-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KxRbV/xKT3yn7yYvBy4MM2SDIvYQkjywz6PZsFoHJEpEynZdeNyfOsFYfI+geOlX CirYzh1zjWoB7kVi59aKLQ== 0001021890-97-000183.txt : 19970526 0001021890-97-000183.hdr.sgml : 19970526 ACCESSION NUMBER: 0001021890-97-000183 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970523 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FISCHER WATT GOLD CO INC CENTRAL INDEX KEY: 0000844788 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 880227654 STATE OF INCORPORATION: NV FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17386 FILM NUMBER: 97613862 BUSINESS ADDRESS: STREET 1: 1621 NORTH 3RD STREET STREET 2: SUITE 1000 CITY: COEUR D'ALENE STATE: ID ZIP: 83814 BUSINESS PHONE: 208-664-67 MAIL ADDRESS: STREET 1: 1621 NORTH 3RD ST STREET 2: STE 1000 CITY: COEUR DALENE STATE: ID ZIP: 83814 10KSB/A 1 AMENDED ANNUAL REPORT ON FORM 10-KSB--1/31/97 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (MarkOne) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to -------- ----------- Commission file number 0-17386 FISCHER-WATT GOLD COMPANY, INC. -------------------------------------------- (Name of small business issuer in its Charter) Nevada 88-0227654 ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1621 North 3rd Street, Suite 1000 Coeur d'Alene, Idaho 83814 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) (Issuer's telephone number, including area code) 208-664-6757 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 Par Value ------------------------------ (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for its most recent fiscal year were $4,390,000. The aggregate market value of the voting stock held by non-affiliates as of May 1, 1997 (using the average of the Bid and Asked prices) was $9,847,634. The number of Shares of Common Stock, $.001 par value, outstanding on May 1, 1997 was 32,314,760. Documents Incorporated by Reference into this Report: None Transitional Small Business Disclosure Format (check one) Yes [ ] No [ X ] 1 PART I Item 1. DESCRIPTION OF BUSINESS Introduction ------------ Fischer-Watt Gold Company, Inc.(collectively with its subsidiaries, "Fischer-Watt" or the "Company"), was formed under the laws of the State of Nevada in 1986. Fischer-Watt's primary business is mining and mineral exploration, and to that end to own, acquire, improve, develop, sell, lease, convey lands or mineral claims or any right, title or interest therein; and to search, explore, prospect or drill for and exploit ores and minerals therein or thereupon. During the fiscal year ended January 31, 1997, no acquisitions were completed by the Company. During the fiscal year ended January 31, 1996, the Company completed two significant acquisitions. The first was the acquisition of the Oronorte property in Colombia, South America, and the second was the acquisition of Great Basin Management Co., Inc., in Reno, Nevada. On August 28, 1995, the Company entered into an agreement with Greenstone Resources Ltd., ("Greenstone") to acquire the Oronorte property in northern Colombia, which includes the El Limon Mine, an underground gold mine, and the rights to several exploration concessions effective August 24, 1995. On October 20, 1995, the Company closed the acquisition from Greenstone. All of the outstanding shares of Greenstone Resources of Colombia Ltd., a Bermuda corporation were acquired. Greenstone Resources of Colombia Ltd., owns 61,540,000 shares of Compania Minera Oronorte S.A.("Oronorte"). The Company completed the acquisition of 470,000 shares of Oronorte from Minas Santa Rosa, a subsidiary of Greenstone. Also on such date, the Company completed the acquisition of 2,800,000 shares of Oronorte from Dual Resources. This significant acquisition resulted in the Company owning, directly or indirectly, 99.9% of Oronorte, which owns the El Limon Mine, a small underground gold mine in the Department of Antioquia, Colombia. The Company assumed operational control of Oronorte on August 24, 1995. In exchange for the various interests in Oronorte, the Company conveyed to Greenstone, all of its interests in Minerales de Copan S.A. de C.V., ("Copan") which included shares and options to purchase shares totaling approximately eight percent of Copan. Copan owns the San Andres Mine in Honduras. Fischer-Watt's non-recourse debt to Greenstone of $115,000 was canceled in connection with this conveyance. 2 On October 18, 1996, Fischer-Watt instituted a lawsuit against Greenstone seeking payment of US $1,508,544 arising from a contractual obligation of Greenstone to Fischer-Watt in connection with the acquisition of Oronorte (see Item 3-Legal Proceedings). On January 29, 1996, the Company acquired Great Basin Management Co., Inc., ("GBM"). GBM is a 100% owner of Great Basin Exploration and Mining Co., Inc., ("GBEM"), a mineral exploration company based in Reno, Nevada. GBM was acquired through the merger of a wholly-owned subsidiary of the Company with GBM in which 4,125,660 shares of Fischer-Watt common stock were issued to the shareholders of GBM. GBEM holds leases on several mineral properties in the Battle Mountain-Eureka Trend in Nevada as well as additional exploration properties in Nevada and California. Two of the Nevada properties, Red Canyon and the Tempo, are in joint venture arrangements with other mining companies. A third property, Coal Canyon, is currently being explored by the Company and a joint venture partner is being sought. See Item 2-Description of Property. On February 28, 1995, Tombstone Explorations Co.Ltd.("Tombstone"), a Vancouver-based mining and exploration company entered into a letter agreement with Fischer-Watt to purchase Fischer-Watt's interest in the Minas de Oro property in Honduras. Minas de Oro was joint ventured with Kennecott Exploration Company ("Kennecott") who had an 80 percent working interest. Tombstone agreed to buy the Kennecott interest and to assume Fischer-Watt's $500,000 promissory note to Kennecott, as well as Fischer-Watt's interest in the property. Under the terms of the agreement, Tombstone paid Fischer-Watt $150,000 in cash and delivered for cancellation, Fischer-Watt's $500,000 promissory note to Kennecott plus all accrued interest. The transaction closed on May 15, 1995. This sale resulted in a gain of $641,000 and substantially reduced the Company's debt. On November 2, 1993, the Company signed a letter of intent to be acquired by Greenstone Resources Ltd. During the due diligence period, Greenstone advanced funds to the Company for current operations. The proposed merger was terminated by Greenstone in February 1994. In March 1994, Fischer-Watt accepted an offer from Greenstone to acquire an option to purchase all of Fischer-Watt's interests in the San Andres project in Honduras for a total purchase price of $955,000 consisting of cash, cancellation of debt incurred pursuant to the proposed merger and $700,000 worth of Greenstone common stock, valued at the time of exercise. Greenstone exercised its option on October 31, 1994. Upon exercise of the option, Greenstone was assigned Fischer-Watt's option to acquire 51% of Compania Minerales de Copan, S.A. de C.V. from Milner Consolidated Silver Mines (25.5%) and North American Palladium Resources (25.5%) as well as all of Fischer-Watt's other rights and interest in the San Andres project. Minerales de Copan owns the San Andres project. As part of the option agreement, Fischer-Watt negotiated a loan from Greenstone to provide all of the funds to purchase up to nine percent of the shares of Compania Minerales de Copan S.A. de C.V.("Copan"). The loan was nonrecourse as to both principal and interest to the Company and was to be repaid out of dividends, if any, from the Copan shares. The shares were pledged to Greenstone as collateral for the loan which was due on or before 3 December 31, 1999. At August 24, 1995, this loan and the related accrued interest obligation, totaling $115,000, were satisfied in conjunction with the sale of the Company's interest in the Copan shares. During fiscal 1997, the Company's only producing metals property was the El Limon Mine in the Oronorte district in Colombia, South America. The Company assumed control of operations in late August 1995 and has produced an average of 1,012 ounces of gold per month since the property was acquired, compared with an historical average of 734 ounces per month. During the third quarter of the fiscal year ended January 31, 1997, average monthly production reached a record high of 1,262 ounces per month. This increase in production reflects the implementation of a grade control program that was instituted under the Company's management. Further improvement in grade will be realized when a new slurry pumping system becomes fully operational. This system is currently being installed and will be fully operational by the third quarter of fiscal 1998. Installation of the system was delayed due to engineering and construction difficulties. Production at the El Limon Mine was augmented by development ore shipped from the Aurora vein at the end of the fiscal year. The ore was contributing approximately 50 ounces of gold per month to production Operations ---------- Since the Company assumed operations of the El Limon Mine on August 24, 1995 and through December 31, 1996, the Company has produced 16,601 ounces of gold (3,746 ounces in fiscal 1996 and 12,855 ounces in fiscal 1997) and 16,018 ounces of silver (3,500 ounces in fiscal 1996 and 12,518 ounces in fiscal 1997). The selling prices the Company received averaged $386.62 and $384.49 per ounce for gold and $5.19 and $5.34 per ounce for silver for fiscal 1997 and 1996, respectively. The cash cost per ounce for gold for fiscal 1996 as previously reported was $338.50. Recently the Company reevaluated its cash cost calculation methodology. For fiscal 1996, the cash cost was calculated treating as a cash cost of production all expenses associated with the Company's operations in Colombia. The Company's revised calculation methodology does not treat all expenses associated with the Company's operation in Colombia as a direct cost related to production; but rather allocates an appropriate percentage to the direct cost of production. Utilizing the revised cash cost calculation methodology the cash cost per ounce of gold was $381.58 for fiscal 1996 and fell to $302.70 in fiscal 1997. The revision in the Company's cash cost calculation methodology was made in an effort to more closely conform to the Gold Institute Production Cost Standard. The Company sells most of its precious metal production to one customer. However due to the nature of the precious metals market the Company is not dependent upon this significant customer to provide a market for its products. Although the Company could be directly affected by weakness in the precious metals processing business, the Company monitors the financial condition of its customer and considers the risk of credit loss to be remote. Production from the El Limon Mine comes from a single vein with an average dip of 42 degrees and an average width of 1.6 feet. The average grade of this vein is 1.2 ounces of gold per tonne. Prior to the time that the company took over the operation the average grade of the ore being sent to the plant for processing was only 0.36 ounces per tonne or 30 % of the available value of the vein. It was apparent from this data that a study program which would identify methods to improve the grade of the ore being sent to the processing plant was necessary. Several steps have been taken already as a result of this grade control program and more will follow. The actions which are already underway are as follows: 4 The previous mining method required a minimum stoping width of 4.0 feet and made it necessary for the miners to stand on a slippery slope of 42 degrees while drilling the holes required to blast the ore