<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, 1999
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)
424 S. Sullivan Rd., Suite #300
Veradale, Washington 99037
(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, 2000 was $792,701. The number of shares of common stock
outstanding at such date was 11,948,964 shares. An additional 8,321,343 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, 1999
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 7
Item 3: Legal Proceedings 8
Item 4: Submission of Matters to a Vote
of Security Holders 8
PART II
Item 5: Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6: Selected Financial Data 9
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8: Financial Statements and Supplementary Data 13
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
PART III
Item 10: Directors and Executive Officers of the Registrant 13
Item 11: Executive Compensation 14
Item 12: Security Ownership of Certain Beneficial
Owners and Management 16
Item 13: Certain Relationships and Related Transactions 18
PART IV
Item 14: Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 18
Index to Financials 20
Signatures F/S - 16
(i)
<PAGE>
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, 1999 had negative working
capital. These factors have caused the Company's 1999 consolidated financial
statements to include an explanatory paragraph related to a going concern
uncertainty. This trend is expected to continue 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 geological studies which have been completed
on the Company's Virginia City properties, and which lead the Company to believe
that there may be significant reserves, are insufficient to establish reserves
under accepted mining practices. No exploration or geological studies have been
done on the Company's Chile properties.
THE NEED FOR SIGNIFICANT ADDITIONAL FINANCING. The Company needs additional
financing to maintain 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, 2000, world gold prices were approximately $290.65 per
ounce, a reduction of approximately 20 % from prices three 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 in
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 companies in the mining industry, which leads management to believe
that it will not be available to the Company. Were the Company subjected to
environmental liabilities, the payment of such liabilities would reduce the
Company's funds. 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)
<PAGE>
GLOSSARY OF SIGNIFICANT MINING TERMS
Certain terms used throughout this report are defined below.
AG. Silver.
AU. Gold.
ARCHEAN. An era in geological time 3.4 billion years ago.
BRECCIATED. Converted into, characterized by, or resembling a coarse-grained
rock, composed of angular broken rock fragments held together by a
mineral cement or in a fine-grained matrix; said of rock structures
marked by an accumulation of angular fragments or of an ore texture
showing mineral fragments without notable rounding.
DACITE. Fine grained extrusive rock with same general composition as
andesite.
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.
IGNIMBRITE. The rock formed by the widespread deposition and consolidation of
ash flows.
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.
MIOCENE. An epoch of the upper Tertiary period; also, the corresponding
worldwide series of rocks.
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.
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.
SILICIFIED. The fossilization whereby the original organic components of an
organism are replaced by silica as quartz, Chalcedony, or opal.
STRIKE. The direction or trend taken by a structural surface; e.g. a
bedding or fault plane as it intersects the horizontal.
(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 mining
properties in the historic Virginia City Mining District of southwestern Montana
and in Chile, South America. The Montana properties presently comprise 204
claims, of which 169 are located in the Virginia City district and 35 are
located at Norris and Pony, Montana, some 35 miles away. The Company acquired
these claims, and approximately 575 other claims and several state leases
(principally in the Alder Gulch area), beginning in 1990, primarily 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 made the decision to terminate its
leases with three of its landowner-lessors primarily due to the passage of a
Montana initiative, I-137, and the high cost of maintaining the leases. The
initiative, which became law in November 1998, precludes new or expanded open
pit mining operations from using cyanide in the process of extracting gold and
silver. 239 claims were relinquished as a result of having terminated the
leases and consequently, in 1998, the Company wrote-off the carrying value of
mineral interests having a book value of approximately $12,000,000.
The Company had been engaged in exploration and limited development activities
primarily in the Alder Gulch area more or less continuously from 1992 to 1998
when the Company relinquished its leases. The activities 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.
As part of a strategy to consolidate its land position, in order to facilitate
continued exploration and development and make its holdings more attractive to
potential development partners, the Company, in 1995, began acquiring additional
mining claims in the Virginia City district and renegotiating the terms under
which certain of the claims were previously acquired. 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. Nearly all of the claims the Company now holds were acquired
through the Easton-Pacific merger.
The Company's Chile property consists of 20 mining claims located in the
province of Chanaral in Region III of Atacarna Chile. The claims were acquired
through a lease with option to purchase and unless the Company is able to enter
into an arrangement with a mining company to explore and finance the lease
payments to hold the claims, the Company does not believe that it will be able
to maintain the claims. The lease payments are $100,000 for each of 2000 and
2001, and $800,000 thereafter.
Although the Company has no established proven or probable reserves, it
believes, based on the exploration activities on the Montana properties
conducted by the Company and others, that there are large gold bearing mineral
systems and that the potential exists for the discovery of a 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 Montana 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 1999 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 424 S. Sullivan Rd.,
Suite # 300, Veradale, WA 99037, 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, 1999, 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 were written off. See the section
of this report entitled "Management's Discussion and
1
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, 1999.
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, and a joint development arrangement is made with a major mining
company. The Company does not expect to commence mining activities on its Chile
property unless 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 Virginia City 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, the
Company 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 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. The Company dropped an additional 125 unpatented claims and a state lease
in 1999.
In May 1998, the Board of Directors and the shareholders of the Company
authorized a one for four reverse stock split. As a result all stockholders of
the Company, as of the date of record, received one share of common stock to
replace every four shares of stock then 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 50.18% of the
outstanding shares of common stock as of March 1, 2000, and also held stock
options, which, if exercised, would increase their combined ownership of the
Company to approximately 56.85%. 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 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 Hanson Industries, Inc., each of whom undertook to guarantee
one-third of
2
the amount Mr. Degerstrom was required to pay the Company during the term of his
guarantee. Mr. Teneff is the Company's president.
Mr. Degerstrom, Hanson Industries Inc., and Mr. Teneff made payments in the
aggregate of $1,125,000 through August 1998, (the date the guaranty expired) and
exercised options for an aggregate of 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 primarily affiliates of the
Company including Mr. Degerstrom, Hanson Industries Inc., and Mr. Teneff. During
1999 the Company sold an aggregate 1,435,716 shares of its common stock to these
affiliates and others for between $0.125 and $0.07 per share and in conjunction
with the sales granted 5-year options for an aggregate 2,914,290 shares of
common stock with an exercise price of between $0.25 and $0.125 per share. In
addition to purchasing shares, Mr. Degerstrom, Hanson Industries Inc., and Mr.
Teneff have made loans to the Company for which they have received options in
the aggregate for 360,000 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 and others.
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 conducted
exploration and limited development activities in the Alder Gulch area more or
less continuously from 1992 through 1998. 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
Mining 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 options for 386,134 shares of common stock exercisable at a
price of $0.50 per share. In July 1999 the Company issued 436,827 shares of its
common stock to N. A. Degerstrom Inc. to satisfy an unrelated $54,603
indebtedness. Neal A. Degerstrom is an affiliate of the Company and 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 conducted no exploration during 1999 and does
not intend to conduct any exploration during 2000. With the passage of I-137,
the Company made the decision to maintain its Montana properties on a stand-by
basis and at minimal cost. The Company does not foresee that it will commence
further exploration of its Montana 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, and
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 Company does not know if or when any of these events may occur.
3
ITEM 2. PROPERTIES.
THE MONTANA PROPERTIES.
OVERVIEW. The Company's Montana properties within the Virginia City Mining
District cover the upper part of Brown's Gulch, Hungry Hollow, and Barton Gulch
and consist of 43 patented and 125 unpatented mining claims. Another 35
patented 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 in Alder Gulch, Brown's
Gulch, and Hungry Hollow 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. 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 7 of this report.
