As
filed with the Securities and Exchange Commission on April 30 ,
2010
Registration
No. 333 165866
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment no. 1
to
Form
S-4
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
Capital
Gold Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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1040
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13-3180530
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
No.)
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76
Beaver Street, 14th
Floor
New
York, New York 10005
(212)
344-2785
(Address, including zip code, and
telephone number, including area code, of registrant’s principal executive
offices)
John
Brownlie
President
and Chief Operating Officer
Capital
Gold Corporation
76
Beaver Street, 14th Floor
New
York, New York 10005
(212)
344-2785
(212)
344-4537 — Facsimile
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
|
Barry
I. Grossman, Esq.
Sarah
E. Williams, Esq.
Kathleen
L. Cerveny, Esq.
Ellenoff
Grossman & Schole LLP
150
East 42nd Street
New
York, NY 10017
(212)
370-1300
(212)
370-7889 — Facsimile
|
Jonathan
H. Gardner, Esq.
Kavinoky
Cook LLP
726
Exchange Street, Suite 800
Buffalo,
New York 14210
(716)
845-6000
(716)
845-6474 – Facsimile
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Approximate
date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective and all other
conditions to the transactions contemplated by the Business Combination
Agreement described in the included proxy statement/prospectus have been
satisfied or waived.
If the
securities being registered on this form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box: ¨
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Smaller
reporting company ¨
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(Do
not check if a smaller reporting
company)
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|||
If
applicable, place an X in the box to designate the appropriate rule provision
relied upon in conducting this transaction:
o Exchange Act Rule
13e-4(i) (Cross-Border Issuer Tender Offer)
o Exchange Act Rule
14d-1(d) (Cross-Border Third-Party Tender Offer)
CALCULATION
OF REGISTRATION FEE
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Proposed
Maximum
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Proposed
Maximum
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Amount
of
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||||||||||||||
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Title
of Each Class of
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Amount
to be
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Offering
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Aggregate
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Registration
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||||||||||||
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Securities to be
Registered
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Registered(1)
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Price Per Security
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Offering Price
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Fee(2)
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||||||||||||
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Shares
of common stock, par value $0.0001 per share
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12,099,135 | $ | 3.335 | (3) | $ | 40,350,616 | $ | 2,877.00 | ||||||||
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Shares
of common stock underlying Warrants exercisable for one share of common
stock par value $0.0001 per share
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4,830,938 | $ | 5.15 | (4) | $ | 24,879,331 | $ | 1,773.90 | ||||||||
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Shares
of common stock underlying Options exercisable for one share of common
stock par value $0.0001 per share
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1,218,403 | $ | 4.77 | (4) | $ | 5,811,783 | $ | 414.39 | ||||||||
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Total
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18,148,476 | — | $ | 71,041,730 | $ | 5,065.29 | (5) | |||||||||
(1) In
accordance with Rule 416, shares of common stock offered hereby shall also be
deemed to cover additional securities to be offered or issued to prevent
dilution pursuant to stock splits, stock dividends or similar
transactions.
(2) Determined
in accordance with Section 6(b) of the Securities Act at a rate equal to $71.30
per $1,000,000 of the proposed maximum aggregate offering price.
(3) Estimated
pursuant to Rule 457(f)(1) solely for the purpose of computing the amount of the
registration fee, based on the average of the high and low prices of the shares
of common stock, par value $0.0001 per share, Capital Gold Corporation on the
NYSE AMEX on March 29, 2010.
(4) Represents
average exercise price of the Warrants or Options, as applicable.
(5) Previously
Paid
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further Amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the SEC, acting pursuant to said Section 8(a),
may determine.
 |
 |
PROPOSED
BUSINESS COMBINATION – YOUR VOTE IS VERY IMPORTANT
To the
Stockholders of Capital Gold Corporation and Nayarit Gold Inc:
The
Boards of Directors of Capital Gold Corporation (“Capital Gold”) and Nayarit
Gold Inc. (“Nayarit”) each have unanimously approved a business
combination agreement, including the annexed amalgamation
agreement (the “Business Combination Agreement”) dated February 10,
2010 between Capital Gold and Nayarit, as amended on April 29,
2010 (the “Amendment”) pursuant to
which Nayarit will become a wholly-owned subsidiary of Capital Gold (the
“Business Combination”).
If the
Business Combination is completed, all outstanding shares of Nayarit common
stock and all outstanding warrants and options to purchase Nayarit common stock
will be converted into the right to receive shares of Capital Gold common stock
and options to purchase Capital Gold common stock, respectively. Each
outstanding share of Nayarit common stock will be converted into the right to
receive 0.134048 shares of Capital Gold common stock, with cash to be paid in
lieu of any fractional share. Based on the number of shares of
Nayarit common stock outstanding on February 10, 2010, Capital Gold expects to
issue approximately 12,099,135 shares of its common stock in the Business
Combination to Nayarit's current stockholders and to reserve for issuance an
additional approximately 4,830,938 and 1,218,403 shares of Capital Gold common
stock upon the exercise of former Nayarit warrants and options,
respectively. Based on the number of outstanding shares of Nayarit
common stock and Capital Gold common stock, after the merger, the current
stockholders of Nayarit would own approximately 19.97% of Capital Gold on a
non-diluted basis.
Capital
Gold common stock is listed on the NYSE AMEX under the symbol “CGC” and closed
at $3.52 per share on February 10, 2010, the trading day prior to the
announcement of the execution of the Business Combination Agreement. Capital
Gold common stock is also listed on the Toronto Stock Exchange (the “TSX”) under
the symbol “CGC” and closed at CDN$3.73 per share on February 10,
2010. Nayarit common stock is listed on the TSX Venture Exchange (the
“TSX-V”) under the symbol “NYG” and closed at CDN$0.52 per share on February 10,
2010. If the Business Combination is completed, Nayarit’s common
shares will no longer be traded on the TSX Venture Exchange, but shares of
Capital Gold will continue to be traded on the NYSE AMEX and the
TSX.
Stockholders
of Capital Gold will be asked at a special meeting (the “Capital Gold Special
Meeting”) to approve the Business Combination Agreement and the Business
Combination, including the issuance and reservation for issuance of shares of
Capital Gold common stock in the Business Combination. The Capital
Gold Special Meeting will be held at 10 a.m on June 11, 2010 at Bayards,
One Hanover Square, New York City, New York, 10004, local
time.
Stockholders
of Nayarit will be asked at a special meeting (the “Nayarit Special Meeting”) to
approve the Business Combination Agreement and the Business
Combination. The Nayarit Special Meeting will be held at 76 Temple
Terrace, Lower Sackville, Nova Scotia, B4C 0A7 on June 11 , 2010 at 11:00
AM, local time.
This
proxy statement/prospectus provides you with detailed information about Capital
Gold, Nayarit, the proposed Business Combination and the Capital Gold Special
Meeting and the Nayarit Special Meeting. We encourage you to read and
consider carefully this joint proxy statement/prospectus in its entirety,
including annexes. For a discussion of significant matters that should be
considered before voting at the special meetings, please see the section
entitled “Risk
Factors.”
The
board of directors of Capital Gold has fixed the close of business on May 5,
2010, as the record date (the “Capital Gold Record Date”) for the determination
of stockholders entitled to notice of and to vote at the Capital Gold Special
Meeting and at any adjournment thereof. A list of stockholders as of the
Capital Gold Record Date entitled to vote at the Capital Gold Special Meeting
will be open to the examination of any Capital Gold stockholder, for any purpose
germane to the Capital Gold Special Meeting, during ordinary business hours
before the Capital Gold Special Meeting at the Capital Gold executive offices,
and at the time and place of the Capital Gold Special Meeting during the
duration of the Capital Gold Special Meeting.
The
Board of Directors of Nayarit has fixed the close of business on May 3, 2010, as
the record date (the “Nayarit Record Date”) for the determination of
stockholders entitled to notice of and to vote at the Nayarit Special Meeting
and at any adjournment thereof. A list of stockholders as of the Nayarit
Record Date entitled to vote at the Capital Gold Special Meeting will be open to
the examination of any Nayarit stockholder, for any purpose germane to the
Nayarit Special Meeting, during ordinary business hours for a period of ten
calendar days before the Nayarit Special Meeting at Nayarit’s executive offices
in Sackville, Nova Scotia, and at the time and place of the Nayarit Special
Meeting during the duration of the Nayarit Special Meeting.
Approval
of the Business Combination requires the affirmative vote of a majority of the
Capital Gold’s common stock voted at the Capital Gold Special Meeting
at which a quorum is present and the affirmative vote of a special
two-thirds majority of the Nayarit common stock voted at the Nayarit
Special Meeting. See the sections entitled “Special Meeting of Stockholders of
Capital Gold” and “Special Meeting of Stockholders of
Nayarit,” for additional information.
After
careful consideration, the respective boards of directors of each of Capital
Gold and Nayarit have unanimously approved the Business Combination Agreement,
the Amendment and the Business Combination. The respective
boards of directors of Capital Gold and Nayarit each have concluded that the
combination of the two companies may produce more value than either company
could achieve individually.
The
Board of Directors of Capital Gold recommends that its stockholders vote or give
instruction to vote “FOR”
the approval of the Business Combination Proposal to be presented at the
Capital Gold Special Meeting.
The Board
of Directors of Nayarit recommends that its stockholders vote or give
instruction to vote “FOR”
the approval of the Business Combination Proposal to be presented at the Nayarit
Special Meeting.
This
joint proxy statement/prospectus describes the proposed Business Combination in
more detail. Capital Gold and Nayarit urge you to read this entire
document carefully, including the Business Combination Agreement, which is
included as Annex I. For a discussion of risk factors you should
consider in evaluating the Business Combination, see the section entitled “Risk Factors” beginning on
page
18.
Your vote is important. Whether or not you plan to attend the
Capital Gold
Special Meeting
or the Nayarit Special
Meeting, please sign,
date and return the enclosed proxy card as soon as possible in the envelope
provided.
We
strongly support the Business Combination of Capital Gold and Nayarit and
recommend that you vote in favor of the proposals presented to you for
approval.
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John
Brownlie
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Colin
Sutherland
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President
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President
and Chief Executive Officer
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Capital
Gold Corporation
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Nayarit
Gold Inc.
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CAPITAL
GOLD CORPORATION
76
Beaver Street, 14th Floor
New
York, NY 10005
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
OF
CAPITAL GOLD CORPORATION
TO
BE HELD ON JUNE 11, 2010
To the
Stockholders of Capital Gold Corporation:
NOTICE IS HEREBY GIVEN that a
special meeting of stockholders (the “Capital Gold Special Meeting”) of Capital
Gold Corporation (“Capital Gold”), a Delaware corporation, will be held at 10 a.m.
on June 11, 2010 at Bayards, One Hanover Square, New York City, New York, 10004,
local time. You are cordially invited to attend the Capital Gold Special
Meeting, at which meeting stockholders will be asked to consider and vote upon
the following proposals, which are more fully described in the accompanying
joint proxy statement/prospectus in the section entitled, “Proposals to be Considered
by Capital
Gold
Stockholders.”
(1) The Business Combination
Proposal — to adopt the
business combination agreement, including the annexed amalgamation
agreement (the “Business Combination Agreement”) dated as of February 10,
2010 as
amended on April 29, 2010 (the “Amendment”) between Capital Gold
and Nayarit Gold Inc., an Ontario corporation (“Nayarit”) pursuant to
which Nayarit will amalgamate with a to be formed wholly-owned Ontario
subsidiary of Capital Gold and Capital Gold will issue approximately 12,099,135
shares of its common stock to stockholders of Nayarit and reserve for issuance
an additional approximately 4,830,938 and 1,218,403 shares of Capital Gold
pursuant to warrants and options, respectively, of Nayarit. As a
result of the transaction, Nayarit will become a wholly-owned subsidiary of
Capital Gold (the “Business Combination”);
(2) The Stockholder Adjournment
Proposal — to consider and vote upon the adjournment of the Capital
Gold Special Meeting to a later date or dates, if necessary, to permit further
solicitation and vote of proxies if, at the time of the Capital Gold Special
Meeting, it appears we cannot consummate the transactions contemplated by the
Business Combination Agreement and the other proposals to be considered by
stockholders (the “Stockholder Adjournment Proposal”); and
(3) Such
other procedural matters as may properly come before the Capital Gold Special
Meeting or any adjournment or postponement thereof.
After
careful consideration, the Board of Directors of Capital Gold has unanimously
approved the Business Combination Agreement the Amendment and the Business
Combination and unanimously recommends that you vote or give instruction to vote
“FOR” the Business Combination Proposal.
All
Capital Gold stockholders are cordially invited to attend the Capital Gold
Special Meeting in person. To ensure your representation at the Capital
Gold Special Meeting, however, you are urged to complete, sign, date and return
the enclosed proxy card as soon as possible. If you are a stockholder
of record of Capital Gold common stock, you may also cast your vote in person at
the Capital Gold Special Meeting. If your shares are held in an
account at a brokerage firm or bank, you must instruct your broker or bank on
how to vote your shares or, if you wish to attend the Capital Gold Special
Meeting and vote in person, you must obtain a proxy from your broker or
bank.
The
Board of Directors of Capital Gold has fixed the close of business on May 5,
2010 as the record date for the determination of stockholders entitled to notice
of and to vote at the Capital Gold Special Meeting and at any adjournment or
postponement thereof. As of the record date, there were
[ ] shares
of Capital Gold common stock issued and outstanding and entitled to vote at the
Capital Gold Special Meeting.
A
complete list of Capital Gold stockholders of record entitled to vote at the
Capital Gold Special Meeting will be available for ten days before the Special
Meeting at the principal executive offices of Capital Gold for inspector by
stockholders during ordinary business hours for any purpose germane to the
Capital Gold Special Meeting.
Your vote is
important. Please sign, date and return your proxy card as
soon as possible to make sure that your shares are represented at the Capital
Gold Special Meeting. If you are a stockholder of record of Capital Gold
common stock, you may also cast your vote in person at the Capital Gold Special
Meeting. If your shares are held in an account at a brokerage firm or
bank, you must instruct your broker or bank on how to vote your
shares.
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BY
ORDER OF THE BOARD OF DIRECTORS,
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Christopher
Chipman
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Secretary
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[ ],
2010
ALL
PROPERLY SIGNED AND DATED PROXIES THAT CAPITAL GOLD RECEIVES PRIOR TO THE VOTE
AT THE CAPITAL GOLD SPECIAL MEETING, AND THAT ARE NOT SUBSEQUENTLY REVOKED, WILL
BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS INDICATED ON THE PROXIES. ALL
PROPERLY SIGNED AND DATED PROXIES RECEIVED BY CAPITAL GOLD PRIOR TO THE VOTE AT
THE CAPITAL GOLD SPECIAL MEETING THAT DO NOT PROVIDE ANY DIRECTION AS TO HOW TO
VOTE IN REGARDS TO THE BUSINESS COMBINATION PROPOSAL WILL BE VOTED FOR APPROVAL
OF THE BUSINESS COMBINATION PROPOSAL.
NAYARIT
GOLD INC.
76 Temple
Terrace, Suite 150
Lower
Sackville, Nova Scotia
B4C
0A7
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
OF
NAYARIT GOLD INC.
TO
BE HELD ON JUNE 11, 2010
To the
Stockholders of Nayarit Gold Inc.:
NOTICE IS HEREBY GIVEN that a
special meeting of stockholders (the “Nayarit Special Meeting”) of Nayarit Gold
Inc. (“Nayarit Gold”), an Ontario corporation, will be held at 11
a.m., local time, on June 11, 2010, at 76 Temple Terrace, Lower
Sackville, Nova Scotia, B4C0A7. You are cordially invited to attend the
Nayarit Special Meeting, at which meeting stockholders will be asked to consider
and vote upon the following proposal, which is more fully described in this
proxy statement/prospectus under the heading, “Proposal to be Considered by
Nayarit
Stockholders.”
(1) The Business Combination
Proposal—to approve by special resolution the business
combination agreement (the “Business Combination Agreement”) dated as of
February 10, 2010 as
amended on April 29, 2010 (the “Amendment”) between Nayarit and
Capital Gold Corporation (“Capital Gold”) pursuant to which Nayarit will
amalgamate with a to be formed wholly-owned Ontario subsidiary of Capital Gold
and the stockholders of Nayarit and holders of other Nayarit securities will
receive securities of Capital Gold in exchange for the securities of Nayarit
that they hold as of the record date for the transaction, as more fully
described in the joint proxy statement/prospectus that accompanies this Notice
(the “Business Combination”); and
(2) Such
other procedural matters as may properly come before the Nayarit Special Meeting
or any adjournment or postponement thereof.
After
careful consideration, the Board of Directors of Nayarit has unanimously
approved the Business Combination Agreement, the Amendment and the Business
Combination and unanimously recommends that you vote or give instruction to vote
“FOR” the Business Combination Proposal.
Stockholders
of Nayarit have certain dissenters rights under the Ontario Business
Corporations Act. See “Special
Meeting of Stockholders of Nayarit – Nayarit Stockholders’ Dissenter
Rights” in the enclosed joint proxy statement/prospectus.
All
Nayarit stockholders are cordially invited to attend the Nayarit Special
Meeting in person. To ensure your representation at the Nayarit Special
Meeting, however, you are urged to complete, sign, date and return the enclosed
proxy card as soon as possible. If you are a stockholder of record of
Nayarit common stock, you may also cast your vote in person at the Nayarit
Special Meeting. If your shares are held in an account at a brokerage
firm or bank, you must instruct your broker or bank on how to vote your shares
or, if you wish to attend the Nayarit Special Meeting and vote in person, you
must obtain a proxy from your broker or bank.
The
Board of Directors of Nayarit has fixed the close of business on May 3, 2010 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Nayarit Special Meeting and at any adjournment or postponement
thereof. As of the record date, there were 91,709,665 shares of
Nayarit common stock issued and outstanding and entitled to vote at the Nayarit
Special Meeting.
Your vote is
important. Please sign, date and return your proxy card as
soon as possible to make sure that your shares are represented at the Nayarit
Special Meeting. If you are a stockholder of record of Nayarit common
stock, you may also cast your vote in person at the Nayarit Special Meeting.
If your shares are held in an account at a brokerage firm or bank, you
must instruct your broker or bank on how to vote your
shares. Registered stockholders of Nayarit have the right to
dissent with respect to the Business Combination and, if the Business
Combination becomes effective, to be paid the fair value of their shares of
Nayarit common stock in accordance with the provisions of Section 185 of the
Business Corporations Act (Ontario) (the “Ontario Act”). A dissenting
stockholder must send to Nayarit a written objection to the Business Combination
resolution which written objection must be received by the Chief Financial
Officer of Nayarit or the Chairman of the Nayarit Special Meeting before the
Nayarit Special Meeting. A Nayarit stockholder's right to dissent is
more particularly described in the accompanying joint proxy statement/prospectus
and the text of Section 185 of the Ontario Act is set forth as Annex II to the
joint proxy statement/prospectus. Failure to strictly comply with the
requirements set forth in Section 185 of the Ontario Act may result in the loss
of any right of dissent. Only registered stockholders of Nayarit are
entitled to dissent.
|
BY
ORDER OF THE BOARD OF DIRECTORS,
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|
Colin
Sutherland
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President
and Chief Executive
Officer
|
[ ],
2010
ALL
PROPERLY SIGNED AND DATED PROXIES THAT NAYARIT RECEIVES PRIOR TO THE VOTE AT THE
NAYARIT SPECIAL MEETING, AND THAT ARE NOT SUBSEQUENTLY REVOKED, WILL BE VOTED IN
ACCORDANCE WITH THE INSTRUCTIONS INDICATED ON THE PROXIES. ALL PROPERLY SIGNED
AND DATED PROXIES RECEIVED BY NAYARIT PRIOR TO THE VOTE AT THE NAYARIT SPECIAL
MEETING THAT DO NOT PROVIDE ANY DIRECTION AS TO HOW TO VOTE IN REGARDS TO THE
BUSINESS COMBINATION PROPOSAL WILL BE VOTED FOR APPROVAL OF THE BUSINES
COMBINATION PROPOSAL.
Nayarit
stockholders should return their completed proxy cards to:
Computershare
Trust Company of Canada
1969
Upper Water Street
Purdy’s
Wharf II
Suite
2008
Halifax,
Nova Scotia B3J 3R7
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The
information in this proxy statement/prospectus is not complete and may be
changed. We may not issue these securities until the
registration statement filed with the Securities and Exchange Commission
is effective. This proxy statement/prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
|
PRELIMINARY
COPY – SUBJECT TO COMPLETION, DATED April
30 , 2010
PROXY
STATEMENT/PROSPECTUS
CAPITAL
GOLD CORPORATION
AND
NAYARIT
GOLD INC.
We are
pleased to announce that the Board of Directors of Capital Gold Corporation
(“Capital Gold”) and the Board of Directors of Nayarit Gold Inc. (“Nayarit”),
have agreed to a Business Combination between Capital Gold and Nayarit
pursuant to a business combination agreement dated as of February 10, 2010,
including the annexed amalgamation agreement (the “Business Combination
Agreement”) as
amended on April 29, 2010 (the “Amendment”).
The
Business Combination Agreement is attached as Annex I to this joint proxy
statement/prospectus. We encourage you to read the Business Combination
Agreement in its entirety, including all annexes.
Pursuant
to the Business Combination Agreement, Nayarit will amalgamate with a
corporation to be organized under the Ontario Business Corporation Act (the
“Ontario Act”) as a wholly-owned subsidiary of Capital Gold and the Nayarit
stockholders will receive 12,099,135 shares of Capital Gold common stock in
exchange for all issued and outstanding shares of Nayarit common
stock. In addition, holders of Nayarit options and warrants will
receive shares of Capital Gold upon the exchange of their options and warrants
on the same basis.
Capital
Gold common stock is listed on the NYSE AMEX under the symbol “CGC” and closed
at USD$3.52 per share on February 10, 2010. Capital Gold common stock is also
listed on the Toronto Stock Exchange (the “TSX”) under the symbol “CGC” and
closed at CAD$3.73 per share on February 10, 2010. Nayarit common stock is
listed on the TSX Venture Exchange (the “TSX-V”) under the symbol “NYG” and
closed at CAD$0.52 per share on February 10, 2010.
Under
the NYSE AMEX rules, stockholder approval is required to be obtained where the
number of shares of a listed company issued or issuable in connection with an
acquisition exceeds 19.99% of the number of issued and outstanding shares of the
company on a non-diluted bases. Under the rules of the TSX,
stockholder approval is required to be obtained where the number of shares
of a listed company issued or issuable in connection with an acquisition
transaction (which includes a merger or amalgamation) exceeds 25% of the number
of shares of the company outstanding, on a non-diluted basis. Capital
Gold stockholder approval is required under the rules of both the NYSE AMEX
and the TSX for the completion of the Business Combination, as the relevant
dilution threshold described immediately above for each stock exchange will be
exceeded.
This
joint proxy statement/prospectus provides you with detailed information about
the Business Combination. You are encouraged to carefully read this
entire document and the documents annexed hereto, including the Business
Combination Agreement. You will note that sections of this joint
proxy statement/prospectus are directed specifically to the stockholders of
Capital Gold and sections of this joint proxy statement/prospectus are directed
specifically to the stockholders of Nayarit. Please pay attention to
the section headings in this document.
YOU SHOULD ALSO CAREFULLY CONSIDER
THE RISK FACTORS BEGINNING ON PAGE 18, TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
BEFORE YOU DECIDE WHETHER TO VOTE OR INSTRUCT YOUR VOTE TO BE CAST TO ADOPT THE
BUSINESS COMBINATION PROPOSALS SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
Capital
Gold and Nayarit are soliciting the enclosed proxy cards on behalf of their
respective Boards of Directors, and they will pay all costs of preparing,
assembling and mailing their respective proxy materials. In addition to
mailing out proxy materials, Capital Gold’s and Nayarit’s officers may solicit
proxies from their respective stockholders by telephone or fax, without
receiving any additional compensation for their services. Capital
Gold and Nayarit have requested brokers, banks and other fiduciaries to
forward proxy materials to the beneficial owners of their common
stock.
Neither
the Securities and Exchange Commission nor any state securities commission nor
any Province of Canada has determined if the attached proxy
statement/prospectus is truthful or complete nor has the Securities and Exchange
Commission or any state securities commission approved or disapproved the
Capital Gold Stock to be issued or issuable in the Business Combination or
determined if the information in this joint proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal
offense.
This
joint proxy statement/prospectus is dated
[ ], 2010 and
is first being mailed to the Capital Gold and Nayarit stockholders on or about
[ ],
2010.
TABLE
OF CONTENTS
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Page
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QUESTIONS
AND ANSWERS FOR ALL STOCKHOLDERS ABOUT THE BUSINESS COMBINATION
PROPOSALS
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1
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QUESTIONS
AND ANSWERS FOR CAPITAL GOLD STOCKHOLDERS
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5
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QUESTIONS
AND ANSWERS FOR NAYARIT STOCKHOLDERS
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6
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SUMMARY
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8
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Information
About The Parties To The Business Combination
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8
|
|
Capital
Gold Corporation
|
8
|
|
Nayarit
Gold, Inc.
|
8
|
|
Summary
Of The Business Combination
|
8
|
|
The
Business Combination Agreement
|
8
|
|
Risks
Associated with Capital Gold and the Business Combination
|
9
|
|
Vote
of Stockholders Required
|
9
|
|
Recommendations
of the Respective Boards of Directors
|
9
|
|
Interests
of Directors and Executive Officers
|
9
|
|
Conditions
to the Completion of the Business Combination
|
9
|
|
Completion
and Effectiveness of the Business Combination
|
10
|
|
Restrictions
on Solicitation of Alternative Transactions by Nayarit
|
10
|
|
Termination
of the Business Combination Agreement and Payment of Certain Termination
Fees
|
10
|
|
Material
U.S. Federal Income Tax Consequences of the Business
Combination
|
10
|
|
Material
Canadian Federal Income Tax Consequences
|
10
|
|
Accounting
Treatment of the Amalgamation
|
12
|
|
Nayarit
Stockholders’ Dissenter Rights
|
12
|
|
Regulatory
Approvals
|
12
|
|
Board
of Directors and Management of Capital Gold Following the Business
Combination
|
12
|
|
Reasons
for Approval of the Business Combination
|
13
|
|
SELECTED
HISTORICAL FINANCIAL INFORMATION OF CAPITAL GOLD
|
14
|
|
SELECTED
HISTORICAL FINANCIAL INFORMATION OF NAYARIT
|
15
|
|
COMPARATIVE
PER SHARE DATA
|
16
|
|
RISK
FACTORS
|
18
|
|
Risks
Related to the Business Combination and the Combined
Entity
|
18
|
|
Risks
Related to Capital Gold
|
22
|
|
Risks
Related to Ownership of Capital Gold Stock
|
27
|
|
THE
BUSINESS COMBINATION
|
30
|
|
Overview
and Structure of the Business Combination
|
30
|
|
Closing
and Effective Time of Amalgamation
|
31
|
|
Conditions
to Closing of the Amalgamation
|
31
|
|
Accounting
Treatment of the Amalgamation
|
31
|
|
Regulatory
Approvals
|
31
|
|
Representations
and Warranties of Capital Gold and Nayarit in the Business Combination
Agreement
|
33
|
|
Covenants
of the Parties
|
33
|
|
Non-Solicitation
|
33
|
|
Indemnifications
Provisions
|
34
|
|
Termination
|
34
|
|
Effect
of Termination
|
34
|
|
Break
Fee
|
35
|
|
COMPARISON
OF RIGHTS OF NAYARIT STOCKHOLDERS AND CAPITAL GOLD
STOCKHOLDERS
|
36
|
|
Authorized
Capital
|
36
|
|
Number
and Election of Directors
|
36
|
|
Removal
of Directors
|
36
|
|
Filling
Vacancies on the Board of Directors
|
36
|
|
Stockholder
Meetings and Provisions for Notices; Proxies
|
37
|
|
Quorum
and Voting by Stockholders
|
37
|
|
Stockholder
Action Without a Meeting
|
37
|
|
Amendment
of Certificate or Articles of Incorporation
|
38
|
|
Amendment
of Bylaws
|
38
|
|
Anti-Takeover
Statutes
|
38
|
|
Limitation
of Liability and Indemnification of Directors and Officers
|
39
|
i
|
Appraisal/Dissenters
Rights
|
39
|
|
Dividends
|
40
|
| DOCUMENTS INCORPORATED BY REFERENCE |
41
|
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
41
|
|
SPECIAL
MEETING OF STOCKHOLDERS OF CAPITAL GOLD
|
42
|
|
General
|
42
|
|
Date,
Time and Place
|
42
|
|
Purpose
of the Special Meeting of Stockholders
|
42
|
|
Recommendation
of Capital Gold’s Board of Directors to Stockholders
|
42
|
|
Record
Date; Who is Entitled to Vote
|
42
|
|
Quorum
and Required Vote for Stockholder Proposals
|
42
|
|
Abstentions
and Broker Non-Votes
|
43
|
|
Voting
Your Shares of Common Stock
|
43
|
|
Revoking
Your Proxy
|
43
|
|
No
Additional Matters May Be Presented at the Special Meeting
|
43
|
|
Who
Can Answer Your Questions About Voting Your Capital Gold
Shares
|
44
|
|
Appraisal
Rights
|
44
|
|
Proxy
Solicitation Costs
|
44
|
|
Vote
of Management of Capital Gold
|
44
|
|
PROPOSALS
TO BE CONSIDERED BY CAPITAL GOLD STOCKHOLDERS
|
45
|
|
The
Business Combination Proposal
|
45
|
|
General
Description of the Business Combination
|
45
|
|
Background
of the Business Combination
|
45
|
|
Capital
Gold’s Board of Directors’ Reasons for Approval of the Business
Combination
|
46
|
|
Terms
of the Business Combination Agreement
|
48
|
|
Certain
Benefits of the Directors and Officers and Others in the Business
Combination
|
48
|
|
Contact
Information for Capital Gold
|
48
|
|
Required
Vote
|
48
|
|
Recommendation
of Capital Gold’s Board of Directors
|
49
|
|
The
Stockholder Adjournment Proposal
|
50
|
|
Purpose
|
50
|
|
Consequences
if the Stockholder Adjournment Proposal is Not Approved
|
50
|
|
Required
Vote
|
50
|
|
Recommendation
of Capital Gold’s Board of Directors
|
50
|
|
SPECIAL
MEETING OF STOCKHOLDERS OF NAYARIT
|
51
|
|
General
|
51
|
|
Date,
Time and Place
|
51
|
|
Purpose
of the Special Meeting of Stockholders
|
51
|
|
Recommendation
of Nayarit’s Board of Directors to Stockholders
|
51
|
|
Nayarit
Stockholders’ Dissenter Rights
|
52
|
|
Canadian
Federal Income Tax Consequences for Holders of Nayarit Shares, Nayarit
Warrants and Nayarit Options
|
54
|
|
Certain
Material U.S. Federal Income Tax Considerations
|
56
|
|
U.S.
Information Reporting
|
57
|
|
Solicitation
of Proxies
|
57
|
|
Voting
Common Shares
|
57
|
|
Registered
Stockholders
|
58
|
|
Non-Registered/Beneficial
Stockholders
|
58
|
|
Appointment
of Proxy Holders
|
58
|
|
Revocability
of Proxies
|
58
|
|
Voting
Shares and Principal Stockholders
|
59
|
|
Additional
Information
|
59
|
|
Board
of Directors Approval
|
59
|
|
PROPOSAL
TO BE CONSIDERED BY NAYARIT STOCKHOLDERS
|
60
|
|
The
Business Combination Proposal
|
60
|
|
General
Description of the Business Combination
|
60
|
|
Background
of the Business Combination
|
61
|
|
Nayarit’s
Board of Directors’ Reasons for Approval of the Business
Combination
|
61
|
ii
|
Terms
of the Business Combination Agreement
|
63
|
|
Fairness
Opinion of Blair Franklin Capital Partners Inc.
|
63
|
|
Certain
Benefits of the Directors and Officers and Others in the Business
Combination
|
64
|
|
Required
Vote
|
64
|
|
Recommendation
of Nayarit’s Board of Directors
|
64
|
|
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
|
65
|
|
INFORMATION
ABOUT CAPITAL GOLD
|
73
|
|
Sonora,
Mexico Concessions
|
73
|
|
Properties
|
73
|
|
Other
Properties
|
80
|
|
Competition
|
80
|
|
Employees
|
80
|
|
Legal
Proceedings
|
81
|
|
Capital
Gold’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations for Years ended July 31, 2009, 2008 and
2007
|
81
|
|
Overview
|
81
|
|
Results
of Operations
|
82
|
|
Liquidity
and Capital Resources
|
87
|
|
Recently
Issued Accounting Pronouncements
|
90
|
|
Capital
Gold’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations for Six Months ended January 31,
2010
|
98
|
|
Receipt
of Technical Report for Updated Reserves at El Chanate
|
98
|
|
El
Oso Project-Saric Properties-Sonora, Mexico
|
100
|
|
Results
of Operations
|
101
|
|
Liquidity
and Capital Resources
|
105
|
|
Management
of Capital Gold
|
112
|
|
Directors
and Executive Officers
|
112
|
|
Board
Leadership Structure and Role in Risk Oversight
|
114
|
|
Committees
|
115
|
|
Corporate
Governance
|
118
|
|
Compliance
with Section 16(a) of the Exchange Act
|
118
|
|
Compensation
of Directors
|
118
|
|
Executive
Compensation of Capital Gold
|
119
|
|
Compensation
Discussion and Analysis
|
119
|
|
Compensation
Committee Report
|
133
|
|
Audit
Committee Report
|
133
|
|
Beneficial
Ownership of Capital Gold’s Securities
|
134
|
|
Interest
of Capital Gold’s Stockholders in the Transaction
|
136
|
|
Certain
Relationships and Related Transactions of Capital Gold
|
136
|
|
Description
of Securities of Capital Gold
|
136
|
|
Common
Stock
|
137
|
|
Anti-Takeover
Provisions
|
137
|
|
Transfer
Agent and Warrant Agent
|
138
|
|
Price
Range of Capital Gold Shares and Dividend Policy
|
138
|
|
INFORMATION
ABOUT NAYARIT
|
140
|
|
Name
and Incorporation
|
140
|
|
Intercorporate
Relationships
|
140
|
|
Description
of Business
|
140
|
|
Property
Description and
Location
|
140
|
|
Dividends
or Distributions
|
151
|
|
Selected
Financial Information
|
151
|
|
Nayarit’s
Management’s Discussion and Analysis of Financial Condition and Results of
Operations for the Year ended September 30, 2009
|
151
|
|
Results
of Operations
|
151
|
|
Capital
Resources
|
152
|
|
Off-Balance
Sheet Arrangements
|
152
|
|
Transactions
with Related Parties
|
152
|
iii
|
Proposed
Transactions
|
152
|
|
Critical
Accounting Estimates
|
152
|
|
Changes
in Accounting Policies and Pronouncements
|
152
|
|
Future
Accounting Changes – Canadian
GAAP
|
153
|
|
Recently
Issued Accounting Pronouncements – U.S. GAAP
|
154
|
|
Management’s
Responsibility for Financial Statements
|
155
|
|
Risks
and Uncertainties
|
155
|
|
Outstanding
Shares
|
155
|
|
Description
of Securities
|
155
|
|
Directors
and Officers
|
159
|
|
Committees
of the Board of Directors
|
161
|
|
Corporate
Cease Trade Orders or Bankruptcies
|
162
|
|
Individual
Bankruptcies
|
162
|
|
Penalties
or Sanctions
|
162
|
|
Executive
Compensation
|
162
|
|
Director
Compensation
|
168
|
|
Indebtedness
of Directors and Executive Officers
|
170
|
|
Statement
of Corporate Governance Practices
|
170
|
|
Form
58-101 – Corporate Governance Disclosure (TSX Issuers)
|
171
|
|
Legal
Proceedings and Regulatory Actions
|
175
|
|
Conflicts
of Interest
|
175
|
|
Interest
of Certain Persons in Matters to be Acted Upon
|
176
|
|
Interest
of Informed Persons in Material Transactions
|
176
|
|
Non-Arm’s
Length Party Transactions
|
176
|
|
Registrar
and Transfer Agent
|
177
|
|
Material
Contracts
|
177
|
|
Experts
and Interests of Experts
|
177
|
|
Other
Material Facts
|
177
|
|
Approvals
|
177
|
|
MANAGEMENT
OF CAPITAL GOLD FOLLOWING THE BUSINESS COMBINATION
|
178
|
|
Directors
and Executive Officers
|
178
|
|
Committees
of the Board of Directors
|
178
|
|
Code
of Conduct and Ethics
|
180
|
|
Director
Compensation
|
180
|
|
Executive
Compensation
|
180
|
|
Employment
Agreements
|
180
|
|
Corporate
Headquarters
|
180
|
|
GLOSSARY
OF TERMS
|
181
|
|
Technical
Terms
|
181
|
|
Additional
Definitions
|
181
|
|
LEGAL
MATTERS
|
183
|
|
EXPERTS
|
183
|
|
OTHER
MATTERS
|
183
|
|
DEADLINE
FOR RECEIPT OF CAPITAL GOLD STOCKHOLDER PROPOSALS
|
183
|
|
DELIVERY
OF MATERIALS TO STOCKHOLDERS WITH SHARED ADDRESSES
|
184
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
184
|
|
INDEX
TO FINANCIAL STATEMENTS
|
F-2
|
|
ANNEX
I – BUSINESS COMBINATION AGREEMENT, AS
AMENDED
|
I-1
|
|
ANNEX
II – RIGHTS OF DISSENTING STOCKHOLDERS OF
NAYARIT
|
II-1
|
|
ANNEX
III – FAIRNESS OPINION OF BLAIR FRANKLIN CAPITAL PARTNERS
INC.
|
III-1
|
TRADEMARKS,
TRADENAMES, SERVICE MARKS AND SERVICE NAMES
This
proxy statement/prospectus contains trademarks, tradenames, service marks and
service names of Capital Gold Corporation and Nayarit Gold, Inc. and others.that
are used in conjunction with the operation of their respective
businesses.
iv
QUESTIONS
AND ANSWERS FOR ALL STOCKHOLDERS
ABOUT
THE BUSINESS COMBINATION PROPOSALS
The following questions and answers
briefly address some commonly asked questions about the Business Combination
Proposals to be presented at the Capital Gold Special Meeting of Stockholders
and the Nayarit Special Meeting of Stockholders. The following questions and
answers may not include all the information that is important to stockholders.
We urge stockholders to read carefully this entire proxy statement/prospectus,
including the annexes and the other documents referred to herein.
|
Q.
Why am I receiving this joint proxy statement/prospectus?
|
A. Capital
Gold and Nayarit have agreed to a Business Combination under the terms of
a Business Combination Agreement that is described in this joint proxy
statement/prospectus. In order to complete the Business
Combination the stockholders of both Capital Gold and Nayarit must approve
the Business Combination Agreement.
|
|
|
Q.
Why is the Business Combination between Capital Gold and Nayarit being
proposed?
|
A. Both
Capital Gold and Nayarit believe that the combined company will create
more value than either company could achieve individually. The combined
company will have greater assets in Mexico with significant exploration
potential, revenues from Capital Gold’s producing mine and greater
management depth. As such, management of both companies believe that the
combined company will be better positioned to attract additional
investment and that the stock of Capital Gold may receive greater investor
attention as Capital Gold progresses to become a mid-tier precious metals
producer in Latin America.
Stockholders
are encouraged to review their respective management’s reasons for the
Business Combination in “Proposals to be Considered by
Capital Gold Stockholders—The Business Combination Proposal” and
“Proposal to be
Considered by Nayarit Stockholders—The Business Combination
Proposal,” herein.
|
|
|
Q.
What will a Nayarit stockholder receive in exchange for Nayarit
common stock pursuant to the Business Combination?
|
A. All of
the Nayarit shares of common stock (the “Nayarit Common Shares”) issued
and outstanding immediately prior to the consummation of the Business
Combination (other than Nayarit Common Shares held by dissenting
stockholders of Nayarit) shall become exchangeable into the common stock
of Capital Gold on the basis of 0.134048 shares of Capital Gold common
stock for each one (1) Nayarit Common Share. See “The Business
Combination.”
|
|
|
Q.
What will a Nayarit option holder receive in exchange for Nayarit options
pursuant to the Business Combination?
|
A. Upon
completion of the Amalgamation, each option to purchase Nayarit Common
Shares outstanding immediately prior to the Effective Time of
the Amalgamation (the “Effective
Time”) will
become an option to purchase, on the same terms, 0.134048 shares of
Capital Gold common stock for each Nayarit Common Share for which the
option was exercisable. See “The Business
Combination.”
|
|
|
Q.
What will a Nayarit warrant holder receive in exchange for Nayarit
warrants pursuant to the Business Combination?
|
A. Upon
completion of the Amalgamation, each warrant to purchase Nayarit Common
Shares outstanding immediately prior to the effective time of
the Amalgamation will become an option to purchase, on the same
terms, 0.134048 shares of Capital Gold common stock for each Nayarit
Common Share for which the warrant was exercisable. See “The Business
Combination.”
|
1
|
Q.
Who will be the directors of Capital Gold following the Business
Combination?
|
A. Upon the
consummation of the Business Combination, the board of directors will
consist of Stephen Cooper, John Cutler, Leonard Sojka, each a
current director of Capital Gold, and Colin Sutherland a nominee of
Nayarit and a nominee of Capital Gold.
|
|
|
Q.
When do you expect the Business Combination to be
completed?
|
A. Capital
Gold and Nayarit are working to complete the Business Combination as
promptly as possible. The completion of the Business Combination, however,
is subject to the satisfaction of a number of
conditions. Assuming the timely satisfaction of these
conditions, Capital Gold and Nayarit hope to complete
the Amalgamation in the second calendar quarter of
2010.
|
|
|
Q.
What stockholder approvals are needed to complete the Business
Combination?
|
A. Holders
of a majority of the shares of Capital Gold common stock voted at the
Capital Gold special meeting must approve the Business Combination
Agreement and the issuance of Capital Gold common stock in connection with
the Business Combination.
Holders
of a special two-thirds majority of the outstanding Nayarit Common Shares
present or represented by proxy at the Nayarit special meeting of
stockholders (the “Nayarit Special
Meeting”) must
approve the Business Combination Agreement.
|
|
|
Q.
How does the board of directors of Capital Gold recommend I vote on the
proposal?
|
A. The board
of directors of Capital Gold recommends that stockholders vote in favor of
the Business Combination Proposal.
|
|
|
Q.
How does the board of directors of Nayarit recommend I vote on the
proposal?
|
A. The board
of directors of Nayarit recommends that stockholders vote in favor of the
applicable Business Combination Proposal.
|
|
|
Q.
How will the officers and directors of Capital Gold and Nayarit
vote?
|
A. The
officers and directors of each of Capital Gold and Nayarit have indicated
that they intend to vote any shares held by them in favor of the
respective Business Combination Proposals.
|
|
|
Q.
Is there a penalty if the Business Combination Proposal is not
approved?
|
A. The
Business Combination provides that a “break fee” of $1 million (the “Break
Fee”) will be payable in the event that the Business Combination is not
consummated because (i) either Capital Gold or Nayarit fails to consummate
the Business Combination as a result of the decision by one of their
boards of directors to change its recommendation to its stockholders to
approve the Business Combination; (ii) if Nayarit accepts an acquisition
proposal from a third party for its stock or material assets; (iii) if
Capital Gold’s or Nayarit’s action or inaction, through no fault of the
other party, results in the termination of the Business Combination
Agreement, or (iv) if the required stockholder approval is not obtained,
then the party that failed to consummate the Business Combination would be
obligated to pay the other party the Break Fee. See “The Business Combination—Break
Fee.”
|
|
|
Q.
What do I need to do now?
|
A. After
carefully reading and considering the information contained in and
incorporated into this proxy statement/prospectus, please submit your
proxy card according to the instructions on the enclosed proxy card as
soon as possible. Unless you submit the applicable proxy card or attend
the relevant special meeting and vote in person, your shares will not be
represented or voted at the applicable special meeting.
|
2
|
Q.
How do I vote?
|
A. If you
hold your shares in “street name,” which means your shares are held of
record by a broker, bank or nominee, you should contact your broker, bank
or nominee to ensure that votes related to the shares you beneficially own
are properly counted. In this regard, you must provide the record holder
of your shares with instructions on how to vote your shares. If you wish
to attend the Capital Gold Special Meeting or the Nayarit Special Meeting
and vote in person, you must obtain a proxy from your broker, bank or
nominee to vote your shares at the relevant special meeting.
|
|
|
Q.
What will happen if I sign and return my proxy card without indicating how
I wish to vote?
|
A. Signed
and dated proxies received by Capital Gold or Nayarit without an
indication of how the stockholder intends to vote on a proposal will be
voted in favor of the relevant Business Combination Proposal and, in the
case of Capital Gold, for the Stockholder Adjournment
Proposal.
|
|
|
Q.
If my shares are held in “street name,” will my broker, bank or
nominee automatically vote my shares for me?
|
A. No. Your
broker, bank or nominee cannot vote your shares with respect to
non-discretionary matters unless you provide instructions on how to vote
in accordance with the information and procedures provided to you by your
broker, bank or nominee. Capital Gold and Nayarit believe the Business
Combination Proposals presented to their respective stockholders will be
considered non-discretionary and therefore your broker, bank or nominee
cannot vote your shares without your instructions.
With
respect to Capital Gold stockholders only, if you do not provide
instructions with your proxy or sign your proxy card your bank or broker
may deliver a proxy card expressly indicating that it is NOT voting your
shares; this indication that a bank or broker is not voting your shares is
referred to as a “broker non-vote.” Broker non-votes will be counted for
purposes of determining whether a quorum is present, but will not count
for purpose of determining the number of votes cast at the Capital Gold
Special Meeting. Your bank, broker or other nominee can vote your shares
only if you provide instructions on how to vote. You should instruct your
broker to vote your shares in accordance with directions you
provide.
|
|
|
Q.
May I change my vote after I have mailed my signed proxy
card?
|
A. Yes. You
may change your vote by sending a later-dated, signed proxy card to your
company’s corporate secretary at the address set forth below so that it is
received by your company’s secretary prior to your company’s Special
Meeting, or attend your company’s Special Meeting in person and vote. You
also may revoke your proxy by sending a notice of revocation to your
company’s Secretary, which must be received prior to your company’s
Special Meeting or, in the case of Nayarit, provide the instrument of
revocation to the chairman of the Nayarit Special Meeting at the time of
that meeting.
|
|
|
Q.
What should I do if I receive more than one set of voting
materials?
|
A. You may
receive more than one set of voting materials, including multiple copies
of this joint proxy statement/prospectus and multiple proxy cards or
voting instruction cards. For example, if you hold your shares in more
than one brokerage account, you will receive a separate voting instruction
card for each brokerage account in which you hold shares. If you are a
holder of record and your shares are registered in more than one name, you
will receive more than one proxy card. If you hold shares of Capital Gold
and Nayarit, you will receive a set of voting materials from both
companies.
|
3
|
Q.
Who can help answer my questions about the Business
Combination?
|
A. If you have
questions about the Business Combination or if you need additional copies
of this joint proxy statement/prospectus or the enclosed proxy card you
should contact the following persons:
Capital
Gold stockholders should contact:
Christopher
Chipman, Secretary
Capital
Gold Corporation
76
Beaver Street, 14th Floor
New
York, New York 10005.
Tel:
(212) 344-2785
Fax:
(212) 344-4537
or
Nayarit
stockholders should contact:
Colin
Sutherland
Nayarit
Gold Inc.
76
Temple Terrace
Suite
150
Lower
Sackville, Nova Scotia
B4C
0A7
Tel: (902)
252-3833
Fax: (902)
252-3836
|
4
QUESTIONS
AND ANSWERS FOR CAPITAL GOLD STOCKHOLDERS
|
Q.
Why is Capital Gold proposing the Business
Combination?
|
A. Capital
Gold believes that the proposed Business Combination will provide
substantial benefits to Capital Gold stockholders. The Capital Gold board
of directors believes the Business Combination provides stockholders with
liquidity, capital raising and strategic and growth opportunities that
would not have been readily available to Capital Gold on a stand-alone
basis. To review the Capital Gold reasons for the transaction in greater
detail, see “Proposals
to be Considered by Capital Gold Stockholders – The Business Combination
Proposal – Capital Gold’s Board of Directors’ Reasons for Approval of the
Business Combination.”
|
|
|
Q.
What percentage of Capital Gold will the current Capital Gold stockholders
own immediately following the Business Combination?
|
A. Upon the
consummation of the Business Combination, the current Capital Gold
stockholders will hold approximately 80.03% of the issued and outstanding
shares of Capital Gold common stock on a non-diluted
basis.
|
|
|
Q.
What will happen if I abstain from voting at the Capital Gold Special
Meeting?
|
A. If you
are a Capital Gold stockholder and you do not submit a proxy card or vote
at the Capital Gold Special Meeting of Stockholders, your shares will not
be counted as present for purposes of determining a quorum and will have
no effect on the outcome of the proposal to approve the issuance of
Capital Gold common stock in the Business Combination. If you
submit a proxy card and affirmatively elect to abstain from voting, your
proxy will be counted for purposes of determining the presence of a quorum
but will not be voted at the special meeting. As a result, your abstention
will have the same effect as a vote against the issuance of Capital Gold
common stock in the Business Combination.
|
|
|
Q.
As a stockholder of Capital Gold, do I have appraisal rights if I object
to the Business Combination?
|
A. No
appraisal rights are available to stockholders of Capital Gold under the
DGCL in connection with the proposals set forth herein.
|
|
|
Q.
If I am not going to attend the Capital Gold Special Meeting in person,
should I return my proxy card instead?
|
A. Yes.
Whether or not you plan to attend the Capital Gold Special Meeting, after
carefully reading and considering the information contained in this proxy
statement, please complete and sign your proxy card. Then return the proxy
card in the enclosed return envelope provided in this package as soon as
possible, to ensure your shares are represented at the special
meeting.
|
5
QUESTIONS
AND ANSWERS FOR NAYARIT STOCKHOLDERS
|
Q.
Why is Nayarit proposing the Business Combination?
|
A. Nayarit
believes that the proposed Business Combination will provide
substantial benefits to Nayarit stockholders. The Nayarit board of
directors believes the Business Combination provides stockholders with
liquidity and will make capital and strategic and growth opportunities
available to Nayarit that would not be available on a stand-alone basis.
To review the Nayarit reasons for the transaction in greater detail, see
“Proposal to be
Considered by Nayarit Stockholders – The Business Combination Proposal –
Nayarit’s Board of Directors’ Reasons for Approval of the Business
Combination.”
|
|
|
Q.
What percentage of Capital Gold will the former Nayarit stockholders own
immediately following the Business Combination?
|
A. Upon the
consummation of the Business Combination, Nayarit stockholders will hold
approximately 19.97% of the issued and outstanding shares of Capital Gold
common stock on a non-diluted basis.
|
|
|
Q.
If I am not going to attend the Nayarit Special Meeting in person, should
I return my proxy card instead?
|
A. Yes.
Whether or not you plan to attend the Nayarit Special Meeting, after
carefully reading and considering the information contained in this proxy
statement, please complete and sign your proxy card. Then return the proxy
card in the enclosed return envelope provided in this package as soon as
possible, to ensure your shares are represented at the special
meeting.
Nayarit
stockholders should return their completed proxy cards to:
Computershare
Trust Company of Canada
1969
Upper Water Street
Purdy’s
Wharf II
Suite
2008
Halifax,
Nova Scotia B3J 3R7
|
|
|
Q.
Will Nayarit stockholders be taxed on the Capital Gold securities that
they receive in exchange for their Nayarit securities?
|
A. For U.S.
federal income tax purposes, the Business Combination is intended to
qualify as a “reorganization” within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the
“Code”). Assuming it is so treated, Nayarit stockholders who
are U.S. persons should not recognize gain or loss as a result of their
receipt of Capital Gold securities in exchange for their Nayarit
securities. No ruling from the IRS or legal opinion is being
obtained, however, concerning the qualification of the Business
Combination as a tax-free reorganization for U.S. federal income tax
purposes. See “Nayarit Special
Meeting—Certain Material U.S. Federal Income Tax
Considerations.”
|
|
|
Q.