and waste. These requirements dictated that at a minimum the grade of the ore being sent to the processing plant would be diluted by 60% and that the productivity of the miners would be restricted. In fact the actual dilution of the ore was higher. Grade to the processing plant of 0.36 ounces per tonne v.s. an available grade of 1.2 ounces per tonne is a dilution of 70%. A new mining method has been designed and put into operation which reduces the minimum stoping width to 3.0 feet and enables the miners work down the 42 degree slope and stand on solid rock while drilling. The vein at the El Limon Mine is a white, opaque quartz which normally breaks into pieces two inches in diameter or smaller when blasted. However the waste material surrounding the vein is a very dark colored metasediment which normally breaks into much larger pieces. The difference in breaking size between the ore material and the waste has been put to use underground by putting all of the blasted material on a two inch grizzly (screen), separating the oversize material and putting it back into mined out working places (stopes) for ground support. Analysis of the sand size particles produced by blasting in the stopes showed that they contain significant amounts of gold and a system has been designed which will allow this fine material to be washed off of the larger fragments of the ore and waste , collected in various sumps underground and on surface and pumped to the processing plant. This washing system in addition to recovering high grade fines allows for visual discernment of ore and waste and manual separation as the material proceeds from underground to the processing plant. Installation of this slurry pumping system which was designed to be done in phases is approximately 50% complete and is anticipated to be fully operational by September 1997. The results of this grade control program to date have been impressive. As stated previously the average feed grade prior to the company taking control of the mine was 0.36 ounces per tonne the average grade presently is 0.57 ounces per tonne. This is a 58% improvement in the grade of material delivered from the mine. The characteristics of the ore body, such as vein width and grade, have not changed. The improved output is being accomplished by a two stage upgrading of the mined ore where waste rock that became mixed in with the vein material during the mining sequence is removed prior to the ore being milled. A large percentage of this waste is now being removed while the ore is still underground. The separation is based on the different breakage characteristics of the ore and waste with the waste rock breaking into larger fragments than the vein material. A second ore and waste separation is carried out on the surface. This sorting is based on color since the waste rock is a uniform dark rock compared to the lighter colored ore. These measures have resulted in the mill feed being upgraded from an average of 0.57 ounces per tonne to 0.65 ounces per tonne, an increase of 14 percent. 5 Since a significant portion of this ore-waste separation is carried out underground, that waste is no longer being hoisted thereby creating hoisting capacity for additional ore. In this way, mill throughput of the upgraded ore has been maintained at around 2,000 tonnes per month. Color separation of ore and waste will be carried out underground once installation of an ore washing and slurry pumping system is fully completed. This is anticipated to be completed by September 1997. At the El Limon Mine, production has steadily increased during the year. In January 1996, 651 ounces of gold were produced. By December 1996, production had risen to 979 ounces of gold. These improved results stem form the new grade control program, the introduction of new satellite ore sources, increased mill recoveries and other operational improvements. To reduce costs and improve efficiencies, personnel changes and realignment are continuing to take place, a new cost control system has been introduced, improved metal revenue enhancement program implemented and improved purchasing procedures put in place at both the mine site and Medellin office. Mine Development ---------------- A change in the mining method at the El Limon Mine has increased productivity in the stopes and development of a new level, Level 6, is underway. The capacity of the locomotive ore cars, and mucking machines, assigned to Level 6 will be increased to improve the efficiency of development and production. To augment production from the El Limon Mine, development of two other properties, both under control of Oronorte, has begun. The first, the La Aurora is approximately six kilometers south of El Limon Mine and is close to a publicly maintained highway. The mine is being developed from two fronts. First, a short adit has been constructed to intersect the vein. At the vein intersection, a 40 meter internal shaft has been constructed and horizontal drifting developed. This has proven the geological interpretation of the vein and supplies approximately 150 tonne per month of development ore to the El Limon Mine plant. Second, an access ramp is being constructed with rubber tired mining equipment and has progressed approximately 230 meters. Completion of the remaining 80 meters is projected for early in the second quarter of 1997. This ramp will allow the La Aurora to be developed and operated utilizing low cost, trackless, mining methods. Development of the second property, the Juan Vara, has been temporarily suspended in order to concentrate efforts on the La Aurora. The Juan Vara is approximately two kilometers from the El Limon Mine processing plant. Earlier in fiscal 1997, two diamond drill holes were completed from surface. One hole intersected the vein at a depth of 80 meters below surface. At this point, the vein is 0.4 meters with an assay grade of 43 grams of gold per tonne. The second hole intersected a narrow vein but was stopped short of the main vein due to mechanical problems with the drill rig. 6 The geometry of both the La Aurora and the Juan Vara vein in relation to the surface topography suggest that they may be developed (if warranted) with rubber tired mining equipment. A rehabilitated one cubic yard LHD vehicle has been purchased in the United States and is now operating at the El Limon Mine. Exploration ----------- Exploration at the El Limon Mine is focused primarily on confirmation and delineation of extensions of the El Limon Mine vein. An ongoing program of drilling from selected locations on Level 5 has proven vein continuity both horizontally and at depth. To the north, Level 5 development has exposed 120 meters of the vein with an average width of 0.5 meters and average grade of over 35 grams of gold per tonne. Drilling has confirmed the continuity of the vein on Level 6. Geological mapping and reinterpretation of old operational maps, indicated the possible existence of approximately 5,000 additional tonnes of material with an average grade of 20 grams of gold per tonne on Level 0. Previously mined areas are being reevaluated for possible additional reserves and/or pillar extraction. Surface drilling at El Carmen property is confirming the continuity of the vein at depth. The drill core indicates the possibility of a disseminated gold stockworks. The grade of this mineralization, while sub-economic, confirmed the presence of a large stockwork associated with the high grade El Carmen vein. Assays of this disseminated stockwork ranged between 0.2 grams of gold per tonne to 0.5 grams of gold per tonne. If the grade in this system is found to improve slightly along strike it could allow for its development by low cost surface mining and heap leach processing methods. On December 18, 1996, the Company announced the acquisition of the 200 hectare El Veinte property, located approximately 14 kilometers south of the El Limon Mine. The El Veinte is viewed as having similar geology to the El Carmen. Drilling at the El Veinte is planned following completion of work at the El Carmen. Fischer-Watt's exploration geologist, based out of the Medellin office, continues the Colombian regional exploration program. A number of disseminated gold mineralization prospects are being examined and management believes that the renowned high grade northern Colombian gold fields can host open-pittable, bulk minable deposits. To date, very little exploration has been carried out in this part of Colombia for these deposits. In Nevada, Fischer-Watt's regional exploration program identified two new gold properties, Amador and Water Canyon, which were acquired by claim staking in fiscal 1997. Three Fischer-Watt properties were under joint venture to other mining companies in fiscal 1997. Battle Mountain Gold continued to explore the Red Canyon property in Eureka County in fiscal 1997 and is planning additional work in fiscal 1998. Digger Resources continued its exploration of the Tempo property in Lander County and is planning a fiscal 1998 exploration program. Cominco American drilled a number of geophysical targets at the Company's Afgan-Kobeh project in Eureka County in fiscal 1997, but withdrew from the joint 7 venture in December. The Afgan claims were subsequently returned to the lessor and the Company is seeking a new joint venture partner for its Kobeh claim block. The Company drilled three core holes in December 1996 at its Coal Canyon property in Eureka County to test for down dip and strike extensions of previously identified gold mineralization. The drilling successfully identified gold in the feeder fault below known mineralization at a depth of 1,281 feet, averaging 0.78 grams per tonne over 61 feet, and also encountered gold grades up to 1.5 grams per tonne over 10 feet in the fault zone 600 feet along strike to the northwest. The Company acquired the Castle gold property, located in Esmeralda County, from Kennecott Exploration in fiscal 1997. Kennecott had identified a drill indicated resource containing between 1.5 million tons and 3.6 million tons averaging 0.046 and 0.049 ounces gold per ton. In California, the Company is actively exploring the Sacramento prospect near Needles. This gold property was acquired in late fiscal 1997 from a prospector and expanded by way of claim staking by the Company. Regional exploration in Nevada will continue in fiscal 1998 and the Company will seek joint venture partners to explore its existing properties in the United States. Recent Private Placements ------------------------- On March 12, 1996 the Company announced that it had completed a $5 million foreign offering conducted outside of the United States pursuant to Regulation "S". These funds were used to finance capital equipment and working capital needs for further development and expansion of Fischer-Watt's gold mining operation in Colombia and its exploration and development activities in Colombia and Nevada. This Regulation S offering consisted of the sale of 4,980,000 units at $1.06 per unit. Each unit was composed of two shares of Fischer-Watt common stock and one share purchase warrant. Each of these warrants entitles the holder to purchase one additional share of Fischer-Watt common stock at an exercise price of $.75 through February 28, 1998. These securities were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. As a part of this placement, 680,000 units were sold under a subscription agreement and, as such, $721,000 is classified as capital stock subscribed. As of May 1, 1997 none of the 680,000 shares have been issued. Subsequent to year end, from March 11, 1997 through April 16, 1997, the Company completed a private placement to accredited investors located in the United States pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "1933 Act"). The estimated net proceeds from this offering of $442,000 are to finance the Company's working