THE NATURE OF HANOVER'S INTEREST IN THE PROPERTIES. The Company owns or holds
nearly all of its 204 Montana 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 $316,000 at December 31, 1999. 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.
Since March of 1995, when Kennecott terminated its mining venture agreement
with the Company, the Company has paid the rental royalties to maintain its
Montana properties, including the Alder Gulch claims until they were
relinquished in 1998. This cost has been substantial; during the five-year
period ended December 31, 1999, the Company expended approximately $4,448,815 to
meet its rental and royalty obligations to the landowner-lessors of its
properties. In addition, the Company spent another $5,958,905 during these five
years to support its operations and conduct limited exploration work.
Substantially all of the rental/royalty payments were made to landowner-lessors
of the Alder Gulch claims. The Company has eliminated nearly all of its
landowner-lessor obligations as a result of having terminated its Alder Gulch
leases.
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,
4
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 PROPERTY. Mineralization on the Easton-Pacific
claims is hosted by Archean metamorphic rocks. These rocks have been subjected
to one or more metamorphic events and subsequent orogenic folding and faulting.
Archean-aged gold deposits in shear zones and iron-formation are noted for their
prolific gold production. The 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 have 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.
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.
THE CHILE PROPERTY.
The Company's Chile property consists of 20 claims located in Region III of
Atacarna, Chile at an elevation of 13,000 to 16,000 feet. The claims known as
the La Tranca claims were acquired through a lease with an option to purchase.
They lie 140 miles northeast of the town of Copiapo and 37 miles northeast of
Placer Dome's La Coipa operation. The La Coipa operation and the La Tranca
claims are within the same precious metal rich northern Maricunga belt system.
The high grade Chimberos silver deposit operated by La Coipa is a major producer
of silver and lies 15 miles west of the La Tranca claims. The claims are easily
accessed by road year round.
Initial surface sampling indicates 8+ ounces per ton silver values over 25+
foot widths on several structures. The color anomaly covers an area two miles
long by one mile wide. The claims are characterized by eight to ten mineralized
northeast-trending silicified and brecciated structures, 30-200 feet wide and up
to 2,000 feet long. The host rocks are stratified Miocene dacite-andesite
volcanic rocks overlain to the east by post-mineral ignimbrite sheets that cover
high potential areas.
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 State of 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 wastewater 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.
5
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, including the areas
of Brown's Gulch, Hungry Hollow, and Barton Gulch, 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 had 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 1998. 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.]
6
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 Company's controlled claim block of properties is located
as of December 31, 1999, including townships and sections, streams, and selected
mine locations.
[The balance of this page has been intentionally left blank.]
7
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.
Subsequent to the Company's scheduling of depositions, 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 reversed 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 early 1998 the Court granted the Company's motion and dismissed
the case. 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 1999.
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 1999 and 1998, 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>
1999 1998
---- ----
High Low High Low
----- ---- ---- ----
<S> <C> <C> <C> <C>
First Quarter $0.2500 $0.1250 $2.252 $1.500
Second Quarter $0.1700 $0.0938 $2.376 $0.969
Third Quarter $0.2000 $0.0700 $1.500 $0.375
Fourth Quarter $0.1875 $0.0800 $0.469 $0.160
</TABLE>
8
HOLDERS. The number of stockholders of record on March 1, 2000 was
approximately 400. Based on mailings made in connection with the 1999 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, 1999 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 through 1998,
Zeller Weiss & Kahn, Mountainside, New Jersey, for 1994 and 1995, and Williams &
Webster, P.S. for 1999.
The selected financial data should be read in conjunction with and is qualified
by such financial statements and the notes thereto.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Balance Sheets:
Working capital
(deficit) $(282,892)$ (395,402) $ (289,024) $ (49,331) $ 428,469
Current assets 37,215 109,662 282,782 203,722 894,229
Total assets 2,714,034 2,975,377 17,626,089 10,806,150 8,441,690
Current liabilities 320,107 505,064 571,806 253,053 465,760
Long-term obligation 0 0 148,515 194,065 0
Total liabilities 320,107 505,064 720,321 447,118 465,760
Stockholder's equity 2,393,927 2,470,313 16,905,768 10,359,032 7,975,930
Summary of Statements
of Operations:
Revenues <F1> 0 0 0 3,510 499,299
Net loss <F2> (454,900)(16,134,840) (1,788,249) (1,328,327) (2,329,190)
Net loss per share (0.04) (2.13) (0.32) (0.31) (0.80)
- -------
<FN>
<F1> Cumulative revenues for the period from inception (May 2, 1990) through
December 31, 1999 were $1,151,958.
<F2> Cumulative losses for the period from inception (May 2, 1990) through
December 31, 1999 were $24,291,087.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW. As a result of the leases for the Alder Gulch claims having been
terminated in 1998, the Company's rental/royalty obligations have been reduced
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 1999 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 any 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 them into production.
At the 1998 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 54% to $0.10 per share at March 1, 2000.
9
In January 1999 three of the Company's 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.
100,000 shares were sold in February to a non-affiliate for $0.25 per share; the
non-affiliate also received an option for 200,000 shares of common stock
exercisable at $0.50 per share. From April through July 1999 the Company sold
600,000 shares of its common stock at $0.125 per share and from August through
December 1999 sold 535,716 shares at between $0.10 and $0.07 per share. Options
for 2,414,290 shares in the aggregate have been granted to the purchasers of the
shares. The majority of the shares were sold to affiliates of the Company. The
Company does not know how long it will be able to borrow from or sell equity to
its affiliates and others and can give no assurance that it will be able to
finance its obligations for the balance of 2000 and thereafter.
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 quoted on the OTC Bulletin Board for the period in which the sales were
made.
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,
Montana's ban against the use of cyanide is lifted, and the Company is able to
reconsolidate the district by renegotiating leases with the primary landowners
of the Alder Gulch claims on more reasonable terms.
RESULTS OF OPERATIONS.
1999 COMPARED TO 1998. During the years ended December 31, 1999 and December
31, 1998, the Company realized no revenues.
Operating expenses decreased to $330,000 for the year ended December 31, 1999
from $15,411,000 for the year ended December 31, 1998. This decrease in
operating expense of $14,781,624 was primarily the result of $14,312,000 in
write-downs of mineral properties. Exclusive of the write-down of mineral
properties, operating expenses decreased to $230,000 in 1999 from $1,100,000 in
1998. This decrease of $870,000 or 79% was due to a general reduction of
virtually all operating expenses.
In addition there was a decrease in expenses of approximately $688,600 as the
result of expiration of 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.
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 from $989,000 for the year ended December 31, 1997. This increase in
operating expense 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 $111,000 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.
10
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, 1999, 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 the Alder
Gulch leases in September and October of 1998 the Company's rental/royalty
payments have been reduced by $1,863,000 for 1999, and by $3,274,500 for 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 2000 total
approximately $11,000.
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 and 1999 financial statements relative to a going concern
uncertainty. The Company has financed its obligations for 1999 by selling
1,435,716 shares of its common stock to certain affiliates of the Company and
others. 300,000 shares were sold in January and February 1999 for $0.25 per
share, 600,000 shares were sold between April 22, 1999 and June 15, 1999 for
$0.125 and 535,716 shares were sold between August 25, 1999 and September 15,
1999 for between $0.10 and $0.07 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 quoted on the OTC Bulletin Board 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 $0.10 per share at March 1, 2000, largely as a consequence
of the significant drop in world gold prices and the passage of I-137.