As a stockholder of Nayarit, do I have dissenters rights if I object to
the Business Combination?
|
A.
Stockholders of Nayarit have certain dissenters rights under the
Ontario Act. See “Special Meeting of
Stockholders of Nayarit – Nayarit Stockholders’ Dissenter Rights”
herein.
|
|
|
Q.
What will happen if I abstain from voting at the Nayarit Special
Meeting?
|
A. If you
are a Nayarit stockholder and you do not submit a proxy card or vote at
the special meeting of Nayarit stockholders, your shares will not be
counted as present for purposes of determining a quorum and will not be
voted at the special meeting.
|
|
|
Q.
What are the federal income tax consequences of exercising my dissenters’
rights?
|
A. For
U.S. federal income tax purposes, Nayarit stockholders who exercise their
dissenters’ rights and receive cash for their Nayarit shares should treat
such receipt as a taxable disposition of such shares. See
“Nayarit Special
Meeting—Certain Material U.S. Federal Income Tax
Considerations.”
|
6
|
Q.
Should I send in my stock certificates now?
|
A. No. You
should not send in your stock certificates at this time. Promptly after
the Effective Time of the Business Combination, Nayarit securityholders
will receive transmittal materials with instructions for surrendering the
Nayarit securities. You should follow the instructions in the post-closing
letter of transmittal regarding how and when to surrender your
certificates.
|
7
SUMMARY
This
summary highlights selected information from this joint proxy
statement/prospectus and is qualified in its entirety by the more detailed
information included elsewhere in this joint proxy
statement/prospectus. Because this is a summary, it may not contain
all of the information that is material or important to
you. Accordingly, you should read this entire joint proxy
statement/prospectus carefully, including the annexes. Please also
see the section entitled “Where You Can Find More Information.”
Information
About the Parties to the Business Combination
Capital
Gold Corporation
Capital
Gold is engaged in the mining, exploration and development of gold properties in
Mexico. Capital Gold’s primary focus is on the operation and development
of the El Chanate project, and Capital Gold also conduct gold exploration in
other locations in Sonora, Mexico. (The financial data in this discussion is in
thousands, except where otherwise specifically noted.)
Capital
Gold’s shares of common stock are currently listed on the NYSE AMEX under the
symbol “CGC” and on the TSX under the symbol “CGC.” Following the Business
Combination, Capital Gold anticipates that the shares of common stock will
continue to be listed on the NYSE AMEX and the TSX.
The
mailing address of Capital Gold’s principal executive office is 76 Beaver
Street, 14th Floor, New York, New York 10005. Its telephone number is
(212) 344-2785.
Nayarit
Gold, Inc.
Nayarit
is a development stage company engaged primarily in the acquisition and
exploration of mineral properties in Mexico. Nayarit controls
approximately 257,000 acres (104,000 hectares) of mining concessions known as
the Orion Project in the State of Nayarit Mexico. The Orion Project
lies in the Sierra Madre Occidental, a prolific mining district in Western
Mexico.
Nayarit’s
shares of common stock are currently listed on the TSX-V under the symbol “NYG”.
Following the Business Combination, Nayarit’s shares of common stock will
be exchanged for shares of Capital Gold which shares will continue to be
listed on the NYSE AMEX and the TSX under the symbol
“CGC.”
The
mailing address of Nayarit’s principal executive office is 76 Temple Terrace,
Suite 150, Lower Sackville, NS, B4C 0A7, Canada. Its telephone number
is (902) 252-3833.
Summary
of the Business Combination
The
Business Combination Agreement (page
30)
The
respective Boards of Directors of Capital Gold and Nayarit have approved a
business combination agreement between Capital Gold and Nayarit dated as of
February 10, 2010 (the “Business Combination Agreement”) that would effect the
amalgamation of Nayarit into a to be formed wholly owned Canadian subsidiary of
Capital Gold. In this proxy statement/prospectus, we sometimes refer
to the transaction covered by the Business Combination Agreement as the
“Business Combination”. If the Business Combination is approved by
the stockholders of both companies, the parties intend to effect an amalgamation
(the “Amalgamation”) of Nayarit and a corporation to be organized under the
Ontario Act as a wholly-owned subsidiary of Capital Gold (“Merger Sub”) in
accordance with the terms of the amalgamation agreement annexed to the Business
Combination Agreement (the “Amalgamation Agreement”), to form a combined entity
(“AmalgSub”). By virtue of the Amalgamation, the separate existence
of each of Nayarit and Merger Sub shall thereupon cease, and AmalgSub, as the
surviving company in the Amalgamation, shall continue its corporate existence
under the Ontario Act as a wholly-owned subsidiary of Capital
Gold.
8
Pursuant
to the terms of the Amalgamation Agreement, by virtue of the Amalgamation and
without any action on the part of Nayarit or the holders of any securities of
Nayarit, all of the Nayarit Shares issued and outstanding immediately prior to
the consummation of the Amalgamation Agreement (other than Nayarit Common Shares
held by dissenting stockholders of Nayarit) shall become exchangeable into the
common stock of Capital Gold on the basis of 0.134048 shares of Capital Gold
common stock for each one (1) Nayarit Common Share. Further, upon
completion of the Amalgamation, each option and warrant to purchase Nayarit
common stock outstanding immediately prior to the Effective Time of the
Amalgamation will become an option or warrant to purchase, on the same terms,
0.134048 shares of Capital Gold common stock for each share of Nayarit common
stock for which the option or warrant was exercisable.
The
Amalgamation Agreement, which is the legal document that governs the Business
Combination, is attached as Exhibit A to the Business Combination Agreement
attached as Annex I to this proxy statement/prospectus. We encourage you to read
it carefully. Capital Gold and Nayarit also have provided a more
detailed description of the Business Combination below under the caption “The Business
Combination.”
The Amendment to the Business
Combination Agreement (page 35)
On
April 29, 2010, Capital Gold and Nayarit entered into an Amendment to the
Business Combination Agreement, pursuant to which, among other things, it
amended the provision with respect to the officers and board of directors of
Capital Gold subsequent to the closing of the Business Combination.
Specifically, because John Brownlie, Capital Gold’s current President and Chief
Operating Officer tendered his resignation to be effective at the closing of the
Business Combination, those provisions were amended to reflect such
resignation.
Risks
Associated with Capital Gold and the Business Combination (page
18)
The
Business Combination poses a number of risks to each company and its respective
stockholders. In addition, the shares of Capital Gold common stock to
be issued to Nayarit stockholders in connection with the Business Combination
will be subject to various risks associated with the combined businesses of
Capital Gold and Nayarit. These risks are discussed in detail under
the caption “Risk
Factors.” Capital Gold and Nayarit encourage you to read and
consider all of these risks carefully.
Vote
of Stockholders Required (pages 48
and 64)
A
complete list of Capital Gold stockholders of record entitled to vote at the
Capital Gold Special Meeting will be available for ten days before the Special
Meeting at the principal executive offices of Capital Gold for inspector by
stockholders during ordinary business hours for any purpose germane to the
Capital Gold Special Meeting.
The
approval of the Business Combination by Capital Gold, including the issuance of
Capital Gold common stock in the Business Combination, requires the affirmative
vote of a majority of the shares of Capital Gold common stock voted at the
Capital Gold Special Meeting at which a quorum is present. As of the
record date, there
were [ ] shares of
Capital Gold common stock outstanding and entitled to vote.
The
approval of the Business Combination by Nayarit requires the affirmative vote of
holders of a special two-thirds majority of the shares of Nayarit common stock
represented in person or by proxy and voted at the Nayarit Special Meeting at
which a quorum is present to vote for the proposal. As of the record
date, there were 91,709,665 shares of Nayarit common stock outstanding and
entitled to vote.
Recommendation
of the Respective Board of Directors (pages 49
and 64)
Both of
the respective Boards of Directors of Capital Gold has and Nayarit have
unanimously determined that the Business Combination, including all of its terms
and conditions, is in the best interests of, the stockholders of Capital Gold
and the stockholders of Nayarit. Each Board recommends that their
respective stockholders vote FOR approval of the Business
Combination.
Interests
of Directors and Executive Officers (page s48
and 64)
As you
consider the recommendations of the respective Boards of Directors of Capital
Gold and Nayarit, you should be aware that certain officers,
directors and other stockholders of both companies have interests
regarding the Business Combination that are different from, or in addition to,
your interests as stockholders of the respective companies. See
“Proposals to be Considered by
Capital Gold Stockholders—The Business Combination Proposal—Certain Benefits of
the Directors and Officers and Others in the Business Combination” and “Proposal
to be Considered by Nayarit Stockholders—The Business Combination
Proposal—Certain Benefits of the Directors and Officers and Others in the
Business Combination.”
Conditions
to the Completion of the Business Combination (page
31)
Capital
Gold and Nayarit's respective obligations to complete the Business Combination
are subject to certain conditions described below under “The Business Combination –
Conditions to Closing the Amalgamation.”
9
Completion
and Effectiveness of the Business Combination (page
31)
Capital
Gold and Nayarit expect to complete the Business Combination when all of the
conditions to the completion of the Amalgamation contained in the Business
Combination Agreement have been satisfied or waived. The Business Combination
will become effective upon the filing of Articles of Amalgamation with the
Ontario Ministry of Government Services (Companies and Personal Property
Security Branch) and the issuance of a Certificate of Amalgamation
therefor.
Capital
Gold and Nayarit are working toward satisfying the conditions to the Business
Combination, and hope to complete the Business Combination as soon as
practicable following the special meetings of their respective
stockholders.
Restrictions
on Solicitation of Alternative Transactions by Nayarit (page
35)
Under the
terms of the Business Combination Agreement, Nayarit may not solicit, initiate
or, subject to limited exceptions, engage in discussions or negotiations with,
or provide material inside information to, any third party regarding any type of
extraordinary transactions, including a merger, Business Combination or sale of
a material amount of assets or capital stock.
Termination
of the Business Combination Agreement and Payment of Certain Termination
Fees (page
34)
Capital
Gold and Nayarit may terminate the Business Combination Agreement by mutual
agreement and under certain other circumstances.
The
Business Combination provides that a “break fee” of $1 million (the “Break Fee”)
will be payable in the event that the Business Combination is not consummated
because certain specified events have occurred. Such events that
would trigger payment of the Break Fee are as follows. If either
Capital Gold or Nayarit, through no fault of the other party, fails to
consummate the Business Combination as a result of the decision by one of their
boards of directors to change its recommendation to its stockholders to approve
the Business Combination, the party whose board changed its recommendation would
be obligated to pay the other party the Break Fee. If Nayarit
accepts an acquisition proposal from a third party for its stock or material
assets (an “Acquisition Proposal”), then Nayarit would be obligated to pay the
Break Fee. If Capital Gold’s or Nayarit ’s action or inaction,
through no fault of the other party, results in the termination of the Business
Combination Agreement by the other party pursuant to termination provisions of
the Business Combination Agreement, then the party that failed to so progress
and consummate the Business Combination would be obligated to pay the other
party the Break Fee. Finally, if either the required Nayarit
stockholder approval vote or the Capital Gold stockholder approval vote is not
obtained following the public announcement of an Acquisition Proposal, then the
defaulting party would be obligated to pay to the other party the Break
Fee.
Material
U.S. Federal Income Tax Consequences of the Business Combination (page
56)
For
U.S. federal income tax purposes, the Business Combination is intended to
qualify as a “reorganization” within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the “Code”). Assuming it
is so treated, Nayarit stockholders who are U.S. persons should not recognize
gain or loss as a result of their receipt of Capital Gold securities in exchange
for their Nayarit securities. No ruling
from the IRS or legal opinion is being obtained, however, concerning the
qualification of the Business Combination as a tax-free reorganization for U.S.
federal income tax purposes. See “Nayarit Special Meeting—Certain Material U.S. Federal
Income Tax Considerations.”
Material
Canadian Federal Income Tax Consequences (page
54)
The
following is a summary of the principal Canadian federal income tax consequences
under the Income Tax
Act (Canada) (the “Tax Act”) generally applicable in respect of the
Business Combination to a holder of Nayarit securities who, for purposes of the
Tax Act and at all relevant times, is a resident of Canada, holds Nayarit shares
of common stock, Nayarit warrants and/ or Nayarit options to purchase common
stock as capital property, deals at arm’s length with Nayarit, is not affiliated
with Nayarit or Capital Gold and to whom Nayarit is not is a foreign
affiliate. This summary is not applicable to a holder that is a
“financial institution” or a “specified financial institution” as defined in the
Tax Act nor to a holder of an interest that is a tax shelter
investment. Generally, securities will be considered to be capital
property to the holder thereof unless they are held in the course of carrying on
a business of trading or dealing in securities or were acquired in one or more
transactions considered to be an adventure in the nature of trade.
10
This
summary does not address the income tax considerations of exercising, cancelling
or otherwise disposing of any options or warrants to acquire Capital Gold
shares, nor does it address all issues relevant to Nayarit Stockholders who
acquired shares on the exercise of options or warrants. This summary
does not address the income tax consequences on the exercise cancellation or
disposition of Capital Gold options or warrants. This summary also
does not address the income tax consequences to persons who are not resident of
Canada for purposes of the Tax Act or any applicable income tax
treaty. Such
security holders should consult their own tax advisors with respect to the
Amalgamation.
This
summary is based upon the current provisions of the Tax Act, the Regulations
thereunder, all proposed amendments to the Tax Act and Regulations publicly
announced by or on behalf of the Minister of Finance prior to the date hereof
(the “Proposed Amendments”) and counsel’s understanding of the administrative
policies and assessing practices of the Canada Revenue Agency (the “CRA”)
publicly available prior to the date of this proxy
statement/prospectus. Except for the Proposed Amendments, this
summary does not take into account or anticipate any changes in the law or
administrative policies or assessing practices of the CRA, nor does it take into
account the tax law of any province, territory or foreign
jurisdiction. There can be no assurance that the Proposed Amendments
will be enacted in the form currently proposed or at all.
This
summary is of a general nature only and is not intended to be, and should not be
construed to be, legal, business or tax advice to any particular
holder. Holders of Nayarit shares and Capital Gold shares should
consult their own tax advisers to determine the tax consequences to them of the
Business Combination.
The
Amalgamation
A holder
of Nayarit shares who disposes of Nayarit shares, warrants or options in the
Business Combination in exchange for Capital Gold shares, warrants or options,
as the case may be, will generally be deemed to have disposed of such shares for
proceeds of disposition equal to the fair market value of the Capital Gold
shares, warrants, or options, as the case may be, received on the
exchange.
Such
holder will realize a capital gain to the extent that such proceeds of
disposition exceed (or are less than) the adjusted cost base of that holder's
Nayarit shares, warrants or options disposed of immediately before the exchange
and any reasonable costs of disposition. A holder of Nayarit shares,
warrants or options will acquire the Capital Gold shares, Capital Gold warrants
or Capital Gold options, as the case may be, at a cost equal to the fair market
value of such Capital Gold shares, Capital Gold warrants or Capital Gold options
received on the exchange. Such capital gain (or capital loss) will be
subject to the tax treatment described below under “Capital Gains and Capital
Losses.”
Dissenting
Nayarit Stockholders
Dissenting
stockholders are advised to consult with their own tax advisors with respect to
the tax treatment of payments received as a result of the exercise of the
dissent rights described herein. A Nayarit stockholder who dissents
from the Business Combination and thereby becomes entitled to a cash payment
that is ultimately paid by Capital Gold should generally be considered to have
realized a capital gain (or capital loss) equal to the amount, if any, by which
the proceeds of disposition of the Nayarit shares (which will be equal to the
amount of the cash payment less any portion that is in respect of interest)
exceed (or are exceeded by) the aggregate of the adjusted cost base of the
Nayarit shares and any reasonable costs of disposition. Any amount in
respect of interest received by a Nayarit dissenting stockholder will be
included in such dissenting stockholder’s income in accordance with the
provisions of the Tax Act.
The date
of disposition of shares disposed of by reason of a stockholder exercising such
stockholder’s dissent rights is unclear and dissenting stockholders should
consult their tax advisers in this regard.
11
Dividends
on Capital Gold Shares
Capital
Gold has stated that it does not intend to pay dividends in the foreseeable
future. Dividends received or deemed to have been received by a
holder of Capital Gold shares will be included in computing the stockholder’s
income. In the case of an individual stockholder, such dividends will
not be eligible for the gross-up and dividend tax credit treatment normally
applicable to dividends received from taxable Canadian corporations and in the
case of a corporate holder such dividends will not be deductible in computing
taxable income. A holder that is a Canadian-controlled private
corporation may be liable to pay an additional refundable tax of 6 2/3% on such
dividends.
Disposition
of Capital Gold Shares
On the
disposition or deemed disposition of Capital Gold shares, a holder will
generally realize a capital gain (or capital loss) equal to the amount by which
the proceeds of disposition, net of any reasonable costs of disposition exceed
(or are less than) the holder’s adjusted cost base of the Capital Gold
shares.
Capital
Gains and Capital Losses
Generally,
only one-half of any capital gain (a “taxable capital gain”) is required to be
included in the holder’s income in the taxation year of disposition, and
one-half of any capital loss (an “allowable capital loss”) may be deducted
against taxable capital gains realized in the taxation year of
disposition. Allowable capital losses that cannot be deducted from
taxable capital gains in the year of disposition can generally be carried back
and deducted in any of the three preceding taxation years or carried forward and
deducted in any following year against taxable capital gains realized in such
years to the extent and in the circumstances set out in the Tax
Act.
Accounting
Treatment of the Amalgamation (page
31)
The
Capital Gold and Nayarit amalgamation will be accounted for under the
acquisition method of accounting. Capital Gold is the acquirer and
will utilize the acquisition method of accounting which is based on Accounting
Standards Codification, or ASC, Topic 805, Business Combinations, or ASC 805 and
uses the fair value concepts defined in ASC 820, Fair Value Measurements and
Disclosures.
Nayarit
Stockholders’ Dissenter Rights (page
52)
Registered
stockholders of Nayarit are entitled to dissent from the Business Combination
Proposal in the manner provided in section 185 of the Ontario
Act. Section 185 of the Ontario Act is reprinted in its entirety and
attached to this proxy statement/prospectus as Annex II. In the event
that the Business Combination is approved by the stockholders of Nayarit and the
Business Combination is effected, registered stockholders of Nayarit who
properly exercise dissent rights will be entitled to be paid the fair value of
their Nayarit Shares as of the close of business on the date the Business
Combination Proposal is approved. A registered Nayarit Stockholder who
wishes to exercise dissent rights must send a Dissent Notice to Nayarit, such
that it is received by Nayarit not later than 4:00 p.m. (Toronto time) on the
business day immediately preceding the day of the Nayarit Special Meeting (or
any postponement or adjournment thereof), at Nayarit Gold Inc., 76 Temple
Terrace, Suite 150, Lower Sackville, Nova Scotia B4C 0A7. Attention:
Megan Spidle. See “Special Meeting
of Stockholders of Nayarit – Nayarit’s Stockholders’ Dissenter
Rights”
herein.
Regulatory
Approvals (page
31)
Capital
Gold and Nayarit do not believe that the Business Combination is subject to the
reporting obligations, statutory waiting periods or other approvals of any
government or regulatory agency or body other than addressing comments raised by
the Securities and Exchange Commission, or SEC, with respect to this proxy
statement/prospectus) a post-closing notice filing under the Investment Canada
Act and the TSX and the TSX Venture Exchange.
Board
of Directors and Management of Capital Gold Following the Business
Combination (page
178)
Upon
the consummation of the Business Combination, the Board of Directors of Capital
Gold shall consist of Stephen M. Cooper, John W. Cutler, Leonard J. Sojka, each
a current director of Capital Gold, and Colin Sutherland, a nominee of Nayarit
and a nominee of Capital Gold. Bradley Langille and Colin Sutherland
will join Capital Gold as senior officers. See “Management of Capital Gold Following
the Business Combination” for more
information.
12
Reasons
for Approval of the Business Combination (pages 46 and
61)
In
reaching its decision to approve the Business Combination Agreement and
recommend the Business Combination Proposal to their respective stockholders,
Capital Gold’s board of directors and Nayarit’s board of directors considered a
number of factors, including those listed below.
Expected
Strategic Benefits of the Business Combination Proposal
|
·
|
Exploration and
Development. The Business Combination will enhance the
combined company’s ability to grow and secure additional capital resources
to continue exploration and development of Nayarit’s Orion Project and
Capital Gold’s El Chanate Project, enhancing long term value for
stockholders.
|
|
·
|
Visibility as a Mid-Tier
Producer. The combined company has the potential to be
recognized as a significant mid-tier producer in Latin America, with the
possibility that further growth opportunities will
follow.
|
|
·
|
Strong Management
Team. The combination of Capital Gold’s and Nayarit’s
management will create a management team with complementary skills in
exploration, business and projected development and
operations.
|
|
·
|
Potential
synergies. The fact that Nayarit’s and Capital Gold’s
respective assets and operations in Mexico are a strategic fit and
complementary.
|
|
·
|
Market exposure. Nayarit’s
investor following in Canada together with Capital Gold’s following as an
NYSE AMEX listed issuer will provide enhanced market exposure to the
combined company.
|
|
·
|
Stockholder liquidity.
Increased market capitalization and a broader stockholder base
resulting from the Amalgamation should improve trading liquidity for
stockholders.
|
The
respective boards of Nayarit and Capital Gold weighed these factors against a
number of other factors identified in their respective deliberations as weighing
negatively against the Business Combination, including:
|
·
|
Fixed exchange rate. The exchange rate is
fixed, and as a result, the Capital Gold shares issued on consummation of
the Business Combination Agreement may have a market value different than
at the time of the announcement of the Business
Combination.
|
|
·
|
Conditions to
closing.
The Business Combination Agreement is subject to several conditions
and because there can be no certainty that these conditions may be
satisfied or waived, the Business Combination may not be successfully
completed, which could negatively impact upon both
companies.
|
|
·
|
Termination rights. The
Business Combination Agreement may be terminated by either Capital Gold or
Nayarit in certain circumstances in which case the market prices for the
Capital Gold or Nayarit shares may be adversely
affected.
|
|
·
|
Limitations on other
opportunities. The
Business Combination Agreement significantly limits the ability of either
party to pursue other Business Combination opportunities until the
transaction is completed.
|
This
discussion of the information and factors considered by the board of directors
of Capital Gold and Nayarit includes the principal positive and negative factors
considered by such boards, but is not intended to be exhaustive and may not
include all of the factors considered. The boards did not quantify or
assign any relative or specific weights to the various factors that it
considered in reaching their determinations that the Business Combination
Agreement and Business Combination Proposals are advisable and in the best
interests of their respective stockholders. Rather, the boards viewed
their respective positions and recommendations as being based on the totality of
the information presented to them and the factors they considered. It
should be noted that this explanation of the reasoning of the respective boards
of directors of Capital Gold and Nayarit and certain information presented in
this section is forward-looking in nature and, therefore, that information
should be read in light of the factors discussed in the section entitled “Cautionary Note Regarding
Forward-Looking Statements” in this joint proxy
statement/prospectus.
13
SELECTED
HISTORICAL FINANCIAL INFORMATION OF CAPITAL GOLD
Capital
Gold is providing the following selected historical financial information to
assist you in your analysis of the financial aspects of the Business
Combination.
The following selected historical
financial information was
derived from Capital Gold’s audited financial
statements as of July 31, 2009 and 2008 contained in its Annual Report on Form
10-K for the fiscal year ended July 31, 2009 filed with the SEC on October 14,
2009, which is incorporated by reference into this joint proxy
statement/prospectus. The unaudited financial statements for the six months ended January 31, 2010 and 2009 which are contained in our Quarterly Report
on Form 10-Q for the six months ended January 31, 2010, filed with the SEC on
March 12, 2010, as amended on our Quarterly Report on Form 10-Q/A for the six
months ended January 31, 2010 filed with the SEC on March 17, 2010, which is
incorporated by reference into this joint proxy statement/prospectus, and Capital Gold’s audited
financial statements as of July 31, 2007, 2006 and 2005 which are available at
www.sec.gov. The results of operations for interim
periods are not necessarily indicative of the results of operations which might
be expected for the entire year.
The
following information is only a summary and should be read in conjunction with
the unaudited interim financial statements of Capital Gold for the six months
ended January 31, 2010 and 2009 and the notes thereto and the audited financial
statements of Capital Gold for the year ended July 31, 2009 and 2008 and the
notes thereto and “Capital
Gold’s
Management’s Discussion
and Analysis of Financial Condition and Results of Operations” contained elsewhere in
this joint proxy statement/prospectus .
|
For
the Six Months Ended
January
31,
|
Fiscal
Year Ended July 31
|
|||||||||||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||
|
Statement
of Operations data:
|
||||||||||||||||||||||||||||
|
Revenues
(1)
|
$ | 24,955 | $ | 20,544 | $ | 42,757 | $ | 33,104 | $ | - | $ | - | $ | - | ||||||||||||||
|
Net
Income (loss)
|
$ | 5,884 | $ | 5,133 | $ | 10,407 | $ | 6,364 | $ | (7,472 | ) | $ | (4,805 | ) | $ | (2,006 | ) | |||||||||||
|
Income
(loss) per share – Basic (2)
|
$ | 0.12 | $ | 0.11 | $ | 0.22 | $ | 0.15 | $ | (0.20 | ) | $ | (0.17 | ) | $ | (0.11 | ) | |||||||||||
|
Income
(loss) per share – Diluted(2)(3)
|
$ | 0.12 | $ | 0.10 | $ | 0.21 | $ | 0.13 | $ | - | $ | - | $ | - | ||||||||||||||
|
Weighted
average shares outstanding – Basic (2)
|
48,505,818 | 48,278,255 | 48,315116 | 43,760,000 | 37,452,816 | 28,051,118 | 18,780,980 | |||||||||||||||||||||
|
Weighted
average shares outstanding – Diluted(2)(3)
|
49,861,776 | 49,729,966 | 49,882,770 | 48,867,282 | 37,452,816 | 28,051,118 | 18,780,980 | |||||||||||||||||||||
|
Balance
Sheet data:
|
||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 4,943 | $ | 8,848 | $ | 6,448 | $ | 10,992 | $ | 2,225 | $ | 2,741 | $ | 4,282 | ||||||||||||||
|
Inventories
|
$ | 28,109 | $ | 14,720 | $ | 21,405 | $ | 13,113 | $ | 3,171 | $ | — | $ | -- | ||||||||||||||
|
Property
and equipment, net
|
$ | 24,725 | $ | 22,537 | $ | 22,417 | $ | 20,918 | $ | 18,000 | $ | 1,036 | $ | 651 | ||||||||||||||
|
Total
assets
|
$ | 63,636 | $ | 50,965 | $ | 54,601 | $ | 48,879 | $ | 27,551 | $ | 9,546 | $ | 5,552 | ||||||||||||||
|
Reclamation
and remediation liability
|
$ | 1,854 | $ | 1,215 | $ | 1,594 | $ | 1,666 | $ | 1,249 | $ | - | $ | - | ||||||||||||||
|
Long-term
debt
|
$ | 2,600 | $ | 6,200 | $ | 4,400 | $ | 8,375 | $ | 12,500 | $ | - | $ | - | ||||||||||||||
|
Total
debt
|
$ | 6,200 | $ | 10,250 | $ | 8,000 | $ | 12,500 | $ | 12,500 | $ | - | $ | - | ||||||||||||||
|
Total
stockholders’ equity
|
$ | 45,250 | $ | 50,965 | $ | 37,882 | $ | 28,197 | $ | 11,986 | $ | 8,930 | $ | 5,269 | ||||||||||||||
Notes:
(1)There
were no revenues for the fiscal years ended July 31, 2007, 2006 and 2005 as
Capital Gold’s first gold sale from production was in August 2007.
(2)Amounts
were adjusted for retroactive effect of reverse stock split with every four (4)
shares of common stock issued and outstanding being converted into one (1) share
of common stock.
(3) Because Capital
Gold incurred losses for the fiscal years ended July 31, 2007, 2006 and 2005,
the effect of stock options and warrants was considered anti-dilutive.
Accordingly, Capital Gold's presentation of diluted net loss per share is the
same as that of basic net loss per share.
14
SELECTED
HISTORICAL FINANCIAL INFORMATION OF NAYARIT
Nayarit
is providing the following selected historical financial information to assist
you in your analysis of the financial aspects of the Business
Combination.
The
following selected historical financial information was derived from
Nayarit’s audited financial statements as of September 30, 2009 and 2008,
prepared in accordance with Canadian GAAP, with a reconciliation to U.S.
GAAP, the unaudited financial statements for the three months ended
December 31, 2009 and 2008, prepared in accordance with Canadian GAAP both
of which are included elsewhere in this proxy statement/prospectus and Nayarit’s
audited financial statements as of September 30, 2007, 2006 and 2005, prepared
in accordance with Canadian GAAP, are available at www.sedar.com. The
results of operations for interim periods are not necessarily indicative of the
results of operations which might be expected for the entire year.
The
following information is presented in accordance with U.S. GAAP and has been
translated from Canadian dollars to U.S. dollars at the period end exchange rate
for balance sheet data and at the average annual exchange rate for statement of
operations data.
The
following information is only a summary and should be read in conjunction with
the unaudited interim financial statements of Nayarit for the three months ended
December 31, 2009 and 2008 and the notes thereto and the audited financial
statements of Nayarit for the year ended September 30, 2009 and the notes
thereto and “Nayarit’s
Management’s Discussion
and Analysis of Financial Condition and Results of Operations” contained elsewhere in
this joint proxy statement/prospectus.
|
For
the Three Months
Ended
December 31
|
Fiscal
Year Ended September 30
|
|||||||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
( unaudited)
|
||||||||||||||||||||||||||||
|
Statement
of Operations data:
|
||||||||||||||||||||||||||||
|
Revenues
(1)
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Net
Loss
|
$ | (902,099 | ) | $ | (2,515,466 | ) | $ | (8,136,340 | ) | $ | (8,264,093 | ) | $ | (5,366,349 | ) | $ | (3,840,011 | ) | $ | (1,830,354 | ) | |||||||
|
Loss
per share – Basic (2)
|
$ | (0.01 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.11 | ) | |||||||
|
Loss
per share – Diluted(2)
|
$ | (0.01 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.11 | ) | |||||||
|
Weighted
Average Shares Outstanding – Basic(2)
|
89,688,896 | 68,001,769 | 79,126,397 | 50,758,673 | 39,978,939 | 30,929,315 | 15,423,436 | |||||||||||||||||||||
|
Weighted
Average Shares Outstanding – Diluted(2)
|
89,688,896 | 68,001,769 | 79,126,397 | 50,758,673 | 39,978,939 | 30,929,315 | 15,423,436 | |||||||||||||||||||||
|
Balance
Sheet data:
|
||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 1,349,955 | $ | 1,290,471 | $ | 2,285,722 | $ | 5,161,202 | $ | 1,374,629 | $ | 145,991 | $ | 701,230 | ||||||||||||||
|
Total
Assets
|
$ | 6,815,777 | $ | 4,194,006 | $ | 7,039,826 | $ | 7,113,098 | $ | 2,075,125 | $ | 2,151,531 | $ | 909,256 | ||||||||||||||
|
Reclamation
and Remediation Liability
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Long-term
Debt
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Total
debt
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Total
stockholders’ equity
|
$ | 6,412,878 | $ | 3,549,294 | $ | 6,691,074 | $ | 6,192,924 | $ | 1,756,708 | $ | 2,007,996 | $ | 839,955 | ||||||||||||||
Notes:
(1) Nayarit
has not had revenues since inception.
(2) Because
Nayarit incurred losses for the periods presented, the effect of stock options
and warrants was considered anti-dilutive. Accordingly, Nayarit's presentation
of diluted net loss per share is the same as that of basic net loss per
share.
15
COMPARATIVE
PER SHARE DATA
The
following table sets forth selected historical per share information of Capital
Gold and Nayarit and unaudited pro forma combined per share information after
giving effect to the merger between Capital Gold and Nayarit, under the
acquisition method of accounting, assuming that 0.134048 shares of Capital Gold
common stock are exchanged into one (1) Nayarit Common Share. The pro
forma shares to be issued assumes the issuance of 12,099,135 common shares,
which is calculated by multiplying 0.134048 by 90,259,548, being the number of
shares of Nayarit common stock outstanding on February 11,
2010. Nayarit stockholders will own approximately 19.97% of the
issued and outstanding shares of Capital Gold common stock. The acquisition
method of accounting is based on Accounting Standards Codification, or ASC,
Topic 805, Business Combinations, or ASC 805, and uses the fair value concepts
defined in ASC 820, Fair Value Measurements and Disclosures. The pro forma
adjustments reflect the assets and liabilities of Nayarit at their preliminary
estimated fair values. Differences between these preliminary estimates and the
final acquisition accounting will occur and these differences could have a
material impact on the unaudited pro forma combined per share information set
forth in the following table.
In
accordance with the requirements of the SEC, the unaudited pro forma combined
and unaudited pro forma Capital Gold and Nayarit per share equivalent
information gives effect to the Amalgamation as if the Amalgamation had
been effective on August 1, 2008 in the case of income per share data, and
January 31, 2010 in the case of book value per share data. You should read this
information in conjunction with the selected historical financial information
included elsewhere in this proxy statement/prospectus, and the historical
financial statements of Capital Gold and Nayarit and related notes that have
been filed with the SEC, certain of which are incorporated in this proxy
statement/prospectus by reference. See “Selected Historical
Financial Information of Capital Gold” beginning on page
14, “Selected
Historical Financial Information of Nayarit” beginning on page 15
and “Where You Can Find More
Information” beginning on page
184. The unaudited Capital Gold pro forma combined per share information
is derived from, and should be read in conjunction with, the unaudited pro forma
condensed combined financial statements and related notes included in this proxy
statement/prospectus. See Unaudited Pro Forma Condensed
Combined Financial Statements” beginning on page
65. The historical per share information of Nayarit below is derived from
audited financial statements as of and for the year ended September 30, 2009 and
the unaudited financial statements as of and for the three months ended December
31, 2009. The unaudited pro forma Nayarit per share equivalents are calculated
by multiplying the unaudited Capital Gold pro forma combined per share amounts
by the exchange ratio of 0.134048.
The
unaudited pro forma combined per share information below is presented for
illustrative purposes only and is not necessarily indicative of the income per
share and book value that would have occurred if the Amalgamation had been
completed as of the beginning of the periods presented, nor is it necessarily
indicative of the future operating results or financial position of the combined
company.
|
Comparative
per Share Data
|
As
of and for the Six
Months
Ended
January
31, 2010
(unaudited)
|
As
of and for the
Twelve
Months Ended
July
31, 2009
|
||||||
|
Capital
Gold - Historical
|
||||||||
|
Historical
per common share:
|
||||||||
|
Earnings
per share (basic)
|
$ | 0.12 | $ | 0.22 | ||||
|
Earnings
per share (diluted)
|
$ | 0.12 | $ | 0.21 | ||||
|
Book
value per share (1)
|
$ | 0.93 | $ | 0.78 | ||||
|
Unaudited
Pro Forma Combined (2)
|
||||||||
|
Unaudited pro
forma per common share(1)
|
||||||||
|
Earnings
per share (basic)
|
$ | 0.07 | $ | 0.04 | ||||
|
Earnings
per share (diluted)
|
$ | 0.07 | $ | 0.03 | ||||
|
Book
value per share(1)
|
$ | 1.42 | $ | N/A | (4 ) | |||
16
|
Comparative
per Share Data
|
As
of and for the Three
Months
Ended December
31,
2009
|
As
of and for the Twelve
Months
Ended September
30,
2009
|
||||||
|
Nayarit
– Historical
|
||||||||
|
Historical
per common share:
|
||||||||
|
Loss
per share (basic)
|
$ | (0.01 | ) | $ | (0.10 | ) | ||
|
Loss
per share (diluted)
|
$ | (0.01 | ) | $ | (0.10 | ) | ||
|
Book
value per share(1)
|
$ | 0.07 | $ | 0.07 | ||||
|
Unaudited
Pro Forma Combined (2)(3)
|
||||||||
|
Unaudited pro
forma per common share:
|
||||||||
|
Earnings
per share (basic)
|
$ | 0.07 | $ | 0.03 | ||||
|
Earnings
per share (diluted)
|
$ | 0.07 | $ | 0.03 | ||||
|
Book
value per share
|
$ | 1.42 | N/A | (4 ) | ||||
(1) The
book value per share is computed by dividing total shareholders' equity by the
number of shares of common stock issued and outstanding as of December 31,
2009.
(2) The
pro forma combined shares outstanding assumes the issuance of 12,099,135 common
shares, which is calculated by multiplying 0.134048 by 90,259,548, being the
number of shares of Nayarit common stock outstanding on February 10,
2010.
(3) The
unaudited pro forma Nayarit per share equivalents are calculated by multiplying
the unaudited Capital Gold pro forma combined per share amounts by the exchange
ratio of 0.134048.
(4) For
the pro forma balance sheet presentation, it was assumed that the merger was
completed on January 31, 2010 and, therefore, the pro forma book values for the
twelve months ended July 31, 2009 are not presented.
17
RISK
FACTORS
In addition to the other information
included in this joint proxy statement/prospectus, Capital Gold and Nayarit
stockholders should carefully consider the following risk factors before
deciding whether to vote in favor of the matters set forth in this joint proxy
statement/prospectus. If any of the risks described below actually
occurs, the respective businesses, operating results, financial condition and/or
stock prices of Capital Gold, Nayarit or the combined company could be
materially adversely affected.
Risks
Related to the Business Combination and the Combined Entity
Completion
of the Business Combination is subject to a number of conditions.
The
obligations of the parties to consummate the Business Combination are subject to
the satisfaction or waiver of specified conditions set forth in the Business
Combination Agreement. Such conditions include satisfaction by all
parties of covenants and obligations contained in the Business Combination
Agreement, the accuracy in all material respects on the date of the Business
Combination Agreement and the closing date of all of the parties’
representations and warranties, obtaining material consents, approval of the
regulatory authorities, and stockholder approval, as set forth in the Business
Combination Agreement. It is possible some or all of these conditions
will not be satisfied or waived by parties to the Business Combination
Agreement, and therefore, the Business Combination may not be
consummated.
Inaccuracies
in projecting operating costs could hinder exploration activity.
Capital
and operating cost estimates made in respect of the combined entity’s mines and
development projects may not prove accurate. Capital and operating costs are
estimated based on the interpretation of geological data, feasibility studies,
anticipated climatic conditions and other factors. Any of the following events,
among the other events and uncertainties described in this proxy
statement/prospectus, could affect the ultimate accuracy of such estimates;
unanticipated changes in grade and tonnage of mineralized material to be mined
and processed; incorrect data on which engineering assumptions are made; delay
in construction schedules, unanticipated transportation costs; the accuracy of
major equipment and construction cost estimates; labor negotiations; changes in
government regulation (including regulations regarding prices, cost of
consumables, royalties, duties, taxes, permitting and restrictions on production
quotas on exportation of minerals) and title claims. Failure to
accurately project such expenses could adversely affect the combined entity’s
ability to continue operations.
The
exchange ratio is fixed and will not be adjusted in the event of any change in
either Capital Gold’s or Nayarit’s stock price.
The
aggregate number of shares to be issued to Nayarit stockholders at closing is
fixed in the Business Combination Agreement at 0.134048 shares of Capital Gold
common stock for each one share of Nayarit common stock. The exact
number of shares of Capital Gold common stock to be issued to holders of Nayarit
common stock will be determined immediately prior to the closing, and is
currently expected to be 12,099,135. The exchange ratio will not be
adjusted for changes in the market price of either Nayarit common stock or
Capital Gold common stock. Changes in the price of Capital Gold
common stock prior to completion of the Business Combination will affect the
purchase price and purchase price allocation that Nayarit stockholders will
receive on the date of the Business Combination. Stock price changes
may result from a variety of factors (many of which are beyond the control of
either Capital Gold or Nayarit), including the following factors:
|
|
·
|
changes
in Nayarit’s and Capital Gold’s respective businesses, operations and
prospects, or the market assessments
thereof;
|
|
|
·
|
market
assessments of the likelihood that the Business Combination will be
completed, including related considerations regarding regulatory approvals
of the Business Combination; and
|
|
|
·
|
general
market and economic conditions and other factors generally affecting the
price of each of Capital Gold’s and Nayarit’s common
stock.
|
The price
of Capital Gold common stock at the closing of the Business Combination may vary
from its price on the date the Business Combination Agreement was executed, on
the date of this proxy statement/prospectus and on the date of the stockholders’
meetings of Nayarit and Capital Gold. As a result, the market value
represented by the exchange ratio will also vary.
18
Because
the date that the Business Combination is completed will be later than the date
of the stockholder meetings, at the time of your meeting, you will not know the
exact market value of the Capital Gold common stock that Nayarit stockholders
will receive upon completion of the Business Combination.
If the
price of Capital Gold common stock increases between the date of the stockholder
meetings and the Effective Time of the Business Combination, Nayarit
stockholders will receive shares of Capital Gold common stock that have a market
value that is greater than the market value of such shares on the date of the
stockholders meetings. On the other hand, if the price of Capital
Gold common stock decreases between the date of the stockholder meetings and the
Effective Time of the Business Combination, Nayarit stockholders will receive
shares of Capital Gold common stock that have a market value that is less than
the market value of such shares on the date of the stockholder
meetings. Therefore, because the exchange ratio is fixed,
stockholders cannot be sure at the time of the stockholder meetings of the
market value of the consideration that will be paid to Nayarit stockholders upon
completion of the Business Combination.
Failure
to complete the Business Combination could negatively impact the stock prices
and the future business and financial results of Capital Gold and
Nayarit.
If the
Business Combination is not completed, the ongoing businesses of Capital Gold
and Nayarit may be adversely affected. Additionally, if the Business
Combination is not completed for certain specific reasons described under the
caption “The Business
Combination”, Capital Gold or Nayarit may be required to pay a
termination fee under the Business Combination Agreement of $1,000,000, and will
have to pay certain costs relating to the Business Combination, such as legal,
accounting, financial advisor, filing, printing and mailing fees. Any
of the foregoing, or other risks arising in connection with the failure of the
Business Combination, including the diversion of management attention from
pursuing other opportunities during the pendency of the Business Combination,
may have an adverse effect on the business, financial results and stock prices
of Capital Gold and Nayarit.
Whether
or not the Business Combination is completed, the announcement and pendency of
the Business Combination could cause disruptions in the businesses of Capital
Gold and Nayarit, which could have an adverse effect on their respective
businesses, financial results and stock prices.
Whether
or not the Amalgamation is completed, the announcement and pendency of the
Business Combination could cause disruptions in the businesses of Capital Gold
and Nayarit as well
as planned or unexpected changes in management. Specifically,
managements’ attention has been focused on the Business Combination, which may
have diverted managements’ attention from the core business of the respective
companies and other opportunities that could have been beneficial to the
respective companies. In addition, current and prospective employees
of Capital Gold and Nayarit may experience uncertainty about their future roles
with Capital Gold following the Business Combination, which may materially and
adversely affect the ability of each of Capital Gold and Nayarit to attract and
retain key personnel. These disruptions could be exacerbated by a
delay in the completion of the Business Combination or termination of the
Business Combination Agreement and could have an adverse effect on the business,
financial results or stock prices of Capital Gold or Nayarit if the Business
Combination is not completed.
The
Business Combination Agreement contains provisions that could discourage a
potential competing acquirer of either Capital Gold or Nayarit.
The
Business Combination Agreement limits the ability of the parties to solicit or
entertain alternative Business Combination proposals from third parties and
provides that in some circumstances, upon termination of the Business
Combination Agreement one of the parties will be required to pay a “break” fee
of $1,000,000 to the other party. These provisions could discourage a
potential competing acquirer that might have an interest in acquiring all or a
significant part of Capital Gold or Nayarit from considering or proposing that
acquisition, even if it were prepared to pay consideration with a higher per
share cash or market value than the market value proposed to be received or
realized in the Business Combination, or might result in a potential competing
acquirer proposing to pay a lower price than it might otherwise have proposed to
pay because of the added expense of the $1,000,000 break fee that may become
payable in certain circumstances.
19
If the
Business Combination Agreement is terminated and either Capital Gold or Nayarit
determines to seek another Business Combination, it may not be able to negotiate
a transaction with another party on terms comparable to, or better than, the
terms of the Business Combination.
The
combined company may not realize the benefits currently anticipated due to
challenges associated with integrating the operations of Capital Gold and
Nayarit.
The
success of the combined company will depend in large part on the success of
management of the combined company integrating the operations of Nayarit with
those of Capital Gold after the completion of the Business
Combination. The failure of the combined company to achieve such
integration could result in the failure of the combined company to realize the
anticipated benefits of the Business Combination and could impair the results of
operations, profitability, and financial results of the combined
company.
The
overall integration of the operations of Nayarit and Capital Gold may also
result in unanticipated operational problems, expenses, liabilities and
diversion of management’s time and attention.
There
can be no assurance that Capital Gold or Nayarit uncovered every item that could
have a material adverse effect on the combined company.
Although
Capital Gold and Nayarit each conducted respective business, financial and legal
due diligence in connection with the proposed Business Combination, there can be
no assurance that due diligence uncovered every item that could have a material
adverse effect on the combined company. Accordingly, there may be
matters involving either or both companies and their respective financial
statements that were not identified during their due diligence. Any
of these issues could materially and adversely affect the combined company’s
financial condition.
Uncertainties
in management’s assessment of Nayarit could cause Capital Gold not to realize
the benefits anticipated to result from the Business Combination.
It is
possible that, following the Business Combination, uncertainties in assessing
the value, strengths and potential profitability of, and identifying the extent
of all weaknesses, risks, contingent and other liabilities of Nayarit could
cause Capital Gold not to realize the benefits anticipated to result from the
Business Combination.
Fluctuation
in the price of gold and base metals could adversely affect the business of the
combined entity.
Changes
in the market price of gold and base metals, which in the past have fluctuated
widely, will affect the profitability of the combined entity’s operations and
its financial condition. The combined company’s profitability and
viability will depend on the market price of gold and base
metals. The market price of gold and base metals is set in the world
market and is affected by numerous industry factors beyond the combined entity’s
control, including the demand for precious metals, expectations with respect to
the rate of inflation, interest rates, currency exchange rates, the demand for
jewelry and industrial products containing metals, production levels,
inventories, costs of substitutes, changes in global or regional investment or
consumption patterns, and sales by central banks and other holders, speculators
and producers of gold and other metals in response to any of the above factors,
and global and regional political and economic factors. A decline in
the market price of gold or other base metals below the combined entity’s
anticipated production costs for any sustained period would have a material
adverse impact on the profit, cash flow and results of operations of the
combined company’s projects and anticipated future operations. Such a
decline also could have a material adverse impact on the ability of the combined
company to finance the exploration and development of its existing and future
mineral projects, including Nayarit’s exploration stage projects. A
decline in the market price of gold or other base metals may also require the
combined company to write-down its mineral reserves which would have a material
adverse effect on the value of Capital Gold’s common stock. Further,
if revenue from gold or base metal sales declines, the combined company may
experience liquidity difficulties in the future.
20
Adverse
land title claims may affect the combined entity’s ability to
operate.
The
acquisition of title to mineral properties is a very detailed and time-consuming
process. Title to, and the area of, mineral concessions may be
disputed. Although both Capital Gold and Nayarit believe they have
taken reasonable measures to ensure proper title to their properties, it is
possible that title defects may be raised by third parties. In particular, the
amalgamation pursuant to which Nayarit will become a wholly-owned subsidiary of
Capital Gold may be considered a transfer of title to Nayarit’s properties under
applicable Mexican law. When a title transfer (or deemed transfer)
takes place, the combined entity’s title may be challenged or
impaired. Third parties may have valid claims underlying portions of
Nayarit’s interests, including government licensing requirements or regulations,
prior unregistered liens, agreements, transfers or claims, and title may be
affected by, among other things, undetected defects. In addition, the
combined entity may be unable to operate its properties as permitted or to
enforce its rights with respect to its properties.
The
combined entity will be subject to certain mining risks, which may adversely
affect the entity’s capital resources.
Mining
operations generally involve a high degree of risk. The combined
entity’s operations are subject to all of the hazards and risks normally
encountered in the exploration, development and production of gold and base
metals, including: unusual and unexpected geologic formations; seismic activity;
rock bursts; cave-ins; flooding and other conditions involved in the drilling
and removal of material, any of which could result in damage to, or destruction
of, mines and other producing facilities; damage to life or property;
environmental damage and possible legal liability. Although adequate
precautions to minimize risk will be taken, milling operations are subject to
hazards such as equipment failure, failure of containment vessels and
contamination of the environment by chemicals used in processing ore such as
cyanide or the failure to retain dams around tailings disposal areas which may
result in environmental pollution and consequent liability. The exploration for
and development of mineral deposits involves significant risks which even a
combination of careful evaluation, experience and knowledge may not
eliminate. Whether a mineral deposit will be commercially viable
depends on a number of factors, some of which are: the particular attributes of
the deposit, such as size, grade and proximity to infrastructure; metal prices,
which are highly cyclical; and government regulations, including regulations
relating to prices, taxes, royalties, land tenure, land use, importing and
exporting of minerals and environmental protection. The exact effect
of these factors cannot be accurately predicted, but the combination of these
factors may result in the combined entity not receiving an adequate return on
invested capital.
The
combined company’s principal operations will be located in Mexico and are
subject to Mexican laws and regulations, and any variation from current
regulations or a change in political climate could adversely affect the combined
company’s ability to conduct its business.
Capital
Gold’s El Chanate open pit gold mine and mining concessions are located in
northern Sonora, Mexico. Capital Gold’s Saric project is also located
in Mexico. Nayarit's Orion Gold Project is located in the State of
Nayarit, Mexico. The combined company’s projects and operations are
subject to Mexican laws and regulations. Investors should assess the
political risks of investing in a foreign country and, more particularly, in
Mexico. Variations from the current regulatory, economic and
political climate in Mexico could have an adverse effect on the affairs of the
combined company.
21
The
combined company’s licenses to operate and conduct exploration in Mexico may not
be renewed.
For the
combined company to carry out mining activities, exploitation licenses in Mexico
must be obtained and kept current. There is no guarantee that all of
the combined company's exploitation licenses will be extended or that new
exploitation licenses will be granted. In addition, such exploitation
licenses could be changed and any application to renew any existing licenses may
not be approved. The combined company may be required to contribute
to the cost of providing the required infrastructure to facilitate the
development of its properties. The combined company also will have to
obtain and comply with permits and licenses which may contain specific
conditions concerning operating procedures, water use, waste disposal, spills,
environmental studies, abandonment and restoration plans and financial
assurances. The combined company’s failure to comply with such
regulations may adversely impact its ability to continue its exploration
operations.
Risks
Related to Capital Gold
While
Capital Gold believes that it will continue to generate positive cash flow and
profits from operations, if it encounters unexpected problems, it may need to
raise additional capital. If additional capital is required and
Capital Gold is unable to obtain it from outside sources, Capital Gold may be
forced to reduce or curtail its operations or its anticipated exploration
activities.
Prior to
the first fiscal quarter of 2008, Capital Gold was not able to generate cash
flow from operations. While it is now generating positive cash flow and
profits, if Capital Gold encounters unexpected problems and it is unable to
continue to generate positive cash flow and profits, it may need to raise
additional capital. Capital Gold also may need to raise additional capital
for property acquisition and new exploration. To the extent that Capital Gold
needs to obtain additional capital, management intends to raise such funds
through the sale of its securities and/or joint venturing with one or more
strategic partners. Capital Gold cannot assure that adequate additional
funding, if needed, will be available or on terms acceptable to it. If
Capital Gold needs additional capital and it is unable to obtain it from outside
sources, Capital Gold may be forced to reduce or curtail its operations or its
anticipated exploration activities.