capital requirements and needs related to further development, expansion, and exploration of mining properties. This Regulation D offering consisted of the sale of 459,000 units at $1.06 per unit. Each unit was composed of two shares of Fischer-Watt common stock and one 8 share purchase warrant. Each of these warrants entitles the holder to purchase one additional share of Fischer-Watt common stock at an exercise price of $.75 through February 17, 1999. These securities were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Definitions ----------- "Adit" A nearly horizontal passage from the surface by which a mine is entered and unwatered. "Dip" The angle or direction of tilt of the vein or strata. "Feasibility" Completion of a detailed written evaluation of the technical, economic and environmental feasibility of constructing and operating a mine. The evaluation contains all information customarily required by institutional lenders in determining whether to make debt financing available for a project of its type and size, including capital and operating costs, environmental constraints, water supplies, facilities for disposal of wastes and reclamation. "Footwall" The mass of rock beneath a fault plane, vein, lode or bed of ore. "Force Majeure" An event which is outside the control of the parties and cannot be avoided by exercise of due care. "Generative Exploration" Exploration for mineral deposits in areas not previously recognized as containing mineralization. "Net Proceeds Interest" Gross revenues from the sale of products, less operating, exploration and development costs of the project, usually calculated on a cash basis. "Net Smelter Return Royalty," or "NSR" Royalty based on the net amount shown due by the smelter or other place of sale as indicated by its return or settlement sheets, after payment of all freight charges from the shipping point to the smelter, and after all smelter charges have been deducted, but without deduction of any other charges. 9 "Participating Interest" The percentage interest representing the operating ownership (cost and revenues) of a participant in a joint venture agreement. "Stope" An excavation from which ore has been excavated in a series of steps. Usually applied to highly inclined or vertical veins. "Strike" The course or bearing of the outcrop of an inclined bed or structure; the direction of a horizontal line in the plane of an inclined stratum. "Target" The indicated location of a potential ore body. The location is indicated by geologic data and concepts and includes a drilling plan (with specific drill hole locations) that will test the accuracy of the geologic data and concepts by penetrating the potential ore body. One property may contain several targets. "Tonne" A unit of weight equal to 2,240 pounds. Also called a long ton, as distinguished from short ton, a weight measurement equal to 2000 pounds. "Winze" A vertical or inclined opening or excavation, sunk underhand, connecting two levels in a mine. "Work Commitments" Total amount of work to be performed on a property to satisfy the terms of the agreement under which the property was acquired. It may be expressed in total dollars to be spent on the property or the number of feet to be drilled on the property. Plan of Operation ----------------- The Company anticipates that it will, during fiscal 1998, continue to improve its operations at Oronorte. This will include additional capital expenditures for shaft rehabilitation and improved hoisting at the El Limon Mine, processing plant improvements and expansion at the El Limon Mine, and completion of the ramp and initial mine at the Aurora. In addition, the Company plans to begin development of the El Carmen property in the Oronorte district, continue the regional exploration program in Northern Colombia, and continue its exploration efforts in the Battle Mountain-Eureka Trend in Nevada. The Company intends to fund these expenditures through a combination of internally generated cash flow and additional debt or equity financings. There can be no assurance, however, that the Company will have available sufficient funds to conduct such activities. 10 Fischer-Watt incurred a net loss of $3,378,000 in fiscal 1997, has an accumulated deficit of $8,058,000, has a net working capital deficiency of $1,038,000 and continues to experience negative cash flows from operations. The Company did report net income in fiscal 1996, however this was principally the result of realized gains on the sale of exchange of non-producing mineral properties. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management believes that as the El Limon Mine gold property, held by Oronorte is further developed and production levels increase, sufficient cash flows will exist to fund the Company's mining operations and exploration and development efforts in other areas. Management anticipates achieving levels of production sufficient to fund the Company's operating needs by the end of fiscal 1998, and until then will fund operations with cash raised from future equity or debt financings, the anticipated exercise of common stock warrants expiring in August 1997 (see Note 9 to Financial Statements), and disposition of or joint ventures with respect to mineral properties. Expenditures for exploration projects may also be reduced, if necessary. The ability of the Company to achieve its operating goals and thus positive cash flows from operations is dependent upon the future market price of gold, future capital raising efforts, and the ability to achieve future operating efficiencies anticipated with increased production levels. Management's plans will require additional financing, reduced exploration activity, or disposition of or joint ventures with respect to mineral properties. While the Company has been successful in these capital raising endeavors in the past, there can be no assurance that its future efforts, and anticipated operating improvements will be successful. The Company does not currently have adequate capital to continue its contemplated business plan beyond the early part of the third quarter of fiscal 1998. The Company is presently investigating all of the alternatives identified above to meet its short-term liquidity needs. The Company believes that it can arrange a transaction or transactions to meet its short-term liquidity needs, however there can be no assurance that any such transactions will be concluded or that if concluded they will be on terms favorable to the Company. Information About Industry Segments ----------------------------------- Fischer-Watt operates in only one segment, mineral activities. Narrative Description of Business --------------------------------- Fischer-Watt has been engaged primarily in the location, acquisition, exploration, development and production of precious metal mineral properties. The search for precious metal deposits that can be profitably produced is extremely high risk and development requires large capital outlays and operational expertise. The value of the Company's properties and exploration results may be affected by the prices of precious metals, especially gold, and by the cost of extracting the precious metals. During the calender year 1996, gold prices averaged over $385 per ounce and fluctuated from a low of $365 to a high of $418. The price of gold on May 1, 1997 was $339.25. During the last ten years, gold prices have averaged $387 per ounce and stayed over $300 per ounce while 11 modern heap leach technologies have allowed lower grades of ore bodies to be mined. For several years, this trend created a resurgence in the United States of exploration activity for gold in the minerals industry. During the past several years, this increase in activity has expanded to Latin America. Gold is traded on the international commodities market, primarily through the London Metals Exchange (LME). The price is controlled by a number of factors, none of which can be influenced by Fischer-Watt. The availability of mining prospects is dependent upon the Company's ability to negotiate leases or concessions with property owners or to locate claims pursuant to the General Mining Law of 1872. Bills recently passed and currently being considered by the United States Congress to amend the federal mining law could substantially impair the ability of the Company and other companies to develop mineral resources on federal unpatented mining claims which constitute one of the primary sources of mining properties in the United States. Such bills contain provisions to eliminate or substantially impair the ability of companies to obtain a patent on unpatented mining claims as well as provisions for the payment of royalties to the Federal government. Other than mining claims, leases, concessions and agreements, the Company has no patents, trademarks, licenses or franchises material to its operations. (See Item 2 - Description of Property). All of the properties in which Fischer-Watt has an interest are accessible throughout the year. If mineralized deposits are discovered under claims or leases in which Fischer-Watt owns an interest, the economic viability of the deposit may depend upon numerous factors not within the Company's control, including the selling price of minerals, the extent of other domestic production, proximity and capacity of water and mills, and the effect of state, federal or foreign government regulations. No portion of the Company's business is subject to renegotiation of profits or termination of contracts or sub-contracts at the election of the Government. Competition in the Company's industry occurs almost exclusively in the acquisition of mining properties because the market price for gold is determined by market factors and conditions that are beyond the Company's control. The exploration for, development of and acquisition of gold and other precious metal properties are subject to intense competition. The principal methods of competition include: (i) bonus payments at the time of lease acquisition, (ii) delay rentals and advance royalty payments, (iii) the use of differential royalty rates, (iv) the amount of annual rental payments, (v) exploration and production commitments by the lessee and (vi) staking claims. Companies with greater financial resources, larger staffs and labor forces, and more equipment for exploration and development may be in a more advantageous position than the Company to compete for such mineral properties. Management believes that competition for acquiring mineral prospects will continue to be intense. 12 The mining industry, including Fischer-Watt, must follow certain local, state and federal regulations imposed in each country where it operates to maintain environmental quality. To the best knowledge of management, all the Company's projects comply with present regulations and their compliance has not resulted in any additional material capital and/or operating costs. The Company's principal executive officer has been involved in the permitting of mines throughout his career. He keeps abreast of applicable legislation affecting the permitting process. Outside consultants are also available that specialize in the permitting process. In Colombia, the Company believes that it is in full compliance with the regulations issued by the Environmental Ministry, a newly created agency that oversees environmental regulations. It cannot be known at this time what additional future laws and regulations might be adopted, nor their effect, if any, on the Company. At May 1, 1997, Fischer-Watt and subsidiaries have employees as shown below: Full-time Part-Time Total Employees Employees Employees --------- --------- --------- United States 8 1 9 Foreign 44 0 44 ----- ---- ---- Total 52 1 53 ===== ==== ==== In addition, the Company contracts with a labor cooperative at the El Limon Mine that provides an hourly labor force of approximately 246 people. The labor cooperative has been contracting with the El Limon Mine since April 1992. It is currently operating under an extension of a one year contract that expired January 15, 1997. Negotiations on a new contract have been held and a new contract is expected to be executed in the near future. The Company does not expect that the new contract will contain material changes from the previous contract. Monthly pay ranges from $209 to $435 per month, per person. Benefits which include health insurance, retirement, social security and vacation and holidays run approximately 56% of annual pay. Foreign Operations ------------------ All of the Company's current production and mining operations are derived from its Colombian subsidiary. The Company plans to continue current exploration efforts in South America and Mexico as well as in the western United States, principally in Nevada. The Company also owns interests in non-producing mineral concessions in Mexico through its 65%-owned Mexican corporation, Minera Montoro S.A. de C.V. ("Montoro"). Montoro was incorporated in Mexico City, Mexico in October 1989. The remaining 35% is owned by Jorge Ordonez, a director of the Company, and his family and business associates. 