Although the Company expects to meet its 2000 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
1999, 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 2000 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
$24,291,087 from its inception through December 31, 1999. 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. When the Company made the
decision to forgo the lease payments on three of its Alder Gulch leases the
leased claims reverted to the landowners and the Company took a loss of
$14,312,000 due to the write down of assets in the fourth quarter of 1998.
Unless the price of gold increases and I-137 is reversed, the Company does not
foresee that it will undertake to reconsolidate the district or further explore
its properties with the objective to determining a commercial ore body or
bodies.
At December 31, 1999, the Company had net operating losses of approximately
$24,278,978, which may be offset against future taxable income through 2014. No
tax benefit has been reported in the financial statements, as the Company
believes there is a significant chance the net operating loss carry-forwards
will expire unused. Accordingly, the potential tax benefits of the net operating
loss carry-forwards are offset by a valuation allowance of the same amount.
Cash flows for the Company for each of the years in the three-year period
ended December 31, 1999 were as follows:
YEAR ENDED DECEMBER 31, 1999. Operating activities of the Company used
$200,000, primarily as a result of the 1999 net loss of $455,000 offset by
$246,000 in non-cash transactions. $66,000 was realized from investing
activities, primarily as a result of the
11
sale of equipment and mineral properties. The Company generated $118,000 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 $16,000 to $13,000 at December 31, 1999.
YEAR ENDED DECEMBER 31, 1998. Operating activities of the Company used
$741,000, primarily as a result of the 1999 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, 1999.
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.
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.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company for the years ended December 31, 1999,
1998, and 1997 which are included elsewhere in this report have been audited by
Williams & Webster, Spokane, Washington and BDO Seidman, LLP, Spokane,
Washington. An index to such financial statements appears at Page 21 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective February 7, 2000, Williams & Webster, P.S. replaced BDO Seidman, LLP
as the Company's independent public accountants.
During the years ended December 31, 1996, 1997, and 1998, BDO Seidman, LLP's
reports on the financial statements of the Company contained no adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles, except for a paragraph wherein BDO
Seidman LLP expressed substantial doubt about the Company's ability to continue
as a going concern. During such periods there were no disagreements with BDO
Seidman LLP 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.
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, nor were they 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.
DIRECTORS AND EXECUTIVE OFFICERS; OTHER KEY INDIVIDUALS
The names, ages, business experience (for at least the past five years) and
positions of the directors, executive officers and other key individuals of the
Company as of December 31,1999 are set out below. The Company's Board of
Directors consists of four members. All directors serve until the next annual
meeting of the Company's stockholders or until their successors are elected and
qualified. Executive officers of the Company are appointed by the Board of
Directors. Mr. Degerstrom and Mr. Fish were each appointed to the Board of
Directors in September of 1995 and Mr. Fish was elected President of the Company
in March of 1996, all pursuant to the terms of a securities purchase agreement
between the Company and Mr. Degerstrom. Mr. Fish resigned his position as
President October 1, 1998 and was appointed Vice President.
<TABLE>
<CAPTION>
Name Age Position
----------- ---- ----------
<S> <C> <C>
Hobart Teneff 79 President, CEO, Director
James A. Fish 69 Vice President, Director
Neal A. Degerstrom 75 Director
Tim Babcock 80 Director
Wayne Schoonmaker <F1> 63 Secretary, Treasurer
- -------------
<FN>
<F1> Mr. Schoonmaker is not an executive officer of the Company.
</FN>
</TABLE>
BIOGRAPHIES OF DIRECTORS, EXECUTIVE OFFICERS, AND KEY INDIVIDUALS.
HOBART TENEFF. Mr. Teneff was appointed a director of the Company and its
President and CEO June1, 1999. From 1975 through 1988 Mr. Teneff served as
President of Gold Reserve Corporation and as a director from 1975 through 1994.
Mr. Teneff was also President, CEO and a director of Pegasus Gold Inc. from 1976
through 1987 and President of Argo Gold Inc. and Montoro Inc. prior to their
being merged into Pegasus in 1980-81. Since 1950, Mr. Teneff has been President
of General Equipment Inc. a privately held company in the industrial water, air,
and heat transfer equipment business. Mr. Teneff holds a degree in chemical
engineering from Gonzaga University.
JAMES A. FISH. Mr. Fish was appointed a director of the Company in September of
1995, President in March of 1996, and Chairman and Chief Executive Officer in
May of 1996. March 30, 1998 Mr. Fish resigned as Chairman and October 1, 1998
as President and CEO. He was appointed Vice President October 1, 1998 and is
also Vice President and General Counsel for N.
13
A. Degerstrom, Inc., positions he has held since September of 1987. Prior to
that, he was in private law practice with the firm of Winston & Cashatt in
Spokane from 1980 through 1987, and at the firm of Fish, Schultz & Tombari from
1962 through 1980. Mr. Fish was employed as superintendent at S&F Construction
from 1955 through 1962 and served in the Navy from 1952 to 1955. He received a
Bachelor of Arts degree in geology from Berea College in Kentucky in 1952 and a
law degree from Gonzaga University School of Law in 1962.
NEAL A. DEGERSTROM. Mr. Degerstrom was appointed a director of the Company in
September of 1995. He is President of N. A. Degerstrom, Inc., Spokane,
Washington, a privately-held company which has been engaged in railroad, heavy
highway, bridge and dam construction, large open pit mining, and worldwide
mineral exploration since 1904, and prior to that was the managing partner of N.
A. Degerstrom Company, the predecessor in interest to N. A. Degerstrom, Inc.
Mr. Degerstrom has been a member of the Advisory Board of the College of
Engineering at Washington State University, president of the Spokane Chapter of
Associated General Contractors, a member of the Society of Explosives Engineers
and the Society of Mining Engineers, and a trustee of the Northwest Mining
Association. He received a Civil Engineering degree from Washington State
University in 1949.
TIM BABCOCK. Mr. Babcock was appointed a director of the company in September
1997. Since 1986 he has owned and operated a consulting firm providing
consulting services to the mining industry. From 1970 to 1980 he owned Capital
City Television, Mineral Resources Development, and January Mining Company. In
1969 he was appointed a member of the Committee on Oceans and Atmosphere by
President Nixon. He served as Senior Executive Vice President of Occidental
International Corporation from 1970 to 1974. Mr. Babcock served as Governor of
the State of Montana from 1960 to 1969. He was awarded the Bronze Star for Valor
in action during WWII and three Battle Stars.
WAYNE SCHOONMAKER. Mr. Schoonmaker was appointed Secretary, Treasurer, and
Principal Accounting Officer of the Company effective as of January of 1996,
succeeding Stephen J. Schmid. From 1981 until 1993, he was Financial Manager of
the Northwest Mining Department of ASARCO, and from 1978 until 1981 was Chief
Accountant at ASARCO's Troy Unit in Montana, where he was responsible for the
installation and implementation of the accounting system for the start-up Troy
mine. From July of 1978 through December of 1978, Mr. Schoonmaker was Assistant
Treasurer of the Bunker Hill Company, and from 1964 to 1978, was Assistant
Corporate Secretary of Hecla Mining Company. Mr. Schoonmaker received a
Bachelor of Science degree in Accounting from the University of Montana in 1962
and MBA from the University of Idaho in 1987. He is a Certified Public
Accountant in Idaho and Montana.
SECTION 16(A) REPORTING OBLIGATIONS. Section 16(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") requires the Company's directors
and executive officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission (the
"Commission"). Such persons are required by Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of copies of reports made pursuant to Section 16(a)
of the Exchange Act and related regulations, the Company believes that during
the year ended December 31, 1999 all reports required of such persons have been
timely filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table discloses compensation received
by the Company's current and former presidents and chief executive officers for
the years ended December 31, 1999, 1998, and 1997. No other executive officer's
salary and bonus exceeded $100,000 in any of these years.