Capital
Gold’s Credit Agreement with Standard Bank plc (“Standard Bank”) imposes
restrictive covenants on it.
Capital
Gold’s Credit Agreement with Standard Bank requires it, among other obligations,
to meet certain financial covenants including, but not limited to, (i) a ratio
of current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S. $15,000,000, and (iii) a quarterly average minimum liquidity of U.S.
$500,000. In addition, the Credit Agreement restricts, among other things,
Capital Gold’s ability to incur additional debt, create liens on its property,
dispose of any assets, merge with other companies, enter into hedge agreements,
organize or invest in subsidiaries or make any investments above a certain
dollar limit. A failure to comply with the restrictions contained in the
Credit Agreement could lead to an event of default thereunder which could result
in an acceleration of such indebtedness. As a condition to closing the Business
Combination, Capital Gold must obtain the consent of Standard Bank.
Capital
Gold’s mining contractor is using reconditioned equipment which could adversely
affect its cost assumptions and its ability to economically and successfully
mine the project.
Sinergia
Obras Civiles Y Mineras, S.A. de C.V. (“Sinergia”), Capital Gold’s mining
contractor, is using fully functioning, but older equipment. Such
equipment is subject to the risk of more frequent breakdowns and need for repair
than new equipment. If the equipment that Capital Gold or Sinergia
uses breaks down and needs to be repaired or replaced, Capital Gold will incur
additional costs and operations may be delayed, resulting in lower amounts of
gold recovered. In such event, Capital Gold’s capital and operating
cost assumptions may be inaccurate and its ability to economically and
successfully mine the El Chanate project may be hampered, resulting in decreased
revenues and, possibly, a loss from operations.
The
gold deposit Capital Gold has identified at El Chanate is relatively
low-grade. If Capital Gold’s estimates and assumptions are
inaccurate, its results of operation and financial condition could be materially
adversely affected.
The gold
deposit Capital Gold is mining at its El Chanate mine is relatively
low-grade. If the estimates of ore grade or recovery rates turn out
to be lower than the actual ore grade and recovery rates, if costs are higher
than expected, or if Capital Gold experiences problems related to the mining,
processing, or recovery of gold from ore at the mine, Capital Gold’s results of
operation and financial condition could be materially adversely
affected. Moreover, it is possible that actual costs and economic
returns may differ materially from Capital Gold’s best
estimates. There can be no assurance that Capital Gold’s operations
at El Chanate will continue to be profitable.
22
Gold
prices can fluctuate on a material and frequent basis due to numerous factors
beyond Capital Gold’s control. Capital Gold’s ability to generate
profits from operations could be materially and adversely affected by such
fluctuating prices.
The
profitability of any gold mining operations in which Capital Gold has an
interest will be significantly affected by changes in the market price of
gold. Gold prices fluctuate on a daily basis. During the
six months ended January 31, 2010, the spot price for gold on the London
Exchange has fluctuated between $870.25 and $1,212.50 per ounce. Gold
prices are affected by numerous factors beyond Capital Gold’s control,
including:
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industrial and commercial demand
for gold,
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the level of interest
rates,
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the rate of
inflation,
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central bank
sales,
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world supply of gold
and
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stability of exchange
rates.
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Each of
these factors can cause significant fluctuations in gold prices. Such external
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments. The current
significant instability in the financial markets heightens these
fluctuations. The price of gold has historically fluctuated
widely and, depending on the price of gold, revenues from mining operations may
not be sufficient to offset the costs of such operations.
Capital
Gold may not be successful in hedging against interest rate fluctuations and may
incur mark-to-market losses and lose money through its hedging
programs.
Capital
Gold has entered into interest rate swap agreements. The terms of
Capital Gold’s Credit Agreement with Standard Bank require that it hedge at
least 50% of its outstanding loan balance. There can be no assurance
that Capital Gold will be able to successfully hedge against interest rate
fluctuations.
Further,
there can be no assurance that the use of hedging techniques will always be to
Capital Gold’s benefit. Hedging instruments that protect against the
market price volatility of metals may prevent Capital Gold from realizing the
full benefit from subsequent increases in market prices with respect to covered
production, which would cause Capital Gold to record a mark-to-market loss, thus
decreasing its profits. Hedging contracts also are subject to the
risk that the other party may be unable or unwilling to perform its obligations
under these contracts. Any significant nonperformance could have a
material adverse effect on Capital Gold’s financial condition, results of
operations and cash flows.
Capital
Gold’s material property interests are in Mexico. Risks of doing business in a
foreign country could adversely affect its results of operations and financial
condition.
Capital
Gold faces risks normally associated with any conduct of business in a foreign
country with respect to its El Chanate Project in Sonora, Mexico, including
various levels of political and economic risk. The occurrence of one
or more of these events could have a material adverse impact on Capital Gold’s
efforts or operations which, in turn, could have a material adverse impact on
its cash flows, earnings, results of operations and financial
condition. These risks include the following:
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labor
disputes,
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invalidity of governmental
orders,
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uncertain or unpredictable
political, legal and economic
environments,
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war and civil
disturbances,
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23
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changes in laws or
policies,
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taxation,
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delays in obtaining or the
inability to obtain necessary governmental
permits,
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governmental seizure of land or
mining claims,
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limitations on
ownership,
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limitations on the repatriation
of earnings,
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increased financial
costs,
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import and export regulations,
including restrictions on the export of gold,
and
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foreign exchange
controls.
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These
risks may limit or disrupt the project, restrict the movement of funds or impair
contract rights or result in the taking of property by nationalization or
expropriation without fair compensation.
Capital
Gold sells gold in U.S. dollars; however, it incurs a significant amount of its
expenses in Mexican pesos. If applicable currency exchange rates
fluctuate, Capital Gold’s revenues and results of operations may be materially
and adversely affected.
Capital
Gold sells gold in U.S. dollars. It incurs a significant amount of
our expenses in Mexican pesos. As a result, Capital Gold’s financial
performance would be affected by fluctuations in the value of the Mexican peso
to the U.S. dollar.
Changes
in regulatory policy could adversely affect Capital Gold’s exploration and
future production activities.
Any
changes in government policy may result in changes to laws
affecting:
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ownership of
assets,
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land
tenure,
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mining
policies,
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monetary
policies,
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taxation,
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rates of
exchange,
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environmental
regulations,
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labor
relations,
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repatriation of income
and/or
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return of
capital.
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Any such
changes may affect Capital Gold’s ability to undertake exploration and
development activities in respect of future properties in the manner currently
contemplated, as well as its ability to continue to explore, develop and operate
those properties in which it has an interest or in respect of which it has
obtained exploration and development rights to date. The possibility,
particularly in Mexico, that future governments may adopt substantially
different policies, which might extend to expropriation of assets, cannot be
ruled out.
As
Capital Gold currently does not enter into forward sales, commodity, derivatives
or hedging arrangements with respect to its future gold production, it is
exposed to the impact of any significant decrease in the gold
price.
As a
general rule, Capital Gold sells its gold at the prevailing market price.
Currently, Capital Gold generally does not enter into forward sales, commodity,
derivative or hedging arrangements to establish a price in advance for the sale
of future gold production, although it may do so in the future. As a result,
Capital Gold may realize the benefit of any short-term increase in the gold
price, but is not protected against decreases in the gold price, and if the gold
price decreases significantly, Capital Gold’s revenues may be materially
adversely affected.
24
Compliance
with environmental regulations could adversely affect Capital Gold’s exploration
and future production activities.
With
respect to environmental regulation, future environmental legislation could
require:
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stricter standards and
enforcement,
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increased fines and penalties for
non-compliance,
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more stringent environmental
assessments of proposed projects
and
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a heightened degree of
responsibility for companies and their officers, directors and
employees.
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There can
be no assurance that future changes to environmental legislation and related
regulations, if any, will not adversely affect Capital Gold’s operations.
Capital Gold could be held liable for environmental hazards that exist on the
properties in which it holds interests, whether caused by previous or existing
owners or operators of the properties. Any such liability could adversely affect
its business and financial condition.
Capital
Gold has and the combined entity will have insurance against losses or
liabilities that could arise from its operations. If it incurs
material losses or liabilities in excess of its insurance coverage, its
financial position could be materially and adversely affected.
Mining
operations involve a number of risks and hazards, including:
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environmental
hazards,
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industrial
accidents,
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metallurgical and other
processing,
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acts of God,
and/or
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mechanical equipment and facility
performance problems.
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Such
risks could result in:
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damage to, or destruction of,
mineral properties or production
facilities,
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personal injury or
death,
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environmental
damage,
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delays in
mining,
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monetary losses,
and/or
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possible legal
liability.
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Industrial
accidents could have a material adverse effect on Capital Gold’s future business
and operations. Capital Gold currently maintains general liability,
business interruption, auto and property insurance
coverage. Capital Gold cannot be certain that the insurance it
has in place will cover all of the risks associated with mining or that it will
be able to maintain insurance to cover these risks at economically feasible
premiums. Capital Gold also might become subject to liability for pollution or
other hazards which it cannot insure against or which it may elect not to insure
against because of premium costs or other reasons. Losses from such events may
have a material adverse effect on Capital Gold’s financial
position.
25
Calculation
of reserves and metal recovery dedicated to future production is not exact,
might not be accurate and might not accurately reflect the economic viability of
Capital Gold’s properties.
Reserve
estimates may not be accurate. There is a degree of uncertainty
attributable to the calculation of reserves, resources and corresponding grades
being dedicated to future production. Until reserves or resources are
actually mined and processed, the quantity of reserves or resources and grades
must be considered as estimates only. In addition, the quantity of reserves or
resources may vary depending on metal prices. Any material change in
the quantity of reserves, resource grade or stripping ratio may affect the
economic viability of Capital Gold’s properties. In addition, there can be no
assurance that mineral recoveries in small scale laboratory tests will be
duplicated in large tests under on-site conditions or during
production.
Capital
Gold is dependent on the efforts of certain key personnel and contractors to
develop Capital Gold’s El Chanate Project. If Capital Gold loses the
services of these persons and contractors and it is unable to replace them,
Capital Gold’s operations at its El Chanate Project may be disrupted and/or
materially adversely affected.
Capital
Gold is dependent on a relatively small number of key personnel, including but
not limited to John Brownlie, President and Chief Operating Officer, who, among
other duties, oversees the El Chanate Project Christopher Chipman, Chief
Financial Officer, and Scott Hazlitt, Vice President—Mine
Development. The loss of any one of Capital Gold’s key personnel
could have an adverse effect on Capital Gold. Mr. Brownlie will
resign from his position as President and Chief Operating Officer effective upon
the closing of the Business Combination. Although the Board of
Directors is actively seeking a Chief Executive Officer of Capital Gold, there
can be no assurance that Mr. Brownlie’s resignation will not have an adverse
effect on Capital Gold. Capital Gold also is dependent upon Sinergia to provide
mining services. Sinergia commenced mining operations on March 25, 2007,
and transitioned from the pre-production to production phase of the mining
contract in July 2007. Sinergia’s mining fleet is not new. If
Capital Gold loses the services of its key personnel, or if Sinergia is unable
to effectively maintain its fleet, operations at its El Chanate Project may be
disrupted and/or materially adversely affected.
There
are uncertainties as to title matters in the mining industry. Capital
Gold believes that it has good title to its properties; however, any defects in
such title that cause Capital Gold to lose its rights in mineral properties
could jeopardize its business operations.
Capital
Gold has investigated its rights to explore, exploit and develop its concessions
in manners consistent with industry practice and, to the best of Capital Gold’s
knowledge, those rights are in good standing. However, Capital Gold
cannot assure that the title to or its rights of ownership in the El Chanate
concessions will not be challenged by third parties or governmental
agencies. In addition, there can be no assurance that the concessions
in which Capital Gold has an interest are not subject to prior unregistered
agreements, transfers or claims and title may be affected by undetected
defects. Any such defects could have a material adverse effect on
Capital Gold.
Capital
Gold’s ability to maintain long-term profitability eventually will depend on its
ability to find, explore and develop additional properties. Capital
Gold’s ability to acquire such additional properties could be hindered by
competition. If Capital Gold is unable to acquire, develop and economically mine
additional properties, it most likely will not be able to be profitable on a
long-term basis.
Gold is a
non-renewable resource and gold mines continue to deplete their reserves while
in operation. They eventually become depleted of ore or become
uneconomical to sustain mining operations. The acquisition of gold
properties and their exploration and development are subject to intense
competition. Companies with greater financial resources and larger
staffs for exploration and development may be in a better position than Capital
Gold to compete for such mineral properties. If Capital Gold is
unable to find, develop and economically mine new properties, Capital Gold most
likely will not be able to be profitable on a long-term basis.
Capital
Gold’s ability on a going forward basis to discover additional viable and
economic mineral reserves is subject to numerous factors, most of which are
beyond Capital Gold’s control and are not predictable. If Capital Gold is unable
to discover such reserves, it most likely will not be able to be profitable on a
long-term basis.
Exploration
for gold is speculative in nature, involves many risks and is frequently
unsuccessful. Few properties that are explored are ultimately
developed into commercially producing mines. As noted above, Capital
Gold’s long-term profitability will be, in part, directly related to the cost
and success of exploration programs. Any gold exploration program
entails risks relating to:
26
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the location of economic ore
bodies,
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development of appropriate
metallurgical processes,
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receipt of necessary governmental
approvals, and
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construction of mining and
processing facilities at any site chosen for
mining.
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The
commercial viability of a mineral deposit is dependent on a number of
factors including:
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the
price of gold,
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the
particular attributes of the deposit, such as
its
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size
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grade,
and
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proximity
to infrastructure,
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financing
costs,
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taxation,
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royalties,
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land
use,
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water
use,
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power
use,
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importing
and exporting gold, and
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environmental
protection.
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The
effect of these factors cannot be accurately predicted.
Risks
Related to Ownership of Capital Gold Stock
The
issuance of a significant number of Capital Gold shares could adversely affect
the market price of Capital Gold shares.
If the
Business Combination is completed, a significant number of additional shares of
Capital Gold common stock will be available for trading in the public
market. The increase in the number of Capital Gold shares may lead to
sales of such shares or the perception that such sales may occur, either of
which may adversely affect the market for, and the market price of, Capital Gold
shares.
The
NYSE AMEX may delist Capital Gold’s securities from its exchange which could
limit investors’ ability to make transactions in Capital Gold’s common stock and
subject it to additional trading restrictions.
Capital
Gold’s common stock is listed on the NYSE AMEX, a national securities
exchange. Although Capital Gold expects to continue to meet the
minimum continued listing standards, it cannot assure you that its securities
will continue to be listed on the NYSE AMEX in the future.
If the
NYSE AMEX delists Capital Gold’s common shares from trading on its exchange,
Capital Gold could face significant material adverse consequences,
including:
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a
limited availability for market quotations for Capital Gold’s common
stock;
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reduced
liquidity with respect to Capital Gold’s common
stock;
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a
determination that Capital Gold’s common stock is a “penny stock,” which
will require brokers trading in the common stock to adhere to more
stringent rules and possibly result in a reduced level of trading activity
in the secondary trading market for Capital Gold’s common
stock;
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limited
amount of news and analyst coverage for Capital Gold’s common stock;
and
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27
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a
decreased ability to issue additional securities or obtain additional
financing in the future.
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In
addition, Capital Gold would no longer be subject to NYSE AMEX rules, including
rules requiring Capital Gold to have a certain number of independent directors
and to meet other corporate governance standards.
Capital
Gold’s stock price may be adversely affected if a significant amount of shares,
including those issued to the Nayarit stockholders, are sold in the public
market.
As of the
date of this joint proxy statement/prospectus, approximately 2,542,476 shares of
Capital Gold’s common stock, constituted "restricted securities" as defined in
Rule 144 under the Securities Act of 1933 and could be resold pursuant to an
exemption from registration afforded by Rule 144. In addition,
Capital Gold has registered herein 18,148,476 shares of common stock, including
common shares issuable upon the exercise of warrants and options of
Nayarit. All of the foregoing shares, assuming exercise of all of the
above options and warrants, would represent in excess of 27% of the then
outstanding shares of Capital Gold’s common stock. Registration of
the shares permits the sale of the shares in the open market or in privately
negotiated transactions without compliance with the requirements of Rule
144. To the extent the exercise price of the warrants or options is
less than the market price of the common stock, the holders of the warrants are
likely to exercise them and sell the underlying shares of common stock.
Capital Gold also may issue shares to be used to meet its capital
requirements or use shares to compensate employees, consultants and/or
directors. Capital Gold is unable to estimate the amount, timing or
nature of future sales of outstanding common stock. Sales of
substantial amounts of Capital Gold’s common stock in the public market could
cause the market price for the common stock to decrease.
Furthermore,
a decline in the price of Capital Gold’s common stock would likely impede its
ability to raise capital through the issuance of additional shares of common
stock or other equity securities.
Capital
Gold does not intend to pay cash dividends in the near future.
Capital
Gold’s board of directors determines whether to pay cash dividends on its issued
and outstanding shares. The declaration of dividends will depend upon
Capital Gold’s future earnings, its capital requirements, its financial
condition and other relevant factors. Capital Gold’s board does not
intend to declare any dividends on its shares for the foreseeable
future. Capital Gold anticipates that it will retain any earnings to
finance the growth of its business and for general corporate
purposes.
Capital
Gold’s stockholders will experience immediate dilution as a consequence of the
issuance of shares of Capital Gold’s common stock as consideration in the
Business Combination. Having a minority share position may reduce the
influence that Capital Gold’s current stockholders have on the management of
Capital Gold.
Based
on the number of shares of Nayarit common stock outstanding on February 10,
2010, Capital Gold expects to issue approximately 12,099,135 shares of its
common stock in the Business Combination to Nayarit's current stockholders and
to assume warrants and options to purchase an additional approximately 4,830,938
and 1,218,403 shares of Capital Gold common stock held by Nayarit's warrant and
option holders, respectively. Based on the number of outstanding
shares of Nayarit common stock and Capital Gold common stock, after the
Amalgamation, the current stockholders of Nayarit would own approximately 19.97%
of Capital Gold. Consequently, the ability of the current
stockholders of Capital Gold following the Business Combination to influence
management of Capital Gold through the election of directors will be
substantially reduced.
If
the Business Combination’s benefits do not meet the expectations of financial or
industry analysts, the market price of Capital Gold’s securities may
decline.
The
market price of Capital Gold’s securities decline prior to or after the
consummation of the Business Combination if:
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·
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the
Company does not achieve the perceived benefits of the Business
Combination as rapidly, or to the extent anticipated by, financial or
industry analysts; or
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·
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the
effect of the Business Combination on Capital Gold’s financial results is
not consistent with the expectations of financial or industry
analysts.
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28
Accordingly,
investors may experience a loss as a result of a decline in the market price of
Capital Gold’s securities. A decline in the market price of Capital Gold’s
securities also could adversely affect its ability to issue additional
securities and its ability to obtain additional financing in the
future.
29
THE
BUSINESS COMBINATION
The
following summary describes the material provisions of the Business Combination
Agreement, as amended. The provisions of the Business Combination
Agreement are complicated and not easily summarized. This summary may
not contain all of the information about the Business Combination Agreement, as
amended that is important to you. The following summary is
qualified in its entirety by reference to the complete text of the Business
Combination Agreement. The Business Combination Agreement is attached
to this joint proxy statement/prospectus as Annex I and is incorporated by
reference into this joint proxy statement/prospectus, and we encourage you to
read it carefully in its entirety for a more complete understanding of the
Business Combination Agreement and the Business Combination.
The
Business Combination Agreement, as amended has been included to provide
information regarding the terms of the transaction. Except for its
status as the contractual document that establishes and governs the legal
relations among Capital Gold and Nayarit with respect to the Business
Combination the Amendment, the Business Combination Agreement is not intended to
be a source of factual, business or operational information about the
parties.
The
Business Combination Agreement, as amended contains representations,
warranties and covenants that the respective parties made to each other as of
the date of the Business Combination or other specific dates. The
assertions embodied in those representations, warranties and covenants were made
for purposes of the contract among the respective parties and are subject to
important qualifications and limitations agreed to by the parties in connection
with negotiating the Business Combination. The representations,
warranties and covenants in the Business Combination Agreement, as
amended are also modified in important part by the underlying disclosure
schedules, which are not filed publicly and which are subject to a contractual
standard of materiality different from that generally applicable to
stockholders, and were used for the purpose of allocating risk among the parties
rather than establishing matters of fact. The parties do not believe
that these schedules contain information that is material to the vote on the
proposals at the respective Special Meetings of Capital Gold and
Nayarit.
Overview
and Structure of the Business Combination, as Amended
The
Business Combination Agreement, as Amended sets forth, among other
things:
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·
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representation
and warranties of the parties as to, among other things, the organization,
corporate power and authority, authorization and validity of the Business
Combination Agreement and, as relevant, other agreements contemplated
therein, the receipt of any necessary consents, approvals and permits, the
accuracy of certain information, and other
matters;
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·
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conditions
to be satisfied or waived on or before the Business Combination Closing
Date, to each party’s obligation to consummate the Business Combination on
the Business Combination Closing
Date;
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·
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covenants
regarding conduct of business prior to the Business Combination Closing
Date and other matters; and
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·
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circumstances
under which the Business Combination Agreement may be terminated prior to
closing of the Business Combination on the Business Combination Closing
Date.
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On
April 29, 2010, the parties to the Business Combination Agreement entered into
Amendment No. 1 to the Business Combination Agreement, pursuant to which, among
other things, the provisions with respect to John Brownlie continuing as
President and Chief Operating Officer and serving as a member of the Board of
Directors were eliminated.
Forms of
the following additional agreements contemplated in connection with the Business
Combination are attached to the form of the Business Combination Agreement
included in this proxy statement/prospectus:
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·
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The
form of Amalgamation Agreement between Nayarit and “MergerSub” as defined
below to form AmalgSub (as defined below) as a wholly owned subsidiary of
Capital Gold; and
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·
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Lock
Up Agreements between Capital Gold and each of Colin Sutherland and
Bradley Langille pursuant to which they each agree not to sell or
otherwise dispose of Capital Gold shares and securities received by them
as stockholders and option holders of
Nayarit.
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30
Pursuant
to the terms of the Business Combination Agreement, as amended
Capital Gold and Nayarit agreed to effect an amalgamation (the “Amalgamation”)
of Nayarit and a corporation, to be organized under the Ontario Act as a
wholly-owned subsidiary of Capital Gold (“Merger Sub”), to form a combined
entity (“AmalgSub”). By virtue of the Amalgamation, the separate
existence of each of Nayarit and Merger Sub shall cease, and AmalgSub, shall
continue its corporate existence under the OBCA as a wholly-owned subsidiary of
Capital Gold. In connection with the Amalgamation, and without any
action on the part of Nayarit or the holders of any securities of Nayarit, all
of the Nayarit Common Shares issued and outstanding immediately prior to the
consummation of the Amalgamation (other than Nayarit Common Shares held by
dissenting stockholders of Nayarit) shall become exchangeable into the common
stock of Capital Gold on the basis of 0.134048 shares of Capital Gold common
stock for each one (1) Nayarit Common Share (the “Amalgamation
Consideration”).
Accounting
Treatment of the Amalgamation (page
31)
The
Capital Gold and Nayarit amalgamation will be accounted for under the
acquisition method of accounting. Capital Gold is the acquirer and
will utilize the acquisition method of accounting which is based on Accounting
Standards Codification, or ASC, Topic 805, Business Combinations, or ASC 805 and
uses the fair value concepts defined in ASC 820, Fair Value Measurements and
Disclosures.
Regulatory
Approvals (page
31)
Capital
Gold and Nayarit do not believe that the Business Combination is subject to the
reporting obligations, statutory waiting periods or other approvals of any
government or regulatory agency or body other than addressing comments raised by
the Securities and Exchange Commission, or SEC, with respect to this proxy
statement/prospectus and the Toronto Stock Exchange and the TSX Venture
Exchange.
Closing
and Effective Time of the Amalgamation
The
Amalgamation is expected to be consummated promptly following the satisfaction
or waiver of the conditions described below under the subsection entitled “Conditions to Closing of the
Amalgamation,” unless Capital Gold and Nayarit agree in writing to hold
the closing at another time but in no event will such time be later than 120
days after the date of the Business Combination Agreement.
The
Effective Time of the Amalgamation will occur concurrently with the filing of
articles of amalgamation with the Ontario Ministry of Government Services
(Companies and Personal Property Security Branch) and the issuance of a
certificate of amalgamation therefor.
Conditions
to Closing of the Amalgamation
The
obligations of the parties to the Business Combination Agreement to consummate
the Amalgamation are subject to the satisfaction (or waiver by the other party)
of the following specified conditions set forth in the Business Combination
Agreement before consummation of the Amalgamation:
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(i)
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Capital
Gold’s stockholders have approved the Business Combination Agreement and
the issuance of the Amalgamation
Consideration;
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(ii)
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Nayarit’s
stockholders have approved the Business Combination
Agreement;
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(iii)
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If
applicable, the required waiting period under any domestic or foreign
anti-trust laws has expired or been
terminated;
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(iv)
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All
governmental authority approvals and third party consents required in
connection with the transactions contemplated by the Business Combination
Agreement have been obtained or
made;
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(v)
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A
registration statement with respect to the Amalgamation Consideration
shall have been declared effective by the SEC and no stop order suspending
the effectiveness of such registration statement is in
effect;
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(vi)
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No
governmental authority has enacted, issued, promulgated, enforced or
entered any law or order that has the effect of making the Amalgamation
illegal or otherwise preventing or prohibiting consummation of the
Amalgamation;
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(vii)
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Final
versions of Capital Gold’s disclosure schedules and Nayarit’s disclosure
schedules have been delivered and are final, true, correct and complete;
and
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(viii)
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No
pending action exists against any of the parties to the Business
Combination Agreement, or against any of their respective officers,
directors, assets or properties, which could be reasonably be expected to
have a material adverse effect.
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The
obligations of Capital Gold to consummate the Amalgamation are subject to
various additional closing conditions (unless waived by Capital
Gold):
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(i)
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The
accuracy in all respects on the date of the Business Combination Agreement
and the Effective Time of all of the representations and warranties of
Nayarit;
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(ii)
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The
performance in all material respects of all covenants and obligations
required to be performed by or complied with by Nayarit at or prior to the
Effective Time;
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(iii)
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The
delivery to Capital Gold by Nayarit of an officer’s certificate evidencing
the accuracy of the representations or warranties made by Nayarit and its
subsidiaries and certifying the performance of the covenants or
obligations required to be performed by
Nayarit;
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31
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(iv)
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The
delivery to Capital Gold by Nayarit of a secretary’s certificate
certifying the resolutions of the board of directors of Nayarit
authorizing the execution of the Business Combination Agreement and the
transaction contemplated thereby;
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(v)
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No
material adverse effect with respect to Nayarit’s business shall have
occurred since the date of the Business Combination
Agreement;
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(vi)
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The
receipt by Capital Gold of a satisfactory opinion from legal counsel to
Nayarit;
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(vii)
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The
receipt by Capital Gold of a satisfactory title opinion from mining
counsel to Nayarit;
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(viii)
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The
receipt of lockup agreements from Colin Sutherland and Bradley
Langille;
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(ix)
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The filing by
Nayarit with the Canadian System for Electronic Document Analysis
and Retrieval (“SEDAR”) all financial statements that are required
pursuant to applicable Canadian
laws;
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(x)
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Holders
of no more than 5% of the Nayarit Common Shares vote against the
Amalgamation and exercise dissent rights under the Ontario
Act;
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(xi)
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The
receipt by Capital Gold of a final report from SRK Consulting concerning
Nayarit’s assets and properties and such final report shall not be
materially different from the preliminary SRK Consulting report provided
to Capital Gold;
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(xii)
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The
resignation of the respective directors and officers of Nayarit and its
subsidiaries except for those directors and officers continuing in their
capacities after the Effective
Time;
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(xiii)
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All
convertible securities of Nayarit and options to purchase Nayarit Common
Shares outstanding prior to the Effective Time shall provide for the
issuance of Capital Gold common stock on the exchange basis set forth in
the Business Combination
Agreement;
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(xiv)
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The
receipt by Capital Gold of a fairness opinion with respect to the
transactions contemplated by the Business Combination Agreement from the
advisors to Capital Gold, if deemed necessary by the board of directors of
Capital Gold;
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(xv)
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The
receipt by Nayarit of a fairness opinion with respect to the
transactions contemplated by the Business Combination Agreement from the
advisors to Nayarit;
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(xvi)
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The
termination of the employment agreements between Nayarit and each of Colin
Sutherland and Bradley Langille without payment by Nayarit of any change
of control payments; and
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(xvii)
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The
receipt by Capital Gold of a certificate from SRK Consulting certifying
Nayarit’s representations and warranties regarding Nayarit’s mining
properties and assets.
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The
obligations of Nayarit to consummate the Amalgamation are subject to various
additional closing conditions (unless waived by Nayarit):
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(i)
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The
accuracy in all respects on the date of the Business Combination Agreement
and the Effective Time of all of representations and warranties of Capital
Gold;
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(ii)
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The
performance in all material respects of all covenants and obligations
required to be performed by or complied with by Capital Gold at or prior
to the Effective Time;
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(iii)
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The
delivery to Nayarit by Capital Gold of an officer’s certificate evidencing
the accuracy of the representations or warranties made by Capital Gold and
certifying the performance of the covenants or obligations required to be
performed by Capital Gold;
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(iv)
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The
delivery to Nayarit by Capital Gold of a secretary’s certificate
certifying the resolutions of the board of directors of Capital Gold
authorizing the execution of the Business Combination Agreement and the
transaction contemplated thereby;
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(v)
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No
material adverse effect with respect to Capital Gold’s business shall have
occurred since the date of the Business Combination
Agreement;
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(vi)
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The
receipt by Nayarit of a satisfactory opinion from legal counsel to Capital
Gold;
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(vii)
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The
resignation of the directors and officers of Capital Gold except for those
directors and officers continuing in their capacities after the Effective
Time;
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32
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(viii)
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Capital
Gold has entered into an agreement with an exchange agent with respect to
the exchange of the certificates evidencing Nayarit Common Shares for the
Amalgamation Consideration; and
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(ix)
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The
receipt by Nayarit of a satisfactory title opinion from mining counsel to
Capital Gold;
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Representations
and Warranties of Capital Gold and Nayarit in the Business Combination
Agreement
The
Business Combination Agreement contains a number of representations that each of
Capital Gold and Nayarit have made to each other. The representations
and warranties contained in the Business Combination Agreement were made for
purposes of the Business Combination Agreement and are subject to qualifications
and limitations agreed to by the respective parties in connection with
negotiating the terms of the Business Combination Agreement. In addition,
certain representations and warranties were made as of a specific date, may be
subject to a contractual standard of materiality different from what might be
viewed as material to stockholders or may have been used for purposes of
allocating risk between the respective parties rather than establishing matters
as facts.
Further,
the representations and warranties are qualified by information in confidential
disclosure schedules delivered by the respective parties together with the
Business Combination Agreement. While Capital Gold and Nayarit do not
believe these schedules contain information for which the securities laws
require public disclosure, other than information that has already been so
disclosed, the disclosure schedules do contain information that modify, qualify
and create exceptions to the representations, warranties and covenants set forth
in the Business Combination Agreement.
This
description of the representations and warranties, and their reproduction in the
copy of the Business Combination Agreement attached to this joint proxy
statement/prospectus as Annex I, are included solely to provide
stockholders with information regarding the terms of the Business Combination
Agreement. Accordingly, the representations and warranties and other
provisions of the Business Combination Agreement should not be read alone and
should not be relied on as statements of true fact, but instead should only be
read together with the information provided elsewhere in this joint proxy
statement/prospectus. See “Where You Can Find More
Information.”
Covenants
of the Parties
Among
other covenants, Capital Gold and Nayarit have agreed to during the period from
the date of the Business Combination Agreement until the earlier of the
termination of the Business Combination Agreement or the closing of the
Amalgamation, unless the other party gives written consent to the
contrary,
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(i)
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conduct
their respective business in all material respects in the ordinary course
of business consistent with past
practice;
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(ii)
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use
commercially reasonable efforts to preserve intact, in all material
respects, their respective business organizations, to keep available the
services of their respective and their respective subsidiaries’ managers,
directors, officers, key employees and
consultants;
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(iii)
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keep
all of their respective mineral rights, permits and contracts in good
standing and in full force and effect;
and
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(iv)
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comply
with all laws in the conduct of their respective
business.
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Non-Solicitation
Each of
Capital Gold and Nayarit have agreed, from the date of the Business Combination
Agreement until the earlier of the Effective Time or termination of the Business
Combination Agreement that it shall not, as more specifically set forth in the
Business Combination Agreement, solicit, furnish information in connection with
or in response to, engage in discussions as to, or take action in furtherance of
an Acquisition Proposal (as defined in the Agreement).
33
Indemnification
Provisions
From the
date of the Business Combination Agreement through the Effective Time, each of
Capital Gold and Nayarit (each of which is referred to as a party and for the
purpose of this description of the indemnification provisions, the “indemnifying
party”), have agreed to indemnify and hold the other party (and its affiliates,
and its or their successors and assigns and respective directors, officers,
employees and agents), harmless from and against any liability, claim (including
claims by third parties), demand, judgment, loss, cost, damage, or expense
whatsoever (including reasonable attorneys’, consultants’ and other professional
fees and disbursements of every kind, nature and description) that arise from
(i) any breach of any representation, warranty, covenant or agreement of
such indemnifying party contained in the Business Combination Agreement and
(ii) any negligence, willful misconduct or fraud committed by the
indemnifying party in connection with the execution, delivery and performance of
the Business Combination Agreement.
Termination
The
Business Combination Agreement may be terminated at any time prior to the
earlier of the Effective Time, notwithstanding the approval by the stockholders
of Capital Gold and Nayarit, as follows:
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(i)
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by mutual written consent of
Capital Gold and Nayarit, as duly authorized by their respective board of
directors;
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(ii)
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by either Capital Gold and
Nayarit if (A) the closing conditions in the Business Combination
Agreement have not been satisfied by the other party by 120 days after the
date of the Business Combination Agreement (the “Completion Deadline”); or
(B) any governmental authority shall have enacted, issued,
promulgated, enforced or entered any order or law that has the effect of
enjoining or otherwise preventing or prohibiting the Amalgamation (unless
the foregoing was the result of the prospective terminating party’s breach
of the Business Combination Agreement, in which case the prospective
terminating party may not terminate pursuant to this
provision);
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(iii)
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by
Capital Gold if (A) there has been a material breach of any
representation, warranty, covenant or agreement on the part of Nayarit, or
any representation or warranty of Nayarit shall have become untrue or
inaccurate, which breach or untrue representation or warranty is incapable
of being cured prior to the closing or is not cured within 20 days of
notice of such breach or inaccuracy, or (B) any of the conditions to
closing are unsatisfied by Nayarit by the Completion Deadline, provided,
however that Capital Gold may not terminate pursuant to this provision if
it has materially breached the Business Combination Agreement and such
breach caused the closing conditions not to be satisfied;
or
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(iv)
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by Nayarit if (A) there has
been a material breach of any representation, warranty, covenant or
agreement on the part of Capital Gold, or any representation or warranty
of Capital Gold shall have become untrue or inaccurate, which breach or
untrue representation or warranty is incapable of being cured prior to the
closing or is not cured within 20 days of notice of such breach or
inaccuracy, or (B) any of the conditions to closing are unsatisfied
by Capital Gold by the Completion Deadline, provided, however Nayarit may
not terminate pursuant to this provision if it has materially breached the
Business Combination Agreement and such breach caused the closing
conditions not to be
satisfied.
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Effect
of Termination
If the
Business Combination Agreement is terminated, neither party shall have any
liability to the other party except for liability for the Break Fee (as defined
below) or fraud or a breach of representation, warranty or covenant prior to
termination as specifically set forth in the Business Combination Agreement, and
all rights and obligations of the parties pursuant to the Business Combination
Agreement shall cease, except as specifically set forth in the Business
Combination Agreement.
34
Break
Fee
The
Business Combination provides that a “break fee” of $1 million (the “Break Fee”)
will be payable in the event that the Business Combination is not consummated
because certain specified events have occurred. Such events that
would trigger payment of the Break Fee are as follows. If either
Capital Gold or Nayarit, through no fault of the other party, fails to
consummate the Business Combination as a result of the decision by one of their
boards of directors to change its recommendation to its stockholders to approve
the Business Combination, the party whose board changed its recommendation would
be obligated to pay the other party the Break Fee. If Nayarit accepts
an acquisition proposal from a third party for its stock or material assets (an
“Acquisition Proposal”), then Nayarit would be obligated to pay the Break
Fee. If Capital Gold’s or Nayarit’s action or inaction, through no
fault of the other party, results in the termination of the Business Combination
Agreement by the other party pursuant to termination provisions of the Business
Combination Agreement, then the party that failed to so progress and consummate
the Business Combination would be obligated to pay the other party the Break
Fee. Finally, if either the required Nayarit stockholder approval
vote or the Capital Gold stockholder approval vote is not obtained following the
public announcement of an Acquisition Proposal, then the defaulting party would
be obligated to pay to the other party the Break Fee.
Amendment to the Business Combination
Agreement
On April
29, 2010, Capital Gold and Nayarit entered into an Amendment to the Business
Combination Agreement, pursuant to which, among other things, it amended the
provision with respect to the officers and board of directors of Capital Gold
subsequent to the closing of the Business Combination. Specifically, because
John Brownlie, Capital Gold’s current President and Chief Operating Officer
tendered his resignation to be effective at the closing of the Business
Combination, those provisions were amended to reflect such
resignation.
35
COMPARISON
OF RIGHTS OF NAYARIT STOCKHOLDERS
AND
CAPITAL GOLD STOCKHOLDERS
Nayarit
is incorporated under the laws of the Province of Ontario,
Canada. Capital Gold is incorporated under the laws of
Delaware. As a result of the Business Combination, the stockholders
of Nayarit will become stockholders of Capital Gold. As stockholders
of Nayarit, their rights are currently governed by the Ontario Business
Corporations Act and by Nayarit’s articles of association, as amended, and its
by-laws. Following the Business Combination, the rights of
stockholders of Nayarit will be governed by the Delaware General Corporation
Law, or the DGCL, and by Capital Gold’s certificate of incorporation, as
amended, and its by-laws. The following discussion summarizes the
material differences between Nayarit’s certificate of incorporation and by-laws,
as amended, and Capital Gold’s certificate of incorporation and by-laws, as
amended, and between the provisions of Ontario law and Delaware law affecting
stockholder rights. This section does not include a complete
description of all differences between the rights of these holders, nor does it
include a complete description of the specific rights of these
holders. In addition, the identification of some of the differences
in the rights of these holders as material is not intended to indicate that
other differences that are equally important do not exist.
Authorized
Capital
Nayarit. The total
number of authorized common shares of Nayarit is unlimited no par
value. There are no shares of Nayarit preferred stock authorized or
outstanding.
Capital Gold. The
total number of authorized shares of Capital Gold is 75,000,000 shares of common
stock, par value $0.0001 per share. There are no shares of preferred
stock authorized or outstanding.
Number
and Election of Directors
Nayarit. The Board
of Directors currently consists of five (5) members. Nayarit’s articles
of association provide that there shall be a minimum of three (3) and a
maximum of ten (10) directors, with the number of directors to be fixed from
time to time by resolution of the Board of Directors.
Capital Gold. The
Board of Directors currently consists of four (4) members. The
Capital Gold by-laws provide the number of the directors of the corporation
shall be not less than three (3) nor more than ten (10), unless and until
otherwise determined by vote of a majority of the entire Board of
Directors.
Removal
of Directors
Nayarit. Nayarit’s
articles of association provide that any director may be removed before the
expiration of his or her term, at any annual or special meeting of stockholders,
by the affirmative vote of at least a majority of stockholders entitled to vote
in the election of directors.
Capital
Gold. Under Delaware law, any director or the entire board of
directors of a Delaware corporation may be removed with or without cause by the
holders of a majority of the shares then entitled to vote at an election of
directors.
Filling
Vacancies on the Board of Directors
Nayarit. Subject
to the laws of Ontario, Nayarit’s bylaws provide that a vacancy on
the Board of Directors may be filled by the affirmative vote of the majority of
the Board, except in the event a vacancy resulted from an increase in the number
of directors, an increase in the maximum number of directors or from a failure
of the stockholders to elect the minimum number of Directors.
Capital Gold. The
Capital Gold bylaws provide that any vacancy in the Board of Directors occurring
by reason of an increase in the number of directors, or by reason of the death,
resignation, disqualification, removal (unless a vacancy created by the removal
of a director by the stockholders shall be filled by the stockholders at the
meeting at which the removal was effected) or inability to act of any director,
or otherwise, shall be filled for the unexpired portion of the term by a
majority vote of the remaining directors, though less than a quorum, at any
regular meeting or special meeting of the Board of Directors called for that
purpose.
36
Stockholder
Meetings and Provisions for Notices; Proxies
Nayarit. Pursuant to
Nayarit’s by-laws, the annual meeting of its stockholders may be held at any
place in or outside of Ontario as the Board of Directors determines, or in the
absence of such determination, at the registered office of
Nayarit. The Board of Directors may also determine the date of the
annual meeting. The Board may also, at any time, call a special
meeting of the stockholders of Nayarit. Notice must be given not less
than 21 days, and not more than 50 days, in advance. Notice for a
special meeting must include the nature of the business to be transacted and the
text of any special resolution to be submitted to the meeting.
Notice
may be waived by any stockholder or person entitled to attend the
meeting. Attendance by any person at a meeting shall still constitute
waiver unless such person attends a meeting for the express purpose of objecting
to the transaction of business on the grounds that the meeting is not lawfully
called. Accidental omission of notice to any individual entitled to
attend a meeting shall not invalidate the proceedings taken or resolutions
passed at any meeting of the stockholders.
Every
Nayarit stockholder entitled to vote at stockholder meetings may appoint a
proxyholder to vote, attend and act at stockholder meetings. Proxies are valid
for one year.
Capital
Gold. Capital Gold’s by-laws provide that all meetings of the
stockholders shall be held at the principal office of the corporation, or at
other places as shall be designated in the notices or waivers of notice of such
meetings.
Under Capital Gold’s by-laws,
written notice stating the time when and place where the meeting is to be held
must be served either personally or by mail no less than 10 days and no more
than 50 days before the date of such annual or special meeting to each
stockholder entitled to vote at the meeting unless otherwise required by
law. For special meetings, the purpose or purposes for such meeting
must also be stated in the notice.
Under
Delaware law, no proxy shall be valid after three years from the date of its
execution, unless the proxy provides for a longer period.
Quorum
and Voting by Stockholders
Nayarit. Nayarit’s
by-laws provide that the holders of a majority of the shares entitled to vote at
meeting of stockholders, whether present or represented by proxy, constitutes a
quorum.
Capital
Gold. Capital Gold’s by-laws provide that the presence at the
commencement of the meeting in person or by proxy of stockholders holding of
record a majority of the total number of shares then issued and outstanding
shall constitute a quorum at any such meeting of stockholders.
Capital
Gold’s by-laws provide that directors are elected by a plurality of the votes
cast at a meeting by holders of shares, present in person or by proxy, at the
meeting and entitled to vote on the election of directors, and except as
otherwise required by law, Capital Gold’s certificate of incorporation as
amended, or Capital Gold’s bylaws, all other matters shall be determined by a
majority of the votes cast, at any meeting at which a quorum is
present.
Stockholder
Action Without a Meeting
Nayarit. Nayarit’s
by-laws provide that any stockholder action permitted by law, the articles of
organization or the bylaws to be taken at a meeting of stockholders may be taken
without a meeting, if a unanimous written consent setting forth the action so
taken is signed by all of Nayarit’s stockholders entitled to
vote.
Capital
Gold. Capital Gold’s by-laws provide that any resolution in
writing, signed by all stockholders entitled to vote thereon, shall be and
constitute action by the stockholders with the same effect as if it had been
duly passed by unanimous vote at a duly called meeting of
stockholders.
37
Amendment
of Certificate or Articles of Incorporation
Nayarit. Under
the Ontario Act, any change to the articles of a corporation must be approved by
special resolution. A “special resolution” is a resolution passed by
a majority of not less than two-thirds of the votes cast by the stockholders who
voted in respect of that resolution, or signed by all the stockholders entitled
to vote on that resolution. If a proposed amendment requires approval by special
resolution, the holders of shares of a class (or of a series of a class, if the
proposed amendment would affect such series differently from the other series of
shares of such class) are entitled to vote separately as a class or series if
the proposed amendment affects the class or series as specified in the Ontario
Act, whether or not the class or series otherwise carries the right to
vote.
Capital
Gold. Capital Gold’s certificate of incorporation does
not contain any special provisions regarding approval of amendments to the
certificate of incorporation. Under the DGCL, an amendment to
the certificate of incorporation requires that the board of directors approve
the amendment, declare it advisable and submit it to stockholders for adoption.
Such amendment must be adopted by a majority in voting power of all issued and
outstanding shares and any greater vote required by the certificate of
incorporation. Except in limited circumstances, any proposed amendment to the
certificate of incorporation that would increase or decrease the authorized
shares of a class of stock, increase or decrease the par value of the shares of
a class of stock, or alter or change the powers, preferences or special rights
of the shares of a class of stock (so as to affect them adversely) requires
approval of the holders of a majority of the outstanding shares of the affected
class, voting as a separate class, in addition to the approval of a majority of
the shares entitled to vote on that proposed amendment. If any proposed
amendment would alter or change the powers, preferences or special rights of any
series of a class of stock so as to affect them adversely, but does not affect
the entire class, then only the shares of the series affected by the proposed
amendment is considered a separate class for purposes of the immediately
preceding sentence.
Amendment
of By-laws
Nayarit. Nayarit’s
by-laws may be amended or repealed, or rescinded by either the stockholders or
by the Board of Directors. Nayarit’s Board may repeal, alter, alter, amend or
rescind it bylaws by a majority vote at a duly called and held Board meeting or
by the unanimous written consent of the Board of Directors subject to
confirmation by a majority of the votes cast by holders of voting shares at the
next meeting of shareholders.
Capital
Gold. Capital Gold’s by-laws provide that the board is
expressly authorized to adopt, amend or repeal the by-laws provided however,
that the stockholders entitled to vote with respect thereto may alter, amend or
repeal bylaws made by the Board of Directors except that the Board of Directors
shall have no power to change the quorum for meetings of stockholders or of the
Board of Directors or to change any provisions of the by-laws with respect to
the removal of directors or the filling of vacancies in the Board resulting from
the removal by the stockholders. The Company’s by-laws also provide that all
by-laws may be altered or repealed and new by-laws may be made by the
affirmative vote of stockholders holding of record at least a majority of the
outstanding shares entitled to vote in the election of directors at any annual
or special meeting of stockholders, provided that the notice or waiver of notice
of such meeting shall have summarized or set forth in full therein, the proposed
amendment.
Anti-Takeover
Statutes
Nayarit. Such
matters as take-over bids, issuer bids or self tenders, going-private
transactions and transactions with directors, officers, significant stockholders
and other related parties to which Nayarit is a party are subject to regulation
by Canadian provincial securities legislation and administrative policies and
rules of Canadian securities administrators. Such legislation and administrative
policies and rules will continue to apply to Capital Gold after the Business
Combination. Such legislation and administrative policies and rules may impose
stockholder approval requirements separate and apart from the Ontario
Act.
Capital Gold. The
provisions of Delaware law relating to Business Combinations do not apply to a
corporation if, among other things, the certificate of incorporation or bylaws
of the corporation contain a provision expressly electing not to be governed by
the provisions of the statute or the corporation does not have voting stock
listed on a national securities exchange or held of record by more than 2,000
stockholders.
Capital
Gold has not “opted out” of the Delaware laws relating to Business
Combinations.
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Under
certain provisions of Delaware law, a corporation may not engage in certain
transactions with an “interested stockholder.” For purposes of this
provision, an “interested stockholder” generally means any person who, together
with its affiliates or associates, directly or indirectly owns 15% or more of
the outstanding voting stock of the corporation. These provisions
prohibit certain Business Combinations between an interested stockholder and a
corporation for a period of three years following the date that the stockholder
acquired its stock unless:
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prior
to the stockholder becoming an interested stockholder, the board of
directors of the corporation approved the Business Combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
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the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
shares held by directors who are also officers and shares held by certain
employee stock plans) in which such stockholder became an interested
stockholder; or
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the
Business Combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
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Limitation
of Liability and Indemnification of Directors and Officers
Nayarit. Nayarit’s
by-laws provide that it shall indemnify a director or officer, a former director
or officer, or a person who acts or acted at Nayarit’s request as a director or
officers of a body corporate of which Nayarit is or was a stockholder or
creditor and his heirs and legal representatives, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him in respect of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or having
been a director or officer of Nayarit or such body corporate,
if:
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he
acted honestly and in good faith with a view to the best interests of
Nayarit; and
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in
the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, he had reasonable grounds for believing
that his conduct was lawful.
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Capital
Gold. Capital Gold’s certificate of incorporation, as amended,
provides that no director of the corporation shall be personally liable to
Capital Gold or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for a breach of fiduciary duties unless the breach
involves: (1) a director’s duty of loyalty to the corporation or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (3) liability for unlawful
payments of dividends or unlawful stock purchases or redemption by the
corporation; or (4) a transaction from which the director derived an improper
personal benefit. Capital Gold’s certificate of incorporation, as
amended also provides that the corporation shall indemnify all persons whom it
may indemnify pursuant to Section 145 of the General Corporation Law of Delaware
or otherwise.
Appraisal/Dissenter’s
Rights
Nayarit. Registered
stockholders of Nayarit are entitled to dissent from the Business Combination
Proposal in the manner provided in section 185 of the Ontario
Act. Section 185 of the Ontario Act is reprinted in its entirety and
attached to this proxy statement/prospectus as Annex II. In the event
that the Business Combination is approved by the stockholders of Nayarit and the
Business Combination is effected, registered stockholders of Nayarit will be
entitled to be paid the fair value of their Nayarit Shares as of the effective
time of the closing of the Business Combination. A registered Nayarit Stockholder who
wishes to exercise Dissent Rights must send a Dissent Notice to Nayarit, such
that it is received by Nayarit not later than 4:00 p.m. (Toronto time) on the
business day immediately preceding the day of the Nayarit Special Meeting (or
any postponement or adjournment thereof), at Nayarit Gold Inc., 76 Temple
Terrace, Suite 150, Lower Sackville, Nova Scotia B4C 0A7. Attention:
Megan Spidle. See “Special Meeting
of Stockholders of Nayarit – Nayarit’s Stockholders’ Dissenter
Rights”
herein.
Capital
Gold. Under Delaware law, Capital Gold stockholders do not
have appraisal rights with respect to shares of any class or series of stock if
such shares are (1) listed on a national securities exchange or (2) held by more
than 2,000 stockholders of record, unless the stockholders receive in exchange
for their shares anything other than shares of stock of the surviving or
acquiring entity, or depository receipts in respect thereof, or shares of stock,
or depository receipts in respect of any other entity that is publicly listed or
held by more than 2,000 holders, or cash in lieu of fractional shares or
fractional depository receipts described above, or a combination of the
foregoing. Since Capital Gold stockholders will not exchange their
shares in the Business Combination for any other security, under Delaware law,
Capital Gold stockholders are not entitled to appraisal rights in connection
with the Business Combination.