13 At this time, management is unaware of any extraordinary risks associated with the Company's present, or proposed, operations in these countries. Colombia suffers social unrest including guerilla action. The guerilla situation is an ongoing problem but the Company continuously evaluates security risks and makes any appropriate adjustments. Inflation remains a problem as it slightly rose to 21.6% in 1996 from 20% in 1995. Hedging mechanisms may be available to mitigate, to some extent, the effects of inflation. The Company does not presently employ forward sales contracts or engage in any hedging activities, but is considering applying hedging activities in the future. The government of Colombia imposes a 4% royalty on the production of gold and silver. FINANCIAL INFORMATION RELATING TO THE COST BASIS OF FOREIGN AND DOMESTIC MINERAL INTERESTS: Year Ended January 31, --------------------------------- 1997 1996 1995 ------- ------- ------- United States $ 2,030,000 $ 1,661,000 $ 304,000 Colombia 2,066,000 1,488,000 - Honduras - - 174,000 --------- --------- ------- Mineral Interests $ 4,096,000 $ 3,149,000 $ 478,000 14 Item 7. FINANCIAL STATEMENTS. See Index to Financial Statements attached hereto as page F-1. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FISCHER-WATT GOLD COMPANY, INC. May 23, 1997 /s/ George Beattie ----------------------------------- George Beattie President, Chief Executive Officer, (Principal Executive Officer), Chairman of the Board and Director In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date ------------------- ----- /s/ Michele D. Wood ---------------------- Michele D. Wood May 23, 1997 Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) /s/ Peter Bojtos ---------------------- Peter Bojtos May 23, 1997 Director, Vice President, and Vice Chairman of the Board /s/ Gerald D. Helgeson ---------------------- Gerald D. Helgeson May 23, 1997 Director and Secretary /s/ James M. Seed ---------------------- James M. Seed May 23, 1997 Director /s/ A. P. Taylor ---------------------- A. P. Taylor May 23, 1997 Director /s/ Jorge Ordonez ---------------------- Jorge Ordonez May 23, 1997 Director 15 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Contents Report of Independent Certified Public Accountants F-2 Financial Statements: Consolidated Balance Sheet F-3 Consolidated Statements of Operations F-5 Consolidated Statement of Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 - F-8 Summary of Accounting Policies F-9 - F-11 Notes to Consolidated Financial Statements F-12 - F-31 F-1 Report of Independent Certified Public Accountants Board of Directors and Shareholders Fischer-Watt Gold Company, Inc. We have audited the accompanying consolidated balance sheet of Fischer-Watt Gold Company, Inc. and subsidiaries as of January 31, 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended January 31, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fischer-Watt Gold Company, Inc. and subsidiaries as of January 31, 1997, and the consolidated results of their operations and their cash flows for the years ended January 31, 1997 and 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred a $3,378,000 net loss in fiscal 1997, has an accumulated deficit of $8,058,000 and a net working capital deficiency of $1,038,000, and continues to experience negative cash flows from operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Spokane, Washington May 9, 1997 F-2 - --------------------------------------------------------------------------------
(Note 1) January 31, 1997 - -------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 484,000 Certificate of deposit (Note 6) 525,000 Accounts receivable (Note 3) 260,000 Inventories (Note 4) 977,000 Prepaid expenses and other 79,000 - -------------------------------------------------------------------------------------------------------------------- Total current assets 2,325,000 - -------------------------------------------------------------------------------------------------------------------- Mineral interests, net (Note 5) 4,096,000 - -------------------------------------------------------------------------------------------------------------------- Property, plant and equipment: Land and buildings (Note 6) 499,000 Machinery and equipment 1,849,000 Furniture and fixtures 143,000 - -------------------------------------------------------------------------------------------------------------------- 2,491,000 Less accumulated depreciation 323,000 - -------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 2,168,000 - -------------------------------------------------------------------------------------------------------------------- Foreign tax refunds, net of $219,000 reserve 435,000 - -------------------------------------------------------------------------------------------------------------------- Other assets 52,000 - -------------------------------------------------------------------------------------------------------------------- Total-assets $ 9,076,000 =================================================================================================================== F-3 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Consolidated Balance Sheet (Note 1) January 31, 1997 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 2,384,000 Notes payable (Note 6) 979,000 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,363,000 - -------------------------------------------------------------------------------------------------------------------- Long-term liabilities: Convertible note payable to shareholder (Note 6) 719,000 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 4,082,000 - -------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 10 and 13) Shareholders' equity: (Notes 8 and 9) Preferred stock, non-voting, convertible, $2.00 par value, 250,000 shares authorized; 0 shares outstanding - Common stock, $0.001 par value, 50,000,000 shares authorized; 31,296,760 shares outstanding 31,000 Additional paid-in capital 12,044,000 Capital stock subscribed 721,000 Foreign currency translation adjustments 256,000 Accumulated deficit (8,058,000) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 4,994,000 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 9,076,000 ===================================================================================================================
See the accompanying summary of accounting policies and notes to consolidated financial statements. F-4 - --------------------------------------------------------------------------------
Fischer-Watt Gold Company, Inc. and Subsidiaries Consolidated Statements of Operations Year ended January 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Sales of precious metals $ 4,390,000 $ 1,378,000 Costs applicable to sales 4,018,000 1,478,000 - -------------------------------------------------------------------------------------------------------------------- Gain (loss) from mining 372,000 (100,000) Gain on sales of mineral interests - 1,528,000 Costs and expenses: Abandoned and impaired mineral interests 588,000 267,000 Selling, general and administrative 1,722,000 322,000 Exploration 611,000 3,000 - -------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (2,549,000) 836,000 Other income (expense): Gain (loss) on sale of assets (1,000) 206,000 Interest income 179,000 1,000 Interest expense (177,000) (74,000) Currency exchange gain (loss), net (202,000) 307,000 Reserve for foreign tax refunds (219,000) - Other income (expense), net (207,000) (152,000) - -------------------------------------------------------------------------------------------------------------------- Net income (loss) before taxes (3,176,000) 1,124,000 Tax provision (Note 11) (202,000) (93,000) - -------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (3,378,000) $ 1,031,000 =================================================================================================================== Earnings (loss) per share $ (.11) $ .07 Weighted average shares outstanding 30,506,060 14,883,000 ===================================================================================================================
See the accompanying summary of accounting policies and notes to consolidated financial statements. F-5 - --------------------------------------------------------------------------------
Fischer-Watt Gold Company, Inc. and Subsidiaries Consolidated Statement of Shareholders' Equity Foreign Total Additional Capital Currency Share- Common Stock Paid-in Stock Accumulated Translation holders' Shares Amount Capital Subscribed Deficit Adjustments Equity - ----------------------------------------------------------------------------------------------------------------------- BALANCE, February 1, 1995 12,344,000 $ 12,000 $5,773,000 $ - $(5,711,000) $ - $ 74,000 Issuance of common stock in private placement, net of $94,000 issue costs 6,067,500 6,000 810,000 - - - 816,000 Issuance of common stock to acquire subsidiary, net of $21,000 issue costs (Note 2) 4,125,660 5,000 1,208,000 - - - 1,213,000 Foreign currency translation adjustments - - - - - 669,000 669,000 Net income for the year - - - - 1,031,000 - 1,031,000 - -------------------------------------------------------------------------------------------------------------------- BALANCE, January 31, 1996 22,537,160 23,000 7,791,000 - (4,680,000) 669,000 3,803,000 Issuance of common stock in private placement, net of $368,000 issue costs 8,600,000 8,000 4,182,000 - - - 4,190,000 Issuance of common stock for exploration rights 100,000 - 50,000 - - - 50,000 Issuance of common stock for services 59,600 - 21,000 - - - 21,000 Capital stock subscribed - - - 721,000 - - 721,000 Foreign currency translation adjustments - - - - - (413,000) (413,000) Net loss for the year - - - - (3,378,000) - (3,378,000) - ----------------------------------------------------------------------------------------------------------------------- BALANCE, January 31, 1997 31,296,760 $ 31,000 $12,044,000 $721,000 $(8,058,000) $ 256,000 $4,994,000 - -----------------------------------------------------------------------------------------------------------------------
See the accompanying summary of accounting policies and notes to consolidated financial statements. F-6 - --------------------------------------------------------------------------------