[The balance of this page has been intentionally left blank.]
14
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ ---------------------------------------------
Other Dollar Value Securities All Other
Executive Annual of Restricted Underlying LTIP Compen-
Officer Year Salary Bonus Compensation Stock Awards Options/SARS Payouts sation
- ------------- ---- ------ ----- ------------ ------------ ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hobart Teneff 1999 $ - 0 -<F1> $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
President, CEO
Raymond A. Hanson 1999$ 37,500<F2> $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Former President 1998 22,500 $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
and CEO
James A. Fish 1999 $ - 0 - $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Former President 1998 67,500<F3> $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
and CEO 1997 90,000 $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
- ----------------------
<FN>
<F1> Mr. Teneff succeeded Mr. Hanson as President and Chief Executive Officer of
the Company effective June 1, 1999.
<F2> Mr. Hanson succeeded Mr. Fish as President and Chief Executive Officer of
the Company effective October 1, 1998. Mr. Hanson's salary for the period
October 1, 1998 through December 31, 1998 and the period from January 1, 1999 to
June 1, 1999 has been paid in the form of five-year options for respectively
50,000 and 83,333 shares of common stock, exercisable at $0.50 per share.
<F3> Mr. Fish succeeded Mr. Fred R. Schmid as President and Chief Executive
Officer of the Company effective March of 1996. Mr. Fish's annual salary was
payable each month in the form of $3,750 in cash and $3,750 in restricted shares
of common stock based on 60% of the average of the "closing" market prices of
the common stock as reported on the Nasdaq SmallCap Market during the preceding
calendar month. Mr. Fish tendered the 19,668 shares of common stock he received
for compensation in 1997 and declined the shares he was entitled to receive for
compensation in 1998 and in lieu thereof was granted a five year option for
58,020 shares of common stock at $0.0001 per share. Mr. Fish has exercised his
option for 58,020 shares of common stock. October 1, 1998 Mr. Fish resigned his
position as President and Chief Executive Officer and was succeeded by Raymond
A. Hanson.
</FN>
</TABLE>
OVERALL COMPENSATION POLICY. Salary compensation of the Company's executive
officers is determined by the Board of Directors and by a compensation committee
of the Board, which is responsible for considering specific information and
making recommendations to the full Board. The Compensation Committee is
comprised of two outside directors appointed annually by the Company's Board of
Directors. Due to Mr. Karl Elers resignation as a director in 1999 Mr. Babcock
is at this time the sole serving member of the Committee. In considering and
recommending executive compensation, the Compensation Committee reviews factors
such as individual executive compensation, corporate performance, stock price
appreciation and the total return to stockholders. The Committee also takes into
consideration, executive compensation levels within a peer group of publicly
held North American gold-mining companies and, at least historically, the views
of the Company's Chief Executive Officer. Where appropriate, the Compensation
Committee also considers other performance measures, such as increase in market
share, safety, environmental awareness, and improvements in relations with the
Company's stockholders, employees, the public, and government regulators.
The objectives of the Company's total executive compensation package are to
attract and retain the best possible executive talent, to provide an economic
framework to motivate the Company's executives to achieve goals consistent with
the Company's business strategy, to provide an identity between executive and
stockholder interests through stock option plans, and to provide a compensation
package that recognizes an executive's individual results and contributions to
the Company's overall business objectives.
SALARY. The key elements of the Company's executive compensation consists of
salary and incentive stock options. The Compensation Committee of the Board
recommends salary levels of officers and employees and determines employee stock
option awards.
Salaries for executive officers are determined by evaluating the
responsibilities of the position held and the experience of the individual, and
by reference to the market for executive talent, the latter of which provides a
comparison of salaries for comparable positions at other gold mining companies.
The salary levels of the Chief Executive Officer and other executive officers of
the Company for the following calendar year are generally set by the Board of
Directors at its annual meeting or at a later special meeting. Specific
individual performance and overall corporate or business segment performance are
reviewed in determining the compensation level of each individual officer. In
evaluating the performance and setting the compensation of
15
the Chief Executive Officer and the other executive officers of the Company, the
Compensation Committee and Board of Directors have traditionally maintained
salary compensation at levels below those of other companies within the
Company's peer group; in order to compensate for these lower salaries, the Chief
Executive Officer and other executive officers of the Company have historically
been granted performance incentives in the form of incentive stock options.
CASH BONUSES. From time to time, the Board of Directors and the Compensation
Committee may approve cash bonuses to executives and key employees, based on
outstanding achievement in the performance of their respective duties. During
1994 the Compensation Committee recommended to the Board, and the Board
authorized and approved, the payment to Fred R. Schmid of a cash bonus of
$150,000 for his services in raising the initial working capital and completing
the 1993 public financing for the Company. No cash bonuses were awarded in
1999.
STOCK OPTIONS. The Company currently maintains two stock option plans, the 1995
Stock Option Plan and the 1998 Equity Incentive Plan. Both plans provide for the
issuance of incentive stock options intended to qualify under Section 422A of
the Internal Revenue Code of 1986, as amended ("the Code"), and options that do
not qualify under the Code. Key individuals of the Company, including officers,
directors, employees, and consultants, are eligible to receive grants of options
under the plans. Under the 1995 and 1998 plans, incentive stock options are
exercisable at prices equivalent to the mean of the high and low sales prices of
the common stock, as reported by the Nasdaq SmallCap Market or a national
exchange as of the date of grant - 110% of such sales prices in the case of
incentive stock options granted to any person owning more than 10% of the total
combined voting power of all classes of the Company's stock. If the Company's
stock is not trading on Nasdaq or a national securities exchange then the Board
of Directors shall determine exercise prices in accordance with Sec. 422 of the
Code. Under the 1998 Equity Incentive Plan non-qualified stock options may be
granted at no less than 85% of fair market value as defined under the plan.
Options for all 1 million shares available under the 1995 Stock Option Plan have
been granted. Forfeited Options under the 1995 Stock Option Plan may be reissued
under the provisions of the 1998 Equity Incentive Plan. The Equity Incentive
Plan is administered by the Compensation Committee of the Board of Directors.
The Committee's function is to determine those persons entitled to receive an
award based on their contributions to the Company or on their ability to
contribute to the long term growth and financial success of the Company. The
Committee also determines the type of an award, the amount of an award, and its
terms. Shares subject to grants, which expire or otherwise terminate, will again
become available for granting.
OPTIONS GRANTED IN 1999. The following table provides information on options
granted under the 1998 Equity Incentive Plan during the year ended December 31,
1999, to the named executive officers of the Company.
<TABLE>
<CAPTION>
Number of Securities Percent of Total Options Option Exercise
Underlying Options Granted to Employees Price Per Expiration
Executive Officer Granted <F1> and Directors in 1999 Share<F2> Date
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hobart Teneff
PRESIDENT, CEO 500,000 43.5% 0.125 05/31/2009
James A. Fish
VICE-PRESIDENT 150,000 13.0% 0.125 05/31/2009
- ------------------------
<FN>
<F1> All of the options were granted as non-qualified stock options as defined
by the Internal Revenue Code.
<F2> Fair market value at date of grant.