39
Dividends
Neither
Capital Gold nor Nayarit currently pays dividends. Under the terms of the
Business Combination Agreement, neither Capital Gold nor Nayarit may declare,
set aside or pay any dividends with respect to their capital stock prior to the
Effective Date of the Amalgamation or the termination of the Business
Combination Agreement. After completion of the Amalgamation, former Nayarit
shareholders who hold the Capital Gold common stock they received as part of the
Amalgamation Consideration will receive whatever dividends are declared and paid
on Capital Gold common stock following the Amalgamation. There can be no
assurance that any dividends will be declared or paid by Capital Gold or as to
the amount or timing of such dividends, if any. Any future dividends will be
made at the discretion of the Capital Gold Board of Directors. Until Nayarit
stockholders have provided to the exchange agent your signed letter of
transmittal and any other items specified by the letter of transmittal with
respect to their shares of Nayarit common stock, any dividends or other
distributions declared after the Effective Time of the Amalgamation with respect
to Capital Gold common stock into which the Nayarit common stock may have been
converted will accrue but will not be paid with respect to such shares. Capital
Gold will pay to former Nayarit shareholders any unpaid dividends or other
distributions, without interest, only after they have duly surrendered their
Nayarit stock certificates.
40
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents, heretofore filed by us with the Commission pursuant to the
Exchange Act, are hereby incorporated by reference, except as superseded or
modified herein:
1. Our
Annual Report on Form 10-K for the fiscal year ended July 31,
2009.
2. Our
Quarterly Report on Form 10-Q, as amended, for the quarter ended January 30,
2009
3. Our
report on Form 8-K filed with the SEC on September 3, 2009.
4. Our
report on Form 8-K filed with the SEC on September 18, 2009.
5. Our
report on Form 8-K filed with the SEC on September 23, 2009.
6. Our
report on Form 8-K filed with the SEC on October 29, 2009.
7. Our
report on Form 8-K filed with the SEC on November 6, 2009.
8. Our
report on Form 8-K filed with the SEC on January 22, 2010.
9. Our
report on Form 8-K filed with the SEC on February 11, 2010.
10. Our
report on Form 8-KA filed with the SEC on March 22, 2010.
11.
Our proxy statement on Schedule 14A filed on Schedule 14A on December 14,
2009
12. A
description of our common stock contained in Form 8-A filed on February 1,
2010.
Each
document filed subsequent to the date of this prospectus pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this
offering shall be deemed to be incorporated by reference in this prospectus and
shall be part hereof from the date of filing of such document.
All
documents filed by the registrant after the date of filing the initial
registration statement on Form S-4 of which this prospectus forms a part and
prior to the effectiveness of such registration statement pursuant to Section
13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934 shall be
deemed to be incorporated by reference into this prospectus and to be part
hereof from the date of filing of such documents.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this proxy statement/prospectus that are not purely
historical are forward-looking statements. The forward-looking
statements include, but are not limited to, statements regarding Capital Gold’s,
Nayarit’s or their respective management’s expectations, hopes, beliefs,
intentions or strategies regarding the future. In addition, any statements that
refer to projections, forecasts or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. The words “anticipates,” “believe,” “continue,” “could,”
“estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,”
“potential,” “predicts,” “project,” “should,” “would” and similar expressions
may identify forward-looking statements, but the absence of these words does not
mean that a statement is not forward-looking. Forward-looking
statements in this proxy statement/prospectus may include, for example,
statements about Capital Gold’s and Nayarit’s:
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ability
to complete the Business
Combination;
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the
benefits of the Business
Combination;
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potential
of exploration assets in Mexico;
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adverse
capital and credit market conditions and their impact on our liquidity,
access to capital and cost of
capital;
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changes
in the combined company’s financial strength and the effect of such
changes on future results of operations and financial
condition;
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general
economic conditions or a prolonged economic downturn affecting the mining
industry;
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fluctuations
in U.S. or foreign currency exchange rates, interest rates, or securities
and real estate markets;
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the
stability of and actions by governments and economies in the markets in
which both companies operate;
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competitive
factors and competitors’ responses
to initiatives;
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the
threat of natural disasters, catastrophes, terrorist attacks, epidemics or
pandemics anywhere in the world where Capital Gold operates or
does business; and
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other
risks and uncertainties described under the caption “Risk Factors” and in
other filings with the SEC in the case of Capital Gold, and with the
Ontario Securities Commission in the case of
Nayarit.
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All
forward-looking statements included herein attributable to Capital Gold, Nayarit
or any person acting on either party’s behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this
section. Except to the extent required by applicable laws and
regulations, Capital Gold and Nayarit do not undertake any obligation to update
these forward-looking statements to reflect events or circumstances after the
date of this proxy statement/prospectus or to reflect the occurrence of
unanticipated events.
Before
you grant your proxy or instruct how your vote should be cast or vote on the
approval of the Business Combination, you should be aware that the occurrence of
the events described in the “Risk Factors” section and
elsewhere in this joint proxy statement/prospectus could have a material adverse
effect on Capital Gold, Nayarit or the combined entity, now or upon completion
of the Business Combination.
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SPECIAL
MEETING OF STOCKHOLDERS OF CAPITAL GOLD
General
Capital
Gold is furnishing this proxy statement/prospectus to its stockholders as part
of the solicitation of proxies by its Board of Directors for use at the Special
Meeting of Stockholders of Capital Gold, to be held on at 10 a.m. local time on
June 11, 2010 at Bayards, One Hanover Square, New York City, New York, 10004,
and at any adjournment or postponement thereof (the “Capital Gold Special
Meeting”). This proxy statement/prospectus is first being furnished
to Capital Gold stockholders on or about [ ], 2010.
This proxy statement/prospectus provides you with information you need to know
to be able to vote or instruct your vote to be cast at the Capital Gold Special
Meeting.
Date,
Time and Place
The
Capital Gold Special Meeting will be held at 10 a.m. local time on June 11, 2010
at Bayards, One Hanover Square, New York City, New York, 10004, or such other
date, time and place to which such meeting may be adjourned or
postponed.
Purpose
of the Special Meeting of Stockholders
At the
Capital Gold Special Meeting, Capital Gold will ask holders of its common stock
to consider and vote upon the following proposals:
(1)
The Business Combination
Proposal—to adopt a business combination agreement (the “Business
Combination Agreement”) dated as of February 10, 2010 as amended on April 29,
2010 (the “Amendment”) by and among the Capital Gold and Nayarit, pursuant
to which Capital Gold will issue approximately 12,099,135 shares of its common
stock to stockholders of Nayarit and reserve for issuance an additional
approximately 4,830,938 and 1,218,403 shares of its common stock for the
exercise warrants and options of Nayarit, respectively, and Nayarit will become
a wholly-owned subsidiary of Capital Gold (the “Business Combination”);
and
(2) The Stockholder
Adjournment Proposal —to
consider and vote upon the adjournment of the Capital Gold Special Meeting to a
later date or dates, if necessary, to permit further solicitation and vote of
proxies if, at the time of the special meeting, it appears Capital Gold cannot
consummate the transactions contemplated by the Business Combination (the
“Stockholder Adjournment Proposal”); and
(3) Such
other procedural matters as may properly come before the Capital Gold Special
Meeting or any adjournment or postponement thereof.
Recommendation
of Capital Gold’s Board of Directors to Stockholders
After
careful consideration of each of the proposals, the Company’s Board of Directors
has determined unanimously that each of them is fair to, and in the best
interests of, Capital Gold and its stockholders and unanimously recommends that
the stockholders vote or instruct their vote to be cast “FOR” the Business
Combination Proposal and the Stockholder Adjournment Proposal.
Record
Date; Who is Entitled to Vote
You
will be entitled to vote or direct votes to be cast at the Capital Gold Special
Meeting if you owned shares of Capital Gold ’s common stock at the close of
business on May 5, 2010, which Capital Gold has fixed as the record date for the
Capital Gold Special Meeting. You are entitled to one vote for each
share of common stock of Capital Gold you owned at the close of business on the
record date. On the record date, there were
[ ] shares of common stock of Capital
Gold outstanding.
Quorum
and Required Vote for Stockholder Proposals
A
quorum of stockholders is necessary to hold a valid meeting. A quorum will be
present at Capital Gold Special at the commencement of the Special Meeting if
Stockholders holding record a majority of the total number of shares of
common stock issued and outstanding and entitled to vote at the Capital Gold
Special Meeting is represented in person or by proxy. Abstentions and broker
non-votes will count as present for the purposes of establishing a
quorum.
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The
approval of the Business Combination Proposal requires the affirmative vote of
the majority of the common stock of Capital Gold voted at the Capital Gold
Special Meeting at which a quorum is present. A quorum for the meeting requires
the presence, in person or by proxy, of stockholders holding of record a
majority of the total shares issued and outstanding and entitled to vote as of
the record date.
The
approval of the Stockholder Adjournment Proposal requires the affirmative vote
of a majority of the common stock of Capital Gold issued and outstanding as of
the record date voted at the Capital Gold Special Meeting.
Abstentions
and Broker Non-Votes
Under
the rules of various national and regional securities exchanges, your broker,
bank or nominee cannot vote your warrants or shares with respect to
non-discretionary matters unless you provide instructions on how to vote in
accordance with the information and procedures provided to you by your broker,
bank or nominee. Capital Gold believes the Business Combination
Proposal presented to stockholders will be considered non-discretionary and
therefore your broker, bank or nominee cannot vote your shares without your
instruction. If you do not provide instructions with your proxy, your broker,
bank or nominee may deliver a proxy card expressly indicating that it is NOT
voting your shares, as the case may be. This indication that a broker, bank or
nominee is not voting your shares is referred to as a “broker
non-vote.”
Abstentions
will have no effect on the Business Combination Proposal or the Stockholder
Adjournment Proposal. Broker non-votes, while considered present for the
purposes of establishing a quorum, will have no effect on the Business
Combination Proposal or the Stockholder Adjournment Proposal.
Voting
Your Shares of Common Stock
Each
share of Common Stock you own in your name entitles you to one vote on the
applicable proposals. Your one or more proxy cards show the number of shares, as
the case may be, you own. There are two ways to vote your shares:
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You
can vote by signing and returning the enclosed proxy card. If you vote by
proxy card, your “proxy,” whose name is listed on the proxy card, will
vote your shares as you instruct on the proxy card. If you sign and return
the proxy card but do not give instructions on how to vote your shares,
your shares will be voted, as recommended by the Capital Gold Board of
Directors, “FOR” the Business Combination Proposal” and “FOR” the
Stockholder Adjournment Proposal.
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You
can attend the Capital Gold Special Meeting and vote in person. Capital
Gold will give you a ballot when you arrive. However, if your shares are
held in the name of your broker, bank or another nominee, you must get a
proxy from the broker, bank or other nominee in order to vote your shares,
at the Capital Gold Special Meeting. That is the only way Capital Gold can
be sure that the broker, bank or nominee has not already voted your
shares.
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Revoking
Your Proxy
If you
give a proxy, you may revoke it at any time before the Capital Gold Special
Meeting, or at the Capital Gold Special Meeting by doing any one of the
following:
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You
may send another proxy card with a later
date;
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You
may notify Christopher Chipman, Capital Gold’s Secretary, in writing
before the Capital Gold Special Meeting, that you have revoked your proxy;
or
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You
may attend the Capital Gold Special Meeting, revoke your proxy, and vote
in person, as indicated above.
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No
Additional Matters May Be Presented at the Special Meeting
The
Capital Gold Special Meeting has been called only to consider the Business
Combination Proposal and the Stockholder Adjournment Proposal. Under Capital
Gold’s bylaws, other than procedural matters incident to the conduct of the
Capital Gold Special Meetings, no other matters may be considered if they are
not included in the notice of the Capital Gold Special Meeting.
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Who
Can Answer Your Questions About Voting Your Capital Gold Shares
If you
have any questions about how to vote or direct a vote in respect of your Capital
Gold shares, you may call Capital Gold’s Chief Financial Officer, Christopher
Chipman, at (212) 344-5158.
Appraisal
Rights
No
appraisal rights are available under the DGCL to the stockholders of Capital
Gold in connection with the proposals set forth herein.
Proxy
Solicitation Costs
Capital
Gold is soliciting proxies on behalf of its Board of Directors. All solicitation
costs will be paid by Capital Gold. This solicitation is being made by mail but
also may be made by telephone or in person. Capital Gold and its directors,
officers and employees may also solicit proxies in person, by telephone or by
other electronic means, including email and facsimile.
Capital
Gold will ask banks, brokers and other institutions, nominees and fiduciaries to
forward its proxy materials to their principals and to obtain their authority to
execute proxies and voting instructions. Capital Gold will reimburse them for
their reasonable expenses.
Vote
of the Management of Capital Gold
As of the
record date for the Capital Gold Special Meeting, Capital Gold’s officers and
directors beneficially owned and were entitled to vote an aggregate of 1,908,475
shares of common stock, which means Capital Gold’s officers and directors own an
aggregate of approximately 3.8% of the outstanding shares of common stock. The
officers and directors of Capital Gold have indicated that they intend to vote
such shares in favor of all proposals presented at the Capital Gold Special
Meeting.
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PROPOSALS TO BE CONSIDERED
BY CAPITAL GOLD STOCKHOLDERS
PROPOSAL
NO. 1
THE
BUSINESS COMBINATION PROPOSAL
The
discussion in this joint proxy statement/prospectus of the Business Combination
Proposal and the principal terms of the Business Combination Agreement are
subject to, and is qualified in its entirety by reference to, the Business
Combination Agreement, which is attached as Annex I to this joint proxy
statement/prospectus.
General
Description of the Transaction
The
respective Boards of Directors of Capital Gold and Nayarit have approved a
business combination agreement between Capital Gold and Nayarit dated February
10, 2010 (the “Business Combination Agreement”) as amended on April 29, 2010
(the “Amendment”) that would effect the amalgamation of Nayarit with a to
be formed corporation as a wholly owned Canadian subsidiary of Capital
Gold. If the Business Combination is approved by the stockholders of
both companies, the parties intend to effect an amalgamation (the
“Amalgamation”) of Nayarit and a corporation, to be organized under the Ontario
Act as a wholly-owned subsidiary of Capital Gold (“Merger Sub”), to form a
combined entity (“AmalgSub”). By virtue of the Amalgamation, the
separate existence of each of Nayarit and Merger Sub shall thereupon cease, and
AmalgSub shall continue its corporate existence under the Ontario
Act as a wholly-owned subsidiary of Capital Gold.
The
parties to the Business Combination Agreement intend to consummate the
Amalgamation as promptly as practicable after the special meetings of the
stockholders of Capital Gold and Nayarit, provided that:
Capital Gold’s
stockholders have approved the Business Combination Agreement and the issuance
of the Amalgamation Consideration;
Nayarit’s
stockholders have adopted the Business Combination Agreement and approved the
transactions contemplated thereby, including the Amalgamation;
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holders
of no more than 5% of the Nayarit shares vote against the Amalgamation and
exercised dissent rights under the Ontario
Act;
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the
SEC has declared effective Capital Gold’s registration statement of which
this proxy statement/prospectus is a part;
and
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the
other conditions specified in the Business Combination Agreement have been
satisfied or waived.
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For
more information, see the section entitled “The Business Combination”
beginning on page 30.
The Business Combination Agreement is included as Annex I to this joint proxy
statement/prospectus The Amendment is included in Annex I as well. You are
encouraged to read the Business Combination Agreement in its
entirety.
Background
of the Business Combination
The terms of the Business Combination
are the result of arms-length negotiations between representatives of Capital
Gold and Nayarit. The following is a discussion of the background of
these negotiations, the Business Combination and related
transactions.
In early
December 2008, John Brownlie and Scott Hazlitt, President and Vice
President—Mine Development of Capital Gold, respectively, held an initial
meeting with Colin Sutherland and Bradley Langille, President and strategic
consultant to Nayarit and scheduled a site visit to Nayarit’s properties in
Mexico which occurred the same month.
During
the ensuing twelve months, Capital Gold explored several other opportunities,
two of which proceeded to a confidentiality agreement and a letter of intent but
none of which opportunities were pursued or consummated.
On December 10, 2009, Mr. Brownlie, Mr.
Sutherland, Mr. Langille and David Badner, an advisor to Nayarit, met in San
Francisco, California, to discuss the potential merger of Capital Gold and
Nayarit during which management from both companies provided overviews of their
respective businesses. The meeting outlined the process for moving
toward a letter of intent, which included discussions around the exchange ratio,
management positions, and overall strategy beyond the transaction. It
was discussed that Nayarit should proceed to finalizing the Preliminary Economic
Assessment in order to provide the financial basis for the Orion
Project.
45
During the period December 12, 2009
through December 16, 2009 Mr. Brownlie held various telephonic discussions with
principals of Nayarit concerning the content of a proposed letter of
intent.
On
December 17, 2009, Capital Gold and Nayarit executed a letter of
intent.
On
January 14, 2010 Capital Gold and its counsel, Ellenoff Grossman & Schole
LLP (“EG&S”), provided a draft Business Combination Agreement to Nayarit and
its counsel, Dennis H. Peterson, of Peterson Law Professional
Corporation. Subsequently, Messrs. Brownlie, Langille, Sutherland and
Badner held various discussions and conference calls to negotiate the terms of
the Business Combination Agreement.
On
January 19, 2010, the Capital Gold Board of Directors met to discuss and
consider Capital Gold’s acquisition of Nayarit. Mr. Brownlie provided
an overview of the proposed transaction including the material
terms. The Board of Directors discussed the various components of the
proposed transaction including the composition of the board and management of
Nayarit. Mr. Barry Grossman and Ms. Sarah Williams, both of EG&S,
counsel to Capital Gold, discussed certain relevant issues, including the
regulatory approval process, the accounting treatment and tax issues with
respect to the transaction. Ms. Williams gave an overview of the
stockholder approval requirements. Senior management and the Board of
Directors discussed the benefits and various transaction risks related to the
proposed acquisition. The Board of Directors then resolved to proceed
with drafting documents to effect the Nayarit acquisition on the terms set forth
in the letter of intent, subject to further input by the Board.
On
January 20, 2010 and January 21, 2010, Mr. Brownlie and Mr. Sutherland, Mr.
Grossman and Ms. Williams, and Christopher Chipman, Chief Financial Officer of
Capital Gold met in New York to discuss the terms and conditions of the
definitive agreement and outlined the items which required further negotiation
and clarification.
On
February 10, 2010 Capital Gold’s Board of Directors met to discuss and approve
terms of the proposed Business Combination Agreement. Jennings
Capital, financial advisor to Capital Gold, provided an overview of the proposed
transaction. Subsequent to these discussions Capital Gold and Nayarit executed
the Business Combination Agreement and an acknowledgement regarding each party’s
completion of its due diligence.
Prior to
the opening of the financial markets on February 11, 2010, Capital Gold and
Nayarit issued a joint press release announcing the execution of the Business
Combination Agreement.
On March
8, 2010, Capital Gold announced that it had completed its due diligence
regarding the Nayarit Business Combination.
Capital
Gold’s Board of Directors’ Reasons for Approval of the Business
Combination
Capital
Gold’s Board of Directors concluded that the Business Combination is fair to,
and in the best interests of, Capital Gold and its stockholders and that the
consideration to be paid in the Business Combination is fair to Capital Gold and
its stockholders. Capital Gold’s management conducted a due diligence review of
Nayarit that included an industry analysis, an evaluation of Nayarit’s existing
business, a valuation analysis and financial projections in order to enable the
Board of Directors to evaluate Nayarit’s business and financial condition and
prospects.
Capital
Gold’s Board of Directors considered Nayarit’s properties, various industry and
financial data, including certain financial analyses developed by Capital Gold
and metrics compiled by Capital Gold’s management in evaluating the
consideration to be paid by Capital Gold in the Business
Combination.
In
considering the Business Combination, Capital Gold’s Board of Directors gave
considerable weight to the following favorable factors:
46
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Exploration and
Development. The Business Combination will enhance the
combined company’s ability to grow and secure additional capital resources
to continue exploration and development of Nayarit’s Orion Project and
Capital Gold’s El Chanate Project, enhancing long term value for
stockholders;
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Visibility as a Mid-Tier
Producer. The combined company has the potential
to be recognized as a significant mid-tier producer in Latin America, with
the possibility that further growth opportunities will
follow;
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Strong Management
Team. The combination of Capital Gold and Nayarit’s
management will create a management team with complementary skills in
exploration, business and projected development and
operations;
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Potential
synergies. The strategic fit and complementary nature of
Nayarit and Capital Gold’s respective assets and operations in
Mexico;
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Market
exposure. Nayarit’s investor following in Canada
together with Capital Gold’s following as an NYSE AMEX listed issuer will
provide enhanced market exposure to the combined company;
and
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Stockholder
liquidity. Increased market capitalization and a broader
stockholder base resulting from the merger should improve trading
liquidity for stockholders.
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Capital
Gold’s Board of Directors believes the above factors strongly supported its
determination and recommendation to approve the Business Combination. Capital
Gold’s Board of Directors did, however, consider the following potentially
negative factors, among others, including the risk factors set forth elsewhere
in this joint proxy statement/prospectus, in its deliberations concerning the
Business Combination:
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Uncertain regulatory
environment. The potential for scrutiny or increased
regulation by the Government of
Mexico;
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Interests of officers and
directors. Interests in the Business Combination that
certain officers and directors of Capital
Gold may have which are different from, or in addition to, the interests
of the Capital Gold stockholders generally, including the matters
described under “Proposals to be Considered by
Capital Gold Stockholders— The Business Combination Proposal—Certain
Benefits of the Directors and Officers and Others in the
Transaction”;
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Limitations on indemnification.
The limitations on indemnification set forth in the Business
Combination Agreement described in “The Business
Combination”;
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Dilution to interests of
stockholders. Control of Nayarit’s current stockholders
of a significant percentage of Capital Gold’s issued shares after the
Business Combination;
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Regulatory issues. The
impact of changes in or additional licensing or other regulations
affecting operations in Mexico and the mining industry
generally;
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Fixed exchange
rate. The exchange rate is fixed, and as a result, the
Capital Gold shares issued on consummation of the Business Combination
Agreement may have a market value different than at the time of the
announcement of the Business
Combination;
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Conditions to
closing. The Business Combination Agreement is subject
to several conditions and because there can be no certainty that these
conditions may be satisfied or waived, the Business Combination may not be
successfully completed, which could negatively impact upon both
companies;
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Termination
rights. The Business Combination Agreement may be
terminated by either Capital Gold or Nayarit in certain circumstances in
which case the market prices for the Capital Gold or Nayarit shares may be
adversely affected; and
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Limitations on other
opportunities. The Business Combination Agreement
significantly limits the ability of either party to pursue other Business
Combination opportunities until the transaction is
completed.
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47
This
discussion of the information and factors considered by the Board of Directors
of Capital Gold includes the principal positive and negative factors considered
by the Board of Directors, but is not intended to be exhaustive and may not
include all of the factors considered by the Board of Directors of Capital
Gold. The Board of Directors of Capital Gold did not quantify or
assign any relative or specific weights to the various factors that it
considered in reaching its determination that Business Combination Agreement and
Business Combination proposal are advisable and in the best interests of Capital
Gold and its stockholders. Rather, the Board of Directors of Capital
Gold viewed its position and recommendation as being based on the totality of
the information presented to it and the factors it considered. In
addition, individual members of the Board of Directors of Capital Gold may have
given differing weights to different factors. It should be noted that
this explanation of the reasoning of the Board of Directors of Capital Gold and
certain information presented in this section is forward-looking in nature and,
therefore, that information should be read in light of the factors discussed in
the section entitled “Cautionary Note Regarding
Forward-Looking Statements” in this joint proxy
statement/prospectus.
Terms
of the Business Combination Agreement
Capital
Gold’s Board of Directors believes the terms of the Business Combination,
including the closing conditions, are customary and reasonable. It was important
to Capital Gold’s Board of Directors that the Business Combination include
customary terms and conditions as it believed such terms and conditions would
allow for a more efficient closing process and lower transaction
expenses.
Certain
Benefits of the Directors and Officers and Others in the Business
Combination
When you
consider the recommendation of the Capital Gold Board of Directors in favor of
approval of the Business Combination, you should keep in mind that Capital Gold
directors and officers have interests in the Business Combination that are
different from, or in addition to, your interests as a
stockholder. These interests include, among other
things:
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It
is currently anticipated that Messrs. Cooper, Cutler, Sojka, each a
current director of Capital Gold, a nominee of Nayarit, and a nominee of
Capital Gold will serve as directors of Capital Gold following the
Business Combination and that John Brownlie will resign as President
and Chief Operating Officer of Capital Gold and Bradley Langille and Colin
Sutherland will join Capital Gold as senior
officers.
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For
a period of thirty-six (36) months following the Effective Time of the
Business Combination, Capital Gold and Nayarit have agreed that they shall
cause their nominees on the Board of Directors to execute and deliver an
undertaking whereby such nominees agree to: (i) nominate the foregoing
individuals for re-election at each annual meeting of the stockholders of
Capital Gold; and (ii) cause any successors chosen by such nominees to
comply with the foregoing provision at each annual meeting of the
stockholders of Capital Gold.
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As
a condition to closing the Business Combination, Capital Gold and Nayarit
have agreed that the employment agreements between Nayarit, on one hand,
and each of Colin Sutherland and Bradley Langille, on the other hand,
shall either have been (i) terminated prior to the Effective Date in
accordance with the terms thereof, including payment of all termination
payments prescribed therein (except for any payments relating to the
change of control of Nayarit), or (ii) terminated with no payment of
change of control benefits in consideration for the execution of a new
employment agreement with Capital Gold on terms comparable to the other
senior officers of Capital Gold.
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Contact
Information for Capital Gold
Any
request for information from Capital Gold may be sent to:
Christopher
Chipman, Chief Financial Officer & Secretary
Capital
Gold Corporation
76 Beaver
Street, 14th Floor
New York,
New York 10005.
Telephone:
(212) 344-2785
Required
Vote
The
approval of the Business Combination Proposal requires the affirmative vote of
the majority of the shares issued and outstanding as of the record date voted at
the Capital Gold Special Meeting.
48
Recommendation
of Capital Gold’s Board of Directors
CAPITAL
GOLD’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF
THE BUSINESS COMBINATION PROPOSAL.
49
PROPOSAL
NO. 2
THE
STOCKHOLDER ADJOURNMENT PROPOSAL
Purpose
The
Stockholder Adjournment Proposal, if adopted, will allow Capital Gold’s Board of
Directors to adjourn the Capital Gold Special Meeting to a later date or dates
to permit further solicitation and vote of proxies if at the time of the Special
Meeting it appears that Capital Gold cannot complete the Business
Combination.
Consequences
if the Stockholder Adjournment Proposal is Not Approved
If the
Stockholder Adjournment Proposal is not approved by Capital Gold’s stockholders,
the Board of Directors may not be able to adjourn the Capital Gold Special
Meeting to a later date even if, based on the tabulated votes, there are not
sufficient votes at the time of the Capital Gold Special Meeting to approve the
transactions contemplated by the Business Combination or it otherwise appears at
the time of the Capital Gold Special Meeting that Capital Gold cannot complete
the Business Combination.
Required
Vote
Approval
of the Stockholder Adjournment Proposal requires the affirmative vote of the
holders of a majority of the votes cast at the Capital Gold Special
Meeting. Such action may be taken despite the absence of a quorum. A
broker non-vote will have no effect on the outcome of the Stockholder
Adjournment Proposal. An abstention will have the same effect as a vote against
the Stockholder Adjournment Proposal.
Approval
of the Stockholder Adjournment Proposal is not conditioned upon the adoption of
any of the other proposals.
Recommendation
of Capital Gold’s Board of Directors
CAPITAL
GOLD’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CAPITAL GOLD STOCKHOLDERS
VOTE “FOR” THE APPROVAL OF THE STOCKHOLDER ADJOURNMENT
PROPOSAL.
50
SPECIAL
MEETING OF STOCKHOLDERS OF NAYARIT
General
As
described earlier in this joint proxy statement/prospectus, Nayarit is
furnishing this joint proxy statement/prospectus to its stockholders as part of
the solicitation of proxies by its Board of Directors for use at the Nayarit
Special Meeting of Stockholders, to be held on June 11, 2010, and at any
adjournment or postponement thereof. This joint proxy
statement/prospectus is first being furnished to Nayarit stockholders on or
about [ ], 2010. This joint proxy
statement/prospectus provides you with information you need to know to be able
to vote or instruct your vote to be cast at the Nayarit Special Meeting of
Stockholders.
Date,
Time and Place
The
Nayarit Special Meeting will be held at 10:00 a.m., Eastern time, on June 11,
2010, at 76 Temple Terrace, Lower Sackville, Nova Scotia, B4C 0A7, or such other
date, time and place to which such meeting may be adjourned or
postponed.
Purpose
of the Special Meeting of Stockholders
At the
Special Meeting of Stockholders, Nayarit will ask holders of its common stock to
consider and vote upon the following proposals:
(1)
The Business Combination
Proposal—to adopt the business combination agreement, including the
amalgamation agreement annexed thereto (the “Business Combination Agreement”)
dated as of February 10, 2010 as amended on April 29, 2010 (the
“Amendment”) by and among the Nayarit and Capital Gold, pursuant to which
Nayarit will amalgamate with a to be formed wholly-owned subsidiary of Capital
Gold and the stockholders and holders of other securities of Nayarit will
receive securities of Capital Gold in exchange for the securities of Nayarit
that they hold as of the record date for the transaction, as more fully
described in this joint proxy statement/prospectus (the “Business Combination”);
and
(2) Such
other procedural matters as may properly come before the Nayarit Special Meeting
of Stockholders or any adjournment or postponement thereof.
The
Business Combination Agreement and the Amendment is described in detail in
this joint proxy statement/prospectus under the caption “The Business Combination” and
the Business Combination is described generally under the captions “Questions and Answers For All
Stockholders About the Business Combination Proposals” and “Summary.” A
complete copy of the Business Combination Agreement and the Amendment is
included in this proxy statement/prospectus as Annex I.
Recommendation
of Nayarit’s Board of Directors to Stockholders
Nayarit’s
Board of Directors has unanimously approved the Business Combination Agreement
and the Amendment and unanimously recommends that the stockholders vote or
instruct their vote to be cast “FOR” the Business Combination
Proposal.
In
reaching its decision to approve the Business Combination Agreement and the
Amendment and recommend the Business Combination Proposal to its stockholders,
Nayarit’s Board of Directors consulted with its management, as well as legal
and financial advisors, and considered a number of factors, including those
listed below.
Expected
Strategic Benefits of the Business Combination Proposal
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Visibility as a Mid-Tier
Producer. The combined company has the potential to be
recognized as a significant mid-tier producer in Latin America, with the
possibility that further growth opportunities will
follow.
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·
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Exploration and
Development. The Business Combination will enhance the
combined company’s ability to grow and secure additional capital resources
to continue exploration and development of the Orion Project and Capital
Gold’s El Chanate Project, enhancing long term value for Nayarit’s
stockholders.
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Stockholder
Liquidity. Increased market capitalization and a broader
stockholder base resulting from the Amalgamation should improve trading
liquidity for Nayarit stockholders.
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51
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Mining
Operations. Capital Gold has mining operations at its El
Chanate open pit mine in Sonora, Mexico. As part of the
combined company, revenue from operations would reduce Nayarit’s
dependency on capital markets for working
capital.
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Market
Exposure. Capital Gold is an NYSE AMEX listed issuer and
the combination will provide enhanced market exposure to Nayarit’s
stockholders.
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Strong Management
Team. The combination of Capital Gold’s and Nayarit’s
management will create a management team with complementary skills in
exploration, business and projected development and
operations.
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Potential
synergies. The strategic fit and complementary nature of
Nayarit’s and Capital Gold’s respective assets in Mexico and the related
potential impact on the combined company’s
earnings.
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The Board
of Directors of Nayarit weighed these factors against a number of other factors
identified in its deliberation as weighing negatively against the Amalgamation,
including:
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Fixed exchange rate –
the currency exchange rate is fixed, and as a result, the Capital Gold
shares issued on consummation of the Business Combination Agreement may
have a market value different than at the time of the announcement of the
Amalgamation.
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Conditions to closing –
the Business Combination Agreement is subject to several conditions and
because there can be no certainty that these conditions may be satisfied
or waived, the Business Combination may not be successfully
completed.
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Termination rights –
the Business Combination Agreement may be terminated by either Nayarit or
Capital Gold in certain circumstances, in which case the market prices for
Nayarit shares may be adversely
affected.
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Limitations on other
opportunities – the Business Combination Agreement substantially
limits any outside opportunities Nayarit might otherwise have with other
potential combination parties.
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This
discussion of the information and factors considered by the Board of Directors
of Nayarit includes the principal positive and negative factors considered by
the Board of Directors, but is not intended to be exhaustive and may not include
all of the factors considered by the Board of Directors of
Nayarit. The Board of Directors of Nayarit did not quantify or assign
any relative or specific weights to the various factors that it considered in
reaching its determination that Business Combination Agreement and Business
Combination proposal are advisable and in the best interests of Nayarit and its
stockholders. Rather, the Board of Directors of Nayarit viewed its
position and recommendation as being based on the totality of the information
presented to it and the factors it considered. In addition,
individual members of the Board of Directors of Nayarit may have given differing
weights to different factors. It should be noted that this
explanation of the reasoning of the Board of Directors of Nayarit and certain
information presented in this section is forward-looking in nature and,
therefore, that information should be read in light of the factors discussed in
the section entitled “Cautionary Note Regarding
Forward-Looking Statements” in this joint proxy
statement/prospectus.
Nayarit
Stockholders’ Dissenter Rights
Registered
stockholders of Nayarit are entitled to dissent from the Business Combination
Proposal in the manner provided in section 185 of the Ontario
Act. Section 185 of the Ontario Act is reprinted in its entirety and
attached to this proxy statement/prospectus as Annex II. In the event
that the Business Combination is approved by the stockholders of Nayarit and the
Business Combination is effected, registered stockholders of Nayarit will be
entitled to be paid the fair value of their Nayarit Shares as of the effective
time of the closing of the Business Combination. The following
summary is qualified by the provisions of section 185 of the Ontario Act, a copy
of which is included in this proxy statement/prospectus as Annex
II.
A
registered Nayarit Stockholder who wishes to exercise Dissent Rights (a
“Dissenting Stockholder”) must send a Dissent Notice to Nayarit, such that it is
received by Nayarit not later than 4:00 p.m. (Toronto time) on the business day
immediately preceding the day of the Nayarit Special Meeting (or any
postponement or adjournment thereof), at Nayarit Gold Inc., 76 Temple Terrace,
Suite 150, Lower Sackville, Nova Scotia B4C 0A7. Attention: Megan
Spidle.
52
Persons
who are beneficial owners of the Nayarit shares registered in the name of a
broker, custodian nominee or other intermediary who wish to dissent should be
aware that only a registered Nayarit stockholders is entitled to
dissent. A Nayarit stockholder, who beneficially owns the Nayarit
shares but is not the registered holder thereof, should contact the registered
holder for assistance.
The
filing of a Dissent Notice does not deprive a Nayarit stockholder of the right
to vote; however, the Ontario Act provides, in effect, that a Nayarit
stockholder who has submitted a Dissent Notice and who votes in favor of the
Business Combination Proposal will no longer be considered a Dissenting
Stockholder with respect to the Nayarit shares voted in favor of the Business
Combination Proposal. Furthermore, the Ontario Act does not provide,
and Nayarit will not assume, that a vote against the Business Combination
Proposal constitutes a Dissent Notice. In addition, the execution or
exercise of a proxy does not constitute a Dissent Notice. Under the
Ontario Act, there is no right of partial dissent and, accordingly, a Dissenting
Stockholder may only dissent with respect to all Nayarit shares held on behalf
of any one beneficial owner that are registered in the name of the Dissenting
Stockholder.
AmalgSub
is required, within 10 days after the Nayarit stockholders adopt the Business
Combination Proposal, to send to each registered Nayarit stockholder who has
filed a Dissent Notice, notice that the Business Combination Proposal has been
adopted, but such notice is not required to be sent to any registered Nayarit
stockholder who voted for the Business Combination Proposal or who has withdrawn
such Dissent Notice.
A
Dissenting Stockholder must then, within 20 days after the Dissenting
Stockholder receives notice that the Business Combination Proposal has been
adopted or, if the Dissenting Stockholder does not receive such notice, within
20 days after the Dissenting Stockholder learns that the Business Combination
Proposal has been adopted, send to Nayarit a written notice (a “Payment Demand”)
containing the name and address of the Dissenting Stockholder, the number of
Nayarit shares in respect of which the Dissenting Stockholder dissents and a
demand for payment of the fair value of such Nayarit shares. Within
30 days after a Payment Demand, the Dissenting Stockholder must send to Nayarit,
the certificates representing the Nayarit shares in respect of which such
Payment Demand was made. A Dissenting Stockholder who fails to send
the certificates representing the Nayarit shares in respect of which the Dissent
Right has been exercised has no right to make a claim under section 185 of the
Ontario Act. Nayarit will endorse on share certificates received from
a Dissenting Stockholder a notice that the holder is a Dissenting Stockholder
and will forthwith return the share certificates to the Dissenting
Stockholder.
On
sending a Payment Demand to Nayarit, a Dissenting Stockholder ceases to have any
rights as a Nayarit stockholder, other than the right to be paid the fair value
of the Nayarit shares in respect of which such Payment Demand was made, except
pursuant to the provisions of section 185 of the Ontario Act.
AmalgSub
is required, not later than seven days after the later of the Effective Date of
the Amalgamation or the date on which AmalgSub or Nayarit received the Payment
Demand of a Dissenting Stockholder, to send to each Dissenting Stockholder who
has sent a Payment Demand a written offer to pay (an “Offer to Pay”) for the
Nayarit shares in respect of which such Payment Demand was made in an amount
considered by the board of directors of AmalgSub to be the fair value thereof,
accompanied by a statement showing the manner in which the fair value was
determined. Every Offer to Pay must be on the same terms. AmalgSub is
required to pay for the Nayarit shares of a Dissenting Stockholder within 10
days after an Offer to Pay has been accepted by a Dissenting Stockholder, but
any such Offer to Pay lapses if AmalgSub does not receive an acceptance thereof
within 30 days after the Offer to Pay has been made.
If
AmalgSub fails to make an Offer to Pay for the Nayarit shares of a Dissenting
Stockholder, or if a Dissenting Stockholder fails to accept an offer that has
been made, AmalgSub may, within 50 days after the Effective Date of the
Amalgamation or within such further period as the Ontario Court may allow, apply
to the Ontario Court to fix a fair value for the Nayarit shares of Dissenting
Stockholders. If AmalgSub fails to apply to the Ontario Court, a
Dissenting Stockholder may apply to the Ontario Court for the same purpose
within a further period of 20 days or within such further period as the Ontario
Court may allow. A Dissenting Stockholder is not required to give
security for costs in such an application.
53
Upon an
application to the Ontario Court, all Dissenting Stockholders whose Nayarit
shares have not been purchased by AmalgSub will be joined as parties and bound
by the decision of the Ontario Court and AmalgSub will be required to notify
each affected Dissenting Stockholder of the date, place and consequences of the
application and of the right of such Dissenting Stockholder to appear and be
heard in person or by counsel. Upon any such application to the
Ontario Court, the Ontario Court may determine whether any person is a
Dissenting Stockholder who should be joined as a party and the Ontario Court
will then fix a fair value for the Nayarit shares of all Dissenting
Stockholders. The final order of the Ontario Court will be rendered
against AmalgSub in favor of each Dissenting Stockholder and for the amount of
the fair value of each Dissenting Stockholder’s Nayarit shares as fixed by the
Ontario Court. The Ontario Superior Court may, in its discretion,
allow a reasonable rate of interest on the amount payable to each Dissenting
Stockholder from the Effective Date of the Amalgamation until the date of
payment.
The
foregoing is only a summary of the provisions of section 185 of the Ontario Act,
which provisions are technical and complex. It is suggested that any
Nayarit stockholder wishing to exercise Dissent Rights seek legal advice as
failure to comply strictly with the provisions of the Ontario Act may prejudice
such Stockholder’s Dissent Rights.
Canadian
Federal Income Tax Consequences for Holders of Nayarit Shares, Nayarit Warrants
and Nayarit Options
The
following is a summary of the principal Canadian federal income tax consequences
under the Income Tax Act (Canada) (the “Tax Act”) generally applicable in
respect of the Business Combination to a holder of Nayarit securities who, for
purposes of the Tax Act and at all relevant times, is a resident of Canada,
holds Nayarit shares of common stock, Nayarit warrants and/ or Nayarit options
to purchase common stock as capital property, deals at arm’s length with
Nayarit, is not affiliated with Nayarit or Capital Gold and to whom Nayarit is
not is a foreign affiliate. This summary is not applicable to a
holder that is a “financial institution” or a “specified financial institution”
as defined in the Tax Act nor to a holder of an interest that is a tax shelter
investment. Generally, securities will be considered to be capital
property to the holder thereof unless they are held in the course of carrying on
a business of trading or dealing in securities or were acquired in one or more
transactions considered to be an adventure in the nature of trade.
This
summary does not address the income tax considerations of exercising, cancelling
or otherwise disposing of any options or warrants to acquire Nayarit shares, nor
does it address all issues relevant to Nayarit Stockholders who acquired shares
on the exercise of options or warrants. This summary does not address
the income tax consequences of exchanging Nayarit stock options or warrants for
stock options or warrants of Capital Gold. This summary also does not
address the income tax consequences to persons who are not resident of Canada
for purposes of the Tax Act or any applicable income tax
treaty. Such
security holders should consult their own tax advisors with respect to the
Amalgamation.
This
summary is based upon the current provisions of the Tax Act, the Regulations
thereunder, all proposed amendments to the Tax Act and Regulations publicly
announced by or on behalf of the Minister of Finance prior to the date hereof
(the “Proposed Amendments”) and counsel’s understanding of the administrative
policies and assessing practices of the Canada Revenue Agency (the “CRA”)
publicly available prior to the date of this proxy
statement/prospectus. Except for the Proposed Amendments, this
summary does not take into account or anticipate any changes in the law or
administrative policies or assessing practices of the CRA, nor does it take into
account the tax law of any province, territory or foreign
jurisdiction. There can be no assurance that the Proposed Amendments
will be enacted in the form currently proposed or at all.
This
summary is of a general nature only and is not intended to be, and should not be
construed to be, legal, business or tax advice to any particular
holder. Holders of Nayarit shares and Capital Gold shares should
consult their own tax advisers to determine the tax consequences to them of the
Business Combination.
The
Amalgamation
A holder
of Nayarit shares who disposes of Nayarit shares in the Business Combination in
exchange for Capital Gold shares will generally be deemed to have disposed of
such shares for proceeds of disposition equal to the adjusted cost base of such
shares immediately before the Amalgamation, thereby realizing neither a capital
gain nor a capital loss by virtue of such disposition. Such a holder
of Nayarit shares will generally be deemed to have acquired the Capital Gold
shares at a cost equal to the adjusted cost base to the holder immediately
before the Amalgamation.
54
A holder
of Nayarit options or warrants who disposes of Nayarit options or warrants in
the Business Combination in exchange for Capital Gold options or warrants will
generally be deemed to have disposed of such options or warrants for proceeds of
disposition equal to the adjusted cost base of such options or warrants
immediately before the Amalgamation, thereby realizing neither a capital gain
nor a capital loss by virtue of such disposition. Such a holder of
Nayarit options or warrants will generally be deemed to have acquired the
Nayarit options or warrants at a cost equal to the adjusted cost base to the
holder immediately before the Amalgamation.
A holder
of Nayarit shares, warrants or options may choose to file a tax return
recognizing a capital gain or capital loss on the exchange of such securities
for Capital Gold shares, warrants or options, as the case may be, under the
Amalgamation, in such holder's taxation year which includes the date upon which
the Amalgamation took place. In such event, the holder will be
considered to have disposed of such shares, warrants or options for proceeds of
disposition equal to the fair market value of the Capital Gold shares, warrants
or options, as the case may be, received on the exchange. Such holder
will realize a capital gain to the extent that such proceeds of disposition
exceed (or are less than) the adjusted cost base of that holder's Nayarit
shares, warrants or options disposed of immediately before the exchange and any
reasonable costs of disposition. Any holder of Nayarit shares,
warrants or options that chooses to recognize a capital gain or capital loss
will acquire the Capital Gold shares, Capital Gold warrants or Capital Gold
options, as the case may be, at a cost equal to the fair market value of such
Capital Gold shares, Capital Gold warrants or Capital Gold options received on
the exchange. Such capital gain (or capital loss) will be subject to
the tax treatment described below under “Capital Gains and Capital
Losses”. It is not possible for a holder of Nayarit shares,
Nayarit warrants or Nayarit options to elect to recognize only a portion of the
gain otherwise realized on a disposition of such shares, warrants or options
using the mechanism described above.
Dissenting
Stockholders
Dissenting
Stockholders are advised to consult with their own tax advisors with respect to
the tax treatment of payments received as a result of the exercise of the
dissent rights described above. A stockholder who dissents from the
Business Combination and thereby becomes entitled to a cash payment that is
ultimately paid by Capital Gold should generally be considered to have realized
a capital gain (or capital loss) equal to the amount, if any, by which the
proceeds of disposition of the Nayarit shares (which will be equal to the amount
of the cash payment less any portion that is in respect of interest) exceed (or
are exceeded by) the aggregate of the adjusted cost base of the Nayarit shares
and any reasonable costs of disposition. Any amount in respect of
interest received by a Dissenting Stockholder will be included in such
Dissenting Stockholder’s income in accordance with the provisions of the Tax
Act.
The date
of disposition of shares disposed of by reason of a stockholder exercising such
stockholder’s dissent rights is unclear and Dissenting Stockholders should
consult their tax advisers in this regard.
Dividends
on Capital Gold Shares
Capital
Gold has stated that it does not intend to pay dividends in the foreseeable
future. Dividends received or deemed to have been received by a
holder of Capital Gold shares will be included in computing the stockholder’s
income. In the case of an individual stockholder, such dividends will
not be eligible for the gross-up and dividend tax credit treatment normally
applicable to dividends received from taxable Canadian corporations and in the
case of a corporate holder such dividends will not be deductible in computing
taxable income. A holder that is a Canadian-controlled private
corporation may be liable to pay an additional refundable tax of 6 2/3% on such
dividends.
Disposition
of Capital Gold Shares
On the
disposition or deemed disposition of Capital Gold shares, a holder will
generally realize a capital gain (or capital loss) equal to the amount by which
the proceeds of disposition, net of any reasonable costs of disposition exceed
(or are less than) the holder’s adjusted cost base of the Capital Gold
shares.
Capital
Gains and Capital Losses
Generally,
only one-half of any capital gain (a “taxable capital gain”) is required to be
included in the holder’s income in the taxation year of disposition, and
one-half of any capital loss (an “allowable capital loss”) may be deducted
against taxable capital gains realized in the taxation year of
disposition. Allowable capital losses that cannot be deducted from
taxable capital gains in the year of disposition can generally be carried back
and deducted in any of the three preceding taxation years or carried forward and
deducted in any following year against taxable capital gains realized in such
years to the extent and in the circumstances set out in the Tax
Act.
55
Certain
Material U.S. Federal Income Tax Considerations
The
following is a summary of certain material U.S. federal income tax
considerations arising from and relating to the Business Combination applicable
to “U.S. Holders” (as defined below) of Nayarit common stock that exchange their
Nayarit common stock for Capital Gold common stock pursuant to the Business
Combination. This summary also addresses certain material U.S.
federal income tax considerations for U.S. Holders and “Non-U.S. Holders” (as
defined below) arising from and relating to ownership of the Capital Gold common
shares received in exchange for Nayarit common shares pursuant to the Business
Combination. This summary does not address any U.S. federal income
tax considerations of U.S. Holders and Non-U.S. Holders of Nayarit or Capital
Gold securities (including warrants and options) other than common
shares.
This
summary is for general information purposes only and does not purport to be a
complete analysis or listing of all potential U.S. federal income tax
consequences of (i) the Business Combination that may apply to a U.S. Holder,
(ii) a U.S. Holder owning Capital Gold common shares, and (iii) a Non-U.S.
Holder owning Capital Gold common shares. In addition, this summary
does not take into account the individual facts and circumstances of any
particular U.S. Holder that may affect the U.S. federal income tax consequences
of the Business Combination to such U.S. Holder or any particular circumstances
of U.S. Holders and Non-U.S. Holders with respect to ownership of the Capital
Gold common shares. Accordingly, this summary is not intended to be,
and should not be construed as, legal or U.S. federal income tax advice with
respect to any U.S. Holder or Non-U.S. Holder. This summary does not address
U.S. state and local, U.S. federal estate and gift, or foreign tax consequences
or the U.S. federal alternative minimum tax. Each U.S. Holder and Non-U.S. Holder
should consult its own tax advisor regarding the U.S. federal income, U.S. state
and local, U.S. federal estate and gift, and foreign tax consequences arising
from and relating to the Business Combination, and the ownership of the Capital
Gold common shares.
Scope
of this Summary
Authorities
This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code");
U.S. Treasury Regulations (whether final, temporary, or proposed); Internal
Revenue Service (“IRS”) rulings and official pronouncements; and judicial
decisions, all as in effect and available, as of the date of this proxy
statement/prospectus. Any of the authorities on which this summary is based
could be changed in a material and adverse manner at any time, and any such
change could be applied on a retroactive basis. This summary does not discuss
the potential effects, whether adverse or beneficial, of any proposed
legislation (including, but not limited to, changes in rates of taxation) that,
if enacted, could be applied at any time, including on a retroactive
basis.
U.S.
Holders
For
purposes of this summary, a "U.S. Holder" is an owner of Nayarit common shares
and Capital Gold common shares received in exchange for Nayarit common shares
that, for U.S. federal income tax purposes, is (a) an individual who is a
citizen or resident of the U.S., (b) a corporation, or any other entity
classified as a corporation for U.S. federal income tax purposes, that is
created or organized in or under the laws of the U.S., any state in the U.S., or
the District of Columbia, (c) an estate if the income of such estate is subject
to U.S. federal income tax regardless of the source of such income, or (d) a
trust if (i) such trust has validly elected to be treated as a U.S. person for
U.S. federal income tax purposes or (ii) a U.S. court is able to exercise
primary supervision over the administration of such trust and one or more U.S.
persons have the authority to control all substantial decisions of such
trust.
This
summary is limited to U.S. Holders who own Nayarit common shares and Capital
Gold common shares directly and not through an intermediary entity, such as a
corporation, partnership, limited liability company or a trust.
Non-U.S.
Holders
A
Non-U.S. Holder for purposes of this summary is a beneficial owner of Capital
Gold common shares that acquires the Capital Gold common shares in exchange for
Nayarit common shares pursuant to the Business Combination who (i) is not a U.S.
Holder as defined above, and (ii) is not a partnership or other pass through
entity for United States federal income tax purposes.
U.S.
Holders and Non-U.S. Holders Subject to Special U.S. Federal Income Tax Rules
Not Addressed
This
summary does not address the U.S. federal income tax consequences applicable to
U.S. Holders and Non-U.S. Holders that are subject to special provisions under
the Code, including, but not limited to, the following: (a) tax exempt
organizations, qualified retirement plans, individual retirement accounts, or
other tax-deferred accounts; (b) financial institutions, insurance companies,
real estate investment trusts, or regulated investment companies; (c) dealers in
securities or currencies or traders in securities that elect to apply a
mark-to-market accounting method; (d) U.S. Holders and Non-U.S. Holders that
have a "functional currency" other than the U.S. dollar; (e) U.S. Holders and
Non-U.S. Holders that own Nayarit or Capital Gold common shares as part of a
straddle, hedging transaction, conversion transaction, constructive sale, or
other arrangement involving more than one position; (f) U.S. Holders and
Non-U.S. Holders that acquired Nayarit or Capital Gold common shares in
connection with the exercise of employee stock options or otherwise as
compensation for services; (g) U.S. Holders and Non-U.S. Holders that hold
Nayarit common shares or Capital Gold common shares other than as a capital
asset within the meaning of Section 1221 of the Code; or (h) U.S. tax
expatriates or former long-term residents of the U.S. U.S. Holders and Non-U.S.
Holders that are subject to special provisions under the Code, including U.S.
Holders and Non-U.S. Holders described immediately above, should consult their
own tax advisors regarding the U.S. federal income tax consequences arising from
and relating to the Business Combination and the ownership and disposition of
the Capital Gold common shares.