Fischer-Watt Gold Company, Inc. and Subsidiaries Consolidated Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents Year ended January 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (3,378,000) $ 1,031,000 Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation, depletion and amortization 462,000 259,000 Stock issued for services 21,000 - Abandoned and impaired mineral interests 588,000 339,000 Gain on disposal of securities - (1,110,000) Gain on sales of mineral interests - (641,000) Other losses, net 1,000 1,000 Changes in assets and liabilities, net of business acquisitions: Accounts receivable 83,000 (223,000) Inventories (372,000) (85,000) Prepaid expenses and other assets 20,000 (105,000) Accounts payable, accrued expenses, and other (255,000) 403,000 - -------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (2,830,000) (131,000) - -------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investments in mineral interests (949,000) (301,000) Investments in plant and equipment (915,000) (139,000) Investment in certificate of deposit, net of fees (509,000) - Proceeds from equipment sales 1,000 - Proceeds from sales of securities - 582,000 Proceeds from sales of mineral interests - 150,000 Investments in securities - (21,000) Purchase of shares of consolidated subsidiary, net of cash acquired (Note 13) - (489,000) - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,372,000) (218,000) - -------------------------------------------------------------------------------------------------------------------- See the accompanying summary of accounting policies and notes to consolidated financial statements. F-7 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year ended January 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock in private placement, net of stock issuance costs 4,190,000 816,000 Proceeds on issuance of special warrant (Note 8) 721,000 - Borrowings on notes payable 509,000 28,000 Payments of stock issuance costs on acquisition of subsidiary - (21,000) Repayment of notes payable - (214,000) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 5,420,000 609,000 - -------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 218,000 260,000 Cash and cash equivalents, beginning of year 266,000 6,000 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 484,000 $ 266,000 ===================================================================================================================
See the accompanying summary of accounting policies and notes to consolidated financial statements. F-8 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Summary of Accounting Policies Business Activities Fischer-Watt Gold Company, Inc. ("Fischer-Watt" or the "Company"), its subsidiaries, and joint ventures are engaged in the business of mining and mineral exploration. Operating activities of the Company include locating, acquiring, exploring, developing, improving, selling, leasing and operating mineral interests, principally those involving precious metals. The Company presently has mineral interests in two broad geographical areas, namely North Central Colombia and the Western United States. The Company's current operational focus is its Oronorte properties, a producing gold mine near Zaragosa, Colombia. Principles of Consolidation The consolidated financial statements include the accounts of Fischer-Watt, and its majority owned subsidiaries. Ownership interests in corporations where the Company maintains significant influence over but not control of the entity are accounted for under the equity method. Joint ventures involving non-producing properties are accounted for at cost. Cash and Cash Equivalents For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories consist of gold and silver produced by the Company's Colombian mining operations, work in process, raw materials used in the production process and operating supplies. Gold and silver inventories are stated at their selling prices reduced by the estimated cost of disposal. Raw materials and operating supplies used in the production process are stated at the lower of cost or replacement value. Production expenses are included in work in process inventories using an average cost of production method and work in process inventories are stated at their lower of cost or net realizable value. Mineral Interests The Company records its interest in mineral properties and areas of geological interest at cost less expenses recovered and receipts from exploration agreements. Exploration development costs are deferred until the related project is placed in production or abandoned. Deferred costs are amortized over the economic life of the related project following commencement of production, by reference to the ratio of units produced to total estimated production (estimated proven and probable reserves), or written off if the mineral properties or projects are sold or abandoned. F-9 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Summary of Accounting Policies Costs associated with pre-exploration, exploration, and acquisition generally are deferred until a determination is made as to the existence of economically recoverable mineral reserves. If these costs are incurred by the Company during a period covered under a generative exploration program agreement with a third party, they are expensed until such time as the third party decides to either reject a property identified during the exploration period or proceed with further exploration of the property. If an election to proceed occurs, future costs are capitalized as incurred. Costs associated with abandoned projects are expensed at the time of abandonment. Non-producing mineral interests are initially recorded at acquisition cost. The cost basis of mineral interests includes acquisition cost, bonus payments made to attract a joint venture partner, and the cost of exploration and development, less bonus payments received on unproven properties and advance royalty payments received. Mineral interests in unproven properties are evaluated on a quarterly basis for possible impairment. Management evaluation considers all the facts and circumstances known about each property including: the results of drilling and other exploration activities to date; the desirability and likelihood that additional future exploration activities will be undertaken by the Company or by others; the land holding costs including work commitments, rental and royalty payments and other lease and claim maintenance commitments; the expiration date of the lease including any earlier dates by which notice of intent to terminate the lease must be given in order to avoid work commitments; the accessibility of the property; the ability and likelihood of joint venturing the property with others; and, if producing, the cost and revenue of continued operations. Unproven properties are considered fully or partially impaired, and are fully or partially abandoned, at the earliest of the time that: geologic mapping, surface sample assays or drilling results fail to confirm the geologic concepts involved at the time the property was acquired; a decision is made not to perform the work commitments or to make the lease payments required to retain the property; the Company discontinues its efforts to find a joint venture partner to fund exploration activities and has decided not to fund those costs itself; or the time the property interest terminates by contract or by operation of law. F-10 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Summary of Accounting Policies Property, Plant & Equipment Property, plant, and equipment are stated at cost. Depreciation on mining assets is provided by the units of production method by reference to the ratio of units produced to total estimated production (proven and probable reserves). Depreciation on non-mining assets is provided by the straight-line method over the estimated service lives of the respective assets, ranging from 2 to 20 years. Stock-based Compensation The value of stock based awards is determined using the intrinsic value method whereby compensation costs is the excess of the quoted market prices of the stock at grant date and other measurement date over the amount an employee must pay to acquire the stock. In 1996 the Company adopted, for footnote disclosure purposes only, SFAS No. 123, "Accounting for Stock-Based Compensation," which requires that companies measure the cost of stock-based employee compensation at the grant date based on the fair value of the stock option and recognize this cost over the service period. Revenue Recognition Sales revenue is recognized upon the production of precious metals having a fixed monetary value. Precious metal inventories are recorded at estimated net realizable value, except in cases where there is no immediate marketability at a quoted market price, in which case they are recorded at the lower of cost or net realizable value. Gains on the sale of mineral interests includes the excess of the net proceeds from sales over the Company's net book value in that property. In situations where a non-producing mineral interest is exchanged for a producing mineral interest, the gain or loss is the difference between the net book value of the exchanged property and the fair market value of the exchanged property or the property received, whichever fair market value is more clearly determinable. Generative exploration program fees, received as part of an agreement whereby a third party agrees to fund a generative exploration program in connection with mineral deposits in areas not previously recognized as containing mineralization in exchange for the right to enter into a joint venture in the future to further explore or develop specifically identified prospects, are recognized as revenue in the period earned. F-11 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Summary of Accounting Policies Bonus payments on proven properties, received as an incentive to enter into a joint exploration and development agreement, are recognized as revenue when received. For unproven properties, bonus payments received are first applied as a reduction of the cost basis of the property with any excess being recognized as revenue. Foreign Currency Translation The Company accounts for foreign currency translation in accordance with the provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS No. 52"). The assets and liabilities of the Company's foreign subsidiary are translated at the rate of exchange in effect at the balance sheet date. Income and expenses are translated using the weighted average rates of exchange prevailing during the period which the foreign subsidiary was owned. The related translation adjustments are reflected in the accumulated translation adjustment section of shareholders' equity. Earnings Per Share The primary earnings per common share was computed by dividing the net income or loss by the weighted average number of common stock shares outstanding for each period presented. Shares issuable upon exercise of outstanding stock options and warrants have been excluded from the computation as their effect on earnings per share would be anti-dilutive in 1997 and would be less than 3% in 1996. Environmental and Reclamation Costs The Company currently has no active reclamation projects, but expenditures relating to ongoing environmental and reclamation programs would either be expensed as incurred or capitalized and depreciated depending on the status of the related mineral property and their future economic benefits. The recording of provisions generally commences when a reasonably definitive estimate of cost and remaining project life can be determined. Income Taxes The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred income taxes to provide for temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred taxes are measured using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. F-12 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Summary of Accounting Policies Concentration of Credit Risk The Company sells most of its precious metal production to one customer. However, due to the nature of the precious metals market, the Company is not dependent upon this significant customer to provide a market for its products. Although the Company could be directly affected by weakness in the precious metals processing business, the Company monitors the financial condition of its significant customer and considers the risk of loss to be remote. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The carrying amount reported in the balance sheets for cash and cash equivalents, certificates of deposit, accounts receivables, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximates its carrying value as the stated or discount rates of the debt reflect recent market conditions. New Accounting Pronouncements Statements of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") issued by the Financial Accounting Standards Board ("FASB") is effective for financial statements with fiscal years beginning after December 15, 1997. The new standard simplifies guidelines regarding the calculation and presentation of earnings per share. The Company does not expect adoption to have a material effect on the presentation of its results of operations. Reclassifications Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 presentation. F-13 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Financial Condition, Liquidity, and Going Concern Fischer-Watt incurred a net loss of $3,378,000 in fiscal 1997, has an accumulated deficit of $8,058,000, has a net working capital deficiency of $1,038,000, and continues to experience negative cash flows from operations. The Company did report net income in fiscal 1996, however this was principally the result of realized gains on the sale or exchange of non-producing mineral properties. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management believes that as the El Limon gold property held by Oronorte is further developed and production levels increase, sufficient cash flows will exist to fund the Company's mining operations and exploration and development efforts in other areas. Management anticipates achieving levels of production sufficient to fund the Company's operating needs by the end of fiscal 1998, and until then will fund operations with cash raised from future equity or debt financings, the anticipated exercise of common stock warrants expiring in August 1997 (see Note 9), and dispositions of or joint ventures with respect to mineral properties. Expenditures for exploration projects may also be reduced if necessary. The ability of the Company to achieve its operating goals and thus positive cash flows from operations is dependent upon the future market price of gold, future capital raising efforts, and the ability to achieve future operating efficiencies anticipated with increased production levels. Management's plans will require additional financing, reduced exploration activity or disposition of or joint ventures with respect to mineral properties. While the Company has been successful in these capital raising endeavors in the past, there can be no assurance that its future efforts and anticipated operating improvements will be successful. 2. Business Combinations (a.) Acquisition of Greenstone Resources of Colombia Ltd.("GRC") Effective August 24, 1995, the Company acquired all of the outstanding shares of GRC, a company incorporated under the laws of Bermuda, by exchanging the Company's net interest in Minerales de Copan, S.A. de C.V., valued at $885,000, assuming a note payable to the seller for $300,000 (see Note 6), and incurring acquisition and organization costs of $72,000. This acquisition was accounted for as a purchase and the assets and liabilities of GRC were adjusted based on their estimated fair market values as of August 24, 1995. Operating results were F-14 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements recorded beginning on August 24, 1995. Subsequent to the acquisition, GRC changed its name to Donna Ltd. ("Donna"). Donna owns 94.9% of the issued and outstanding common shares of Compania Minera Oronorte S.A. ("Oronorte"), a company incorporated under the laws of Colombia, and the Company owns 5.1% of the Oronorte shares. (b). Acquisition of Great Basin Management Co., Inc. ("GBM") On January 29, 1996, the Company acquired 100% of the issued and outstanding common shares of GBM and its wholly owned subsidiary, Great Basin Exploration and Mining Company, Inc. ("GBEM"), a mineral exploration Company. The GBM shares were purchased in exchange for 4,125,660 shares of the Company's common stock having an estimated fair market value at the date of exchange of $1,234,000. These shares issued by the Company were restricted as to trading until January 1997. (c). Unaudited Pro Forma Information The following unaudited pro forma information has been prepared on the basis that the acquisitions of GRC and GBM had both occurred at the beginning of fiscal 1996. The unaudited pro forma information includes adjustments to depreciation and depletion expense based on the allocation of the purchase price to the property, plant, equipment and mineral interests acquired. Year ended January 31, 1996 - -------------------------------------------------------------------------------- Sales of precious metals $ 3,342,000 Net income $ (321,000) Net earnings per common share $ (.01) ================================================================================ F-15 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements 3. Accounts Receivable Accounts receivable consist of: January 31, 1997 - -------------------------------------------------------------------------------- Trade $ 179,000 Other 81,000 - -------------------------------------------------------------------------------- Total accounts receivable $ 260,000 ================================================================================ 4. Inventories Inventories consist of: 1997 - -------------------------------------------------------------------------------- Finished products and products in process $ 412,000 Supplies, materials and spare parts 565,000 - -------------------------------------------------------------------------------- Total inventories $ 977,000 - -------------------------------------------------------------------------------- 5. Mineral Interests Capitalized costs for mineral interests consist of: January 31, 1997 - -------------------------------------------------------------------------------- Operating mining property: El Limon Mine, Oronorte District $ 1,436,000 Less accumulated depletion 245,000 - -------------------------------------------------------------------------------- 1,191,000 - -------------------------------------------------------------------------------- Non-operating properties, net of reserves: El Carmen, Colombia 451,000 La Aurora, Colombia 278,000 Juan Vara, Colombia 145,000 El Veinte, Colombia 1,000 F-16 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements January 31, 1997 - -------------------------------------------------------------------------------- Kobeh, Nevada 67,000 Coal Canyon, Nevada 597,000 Red Canyon, Nevada 334,000 Tempo, Nevada 50,000 Oatman, Arizona 10,000 Modoc, California 73,000 Sacramento Mountains, California 147,000 Nevada Regional 1,000 Castle, Nevada 728,000 Water Canyon, Nevada 13,000 Amador, Nevada 10,000 - -------------------------------------------------------------------------------- Total mineral interests $ 4,096,000 ================================================================================ 6. Notes Payable Pursuant to agreements among Greenstone Resources Ltd. ("Greenstone"), Dual Resources Ltd. ("Dual"), and the Company, Greenstone made a payment of $300,000 to Dual in August 1995 to acquire 2,800,000 shares of Oronorte common stock for the benefit of the Company. The Company's obligation to repay Greenstone this $300,000 is evidenced by a note payable which bears interest at the rate of 10% per annum. This note became payable, in full, on June 20, 1996 at which time the Company withheld payment while negotiating the settlement of amounts owed to the Company by Greenstone (see Note 13). The Company has a note payable of $100,000 to Serem Gatro, the previous owner of GBEM. The note bears interest at 8% and is currently past due. Accrued interest as of January 31, 1997 was $10,000. Subsequent to year end the Company negotiated a settlement agreement with Serem Gatro. Pending the closing of the agreement, the principal and accrued interest will be canceled in exchange for 185,624 shares of the Company's common stock. The Company has a $500,000 line of credit with a bank. Advances under this line, which totaled $428,000 at December 31, 1996, accrue interest at rates from 26% F-17 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements to 39% and are collateralized by a $525,000 certificate of deposit which bears interest at 3.9%. The Company has a $129,000 note payable to a bank at December 31, 1996. The note bears interest at the legal Colombian rate (DTF) plus 10 points (38.32% at January 31, 1997), requires interest to be paid quarterly, and is collateralized by a building. The Company also has other notes payable of $12,000. The Company delivered to Kennecott Exploration Company, a shareholder of the Company, a promissory note in the amount of $700,000, which bears interest at an annual interest rate equal to the prime or base rate, or legal rate, if less. The note was issued in connection with the acquisition of mineral interests. Principal and interest are due in cash on September 30, 1998 or, at the option of the Company, by issuance of 1,000,000 (one million) shares of the Company's common stock. Accrued interest at January 31, 1997 was $19,000. The Company's option to issue shares in satisfaction of this debt is subject to a limitation that Kennecott's ownership of Fischer-Watt cannot exceed 10% of the outstanding voting common stock. 7. Pension Benefits The Company participates in an employee 401(k) plan, which was set up for the benefit of substantially all domestic employees. To be eligible, an employee must be at least 21 years old. Participants may elect to defer 1% to 15% of eligible compensation of a pre-tax basis. The Company can also elect to make contributions to the plan, the amount being completely at the discretion of the Company. No contributions were made in 1996 or 1997. 