</FN>
</TABLE>
OPTIONS EXERCISED AND OPTION VALUES. No options were exercised during the year
ended December 31, 1999 by any named executive officer of the Company. At
December 31, 1999 the OTC-Bulletin Board's quoted closing price for the
Company's common stock was lower than the option exercise price for all of the
shares for which options were granted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 1, 2000 the names of, and number
of shares beneficially owned by, persons known to the Company to own more than
five percent (5%) of the Company's common stock; the names of, and number of
shares beneficially owned by each director and executive officer of the Company;
and the number of shares beneficially owned by all directors and executive
officers as a group. At such date, the number of shares of common stock of the
Company outstanding was 11,948,964 shares and an additional 8,321,343 shares
were deemed outstanding.
16
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Name of Owner Ownership (all direct
nless otherwise noted) Percent of (Class)
- ----------- ------------------------------ -------------
<S> <C> <C>
Raymond A. Hanson <F1> 2,037,803 10.05%
James A. Fish <F2>, <3> 385,451 1.91%
Neal A. Degerstrom <F2>, <F4> 6,081,177 30.00%
Tim Babcock <F2>, <F5> 104,450 0.52%
Hobart Teneff <F2>, <F6> 3,255,850 16.06%
All directors and
executive officers
as a group (4 persons) <F7> 9,826,928 48.48%
- ------------------
<FN>
<F1> Mr. Hanson was President and Chief Executive Officer of the Company from
October 1, 1998 to June 1, 1999. The shares attributed to Mr. Hanson include
969,814 shares owned by Hanson Industries, Inc. (167,750 of which were acquired
pursuant to the securities purchase agreement described in footnote 4 below),
500,000 shares issuable to Hanson Industries, Inc. pursuant to currently
exercisable options granted in connection with the purchase of shares, 117,748
shares of common stock issuable to Hanson Industries Inc. pursuant to currently
exercisable options granted in connection with a partial assignment of the
Degerstrom guaranty given to acquire Easton-Pacific. 145,833 shares, of which
12,500 are issuable to Hanson Industries Inc., are issuable pursuant to
currently exercisable options granted in lieu of compensation and rent for the
period October 1, 1998 through May 15, 1999.
<F2> Director of the Company.
<F3> Mr. Fish is Vice President of the Company. The shares attributed to Mr.
Fish include 27,000 shares acquired pursuant to the securities purchase
agreement described in footnote 4, below. Such shares are also attributed to
Neal A. Degerstrom in the foregoing table. Also includes 250,000 shares issuable
pursuant to currently exercisable options of common stock.
<F4> The forgoing table attributes to Mr. Degerstrom all of the shares of the
Company purchased by Mr. Degerstrom and his permitted assigns pursuant to the
securities purchase agreement between the Company and Mr. Degerstrom dated as of
June 1, 1995, as amended. Although all shares purchased by Mr. Degerstrom and
his assigns are shown in the table above as beneficially owned by Mr.
Degerstrom, a Schedule 13D dated June 20, 1995, as amended through the date of
the report, filed by Mr. Degerstrom and others states that 2,663,200 such shares
(665,800 post recapitalization) were registered in Mr. Degerstrom's or his
company's name as of the date of the report, representing approximately 12.8% of
the common stock deemed outstanding at such date. The Schedule 13D filed by Mr.
Degerstrom and his permitted assigns also states that none of the persons
identified as reporting persons in the Schedule 13D controls the voting or
disposition of any shares of common stock of the Company other than those owned
by each such person, and on this basis Mr. Degerstrom disclaims beneficial
ownership of the shares owned by his assigns. On March 17, 1997, the Board of
Directors granted Mr. Degerstrom three-year options to purchase up to 2,312,970
shares (578,243 shares post recapitalization) of common stock as consideration
for his guaranty of certain obligations in connection with the Company's
agreement to acquire Easton-Pacific. Mr. Degerstrom subsequently assigned
1,541,978 of the options (385,495 post recapitalization) to two then non-
affiliates of the Company, each of whom agreed to severally guarantee one third
of the amount Mr. Degerstrom paid pursuant to his guaranty with the Company.
The options were exercisable by Mr. Degerstrom and the then non-affiliate co-
guarantors at the price of $1.25 per share ($5.00/share post recapitalization).
After giving effect to Mr. Degerstrom's remaining options for his guaranty, the
141,155 shares he and his company acquired in exchange for Easton Pacific
shares, the options for 1,202,858 shares he was granted in connection with
certain of his loans and purchases, the options for 500,000 shares of common
stock granted under the Company's 1998 Equity Incentive Plan, the 193,067 shares
and options for 386,134 shares his company received for drilling services, and
the options for 228,648 shares and 436,827 shares his company received to cancel
a Company indebtness, the number of shares of common stock of the Company
beneficially owned by Mr. Degerstrom at March 1, 2000 was 4,866,975 shares, or
approximately 24.24% of the common stock deemed outstanding.
<F5> All are shares issuable pursuant to presently exercisable options granted
under the Company's 1995 Stock Option Plan.
<F6> Includes options to acquire 117,748 shares of common stock pursuant to an
assignment by Mr. Degerstrom to Mr. Teneff of one third of the option that was
granted to Mr. Degerstrom by the Company's Board of Directors as consideration
in connection with the Easton-Pacific transaction. Also includes 167,750 shares
acquired pursuant to the securities purchase agreement between the Company and
Mr. Degerstrom, 20,000 shares owned by General Equipment Company, and 1,202,858
shares issuable pursuant to currently exercisable options granted in connection
with the loan and purchase of shares and options for 500,000 shares issuable
pursuant to the Company's 1998 Equity Incentive Plan. See footnote 4 above.
<F7> See footnotes 3, 4, 5, and 6 above.
</FN>
</TABLE>
17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998 N. A. Degerstrom, Inc., an affiliated company of Mr. Degerstrom's,
conducted exploration drilling as part of the Company's exploration program at
Virginia City. N. A. Degerstrom, Inc. was partially compensated for its services
with 193,067 shares of stock valued at $0.525 per share and a five year option
for 386,134 shares of stock exercisable at a price of $0.50 per share. The
shares were calculated by averaging the closing prices for the Company's stock
for each entire month during which drilling was conducted and then averaging the
monthly averages. N. A. Degerstrom, Inc. also received $60,961 in cash. Options
for 228,642 shares of common stock were granted in April 2000 to satisfy the
remaining $43,922 owed on the contract.
In September 1999 the Company sold three of its mining claims at Pony, Montana
to its President for $25,000.
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
Form10-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.
18
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 21. The financial statements and supplementary data
appears at page F/S-2 through F/S-15 of this report.
REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed by the Company during the 4th
Quarter of 1999.
19
HANOVER GOLD COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F/S -1
Financial Statements:
Balance Sheets as of December 31, 1999
and December 31, 1998 F/S-2
Statements of Operations for the Years Ended December 31, 1999,
1998, 1997, and for the period from inception (May 2, 1990)
to December 31, 1999 F/S-3
Statements of Changes in Stockholders' Equity
for the period from inception (May 2, 1990) to
December 31, 1999 F/S-4
Statements of Cash Flow for the Years Ended December 31, 1999,
1998, 1997, and for the period from inception (May 2, 1990) to
December 31, 1999 F/S-7
Summary of Accounting Policies F/S-9
Notes to Financial Statements F/S-9
Signatures F/S-16
[The balance of this page has been intentionally left blank.]
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hanover Gold Company, Inc.
Spokane, Washington
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of Hanover Gold Company, Inc. (a
development stage company) as of December 31, 1999, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended and
from inception on May 2, 1990 through December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Hanover Gold Company, Inc. as of
December 31, 1998 were audited by other auditors whose report dated March 5,
1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hanover Gold Company, Inc. as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended and from inception on May 2, 1990 through December 31, 1999
then ended 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 3 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern.