Controlled
Foreign Corporation Status
This
discussion assumes that prior to the Business Combination, Nayarit is not a
“controlled foreign corporation” (“CFC”) as such term is defined in the
Code.
U.S.
Federal Income Tax Consequences of the Business Combination to U.S.
Holders
U.S. Tax Consequences if the Business
Combination is a Tax-Free Reorganization
While the Business Combination is
intended to qualify as a tax-free “reorganization” within the meaning of Section
368(a) of the Code, there is no certainty that the IRS would agree with this
position, and there could be other sections of the Code that apply to disallow
the treatment to U.S. Holders described below that applies to a U.S. Holder who
participates in a reorganization. For example, in addition to meeting
all of the requirements of Section 368(a) of the Code, all of the requirements
of Section 367 of the Code and Treasury Regulations issued thereunder (some of
which have been issued recently and are therefore untested) must also be
met.
Assuming the Business Combination is
treated as a reorganization under Section 368(a) of the Code, the requirements
of Section 367 of the Code are also met, and subject to the discussion of the
“passive foreign investment company” (“PFIC”) rules below, the material U.S.
federal income tax consequences of the Business Combination should be as
follows:
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none
of Capital Gold, Nayarit, Merger Sub or AmalgSub will recognize gain or
loss in the Business Combination;
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U.S.
Holders of Nayarit common shares will not recognize gain or loss in the
Business Combination;
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the
tax basis of the Capital Gold common shares received in the Business
Combination by a U.S. Holder of Nayarit common shares will be the same as
the tax basis of the shares of Nayarit common shares exchanged
therefor;
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the
holding period for the Capital Gold common shares received in the Business
Combination by a U.S. Holder of Nayarit common shares will include the
holding period of the Nayarit common shares exchanged therefor;
and
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U.S.
Holders who exchange Nayarit common shares for Capital Gold common shares
pursuant to the Business Combination may be required to report certain
information to the IRS on their U.S. federal income tax returns for the
taxable year in which the Business Combination occurs, and to retain
certain records related to the Business Combination. U.S. Holders should consult
their own U.S. tax advisors regarding the proper tax reporting of the
Business Combination.
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The
foregoing discussion is not binding on the IRS or any court, and none of Capital
Gold, Merger Sub, AmalgSub or Nayarit intends to request a ruling from the IRS
or an opinion from counsel regarding the U.S. federal income tax consequences of
the Business Combination. The IRS could challenge the conclusions reflected
above.
In
addition, U.S. Holders who properly exercise their dissenters’ rights and
receive cash in exchange for their Nayarit common shares should expect to treat
the receipt of such cash as a taxable event.
U.S. Tax Consequences if the Business
Combination is not a Tax-Free Reorganization
If the
Business Combination does not constitute a tax-free reorganization within the
meaning of Section 368(a) of the Code or does not meet any other applicable Code
requirements for a tax-free reorganization for U.S. federal income tax purposes,
the material U.S. federal income tax consequences of the Business Combination
should be as follows:
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a
U.S. Holder will recognize gain or loss in an amount equal to the
difference, if any, between: (i) the fair market value of the Capital Gold
common shares received in exchange for Nayarit common shares pursuant to
the Business Combination; and (ii) the adjusted tax basis of such U.S.
Holder in the Nayarit common shares
exchanged;
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the
tax basis of a U.S. Holder in the Capital Gold common shares received in
exchange for Nayarit common shares pursuant to the Business Combination
would be equal to the fair market value of such Capital Gold common shares
on the date of receipt; and
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the
holding period of a U.S. Holder for the Capital Gold common shares
received in exchange for Nayarit common shares pursuant to the Business
Combination will begin on the day after the date of
receipt.
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U.S.
Tax Considerations if Nayarit Is or Was a PFIC
If
Nayarit is or has been a PFIC under Section 1297 of the Code, the U.S. federal
income tax consequences described above could be materially and adversely
different to U.S. Holders. For example, if Nayarit is or was a PFIC,
the Business Combination may be taxable to a U.S. Holder notwithstanding
qualifying as an otherwise tax-free reorganization under Section 368(a) of the
Code. Moreover, if Nayarit is or was a PFIC and the Business
Combination is taxable to a U.S. Holder, the tax consequences of recognizing a
gain or loss under the PFIC regime may be adverse to U.S. Holders.
Nayarit
(or certain of its non-U.S. corporate subsidiaries ("Related Entities")) is or
was a PFIC in any year if it derives 75% or more of its gross income from
certain types of “passive” income that year, or if the average value during the
year of Nayarit or the Related Entity’s “passive assets” (generally, assets that
generate passive income) is 50% or more of the average value of all assets held
by Nayarit or the Related Entity in a taxable year.
The PFIC
rules are very complex. Neither Nayarit nor any Related Entity can
give any assurance as to its status as a PFIC for the current or any prior
taxable year, and offers no opinion or representation of any kind with respect
to the PFIC status of Nayarit or any Related Entity. U.S. Holders should consult their own
tax advisors with respect to the PFIC issue and its applicability to their
particular tax situation.
The
U.S. federal income tax rules applicable to U.S. Holders who dispose of their
stock in a non-U.S. corporation such as Nayarit in a transaction such as the
Business Combination are complex, especially in light of the potential
application of the PFIC rules. U.S. Holders should consult their own
tax advisors concerning the U.S. federal, state, local and foreign tax treatment
to them on the Business Combination.
U.S.
Federal Income Tax Considerations of Owning Capital Gold Common
Shares
After the
Business Combination, the U.S. Holders and Non-U.S. Holders will own common
shares of Capital Gold, a U.S. domestic corporation for U.S. federal income tax
purposes. Capital Gold is subject to U.S. federal income tax at the
corporate level on its worldwide income. Moreover, since Capital Gold
will be the sole shareholder of Nayarit, Nayarit will be a CFC of Capital Gold
under the Code.
U.S.
Holders
Distributions on Capital Gold Common
Shares
The gross
amount of any distribution by Capital Gold with respect to the Capital Gold
common shares generally should be included in the gross income of a U.S. Holder
as U.S.-source dividend income to the extent such distribution is paid out of
current or accumulated earnings and profits of Capital Gold, as determined under
United States federal income tax principles. To the extent that the
amount of any distribution exceeds Capital Gold’s current and accumulated
earnings and profits for a taxable year, the distribution is treated as a
tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis
in the Capital Gold common shares. Then, to the extent that such distribution
exceeds the U.S. Holder’s adjusted tax basis in the Capital Gold common shares,
it is treated as gain from the sale or exchange of the U.S. Holder’s Capital
Gold common shares (See “Dispositions of Capital Gold Common Shares”,
below). Dividends received by non-corporate U.S. Holders may be
subject to United States federal income tax at lower rates (generally 15%) than
other types of ordinary income in taxable years beginning on or before December
31, 2010, if certain conditions are met (including a holding period
requirement). This preferential rate is scheduled to expire for tax
years beginning on or after January 1, 2011.
Dispositions of Capital Gold Common
Shares
Gain or
loss, if any, realized by a U.S. Holder on the sale or other disposition of
Capital Gold common shares generally is subject to United States federal income
taxation as capital gain or loss in an amount equal to the difference between
the U.S. Holder’s adjusted tax basis in the Capital Gold common shares and the
amount realized on the disposition. Net capital gain (i.e., capital
gain in excess of capital loss) recognized by a non-corporate U.S. Holder upon a
sale or other disposition of Capital Gold common shares that have been held for
more than one year is generally subject to a maximum United States federal
income tax rate of 15% (which is scheduled to increase to a maximum rate of 20%
on January 1, 2011). Deductions for capital losses are subject to
limitations. There is no preferential United States federal capital
gains rate for U.S. Holders that are corporations that dispose of Capital Gold
common shares.
Backup Withholding and Information
Reporting
Noncorporate
U.S. Holders are generally subject to certain information reporting
requirements, on IRS Form 1099, with respect to (i) dividend payments or other
taxable distributions made to such U.S. Holder within the United States, and
(ii) the payment of proceeds to such U.S. Holder from the sale of Capital Gold
common shares effected at a United States office of a
broker. Corporate U.S. Holders will also be subject to these rules
for payments made after December 31, 2011.
Capital
Gold may also be required to collect a backup withholding tax, if (i) a U.S.
Holder fails to furnish or certify its correct taxpayer identification number to
Capital Gold in the manner required, (ii) Capital Gold is notified by the IRS
that the U.S. Holder has failed to report payments of dividends and interest
properly, or (iii) under certain circumstances, the U.S. Holder fails to certify
that the U.S. Holder has not been notified by the IRS that the U.S. Holder is
subject to backup withholding for failure to report interest and dividend
payments.
Backup
withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be returned or credited against the U.S. Holder’s
United States federal income tax liability, as long as the required information
is provided to the IRS.
Non-U.S.
Holders
Distributions on Capital Gold Common
Shares
After the
Business Combination, the Non-U.S. Holders will own common shares of Capital
Gold, a U.S. corporation. The gross amount of any distribution by
Capital Gold with respect to the Capital Gold common shares is treated first as
dividend income to the extent such distribution is paid out of current or
accumulated earnings and profits of Capital Gold, as determined under United
States federal income tax principles. To the extent that the amount
of any distribution exceeds Capital Gold’s current and accumulated earnings and
profits for a taxable year, the distribution is treated as a tax-free return of
capital to the extent of the Non-U.S. Holder’s adjusted tax basis in the Capital
Gold common shares. Then, to the extent that such distribution exceeds the
Non-U.S. Holder’s adjusted tax basis in the Capital Gold common shares, it is
taxed as gain from the sale or exchange of the Non-U.S. Holder’s Capital Gold
common shares (See “Dispositions of Capital Gold Common Shares”, below). Any
such distribution that constitutes a dividend is treated as United States source
gross income for Non-U.S. Holders of Capital Gold common shares, and is subject
to withholding under Section 1441 of the Code (unless it is treated as
“effectively connected” income as described below). The withholding rate under
the Code on dividends is generally 30%, but may be reduced pursuant to a
treaty. Any dividend income that is “effectively connected” with a
Non-U.S. Holder’s conduct of a U.S. trade or business (and, where a tax treaty
applies, is attributable to a U.S. permanent establishment maintained by the
Non-U.S Holder) will not be subject to the withholding tax described in this
paragraph but instead will be taxed as described in the second bullet point and
the remaining discussion under the heading “Dispositions of Capital Gold Common
Shares” below. Non U.S. Holders will be required to provide specific
documentation to claim a treaty exemption or reduced rate of withholding with
respect to the distribution.
Dispositions of Capital Gold Common
Shares
A
Non-U.S. Holder generally will not be subject to U.S. federal income tax with
respect to gain recognized upon the disposition of Capital Gold common shares
unless:
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such
Non-U.S. Holder is an individual who is present in the United States for a
period or periods aggregating 183 days or more during the taxable year of
disposition and certain other conditions are
met;
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such
gain is effectively connected with such Non-U.S. Holder’s conduct of a
U.S. trade or business (and, where a tax treaty applies, is attributable
to a U.S. permanent establishment maintained by the Non-U.S Holder);
or
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the
Capital Gold common shares constitutes a U.S. real property interest by
reason of its status as a “United States real property holding
corporation” for U.S. federal income tax purposes
(“USRPHC”).
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A
Non-U.S. Holder described in the first bullet above is required to pay a flat
30% tax on the gain derived from the sale, which tax may be offset by U.S.
source capital losses. A Non-U.S. Holder described in the second
bullet above or if the third bullet applies is required to pay tax on the net
gain derived from the sale under regular graduated U.S. federal income tax
rates, and corporate Non-U.S. Holders described in the second bullet above may
also be subject to branch profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. You should consult any applicable
income tax treaties that may provide for different results.
U.S. Estate and Gift Tax Consequences
of Transfers of Capital Gold Common Shares
The U.S.
gift, estate, and generation-skipping transfer tax rules generally apply to a
Non-U.S. Holder of Capital Gold common shares. Non-U.S Holders of
Capital Gold common shares should consult an independent tax advisor with
respect to U.S. gift, estate, and generation-skipping transfer tax consequences
applicable to the ownership of Capital Gold common shares.
Backup Withholding and Information
Reporting
Generally,
Capital Gold must report annually to the IRS and to Non-U.S. Holders the amount
of dividends paid and the amount of tax, if any, withheld with respect to those
payments. These information reporting requirements apply even if withholding is
not required. Pursuant to tax treaties or other agreements, the IRS may make
such information available to tax authorities in the Non-U.S. Holder’s country
of residence. The payment of proceeds from the sale of Capital Gold common
shares by a broker to a Non-U.S. Holder is generally not subject to information
reporting if:
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the
Non-U.S. Holder certifies his, her or its non-U.S. status under penalties
of perjury by providing a properly executed IRS Form W-8BEN, or otherwise
establish an exemption; or
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the
sale of the Capital Gold common shares is effected outside the U.S. by a
foreign office of a broker, unless the broker is (1) a U.S.
person; (2) a foreign person that derives 50% or more of its
gross income for certain periods from activities that are effectively
connected with the conduct of a trade or business in the U.S.; (3) a CFC
for U.S. federal income tax purposes; or (4) a foreign partnership more
than 50% of the capital or profits interest of which is owned by one or
more U.S. persons or which engages in a U.S. trade or
business.
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A
backup withholding tax may apply to amounts paid to a Non-U.S Holder if the
Non-U.S Holder fails to properly establish its foreign status on the applicable
IRS Form W-8 or if certain other conditions are met. Backup withholding is not
an additional tax. Any amounts withheld under the backup withholding
rules may be refunded or credited against the Non-U.S Holder’s U.S. federal
income tax liability, assuming the required information is timely provided to
the IRS.
New
U.S. legislation signed into law on March 18, 2010 ( The Hiring Incentives
to Restore Employment (HIRE) Act) substantially change the withholding and
reporting rules applicable to Non-U.S. Holders that are not individuals that
receive certain U.S.-source income, generally effective for payments made after
December 31, 2012. Certain changes made by the HIRE Act may,
depending on how such changes are implemented by the U.S. Treasury, result in
different U.S. federal income tax consequences for Non-U.S. Holders that are not
individuals than those described above, including with respect to withholding
and information reporting, and distributions on and dispositions of Capital Gold
common shares.
56
Solicitation
of Proxies
The
enclosed proxy is being solicited by or on behalf of the management of
Nayarit. The cost of soliciting proxies will be borne by
Nayarit. While most proxies will be solicited by mail only, regular
employees of Nayarit may also solicit proxies by telephone or in
person. Such employees will receive no additional compensation for
these services other than their regular salaries, but will be reimbursed for
their reasonable expenses.
Nayarit
will provide proxy materials to brokers, custodians, nominees and fiduciaries
and will request that such materials be promptly forwarded to the beneficial
owners of common shares registered in the names of such brokers, custodians,
nominees and fiduciaries. Nayarit will reimburse brokers, custodians,
nominees and fiduciaries for their reasonable charges and expenses incurred in
forwarding proxy materials to beneficial owners of common shares.
Voting
Common Shares
The Board
of Directors of Nayarit has fixed May 3 , 2010 as the record date for the
purpose of determining Stockholders entitled to receive Notice of the Meeting
(the "Meeting Record Date").
Nayarit
will prepare, no later than ten (10) days following the Meeting Record Date, a
list of stockholders entitled to vote as of the Meeting Record Date, showing the
number of common shares held by each such stockholder. Each person
named on the list of stockholders is entitled to one (1) vote for each common
share held, except to the extent that: (i) the stockholder has transferred any
common shares after the Meeting Record Date; and (ii) the transferee of those
common shares produces properly endorsed share certificates or otherwise
establishes ownership of those common shares and requests not later than ten
(10) days before the date of the Nayarit Special Meeting that the transferee's
name be included on such list before the Nayarit Special Meeting, in which case
the transferee is entitled to vote those common shares at the Nayarit Special
Meeting.
57
Registered
Stockholders
Registered
stockholders are stockholders whose common shares are held in their own name and
they will have received a proxy form in their own name.
Non-Registered/Beneficial
Stockholders
Beneficial
stockholders are stockholders who do not hold their Nayarit Common Shares in
their own name, but rather in the name of a nominee, such as a bank, trust
company, securities broker or other financial institution (and is known as
holding in "street form").
If you
are a non-registered Nayarit stockholder, there are two (2) ways you can vote
your Nayarit Common Shares held by your nominee. Your nominee is
required to seek voting instructions from you in advance of the Nayarit Special
Meeting in accordance with securities laws, and so you will receive, or will
have already received from your nominee, a request for voting instructions or a
proxy form for the number of common shares you hold. Every nominee
has its own mailing procedures and provides its own signing and return
instructions. Therefore, please follow them in order to make sure
that your common shares are voted.
Alternatively,
if you wish to vote in person at the Nayarit Special Meeting, please insert your
own name in the space provided on the "Request for Voting Instructions" or proxy
form to appoint yourself as proxy holder and follow the signing and return
instructions of your nominee. Non-registered stockholders who appoint
themselves as proxy holders should, at the Nayarit Special Meeting, present
themselves to a representative of Computershare Trust Company of
Canada.
Appointment
of Proxy Holders
The
persons named in the enclosed form of proxy are directors and/or officers of
Nayarit. A stockholder has the right to appoint some other person
(who need not be a stockholder) to attend and to act for and on behalf of such
stockholder at the Nayarit Special Meeting. To exercise this right,
the stockholder must either insert the name of the desired person in the blank
space provided in the proxy and strike out the other names or submit another
proper form of proxy and, in either case, deliver the completed proxy by post or
other form of delivery to the transfer agent for the common shares,
Computershare Trust Company of Canada, 1969 Upper Water Street, Purdy’s Wharf
II, Suite 2008, Halifax, Nova Scotia, B3J 3R7 in either case to be
received not later than the close of business on
[ ], 2010 (i.e. 5:00 pm, Atlantic time) or,
in the event of an adjournment, not later than two (2) business days preceding
the day to which the Nayarit Special Meeting is adjourned.
All
Nayarit Common Shares represented by a properly executed and deposited proxy
will be voted or withheld from voting on the matters identified in the Notice of
Special Meeting in accordance with the instructions of the stockholder as
specified thereon.
If you have appointed a person who
was designated by Nayarit to vote on your behalf as provided in the enclosed form of proxy and you do not
provide any instructions concerning any matter identified in the Notice
of Meeting, the Common
Shares represented by such proxy will be voted:
“FOR” the
approval of the Business Combination Agreement and the Business
Combination.
The
enclosed form of proxy, when properly signed, confers discretionary authority on
the person or persons named to vote on any amendment to matters identified in
the Notice of Meeting and on any other matter properly coming before the Nayarit
Special Meeting. Nayarit management is not aware of any such matter;
however, if such matter properly comes before the Special Meeting, the proxies
will be voted at the discretion of the person or persons named
therein. The persons named in the form of proxy are either officers
or directors of Nayarit.
Revocability
of Proxies
A
stockholder executing the enclosed form of proxy has the right to revoke it at
any time before it is exercised. Relevant provisions of the Ontario
Act provide that a stockholder may revoke a proxy by
depositing an instrument in writing, executed by the stockholder or by an
attorney authorized in writing, at, or by transmitting by telephonic or
electronic means or any other manner permitted by law, a revocation to, the
registered office of Nayarit at 76 Temple Terrace, Suite 150, Lower Sackville,
Nova Scotia, B4C 0A7 at any time up to and including the last business day
preceding the day of the Nayarit Special Meeting, or any adjournment thereof, or
by depositing such instrument with the Chair of the Meeting on the day of the
Nayarit Special Meeting, or any adjournment thereof, or in any other manner
permitted by law.
58
Voting
Shares and Principal Stockholders
The
authorized capital of Nayarit consists of an unlimited number of common
shares. As of March 29, 2010, there were 91,459,665 common shares
outstanding. Each common share carries the right to one (1) vote on
any matter properly coming before the Nayarit Special Meeting. A
quorum for the Nayarit Special Meeting of Stockholders requires two (2) persons
present in person or by proxy.
To the
knowledge of the directors and officers of Nayarit, no person or company
beneficially owns, directly or indirectly, or exercises control or direction
over, in excess of 10% of the outstanding Nayarit Common Shares.
Additional
Information
Nayarit
will furnish, without charge, to any stockholder submitting a written request, a
copy of Nayarit’s annual report for the year ended September 30, 2009, including
the financial statements and schedules thereto. Such written request
should be directed to the attention of Nayarit Gold Inc., 76 Temple Terrace,
Suite 150, Lower Sackville, Nova Scotia, B4C 0A7, Canada.
Board
of Directors Approval
The
contents of this proxy statement/prospectus relating specifically to Nayarit,
the Nayarit Supplement and the sending of this joint proxy statement/prospectus
to the stockholders of Nayarit have been approved by the Board of Directors of
Nayarit.
59
PROPOSAL TO BE CONSIDERED BY
NAYARIT STOCKHOLDERS
PROPOSAL
NO. 1
THE
BUSINESS COMBINATION PROPOSAL
The
discussion in this joint proxy statement/prospectus of the Business Combination
Proposal and the principal terms of the Business Combination Agreement are
subject to, and is qualified in its entirety by reference to, the Business
Combination Agreement, which is attached as Annex I to this proxy
statement/prospectus.
The
stockholder resolution submitted to the stockholders of Nayarit is as
follows:
BE IT
RESOLVED AS A SPECIAL RESOLUTION THAT:
|
|
1.
|
The
Business Combination Agreement dated as of February 10, 2010 as amended on
April 29, 2010 between Capital Gold Corporation and Nayarit Gold Inc.
(the “Business Combination Agreement”), including the execution and
performance of such Agreement, is approved; and be it further resolved
that
|
|
|
2.
|
That
the officers of Nayarit execute such further documents and take
further action as, in their discretion, is necessary of desirable to give
effect to the forgoing
resolutions.
|
General
Description of the Business Combination
The
respective Boards of Directors of Capital Gold and Nayarit have approved a
Business Combination Agreement between Capital Gold and Nayarit dated February
10, 2010 (the “Business Combination Agreement”) that would effect the
Amalgamation of Nayarit with a to be formed corporation as a wholly owned
Canadian subsidiary of Capital Gold. If the Business Combination is
approved by the stockholders of both companies, the parties intend to effect an
amalgamation (the “Amalgamation”) of Nayarit and a corporation, to be organized
under the Ontario Act as a wholly-owned subsidiary of Capital Gold (“Merger
Sub”), to form a combined entity (“AmalgSub”). By virtue of the
Amalgamation, the separate existence of each of Nayarit and Merger Sub shall
thereupon cease, and AmalgSub shall continue its corporate existence under the
Ontario Act as a wholly-owned subsidiary of Capital Gold.
The
parties to the Business Combination Agreement intend to consummate the
Amalgamation as promptly as practicable after the Special Meetings of the
stockholders of Capital Gold and Nayarit, provided that:
|
|
•
|
Capital Gold’s stockholders have
approved the Business Combination Agreement and the issuance of the
Amalgamation Consideration;
|
|
|
•
|
Nayarit’s
stockholders have adopted the Business Combination Agreement and approved
the transactions contemplated thereby, including the
Amalgamation;
|
|
|
•
|
holders of no more than 5% of
the Nayarit shares vote against the Amalgamation and exercise dissent
rights under the Ontario
Act
|
|
|
•
|
the SEC has declared effective
Capital Gold’s registration statement of which this proxy
statement/prospectus is a part;
and
|
|
|
•
|
the other conditions specified in
the Business Combination Agreement have been satisfied or
waived.
|
For more information, see the
section entitled “The Business Combination”
beginning on page 30.
The Business Combination Agreement is included as Annex I to this joint proxy
statement/prospectus. You are encouraged to read the Business Combination
Agreement in its entirety.
60
Background
of the Business Combination
The terms
of the Business Combination are the result of arms-length negotiations between
representatives of Capital Gold and Nayarit. The following is a discussion of
the background of these negotiations, the Business Combination and related
transactions.
In
December 2008, Colin Sutherland, and Bradley Langille, respectively, President
and strategic consultant to Nayarit, had an introductory meeting with John
Brownlie, President of Capital Gold, and scheduled a site visit to Nayarit’s
properties in Mexico which occurred the same month.
On
December 10, 2009, Mr. Sutherland, Mr. Langille and David Badner, respectively
President, strategic consultant and advisor of Nayarit, met with Mr. Brownlie in
San Francisco, California, to discuss the potential merger of Nayarit and
Capital Gold during which management from both companies provided overviews of
their respective businesses. The meeting outlined the process for moving
toward a letter of intent, which included discussions around the exchange ratio,
management positions, and overall strategy beyond the transaction. It was
discussed that Nayarit should proceed to finalizing the Preliminary Economic
Assessment in order to provide the financial basis for the Orion
Project.
During
the period December 12, 2009 through December 16, 2009, principals of Nayarit
and Mr. Brownlie held various telephonic discussions concerning the content of a
proposed letter of intent.
On
December 17, 2009, the Board of Directors of Nayarit approved the execution of
the letter of intent.
On
December 17, 2009, Nayarit and Capital Gold executed a letter of
intent.
On
January 14, 2010 Nayarit and its counsel, Dennis H. Peterson, of Peterson Law
Professional Corporation received from Capital Gold and its counsel, Ellenoff
Grossman & Schole LLP, or EG&S, a draft Business Combination Agreement
to Nayarit. Subsequently, Messrs. Langille, Sutherland, Badner and
Brownlie held various discussions and conference calls to negotiate the terms of
the Business Combination Agreement.
On
January 18, 2010, the Nayarit Board of Directors met and approved the execution
of the definitive agreement upon final receipt of the document.
On
January 20, 2010 and January 21, 2010, Mr. Brownlie, Mr. Sutherland, Mr.
Langille, Mr. Badner, Mr. Peterson, EG&S, Lonnie Kirsch, CGC Canadian
counsel, and Christopher M. Chipman, Capital Gold CFO, met in New York to
discuss the terms and conditions of the definitive agreement and outlined the
items which required further negotiation and clarification.
On
January 27, 2010, the Nayarit Board of Directors met and approved the execution
of the final definitive agreement.
On
February 9, 2010, the Nayarit Board of Directors met and approved the execution
of the final definitive agreement with adjustment to the exchange
ratio.
On
February 10, 2010, Nayarit and Capital Gold executed the Business Combination
Agreement and an acknowledgement regarding each party’s completion of its due
diligence.
Prior to
the opening of the financial markets on February 11, 2010, Nayarit and Capital
Gold issued a joint press release announcing the execution of the Business
Combination Agreement.
Nayarit’s
Board of Directors’ Reasons for Approval of the Business
Combination
Nayarit’s
Board of Directors concluded that the Business Combination is fair to, and in
the best interests of, Nayarit and its stockholders and that the consideration
to be paid in the Business Combination is fair to Nayarit and its stockholders.
Nayarit’s management conducted a due diligence review of Nayarit that included
an industry analysis, an evaluation of Nayarit’s existing business, a valuation
analysis and financial projections in order to enable the Board of Directors to
evaluate Nayarit’s business and financial condition and
prospects.
61
Nayarit’s
Board of Directors considered Nayarit’s properties, various industry and
financial data, including certain financial analyses developed by Nayarit and
metrics compiled by Nayarit’s management in evaluating the consideration to be
paid by Nayarit in the Business Combination.
Nayarit’s
Board of Directors considered a wide variety of factors in connection with its
evaluation of the Business Combination. In light of the complexity of
those factors, the Board of Directors did not consider it practicable to, nor
did it attempt to, quantify or otherwise assign relative weights to the specific
factors it considered in reaching its decision. Furthermore, individual members
of the board may have given different weight to different factors.
In
considering the Business Combination, Nayarit’s Board of Directors gave
considerable weight to the following favorable factors:
|
·
|
Market
Exposure. Capital Gold is a NYSE AMEX listed issuer with
a producing mine in Mexico. The Business Combination will
provide enhanced exposure to capital markets and greater shareholder
liquidity.
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|
·
|
Visibility as
a Mid-Tier Producer. The combined company
has the potential to be recognized as a significant mid-tier producer in
Latin America, with the possibility that further growth opportunities will
follow.
|
|
·
|
Exploration
and Development. The Business Combination will enhance the
combined company’s ability to grow and secure additional capital resources
to continue exploration and development of the Orion Project and Capital
Gold’s El Chanate Project, enhancing long term value for Nayarit’s
stockholders.
|
|
·
|
Stockholder
Liquidity.
Increased market capitalization
and a broader stockholder base resulting from the Amalgamation should improve trading liquidity
for Nayarit
stockholders.
|
|
·
|
Mining
Operations. Capital Gold has mining operations
at its El Chanate open pit mine in Sonora, Mexico. As part of
the combined company, revenue from operations would reduce Nayarit’s
dependency on capital markets for working
capital.
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|
·
|
Strong
Management Team. The combination of
Capital Gold’s and Nayarit’s management will
create a management team with complementary skills in exploration,
business and projected development and
operations.
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·
|
Potential
synergies. The strategic fit and
complementary nature of Nayarit’s and Capital Gold’s respective
assets in
Mexico and the
related potential impact on the combined company’s
earnings.
|
Nayarit’s
Board of Directors believes the above factors strongly supported its
determination and recommendation to approve the Business Combination. Nayarit’s
Board of Directors did, however, consider the following potentially negative
factors, among others, including the risk factors set forth elsewhere in this
proxy statement, in its deliberations concerning the Business
Combination:
|
·
|
Fixed exchange
rate. The currency exchange rate is
fixed, and as a result, the Capital Gold shares issued on consummation of
the Business Combination Agreement may have a market value different that
at the time of the announcement of the Amalgamation.
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|
·
|
Conditions to
closing. The Business Combination Agreement
is subject to several conditions and because there can be no certainty
that these conditions may be satisfied or waived, the Business Combination may not be successfully
completed.
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·
|
Termination
rights. The Business Combination
Agreement may be terminated by
either Nayarit or Capital Gold in certain circumstances, in which case the
market prices for Nayarit shares may be adversely affected.
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62
|
·
|
Limitations on
other opportunities. The Business Combination Agreement
substantially limits any outside opportunities Nayarit might otherwise
have with other potential combination
parties.
|
Terms
of the Business Combination Agreement
Nayarit’s
Board of Directors believes the terms of the Business Combination, including the
closing conditions, are customary and reasonable. It was important to Nayarit’s
Board of Directors that the Business Combination include customary terms and
conditions as it believed such terms and conditions would allow for a more
efficient closing process and lower transaction expenses.
Fairness
Opinion of Blair Franklin Capital Partners Inc.
The Board
or Directors of Nayarit retained Blair Franklin Capital Partners Inc. (“Blair
Franklin”) to provide its opinion s as to the fairness of the consideration to
be offered to the Nayarit shareholders in the Business
Combination. Blair Franklin concluded that the consideration to be
offered to the Nayarit shareholders in the Business Combination is fair from a
financial point of view. Blair Franklin’s opinion is qualified by
certain conditions and assumptions specified in their opinion letter to the
Board of Directors of Nayarit Gold dated March 25, 2010. A copy of
Blair Franklin’s fairness opinion is included with this joint proxy
statement/prospectus as Annex III.
Blair
Franklin is an independent investment bank based in Toronto,
Ontario. Blair Franklin provides advice on mergers, acquisitions,
divestitures, related party transactions, financing, restructurings, risk
management and governance issues. Blair Franklin also provides
valuations and fairness opinions to corporate, private, institutional and public
sector clients. Blair Franklin’s engagement by Nayarit provides for
payment of their fees upon completion of their work, regardless of the outcome
of their conclusion. Blair Franklin did not provid financial advisory
services or participate in a financing for Nayarit or Capital Gold within the
twenty-four months preceding the date of their fairness
opinion.
Among the
qualifications noted in the Blair Franklin fairness opinion is the statement
that Blair Franklin was not asked to prepare a formal valuation of Nayarit or
Capital Gold, or their respective securities or assets, and that their fairness
opinion should not be construed as such.
In preparing its opinion, Blair
Franklin reviewed and relied upon, among other things the following
documents.
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1.
|
Consolidated
financial statements for Nayarit for the years ended September 30, 2009
and 2008;
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2.
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Consolidated
financial statements for Capital Gold for the years ended July 31, 2009
and 2008;
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3.
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quarterly
reports for Nayarit for the three-month periods ended December 31, 2009
and 2008;
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4.
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quarterly
reports for Capital Gold for the six-month periods ended January 31, 2009
and 2008;
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5.
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Public
information relating to the business, operations, financial performance
and share price trading history of Nayarit, Capital Gold and other
selected public companies whose businesses if believed to be
relevant;
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|
|
6.
|
Business
Combination Agreement by and between Capital Gold and Nayarit dated
February 10, 2010;
|
|
7.
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Draft
Form-S-4 related to the
Transaction;
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|
|
8.
|
Certain
internal financial analyses and forecasts prepared by the management of
Nayarit and Capital;
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|
|
9.
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Preliminary
Economic Assessment for Animas/Del Norte deposit (part of the Orion
project) dated February 2010;
|
|
10.
|
43-101
resource estimate for the Orion project dated November
2009;
|
63
|
11.
|
43-101
Technical Report for the El Chanate Gold Mine dated November
2009;
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|
12.
|
Mine
site visit of the El Chanate Gold
Mine;
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|
13.
|
Discussions
with Nayarit and Capital Gold management concerning their respective
business operations, financial condition, results and
prospects;
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|
14.
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Comparable
trading multiples and comparable transaction multiples for selected
companies / businesses considered
relevant;
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15.
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Industry
and financial market information;
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16.
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Other
publicly available information considered
relevant;
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17.
|
A
certificate provided to us by senior officers of Nayarit as to certain
factual matters;
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|
18.
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A
certificate provided to us by senior officers of Capital Gold as to
certain factual matters; and
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19.
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Such
other information, documentation, analyses and discussions that we
considered relevant in the
circumstances.
|
Blair
Franklin has not, to the best of its knowledge, been denied access by Nayarit or
Capital Gold to any information that it requested.
Certain
Benefits of the Directors and Officers and Others in the Business
Combination
When you consider the recommendation of
the Nayarit Board of Directors in favor of approval of the Business Combination,
you should keep in mind that Nayarit directors and officers have interests in
the Business Combination that are different from, or in addition to, your
interests as a stockholder. These interests include, among other
things:
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|
·
|
It
is currently anticipated that Messrs. Cooper, Cutler, Sojka, each a
current director of Capital Gold, a nominee of Nayarit, and a nominee of
Capital Gold will serve as directors of Capital Gold following the
Business Combination and that John Brownlie will resign as President
and Chief Operating Officer of Capital Gold and Bradley Langille and Colin
Sutherland will join Capital Gold as senior
officers.
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|
·
|
Pursuant
to Mr. Brownlie’s employment agreement with Capital Gold, he is entitled
to a payment in the amount of $375,000 upon the consummation of the
Business Combination. In connection with his aforementioned
resignation, Mr. Brownlie and Capital Gold have entered into a Severance
Agreement and General Release, pursuant to which Mr. Brownlie employment
agreement will terminate and he will resign as President and Chief
Operating Officer effective upon the consummation of the Business
combination. Pursuant to the Severance Agreement, Mr. Brownlie
will be entitled to severance payments in the aggregate amount of
approximately $1.7 million, payable over a six month period. A
copy of the Severance Agreement has been filed as Exhibit 10.24 to the
registration statement of which this proxy statement/prospectus is a
part.
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|
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·
|
For
a period of thirty-six (36) months following the Effective Time of the
Business Combination, Capital Gold and Nayarit have agreed that they shall
cause their nominees on the Board of Directors to execute and deliver an
undertaking whereby such nominees agree to: (i) nominate the foregoing
agreed upon individuals for re-election at each annual meeting of the
stockholders of Capital Gold; and (ii) cause any successors chosen by such
nominees to comply with the foregoing provision at each annual meeting of
the stockholders of Capital Gold.
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|
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·
|
As
a condition to closing the Business Combination, Capital Gold and Nayarit
have agreed that the employment agreements between Nayarit, on one hand,
and each of Colin Sutherland and Bradley Langille, on the other hand,
shall either have been (i) terminated prior to the Effective Date in
accordance with the terms thereof, including payment of all termination
payments prescribed therein, or (ii) terminated with no payment of change
of control benefits in consideration for the execution of a new employment
agreement with Capital Gold on terms comparable to the other senior
officers of Capital Gold.
|
Required
Vote
The Business Combination Proposal
requires the affirmative vote of not less than two-thirds of the Nayarit Common
Shares voted in person or by proxy on the matter.
Recommendation
of Nayarit’s Board of Directors
THE
BOARD OF DRECTORS OF NAYARIT UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE BUSINESS
COMBINATION PROPOSAL.
64
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined balance sheet and statements of
operations are presented to give effect to the proposed transaction. The pro
forma information was prepared based on the historical financial statements and
related notes of Capital Gold and Nayarit after giving effect to the
Amalgamation using the acquisition method of accounting. In addition, the
unaudited pro forma condensed combined financial information was based on and
should be read in conjunction with:
|
|
·
|
Capital
Gold’s historical consolidated financial statements and related notes
included in the Capital Gold Form 10-K for the fiscal year
ended July 31, 2009 and the Capital Gold Form 10-Q for the six months
ended January 31, 2010, and
|
|
|
·
|
Nayarit's
historical consolidated financial statements and related notes for the
fiscal year ended September 30, 2009 prepared in accordance with Canadian
GAAP with a reconciliation to accounting principles generally accepted in
the United States of American (“U.S. GAAP”) and for the quarterly period
ended December 31, 2009 prepared in accordance with Canadian
GAAP.
|
The unaudited pro forma condensed
combined balance sheet is presented as if the transaction occurred on January
31, 2010. The unaudited pro forma condensed combined statements of operations
combine the results of operations of Capital Gold and Nayarit for the year ended
July 31, 2009 and the six months ended January 31, 2010, and are presented as if
the transaction occurred on August 1, 2008. The historical consolidated
financial information has been adjusted in the unaudited pro forma condensed
combined financial statements to give effect to pro forma events that are (1)
directly attributable to the Amalgamation, (2) factually supportable, and (3)
with respect to the statement of operations, expected to have a continuing
impact on the combined results.
The
unaudited pro forma condensed combined financial statements have been prepared
for illustrative purposes only and are not necessarily indicative of the
consolidated financial position or results of operations in future periods or
the results that actually would have been achieved had Capital Gold and Nayarit
been a combined company during the respective periods presented. Certain
reclassification adjustments have been made in the presentation of Nayarit’s
historical amounts to conform to Capital Gold’s presentation.
The
unaudited pro forma condensed combined financial information does not reflect
any cost savings or operating synergies that the combined company may achieve as
a result of the Amalgamation or the costs to integrate the operations of Nayarit
with Capital Gold.
65
Capital
Gold Corporation
Unaudited
Pro Forma Condensed Combined Balance Sheet
As
of January 31, 2010
(in
thousands)
|
Pro Forma
|
|||||||||||||||||
|
Historical
|
Adjustments
|
Combined
|
|||||||||||||||
|
Capital Gold
|
Nayarit
|
(Note 5)
|
Pro Forma
|
||||||||||||||
|
Assets
|
|||||||||||||||||
|
Current
Assets:
|
|||||||||||||||||
|
Cash
and cash equivalents
|
$ | 4,943 | $ | 1,350 | $ | (2,161 | ) |
(a)
|
$ | 4,132 | |||||||
|
Accounts
receivable
|
2,417 | - | - | 2,417 | |||||||||||||
|
Inventories
|
28,109 | - | - | 28,109 | |||||||||||||
|
Other
current assets
|
1,624 | 1,207 | - | 2,831 | |||||||||||||
|
Total
current assets
|
37,093 | 2,557 | (2,161 | ) | 37,489 | ||||||||||||
|
Property
and equipment, net
|
24,725 | 222 | - | 24,947 | |||||||||||||
|
Exploration
property interests
|
- | 4,036 | 44,012 |
(b)
|
48,048 | ||||||||||||
|
Goodwill
|
— | — | — | — | |||||||||||||
|
Intangibles,
net
|
686 | - | - | 686 | |||||||||||||
|
Deferred
finance costs and other assets
|
1,132 | - | - | 1,132 | |||||||||||||
| $ | 63,636 | $ | 6,815 | $ | 41,851 | $ | 112,302 | ||||||||||
|
Liabilities
and shareholders’ equity
|
|||||||||||||||||
|
Current
liabilities:
|
|||||||||||||||||
|
Accounts
payable and accrued liabilities
|
$ | 5,862 | $ | 402 | $ | 27 |
(c)(g)
|
$ | 6,291 | ||||||||
|
Deferred
tax liability
|
4,279 | - | 6,088 |
(d)
|
10,367 | ||||||||||||
|
Current
portion of long-term debt
|
3,600 | - | - | 3,600 | |||||||||||||
|
Other
current liability
|
112 | - | - | 112 | |||||||||||||
|
Total
current liabilities
|
13,853 | 402 | 6,115 | 20,370 | |||||||||||||
|
Long-term
debt
|
2,600 | - | - | 2,600 | |||||||||||||
|
Reclamation
and remediation liability and other
|
1,933 | - | - | 1,933 | |||||||||||||
|
Total
Liabilities
|
18,386 | 402 | 6,115 | 24,903 | |||||||||||||
|
Commitments
and Contingencies
|
$ | — | $ | — | $ | — | $ | — | |||||||||
|
Shareholders’
equity:
|
45,250 | 6,413 | 35,736 |
(e)(g)
|
87,399 | ||||||||||||
|
Total
Shareholders’ equity
|
$ | 63,636 | $ | 6,815 | $ | 41,851 | $ | 112,302 | |||||||||
See
accompanying notes to the unaudited pro forma condensed combined financial
statements.
66
Capital
Gold Corporation
Unaudited
Pro Forma Condensed Combined Statement of Operations
For
the Twelve Months Ended July 31, 2009
(in
thousands, except per share amounts)
|
Pro Forma
|
||||||||||||||||
|
Historical
|
Adjustments
|
Combined
|
||||||||||||||
|
Capital Gold
|
Nayarit
|
(Note 5)
|
Pro
Forma
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Sales
– Gold, net
|
$ | 42,757 | $ | - | $ | - | $ | 42,757 | ||||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Costs
applicable to sales
|
13,883 | - | 13,883 | |||||||||||||
|
Depreciation
and amortization
|
3,019 | 67 | - | 3,086 | ||||||||||||
|
General
and administrative
|
5,464 | 2,211 | - | 7,675 | ||||||||||||
|
Exploration
|
1,600 | 5,840 | - | 7,440 | ||||||||||||
|
Total
costs and expenses
|
23,966 | 8,118 | - | 32,084 | ||||||||||||
|
Income
(loss) from operations
|
18,791 | (8,118 | ) | - | 10,673 | |||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
43 | 34 | - | 77 | ||||||||||||
|
Interest
expense
|
(597 | ) | - | - | (597 | ) | ||||||||||
|
Other
income (expense)
|
(313 | ) | (53 | ) | - | (366 | ) | |||||||||
|
Loss
on change in fair value of derivative
|
(1,975 | ) | - | - | (1,975 | ) | ||||||||||
|
Total
other income (expense)
|
(2,842 | ) | (19 | ) | - | (2,861 | ) | |||||||||
|
Income
(loss) before taxes
|
15,949 | (8,137 | ) | - | 7,812 | |||||||||||
|
Income
tax expense
|
(5,542 | ) | - | - | (5,542 | ) | ||||||||||
|
Net
income (loss)
|
$ | 10,407 | $ | (8,137 | ) | $ | - | 2,270 | ||||||||
|
Share
Data:
|
||||||||||||||||
|
Net
income (loss) per common share
|
||||||||||||||||
|
Basic
|
$ | 0.22 | $ | (0.10 | ) | $ | 0.04 | |||||||||
|
Diluted
|
$ | 0.21 | $ | (0.10 | ) | $ | 0.03 | |||||||||
|
Basic
weighted average common shares outstanding(1)
|
48,315,116 | 79,126,397 | 60,414,251 | |||||||||||||
|
Diluted
weighted average common shares outstanding(1)
|
49,882,769 | 79,126,397 | 68,031,246 | |||||||||||||
(1)Pro
forma weighted average shares outstanding takes into consideration the
additional Capital Gold common stock issued in exchange for Nayarit common
stock. See Note 1. Equivalent common shares of Nayarit, consisting of
stock options and warrants are excluded from the calculation of historical
diluted net loss per share for the year ended September 30, 2009, since their
effect is antidilutive.
See
accompanying notes to the unaudited pro forma condensed combined financial
statements.
67
Capital
Gold Corporation
Unaudited
Pro Forma Condensed Combined Statement of Operations
For
the Six Months Ended January 31, 2010
(in
thousands, except per share amounts)
|
Pro Forma
|
||||||||||||||||
|
Historical
|
Adjustments
|
Combined
|
||||||||||||||
|
Capital Gold
|
Nayarit
|
(Note 5)
|
Pro
Forma
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Sales
– Gold, net
|
$ | 24,955 | $ | - | $ | - | $ | 24,955 | ||||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Costs
applicable to sales
|
8,735 | 8,735 | ||||||||||||||
|
Depreciation
and amortization
|
1,709 | 24 | 1,733 | |||||||||||||
|
General
and administrative
|
3,660 | 941 | (216 | ) | 4,385 | |||||||||||
|
Exploration
|
681 | 960 | 1,641 | |||||||||||||
|
Total
costs and expenses
|
14,785 | 1,925 | (216 | ) | 16,494 | |||||||||||
|
Income
(loss) from operations
|
10,170 | (1,925 | ) | 216 | 8,461 | |||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
8 | 8 | 16 | |||||||||||||
|
Interest
expense
|
(235 | ) | - | (235 | ) | |||||||||||
|
Other
income (expense)
|
(62 | ) | (133 | ) | (195 | ) | ||||||||||
|
Loss
on change in fair value of derivative
|
- | - | - | |||||||||||||
|
Total
other income (expense)
|
(289 | ) | (125 | ) | (414 | ) | ||||||||||
|
Income
(loss) before taxes
|
9,881 | (2,050 | ) | 216 | 8,047 | |||||||||||
|
Income
tax expense
|
(3,997 | ) | - | (3,997 | ) | |||||||||||
|
Net
income (loss)
|
$ | 5,884 | $ | (2,050 | ) | 216 | $ | 4,050 | ||||||||
|
Share
Data:
|
||||||||||||||||
|
Net
income (loss) per common share
|
||||||||||||||||
|
Basic
|
$ | 0.12 | $ | (0.02 | ) | $ | 0.07 | |||||||||
|
Diluted
|
$ | 0.12 | $ | (0.02 | ) | $ | 0.07 | |||||||||
|
Basic
weighted average common shares outstanding(1)
|
48,505,818 | 89,538,081 | 60,604,953 | |||||||||||||
|
Diluted
weighted average common shares outstanding(1)
|
49,861,776 | 89,538,081 | 67,941,502 | |||||||||||||
(1)Pro
forma weighted average shares outstanding takes into consideration the
additional Capital Gold common stock issued in exchange for Nayarit common
stock. See Note 1. Equivalent common shares of Nayarit,
consisting of stock options and warrants are excluded from the calculation of
historical diluted net loss per share for the three months ended December 31,
2009, since their effect is antidilutive.
See
accompanying notes to the unaudited pro forma condensed combined financial
statements.
68
Notes
to Unaudited Pro Forma Condensed Combined Financial Statements
1.
Description of the Amalgamation
On
February 10, 2010, Capital Gold and Nayarit agreed to effect an amalgamation
(the “Amalgamation”) of Nayarit and a corporation, to be organized under the
Ontario Act as a wholly-owned subsidiary of Capital Gold (“Merger Sub”), to form
a combined entity (“AmalgSub”). By virtue of the Amalgamation, the
separate existence of each of Nayarit and Merger Sub shall cease, and AmalgSub,
as the surviving company in the Amalgamation, shall continue its corporate
existence under the OBCA as a wholly-owned subsidiary of Capital
Gold. In connection with the Amalgamation, and without any action on
the part of Nayarit or the holders of any securities of Nayarit, all of the
common shares of Nayarit (the “Nayarit Common Shares”) issued and outstanding
immediately prior to the consummation of the Amalgamation (other than Nayarit
Common Shares held by dissenting stockholders of Nayarit) shall become
exchangeable into the common stock of Capital Gold on the basis of 0.134048
shares of Capital Gold common stock for each one (1) Nayarit Common Share (the
“Amalgamation Consideration”). Upon the exchange of Nayarit Common Shares for
shares of Capital Gold Common Stock, all Nayarit Common Shares shall, by virtue
of the Amalgamation and without any action on the part of the Nayarit
Stockholders, be automatically cancelled and shall cease to exist, and each
Nayarit Stockholder shall cease to have any rights with respect thereto, except
the right to receive the Amalgamation Consideration, subject to the terms and
conditions of the agreement. The Nayarit outstanding options and
warrants shall be exerciseable for or satisfied with the issuance of (and the
holder thereof shall accept), in lieu of the number of Nayarit Common
Shares otherwise issuable thereunder, the number of shares of Capital Gold
common stock which the holder would have been entitled to receive as a result of
the transactions contemplated by the Amalgamation if, immediately prior to the
Effective Time, such holder had been the registered holder of the number of
Nayarit Common Shares to which such holder was theretofore entitled under such
Nayarit options and warrants.
The
Amalgamation is subject to Capital Gold and Nayarit stockholder approval and
other usual and customary closing conditions. The Amalgamation is currently
expected to be completed in June 2010, subject to receipt of Capital Gold and
Nayarit stockholder approval and other usual and customary closing
conditions.
2.
Basis of Presentation
The
unaudited pro forma condensed combined financial information was prepared using
the acquisition method of accounting in accordance with Accounting Standards
Codification, or ASC, Topic 805, Business Combinations, or ASC 805, and was
based on the historical financial statements of Capital Gold and Nayarit. In
Amalgamation transactions in which the consideration is not in the form of cash,
measurement of the acquisition consideration is based on the fair value of the
consideration given or the fair value of the asset (or net assets) acquired
whichever is more clearly evident and, thus, more reliably measurable. The
acquisition method of accounting is based on ASC 805 and uses the fair value
concepts defined in ASC 820, Fair Value Measurements and
Disclosures.
ASC 805
requires, among other things, that most assets acquired and liabilities assumed
be recognized at their acquisition date fair values and that the fair value of
intangibles are recognized regardless of their intended use. The costs of the
acquisition will be expensed. In addition, ASC 805 establishes that
the consideration transferred be measured at the closing date of the
Amalgamation at the then-current market price. This particular requirement may
result in the equity consideration being valued differently from the amount
reflected in these unaudited pro forma condensed combined financial statements.
See Note 3 for the estimate of consideration expected to be
transferred.
ASC 820
defines the term "fair value" and sets forth the valuation requirements for any
asset or liability measured at fair value, expands related disclosure
requirements and specifies a hierarchy of valuation techniques based on the
nature of the inputs used to develop the fair value measures. Fair value is
defined in ASC 820 as "the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date." This is an exit price concept for the valuation of the
asset or liability. In addition, market participants are assumed to be buyers
and sellers in the principal (or the most advantageous) market for the asset or
liability. Fair value measurements for an asset assume the highest and best use
by market participants. Accordingly, Capital Gold may be required to record
assets which are not intended to be used or sold and/or to value assets at fair
value measures that do not reflect Capital Gold's intended use of such assets.
Many of these fair value measurements can be highly subjective and it is also
possible that other professionals, applying reasonable judgment to the same
facts and circumstances, could develop and support a range of alternative
estimated amounts.
69
The
unaudited pro forma financial information presented for Capital was prepared
based on the historical financial statements of Nayarit prepared and presented
in Canadian dollars and were translated from Canadian dollars to U.S. Dollars at
the spot rate for the balance sheet data and the average exchange rate for the
applicable period for the statement of operations data. In
addition, the historical financial statements for Nayarit used in the
preparation of the pro forma financial statements were adjusted to reflect the
reconciliation from Canadian GAAP to US GAAP. The main adjustment to
the unaudited pro forma condensed consolidated balance sheet as of January 31,
2010, was a reduction in exploration property interests of
$19,328. The main adjustments to the unaudited pro forma condensed
combined statement of operations for the year ended July 31, 2009 and for the
six months ended January 31, 2010, resulted in an addition to exploration
expense of $5,839 and $960, respectively.