8. Shareholders' Equity On March 12, 1996 the Company completed a $5 million foreign offering of common stock pursuant to Regulation "S". This offering consisted of the sale of 4,980,000 units at $1.06 per unit. Each unit was composed of two shares of Fischer-Watt common stock and one share purchase warrant. Each of these warrants entitles the holder to purchase one additional share of Fischer-Watt common stock at an exercise price of $.75 through February 28, 1998. These securities were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The funds raised were used to finance capital F-18 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements equipment and working capital needs for further development and expansion of Fischer-Watt's gold mining operation in Colombia and its exploration and development activities in Colombia and Nevada. As part of this offering, 680,000 units were sold under a subscription agreement and the collected proceeds of $721,000 are classified as capital stock subscribed within the Company shareholders' equity accounts. As of January 31, 1997, none of the 680,000 shares had been issued. Subsequent to January 31, 1997, the Company issued 100,000 common shares in exchange for professional services rendered. The shares had an estimated fair market value of $53,000. In April 1997, the Company completed a private placement to accredited investors located in the United States pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "1933 Act"). The estimated net proceeds from this offering of $442,000 are to finance the Company's working capital requirements and needs related to further development, expansion, and exploration of mining properties. This Regulation D offering consisted of the sale of 459,000 units at $1.06 per unit. Each unit was composed of two shares of Fischer-Watt common stock and one share purchase warrant. Each of these warrants entitles the holder to purchase one additional share of Fischer-Watt common stock at an exercise price of $.75 through February 28, 1999. These securities were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 9. Common Stock Options and Warrants In May 1987, the board of directors approved a nonqualified stock option plan. Two officers, four employees and one independent contractor were granted options to purchase a total of 710,000 shares of common stock at $1.50 per share (fair market value at date of grant). These options vest at rates ranging from 2,000 to 5,000 shares per month per individual and become exercisable six months after vesting. These options expire 10 years after they become exercisable. At January 31, 1997, options on 706,000 shares had vested and were exercisable. In October 1991, three officers and three employees were granted options to purchase a total of 504,000 shares of common stock at $1.15 per share (fair market value at the date of grant). Options on 74,000 shares vested immediately F-19 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements and the remainder vest at rates ranging from 2,000 to 4,000 shares per month, and become exercisable six months after vesting. These options expire 10 years after they become exercisable. At January 31, 1997, options on 382,000 shares had vested and were exercisable. In July 1993, two officers and four employees were granted options to purchase a total of 600,000 shares of common stock at $.50 per share (fair market value at the date of grant). These options vest at the rate of 2,000 shares per month per employee and become exercisable six months after vesting. These options expire 10 years after they become exercisable. Options granted on 450,000 of the 600,000 shares were later canceled pursuant to employee settlement agreements. At January 31, 1997, options on 136,000 shares had vested and options on 124,000 shares were exercisable. In conjunction with an employment contract effective September 1, 1993, with an officer and director, options were granted on 500,000 shares of common stock at $.20 per share (fair market value at date of grant). These options vest at the rate of 20,000 shares per month and become exercisable six months after vesting. These options expire 10 years after they become exercisable. At January 31, 1997, options on 500,000 shares had vested and were exercisable. In October 1993, two officers and four employees were granted options to purchase a total of 450,000 shares of common stock at $.17 per share (fair market value at date of grant). These options vested immediately and became exercisable six months after vesting. The options expire in April 2004. At January 31, 1997, options on 450,000 shares had vested and were exercisable. In April and July 1994, two directors were each granted options to purchase 100,000 shares of common stock at $.08 and $.05 per share (fair market value at time of grant), respectively in an agreement separate from the Company's nonqualified stock option plan. These options vest after approximately one year of service as a director and become exercisable upon vesting. These options expire five years after they become exercisable. At January 31, 1997, options on all 200,000 shares had vested or were exercisable. On June 1, 1995, two directors and two consultants were each granted options to purchase a total of 525,000 shares of common stock at $.0625 per share (fair market value at time of grant) in an agreement separate from the Company's F-20 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements nonqualified stock option plan. These options became exercisable on June 1, 1996 and expire five years after they become exercisable. At January 31, 1997, options on all 525,000 shares had been vested or were exercisable. Pursuant to the November 1995 private placement, the Company issued warrants to purchase 3,033,750 shares of common stock at $.30 per share on or before August 1997. On February 20, 1996, two consultants were each granted options to purchase a total of 200,000 shares of common stock at $.37 per share (fair market value at the time of grant) in an agreement separate from the Company's nonqualified stock option plan. These options become exercisable on February 20, 1997 and expire five years after they become exercisable. At January 31, 1997, options on 200,000 shares had vested and none were exercisable. On June 1, 1996, two directors were granted options to purchase a total of 200,000 shares of common stock at $.72 per share (fair market value at the time of grant) in an agreement separate from the Company's nonqualified stock option plan. These options become exercisable on June 1, 1997 and expire five years after they become exercisable. At January 31, 1997, options on 200,000 shares had vested and none were exercisable. On November 1, 1996, a former employee and an officer were granted options to purchase 50,000 and 100,000 shares, respectively, of common stock at $.56 per share (fair market value at the time of grant) in an agreement separate from the Company's nonqualified stock option plan. These options become exercisable on November 1, 1997 and expire on November 1, 2002. At January 31, 1997, options on 150,000 shares had vested and none were exercisable. On February 1, 1997, an officer was granted options to purchase 100,000 shares of common stock at $.53 per share (fair market value at the time of grant). These options become exercisable on March 1, 1998 and expire five years after they become exercisable. The Company has reserved 300,000 common shares for issuance upon exercise of ten Warrants issued in January 1996 and 1997 in consideration for investment banking and promotional services as follows: 100,000 common shares are reserved for F-21 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements issuance upon exercise of warrant's issued on January 10, 1996 exercisable at $.28 per share (fair market value at time of grant) prior to January 10, 2000. 100,000 shares are reserved for issuance upon exercise of warrants issued on January 10, 1996, exercisable at $.31 per share at any time prior to January 10, 2001. The remaining 100,000 shares are reserved for issuance upon exercise of warrants issued on January 14, 1997, exercisable at $.41 per share at any time prior to January 14, 2001. 10. Stock-based Compensation Plans The Company accounts for stock-based compensation plans by applying APB Opinion #25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options approximates the market price of the underlying stock at the date of grant, no compensation cost is recognized. The Company's plan states that the exercise price of each option will be granted at an amount that equals the market value at the date of grant. All options vest at a time determined at the discretion of the Company's Board of Directors. All options, expire if not exercised within 10 years from the date of grant, unless stated otherwise by the Board of Directors upon issuance. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS 123. The fair value of the option grants is estimated on the date of grant utilizing the Black-Scholes option pricing model with the following weighted average assumptions for grants in 1996 and 1997, respectively: expected life of options of 6 years and 6 years, expected volatility of 30% and 30%, risk-free interest rates of 5.98% and 5.73% and no dividend yield. The weighted average fair value at the date of grant for options granted during 1996 and 1997 approximated $0.01 and $0.09 per option. Under the provisions of SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated below: F-22 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements January 31, 1997 1996 - -------------------------------------------------------------------------------- Net income (loss) As reported $ (3,378,000) $ 1,031,000 Pro forma $ (3,439,000) $ 1,026,000 Primary earnings (loss) per share As reported $ (0.11) $ 0.07 Pro forma $ (0.11) $ 0.07 ================================================================================ The following table summarizes the stock option activity: Stock Weighted-average Options Price per Share - -------------------------------------------------------------------------------- Outstanding at February 1, 1995 2,374,000 $ 0.74 Granted 525,000 0.06 - -------------------------------------------------------------------------------- Outstanding at January 31, 1996 2,899,000 0.62 Granted 550,000 0.55 - -------------------------------------------------------------------------------- Outstanding at January 31, 1997 3,449,000 $ 0.61 ================================================================================ F-23 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table summarizes information about fixed-price stock options : Outstanding at January 31, 1997: Options Outstanding Options Exercisable ------------------------ -------------------------- Weighted- Weighted- Weighted- Average Average Average Range of Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - -------------------------------------------------------------------------------- $ 0.05-$0.08 725,000 3.9 years $ 0.06 725,000 $ 0.06 $0.17 450,000 6.8 0.17 450,000 0.17 $0.20 500,000 7.6 0.20 500,000 0.20 $0.37 200,000 4.8 0.37 - - $ 0.50-$0.56 286,000 6.5 0.53 124,000 0.50 $0.72 200,000 5.2 0.72 - - $1.15 382,000 6.3 1.15 382,000 1.15 $1.50 706,000 2.6 1.50 706,000 1.50 - -------------------------------------------------------------------------------- $ 0.50-$1.50 3,449,000 5.7 years $ 0.61 2,887,000 $ 0.62 ================================================================================ The Company accounts for transactions with individuals other than employees in which goods or services are the consideration received for the issuance of equity instruments in accordance with the provisions of SFAS 123, based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. 11. Income Taxes The components of net income (loss) before taxes for the Company's domestic and foreign operations were as follows: January 31, 1997 1996 - -------------------------------------------------------------------------------- Domestic $ (1,815,000) $ 1,123,000 Foreign (1,361,000) 1,000 - -------------------------------------------------------------------------------- Net income (loss) before taxes $ (3,176,000) $ 1,124,000 ================================================================================ F-24 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements The consolidated tax provision is comprised of the following: January 31, 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $ - $ 16,000 State 1,000 77,000 Foreign 201,000 - - -------------------------------------------------------------------------------- Tax Provision $ 202,000 $ 93,000 ================================================================================ The difference between the federal statutory tax rate and the effective tax rate on net income before taxes is as follows: January 31, 1997 1996 - -------------------------------------------------------------------------------- Federal statutory rate (34.0)% 34.0% Utilization of tax loss carry forwards - (34.0) Increase in net deferred tax asset valuation allowance 34.0 - Alternative minimum tax - 1.4 State income taxes 0.1 6.9 Other - 2.1 - -------------------------------------------------------------------------------- 0.1% 10.4% ================================================================================ The Company has regular federal tax loss carryforwards of approximately $5.8 million and federal alternative minimum tax loss carryforwards of approximately $5.9 million at January 31, 1997 which expire from 2003 to 2011. Temporary differences between taxable income reported on the Company's federal tax return and net income reflected in the accompanying statements of operations result primarily from the capitalization of mine exploration and development costs for financial reporting purposes and deducting those costs for tax F-25 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements reporting purposes, partially offset by a lack of tax basis in properties sold, traded or abandoned. Additional temporary differences related to depreciation, mineral interest write-downs and non-deductible accruals exist. The tax effect of each of these temporary differences and net operating loss carryforwards, totaling $1.8 million and $2.6 million for the years ended January 31, 1996 and 1997, are entirely offset by a valuation allowance as management does not believe the Company has met the "more likely than not" standard imposed by FAS 109 to allow recognition of a net deferred tax asset. 