Management's plans regarding the resolution of this issue are also discussed in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
March 16, 2000
F/S-1
<PAGE>
HANOVER GOLD COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
----------------------
1999 1998
---------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 12,970 $ 28,632
Prepaid expenses and
other current assets 24,245 81,030
-------- ---------
Total current assets 37,215 109,662
-------- ---------
MINERAL PROPERTIES 2,597,147 2,370,334
-------- ---------
FIXED ASSETS
Furniture and equipment 152,710 228,049
Less: accumulated depreciation (105,038) ($130,510)
-------- ---------
Total Fixed Assets 47,672 97,539
-------- ---------
OTHER ASSETS 32,000 37,842
-------- ---------
TOTAL ASSETS $ 2,714,034 $ 2,626,377
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,105 $ 37,393
Notes payable to shareholders 297,000 428,491
Accrued payroll and payroll taxes 2,141 13,068
Other accrued expenses 19,861 15,590
Notes payable - 10,522
------- --------
Total Current Liabilities 320,107 505,064
------- --------
COMMITMENTS AND CONTINGENCIES - -
------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value;
shares authorized 2,000,000, no
shares issued and outstanding - -
Common Stock, $0.0001 par value,
48,000,000 shares authorized;
11,621,276 and 9,353,533 shares
issued and outstanding
respectively 1,164 935
Additional paid-in capital 26,686,997 26,308,712
Accumulated deficit during
the development stage (24,291,087) (23,836,187)
Treasury stock, at cost
(19,668 shares) (3,147) (3,147)
----------- -----------
Total Stockholders equity 2,393,927 2,470,313
----------- -----------
TOTAL LIABILITY AND
STOCKHOLDERS' EQUITY $ 2,714,034 $ 2,975,377
========= =========
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
F/S-2
HANOVER GOLD COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative Amounts
Year Ended December 31, From Date of Inception
---------------------- (May 2, 1990) through
1999 1998 1997 December 31, 1999
----- ----- ----- --------------
<S> <C> <C> <C> <C>
REVENUES $ - $ - $ - $ 1,151,958
COST OF GOODS MINED - - - 1,987,483
---- ---- ---- -------
GROSS PROFIT (LOSS) - - - (835,525)
---- ---- ---- -------
GENERAL AND
ADMINISTRATIVE EXPENSES
Depreciation and amortization 22,866 35,995 28,483 185,625
Provision for bad debt - - - 779,921
Other general and administrative
expenses 306,802 1,063,579 960,619 6,556,574
------- ------- ------ -------
Total Expenses 329,668 1,099,574 989,102 7,522,120
OPERATING LOSS (329,668) (1,099,574) (989,102) (8,357,645)
------- ------- ------ -------
OTHER INCOME (EXPENSE)
Abandonment of mining interests - (12,012,050) - (12,012,050)
Write-down of mineral property - (2,300,000) - (2,300,000)
Loss on sale of mineral property (108,187) - - (108,187)
Amortization of guaranty fee - (688,585) (768,585) (1,457,170)
Interest income (expense), net (30,969) (30,120) (26,566) (28,944)
Gain (loss) on sale of equipment 13,924 (4,511) (3,996) (27,091)
------ ------- ------- -------
Total other income (expense) (125,232) (15,035,266) (799,147) (15,933,442)
------- -------- ------- --------
NET LOSS BEFORE
INCOME TAXES (454,900) (16,134,840) (1,788,249) (24,291,087)
INCOME TAXES - - - -
------- -------- ------ --------
NET LOSS $(454,900) $(16,134,840) $(1,788,249) $(24,291,087)
======== ========== ========= ==========
BASIC AND DILUTED
NET LOSS PER COMMON SHARE ($0.04) ($2.13) ($0.32) ($6.12)
====== ====== ====== ======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,484,963 7,582,950 5,539,610 3,969,444
======== ======= ======= =======
- -----------
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
[The balance of this page has been intentionally left blank.]
F/S-3
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Stockholders'
--------------- Paid in Subscription Treasury Development Equity
Shares Amount Capital Receivable Stock Stage Total
-------- ----- -------- ------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 2, 1990 - $ - $ - $ - $ - $ - $ -
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 for
cash ($0.24/share) 739,377 74 166,596 - - - 166,670
Issuance of common stock for
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
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Stockholders'
------------- 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) 300,000 30 1,199,970 - - - 1,200,000
Issuance of common stock in
satisfaction of vendor
obligations at prices ranging
from $4.00 to $4.24/share 67,420 7 274,089 - - - 274,094
Issuance of common stock to
officer at minimum cost 49,459 5 15 - - - 20
Issuance of common stock
pursuant to convertible
debt at $0.83 per share 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 at prices ranging
from $6.24 to $16.00/share 195,000 19 1,459,981 - - - 1,460,000
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 of 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
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 - - 1,457,170 - - - 1,457,170
Deferred guaranty fee,
subject to grant exercise - - (688,585) - - - (688,585)
Issuance of common stock
for cash at prices ranging
from $2.00 to $5.00/share 634,750 64 2,798,686 - - - 2,798,750
Issuance of common stock
for an acquisition
of Easton-Pacific 1,750,000 175 4,726,225 - - - 4,726,400
- ----------------- --------- ----- ------- ----- ----- -------- --------
BALANCE, carried forward 7,356,361 $736 $24,606,379 $ - $ - $(5,913,098) $15,117,519
To Be Continued Next Page
</TABLE>
F/S - 5
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Stockholders'
----------- Paid in Subscription Treasury Development Equity
Shares Amount Capital Receivable Stock Stage Total
------ ------ ------ -------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, carried forward 7,356,361 $ 736 $24,606,379 $ - $ - $(5,913,098) $15,117,519
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 at prices ranging
from $0.50 to $2.12/share 1,067,847 105 1,336,464 - - - 1,336,569
Cancellation of common stock
issued for property
rights ($8.00/share) (131,250) (13) (1,049,987) - - - (1,050,000)
Share adjustment 116 - - - - - -
Issuance of common stock and
options for cash at prices
ranging from $0.25
to $0.38/share 866,666 87 274,913 - - - 275,000
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
Issuance of common stock
and options for cash at
prices ranging
from $0.07 to $0.25/share 1,435,716 145 194,856 - - - 195,001
Issuance of common stock for
debt at $0.12/share 436,827 44 54,560 - - - 54,604
Issuance of common stock for
accrued interest at
$0.07/share 395,200 40 29,600 - - - 29,640
Options issued for accounts
payable - - 57,160 - - - 57,160
Options issued for services - - 42,109 - - - 42,109
Net loss for the year ended
December 31, 1999 - - - - - (454,900) (454,900)
- -------------------- ---------- ------ ----------- ------ ------ ---------- --------
BALANCE, December 31, 1999 11,621,276 $1,164 $26,686,997 $ - $(3,147)$(24,291,087) $2,393,927
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F/S - 6
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, From Date of Inception
----------------------- (May 2, 1990) through
1999 1998 1997 December 31, 1999
----- ----- ----- ------------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss $(454,900) $(16,134,840) $(1,788,249) $(24,291,087)
Adjustments to reconcile
net loss to net cash
used in operating activities:
(Gain) loss on sale of
equipment (13,924) 4,510 3,996 27,090
Loss on sale of mineral
property 108,187 - - 108,187
Abandonment of mining
interests - 12,012,050 - 12,012,050
Write-down of mineral
properties - 2,300,000 - 2,300,000
Depreciation and
depletion 22,866 35,995 28,483 185,625
Common stock and options
issued for services 42,109 402,377 41,250 685,776
Common stock issued for
interest 29,640 - - 29,640
Common stock issued for
payables 57,160 - - 57,160
Amortization of deferred
guaranty fee - 688,585 768,585 1,457,170
Write-off of note receivable - - - 779,921
Changes in operating assets
and liabilities,
Excluding effect of
Easton acquisition:
Supplies inventory - - 10,000 -
Prepaid expenses 56,785 21,669 22,255 3,342
Other assets 5,842 (13,848) (570) (32,000)
Accounts payable (36,288) (3,494) (31,964) 72,486
Accrued expenses (17,178) (54,153) 25,761 106,568
Cash used in -------- --------- -------- ----------