The
unaudited pro forma condensed combined financial information for Capital was
based on Nayarit's historical consolidated financial statements for the fiscal
year ended September 30, 2009 and for the quarterly period ended December 31,
2009. The unaudited pro forma condensed consolidated balance sheet as
of January 31, 2010, was prepared
based on Nayarit’s unaudited historical consolidated balance sheet as of
December 31, 2009. The unaudited pro forma condensed combined
statement of operations for the year ended July 31, 2009, was prepared based on
Nayarit’s audited statement of operations for the year ended September 30,
2009. The unaudited pro forma condensed combined statement of
operations for the six months ended January 31, 2010, was prepared based on
combining Nayarit’s unaudited statement of operations for the three months ended
September 30, 2009 as well as the unaudited statement of operations for the
three months ended December 31, 2009.
3.
Estimate of Consideration Expected to be Transferred
The
following is a preliminary estimate of consideration to be transferred to effect
the Amalgamation:
|
Conversion
Calculation
|
Estimated
Fair
Value
|
Form
of
Consideration
|
||||||||
|
(In
thousands, except per share amounts)
|
||||||||||
|
Number
of Nayarit shares outstanding as of the Amalgamation
date(1)
|
90,260 | |||||||||
|
Exchange
ratio(1)
|
0.134048 | |||||||||
|
Number
of shares to be issued to Nayarit shareholders
|
12,099 | |||||||||
|
Assumed
value of Capital Gold common shares to
be
issued(1)
|
$ | 3.52 | $ | 42,588 |
Capital
Gold
Common
stock
|
|||||
|
Assumed
value of Nayarit’s options and warrants to be exchanged for Capital Gold
options and warrants
|
1,749 |
Capital
Gold
Options
and
Warrants
|
||||||||
|
Estimate
of consideration expected to be transferred
|
$ | 44,337 | ||||||||
(1) In accordance with ASC 805,
the fair value of equity securities issued as part of the consideration
transferred will be the closing market price of Capital Gold’s common stock on
the effective date of the Amalgamation. For purposes of determining the
consideration transferred within these pro forma financial statements, the
Capital Gold common share price on February 10, 2010 of $3.52 was used in the
calculation. The pro forma shares to be issued assumes the issuance of
12,099,135 common shares, which is calculated by multiplying 0.134048 by
90,259,548, being the number of shares of Nayarit common stock outstanding on
February 10, 2010. Nayarit shareholders will own approximately 19.97%
of the issued and outstanding shares of Capital Gold common stock.
(2)
The Nayarit outstanding options and warrants shall be exerciseable for or
satisfied with the issuance of (and the holder thereof shall accept),
in lieu of the number of Nayarit Common Shares otherwise issuable thereunder,
the number of shares of Capital Gold common stock which the holder would have
been entitled to receive as a result of the transactions contemplated by the
Amalgamation if, immediately prior to the Effective Time, such holder had been
the registered holder of the number of Nayarit Common Shares to which such
holder was theretofore entitled under such Nayarit options and
warrants. For these pro forma financial statements and for
determining the fair value of consideration paid with regard to Nayarit’s
options and warrants, a weighted average exercise price of $0.65 and $0.70 has
been used for all options and warrants respectively.
70
4.
Estimate of Assets to be Acquired and Liabilities to be Assumed
The
following is a preliminary estimate of the assets to be acquired and the
liabilities to be assumed by Capital Gold as a result of the Amalgamation as of
January 31, 2010:
|
(In
thousands)
|
||||
|
Assets
|
||||
|
Current
assets(i)
|
$ | 2,557 | ||
|
Property
and equipment, net(ii)
|
222 | |||
|
Exploration
property interests (iii)
|
48,048 | |||
|
Identifiable
intangible assets (iv)
|
- | |||
|
Goodwill(v)
|
- | |||
|
Total
Assets
|
$ | 50,827 | ||
|
Liabilities
|
||||
|
Current
liabilities(vi)
|
$ | 402 | ||
|
Long-term
income tax liabilities (vii)
|
6,088 | |||
|
Total
liabilities
|
$ | 6,490 | ||
|
Estimate
of consideration to be transferred
|
$ | 44,337 | ||
(i) Current
assets include $1,350 of cash, $1,200 of prepaid expenses, IVA receivables, and
other current assets and $7 in short term investments.
(ii) Property
and equipment is predominately comprised of property, plant and
equipment. For the purpose of determining a preliminary estimate of
the assets to be acquired, property and equipment was estimated to be the net
book value as of January 31, 2010, as these assets represent 0.5% of the
estimated consideration expected to be transferred.
(iii) Exploration
property interests are deferred until such time as the properties are either
placed into commercial production, sold, determined not to be economically
viable, or abandoned. Exploration property interests will be
amortized on the units-of-production basis over the estimated useful lives of
the properties following the commencement of production, or written off if the
properties are sold, or abandoned.
(iv) There
were no identifiable intangibles included with this transaction. All
acquisition costs and fair values associated with Nayarit’s properties are
included within exploration property interests. There are no customer
relationships, trade names, software, etc. identified as intangible assets
recognized as part of the Amalgamation.
(v) Goodwill
represents the excess of the preliminary purchase price over the estimated value
of assets acquired and liabilities assumed. Based upon the Company’s
preliminary allocation using estimates, assumptions, valuations and other
studies, it was determined that there was no goodwill associated with this
transaction.
(vi) Current
liabilities include $402 of accounts payable and accrued
liabilities.
(vii) Other
long-term liabilities include $6,088 of deferred tax liabilities. The
estimated measurement of deferred income tax assets from the acquisition of net
operating loss carry forwards of Nayarit was reduced by a valuation allowance
for any tax benefits, which are, on a more likely than not basis, not expected
to be realized. As of September 30, 2009, Nayarit's deferred tax asset
associated with its net operating loss carry forwards was $2.068 which was fully
reserved for.
The
allocation of the estimated acquisition consideration is preliminary because the
proposed Amalgamation has not yet been completed. The preliminary allocation is
based on estimates, assumptions, valuations and other studies which have not
progressed to a stage where there is sufficient information to make a definitive
allocation. Accordingly, the acquisition consideration allocation pro forma
adjustments will remain preliminary until Capital Gold’s management determines
the final acquisition consideration and the fair values of assets acquired and
liabilities assumed. The final determination of the acquisition consideration
allocation is anticipated to be completed as soon as practicable after
completion of the Amalgamation. The final amounts allocated to assets acquired
and liabilities assumed could differ significantly from the amounts presented in
the unaudited pro forma condensed combined financial
statements.
71
5.
Pro Forma Adjustments and Assumptions
Adjustments
included in the "Pro Forma Adjustments" column represent the
following:
|
(In
thousands)
|
|||||
|
(a)
|
Estimated
transaction costs of Capital Gold and Nayarit remaining to be
paid
|
$ | 2,161 | ||
|
(b)
|
Reflects
the pro forma impact of the exploration property interests of Nayarit
which have been allocated to exploration property interests. Exploration
property interests will be amortized on the units-of-production basis over
the estimated useful lives of the properties following the commencement of
production, or written off if the properties are sold, or
abandoned.
|
|
Estimated Fair
Market Value
|
Estimated
Useful Life
|
|||||||
|
(In thousands, other than useful life estimate)
|
||||||||
|
Exploration
property interests
|
$ | 44,012 | (1 | ) | ||||
|
Total
|
$ | 44,012 | ||||||
|
|
(1)
|
Exploration
property interests will be amortized on the units-of-production basis over
the estimated useful lives of the properties following the commencement of
production, or written off if the properties are sold, or
abandoned.
|
|
(c)
|
Reflects
the reversal of accounts payable and accrued transaction costs of $193
that were reflected within the companies' historical January 31, 2010
balance sheets. For purposes of these pro forma financial statements, all
incurred and estimated remaining transaction costs were treated as
reductions in cash and cash equivalents.
|
|
(d)
|
Reflects
an estimate of the tax impacts of the acquisition on the balance sheet and
income statement, primarily related to estimated fair value adjustments
for exploration property interests. The estimated rate is based on the
historical effective tax rate for Capital Gold’s wholly-owned subsidiary
in Mexico, Minera Santa Rita S. de R.L. de C.V. (“MSR”) which is 28% for
the periods ending July 31, 2009 and January 31, 2010, respectively.
Capital Gold believes that using the historical effective tax rate for MSR
is factually supportable in that it is derived from statutory rates and
recognizes that MSR is the only material income tax paying entity within
the combined company. The actual effective tax rate of the combined
company could be significantly different (either higher or lower) than the
estimated tax rate and depends on post-acquisition activities, including
repatriation decisions. On January 1, 2010, the Mexican government enacted
legislation, which increases the regular income tax rate from 28% to
30%. The regular income tax rate will decrease to 29% in 2013
and then back to 28% in 2014, according to legislation. The preliminary
estimate of the deferred tax liability at January 31, 2010 was computed
using a rate of 28% and could be significantly different (either higher or
lower) depending upon several factors, including the allocation of
Amalgamation consideration by
jurisdiction.
|
|
(In
thousands)
|
|||||
|
(e)
|
Elimination
of Nayarit’s historical equity
|
$ | (6,413 | ) | |
|
Issuance
of Capital Gold’s common stock
|
44,337 | ||||
|
Estimated
transaction costs remaining to be incurred
|
(2,188 | ) | |||
|
Net
pro forma adjustment
|
$ | 35,736 | |||
|
(f)
|
Reflects
the pro forma impact of the reversal of transaction costs incurred through
January 31, 2010.
|
|
For the six months
ended January 31, 2010
|
||||
|
(In
thousands)
|
||||
|
Reversal
of Capital Gold and Nayarit transaction costs incurred
|
$ | 216 | ||
|
Pro
Forma Adjustment
|
$ | 216 | ||
|
(g)
|
Reflects
the pro forma impact of change in control payments to an executive officer
of $220.
|
72
INFORMATION
ABOUT CAPITAL GOLD
Capital
Gold Corporation is engaged in the mining, exploration and development of gold
properties in Mexico. Our primary focus is on the operation and
development of the El Chanate project, and Capital Gold also conducts gold
exploration in other locations in Sonora, Mexico. (The financial data in this
discussion is in thousands, except where otherwise specifically
noted.)
Sonora,
Mexico Concessions
Through
wholly-owned subsidiaries, Capital Gold owns 100% of 16 mining concessions
located in the Municipality of Altar, State of Sonora, Republic of Mexico
totaling approximately 3,544 hectares (8,756 acres or 13.7 square miles).
Capital Gold commenced mining operations on two of these concessions in late
March 2007 and achieved gold production and revenue from operations in early
August 2007. Capital Gold sometimes refers to the operations on these two
concessions as the El Chanate Project. Capital Gold’s results of
operations differ from the fiscal year ended July 31, 2007 because it is now
realizing revenue from operations.
In April
2008, Capital Gold leased 12 mining concessions totaling 1,790 hectares located
northwest of Saric, Sonora. In addition, Capital Gold owns a claim for
approximately 2,304 additional hectares adjacent to this property. The
approximate 4,000 hectare area is accessible by paved roads and has cellular
phone service from hilltops. These concessions and this claim are about 60
miles northeast of the El Chanate project. Mineralization is evident throughout
the concession group and is hosted by shear zones and stockwork quartz veins in
volcanic and intrusive rocks. Capital Gold has completed exploration work
consisting of geological mapping, systematic geochemical sampling of rock and
soils, geophysical surveys, trenching and 32 reverse circulation drill holes
totaling 2,560 meters. The results of this early work has justified an
expanded drill campaign which is currently underway and consists of 23 reverse
circulation drill holes between 100 to 150 meters deep totaling 2,100
meters. All of these holes will be focused on the northern part of the
concession group near the Sombreretillo Ranch. These holes will vary in
depth from 40 to 50 meters. SRK of Lakewood, Colorado has made a site
visit and will monitor the quality assurance and quality control during the
drilling campaign. All of the drill hole samples have been and will be
assayed by ALS Chemex. The ALS Chemex facility in Hermosillo does the
sample preparation, and the assays are performed at the ALS Chemex’s Vancouver
laboratory. ALS Chemex laboratories provide the highest level of quality
and have ISO 9001:2000 certification at all locations.
Properties
El
Chanate Properties – Sonora, Mexico
Through
Capital Gold’s wholly-owned subsidiary, Oro de Altar S. de R. L. de C.V.
(“Oro”), Capital Gold owns 100% of the following 21 mining concessions, all of
which are located in the State of Sonora United States of Mexico.
The 21
mining concessions are as follows:
|
Lot
|
Title #
|
Hectars
|
Owner
|
|||||
|
1
|
SAN
JOSE
|
200718
|
96.00
|
Oro
|
||||
|
2
|
LAS
DOS VIRGEN
|
214874
|
132.235
|
Oro
|
||||
|
3
|
RONO
#1
|
206408
|
82.1902
|
Oro
|
||||
|
4
|
RONO
#3
|
214224
|
197.218
|
Oro
|
||||
|
5
|
LA
CUCHILLA
|
211987
|
143.3481
|
Oro
|
||||
|
6
|
ELSA
|
212004
|
2,035.3997
|
Oro
|
||||
|
7
|
ELISA
|
214223
|
78.4717
|
Oro
|
||||
|
8
|
ENA
|
217495
|
190.00
|
Oro
|
||||
|
9
|
EVA
|
212395
|
416.8963
|
Oro
|
||||
|
10
|
MIRSA
|
212082
|
20.5518
|
Oro
|
||||
|
11
|
OLGA
|
212081
|
60.589
|
Oro
|
||||
|
12
|
EDNA
|
219624
|
24.0431
|
Oro
|
||||
|
13
|
LA
TIRA
|
219324
|
1.7975
|
Oro
|
||||
|
14
|
LA
TIRA 1
|
219623
|
18.6087
|
Oro
|
||||
|
15
|
LOS
TRES
|
223634
|
8.00
|
Oro
|
73
|
Lot
|
Title #
|
Hectars
|
Owner
|
|||||
|
16
|
EL
CHARRO
|
206404
|
40.00
|
Oro
|
||||
|
17
|
SANTA
RITA 4 FRACCION I
|
233574
|
5.0728
|
Oro
|
||||
|
18
|
SANTA
RITA 4 FRACCION II
|
233575
|
4.7786
|
Oro
|
||||
|
19
|
SANTA
RITA 4 FRACCION III
|
233576
|
110.2725
|
Oro
|
||||
|
20
|
SANTA
RITA I
|
231373
|
3,765.9666
|
Oro
|
||||
|
21
|
SANTA
RITA III
|
232117
|
2,233.3163
|
Oro
|
||||
|
Total
|
9,664.7559
|
At the El
Chanate Project Capital Gold is mining on two concessions, San Jose and Las Dos
Virgens. Capital Gold is utilizing four other concessions for
processing mined ores. In the future, Capital Gold plans to explore
some or all of these concessions to determine whether or not further activity is
warranted.
During
the fiscal years ended July 31, 2008 and 2009, Capital Gold completed 39 core
and reverse circulation drill holes to delineate additional reserves at the El
Chanate open pit mine. These holes totaled approximately 7,800
meters, and were targeted to fill in gaps in the ore body and test the outer
limits of the currently known ore zones. Inclusive of this
drilling, the total number of drill holes at the El Chanate mine is currently
367. This combination of reverse circulation and core drilling
totals 54,320 meters. The knowledge obtained about the geology
of the deposit during mining, combined with the assays from the samples from
this exploration drilling, was used to expand the information in our mine
database. Capital Gold has used this data to re-estimate El Chanate’s
mineral reserves. The new mineral reserves are based on an updated block model
and an updated mine plan and production schedule developed by IMC (“2009
Report”). The updated pit design for the revised plan is based on a plant
recovery of gold that varies by rock types, but is expected to average 64.2%
over the mine life. A gold price of $750 per ounce (SEC three year
average as of March 20, 2009) was used to estimate the reserves compared to a
gold price of $550 per ounce used in the prior estimate. The stated
proven and probable mineral reserves have been prepared in accordance with the
Canadian Institute of Mining, Metallurgy and Petroleum (CIM)
Definitions.. A technical report supporting this estimate was
finalized that complies with Canada’s National Instrument 43-101 Standards of
Disclosure for Mineral Projects. These reserves are equivalent to proven and
probable reserves as defined by the United States Securities and Exchange
Commission (SEC) Industry Guide 7.
74
According
to the 2009 Report, Capital Gold’s proven and probable reserves have increased
to 43.1 million metric tonnes with a gold grade of 0.66 grams per tonne (47.6
million U.S. short tons at 0.019 ounces per ton) net of depletion of 5,662,000
tonnes (through the end of December 2008). The open pit stripping ratio is
1.24:1 (1.24 tonnes of waste to one tonne of ore). The following
Summary is extracted from the 2009 Report. Please note that the
reserves as stated are an estimate of what can be economically and legally
recovered from the mine and, as such, incorporate losses for dilution and mining
recovery. The 913,400 ounces of
contained gold represents ounces of gold contained in ore in the ground, and
therefore does not reflect losses in the recovery process. Total gold
produced is estimated to be 586,000 ounces, or approximately 64.2% of the
contained gold. Individual portions of the ore body may
experience varying recovery rates ranging from about 73% to
48%. Oxidized and sandstone ore types may have recoveries of about
73%; fault zone ore type recoveries may be about 64%; siltstone ore types
recoveries may be about 48% and latite intrusive ore type recoveries may be
about 50%.
El
Chanate Mine
Material
Reserves and Production Summary:
|
Metric
|
U.S.
|
|||
|
Materials
|
||||
|
Reserves
|
||||
|
Proven
|
20.9
Million Tonnes @ 0.772 g/t(1)
|
23.0
Million Tons @ 0.0225 opt(1)
|
||
|
Probable
|
14.9
Million Tonnes @ 0.702 g/t(1)
|
16.5
Million Tons @ 0.0205 opt(1)
|
||
|
Low
Grade Stockpile (Probable)
|
7.3
Million
Tonnes @ 0.246 g/t(1)
|
8.1
Million Tons @ 0.0007 opt(1)
|
||
|
Total
Reserves(2)
|
43.1
Million Tonnes @ 0.659 g/t(1)
|
47.6
Million Tons @ 0.0192 opt(1)
|
||
|
Waste
|
53.6 Million
Tonnes
|
58.9
Million Tons
|
||
|
Total
|
96.7
Million Tonnes
|
106.5
Million tons
|
||
|
Contained
Gold
|
28.41
Million grams
|
913,400 Oz
|
||
|
Production
|
||||
|
Ore
Crushed
|
5.0
Million Tonnes /Year
|
5.51
Million Tons/Year
|
||
|
13,699
Mt/d(1)
|
15,100
t/d(1)
|
|||
|
Operating
Days/Year
|
365
Days per year
|
365
Days per year
|
||
|
Gold
Plant Average Recovery
|
64.20
%
|
64.20%
|
||
|
Average
Annual Production
|
2.21 Million
grams
|
71,079 Oz
|
||
|
Total
Gold Produced
|
18.24
Million grams
|
586,403 Oz
|
|
(1)
|
“g/t”
means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
metric tonnes per day and “t/d” means tons per day.
|
|
(2)
|
The
reserve estimates are based on a gold cutoff grade of 0.20 grams per
metric tonne.
|
The 2009
reserve modeling has been modified from previous methodology to closely
reconcile with the production results through December 2008. The 2009
model uses indicator kriging to define mineralized zones followed by block grade
estimation utilizing inverse distance estimation.
In the
mineral resource block model developed, with blocks 6m (meters) x 6m x 6m high,
Measured and Indicated resources (corresponding to Proven and Probable reserves
respectively when within the pit design) were classified in accordance with the
following scheme:
|
|
·
|
Blocks with 2 or more drill holes
within a search radius of 80m x 70m x 15m and with a relative kriging
standard deviation less than or equal to 0.45 were classified as Measured
(corresponding to Proven);
|
|
|
·
|
Blocks with 1 hole within the
search radius of 80m x 70m x 15m and with a relative kriging standard
deviation of 0.60 or less, blocks with 2 holes and a kriging standard
deviation of 0.70 or less, blocks with 3 holes and a kriging standard
deviation of 0.80 or less, blocks with 4 holes and a relative kriging
standard deviation of 0.90 or less and all blocks with 5 or more holes
within the search radius were classified as Indicated (corresponding to
Probable), unless they met the above criterion for
Proven;
|
75
|
|
·
|
Blocks with a grade estimate that
did not meet the above criteria were classified as Inferred
(and which was classed as waste material in the mining reserves estimate);
and
|
|
|
·
|
Blocks outside the above search
radii or outside suitable geological zones were not assigned a gold grade
or a resource
classification.
|
The mine
plan used as the basis for the reserve is based on operating gold cutoff grades
of 0.25 to 0.30 grams/tonne, depending on the operating year. The
variation is due to balancing the mine and plant production capacities on a year
by year basis for the plan. The internal (in-pit) and break even
cutoff grade calculations are as follows:
|
Cutoff
Grade Calculation
|
Internal
Cutoff Grade
|
Break
Even Cutoff Grade
|
||
|
Basic
Parameters
|
||||
|
Gold
Price
|
US$750/oz
|
US$750/oz
|
||
|
Shipping
and Refining
|
US$
1.00/oz
|
US$
1.00/oz
|
||
|
Gold
Recovery*
|
64.2%
|
64.2%
|
||
|
Royalty
|
4%
of NSR
|
4%
of NSR
|
||
|
Operating
Costs per Tonne of Ore
|
$
per Tonne of Ore
|
$
per Tonne of Ore
|
||
|
Mining
|
1.156
|
1.156
|
||
|
Processing/G&A
|
2.683
|
2.683
|
||
|
Total
|
3.839
|
3.839
|
||
|
Cutoff
Grade
|
Grams
per Tonne
|
Grams
per Tonne
|
||
|
Head
Grade Cutoff (64.2% average recov.)
|
0.19
g/t Au
|
0.27
g/t Au
|
||
|
Recovered
Gold Grade Cutoff
|
0.12
|
0.17
|
* Plant
recovery of gold varies by rock type but is expected to average 64.2% based on
work done to date.
The
following table represents a summary of cumulative activity in connection with
Capital Gold’s proven and probable mineral reserves:
|
Proven
and probable mineral reserve (Ktonnes of ore)
|
July
31,
2009
|
July
31,
2008
|
July
31,
2007
|
|||||||||
|
Ore
|
- | - | - | |||||||||
|
Beginning
balance (Ktonnes)
|
35,417 | 38,916 | 19,868 | |||||||||
|
Additions
|
9,342 | - | 19,593 | |||||||||
|
Reductions
|
(3,848 | ) | (3,499 | ) | (545 | ) | ||||||
|
Ending
Balance
|
40,911 | 35,417 | 38,916 | |||||||||
|
Contained
gold
|
||||||||||||
|
Beginning
balance (thousand of ounces)
|
719 | 814 | 490 | |||||||||
|
Additions
|
239 | - | 342 | |||||||||
|
Reductions
|
(99 | ) | (95 | ) | (18 | ) | ||||||
|
Ending
Balance
|
859 | 719 | 814 | |||||||||
During
2009 and subsequent to the fiscal year ended July 31, 2009, Capital Gold
conducted exploration activities in the El Chanate pit area including, core
drilling at depth to determine the potential of increasing its reserves further.
The data obtained from geological mapping of the deposit’s mine pit areas,
combined with assays from samples of the exploration drilling therein, were used
to expand information in Capital Gold’s mine database. SRK Consulting, Inc. U.S.
(SRK) of Lakewood, Colorado, an independent consulting firm, used this data to
re-estimate El Chanate’s Mineral Reserves. The table below shows the updated
Proven and Probable reserves at El Chanate as of October 2009:
76
|
Mineral Reserve Class
|
Ore (tonnes)
|
Grade (g/t)
|
Contained Gold (oz.)
|
|||||||||
|
Proven
Mineral Reserve
|
22,401,000
|
0.70
|
503,000
|
|||||||||
|
Probable
Mineral Reserve
|
48,155,000
|
0.65
|
1,001,000
|
|||||||||
|
Proven
and Probable Mineral Reserve
|
70,557,000
|
0.66
|
1,504,000
|
|||||||||
The new
mineral reserves are based on an updated resource block model and an updated
mine plan and mine production schedule both developed by SRK. The updated pit
design for the revised plan is based on a plant recovery of gold that varies by
rock type, but has a weighted average recovery of 58.25%. A gold price of US$800
per ounce (SEC three year average as of September 2009) was used to estimate the
reserves. The stated proven and probable mineral reserves have been prepared in
accordance with the Canadian Institute of Mining, Metallurgy and Petroleum (CIM)
Definitions. A technical report supporting this estimate is being finalized that
complies with National Instrument 43-101 Standards of Disclosure for Mineral
Projects and will be filed on SEDAR shortly. These reserves are equivalent to
proven and probable reserves as defined by the United States Securities and
Exchange Commission (SEC) Industry Guide 7.
El
Chanate is an open pit heap leach mining and processing
operation. Ore is hauled by truck from the pits to the processing
plant. The recovery of gold from certain gold ores is achieved
through the heap leaching process. Under this method, ore is placed on leach
pads where it is treated with a cyanide bearing solution, which dissolves gold
and silver contained within the ore. The resulting “pregnant” solution is
further processed in a plant where the gold is recovered. The mining and other
mobile equipment is refurbished as is the smaller of the two ADR processing
plants. All other equipment and infrastructure at the El Chanate mine
are new. Management continuously analyzes production results and
considers improvements and modernizations as deemed necessary.
Equipment
and infrastructure include: A three stage crushing plant, a fleet of haul
trucks, loaders and mining support equipment, a leach pad and solution holding
ponds, two ADR processing plants, and a refinery. In addition, there
are numerous ancillary support facilities including warehouses, maintenance
shops, roadways, administrative offices, power and water supply systems, and a
fully equipped assay and metallurgical laboratory.
During
fiscal 2008 and 2009, Capital Gold identified certain restrictions related to
its ADR plant capacity which limited the amount of solution that can be
processed. Capital Gold addressed these issues by increasing the
installed pumping capacity to increase solution flow to the leach
pad. Capital Gold also purchased and installed an additional set of
carbon columns and a strip vessel to process an additional two tonnes of carbon
per strip. The installation and commissioning of this new ADR plant was
completed at the end of October 2008. In May 2009, Capital Gold
completed the procurement and installation of an additional secondary crusher
and tunnel conveyor that allowed it to increase production from 7,500 tonnes per
day to 13,000 tonnes per day of crushed ore. In August 2009, Capital
Gold initiated the construction of an additional leach
pad. Permitting and site clearing has been completed and the
construction contractor has begun with the site preparation and other
earthworks. Golder Engineering of Tucson, Arizona will oversee
construction activities and quality control and quality assurance for the
project. The construction schedule anticipates that stacking ore on the new pad
will commence in January 2010. The total cost of the completed leach
pad will be approximately $3,300. In October 2009, Capital Gold
committed to the purchase of an additional tertiary crusher and screen module
for the El Chanate mine. The total cost for the module is
approximately $1,000 with one-third due upon execution of the sales order,
one-third due in 30 days and one-third upon shipment. Once this
equipment is installed and functioning, Capital Gold expects production to
increase to approximately 70,000 ounces of gold per annum.
Capital
Gold commenced gold production at the El Chanate mine on July 31,
2007. During the fiscal years ended July 31, 2009 and 2008, Capital
Gold sold 48,418 and 39,102 ounces of gold, respectively. Management
has been and anticipates that it will continue to fund expansion costs with its
cash flow from operations.
Surface
Property Ownership
Anglo
Gold purchased surface property ownership, consisting of 466 hectares in Altar,
Sonora, on January 27, 1998. The ownership was conveyed
to Capital Gold's subsidiary, Oro de Altar S.A. de C.V., in
2002. MSR, one of Capital Gold’s wholly-owned Mexican subsidiaries,
has a lease on the property for the purpose of mining the Chanate gold
deposit. The purchase transaction was recorded as public deed 19,591
granted by Mr. Jose Maria Morera Gonzalez, Notary Public 102 of the Federal
District, registered at the Public Registry of Property of Caborca, Sonora,
under number 36026, book one, volume 169 of the real estate registry section on
May 7, 1998.
77
Capital
Gold purchased surface property ownership, consisting of 220 hectares in Altar,
Sonora, in March 2009, adjacent to the El Chanate mine in order to accommodate
future leach pad expansion requirements. The purchase transaction was
recorded as public deed number 18,174, dated March 26, 2009, issued by Mr. José
Antonio Dávila Payán, Notary Public number 3 in Caborca, Sonora.
General
Information and Location
The El
Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
northeast of the town of Caborca and nine kilometers from a paved
road. It is accessible by an all weather dirt
road. Driving time from Caborca is approximately 30
minutes. Access from Caborca to the village of 16 de
September (“Ejido”) is over well maintained National highways. Capital Gold
acquired rights for service road access from the Ejido, and constructed this
road.
The
project is situated on the Sonora desert in a hot and windy climate, generally
devoid of vegetation with the exception of cactus. The terrain is
generally flat with immense, shallow basins, scattered rock outcropping and low
rocky hills and ridges. The desert floor is covered by shallow, fine
sediment, gravel and caliche. The delineated ore zone and current
mine plan covers an area of approximately 5,576 feet long by 2,558 feet
wide. There is evidence of potential additional mineralization within
the El Chanate concessions that warrant further exploration.
In 2005,
Capital Gold acquired 15 year rights of way to access the El Chanate Project
from the Ejido and local ranchers. Capital Gold subsequently
purchased an extension of its rights-of-way from 15 to 30
years. Capital Gold acquired a water allocation and water well that
draws from a large regional aquifer. The 2005 feasibility study
indicated our average life of mine water requirements, at that time, for ore
processing only, will be about 94.6 million gallons per year (11.4 liters per
second). The amount of water Capital Gold was permitted to pump from
the well was approximately 71.3 million gallons per year (8.6 liters per
second). During the fiscal years ended July 31, 2008 and 2009, on two
occasions Capital Gold acquired additional water right permits that allow
it to pump up to 149.5 million gallons per year. Based on current
water consumption, Capital Gold has sufficient water to meet its current
requirements.
In
December 2005, MSR entered into a Mining Contract with Sinergia. The
Mining Contract, as amended, became effective November 1, 2006 and work
commenced on March 25, 2007 (the “Commencement Date”). Pursuant to an
amendment to the Mining Contract, the mining rates set forth in that contract
are subject to adjustment for the rate of inflation between September 23,
2005 and the Commencement Date. Pursuant to the Mining Contract,
Sinergia, using its mining fleet, is obligated to perform all of the mining,
blasting and mine maintenance work at the El Chanate Project for the life of the
mine at a predetermined mining rate and fleet size. Sinergia’s mining
rates are subject to escalation on an annual basis. This escalation
is tied to the percentage escalation in Sinergia’s costs for equipment parts,
interest rates and labor. One of the principals of Sinergia (“FG’s
Successor”) is one of the former principals of Grupo Minero FG S.A. de C.V.
(“FG”). FG is Capital Gold’s former joint venture
partner.
Historical
workings suggest that the area has been mined for gold since the early 19th
century. A number of old underground workings exist characterized by
narrow shafts, to a depth of several tens of feet and connecting drifts and
cross cuts. The current open pit mine has been developed below the
existence of historical small scale mining.
Geology
The
project area is underlain by sedimentary rocks of the Late Jurassic – Early
Cretaceous Bisbee Group, and the Late Cretaceous Chanate Group, which locally
are overlain by andesites of the Cretaceous El Charro volcanic
complex. The sedimentary strata are locally intruded by andesitic
sills and dikes, a microporphyritic latite and by a diorite
stock. The sedimentary strata are comprised of mudstone, siltstone,
sandstone, conglomerate, shale and limestone. Within the drilled
resource area, a predecessor exploration company differentiated two units on the
basis of their position relative to the Chanate fault. The upper
member is an undifferentiated sequence of sandstone, conglomerate and lesser
mudstone that lies above the Chanate fault and it is assigned to the Escalante
Formation of the Middle Cretaceous Chanate Group. The lower member is
comprised of mudstone with mixed in sandstone lenses and thin limestone
interbeds; it lies below the Chanate fault and is assigned to the Arroyo Sasabe
Formation of the Lower Cretaceous Bisbee Group. The Arroyo Sasabe
formation overlies the Morita Formation of the Bisbee Group. Both the
Escalante and Arroyo Sasabe formations are significantly mineralized proximal to
the Chanate fault, while the Morita Formation is barren.
78
The main
structural feature of the project area is the Chanate fault, a 7 km long
(minimum) northwest-striking, variably southwest-dipping structure that has been
interpreted to be a thrust fault. The Chanate fault is overturned
(north-dipping) at surface, and is marked by brittle deformation and shearing
which has created a pronounced fracture foliation and fissility in the host
rocks. In drill holes the fault is often marked the presence of an
andesite dike. Reports prepared by a predecessor exploration company
describe the fault as consisting of a series of thrust ramps and flats; however,
geologic cross sections which Capital Gold has reviewed but did not prepare may
negate this interpretation.
Alteration/Mineralization
A
predecessor exploration company defined a 600 meter long, 300 meter wide, 120
meter thick zone of alteration that is centered about the Chanate
fault. The strata within this zone are silicified and pyritized to
varying degrees. In surface outcrop the mineralized zone is
distinguished by its bleached appearance relative to unmineralized
rock. The mineralized zone contains only single digit ppm (parts per
million) levels of gold. Dense swarms of veinlets form thick,
mineralized lenses, within a larger area of sub-economic but anomalous gold
concentrations. Drill hole data indicates the mineralized lenses are
sub-horizontal to gently southwest-dipping and are generally parallel to the
Chanate fault. The fault zone itself is generally weakly mineralized,
while strata in the adjacent hanging and footwalls are well
mineralized.
Capital
Gold’s Acquisition and Ownership of the El Chanate Project
In June
2001, Capital Gold purchased 100% of the issued and outstanding stock of Minera
Chanate, S.A. de C.V. from AngloGold North America Inc. and AngloGold (Jerritt
Canyon) Corp. Minera Chanate’s assets at the time of the closing of
the purchase consisted of 106 exploitation and exploration concessions in the
States of Sonora, Chihuahua and Guerrero, Mexico. By June 2002, after property
reviews and to minimize tax payments, the 106 concessions had been reduced to 12
concessions. To cover certain non-critical gaps between concessions,
four new concessions were acquired, and the number of concessions is now
16. These concessions are contiguous, totaling approximately 3,543
hectares (8,756 acres or 13.7 square miles). Although there are
16 concessions, Capital Gold is only mining two of these concessions at the
present time. Capital Gold also owns outright 466 hectares (1,151
acres or 1.8 square miles) of surface rights at El Chanate and no third party
ownership or leases exist on this fee land or the El Chanate
concessions. In the future, assuming adequate funding is available,
Capital Gold plans to conduct exploration activities on some of the other
concessions.
Pursuant
to the terms of the agreement with AngloGold, in December 2001, Capital Gold
made a $50 payment to Anglo Gold. Anglo Gold will be entitled to
receive the remainder of the purchase price by way of an ongoing percentage of
net smelter returns of between 2% and 4% plus a 10% net profits interest (until
the total net profits interest payment received by AngloGold equals
$1,000). Anglo Gold's right to a payment of a percentage of net
smelter returns and the net profits interest will terminate when they aggregate
$18,018. In accordance with the agreement, the foregoing payments are
not to be construed as royalty payments. Should the Mexican government or other
jurisdiction determine that such payments are royalties, Capital Gold could be
subjected to and would be responsible for any withholding taxes assessed on such
payments. During the first
part of calendar 2008, Royal Gold, Inc. acquired from Anglo Gold the right to
receive both the net smelter returns of between 2% and 4% plus and the 10% net
profits interest which terminates at such point as they aggregate
$18,018. As of July 31, 2009, Capital Gold has incurred approximately
$3,082 with regard to the net smelter return. In addition, in
March 2009, Capital Gold paid the total $1,000 net profit interest to Royal
Gold. As of July 31, 2009, Capital Gold has approximately $13,936
remaining to be incurred on the net smelter return.
79
Under the
terms of the agreement, Capital Gold had granted AngloGold the right to
designate one of its wholly-owned Mexican subsidiaries to receive a one-time
option to purchase 51% of Minera Chanate (or such entity that owns the El
Chanate concessions at the time of option exercise). That option was
exercisable over a 180-day period commencing at such time as Capital Gold
notified Anglo Gold that Capital Gold had made a good faith determination that
it had gold-bearing ore deposits on any one of the identified groups of El
Chanate concessions, when aggregated with any ore that Capital Gold has mined,
produced and sold from such concessions, in excess of 2,000,000 troy ounces of
contained gold. The exercise price would equal twice Capital Gold’s
project costs on the properties during the period commencing on December 15,
2000 and ending on the date of such notice. In January 2008, Capital
Gold made a good faith determination and notified AngloGold that the drill
indicated resources at the El Chanate gold mine exceeded two million ounces of
contained gold. The term "drill indicated resources" is defined in the
agreement. A drill indicated resource number does not rise to the
level of, and should not be considered proven and probable reserves as those
terms are defined under guidelines of the Securities Exchange Commission
(“SEC”). On July 1, 2008, AngloGold notified Capital Gold that it
would not be exercising its option.
El
Oso Project - Saric Properties – Sonora, Mexico
In April
2008, Capital Gold leased 12 mining concessions totaling 1,790 hectares located
northwest of Saric, Sonora. In addition, Capital Gold owns a claim for
approximately 2,304 additional hectares adjacent to this property. The
approximate 4,000 hectare area is accessible by paved roads and has cellular
phone service from hilltops. These concessions and this claim are
about 60 miles northeast of the El Chanate project. Mineralization is evident
throughout the concession group and is hosted by shear zones and stockwork
quartz veins in volcanic and intrusive rocks. Capital Gold has completed
exploration work consisting of geological mapping, systematic geochemical
sampling of rock and soils, geophysical surveys, trenching and 32 reverse
circulation drill holes totaling 2,560 meters. The results of this
work justified an expanded drill campaign which is currently underway and
consists of 23 reverse circulation drill holes totaling 2,100
meters. All of these holes will be focused on the northern part of
the concession group near the Sombreretillo Ranch. These holes will
vary in depth from 100 to 150 meters. SRK of Lakewood, Colorado has
made a site visit and will monitor the quality assurance and quality control
during the drilling campaign. All of the drill hole samples have been
and will be assayed by ALS Chemex. The ALS Chemex facility in
Hermosillo does the sample preparation, and the assays are performed at the ALS
Chemex’s Vancouver laboratory. ALS Chemex laboratories provide the
highest level of quality and have ISO 9001:2000 certification at all
locations.
The lease
agreement, which allows Capital Gold to explore the property, required an
initial payment of $45 upon execution of the lease. In addition,
Capital Gold is required to make ten payments of $25 every four months
initiating six months after execution of the lease agreement. The agreement also
contains an option to acquire the mining concessions for a cash payment of
$1,500 at the end of the term (December 2010). If Capital Gold elects
not to exercise this option, it would have the ability to mine the concessions
by paying a 1% net smelter return to the owners of the leased concessions capped
at $3,000. Prior payments made under this lease agreement would be
deductible from the $3,000 cap.
Capital
Gold continues to investigate other exploration projects in northern Mexico and
other locations.
Other
Properties
Capital
Gold currently leases its headquarters located in New York, New York consisting
of a suite of offices of approximately 3,800 square feet. Capital
Gold also leases an administrative office in Caborca, Sonora, Mexico located
near its El Chanate mine.
Competition
The
acquisition of gold properties and their exploration and development are subject
to intense competition. Companies with greater financial resources, larger
staffs and more equipment for exploration and development may be in a better
position than us to compete for such mineral properties. Capital Gold’s
limited financial resources in relation to companies with greater resources may
hinder its ability to compete for and acquire additional mineral
properties.
Employees
As of
October 7, 2009, Capital Gold had 162 full time and 13 temporary employees
working at its El Chanate mine in Sonora, Mexico as well as 7 full time
employees in the U.S. Capital Gold also utilizes a mining contractor at
the El Chanate mine which had 55 personnel onsite.
80
Legal
Proceedings
There is
no material litigation currently pending against Capital Gold or any members of
its management team in their capacity as such.
Capital
Gold’s Management’s Discussion and Analysis of Financial Condition and Results
of Operations for
Years
Ended July 31, 2009, 2008 and 2007
The
following discussion relates to the three fiscal years ended July 31, 2009, 2008
and 2007. As disclosed in greater detail elsewhere in this proxy
statement/prospectus, Capital Gold commenced mining operations and began to
receive operating revenues in August 2007, shortly after the end of the fiscal
year ended July 31, 2007 (the financial data in this discussion is in thousands,
except where otherwise specifically noted).
Capital
Gold utilizes certain non-GAAP performance measures and ratios in managing the
business. Capital Gold believes these measures may provide users with additional
meaningful comparisons between current results and results in prior operating
periods. Non-GAAP financial measures should be viewed in addition to, and not as
an alternative to, the reported operating results or cash flow from operations
or any other measure of performance prepared in accordance with accounting
principles generally accepted in the United States. In addition, the
presentation of these measures may not be comparable to similarly titled
measures other companies use. “Cash costs per ounce sold” is a
non-GAAP measure which includes all direct mining costs, refining and
transportation costs and by-product credits as well as royalties as reported in
Capital Gold's financial statements. “Total cost per ounce sold” is a
non-GAAP measure which includes “cash costs per ounce sold” as well as
depreciation and amortization as reported in Capital Gold's financial
statements.
Overview
You
should read the following discussion and analysis of Capital Gold’s financial
condition and results of operations in conjunction with Capital Gold’s financial
statements and related notes included elsewhere in this proxy
statement/prospectus.
Capital
Gold’s financial position was as follows:
|
For the year
|
For the year
|
|||||||
|
ended
|
ended
|
|||||||
|
July 31,
|
July 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Total
debt
|
$ | 8,000 | $ | 12,500 | ||||
|
Total
stockholders’ equity
|
$ | 37,882 | $ | 28,197 | ||||
|
Cash
and cash equivalents
|
$ | 6,448 | $ | 10,992 | ||||
|
Working
capital
|
$ | 20,646 | $ | 15,825 | ||||
During
the fiscal year ended July 31, 2009 Capital Gold’s debt and liquidity positions
were affected by the following:
|
|
·
|
Net cash provided from operations
of $7,536;
|
|
|
·
|
Capital expenditures of
$5,174;
|
|
|
·
|
Repayments on Credit Facility of
$4,500; and
|
|
|
·
|
Proceeds from the issuance of
common stock upon the exercise of warrants of
$319;
|
Looking
Forward
Certain
key factors will affect Capital Gold’s future financial and operating results.
These include, but are not limited to, the following (the financial data in this
discussion is in thousands except for ounces and cash cost
data):
81
|
|
·
|
Fluctuations in gold
prices;
|
|
|
·
|
Capital Gold expects fiscal 2010
gold sales of approximately 60,000 ounces and 90,000 ounces of
silver;
|
|
|
·
|
Cash costs per ounce sold for
fiscal 2010 are expected to be approximately $330 per
ounce;
|
|
|
·
|
Capital Gold anticipates capital
expenditures of approximately $5,000 in fiscal 2010 with approximately
$3,300 being allocated to leach pad expansion and approximately $1,000 for
the addition of a new tertiary crusher and screening
module;
|
|
|
·
|
Repayments on Credit Facility of
$3,600 during fiscal 2010;
and
|
|
|
·
|
Capital Gold’s fiscal year 2010
expectations, particularly with respect to sales volumes and cash costs
per ounce sold, may differ significantly from actual quarter and full
fiscal year results due to variations in: ore grades and hardness, metal
recoveries, waste removed, commodity input prices, foreign currencies and
gold sale prices.
|
Result
of Operations
Fiscal year ended July 31,
2009 compared to fiscal year ended July 31, 2008
Net
income for the years ended July 31, 2009 and 2008 was approximately $10,407 and
$6,364, respectively, representing an increase of approximately 64% over the
prior period. Net income before income taxes was $15,949 and $9,871
for the years ended July 31, 2009 and 2008, respectively, which represented an
increase of 62%. Net income and net income before taxes increased
primarily as a result of higher revenues from more ounces of gold being sold
during the year ended July 31, 2009, as compared to the same period a year ago.
Income tax expense increased in conjunction with the increase in net income
before tax, which was anticipated.
Revenues
& Costs Applicable to Sales
Gold
sales for the fiscal year ended July 31, 2009 totaled approximately $42,757 as
compared to $33,104 in the prior period representing an increase of
approximately $9,653 or 29%. Capital Gold sold 48,418 ounces at an
average realizable price per ounce of approximately $883 in the current
period. Capital Gold sold 39,102 ounces at an average realizable
price per ounce of $847 during the same period last year.
Costs
applicable to sales were approximately $13,883 and $10,690, respectively, for
the year ended July 31, 2009 and 2008, an increase of approximately $3,193 or
30%, which increased in conjunction with Capital Gold’s increase in
revenues. Cash costs of $271 per ounce of gold sold for the year
ended July 31, 2009 was 2% lower than the $276 for the year ended July 31,
2008. The primary reason for this decrease in cash costs in the
current year can be attributed to the 10% net profit interest paid to Royal Gold
which was primarily incurred in the prior fiscal year. This was
offset by a higher waste-to-ore strip ratio of 1.12 to 1 experienced during the
fiscal year ended July 31, 2009 as compared to the prior fiscal year of 0.75 to
1. Capital Gold’s increased production profile in the current fiscal
year advanced the removal of more waste tonnes than in the prior
year. Total costs of $314 per ounce of gold sold for the year
ended July 31, 2009, was 6% lower than the $335 total cost in the prior
period. The primary reason for this decrease in total costs was
attributed to higher amortization charges recorded in the prior period related
to the repurchase of the 5% net profit interest acquired from FG in 2006 for
$500.
Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $1,076 and $707 for
the year ended July 31, 2009 and 2008, on silver ounces sold of 86,523 and
40,461, respectively.
Depreciation
and Amortization
Depreciation
and amortization expense during the year ended July 31, 2009 and 2008 was
approximately $3,019 and $3,438, respectively. The primary reason for
the decrease of approximately $419, or 12%, was due to amortization charges
recorded in the prior period related to the repurchase of the 5% net profit
interest acquired from FG in 2006 for $500. The $500 was fully
amortized during the quarterly period ended April 30, 2008. This was
slightly offset by an increase in Units-of-Production depreciation and
amortization mainly attributable to additional ounces being produced in the
current period versus the same period in the prior year. Depreciation
and amortization also includes deferred financing costs resulting from the
credit arrangements entered into with Standard Bank. This accounted
for approximately $934 and $1,088 of depreciation and amortization expense
during the year ended July 31, 2009 and 2008, respectively, and also slightly
contributed to the decrease in depreciation and amortization noted
above.
82
General
and Administration Expense
General
and administrative expenses during the year ended July 31, 2009 were
approximately $5,464, a decrease of approximately $122, or 2%, from the year
ended July 31, 2008. The decrease in general and administrative expenses
resulted primarily from: 1) lower salaries and wages primarily due to a decrease
in cash bonuses of approximately $345 during the current fiscal year compared to
the prior year, 2) lower equity based compensation of approximately
$93 as compared to the prior year, 3) lower investor relations and travel
expenses of approximately $87. Offsetting these decreases were higher
legal and financial advisor fees incurred as a result of Amalgamation and
acquisition activity during the current year as well as higher
audit fees associated with the attestation report issued on the
effectiveness of Capital Gold’s internal controls during the current
period.
Exploration
Expense
Exploration
expense during the year ended July 31, 2009 and 2008 was approximately $1,600
and $938, respectively, or an increase of $662, or 71%. The primary
reasons for the increase can be attributed to increased activity during the
current period associated with on-going exploration, drilling and geochemical
work being conducted on Capital Gold’s leased and owned concessions located
northwest of Saric, Sonora. Exploration expense for the current
period also included costs incurred from a 10 hole, deep core drilling campaign
at Capital Gold’s El Chanate mine totaling 2,500 meters. Exploration
expense in the prior period included a drilling campaign initiated in December
2007 at El Chanate which consisted of 26 reverse circulation holes amounting to
4,912 meters. These drill holes were mainly positioned to test the
outer limits of the currently known ore zones within the pit.
Other
Income and Expense
Capital
Gold’s loss on the change in fair value of derivative instruments during the
year ended July 31, 2009 and 2008, was approximately $1,975 and $1,356,
respectively, and was reflected as Other Expense. The primary reason for
the increase can be attributed to the settlement, on March 24, 2009, with
Standard Bank, PLC, the remaining 58,233 ounces of gold under the original Gold
Price Protection arrangements entered into in March 2006. The purpose of these
arrangements at the time was to protect Capital Gold in the event the gold price
dropped below $500 per ounce. Total remuneration to unwind these arrangements
was approximately $1,906. In conjunction with the settlement of the gold price
protection agreements, Capital Gold incurred an Other Expense of
approximately $1,391 during the current period. These contracts were
not designated as hedging derivatives; and therefore, special hedge accounting
does not apply.
Interest
expense was approximately $597 for the year ended July 31, 2009 compared to
approximately $1,207 for the same period a year earlier. This
decrease was mainly due to lower interest charges incurred during the current
period related to Capital Gold’s credit arrangements with Standard
Bank. As of July 31, 2009, there was $8,000 outstanding on Capital
Gold’s term note.
Income
Tax Expense
Income
tax expense was $5,542 during the fiscal year ended July 31, 2009, compared to
$3,507 in 2008 with an effective tax rate of 35% and 35%,
respectively. The factors that most significantly impact Capital
Gold’s effective tax rate are valuation allowances related to deferred tax
assets offset partially by lower statutory tax rates in Mexico. Current year
income tax expense and deferred income tax expense amounted to $3,909 and $1,633
as of July 31, 2009, respectively. Prior year income tax expense and
deferred income tax expense amounted to $2,111 and $1,396 as of July 31, 2008,
respectively.
83
Mining
operations are primarily conducted in Mexico. Mexico has tax laws, tax
incentives and tax rates that are significantly different than those of the
United States. On October 1, 2007, the Mexican government enacted
legislation which introduced certain tax reforms as well as a new minimum flat
tax system. This new flat tax system integrates with the regular income
tax system and is based on cash-basis net income that includes only certain
receipts and expenditures. The flat tax is set at 17.5% of cash-basis net
income as determined, with transitional rates of 16.5% and 17.0% in 2008 and
2009, respectively. If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax. If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period.
Annualized income projections indicate that Capital Gold will not be liable for
any excess flat tax for calendar year 2009 and, accordingly, have recorded a
Mexican income tax provision as of July 31, 2009.
As the
new legislation was recently enacted, it remains subject to ongoing varying
interpretations. There is the possibility of implementation amendments by
the Mexican government and the estimated future income tax liability recorded at
the balance sheet date may change.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which, on
a more likely than not basis, are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
During
the fiscal years ended July 31, 2009 and 2008, Capital Gold completed a
reconciliation of its U.S. book and tax basis assets and liabilities as well as
a detailed analysis of its income taxes payable.
Based on
the uncertainty and inherent unpredictability of the factors influencing Capital
Gold’s effective tax rate and the sensitivity of such factors to gold and other
metals prices as discussed above, the effective tax rate is expected to be
volatile in future periods.
For more
information concerning income taxes, please see Note 21 within the Capital Gold
consolidated financial statements incorporated by reference into this joint
proxy statement/prospectus .
Changes
in Foreign Exchange Rates
During
the years ended July 31, 2009 and 2008, Capital Gold recorded equity adjustments
from foreign currency translations of approximately $2,731 and $622,
respectively. These translation adjustments are related to changes in
the rates of exchange between the Mexican Peso and the U.S. dollar and are
included as a component of other comprehensive income. The Mexican
Peso and the U.S. dollar exchange rate as of July 31, 2009 was
12.9933. As of July 31, 2008, such exchange rate was
10.0483.