12. Transactions with Related Parties Peter Bojtos became a director and officer of the Company on April 24, 1996. Mr. Bojtos had been engaged on August 25, 1995 by the Company, on a non-exclusive basis, as an independent contractor to raise funds for the Company in the form of issuance of restricted common stock and warrants to purchase additional shares. He was compensated in cash at the rate of 10% of the net amount raised and was paid $81,000 for those services. Mr. Bojtos purchased 180,000 units of that offering under the same terms and conditions as the other subscribers which consisted of 360,000 shares of restricted common stock and warrants to purchase an additional 180,000 shares at any date prior to August 31, 1997 for $.30 per share. Lynn Bojtos, wife of Peter Bojtos, purchased an additional 170,000 shares, under these same terms and conditions. In March of 1996, he was again engaged to raise funds for the Company. The Company completed a $5 million foreign offering outside the United States pursuant to Regulation "S". Mr. Bojtos was paid $132,000 for his services in connection with this offering. On May 21, 1996, Mr. Bojtos was granted for services to the Company an option to purchase 100,000 shares of common stock of the Corporation after February 20, 1997 at an exercise price of $.37 per share. Anthony P. Taylor, an officer and director of the Company since June 1994, and an officer, director and major shareholder of GBM when the Company acquired GBM through a merger that was completed on January 29, 1996 (see Note 2). As a result of the merger, Dr. Taylor received 1,541,694 shares of restricted Fischer-Watt common stock in exchange for his shares of GBM. Following the merger of GBM with the Company, Dr. Taylor served as the Company's Vice President, Exploration until September 16, 1996. Dr. Taylor received a Company vehicle with an estimated fair market value of $23,375, less debt assumed of F-26 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements $15,638 during fiscal 1997. Dr. Taylor received compensation as a consulting geologist of $13,200 in fiscal 1997. In addition, for his services as a Director, Dr. Taylor received options to purchase 200,000 shares of common stock of the Company at an exercise prices of $.0625 and $.72 per share. Michele Wood, an officer of the Company since November 1, 1996 received compensation of $51,125 for financial consulting services in fiscal 1997. In addition, Ms. Wood received an option to purchase 100,000 shares of common stock at an exercise price of $.56 per share. Kennecott Exploration Company, who owns 3,048,000 shares of the Company's common stock, loaned the Company $500,000 in March 1992. Kennecott had a joint venture with the Company on the Minas de Oro property in Honduras. In May 1995, both Kennecott and the Company sold their interests in the Minas de Oro property to a third party. In connection with that sale, Fischer-Watt received $150,000 and the $500,000 debt and accrued interest owed to Kennecott was canceled. A $641,000 gain on the sale of this property was recorded on the fiscal 1996 statement of operations. The Company delivered to Kennecott Exploration Company a convertible promissory note in the amount of $700,000 (see Note 6). On June 5, 1996, James M. Seed was appointed a director of the Company. Prior to becoming a director, Mr. Seed and several entities affiliated with Mr. Seed purchased 333,400 shares of an offering of restricted common stock and warrants under the same terms and conditions as the other subscribers (see Note 8). Jorge E. Ordonez became a Director of the Company on June 5, 1996 replacing Mr. Buchanan. Mr. Ordonez has numerous interests and is a director of Hecla Mining Company, which is also in the business of mining precious metals. Mr. Ordonez is a principal shareholder in Minera Montoro S.A. de C.V. ("Montoro"), a Mexican corporation. The Company holds a 65% interest in Montoro. During the past two fiscal years no significant or material transactions have occurred between the Company and Montoro. F-27 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements 13. Commitments and Contingencies Upon the purchase of GRC (see Note 2) the Company assumed GRC's liabilities related to transactions governed by Colombian law concerning the movement of foreign currency into and out of Colombia. The Colombian government has the right to request an audit of foreign currency movement within a two year time frame. No request or notice of an audit has been received from the Colombian government to date. Therefore, the likelihood of a loss resulting from the actions of GRC prior to the Company's purchase cannot presently be determined. In connection with the purchase of GRC, Greenstone Resources Canada Ltd. ("Greenstone") agreed to reimburse the Company for certain liabilities existing at the date of purchase in excess of $1,000,000. Subject to final assessment of liabilities and GRC's right to offset certain assets against liabilities, the Company estimates this excess of liabilities to be $309,000. Management is demanding Greenstone to fund its share of these excess liabilities in accordance with the terms of the purchase agreement and, however no receivable from Greenstone has been accrued as of January 31, 1997. Oronorte is currently the defendant in several claims relating to labor contracts and employee terminations which occurred during a labor strike. This strike and the resulting terminations took place during the former ownership of Oronorte. The estimated amount of the claims against Oronorte totals approximately $200,000. The Company is currently seeking to recover this estimated amount of the claims from Greenstone in connection with the excess liabilities discussed above. The Company's property interests require minimum payments to be made, or work commitments to be satisfied, to maintain ownership of the property not in production. However, all of these payments may be avoided by timely forfeiture of the related property interest. If the joint venture partner, or the Company, fails to meet these commitments, the Company could lose its rights to explore, develop or mine the property. F-28 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements The table below lists the various properties and the required financial commitments for the year ending January 31, 1998. Work Joint Company Lease Commit- Venture Net Property Payments ment Total Share Cost - -------------------------------------------------------------------------------- Amador $ 5,000 $ - $ 5,000 $ - $ 5,000 America 48,000 100,000 148,000 148,000 - Castle 5,400 - 5,400 - 5,400 Coal Canyon 29,400 200,000 229,400 - 229,400 Kobeh 17,700 - 17,700 - 17,700 Modoc 20,000 - 20,000 20,000 - Oatman 200 - 200 200 - Red Canyon 74,500 - 74,500 74,500 - Sacramento 46,400 15,000 61,400 - 61,400 Tempo 118,500 200,000 318,500 318,500 - Tuscarora - 2,000 2,000 2,000 - Water Canyon 6,200 - 6,200 - 6,200 Other 3,000 - 3,000 - 3,000 - -------------------------------------------------------------------------------- Totals $ 374,300 $ 517,000 $ 891,300 $ 563,200 $ 328,100 ================================================================================ F-29 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements 14. Supplemental Disclosure of Cash Flow Information Cash paid for interest during the fiscal years ended January 31, 1997 and 1996 was $106,000 and $54,000. Cash paid for income taxes during the years ended January 31, 1997 and 1996 was $42,000 and $4,000. Non-cash investing and financing activities were as follows: January 31, 1997 1996 - -------------------------------------------------------------------------------- Note payable issued for mineral property $ 700,000 $ - Stock issued for mineral property $ 50,000 $ 50,000 Debt assumed by buyer in connection with disposal of mineral interest $ - $ 541,817 - -------------------------------------------------------------------------------- The net change in assets and liabilities due to the acquisition of subsidiaries during the fiscal year ended January 31, 1996 was comprised of the following: Great Basin Management Company, Donna Ltd. Inc. Total - -------------------------------------------------------------------------------- Value of consideration $ 1,000,000 $ - $ 1,000,000 Value of stock issued - 1,234,000 1,234,000 Net debt assumed 185,000 - 185,000 Capitalized acquisition costs 72,000 - 72,000 Assets acquired Working capital, other than cash (1,065,000) (39,000) (1,104,000) Property, plant and equipment (2,931,000) (1,579,000) (4,510,000) Liabilities assumed Current liabilities 2,443,000 239,000 2,682,000 Long-term debt 300,000 148,000 448,000 - -------------------------------------------------------------------------------- F-30 - -------------------------------------------------------------------------------- Fischer-Watt Gold Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements Great Basin Management Company, Donna Ltd. Inc. Total - -------------------------------------------------------------------------------- Cash acquired 4,000 3,000 7,000 Less elimination of intercompany debt (300,000) (124,000) (424,000) Less cash paid for acquisition (72,000) - (72,000) - -------------------------------------------------------------------------------- Net change in assets and liabilities due to acquisition of subsidiaries $ (368,000) $ (121,000) $ (489,000) ================================================================================ 15. Segment information The following table summarizes certain selected financial information of the Company's balance sheet and operating results, on a geographical segment basis:
Great Basin Management Donna Ltd. Company, Inc. (Colombia) (Nevada) Other Consolidated - -------------------------------------------------------------------------------------------- Year ended January 31, 1997 Sales $ 4,390,000 $ - $ - $4,390,000 Operating income (loss) $ 372,000 $ - $ - $ 372,000 Total Assets $ 5,931,000 $1,781,000 $1,364,000 $9,076,000 Depreciation and depletion expense $ 458,000 $ - $ 4,000 $ 462,000 Capital expenditures $ 1,634,000 $ 179,000 $ 792,000 $2,605,000 - ------------------------------------------------------------------------------------------- Year ended January 31, 1996 Sales $ 1,378,000 $ - $ - $1,378,000 Operating income (loss) $ (100,000) $ - $ - $ (100,000) Total Assets $ 2,534,000 $1,645,000 $2,338,000 $6,517,000 Depreciation and depletion expense $ 257,000 $ - $ 2,000 $ 259,000 Capital expenditures $ 349,000 $ - $ 91,000 $ 440,000 ===========================================================================================
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