operating activities (199,701) (741,149) (920,453) (6,498,072)
Cash Flows from --------- --------- --------- ----------
Investing activities:
Proceeds from sale of
equipment 40,925 325 12,300 68,826
Advances under
notes receivable - - - (1,089,219)
Purchase of furniture
and equipment - (4,300) (73,118) (363,613)
Sales (purchases) of
mineral properties 25,000 (1,050,771) (1,724,701) (10,358,585)
Cash provided by (used in) ------- ---------- ---------- -----------
investing activities 65,925 (1,054,746) (1,785,519) (11,742,591)
Cash Flows from ------- ---------- ---------- ------------
Financing activities:
Proceeds from shareholder
note payable - - - 73,405
Sale of common stock 195,001 1,611,570 2,798,750 17,674,546
Proceeds from
convertible debt - - - 215,170
Proceeds from
long term debt - - 45,000 45,000
Payment of long-term debt - (72,065) (54,048) (172,343)
Proceeds (to) from
related party (76,887) 108,086 - 31,199
Payment of stock
subscription receivable - - - 249,360
Repurchase of
common stock - (3,147) - (39,947)
Capital
contributions - - - 177,243
------- ------- --------- ---------
Cash provided by
financing activities 118,114 1,644,444 2,789,702 18,253,633
------- --------- --------- ----------
Net increase (decrease)
in cash (15,662) (151,451) 83,730 12,970
Cash and cash equivalents,
beginning of period 28,632 180,083 96,353 -
------- -------- ------- -------
Cash and cash equivalents,
end of period $12,970 $ 28,632 $ 180,083 $12,970
======= ========= ========= ========
Supplemental cash flow
disclosure:
Interest $32,643 $ 42,068 $ 35,068 $133,824
======== ========= ========= ========
Income taxes $ - $ - $ - $ -
======== ========= ========= ========
</TABLE>
To be continued next page
F/S-7
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Year Ended December 31, From Date of Inception
----------------------- (May 2, 1990) through
1999 1998 1997 December 31, 1999
----- ----- ----- ------------------
<S> <C> <C> <C> <C>
Non-Cash Investing and
Financing Activities:
Common stock issued for
acquisition of mineral
property rights $ - $ - $ - $ 2,257,518
Long-term debt issued
for acquisition of
mineral property rights - - - 263,946
Note receivable
given in exchange for
mineral property rights - - - 309,298
Fixed assets traded for
acquisition of
mineral property rights - - - 66,177
Issuance of common stock
for debt 54,603 50,000 - 104,603
Common stock issued in
payment of notes payable
and accrued interest 29,640 - - 167,456
Long-term debt issued
for acquisition
of equipment - - 17,548 17,548
Cancellation of common stock
issued for acquisition
of mineral property -(1,050,000) - (1,050,000)
Mineral property transferred
for long-term debt - 143,631 - 143,631
Common stock issued to
acquire net
assets of Easton-Pacific - - 5,268,212 5,268,212
Common stock options issued
for payables 57,160 - - 57,160
Common stock options
issued for services 25,000 - - 25,000
-------------
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
[The balance of this page has been intentionally left blank.]
F/S-8
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - ORGANIZATION AND DESCRIPTION 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.
The Company is seeking additional capital and management believes its
properties can ultimately be sold or developed to enable the Company to
continue its operations. However, there are inherent uncertainties in
mining operations and management cannot provide assurances that it will
be successful in this endeavor. Furthermore, the Company is in the
development stage, as it has not realized any significant revenues from
its planned operations.
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 $4,878,000 (which included
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Hanover Gold
Company, Inc. is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for
their integrity and objectivity. These accounting policies conform to
generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
ACCOUNTING METHOD
The Company's financial statements are prepared using the accrual
method of accounting.
CASH AND 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. Depreciation amounted to
$22,866 and $35,995 for 1999 and 1998, respectively.
MINERAL PROPERTIES
Costs of acquiring, exploring, and developing mineral properties are
capitalized by project area. Costs to maintain the mineral rights and
leases are expensed as incurred. When a property reaches the production
stage, the related capitalized costs will be amortized, using the units
of production method on the basis of periodic estimates of ore
reserves. Mineral properties are periodically assessed for impairment
of value and any losses are charged to operations at the time of
impairment.
F/S - 9
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
MINERAL PROPERTIES - CONTINUED
Should a property be abandoned, its capitalized costs are charged to
operations. The Company charges to operations the allocable portion of
capitalized costs attributable to properties sold. Capitalized costs
are allocated to properties sold based on the proportion of claims sold
to the claims remaining within the project area.
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, 1999, 1998 and 1997,
outstanding options and warrants to purchase 7,979,363; 3,472,398; and
633,243 shares, respectively, of the Company's common stock were not
included in the computation of diluted EPS as their effect would be
antidilutive.
PROVISION OF TAXES
At December 31, 1999, the Company has net operating losses of
approximately $24,291,000, which may be offset against future taxable
income through 2014. No tax benefit has been reported in the financial
statements, as the Company believes there is a significant chance the
net operating loss carryforwards will expire unused. Accordingly, the
potential tax benefits of the net operating loss carryforwards are
offset by a valuation allowance of the same amount.
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,
1999 and 1998 for cash equivalents, accounts payable, and accrued
expenses approximate fair value due to 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 approximates its carrying value.
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.
IMPAIRED ASSET POLICY
The Company reviews its long-lived assets quarterly to determine if any
events or changes in circumstances have transpired which indicate that
the carrying value of its assets may not be recoverable. The Company
determines impairment by comparing the undiscounted future cash flows
estimated to be generated by its assets to their respective carrying
amounts. The Company does not believe any adjustments are needed to the
carrying value of its assets at December 31, 1999.
NOTE 3 - 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 has negative working capital.
Additionally, in response to continued depressed
F/S-10
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
NOTE 3 - GOING CONCERN - continued
gold prices and the impact of new legislation in Montana, 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 projects and reducing corporate activities and expenses. To
the extent, additional funds are required, the Company will attempt to
raise these funds through additional borrowing or extensions on shareholder
debt or through future sales of shares of its common stock. To date, the
Company has contracted with consultants 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.
NOTE 4 - MINERAL PROPERTIES
MONTANA
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.
During the fourth quarter 1998, primarily in response to the passage of
new legislation in Montana, 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 the fourth quarter 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 1998, the Company deeded back to the seller two properties in
satisfaction of unpaid notes payable balances of $143,632.
During 1999, the Company sold four of its claims to an officer of the
Company for $25,000. This transaction resulted in a loss of $108,187.
CHILE
In October 1999, the Company executed an agreement to purchase the La
Tranca silver/gold prospect located in the northern Maricunga belt of
Chile. See Note 6.
NOTE 5 - RELATED PARTY TRANSACTIONS
In 1994 and 1995, the Company advanced $1,222,000 and $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.