Summary
of Annual Results
(000’s
except per share data and ounces sold)
|
For
the year
|
For
the year
|
For
the year
|
||||||||||
|
ended
|
ended
|
Ended
|
||||||||||
|
July
31,
|
July
31,
|
July
31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$
|
42,757
|
$
|
33,104
|
$
|
-
|
||||||
|
Net
income (loss)
|
10,407
|
6,364
|
(7,472
|
)
|
||||||||
|
Basic
net income (loss) per share
|
0.05
|
0.04
|
(0.05
|
)
|
||||||||
|
Diluted
net income (loss) per share
|
0.05
|
0.03
|
-
|
|||||||||
|
Gold
ounces sold
|
48,418
|
39,102
|
-
|
|||||||||
|
Average
price received
|
$
|
883
|
$
|
847
|
-
|
|||||||
|
Cash
cost per ounce sold
|
$
|
271
|
$
|
276
|
-
|
|||||||
|
Total
cost per ounce sold
|
$
|
314
|
$
|
335
|
-
|
|||||||
84
Summary
of Results of Operations
|
For
the year
|
For
the year
|
For
the year
|
||||||||||
|
ended
|
ended
|
ended
|
||||||||||
|
July
31,
|
July
31,
|
July
31,
|
||||||||||
|
2009
|
2008
|
2007(1)
|
||||||||||
|
Tonnes
of ore mined
|
3,847,883
|
3,498,612
|
545,089
|
|||||||||
|
Tonnes
of waste removed
|
4,319,949
|
2,627,318
|
209,567
|
|||||||||
|
Ratio
of waste to ore
|
1.12
|
0.75
|
0.38
|
|||||||||
|
Tonnes
of ore processed
|
3,999,346
|
3,529,699
|
631,530
|
|||||||||
|
Grade
(grams/tonne)
|
0.78
|
0.85
|
0.88
|
|||||||||
|
Gold
(ounces)
|
||||||||||||
|
-Produced(2)
|
49,921
|
39,242
|
578
|
|||||||||
|
-Sold
|
48,418
|
39,102
|
-
|
|||||||||
(1) Commercial
production at El Chanate commenced on July 31, 2007 and the operation was still
in its ramp up phase and production results are not comparable.
(2) Gold
produced each year does not necessarily correspond to gold sold during the year,
as there is a time delay in the actual sale of the gold.
Fiscal year ended July 31,
2008 compared to fiscal year ended July 31, 2007
Net
income for the year ended July 31, 2008 was approximately $6,364 compared to a
net loss of approximately $7,472 for the year ended July 31, 2007. The principal
reason for this increase was Capital Gold’s transition to an
operating company during the year ended July 31, 2008. Capital
Gold’s first gold sale occurred in August 2007. Net income per common
share was $0.15 for the year ended July 31, 2008, on a basic basis and $0.13 on
a diluted basis. The net loss per share for the same period in 2007
was $0.20 on a basic basis. Basic and diluted net loss per share is computed
using the weighted average number of shares of common stock outstanding during
the period. Equivalent common shares, consisting of stock options and warrants,
were excluded from the calculation of diluted net loss per share for the fiscal
year ended July 31, 2007 since their effect was anti-dilutive.
Revenues
and Costs Applicable to Sales
Gold
revenue for the year ended July 31, 2008 totaled approximately
$33,104. Capital Gold sold 39,102 ounces at an average realizable
price per ounce of approximately $847. Costs applicable to sales were
approximately $10,690 for the current period. There were no metal
sales for the same period in the prior year as Capital Gold had not yet realized
revenue from its operations. Capital Gold’s cash cost and total cost
per ounce sold, excluding Royal Gold’s 10% net profit interest, formerly owned
by Anglo Gold, was $257 and $316, respectively, for the year ended July 31,
2008. If Capital Gold factors in this net profit interest cost for
the same period, its cash cost and total cost per ounce sold would be $276 and
$335, respectively. These costs were slightly higher than previous
quarter results primarily due to the accrual of this net profit interest which
is capped at $1,000. As of July 31, 2008, Capital Gold had
approximately $753 accrued towards this net profits interest. Capital
Gold anticipates accruing the remaining portion of the net profit interest
within this calendar year.
Revenues
from by-product sales (silver) are credited to Costs applicable to sales as
a by-product credit. Silver sales totaled 40,461 ounces at an average
price of $17.48 amounting to approximately $707 for the year ended July 31,
2008.
Depreciation
and Amortization
Depreciation
and amortization expense during the year ended July 31, 2008 and 2007 was
approximately $3,438 and $891, respectively. The increase of
approximately $2,547 was primarily due to a full year of depreciation and
amortization charges related to the El Chanate capital costs being incurred
during the year ended July 31, 2008. The charges during the same
period in the prior year were significantly lower as most of these assets were
placed in service in April 2007. Depreciation and amortization also
represents deferred financing costs resulting from the Credit Agreement Capital
Gold entered into with Standard Bank. This accounted for
approximately $1,088 and $876 of the amortization expense during the years ended
July 31, 2008 and 2007, respectively.
85
General
and Administration Expense
General
and administrative expenses during the year ended July 31, 2008 were
approximately $5,586, an increase of approximately $2,693 or 93% from the year
ended July 31, 2007. The increase in general and administrative
expenses resulted primarily from: 1) higher salaries and wages for officers and
employees including the hiring of a controller and the awarding of cash bonuses
of approximately $1,708, 2) the granting of stock options and
restricted stock to officers and employees under Capital Gold’s 2006 Equity
Incentive Plan amounting to approximately $467, 3) higher investor
relations fees and travel fees of approximately $221, 4) higher
accounting and consulting fees of approximately $419 versus the same period a
year earlier, primarily due to the awarding of a cash bonus to one of Capital
Gold’s officers as well as higher consulting fees related to compliance with
internal control over financial reporting, and 5) an increase in insurance costs
of approximately $116 versus the same period a year earlier as Capital Gold was
not yet in full production in the prior period. The above mentioned
increases in compensation, cash bonus awards as well as the stock option and
restricted stock awards were granted based upon recommendations from an
independent report on executive compensation. This independent
report, requested by the Compensation Committee, was obtained in order to assist
Capital Gold in attracting and retaining individuals of experience and ability,
to provide incentive to Capital Gold’s employees and directors, to encourage
employee and director proprietary interests in Capital Gold’s company, and to
encourage employees to remain in Capital Gold’s employ.
Exploration
Expense
Exploration
expense during the years ended July 31, 2008 and 2007 was approximately $938 and
$1,816, respectively, or a decrease of $878 or 48%. The primary
reason for the decrease in exploration expense was the result of higher
engineering and planning costs related to the El Chanate Project being expensed
in the prior period as well as the costs incurred from the 72-hole reverse
circulation drilling campaign targeted to identify additional reserves at the El
Chanate Project which was completed in May 2007. Exploration expense
for the year ended July 31, 2008 includes: 1) costs from the completed 26-hole
reverse circulation drilling program in December 2007 consisting of 4,912 meters
at the El Chanate mine. The drill holes were targeted to test the
outer limits of the existing ore zones, and 2) costs associated with Capital
Gold’s leased 12 mining concessions totaling 1,790 hectares located northwest of
Saric, Sonora. Capital Gold initiated a drill program as well as geochemical
work related to these claims during fiscal 2008. Also, a claim was
filed for approximately 2,200 additional hectares adjacent to this property.
These concessions and this claim are approximately sixty miles northeast of the
El Chanate project and can be accessed by a paved road. Surface
mineralization is evident throughout the property and is hosted by shear
zones and veins in a granite intrusive; follow up exploration is
underway.
Other
Income and Expense
Capital
Gold’s loss on the change in fair value of derivative instruments during the
year ended July 31, 2008 and 2007, was approximately $1,356 and $1,226,
respectively, and was reflected as another expense. This was primarily due
to the change in fair value of two identically structured derivative contracts
with Standard Bank which correlates to fluctuations in the gold
price. These contracts were not designated as hedging derivatives;
and therefore, special hedge accounting does not apply.
Interest
expense was approximately $1,207 for the year ended July 31, 2008 compared to
approximately $792 for the same period a year earlier. This increase
was mainly due to higher interest charges incurred during fiscal 2008 related to
Capital Gold’s outstanding credit facility with Standard Bank. As of
July 31, 2008 and 2007, there was $12,500 outstanding on this credit
facility.
Income
Tax Expense
Income
tax expense was $3,507 during the fiscal year ended July 31, 2008, compared to
$0 in 2007 with an effective tax rate of 35% and 0%,
respectively. The factors that most significantly impact Capital
Gold’s effective tax rate are valuation allowances related to deferred tax
assets offset partially by lower statutory tax rates in Mexico. Current income
tax expense and deferred income tax expense amounted to $2,111 and $1,396 as of
July 31, 2008, respectively.
86
Mining
operations are conducted in Mexico. Mexico has tax laws, tax incentives and tax
rates that are significantly different than those of the United
States. On October 1, 2007, the Mexican government enacted
legislation which introduced certain tax reforms as well as a new minimum flat
tax system. This new flat tax system integrates with the regular income
tax system and is based on cash-basis net income that includes only certain
receipts and expenditures. The flat tax is set at 17.5% of cash-basis net
income as determined, with transitional rates of 16.5% and 17.0% in 2008 and
2009, respectively. If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax. If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax. Companies are required to
prepay income taxes on a monthly basis based on the greater of the flat tax or
regular income tax as calculated for each monthly period. Annualized
income projections indicated that Capital Gold would not be liable for any
excess flat tax for calendar year 2008 and, accordingly, recorded a Mexican
income tax provision as of July 31, 2008.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which, on
a more likely than not basis, are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
During
the fiscal year ended 2008, Capital Gold completed a reconciliation of its U.S.
book and tax basis assets and liabilities as well as a detailed analysis of
Capital Gold’s income taxes payable.
Based on
the uncertainty and inherent unpredictability of the factors influencing Capital
Gold’s effective tax rate and the sensitivity of such factors to gold and other
metals prices as discussed above, the effective tax rate is expected to be
volatile in future periods.
For more
information concerning income taxes, please see Note 21 within the Capital Gold
consolidated financial statements incorporated by reference into this joint
proxy/prospectus .
Changes
in Foreign Exchange Rates
During
the year ended July 31, 2008 and 2007, Capital Gold recorded equity adjustments
from foreign currency translations of approximately $622 and $205,
respectively. These translation adjustments are related to changes in
the rates of exchange between the Mexican Peso and the US dollar and are
included as a component of other comprehensive income.
Liquidity
and Capital Resources
Operating
activities
Cash provided by operating
activities during the year ended July 31, 2009 was approximately $7,536,
which primarily represents cash flows resulting from Capital Gold’s realization
of revenue from operations during the year ended July 31, 2009. The
increase period-to-period was mainly due to higher net income during the year
ended July 31, 2009. In addition, Capital Gold utilized cash
flows from operations to pay the following one time items: 1) 10% net
profits interest of $1,000 to Royal Gold, and 2) $1,906 to close out
the remaining 58,233 ounces of gold under the original Gold Price Protection
arrangements that Capital Gold entered into in March 2006 to Standard
Bank. Cash used in
operating activities for the same period a year ago was $6,318, as this
was Capital Gold’s first year realizing revenue from operations.
Investing
Activities
Cash used in investing
activities during the year ended July 31, 2009, amounted to approximately
$5,174, primarily from the acquisition of an additional secondary crusher and
tunnel conveyor, mobile equipment, conveyors, ADR plant equipment, and a carbon
regeneration kiln. Cash used in investing activities
for the same period a year ago was approximately $5,479 which was due to
costs incurred for leach pad expansion, conveyors, additional water rights, and
original ADR plant equipment for the El Chanate mine.
87
In August
2009, Capital Gold initiated the construction of an additional leach pad
area. Permitting and site clearing has been completed and the
construction has commenced. Golder Engineering of Tucson, Arizona will oversee
construction activities and quality control and quality assurance for the
project. The construction schedule anticipates that stacking ore on the new pad
will commence in January 2010 and will cost approximately $3,300. In
October 2009, Capital Gold committed to the procurement of a new tertiary
crusher and screen module for the El Chanate mine. The cost for this
equipment is approximately $1,000 with one-third due upon execution of the sales
order, one-third due in 30 days and one-third upon shipment. This is
part of Capital Gold’s ongoing production expansion plan.
Financing
Activities
Cash used in financing
activities during the year ended July 31, 2009 amounted to approximately
$4,175, primarily from the repayment of the Credit Facility in the amount of
$4,500. Capital Gold also received proceeds of approximately $319 in
the current period from the issuance of common stock upon the exercising of
213,932 options. Cash provided by financing
activities during the year ended July 31, 2008 amounted to approximately
$7,306, primarily from the exercising of 5,748,544 warrants for gross proceeds
of approximately $7,474.
Term
Loan and Revolving Credit Facility
On July
17, 2008, Capital Gold closed in escrow, pending execution of Mexican collateral
documents and certain other ministerial matters, an Amended and Restated Credit
Agreement (the “Credit Agreement”) involving Capital Gold’s wholly-owned Mexican
subsidiaries MSR and Oro, as borrowers (“Borrowers”), Capital Gold, as
guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender. The Mexican collateral documents were executed on September
18, 2008, effectively closing the loan. The Credit Agreement amends
and restates the prior credit agreement between the parties dated August 15,
2006 (the “Original Agreement”). Under the Original Agreement, MSR and Oro could
borrow, and did borrow, money in an aggregate principal amount of up to $12,500
(the “Term Loan”) for the purpose of constructing, developing and operating the
El Chanate gold mining project in Sonora State, Mexico. Capital Gold guaranteed
the repayment of the Term Loan and the performance of the obligations under the
Original Agreement.
The
Credit Agreement establishes a new senior secured revolving credit facility that
permits Borrowers to borrow up to $5,000 during the one year period after the
closing of the Credit Agreement. The Borrowers may request a borrowing of the
Revolving Commitment from time to time, provided that the Borrowers are not
entitled to request a borrowing more than once in any calendar month (each
borrowing a “Revolving Loan”). Repayment of the Revolving Loans will be secured
and guaranteed in the same manner as the Term Loan. Term Loan principal shall be
repaid quarterly commencing on September 30, 2008 and consisting of four
payments in the amount of $1,125, followed by eight payments in the amount of
$900 and two final payments in the amount of $400. There is no prepayment
fee. Principal under the Term Loan and the Revolving Loans shall bear
interest at a rate per annum equal to the LIBO Rate, as defined in the Credit
Agreement, for the applicable Interest Period plus the Applicable Margin. An
Interest Period can be one, two, three or six months, at the option of the
Borrowers. The Applicable Margin for the Term Loan and the Revolving Loans is
2.5% per annum and 2.0% per annum, respectively. The Borrowers are
required to pay a commitment fee in respect of the Revolving Commitment at the
rate of 1.5% per annum on the average daily unused portion of the Revolving
Commitment. Pursuant to the terms of the Original Credit Agreement,
Standard Bank exercised significant control over the operating accounts of MSR
located in Mexico and in the United States. Standard Bank’s control over the
accounts has been lifted significantly under the terms of the Credit Agreement,
giving the Borrowers authority to exercise primary day-to-day control over the
accounts. However, the accounts remain subject to an account pledge agreement
between MSR and Standard Bank.
On
September 17, 2009, Capital Gold’s ability to borrow under the Revolving Loan
expired. Capital Gold had not drawn on this facility during the term
period and determined that it was not cost beneficial to maintain the Revolving
Loan on a going forward basis.
Debt
Covenants
Capital
Gold’s Credit Agreement with Standard Bank requires it, among other obligations,
to meet certain financial covenants including, but not limited to, (i) a ratio
of current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S. $15,000,000, and (iii) a quarterly average minimum liquidity of U.S.
$500,000. In addition, the Credit Agreement restricts, among other things,
Capital Gold’s ability to incur additional debt, create liens on its property,
dispose of any assets, merge with other companies, enter into hedge agreements,
organize or invest in subsidiaries or make any investments above a certain
dollar limit.
88
As of
July 31, 2009, Capital Gold and its related entities were in compliance with all
debt covenants and default provisions. For the purposes of meeting
these financial covenants, the accounts of Caborca Industrial are not required
to be included in the calculation of these covenants.
Environmental
and Permitting Issues
Management
does not expect that environmental issues will have an adverse material effect
on Capital Gold’s liquidity or earnings. Capital Gold complies with
all laws, rules and regulations concerning mining, environmental, health, zoning
and historical preservation issues, Capital Gold is not aware of any
environmental concerns or current reclamation requirements at the El Chanate
concessions. Capital Gold has received the required Mexican
government permits for operations. Any revisions to the current mine
plan may require Capital Gold to amend the permits.
Capital
Gold received the annual extension to the explosive use permit from the relevant
authorities. The permit is valid through December 2009.
Capital
Gold includes environmental and reclamation costs on an ongoing basis, in its
revenue and cost projections. No assurance can be given that
environmental regulations will not be revised by the Mexican authorities in the
future. As of July 31, 2009, management has estimated the reclamation
costs for the El Chanate site to be approximately $2,950. Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. Capital Gold reviews, on
an annual basis, unless otherwise deemed necessary, the asset retirement
obligation at each mine site. Capital Gold reviewed the estimated
present value of the El Chanate mine reclamation and closure costs as of July
31, 2009. This resulted in an accrual for reclamation obligations as
of July 31, 2009 of $1,594 relating to mineral properties in accordance with ASC
guidance for asset retirement and environmental obligations.
Capital
Gold own properties in Leadville, Colorado for which it has previously recorded
an impairment loss. Part of the Leadville Mining District has been
declared a federal Superfund site under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, and the Superfund Amendments
and Reauthorization Act of 1986. Several mining companies and one
individual were declared defendants in a possible lawsuit. Capital
Gold was not named a defendant or Principal Responsible
Party. Capital Gold did respond in full detail to a lengthy
questionnaire prepared by the Environmental Protection Agency ("EPA") regarding
Capital Gold’s proposed procedures and past activities in November
1990. To Capital Gold’s knowledge, the EPA has initiated no further
comments or questions. The Division of Reclamation, Mining and Safety
of the State of Colorado (the “Division”) conducted its most recent inspection
of Capital Gold’s Leadville Mining properties in August 2007. The
Division concluded that based upon 2007 equipment prices and labor costs, an
additional $46 was necessary to be bonded with the Division to reclaim the site
to achieve the approved post-mining land use. The total amount of the
bond sufficient to perform reclamation as of April 30, 2009, was approximately
$82. Capital Gold met this bonding requirement. During
Capital Gold’s fiscal year ended July 31, 2008, Capital Gold sold two of the
Leadville Mining claims and the mill for gross proceeds of $100. In
May 2009, Capital Gold received its bond back from the
Division.
89
Contractual
Obligations
Capital
Gold’s contractual obligations as of July 31, 2009 are summarized as
follows:
|
Payments Due by Period
|
||||||||||||||||||||
|
Contractual Obligations(5)
|
Total
|
Less than
1 Year
|
1 – 3
Years
|
3 – 5
Years
|
More than
5 Years
|
|||||||||||||||
|
Debt
(1)
|
$
|
8,650
|
$
|
3,860
|
$
|
4,790
|
$
|
-
|
$
|
-
|
||||||||||
|
Remediation
and reclamation obligations(2)
|
3,741
|
-
|
-
|
-
|
3,741
|
|||||||||||||||
|
Operating
leases(3)
|
760
|
247
|
513
|
-
|
-
|
|||||||||||||||
|
Derivative
instruments(4)
|
184
|
154
|
30
|
-
|
-
|
|||||||||||||||
|
$
|
13,335
|
$
|
4,261
|
$
|
5,333
|
$
|
-
|
$
|
3,741
|
|||||||||||
|
(1)
|
Amounts represent principal
($8,000) and estimated interest payments ($650) assuming no early
extinguishment.
|
|
(2)
|
Mining operations are subject to
extensive environmental regulations in the jurisdictions in which they
operate. Pursuant to environmental regulations, Capital Gold is required
to close its operations and reclaim and remediate the lands that
operations have disturbed. The estimated undiscounted cash outflows of
these remediation and reclamation obligations are reflected here. For more
information regarding remediation and reclamation liabilities, see Note 12
to the Consolidated Financial
Statements.
|
|
(3)
|
Amounts represent a
non-cancelable operating lease for office space in New York that commenced
on September 1, 2007 and terminates on August 31, 2012. In addition to
base rent, the lease calls for payment of utilities and other occupancy
costs. Also, includes an operating lease for office space in Caborca,
Sonora, as well as leased concessions in Saric, Sonora for
exploration.
|
|
(4)
|
Amounts represent the net cash
settlement of interest rate swap agreement with Standard
Bank.
|
|
(5)
|
Contractual obligations do not
include the net smelter return payments as this payment is linked to the
gold price and cannot be reasonably estimated given variable market
conditions. As of July 31, 2009, the amount remaining in net
smelter return payments due to Royal Gold was approximately
$13,936.
|
To date,
Capital Gold has not been adversely affected by the recent volatility in the
global credit and foreign exchange markets. To a minor degree Capital
Gold has benefited from the devaluation of the Mexican peso compared to the U.S.
dollar.
While
Capital Gold believes that its available funds in conjunction with anticipated
revenues from metal sales will be adequate to cover its cash requirements for
the fiscal year ending July 31, 2010, if Capital Gold encounters unexpected
problems it may need to raise additional capital. Capital Gold also
may need to raise additional capital for significant property acquisitions
and/or exploration activities. To the extent that Capital Gold needs to obtain
additional capital, management may raise such funds through the sale of its
securities, obtain debt financing, and/or joint venturing with one or more
strategic partners. Capital Gold cannot assure that adequate
additional funding, if needed, will be available or on terms acceptable to
it. If Capital Gold needs additional capital and it is unable to
obtain it from outside sources, it may be forced to reduce or curtail its
operations or its anticipated exploration activities.
Recently
Issued Accounting Pronouncements
Fair
Value Accounting
In
September 2006, the ASC guidance for fair value measurements and disclosure was
updated to define fair value, establish a framework for measuring fair value,
and expand disclosures about fair value measurements. Capital Gold adopted the
updated guidance for assets and liabilities measured at fair value on a
recurring basis on January 1, 2008. In February 2008, the FASB staff issued an
update to the guidance which delayed the effective date for nonfinancial assets
and nonfinancial liabilities that are recognized or disclosed at fair value in
the financial statements on a nonrecurring basis. Capital Gold adopted the
updated guidance for Capital Gold’s nonfinancial assets and liabilities measured
at fair value on a nonrecurring basis on January 1, 2009.
90
In
October 2008, the ASC guidance for fair value measurements was further updated
and clarifies the application of ASC guidance for fair value measurements in an
inactive market. The intent of this update is to provide guidance on how the
fair value of a financial asset is to be determined when the market for that
financial asset is inactive. The guidance states that determining fair value in
an inactive market depends on the facts and circumstances, requires the use of
significant judgment and, in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. The updated guidance was effective
upon issuance. Capital Gold has incorporated the principles of this update in
determining the fair value of financial assets when the market for those assets
is not active.
ASC
guidance for fair value measurements establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy in accordance with ASC guidance for fair
value measurements are described below:
|
Level 1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities;
|
|
Level 2
|
Quoted
prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the
asset or liability;
|
|
Level 3
|
Prices
or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (supported by little or no
market activity).
|
The
following table sets forth Capital Gold’s financial assets and liabilities
measured at fair value by level within the fair value hierarchy. As required by
ASC guidance for fair value measurements, assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the
fair value measurement.
|
Fair
Value at July 31, 2009
(in
thousands)
|
||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
equivalents
|
$
|
3,334
|
$
|
3,334
|
$
|
-
|
$
|
-
|
||||||||
|
Marketable
securities
|
35
|
35
|
-
|
-
|
||||||||||||
|
$
|
3,369
|
$
|
3,369
|
$
|
-
|
$
|
-
|
|||||||||
|
Liabilities:
|
||||||||||||||||
|
Interest
rate swap
|
193
|
-
|
193
|
-
|
||||||||||||
|
$
|
193
|
$
|
-
|
$
|
193
|
$
|
-
|
|||||||||
Capital
Gold’s cash equivalent instruments are classified within Level 1 of the
fair value hierarchy because they are valued using quoted market prices. The
cash instruments that are valued based on quoted market prices in active markets
are primarily money market securities.
Capital
Gold’s marketable equity securities are valued using quoted market prices in
active markets and as such are classified within Level 1 of the fair value
hierarchy. The fair value of the marketable equity securities is calculated as
the quoted market price of the marketable equity security multiplied by the
quantity of shares held by Capital Gold.
Capital
Gold has an interest rate swap contract to hedge a portion of the interest
rate risk exposure on its outstanding loan balance. The hedged portion of
Capital Gold’s debt is valued using pricing models which require inputs,
including risk-free interest rates and credit spreads. Because the inputs are
derived from observable market data, the hedged portion of the debt is
classified within Level 2 of the fair value hierarchy.
91
In April
2009, the ASC guidance was further updated to provide additional guidance on
determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and identifying circumstances that
indicate when a transaction is not orderly. In April 2009, the guidance for
investments in debt and equity securities was updated to: (i) clarify the
interaction of the factors that should be considered when determining whether a
debt security is other than temporarily impaired, (ii) provide guidance on the
amount of an other-than-temporary impairment recognized for a debt security in
earnings and other comprehensive income and (iii) expand the disclosures
required for other-than-temporary impairments for debt and equity securities.
Also in April 2009, the guidance for financial instruments was updated to
require disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. Capital Gold adopted the updated guidance for the interim period
ended April 30, 2009. The adoption of this standard did not have a material
impact on the financial condition or the results of Capital Gold’s
operations.
Fair
Value Option
In March
2007, the ASC guidance for the fair value option for financial assets and
liabilities was established, which permits entities to choose to measure many
financial instruments and certain other items at fair value with the objective
of improving financial reporting by mitigating volatility in reported earnings
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. The provisions of this
guidance were adopted January 1, 2009. Capital Gold did not elect the Fair Value
Option for any of its financial assets or liabilities, and therefore, the
adoption of this guidance had no impact on Capital Gold’s consolidated financial
position, results of operations or cash flows.
Derivative
Instruments
In March
2008, the ASC guidance for derivatives and hedging was updated for enhanced
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and the related hedged items are accounted for, and how
derivative instruments and the related hedged items affect an entity’s financial
position, financial performance and cash flows. Capital Gold adopted the updated
guidance for the fiscal year ended July 31, 2008. The adoption had no impact on
Capital Gold’s consolidated financial position, results of operations or cash
flows.
Accounting
for the Useful Life of Intangibles
In April
2008, the ASC guidance for goodwill and other intangibles was updated to amend
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset.
The intent of this update is to improve the consistency between the useful life
of a recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset under guidance for business combinations.
The updated guidance is effective for Capital Gold’s fiscal year beginning
August 1, 2009 and will be applied prospectively to intangible assets acquired
after the effective date. Capital Gold does not expect the adoption
to have an impact on Capital Gold’s consolidated financial position, results of
operations or cash flows.
Business
Combinations
In April
2009, the ASC guidance for business combinations was updated to address
application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. This guidance is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after January 1, 2009. Capital Gold will
apply the updated guidance to all future business combinations.
Equity Method Investment
In November 2008, the ASC guidance for
equity method and joint venture investments was updated to clarify the
accounting for certain transactions and impairment considerations involving
equity method investments. The intent is to provide guidance on: (i) determining
the initial measurement of an equity method investment, (ii) recognizing
other-than- temporary impairments of an equity method investment and (iii)
accounting for an equity method investee’s issuance of shares. The updated
guidance is effective for Capital Gold’s fiscal year beginning August 1, 2009
and will be applied prospectively. Capital Gold does not expect the
adoption to have an impact on Capital Gold’s consolidated financial position or
results of operations.
92
Equity-linked Financial
Instruments
In June 2008, the ASC guidance for
derivatives and hedging when accounting for contracts in an entity’s own equity
was updated to clarify the determination of whether an instrument (or embedded
feature) is indexed to an entity’s own stock which would qualify as a scope
exception from hedge accounting. The updated guidance is effective for Capital
Gold’s fiscal year beginning August 1, 2009. The adoption had no impact on
Capital Gold’s consolidated financial position or results of
operations.
Subsequent Events
In May 2009, the ASC guidance for
subsequent events was updated to establish accounting and reporting standards
for events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The update sets forth: (i)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (ii) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet in its financial statements, and (iii) the disclosures that an
entity should make about events or transactions occurring after the balance
sheet date in its financial statements. Capital Gold adopted the updated
guidance for the fiscal year ended July 31, 2009. The adoption had no impact on
Capital Gold’s consolidated financial position, results of operations or cash
flows.
Variable Interest Entities
In June 2009, the ASC guidance for
consolidation accounting was updated to require an entity to perform a
qualitative analysis to determine whether the enterprise’s variable interest
gives it a controlling financial interest in a variable interest entity (“VIE”).
This analysis identifies a primary beneficiary of a VIE as the entity that has
both of the following characteristics: i) the power to direct the activities of
a VIE that most significantly impact the entity’s economic performance and ii)
the obligation to absorb losses or receive benefits from the entity that could
potentially be significant to the VIE. The updated guidance also requires
ongoing reassessments of the primary beneficiary of a VIE. The updated guidance
is effective for Capital Gold’s fiscal year beginning August 1, 2010. Capital
Gold currently accounts for Caborca Industrial (“CI”) as a VIE and is evaluating
the potential impact of adopting this statement on Capital Gold’s consolidated
financial position, results of operations and cash flows.
The Accounting Standards
Codification
In June 2009, the Financial Accounting
Standards Board (“FASB”) established the FASB Accounting Standards Codification
(“ASC”) as the single source of authoritative GAAP to be applied by
nongovernmental entities. The ASC is a new structure which took existing
accounting pronouncements and organized them by accounting topic. Relevant
authoritative literature issued by the Securities and Exchange Commission
(“SEC”) and select SEC staff interpretations and administrative literature was
also included in the ASC. All other accounting guidance not included in the ASC
is non-authoritative. The ASC is effective for Capital Gold’s interim quarterly
period beginning August 1, 2009. The adoption of the ASC did not have an impact
on Capital Gold’s consolidated financial position, results of operations or cash
flows.
Disclosure
About Off-Balance Sheet Arrangements
Capital
Gold does not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
Critical
Accounting Policies
Capital
Gold’s financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions
are affected by management’s application of accounting
policies. Critical accounting policies for us include inventory,
revenue recognition, property, plant and mine development, impairment of
long-lived assets, accounting for equity-based compensation, environmental
remediation costs and accounting for derivative and hedging
activities.
93
Ore
on Leach Pads and Inventories (“In-Process Inventory”)
Costs
that are incurred in or benefit the productive process are accumulated as ore on
leach pads and inventories. Ore on leach pads and inventories are carried at the
lower of average cost or market. The current portion of ore on leach pads and
inventories is determined based on the amounts to be processed within the next
12 months. The major classifications are as follows:
Ore on Leach
Pads
The
recovery of gold from ore is achieved through the heap leaching process. Under
this method, ore is placed on leach pads where it is treated with a chemical
solution, which dissolves the gold contained in the ore. The resulting
“pregnant” solution is further processed in a processing plant that extracts
gold from this solution producing gold dore. Costs are applied to ore on leach
pads based on current mining costs, including applicable depreciation, depletion
and amortization relating to the mining operation. Costs are removed from ore on
leach pads as ounces are recovered based on the average cost per estimated
recoverable ounce of gold on the leach pad.
The
estimates of recoverable gold on the leach pads are calculated from the
quantities of ore placed on the leach pads (measured tonnes added to the leach
pads), the grade of ore placed on the leach pads (based on fire assay data) and
a recovery percentage (based on ore type and column testwork). It is estimated
that Capital Gold’s leach pad at El Chanate will recover all ounces placed
within a one year period from date of placement.
Although
the quantities of recoverable gold placed on the leach pads are reconciled by
comparing the grades of ore placed on pads to the quantities of gold actually
recovered (metallurgical balancing), the nature of the leaching process
inherently limits the ability to precisely monitor inventory levels. As a
result, the metallurgical balancing process needs to be constantly monitored and
estimates need to be refined based on actual results over time. Capital Gold’s
operating results may be impacted by variations between the estimated and actual
recoverable quantities of gold on its leach pads.
In-process
Inventory
In-process
inventories represent materials that are currently in the process of being
converted to a saleable product. Conversion processes vary depending on the
nature of the ore and the specific processing facility, but include leach
in-circuit, flotation and column cells and carbon in-pulp inventories.
In-process material are measured based on assays of the material fed into the
process and the projected recoveries of the respective plants. In-process
inventories are valued at the average cost of the material fed into the process
attributable to the source material coming from the mines and/or leach pads plus
the in-process conversion costs, including applicable depreciation relating to
the process facilities incurred to that point in the process.
Precious Metals
Inventory
Precious
metals inventories include gold doré and/or gold bullion. Precious metals that
result from Capital Gold’s mining and processing activities are valued at the
average cost of the respective in-process inventories incurred prior to the
refining process, plus applicable refining costs.
Materials and
Supplies
Materials
and supplies are valued at the lower of average cost or net realizable value.
Cost includes applicable taxes and freight.
Property,
Plant and Mine Development
Expenditures
for new facilities or equipment and expenditures that extend the useful lives of
existing facilities or equipment are capitalized and depreciated using the
straight-line method at rates sufficient to depreciate such costs over the
estimated productive lives, which do not exceed the related estimated mine
lives, of such facilities based on proven and probable reserves.
Mineral
exploration costs are expensed as incurred. When it has been determined that a
mineral property can be economically developed as a result of establishing
proven and probable reserves, costs incurred prospectively to develop the
property will be capitalized as incurred and are amortized using the
units-of-production (“UOP”) method over the estimated life of the ore body based
on estimated recoverable ounces or pounds in proven and probable
reserves.
94
Impairment
of Long-Lived Assets
Capital
Gold reviews and evaluates its long-lived assets for impairment when events or
changes in circumstances indicate that the related carrying amounts may not be
recoverable. An impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded
based on discounted estimated future cash flows. Future cash flows are estimated
based on quantities of recoverable minerals, expected gold and other commodity
prices (considering current and historical prices, price trends and related
factors), production levels and operating costs of production and capital, all
based on life-of-mine plans. Existing proven and probable reserves and value
beyond proven and probable reserves, including mineralization other than proven
and probable reserves and other material that is not part of the measured,
indicated or inferred resource base, are included when determining the fair
value of mine site reporting units at acquisition and, subsequently, in
determining whether the assets are impaired. The term “recoverable minerals”
refers to the estimated amount of gold or other commodities that will be
obtained after taking into account losses during ore processing and treatment.
Estimates of recoverable minerals from such exploration stage mineral interests
are risk adjusted based on management’s relative confidence in such materials.
In estimating future cash flows, assets are grouped at the lowest level for
which there are identifiable cash flows that are largely independent of future
cash flows from other asset groups. Capital Gold’s estimates of future cash
flows are based on numerous assumptions and it is possible that actual future
cash flows will be significantly different than the estimates, as actual future
quantities of recoverable minerals, gold and other commodity prices, production
levels and operating costs of production and capital are each subject to
significant risks and uncertainties.
Reclamation
and Remediation Costs (Asset Retirement Obligations)
Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. Capital Gold reviews, on an annual
basis, unless otherwise deemed necessary, the asset retirement obligation at its
mine site in accordance with ASC guidance for asset retirement and environmental
obligations.
Deferred
Financing Costs
Deferred
financing costs which were included in other assets and a component of
stockholders’ equity relate to costs incurred in connection with bank borrowings
and are amortized over the term of the related borrowings.
Intangible
Assets
Purchased
intangible assets consisting of rights of way, easements, net profit interests,
etc. are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the economic lives of the respective assets,
generally five years or using the units of production method. It is Capital
Gold’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
ASC guidance for accounting for the impairment of disposed of long lived
assets. There was no impairment at July 31, 2009.
Fair
Value of Financial Instruments
The
carrying value of Capital Gold’s financial instruments, including cash and cash
equivalents, loans receivable and accounts payable approximated fair value
because of the short maturity of these instruments.
95
Revenue
Recognition
Revenue
is recognized from the sale of gold dore when persuasive evidence of an
arrangement exists, the price is determinable, the product has been shipped to
the refinery, the title has been transferred to the customer and collection of
the sales price is reasonably assured from the customer. Capital Gold
sells its precious metal content to a financial institution. Revenues are
determined by selling the precious metal content at the spot price. Sales are
calculated based upon assay of the dore’s precious metal content and its
weight. Capital Gold sells approximately 95% of the precious metal
content contained within the dore from the refinery based upon the preliminary
assay of Capital Gold. The residual ounces are sold upon obtaining the final
assay and settlement for the shipment. Capital Gold forwards an irrevocable
transfer letter to the refinery to authorize the transfer of the precious metal
content to the customer. The sale is recorded by Capital Gold upon
the refinery pledging the precious metal content to the
customer. Capital Gold waits until the dore precious metal content is
pledged to the customer at the refinery to recognize the sale because
collectability is not ensured until the dore precious metal content is
pledged. The sale price is not subject to change subsequent to the
initial revenue recognition date.
Revenues
from by-product sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $1,076, $707 and $0
for the fiscal years ended July 31, 2009, 2008 and 2007,
respectively.
Foreign
Currency Translation
Assets
and liabilities of Capital Gold's Mexican subsidiaries are translated to US
dollars using the current exchange rate for assets and liabilities. Amounts on
the statement of operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency translation are
included as a component of other comprehensive income (loss).
Comprehensive
Income (Loss)
Comprehensive
income (loss) which is reported on the accompanying consolidated statement of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses, the fair
value change in Capital Gold’s interest rate swap agreement and net unrealized
gains and losses on available-for-sale securities.
Income
Taxes
On
October 1, 2007, the Mexican government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system. This new
flat tax system integrates with the regular income tax system and is based on
cash-basis net income that includes only certain receipts and
expenditures. The flat tax is set at 17.5% of cash-basis net income as
determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively. If the flat tax is positive, it is reduced by the regular
income tax and any excess is paid as a supplement to the regular income
tax. If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period.
This legislation remains subject to ongoing varying interpretations. There
is the possibility of implementation amendments by the Mexican government and
the estimated future income tax liability recorded at the balance sheet date may
change.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. In accordance with ASC guidance for income
taxes, the measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits, which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
Equity
Based Compensation
In
connection with offers of employment to Capital Gold’s executives as well as in
consideration for agreements with certain consultants, Capital Gold issues
options and warrants to acquire its common stock. Employee and non-employee
awards are made in the discretion of the Board of Directors.
96
Capital
Gold accounts for stock compensation under ASC guidance for compensation – stock
compensation, which was adopted March 1, 2006. In accordance with this guidance,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
requisite service period. Capital Gold adopted the provisions of this guidance
using a modified prospective application. Under this method, compensation cost
is recognized for all share-based payments granted, modified or settled after
the date of adoption, as well as for any unvested awards that were granted prior
to the date of adoption. Prior periods are not revised for comparative purposes.
Because Capital Gold previously adopted only the pro forma disclosure
provisions, it will recognize compensation cost relating to the unvested portion
of awards granted prior to the date of adoption, using the same estimate of the
grant-date fair value and the same attribution method used to determine the pro
forma disclosures under ASC guidance for compensation – stock compensation,
except that forfeitures rates will be estimated for all options, as required by
the guidance.
Accounting
for Derivatives and Hedging Activities
On
October 11, 2006, prior to the initial draw on the Credit Facility, Capital Gold
entered into interest rate swap agreements in accordance with the terms of the
Credit Facility, which requires that Capital Gold hedges at least 50% of its
outstanding debt under this facility. The agreements entered into
cover $9,375 or 75% of the outstanding debt. Both swaps covered this same
notional amount of $9,375, but over different time horizons. The
first covered the six months that commenced on October 11, 2006 and
terminated on March 31, 2007 and the second covers the period from March 30,
2007 through December 31, 2010. Capital Gold intends to use discretion in
managing this risk as market conditions vary over time, allowing for the
possibility of adjusting the degree of hedge coverage as it deems
appropriate. However, any use of interest rate derivatives will be
restricted to use for risk management purposes.
Capital
Gold used variable-rate debt to finance a portion of the El Chanate Project.
Variable-rate debt obligations expose Capital Gold to variability in interest
payments due to changes in interest rates. As a result of these
arrangements, Capital Gold will continuously monitor changes in interest rate
exposures and evaluate hedging opportunities. Capital Gold’s risk management
policy permits it to use any combination of interest rate swaps, futures,
options, caps and similar instruments, for the purpose of fixing interest rates
on all or a portion of variable rate debt, establishing caps or maximum
effective interest rates, or otherwise constraining interest expenses to
minimize the variability of these effects.
The
interest rate swap agreements will be accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense. No component of hedge results will be excluded from
the assessment of hedge effectiveness.
Capital
Gold is exposed to credit losses in the event of non-performance by
counterparties to these interest rate swap agreements, but it does not expect
any of the counterparties to fail to meet their obligations. To manage credit
risks, Capital Gold selects counterparties based on credit ratings, limit its
exposure to a single counterparty under defined guidelines, and monitor the
market position with each counterparty in accordance with ASC guidance for
derivatives and hedging.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures 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 these estimates.
97
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
for
the Six Months Ended January 31, 2010
Receipt
of Technical Report for Updated Reserves at El Chanate
As
previously announced, during 2009 and subsequent to the fiscal year ended July
31, 2009, Capital Gold conducted exploration activities in the El Chanate pit
area including, core drilling at depth to determine the potential of increasing
its reserves further. The data obtained from geological mapping of the deposit’s
mine pit areas, combined with assays from samples of the exploration drilling
therein, were used to expand information in our mine database. SRK Consulting
(U.S.), Inc. (“SRK”) of Lakewood, Colorado, an independent consulting firm, used
this data to re-estimate El Chanate’s Mineral Reserves. These efforts resulted
in a significant expansion of our reserve estimates, which Capital Gold reported
in its Form 10-K for the year ended July 31, 2009. With the receipt
of SRK’s technical report titled NI 43-101 Technical Report, Capital Gold
Corporation, El Chanate Gold Mine, Sonora, Mexico and dated November 27, 2009
(the “SRK Report”), with respect to the updated reserve estimation and the
updated mine plan and mine production schedule, current as of October 1, 2009,
Capital Gold is re-publishing its previously announced reserve estimates along
with additional information. The SRK Report complies with Canadian National
Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”).
Both Bart A. Stryhas PhD., Principal Resource Geologist, and Bret C. Swanson,
BE(Mining), MAusIMM, are “Qualified Persons” as defined by NI
43-101.
Capital
Gold’s proven and probable reserve tonnage has increased to 70.6 million metric
tonnes with an average gold grade of 0.66 grams per tonne (77.8 million US
short tons at 0.0193 ounces per ton). The proven and probable reserve has
1,504,000 contained ounces of gold. The open pit strip ratio for the life of
mine is 2.88:1 (2.88 tonnes of waste to one tonne of ore). For the
next three years, Capital Gold anticipates the open pit strip ratio will be
consistent with our strip ratio experienced for the fiscal year ended July 31,
2009 (1.12:1). Determination of operational pre-stripping (increase in strip
ratio) will be made after further geological drilling and determination of
corporate strategy within the three year window of opportunity. There is also
the potential to improve the life of mine strip ratio as the report identifies
material within the pit design classified as waste that with additional drilling
could be reclassified as ore. The updated pit design for the revised mine plan
is based on a plant recovery of gold that varies by rock types, but is expected
to average 58.25%. A gold price of US$800 (SEC three year average as of October
1, 2009) per ounce was used to re-estimate the reserves compared with a gold
price of $750 per ounce used in the previous reserve estimate. The
stated proven and probable mineral reserves have been prepared in accordance
with the Canadian Institute of Mining, Metallurgy and Petroleum
(CIM). CIM definitions for proven and probable reserves convert
directly from measured and indicated mineral resources with the application of
appropriate economic parameters. These reserves are equivalent to proven and
probable reserves as defined by the United States Securities and Exchange
Commission (SEC) Industry Guide 7.
The
following summary is extracted from the SRK Report. Please note
that the reserves as stated are an estimate of what can be economically and
legally recovered from the mine and, as such, incorporate losses for dilution
and mining recovery. The 1,504,000 ounces of
contained gold represents ounces of gold contained in ore in the ground, and
therefore does not reflect losses in the recovery process. Total gold
produced is estimated to be 876,000 ounces, or approximately 58.25% of the
contained gold. The gold recovery rate is expected to average approximately
58.25% for the entire ore body. Individual portions of the ore body
may experience varying recovery rates ranging from about 48% to
65%. Oxidized and sandstone ore types may have recoveries of about
65%; siltstone ore types recoveries may be about 48% and latite intrusive ore
type recoveries may be about 50%.
98
Material
Reserves and Production Summary
|
Metric
|
U.S.
|
|||
|
Materials
|
||||
|
Reserves
|
||||
|
Proven
|
22.4
Million Tonnes @ 0.70 g/t(1)
|
24.7
Million Tons @ 0.0204 opt(1)
|
||
|
Probable
|
48.2 Million
Tonnes @ 0.65 g/t(1)
|
53.0 Million Tons
@ 0.0189 opt(1)
|
||
|
Total
Reserves(2)
|
70.6
Million Tonnes @ 0.66 g/t(1)
|
77.7
Million Tons @ 0.0193 opt(1)
|
||
|
Waste
|
203.5 Million Tonnes
|
224.3 Million Tons
|
||
|
Total
Ore/Waste
|
274.1
Million Tonnes
|
302.0
Million tons
|
||
|
Contained
Gold
|
46.78
Million grams
|
1,504,000 Oz
|
||
|
Production
|
||||
|
Ore
Crushed
|
5.4
Million Tonnes /Year
|
6.0
Million Tons/Year
|
||
|
14,868
Mt/d(1)
|
16,390
t/d(1)
|
|||
|
Operating
Days/Year
|
365
Days per year
|
365
Days per year
|
||
|
Gold
Plant Average Recovery
|
58.25
%
|
58.25%
|
||
|
Average
Annual Production
|
2.1 Million
grams
|
67,391 Oz
|
||
|
Total
Gold Produced
|
27.25
Million grams
|
876,080 Oz
|
|
(1)
|
“g/t”
means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
metric tonnes per day and “t/d” means tons per
day.
|
|
(2)
|
The
reserve estimates are mainly based on a gold cutoff grade of 0.15 g/t for
sandstone and 0.19 grams for siltstone and latite within the pit
design.
|
The SRK
resource estimation is based on information from 371 holes for a total of 55,294
meters of drilling. There are 333 reverse circulation holes and 38
core holes. The drill holes were carefully logged, sampled and tested
with gold fire assay (industry standard). A geological model was
constructed based on four general rock groups which are cut by thrust faults and
normal faults. The mineral resource model blocks are 6m (meters) x 6m
x 6m. All block grade estimates were made using 6m bench
composites. An ordinary Kriging algorithm was employed to generate a
categorical indicator grade shell based on a 0.1ppm gold
threshold. An inverse distance cubed algorithm was used for the gold
grade estimation within the grade shells.
The life
of mine plan used as the basis for the reserve is based on operating gold cutoff
grades of 0.15 to 0.19 g/t, depending on the ore type to be
processed. The internal (in-pit) and break even cutoff grade
calculations are as follows:
|
Cutoff
Grade Calculation
|
Internal
Cutoff Grade
|
Break
Even Cutoff Grade
|
||
|
Basic
Parameters
|
||||
|
Gold
Price
|
US$800/oz
|
US$800/oz
|
||
|
Gold
Selling Cost (4% Royalty, Refining, Transport, Silver Credit,
etc)
|
$
25.258/oz
|
$
25.258/oz
|
||
|
Gold
Recovery*
|
58.25%
|
58.25%
|
||
|
Operating
Costs per Tonne of Ore
|
||||
|
Mining
|
$ 1.08/tonne | |||
|
Processing
– Heap leach
|
$ 2.357/tonne |
$
2.357/tonne
|
||
|
Total
|
$
2.357/tonne
|
$
3.44/tonne
|
||
|
Cutoff
Grade
|
Grams per Tonne |
Grams
per Tonne
|
||
|
Head
Grade Cutoff (58.25% average recovery)
|
0.15
g/t gold
|
0.24
g/t gold
|
||
|
Recovered
Gold Grade Cutoff
|
0.09
g/t gold
|
0.14
g/t
gold
|
99
* Plant
recovery of gold varies by rock type but weighted average gold recovery is
expected to average 58.25% based on work done to date.
In August
2009, Capital Gold initiated the construction of an additional leach pad area
with capacity for eight million tonnes of ore, at a cost of approximately
$3,300. Permitting and site clearing has been completed, the
construction contractor has completed the earthworks and the geomembrane liners
have been applied to nearly all of the new leach pad area. Capital
Gold initiated leaching of ore on the new leach pad as of December 31,
2009. Golder Engineering of Tucson, Arizona is overseeing
construction activities and quality control and assurance for the project. The
construction schedule anticipates that construction will be complete in March
2010. As of January 31, 2010, approximately half of these
construction costs have been incurred.
In
December 2009, Capital Gold completed the procurement and commissioning of a new
tertiary crusher for the El Chanate mine. The cost for this equipment
was approximately $1,075.
The
following table represents a summary of our proven and probable mineral
reserves.
|
Proven
and probable mineral reserve (Ktonnes of
ore)
|
January
31,
2010
|
July
31,
2009
|
||||||
|
Ore
|
- | - | ||||||
|
Beginning
balance (Ktonnes)
|
40,911 | 35,417 | ||||||
|
Additions
|
30,388 | 9,342 | ||||||
|
Reductions
|
(2,234 | ) | (3,848 | ) | ||||
|
Ending
Balance
|
69,065 | 40,911 | ||||||
|
Contained
gold
|
||||||||
|
Beginning
balance (thousand of ounces)
|
859 | 719 | ||||||
|
Additions
|
662 | 239 | ||||||
|
Reductions
|
(54 | ) | (99 | ) | ||||
|
Ending
Balance
|
1,467 | 859 | ||||||
El
Oso Project - Saric Properties – Sonora, Mexico
In April
2008, Capital Gold leased 12 mining concessions totaling 1,789 hectares located
northwest of Saric, Sonora. In addition, Capital Gold owns a claim for
approximately 2,233 additional hectares adjacent to this property. The
approximate 4,022 hectare area is accessible by paved roads and has cellular
phone service from hilltops. These concessions and this claim are
about 60 miles northeast of the El Chanate project. Mineralization is evident
throughout the concession group and is hosted by shear zones and stockwork
quartz veins in volcanic and intrusive rocks. Capital Gold has completed
exploration work consisting of geological mapping, systematic geochemical
sampling of rock and soils, geophysical surveys, trenching and 73 reverse
circulation drill holes totaling 6,121 meters and more recently a one meter
interval topographic survey over the concession area. SRK of
Lakewood, Colorado has visited the site and has monitored the quality assurance
and quality control during these drill campaigns. SRK will also
assist on the next phase of the exploration program. All of the drill
hole samples have been assayed by ALS Chemex. The ALS Chemex facility
in Hermosillo does the sample preparation, and the assays are performed at the
ALS Chemex’s Vancouver laboratory.
In
January 2010, Capital Gold initiated an additional drill campaign at Saric that
consisted of 13 core holes totaling approximately 1,100 meters. The
drilling was completed on February 23, 2010 and targeted the existing
mineralized structure to confirm the geologic interpretation and confirm the
accuracy of previous reverse circulation drilling. The drill hole samples are
being assayed by ALS Chemex.
The lease agreement required an initial
payment of $45 upon execution of the lease. Capital Gold is required
to pay an additional $250, consisting of ten payments of $25 every four months
beginning six months after execution of the lease agreement. The agreement also
contains an option to acquire the mining concessions for a cash payment of
$1,500 at the end of the term (December 2010). If Capital Gold elects
not to exercise this option, it would have the ability to mine the concessions
by paying a 1% net smelter return to the owners of the leased concessions,
capped at $3,000. Prior payments made under this lease agreement
would be deductible from the $3,000 cap.
