warrants to
purchase 27,875 and 10,400 shares of the Company's
common stock at $5.00 per share were exercised in
1991 and 1992. Warrants to purchase 765,426 and
332,224 shares of the Company's common stock at
$6.40 per share were exercised in 1993 and 1994.
In March 1997, the Company issued a three-year
option to purchase 578,242 shares of the Company's
common stock at $5.00 per share to a shareholder
in exchange for a shareholder's guarantee of the
Company's mineral property obligations for an
eighteen months period ending in September 1998.
The fair value of these options, as determined
using the Black Scholes option pricing model, was
$1,450,000 and was amortized to expense over the
guaranty period. During 1997, 225,000 shares of
common stock were issued pursuant to the option.
During 1998, the Company issued 25,000 stock
warrants to Mr. Wilson, a consultant of the
Company, in exchange for services performed
relative to certain mineral property negotiations.
These warrants are exercisable at $2.00 per share
and expire in February 2003.
During 1998, the Company issued 58,020 stock
warrants to Mr. Fish, the out-going president of
the Company, as payment in full for his salary for
the period of service provided. These warrants are
exercisable at $0.0001 per share and expire in
December 2003.
During 1998, the Company issued 1,600,000 stock
warrants in conjunction with the sale of the
Company's common stock. These warrants are
exercisable at $0.50 per share and expire in
December 2003. In addition 386,134 stock warrants
were issued as payment for drilling services to a
company owned by Mr. Degerstrom. These warrants
are exercisable at $0.50 per share and expire in
December 2003.
STOCK OPTION 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
1,000,000. Grants of options, appreciation rights
and restricted stock are based solely on the
discretion of the Board of Directors at exercise
prices at least equal to the fair value of the
stock on the date of grant. Options granted under
the 1995 plan vest immediately.
Stock option activity under the 1995 Plan is
summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Share Price
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding at
December 31, 1995 200,000 $ 6.40
Granted - -
Exercised - -
Expired - -
- ----------------------------------------------------------------
Outstanding at
December 31, 1996 200,000 6.40
Granted 30,000 1.50
Exercised - -
Expired - -
- ---------------------------------------------------------------
Outstanding at
December 31, 1997 230,000 5.76
Granted 770,000 1.19
Exercised - -
Expired - -
- ---------------------------------------------------------------
Outstanding at
December 31, 1998 1,000,000 $ 1.49
===============================================================
</TABLE>
F/S - 13
SFAS No. 123 requires the Company to provide pro
forma information regarding net loss and loss per
share as if compensation cost for the Company's
stock option plan had been determined in
accordance with the fair value based method
prescribed by SFAS No. 123. The Company estimates
the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing
model with the following weighted-average
assumptions used: dividend yield of zero percent;
expected volatility of 35 percent; risk-free
interest rate of 6 percent; and expected lives of
five years. The weighted average fair value at
date of grant for options granted to employees in
1998 and 1997 was $0.19 and $0.23 per option.
Under the accounting provisions of SFAS No. 123,
the Company's net loss and loss per share for each
of the three years in the period ended December
31, 1998 would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $ (16,134,840) $ (1,788,249) $ (1,328,327)
Pro forma (16,148,417) (1,815,249) (1,328,327)
Loss per share
As reported $ (2.13) $ (0.32) $ (0.31)
Pro forma (2.13) (0.33) (0.31)
==============================================================
</TABLE>
The following table summarizes information about
stock options and warrants outstanding at December
31, 1998:
Options and Warrants Out-
Weighted Average Number Outstanding standing and Exercisable
Exercise and Exercisable Weighted Average Remaining
Prices at 12/31/98 Contractual Life (years)
--------------------------------------------
$ 0.0001 58,020 5.0
$ 0.3750 582,500 9.8
$ 0.5000 1,986,134 4.9
$ 1.5000 30,000 8.9
$ 2.0000 25,000 4.3
$ 2.2500 187,500 9.3
$ 5.0000 353,244 1.2
$ 6.4000 200,000 1.4
$ 8.0000 50,000 0.2
---------------------------------------------
$0.0001 - $8.0000 3,472,398 5.3
=============================================
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F/S - 14
8. SUPPLEMENTAL Supplemental schedule ofnon-cash investing and
DISCLOSURES OF CASH- financing activities.
FLOW INFORMATION
<TABLE>
<CAPTION>
Cumulative Amounts From
Date of Inception (May 2, 1990) December 31,
Through December 31, --------------------
1998 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mineral property rights
Acquired in exchange for:
Issuance of
common stock $2,257,518 $ - $ - $1,460,000
Issuance of long-
term debt 263,946 - - 263,946
Note receivable 309,298 - - 309,298
Fixed Assets 66,177 - - 66,177
Issuance of shares of
common stock in
satisfaction of vendor
obligations 50,000 50,000 - -
Conversion of notes
payable and accrued
interest to common stock 137,816 - - -
Equipment acquired through
issuance of
long-term debt 17,548 - 17,548 -
Cancellation of stock
issued in exchange
for mineral property 1,050,000 1,050,000 - -
Mineral property
transferred to extinguish
long term debt 143,631 143,631 - -
Common stock issued to
acquire net assets of
Easton-Pacific,
including:
Prepaid expenses 27,585 - 27,585 -
Mineral properties 4,969,721 - 4,969,721 -
Notes payable 247,000 - 247,000 -
Accounts payable 2,715 - 2,715 -
Accrued expenses $ 21,191 $ - $ 21,191 $ -
============================================================================
</TABLE>
[The balance of this page has been intentionally left blank.]
F/S - 15
<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/ Raymond A. Hanson
---------------------
Raymond A. Hanson, its President
and Chief Executive Officer
Date: March 31, 1999
By: /s/ Wayne Schoonmaker
----------------------
Wayne Schoonmaker, its
Principal Accounting Officer
Date: March 31, 1999
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
---------------------- ---------------------
Neal A. Degerstrom Wayne Schoonmaker
Director Secretary and Treasurer
Date: March 31, 1999 Date: March 31, 1999
By: /s/ Tim Babcock By: /s/ Karl E. Elers
--------------- -----------------
Tim Babcock Karl E. Elers
Director Director
Date: March 31, 1999 Date: March 31, 1999
By: /s/ James A. Fish
-----------------
James A. Fish
Director
Date: March 31, 1999
F/S-16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000778165
<NAME> HANOVER GOLD COMPANY INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,632
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 109,622
<PP&E> 2,958,383<F1>
<DEPRECIATION> 130,510
<TOTAL-ASSETS> 2,975,377
<CURRENT-LIABILITIES> 505,064
<BONDS> 0
0
0
<COMMON> 935
<OTHER-SE> 2,469,378<F2>
<TOTAL-LIABILITY-AND-EQUITY> 2,975,377
<SALES> 0
<TOTAL-REVENUES> 3,163<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,416,135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 721,868
<INCOME-PRETAX> (16,134,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,134,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,134,840)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (1.86)
<FN>
<F1>Consists of $2,730,334 in resource properties and claims, and $228,049 in
property and equipment, at cost.
<F2>Consists of $26,308,712 in additional paid-in capital, less a deficit of
$23,836,187 accumulated during development stage, less $3,147 treasury stock.
<F3>Consists of $3,163 in interest in interest income.
</FN>
</TABLE>