In 1995, the Company entered into an agreement, as amended,
(collectively, the "Stock Purchase Agreement") with a director of the
Company and his 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:
F/S - 11
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
NOTE 5 - RELATED PARTY TRANSACTIONS - continued
<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>
During 1996, the Company paid $65,438 for sampling and assaying
services to a company controlled by a director 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 1999, the Company
issued shares of common stock to this same company to satisfy a 1998
outstanding payable for drilling and assaying services.
During 1998, the Company received advances of $108,086 from a director.
At December 31, 1999 and 1998, the Company owed officers $50,000 and
$181,491, respectively.
As part of its acquisition of Easton-Pacific in 1997 (Note 1), the
Company assumed a $247,000 note payable an officer of Easton-Pacific.
The note has a stated interest rate of 12% and is due on demand.
During 1999, the Company sold three of its mineral claims to an officer
of the Company resulting in a loss of $108,187. See Note 4.
NOTE 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, 1999, 1998, and
1997 was approximately $6,700, $22,000 and $28,000, respectively.
PURCHASE OF MINERAL PROPERTY
In October 1999, the Company executed an agreement to purchase the
LaTranca silver/gold prospect located in the northern Maricunga belt of
Chile. The agreement calls for a total purchase price of $1,005,000
payable in installments through October 6, 2003 with title passing to
the Company upon payment of the final installment. The agreement also
calls for a 2% net smelter return royalty on production up to a maximum
of $1,000,000. In compliance with terms of this agreement the Company
has paid a deposit of $5,000 which is reflected in other assets in
these financial statements. Other installments required under the
agreement are as follows:
April 7, 2000 $ 50,000
October 6, 2000 50,000
October 8, 2001 100,000
October 6, 2002 200,000
October 6, 2003 600,000
----------
Total installments $1,000,000
==========
NOTE 7 - STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
In May 1998, the Board of Directors authorized a 1 for 4 reverse stock
split, which granted 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
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
NOTE 7 - STOCKHOLDERS' EQUITY - continued
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 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 the outgoing
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 a director of the Company. These warrants are
exercisable at $0.50 per share and expire in December 2003.
During 1998, the Company issued 212,735 shares of its common stock for
services valued at $160,563. The Company also sold 1,934,513 shares of
common stock with options at prices ranging from $0.50 to $2.12 per
share. In addition, the Company issued stock options for accounts
payable valued at $50,000 and services valued at $238,668.
During 1999, the Company issued 436,827 shares of its common stock to a
director of the Company in payment of $54,604 debt and also issued
395,200 shares of common stock for payment of accrued interest in the
amount of $29,640. The Company also sold 1,435,716 shares of common
stock with options at prices ranging from $0.07 to $0.25 per share. In
addition, the Company issued stock options for accounts payable valued
at $57,160 and services valued at $25,000.
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, appreciate 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. As options mature, they revert to the 1998 Plan.
During May 1999, the Company adopted its 1998 Equity Incentive Plan
("the 1998 Plan") to aid the Company in maintaining and developing a
management team and attracting qualified officers and employees. A
total of 2,041,800 shares of common stock may be subject to, or issued
pursuant to, terms of the plan. A summary of these options during 1999
follows.
F/S - 13
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
NOTE 7 - STOCKHOLDERS' EQUITY - continued
STOCK OPTION PLAN - continued
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Share Price
-------- ----------
<S> <C> <C>
Outstanding at December 31, 1996 200,000 $ 6.40
Granted 30,000 1.50
Exercised or expired - -
--------- ------
Outstanding at December 31, 1997 230,000 5.76
Granted 3,242,398 1.19
Exercised or expired - -
--------- ------
Outstanding at December 31, 1998 3,472,398 1.49
Granted 4,598,765 0.22
Exercised or expired (91,800) 4.68
--------- ------
Outstanding at December 31, 1999 7,979,363 $ 0.71
========= ======
</TABLE>
The number of options outstanding exceeds the options allowable under
the 1995 plan and the 1998 plan due to individual issuances of options
for services, debt, and stock incentives. Options outstanding under the
1995 Plan as of December 31, 1999 and 1998 were 958,200 and 1,000,000
respectively. Options outstanding under the 1998 Plan as of December
31, 1999 were 1,150,000.
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 1999 and
1998 was $0.04 and $0.19 per option.
The following table summarizes information about stock options and
warrants outstanding at December 31, 1999
Weighted Number Options and Warrants Out-
Average Outstanding standing and Exercisable
Exercise and Exercisable Weighted Average Remaining
Prices at 12/31/99 Contractual Life (years)
-------- ------------- ------------------------
$ 0.0001 58,020 4.0
$ 0.1250 1,150,000 9.4
$ 0.2000 1,214,290 2.1
$ 0.2500 1,888,642 4.6
$ 0.3750 540,700 8.8
$ 0.5000 2,331,967 3.9
$ 1.5000 30,000 7.9
$ 2.0000 25,000 3.3
$ 2.2500 187,500 7.3
$ 5.0000 353,244 0.2
$ 6.4000 200,000 0.4
--------- --------- -----
$0.0001
- $6.4000 7,979,363 5.1
========= ========= =====
F/S - 14
HANOVER GOLD COMPANY, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
NOTE 8 - YEAR 2000 ISSUES
The Company had modified its business technologies to be ready for the
year 2000. Critical data processing systems have been reviewed and the
Company does not expect a significant effect on internal operations.
However, like other companies, Hanover Gold Company, Inc. could be
adversely affected if the computer systems its suppliers or customers
use do not properly process and calculate date-related information and
data for the period surrounding and including January 1, 2000. This is
commonly known as the "Year 2000" issue. Additionally, this issue could
impact non-computer systems and devices such as production equipment,
elevators, etc. At this time, because of the complexities involved in
the issue, management cannot provide absolute assurances that the Year
2000 issue will not have an impact on the Company's operations.
[The balance of this page has been intentionally left blank.]
F/S - 15
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/ Hobart Teneff
----------------------
Hobart Teneff, its President
and Chief Executive Officer
Date: March 30, 2000
By: /s/ James A. Fish
----------------------
James A. Fish, its
Vice-President
Date: March 30, 2000
By: /s/ Wayne L. Schoonmaker
-----------------------
Wayne L. Schoonmaker, its
Principal Accounting Officer
Date: March 30, 2000
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 L. Schoonmaker
------------------- ---------------------
Neal A. Degerstrom Wayne L. Schoonmaker
Director Secretary and Treasurer
Date: March 30, 2000 Date: March 30, 2000
By: /s/ Tim Babcock By: /s/ Hobart Teneff
----------------- ---------------------
Tim Babcock Hobart Teneff
Director Director
Date: March 30, 2000 Date: March 30, 2000
By: /s/ James A. Fish
-----------------
James A. Fish
Director
Date: March 30, 2000
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,970
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,215
<PP&E> 2,749,857<F1>
<DEPRECIATION> 105,038
<TOTAL-ASSETS> 2,714,034
<CURRENT-LIABILITIES> 320,107
<BONDS> 0
0
0
<COMMON> 1,164
<OTHER-SE> 2,392,763<F2>
<TOTAL-LIABILITY-AND-EQUITY> 2,714,034
<SALES> 0
<TOTAL-REVENUES> 15,598<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 437,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,643
<INCOME-PRETAX> (454,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (454,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (454,900)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
<FN>
<F1>Consists of $2,597,147 in resource properties and claims, and 152,710 in
property and equipment, at cost.
<F2>Consists of $26,686,997 in additional paid-in capital, less a deficit of
$24,291,087 accumulated during development stage, less $#,147 treasury stock.
<F3>Consists of $1,674 in interest income and $13,924 gain on sale of assets.
</FN>
</TABLE>