100
Capital
Gold continues to investigate other exploration projects in northern Mexico and
other locations.
Result
of Operations
As discussed more fully in Note 1 to
the financial statements, the financial information as of the fiscal year ended
July 31, 2009 and for the three and six months ended January 31, 2009 has been
recast so that the basis of presentation is consistent with that of the
financial information as of January 31, 2010 and for the three and six months
ended January 31, 2010. This recast reflects a 1-for-4 reverse stock split
of Capital Gold's common stock that became effective on
January 25, 2010.
Three months ended January
31, 2010 compared to three months ended January 31, 2009
Net income for the three months ended
January 31, 2010 and 2009 was approximately $2,944 and $3,196, respectively,
representing a decrease of approximately $252 or 8% over the prior
period. Income before taxes was $5,222 and $4,978 for the three
months ended January 31, 2010 and 2009, respectively, which represented an
increase of 5%. Income before taxes increased primarily as a result
of higher revenues from a higher gold price being realized from ounces sold
during the three months ended January 31, 2010, as compared to the same period a
year ago.
Revenues
& Costs Applicable to Sales
Gold
sales for the three months ended January 31, 2010 totaled approximately $13,228
as compared to $11,369 in the prior period representing an increase of
approximately $1,859 or 16%. Capital Gold sold 11,816 ounces at an
average realizable price per ounce of approximately $1,119 in the current
period. Capital Gold sold 13,277 ounces at an average realizable
price per ounce of $856 during the same period last year.
Costs
applicable to sales were approximately $4,625 and $3,655, respectively, for the
three months ended January 31, 2010 and 2009, an increase of approximately $970
or 27%. Cash costs were $372 per ounce of gold sold for the three
months ended January 31, 2010 as compared to $251 for the three months ended
January 31, 2009. The primary reasons for this increase in cash
cost per ounce sold in the current period is attributable to: 1) higher mining
costs primarily due to an increase in tonnage mined, higher diesel fuel
consumption and explosive costs as well as the impact of a price escalation
within our mining contract with Sinergia, 2) higher leaching and ADR plant costs
mainly due to an increase in consumption of certain chemicals, water and
electricity as well as a price increase in cost of lime. This
increased consumption was mainly the result of increasing the solution flow
through to the leach pad as Capital Gold increased the level of lifts or height
of the leach pad, 3) higher crushing costs due to an increased consumption of
crushing supplies and parts. This resulted from the addition of the
new crushers as well as the increased tonnage put through the circuit, and 4)
higher heavy equipment maintenance due to an increase in wear parts and tires
for our equipment during the current quarter. Total costs were $425
per ounce of gold sold for the three months ended January 31, 2010 as compared
to $290 total cost in the prior period. The primary reason for this
increase in total costs was attributed to the same reason as detailed above for
the increase in cash costs per ounce sold.
Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $290 and $225 for the
three months ended January 31, 2010 and 2009, on silver ounces sold of 16,400
and 20,000, respectively.
Depreciation
and Amortization
Depreciation and amortization expense
during the three months ended January 31, 2010 and 2009 was approximately $866
and $755, respectively. The primary reason for the increase of
approximately $111, or 15%, in the current period was due to an increase in
depreciation and amortization charges related to property, plant and equipment
additions. Depreciation and amortization also includes amortization of deferred
financing costs resulting from the credit arrangements entered into with
Standard Bank. This accounted for approximately $233 and $247 of
depreciation and amortization expense during the three months ended January 31,
2010 and 2009, respectively.
101
General
and Administration Expense
General
and administrative expenses during the three months ended January 31, 2010 were
approximately $2,031, an increase of approximately $970, or 91%, from the three
months ended January 31, 2009. This increase resulted primarily from: 1) higher
salaries and wages mainly due to a bonus payment during the current quarter to a
Company executive, 2) higher legal fees in conjunction with the Nayarit
transaction, and 3) higher equity compensation expense in the current period in
conjunction with the issuance of stock options.
On
January 19, 2010, at the recommendation of the Compensation Committee of the
Board of Directors, Capital Gold's Board of Directors approved the issuance
of 500,000, 50,000, 50,000, 50,000 and 37,500 options to John Brownlie, Leonard
J. Sojka, John Cutler Steven Cooper and Trey Wasser, respectively, aggregating
687,500 stock options under our 2006 Equity Incentive Plan. The stock options
for John Brownlie and Trey Wasser have a term of five years and vest as follows:
one-third vested upon issuance and the balance vests on a one-third basis
annually thereafter. The stock options for Leonard J. Sojka, John Cutler, and
Steven Cooper have a term of five years and vest 25,000 on January 19, 2010,
12,500 on January 19, 2011 and 12,500 on January 19, 2012. The exercise
price of the stock options is $3.60 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). In the event of a termination of
continuous service (other than as a result of a change of control, as defined in
the Plan), unvested stock options shall terminate and, with regard to vested
stock options, the exercise period shall be the lesser of the original
expiration date or one year from the date continuous service terminates. Upon a
change of control, all unvested stock options and unvested restricted stock
grants immediately vest. Capital Gold utilized the Black-Scholes method to
fair value the 687,500 options received by these individuals totaling
$1,486. For the three months ended January 31, 2010, Capital Gold recorded
approximately $566 in equity compensation expense on the vested portion of these
stock options. The grant date fair value of each stock option was
$2.16.
Exploration
Expense
Exploration
expense during the three months ended January 31, 2010 and 2009 was
approximately $349 and $406, respectively, or a decrease of $57, or
14%. The primary reason for the decrease can be attributed to the
prior year containing exploration expense associated with a 10 hole, deep core
drilling campaign at our El Chanate mine totaling 2,500 meters. Both
periods presented include activity associated with on-going exploration,
drilling and geochemical work being conducted on our leased and owned
concessions located northwest of Saric, Sonora.
Other
Income and Expense
Capital
Gold's loss on the change in fair value of derivative instruments during the
three months ended January 31, 2010 and 2009, was approximately $0 and $274,
respectively, and was reflected as Other Expense. The primary reason for
the decrease can be attributed to the close out, on February 24, 2009, with
Standard Bank, Plc., of the remaining 58,233 ounces of gold hedged under the
original Gold Price Protection arrangements originally entered into in March
2006.
Interest expense was approximately
$102 for the three months ended January 31, 2010 compared to approximately $227
for the same period a year earlier. This decrease was due to lower
interest charges incurred during the current period, based on a lower average
debt balance compared to the prior period. As of January 31, 2010 and
2009, there was $6,200 and $10,250, respectively, outstanding on our term note
with Standard Bank.
Six months ended January 31,
2010 compared to six months ended January 31, 2009
Net income for the six months ended
January 31, 2010 and 2009 was approximately $5,884 and $5,133, respectively,
representing an increase of approximately 15% over the prior
period. Income before taxes was $9,881 and $7,842 for the six months
ended January 31, 2010 and 2009, respectively, which represented an increase of
26%. Income before taxes increased primarily as a result of higher
revenues from a higher gold price being realized from ounces sold during the six
months ended January 31, 2010, as compared to the same period a year ago. Income
tax expense increased in conjunction with the increase in net income before tax,
which was anticipated.
102
Revenues
& Costs Applicable to Sales
Gold
sales for the six months ended January 31, 2010 totaled approximately $24,955 as
compared to $20,544 in the prior period representing an increase of
approximately $4,411 or 21%. Capital Gold sold 23,549 ounces at an
average realizable price per ounce of approximately $1,060 in the current
period. Capital Gold sold 24,690 ounces at an average realizable
price per ounce of $832 during the same period last year.
Costs
applicable to sales were approximately $8,735 and $6,697, respectively, for the
six months ended January 31, 2010 and 2009, an increase of approximately $2,038
or 30%. Cash costs were $355 per ounce of gold sold for the six
months ended January 31, 2010 as compared to $260 for the six months ended
January 31, 2009. The primary reasons for this increase in cash
cost per ounce sold in the current period is attributable to:
1) higher leaching and ADR plant costs mainly due to an increase in
consumption of certain chemicals, water and electricity as well as an increase
in the price of lime. This increased consumption was mainly the
result of increasing the solution flow through to the leach pad as Capital Gold
increased the level of lifts or height of the leach pad, 2) higher mining costs
primarily due to an increase in tonnage mined, higher diesel fuel consumption
and explosive costs as well as the impact of a price escalation within our
mining contract with Sinergia , and 3) higher crushing costs due to an increased
consumption of crushing supplies and parts. This resulted from the
addition of the new crushers as well as the increased tonnage put through the
circuit. Total costs were $407 per ounce of gold sold for the six
months ended January 31, 2010 as compared to $299 total cost in the prior
period. The primary reason for this increase in total costs was
attributed to the same reason as detailed above for the increase in cash costs
per ounce sold.
Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $544 and $524 for the six
months ended January 31, 2010 and 2009, on silver ounces sold of 32,160 and
45,334, respectively.
Depreciation
and Amortization
Depreciation and amortization expense
during the six months ended January 31, 2010 and 2009 was approximately $1,709
and $1,458, respectively. The primary reason for the increase of
approximately $251, or 17%, in the current period was due to an increase in
depreciation and amortization charges related to property, plant and equipment
additions. Depreciation and amortization also includes amortization of deferred
financing costs resulting from the credit arrangements entered into with
Standard Bank. This accounted for approximately $467 and $484 of
depreciation and amortization expense during the six months ended January 31,
2010 and 2009, respectively.
General
and Administration Expense
General
and administrative expenses during the six months ended January 31, 2010 were
approximately $3,660, an increase of approximately $1,222, or 50%, from the six
months ended January 31, 2009. This increase resulted primarily from: 1) a
one-time charge of $426 related to the termination of an employment agreement of
an executive officer without cause pursuant to a restructuring of our corporate
investor relations function, 2) higher salaries and wages mainly due to a bonus
payment during the current quarter to a Company executive of $375, and 3) higher
equity compensation expense of $260 as compared to prior period due primarily
from the issuance of stock options to officers and directors.
On
January 19, 2010, at the recommendation of the Compensation Committee of the
Board of Directors, Capital Gold's Board of Directors approved the issuance
of 500,000, 50,000, 50,000, 50,000 and 37,500 options to John Brownlie, Leonard
J. Sojka, John Cutler Steven Cooper and Trey Wasser, respectively, aggregating
687,500 stock options under our 2006 Equity Incentive Plan. The stock options
for John Brownlie and Trey Wasser have a term of five years and vest as follows:
one-third vested upon issuance and the balance vests on a one-third basis
annually thereafter. The stock options for Leonard J. Sojka, John Cutler, and
Steven Cooper have a term of five years and vest 25,000 on January 19, 2010,
12,500 on January 19, 2011 and 12,500 on January 19, 2012. The exercise
price of the stock options is $3.60 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). In the event of a termination of
continuous service (other than as a result of a change of control, as defined in
the Plan), unvested stock options shall terminate and, with regard to vested
stock options, the exercise period shall be the lesser of the original
expiration date or one year from the date continuous service terminates. Upon a
change of control, all unvested stock options and unvested restricted stock
grants immediately vest. Capital Gold utilized the Black-Scholes method to
fair value the 687,500 options received by these individuals totaling
$1,486. For the six months ended January 31, 2010, Capital Gold recorded
approximately $566 in equity compensation expense on the vested portion of these
stock options. The grant date fair value of each stock option was
$2.16.
103
Exploration
Expense
Exploration
expense during the six months ended January 31, 2010 and 2009 was approximately
$681 and $896, respectively, or a decrease of $215, or 24%. The
primary reason for the decrease can be attributed to the prior year containing
exploration expense associated with a 10 hole, deep core drilling campaign at
our El Chanate mine totaling 2,500 meters. Both periods presented
include activity associated with on-going exploration, drilling and geochemical
work being conducted on our leased and owned concessions located northwest of
Saric, Sonora.
Other
Income and Expense
Our loss
on the change in fair value of derivative instruments during the six months
ended January 31, 2010 and 2009, was approximately $0 and $578, respectively,
and was reflected as Other
Expense. The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.
Interest expense was approximately
$235 for the six months ended January 31, 2010 compared to approximately $427
for the same period a year earlier. This decrease was due to lower
interest charges incurred during the current period, based on a lower average
debt balance compared to the prior period. As of January 31, 2010 and
2009, there was $6,200 and $10,250, respectively, outstanding on our term note
with Standard Bank.
Changes
in Foreign Exchange Rates
During the six months ended January 31,
2010 and 2009, Capital Gold recorded equity adjustments from foreign currency
translations of approximately $100 and $3,530, respectively. These
translation adjustments are related to changes in the rates of exchange between
the Mexican Peso and the U.S. dollar and are included as a component of other
comprehensive income. The Mexican Peso and the U.S. dollar exchange
rate as of January 31, 2010 was 13.1154. As of July 31, 2009, such
exchange rate was 12.9933.
Summary
of Quarterly Results
(000’s
except per share data)
|
For
the three
|
For
the three
|
For
the six
|
For
the six
|
|||||||||||||
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
|||||||||||||
|
January 31,
2010
|
January 31,
2009
|
January 31,
2010
|
January 31,
2009
|
|||||||||||||
|
Revenues
|
13,228 | 11,369 | 24,955 | 20,544 | ||||||||||||
|
Net
Income
|
2,944 | 3,196 | 5,884 | 5,133 | ||||||||||||
|
Basic
net income per share
|
0.06 | 0.07 | 0.12 | 0.11 | ||||||||||||
|
Diluted
net income per share
|
0.06 | 0.06 | 0.12 | 0.10 | ||||||||||||
|
Gold
ounces sold
|
11,816 | 13,277 | 23,549 | 24,690 | ||||||||||||
|
Average
price received
|
$ | 1,119 | $ | 856 | $ | 1,060 | $ | 832 | ||||||||
|
Cash
cost per ounce sold(1)
|
$ | 372 | $ | 251 | $ | 355 | $ | 260 | ||||||||
|
Total
cost per ounce sold(1)
|
$ | 425 | $ | 290 | $ | 407 | $ | 299 | ||||||||
|
(1)
|
"Cash
costs per ounce sold" is a Non-GAAP measure, which includes all direct
mining costs, refining and transportation costs, by-product credits and
royalties as reported in the Company's financial statements. It also
excludes intercompany management fees. “Total cost per ounce
sold” is a Non-GAAP measure which includes “cash costs per ounce sold” as
well as depreciation and amortization as reported in the Company's
financial statements.
|
104
Summary
of Results of Operations
|
For
the three
months
ended
January
31,
2010
|
For
the three
months
ended
January
31,
2009
|
For
the six
months
ended
January
31,
2010
|
For
the six
months
ended
January
31,
2009
|
|||||||||||||
|
Tonnes
of ore mined
|
1,097,645 | 879,584 | 2,233,537 | 1,904,680 | ||||||||||||
|
Tonnes
of waste removed
|
1,113,353 | 1,040,942 | 2,326,179 | 2,254,382 | ||||||||||||
|
Ratio
of waste to ore
|
1.03 | 1.18 | 1.04 | 1.18 | ||||||||||||
|
Tonnes
of ore processed
|
1,090,184 | 946,445 | 2,212,367 | 1,954,126 | ||||||||||||
|
Grade
(grams/tonne)
|
0.74 | 0.90 | 0.72 | 0.88 | ||||||||||||
|
Gold
(ounces)
|
||||||||||||||||
|
- Produced(1)
|
12,045 | 13,646 | 23,953 | 25,534 | ||||||||||||
|
- Sold
|
11,816 | 13,277 | 23,549 | 24,690 | ||||||||||||
|
|
(1)
|
Gold
produced each year does not necessarily correspond to gold sold during the
year, as there is a time delay in the actual sale of the
gold.
|
Liquidity
and Capital Resources
Operating
activities
Cash provided by operating
activities during the six months ended January 31, 2010 and 2009 was
$5,210 and $7,014, respectively. Cash provided by operating
activities decreased $1,804 as compared to the six months ended January 31,
2009, primarily due to higher net income resulting from an increase in the
average gold price received for ounces sold, an increase in inventory balances
during the current period of $5,323, and an increase in accounts payable and
accrued expenses of $1,580.
Investing
Activities
Cash used in investing activities
during the six months ended January 31, 2010, amounted to approximately
$4,922, primarily for the acquisition of an additional tertiary crusher and
screen plant, additional water rights, as well as costs incurred for leach pad
expansion. In August 2009, Capital Gold initiated the construction of
an additional leach pad area with capacity for an additional eight million
tonnes of ore at an approximate cost of $3,300. Permitting and site
clearing has been completed. The construction contractor has completed the
earthworks and the application of the geomembrane liners is nearly
complete. Golder Engineering of Tucson, Arizona is overseeing
construction activities and quality control and assurance for the project.
Capital Gold initiated leaching of ore on the new pad as of December 31,
2009. As of January 31, 2010, approximately half of these
construction costs have been incurred.
In
addition, on January 25, 2010, the Company entered into a Collateral Agreement
(the “Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it is proposed that the Company will
acquire twenty-five percent of all of the issued and outstanding equity of MRS
for aggregate investment of $2,000. The Collateral Agreement required
the Company to promptly pay $500 to MRS, with the Company’s intention to invest
the remaining $1,500 being set forth in a letter of intent (the “LOI”) entered
into on January 25, 2010, the material terms of which are non-binding. The
Company’s obligation to invest the remaining $1,500 will only arise if the
Company and MRS sign a definitive Investment Agreement (the “Investment
Agreement”) pursuant to which it is contemplated that such remaining funds will
be invested in stages, according to milestones that MRS is expected to
reach in the deployment of a gold recovery technology pilot program at the
Company’s El Chanate mine. The consummation of the Investment Agreement is
contingent upon MRS meeting certain requirements, including requirements with
respect to its budget, business plan, securing the employment of its founders
and securing rights to certain technology. In the event that the Investment
Agreement is not consummated, the Collateral Agreement provides that the $500
payment to MRS will be repaid with interest. Such repayment is secured by cash
flows from MRS’s Consulting / Services Agreement with a third-party gold mining
company, the expected value of which is $1,275 to MRS. The Investment
Agreement is also subject to final approval by the Board of Directors of the
Company and the managers of MRS. On March 25, 2010, the Company
elected not to pursue the implementation of the MRS technology at its El Chanate
mine. Accordingly, the Company has demanded repayment of the amounts paid
to MRS in accordance with the letter agreement between MRS and the
Company.
105
Cash used in investing activities
during the six months ended January 31, 2009, amounted to approximately
$3,503, primarily from the acquisition of mobile equipment, conveyors and ADR
plant equipment, including the carbon regeneration kiln.
Financing
Activities
Cash used in financing activities
during the six months ended January 31, 2010 amounted to approximately
$1,893, primarily from the repayment of our term loan of
$1,800. Capital Gold also received proceeds of approximately $53 in
the current period from the issuance of common stock upon the exercising of
125,000 options. In addition, Capital Gold incurred $150 in finance
costs to amend our Amended and Restated Credit Agreement with Standard Bank (See
“Term loan and Revolving Credit Facility” section below). Cash used
in financing activities during the six months ended January 31, 2009 amounted to
approximately $2,125, primarily from the repayment of the term loan of
$2,250.
Business
Combination Agreement
On
February 10, 2010, Capital Gold entered into a business combination
agreement (the “Business Combination Agreement”) with Nayarit, a corporation
organized under the Ontario Act. Pursuant to the terms of the
Business Combination Agreement, the Company and Nayarit intend to effect an
amalgamation (the “Amalgamation”) of Nayarit and a corporation, to be organized
under the Ontario Act as a wholly-owned subsidiary of Capital Gold (“Merger
Sub”), to form a combined entity (“AmalgSub” or “Surviving Company”), with
AmalgSub continuing as the surviving entity following the
Amalgamation. By virtue of the Amalgamation, the separate existence
of each of Nayarit and Merger Sub shall thereupon cease, and AmalgSub, as the
surviving company in the Amalgamation, shall continue its corporate existence
under the Ontario Act as a wholly-owned subsidiary of Capital Gold. Pursuant to
the terms of the Business Combination Agreement, by virtue of the Amalgamation
and without any action on the part of Nayarit or the holders of any securities
of Nayarit, all of the Nayarit Common Shares issued and outstanding immediately
prior to the consummation of the Business Combination Agreement (other than
Nayarit Common Shares held by dissenting stockholders of Nayarit) shall become
exchangeable into Capital Gold’s common stock on the basis of 0.134048
shares of Capital Gold common stock for each one (1) Nayarit Common Share
(the “Amalgamation Consideration”). Capital Gold anticipates closing
this transaction in June 2010.
Term
loan and Revolving Credit Facility
In September 2008, Capital Gold
closed an Amended And Restated Credit Agreement (the “Credit Agreement”)
involving its wholly-owned Mexican subsidiaries MSR and Oro, as borrowers
(“Borrowers”), us, as guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender. The Credit Agreement amends and restates the prior credit
agreement between the parties dated August 15, 2006. Under the Credit
Agreement, MSR and Oro borrowed money in an aggregate principal amount of up to
$12,500 (the “Term Loan”) for the purpose of constructing, developing and
operating the El Chanate gold mining project in Sonora State,
Mexico. Capital Gold guaranteed the repayment of the Term Loan and
the performance of the obligations under the Credit Agreement. As of
January 31, 2010, the outstanding amount on the term note was $6,200 and accrued
interest on this agreement was approximately $14.
Term Loan principal shall be repaid
quarterly and commenced on September 30, 2008 and consisted of four payments in
the amount of $1,125, followed by eight payments in the amount of $900 and two
final payments in the amount of $400. There is no prepayment
fee. Principal under the Term Loan shall bear interest at a rate per
annum equal to the LIBOR Rate, as defined in the Credit Agreement, for the
applicable Interest Period plus the Applicable Margin. An Interest Period can be
one, two, three or six months, at the option of the Borrowers. The Applicable
Margin for the Term Loan is 2.5% per annum. Pursuant to the terms of the Credit
Agreement, operating accounts remain subject to an account pledge agreement
between MSR and Standard Bank.
106
The Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro. As
additional collateral for the Loan, Capital Gold, together with its subsidiary,
Leadville Mining & Milling Holding Corporation, pledged all of its ownership
interest in MSR and Oro.
On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. Capital Gold had
not drawn on this facility during the term period.
In
December 2009, Capital Gold executed a mandate letter from Standard Bank which
set forth terms and conditions for amending the Credit Agreement to add a
revolving loan of $15,000 to the existing Term Loan. The revolving
loan would have a term of one year and shall bear interest at a rate per annum
equal to the LIBOR Rate, as defined in the Credit Agreement, for the applicable
Interest Period plus the Applicable Margin. The Applicable Margin for the
revolving loan is 3.0% per annum. There were no significant changes to the
existing Term Loan. The revolving loan is subject to credit and regulatory
approval as well as legal, regulatory, technical and financial due
diligence. Capital Gold incurred an arrangement fee of $150 in
connection with the mandate letter which will be amortized over the term of the
revolving loan as, deferred financing costs, upon closing.
Debt
Covenants
Capital
Gold’s Credit
Agreement with Standard Bank requires us, among other obligations, to meet
certain financial covenants including (i) a ratio of current assets to current
liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
minimum tangible net worth at all times of at least $15,000, and (iii) a
quarterly average minimum liquidity of $500. In addition, the Credit Agreement
restricts, among other things, our ability to incur additional debt, create
liens on our property, dispose of any assets, merge with other companies, enter
into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit. A failure to comply with
the restrictions contained in the Credit Agreement could lead to an event of
default thereunder which could result in an acceleration of such
indebtedness.
As of
January 31, 2010, Capital Gold and its related entities were in compliance with
all debt covenants and default provisions.
Environmental
and Permitting Issues
Management
does not expect that environmental issues will have an adverse material effect
on our liquidity or earnings. Capital Gold complies with all laws,
rules and regulations concerning mining, environmental, health, zoning and
historical preservation issues and Capital Gold is not aware of any
environmental at the El Chanate concessions. Capital Gold has
received the required Mexican government permits for operations. Any
revisions to our mine plan may require us to amend the permits.
Capital
Gold received the annual extension to the explosive use permit from the relevant
authorities. The permit is valid through December 2010.
Capital
Gold includes environmental and reclamation costs on an ongoing basis, in its
revenue and cost projections. No assurance can be given that
environmental regulations will not be revised by the Mexican authorities in the
future. As of January 31, 2010, Capital Gold has estimated the
reclamation costs for the El Chanate site to be approximately
$3,766. Reclamation costs are allocated to expense over the life of
the related assets and are periodically adjusted to reflect changes in the
estimated present value resulting from the passage of time and revisions to the
estimates of either the timing or amount of the reclamation and closure costs.
The asset retirement obligation is based on when the spending for an existing
environmental disturbance and activity to date will occur. Capital Gold reviews,
on an annual basis, unless otherwise deemed necessary, the asset retirement
obligation at each mine site. Capital Gold reviewed the estimated
present value of the El Chanate mine reclamation and closure costs as of January
31, 2010 primarily due to the addition of the new leach pad in accordance with
ASC guidance for asset retirement and environmental obligations. As
of January 31, 2010, Capital Gold’s reclamation and remediation
liability was $1,854.
Recently
Issued Accounting Pronouncements
See Note
2 to the Capital Gold Condensed Consolidated Financial Statements
incorporated by reference into this joint
proxy/prospectus .
107
Disclosure
About Off-Balance Sheet Arrangements
Capital
Gold does not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
Critical
Accounting Policies
Capital
Gold’s
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions
are affected by management’s application of accounting
policies. Critical accounting policies for us include inventory,
revenue recognition, property, plant and mine development, impairment of
long-lived assets, accounting for equity-based compensation, environmental
remediation costs and accounting for derivative and hedging
activities.
Ore
on Leach Pads and Inventories (“In-Process Inventory”)
Costs that are incurred in or benefit
the productive process are accumulated as ore on leach pads and inventories. Ore
on leach pads and inventories are carried at the lower of average cost or
market. The current portion of ore on leach pads and inventories is determined
based on the amounts to be processed within the next 12 months. The major
classifications are as follows:
Ore on Leach
Pads
The recovery of gold from ore is
achieved through the heap leaching process. Under this method, ore is placed on
leach pads where it is treated with a chemical solution, which dissolves the
gold contained in the ore. The resulting “pregnant” solution is further
processed in a processing plant that extracts gold from this solution producing
gold doré. Costs are applied to ore on leach pads based on current mining costs,
including applicable depreciation, depletion and amortization relating to the
mining operation. Costs are removed from ore on leach pads as ounces are
recovered based on the average cost per estimated recoverable ounce of gold on
the leach pad.
The estimates of recoverable gold on
the leach pads are calculated from the quantities of ore placed on the leach
pads (measured tonnes added to the leach pads), the grade of ore placed on the
leach pads (based on fire assay data) and a recovery percentage (based on ore
type and column testwork). It is estimated that Capital Gold’s leach pad at El
Chanate will recover all ounces placed within a one year period from date of
placement.
Although
the quantities of recoverable gold placed on the leach pads are reconciled by
comparing the grades of ore placed on pads to the quantities of gold actually
recovered (metallurgical balancing), the nature of the leaching process
inherently limits the ability to precisely monitor inventory levels. As a
result, the metallurgical balancing process needs to be constantly monitored and
estimates need to be refined based on actual results over time. Capital
Gold’s
operating results may be impacted by variations between the estimated and actual
recoverable quantities of gold on its leach pads.
In-process
Inventory
In-process inventories represent
materials that are currently in the process of being converted to a saleable
product. Conversion processes vary depending on the nature of the ore and the
specific processing facility, but include leach in-circuit, flotation and column
cells and carbon in-pulp inventories. In-process material are measured based on
assays of the material fed into the process and the projected recoveries of the
respective plants. In-process inventories are valued at the average cost of the
material fed into the process attributable to the source material coming from
the mines and/or leach pads plus the in-process conversion costs, including
applicable depreciation relating to the process facilities incurred to that
point in the process.
Materials and
Supplies
Materials and supplies are valued at
the lower of average cost or net realizable value. Cost includes applicable
taxes and freight.
108
Mineral
Reserves
Critical
estimates are inherent in the process of determining our reserves. Capital
Gold’s reserves are affected largely by our assessment of future metals prices,
as well as by engineering and geological estimates of ore grade, accessibility
and production cost. Metals prices are estimated at long-term averages. Capital
Gold’s assessment of reserves occurs periodically and Capital Gold utilizes
external firms to conduct such reserve estimates.
Reserves
are a key component in valuation of our properties, plants and equipment.
Reserve estimates are used in determining appropriate rates of
units-of-production depreciation, with net book value of many assets depreciated
over remaining estimated reserves. Reserves are also a key component
in forecasts, with which Capital Gold compares future cash flows to current
asset values to ensure that carrying values are reported appropriately. Reserves
also play a key role in the valuation of certain assets in the determination of
the purchase price allocations for our acquisitions. Reserves are a
culmination of many estimates and are not guarantees that Capital Gold will
recover the indicated quantities of metals.
Property,
Plant and Mine Development
Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the straight-line method at
rates sufficient to depreciate such costs over the estimated productive lives,
which do not exceed the related estimated mine lives, of such facilities based
on proven and probable reserves.
Mineral exploration costs are expensed
as incurred. When it has been determined that a mineral property can be
economically developed as a result of establishing proven and probable reserves,
costs incurred prospectively to develop the property will be capitalized as
incurred and are amortized using the units-of-production (“UOP”) method over the
estimated life of the ore body based on estimated recoverable ounces or pounds
in proven and probable reserves.
Impairment
of Long-Lived Assets
Capital Gold reviews and evaluates its
long-lived assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. An impairment
is considered to exist if the total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the assets, including
goodwill, if any. An impairment loss is measured and recorded based on
discounted estimated future cash flows. Future cash flows are estimated based on
quantities of recoverable minerals, expected gold and other commodity prices
(considering current and historical prices, price trends and related factors),
production levels and operating costs of production and capital, all based on
life-of-mine plans. Existing proven and probable reserves and value beyond
proven and probable reserves, including mineralization other than proven and
probable reserves and other material that is not part of the measured, indicated
or inferred resource base, are included when determining the fair value of mine
site reporting units at acquisition and, subsequently, in determining whether
the assets are impaired. The term “recoverable minerals” refers to the estimated
amount of gold or other commodities that will be obtained after taking into
account losses during ore processing and treatment. Estimates of recoverable
minerals from such exploration stage mineral interests are risk adjusted based
on management’s relative confidence in such materials. In estimating future cash
flows, assets are grouped at the lowest level for which there are identifiable
cash flows that are largely independent of future cash flows from other asset
groups. Our estimates of future cash flows are based on numerous assumptions and
it is possible that actual future cash flows will be significantly different
than the estimates, as actual future quantities of recoverable minerals, gold
and other commodity prices, production levels and operating costs of production
and capital are each subject to significant risks and
uncertainties.
Reclamation
and Remediation Costs (Asset Retirement Obligations)
Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and closure costs. The asset retirement obligation is based on when
the spending for an existing environmental disturbance and activity to date will
occur. Capital Gold reviews, on an annual basis, unless otherwise deemed
necessary, the asset retirement obligation at our mine site in accordance with
ASC guidance for asset retirement and environmental
obligations.
109
Deferred
Financing Costs
Deferred financing costs which were
included in other assets and a component of stockholders’ equity relate to costs
incurred in connection with bank borrowings and are amortized over the term of
the related borrowings.
Intangible
Assets
Purchased intangible assets consisting
of rights of way, easements, net profit interests, etc. are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with ASC guidance for goodwill and other
intangibles. There was no impairment at January 31, 2010.
Fair
Value of Financial Instruments
The carrying value of our financial
instruments, including cash and cash equivalents, loans receivable and accounts
payable approximated fair value because of the short maturity of these
instruments. The carrying value of long term debt approximates fair
value due to the variable nature of the debt’s interest rates.
Revenue
Recognition
Revenue
is recognized from the sale of gold doré when persuasive evidence of an
arrangement exists, the price is determinable, the product has been shipped to
the refinery, the title has been transferred to the customer and collection of
the sales price is reasonably assured from the customer. The Company
sells its precious metal content to a financial institution. Revenues are
determined by selling the precious metal content at the spot price. Sales are
calculated based upon assay of the doré’s precious metal content and its
weight. The Company sells approximately 95% of the precious metal
content contained within the doré from the refinery based upon the preliminary
assay of the Company. The residual ounces are sold upon obtaining the final
assay and settlement for the shipment. The Company forwards an irrevocable
transfer letter to the refinery to authorize the transfer of the precious metal
content to the customer. The sale is recorded by the Company upon the
refinery pledging the precious metal content to the customer. The
Company waits until the doré precious metal content is pledged to the customer
at the refinery to recognize the sale because collectability is not ensured
until the doré precious metal content is pledged. The sale price is
not subject to change subsequent to the initial revenue recognition
date.
Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $544 and $524 for the six
months ended January 31, 2010 and 2009, on silver ounces sold of 32,160 and
45,334, respectively.
Foreign
Currency Translation
Assets
and liabilities of Capital Gold’s Mexican
subsidiaries are translated to US dollars using the current exchange rate for
assets and liabilities. Amounts on the statement of operations are translated at
the average exchange rates during the year. Gains or losses resulting from
foreign currency translation are included as a component of other comprehensive
income (loss).
Comprehensive
Income (Loss)
Comprehensive
income (loss) which is reported on the accompanying consolidated statement of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses, the fair
value change in our interest rate swap agreement and net unrealized gains and
losses on available-for-sale securities.
110
Income
Taxes
On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008. This new flat tax system integrates with
the regular income tax system and is based on cash-basis net income that
includes only certain receipts and expenditures. The flat tax is set
at 17.5% of cash-basis net income for tax year 2010, which increased from 17%
for tax year 2009. If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax. For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.
On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%. The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.
Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period.
This legislation remains subject to ongoing varying interpretations. There
is the possibility of implementation amendments by the Mexican government and
the estimated future income tax liability recorded at the balance sheet date may
change.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which are, on a more likely than not
basis, not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.
Equity
Based Compensation
In
connection with offers of employment to our executives as well as in
consideration for agreements with certain consultants, Capital Gold issues
options and warrants to acquire its common stock. Employee and non-employee
awards are made in the discretion of the Board of Directors.
Capital
Gold accounts for stock compensation under ASC guidance for compensation – stock
compensation, which requires it to expense the cost of employees services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. This expense must be recognized ratably over the
requisite service period following the date of grant.
Accounting
for Derivatives and Hedging Activities
On
October 11, 2006, prior to our initial draw on the Credit Agreement, Capital
Gold entered into interest rate swap agreements in accordance with the terms of
the Credit Agreement, which requires that Capital Gold hedge at least 50% of our
outstanding debt under this agreement. The agreements entered into
cover $9,375 or 75% of the outstanding debt. Both swaps covered this same
notional amount of $9,375, but over different time horizons. The
first covered the six months that commenced on October 11, 2006 and terminated
on March 31, 2007 and the second covers the period from March 30, 2007 through
December 31, 2010. Capital Gold intends to use discretion in managing this
risk as market conditions vary over time, allowing for the possibility of
adjusting the degree of hedge coverage as it deems
appropriate. However, any use of interest rate derivatives will be
restricted to use for risk management purposes.
Capital
Gold used variable-rate debt to finance a portion of the El Chanate Project.
Variable-rate debt obligations expose us to variability in interest payments due
to changes in interest rates. As a result of these arrangements,
Capital Gold will continuously monitor changes in interest rate exposures and
evaluate hedging opportunities. Capital Gold’s risk management policy permits us
to use any combination of interest rate swaps, futures, options, caps and
similar instruments, for the purpose of fixing interest rates on all or a
portion of variable rate debt, establishing caps or maximum effective interest
rates, or otherwise constraining interest expenses to minimize the variability
of these effects.
The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense. No component of hedge results is excluded from the
assessment of hedge effectiveness.
111
Capital Gold is exposed to credit
losses in the event of non-performance by counterparties to these interest rate
swap agreements, but we do not expect any of the counterparties to fail to meet
their obligations. To manage credit risks, Capital Gold selects counterparties
based on credit ratings, limit our exposure to a single counterparty under
defined guidelines, and monitor the market position with each counterparty as
required by ASC guidance for derivatives and hedging.
Use
of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
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 these estimates.
Management
of Capital Gold
Directors
and Executive Officers
Capital
Gold’s current directors and executive officers are as follows:
|
Name
|
Age
|
Position
|
||
|
Stephen
M. Cooper
|
46
|
Chairman
of the Board
|
||
|
John
Brownlie
|
59
|
President,
Chief Operating Officer, Director
|
||
|
Leonard
J. Sojka
|
54
|
Director
|
||
|
John
W. Cutler
|
61
|
Director
|
||
|
Christopher
M. Chipman
|
37
|
Chief
Financial Officer
|
||
|
J.
Scott Hazlitt
|
58
|
Vice
President – Mine
Development
|
Directors
are elected at the meeting of stockholders called for that purpose and hold
office until the next stockholders meeting called for that purpose or until
their resignation or death. Officers of Capital Gold are elected by the
directors at meetings called by the directors for its purpose.
STEPHEN
M. COOPER has been a Director since October 2009 and was named Chairman of the
Board in March 2010. Mr. Cooper has over 20 years of experience in the energy
technology industry. He is has served since 2008 as the President of EnergyIQ, a
Denver based exploration and production data management group for the oil and
gas industry. Previously, he worked for over 14 years with IHS Energy, a
technical information and decision making tools provider, holding the position
of CTO. Mr. Cooper has a Ph.D. in Mining and a bachelor’s degree in Mining
Engineering, both from Nottingham University. Dr. Cooper not only brings
advanced degrees in mining and mining engineering as well as practical
experience in management of an exploration and production company.
JOHN
BROWNLIE is Capital Gold’s President, Chief Operating Officer and Director. He
has been with Capital Gold since May 2006 and was instrumental in the
development of the El Chanate mine. Mr. Brownlie was appointed President in
September 2009. He currently oversees the operations and exploration activities
in Mexico and represents the company in investing activities. Mr. Brownlie
provided team management for mining projects requiring technical,
administrative, political and cultural experience over his 35 year mining
career. From 2000 to 2006, Mr. Brownlie was a consultant providing mining and
mineral related services to various companies including SRK, Oxus Mining plc and
Cemco Inc, a manufacturing services company. From 1995 to 2000, he was the
General Manager for the Zarafshan-Newmont Joint Venture in Uzbekistan, a
one-million tonne per month heap leach operation that produced over 450,000
ounces of gold annually. From 1988 to 1995, Mr. Brownlie served as the Chief
Engineer and General Manager for Monarch Resources in Venezuela, at both the El
Callao Revemin Mill and La Camorra gold mine. Before that, Mr. Brownlie was a
resident of South Africa and was associated with numerous mineral processing and
mining projects throughout Africa. He is a mechanical engineer and fluent in
Spanish. Mr. Brownlie is also a director of Palladon Ventures, Ltd., a publicly
traded mineral-related company.
112
Mr.
Brownlie and Capital Gold have entered into a Severance Agreement and General
Release, pursuant to which Mr. Brownlie employment agreement will terminate and
he will resign as President and Chief Operating Officer effective upon the
consummation of the Business combination. Pursuant to the Severance
Agreement, Mr. Brownlie will be entitled to severance payments in the aggregate
amount of approximately $1.7 million, payable over a six month
period. A copy of the Severance Agreement has been filed as Exhibit
10.24 to the registration statement of which this proxy statement/prospectus is
a part.
LEONARD
J. SOJKA has been a Director since September 2009. Mr. Sojka has served as an
investment advisor to institutional investors at SVR Capital LLC since September
2002, where his primary industry focus is on the metals and mining sector. Since
September 2008, Mr. Sojka has also served as a director and the corporate
secretary and since March 2009 its CFO, for Palladon Ventures, Ltd., an
exploration and development company which is developing the Iron Mountain
Project in southwest Utah. He was appointed Palladon CFO in October 2009. He
previously occupied positions as an analyst or portfolio manager at a variety of
firms, including Whitebox Long/Short Fund, Bighorn Capital LLC, and Deephaven
Capital LLC. He received a B.S. in Accounting from the University of Minnesota
and MBA in Finance from the University of Chicago.
Mr. Sojka
brings over 7 years knowledge of the metals and mining section through his
positions as advisor to and analyst applying fundamental, technical and
arbitrage analysis for institutional investors or in his role as a director of
an exploration and development company. His finance experience qualifies him to
serve as chair of the Audit Committee.
JOHN
W. CUTLER has been a Director since September 2009. Mr. Cutler has over 35 years
of experience in the investment management and securities industries. He is has
served since 2009 as the President, Chief Executive Officer and a director
since 2008 of Palladon Ventures, Ltd. Mr. Cutler is also currently serving as
the Managing General Partner of Par Associates, an investment partnership which
he organized in 1988. Previously, from 2005 to 2009, Mr. Cutler served as a
strategist at Swank Capital, LLC, a multi-fund manager specializing in energy
and natural resource investments. Mr. Cutler also previously held positions with
John S. Herold, Inc., SmithBarney, Inc., and First Boston
Corporation.
Mr.
Cutler brings over 35 years experience in investment management and securities
focusing on energy and natural resources. He also brings practical experience in
developing natural resources through his current position as chief executive
officer of an exploration and development company. His experience in finance
qualifies him to serve on the Audit Committee and enable him to bring a
investor-centric perspective to the board discussions.
CHRISTOPHER
M. CHIPMAN is Capital Gold’s Chief Financial Officer. Mr. Chipman has been
Capital Gold’s Chief Financial Officer since March 1, 2006. Since November 2000,
Mr. Chipman has been a managing member of Chipman & Chipman, LLC, a
consulting firm that assists public companies with the preparation of periodic
reports required to be filed with the Securities and Exchange Commission and
compliance with Section 404 of the Sarbanes Oxley Act of 2002. The firm also
provides outsourced financial resources to clients assisting in financial
reporting, forecasting and accounting services. Mr. Chipman is a CPA and, from
1996 to 1998, he was a senior accountant with the accounting firm of Grant
Thornton LLP. Mr. Chipman was the Controller of Frontline Solutions, Inc., a
software company (March 2000 to November 2000); a Senior Financial Analyst for
GlaxoSmithKline (1998-2000); and an Audit Examiner for Wachovia Corporation
(1994-1996). He received a B.A. in Economics from Ursinus College in 1994 and is
a Certified Public Accountant. He is a member of the American and Pennsylvania
Institute of Certified Public Accountants.
J. SCOTT
HAZLITT is Capital Gold’s Vice President of Mine Development, has been in the
mining business since 1974. Since 2001, he has focused on development of our El
Chanate concessions. Currently, he is involved in mine expansion plans and
corporate development. He has worked primarily in reserves, feasibility,
development and mine operations. His work experience has included precious
metals, base metals, uranium, and oil shale. Mr. Hazlitt served as mine manager
at Capital Gold’s Hopemore Mine in Leadville, Colorado from November 1999 until
2001. He was Mine Operations Chief Geologist for Getchell Gold from 1995 to
1999. From 1992 to 1995, he was self-employed as a consulting mining geologist
in California and Nevada. From 1988 to 1992, Mr. Hazlitt was a project geologist
and Mine Superintendent for the Lincoln development project. He served as Vice
President of Exploration for Mallon Minerals from 1984 to 1988. He was a mine
geologist for Cotter Corporation in 1978 and 1979, and was a mine geologist for
ASARCO from 1979 to 1984. He was a contract geologist for Pioneer Uravan and
others from 1975 to 1977. Mr. Hazlitt was a field geologist for ARCO Syncrude
Division at their CB oil Shale project in 1974 and 1975. His highest educational
degree is Master of Science from Colorado State University. He is a registered
geologist in the state of California.
113
Capital
Gold’s Board of Directors is responsible for the management and direction of our
company and for establishing broad corporate policies. A primary responsibility
of the Board is to provide effective governance over our affairs for the benefit
of our stockholders. In all actions taken by the Board, the Directors are
expected to exercise their business judgment in what they reasonably believe to
be the best interests of our company. In discharging that obligation, Directors
may rely on the honesty and integrity of our senior executives and our outside
advisors and auditors.
On
November 18, 2009, the Board of Directors determined that Leonard Sojka, John
Cutler and Stephen Cooper are “independent directors” under Section 121B(2)(a)
of the NYSE Amex Company Guide.
The Board
of Directors met six times during fiscal 2009 and acted by unanimous written
consent on eight occasions. Each of the directors attended at least 83% of the
aggregate of the total number of meetings of the Board of Directors they were
eligible to attend and the total number of meetings held by all committees on
which they served.
Recognizing
that director attendance at Capital Gold’s annual meetings of stockholders can
provide stockholders with an opportunity to communicate with members of the
Board, Capital Gold strongly encourages (but does not require) members of the
Board to attend such meetings.
On March
18, 2010, Gifford A. Dieterle resigned as a Chairman of the Board and Chief
Executive Officer of Capital Gold.
The Board
of Directors currently has three standing committees: an Audit Committee, a
Corporate Governance and Nominating Committee and a Compensation Committee. In
addition to the descriptions below, please refer to the “Report of the
Compensation Committee” and “Report of the Audit Committee” included in this
joint proxy statement/prospectus.
Board
Leadership Structure and Role in Risk Oversight
The
Capital Gold Board of Directors does not have a policy, one way or the other, on
whether the same person should serve as both the chief executive officer and
chairman of the board or, if the roles are separate, whether the chairman should
be selected from the non-employee directors or should be an employee. The board
may appoint a Lead Director who shall: (i) preside at all meetings of the Board
at which the Chairman is not present, including executive sessions of the
independent directors; (ii) serve as liaison between the Chairman and the
independent directors; (iii) approve information sent to the Board; (iv) approve
meeting agendas for the Board; (v) approve meeting schedules to assure that
there is sufficient time for discussion of all agenda items; (vi) have the
authority to call meetings of the independent directors; and (vii) if requested
by major stockholders, ensure that he or she is available for consultation and
direct communication. The Board believes that it should have the flexibility to
make these determinations at any given point in time in the way that it believes
best to provide appropriate leadership for Capital Gold at that time. Due to the
resignation of Gifford A. Dieterle on March 18, 2010, the Board has taken steps
to assign his various duties to other senior executives of Capital Gold. The
Board believes that a leadership structure, whereby an individual serves as both
chief executive officer and board chairman, is appropriate given the
efficiencies of having the chief executive officer also serve in the role of
chairman and Capital Gold’s strong corporate governance structure.
The
Capital Gold Board, either as a whole or through its committees, regularly
discusses with management strategic and financial risks and exposures associated
with Capital Gold’s annual operating budget, their potential impact on Capital
Gold and the steps taken to manage them. While the Board of Directors is
ultimately responsible for risk oversight at Capital Gold, the Board’s
committees assist the Board in fulfilling its oversight responsibilities in
certain areas of risk. In particular, the Audit Committee focuses on financial
and enterprise risk exposures and discusses with management, the internal
auditors, and the independent registered public accountants Capital Gold’s
policies with respect to risk assessment and risk management, including risks
related to financial reporting, tax, accounting, disclosure, internal control
over financial reporting, financial policies and credit and liquidity matters.
The Corporate Governance and Nominating Committee assists the Board of Directors
in fulfilling its duties and oversight responsibilities relating to Capital
Gold’s compliance and ethics programs, including compliance with legal and
regulatory requirements. The Corporate Governance and Nominating Committee also
annually review Capital Gold’s corporate governance guidelines. Finally, the
Compensation Committee assists the Board in fulfilling its oversight
responsibilities with respect to the management of risks arising from Capital
Gold’s compensation policies and programs and focuses on succession planning for
the executive officers.
114
Committees
Audit
Committee
The Audit
Committee currently consists of Leonard J. Sojka, Committee Chairman, John W.
Cutler and Stephen M. Cooper, the non-employee members of the Board. The
Board of Directors has determined that all three members satisfy the definition
of “independent directors” in Rule 10A-3(b)(1)(ii) under the Securities Exchange
Act of 1934 (the “Exchange Act”). The Audit Committee met on four occasions in
fiscal 2009. All committee members were present at the meetings. Representatives
of our independent auditor were in attendance at one meeting without management
present.
The Board
has determined that Mr. Sojka qualifies as an “audit committee financial expert”
as that term is defined by the rules and regulations of the SEC.
The Audit
Committee acts pursuant to the Audit Committee Charter as adopted by the Board.
The charter is available on our website at www.capitalgoldcorp.com, and can be
found under the Corporate Info; Corporate Governance tab. The Audit Committee
reviews and evaluates the charter annually to ensure its adequacy and accuracy,
and is charged with performing an annual self-evaluation and reporting the
results of the evaluation to the full Board.
The
Audit Committee is directly responsible for the appointment, retention and
termination, and for determining the compensation of, the Capital Gold’s independent
auditor engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for Capital Gold. The Audit
Committee is also directly responsible for oversight of the work of the
independent auditor (including resolution of disagreements between management
and the independent auditor regarding financial reporting) engaged for the
purpose of preparing or issuing an audit report or performing other audit,
review or attest services for Capital Gold. The Audit Committee reviews the
overall audit plan (both internal and external) with the independent auditor and
the members of management who are responsible for preparing Capital Gold’s financial
statements, including Capital Gold’s Chief Financial
Officer, all critical accounting policies and practices used or to be used by
Capital Gold, Capital Gold’s disclosures
under “Management’s Discussion and Analysis of Financial Conditions and Results
of Operations” prior to the filing of Capital Gold’s Annual Report on
Form10-K, and significant financial reporting issues that have arisen in
connection with the preparation of such audited financial
statements.
The
Audit Committee also reviews any analyses prepared by management and/or the
independent auditors setting forth significant financial reporting issues and
judgments made in connection with the preparation of financial statements,
including analyses of the effects of alternative Generally Accepted Accounting
Principles methods on the financial statements, major issues as to the adequacy
of Capital Gold’s internal
controls and any special audit steps adopted in light of material control
deficiencies; major issues regarding accounting principles and procedures and
financial statement presentations, including any significant changes in Capital
Gold’s
selection or application of accounting principles; and the effects of regulatory
and accounting initiatives, as well as off-balance sheet transactions and
structures, on the financial statements of Capital Gold.
Corporate
Governance and Nominating Committee
The
Corporate Governance and Nominating Committee currently consists of Stephen M.
Cooper, Committee Chair, John W. Cutler and Leonard J. Sojka. The Corporate
Governance and Nominating Committee, consisting entirely of independent
directors, proposes to the Board of Directors slates of directors to be
recommended for election at the Annual Meeting of Stockholders (and any
directors to be elected by the Board of Directors to fill vacancies) and slates
of officers to be elected by the Company’s Board of Directors. It also advises
the Board of Directors on various corporate governance issues, and leads the
Board of Directors in its annual review of the Board’s performance. The
Corporate Governance and Nominating Committee also is responsible for
recommending to the Board amounts of director compensation. Our Board of
Directors had nominated all directors for election in prior years as the Company
had not yet established a Corporate Governance and Nominating
Committee.
115
Capital Gold has established a process
for identifying and nominating director candidates. The following is an outline
of the process for nomination of candidates for election to the Board: (a) the
Chief Executive Officer, President, the Corporate Governance and Nominating
Committee or other members of the Board of Directors identify the need to add
new Board members, with careful consideration of the mix of qualifications,
skills and experience represented on the Board of Directors; (b) the Chairman of
the Corporate Governance and Nominating Committee coordinates the search for
qualified candidates with input from management and other Board members; (c) the
Corporate Governance and Nominating Committee engages a candidate search firm to
assist in identifying potential nominees, if it deems such engagement necessary
and appropriate; (d) selected members of management and the Board of Directors
interview prospective candidates; and (e) the Corporate Governance and
Nominating Committee recommends a nominee and seeks full Board endorsement of
the selected candidate, based on its judgment as to which candidate will best
serve the interests of Capital Gold’s stockholders.
Although
the Capital Gold Board does not have a formal diversity policy, the Corporate
Governance and Nominating Committee and the board will consider such factors as
it deems appropriate to assist in developing a board of directors and committees
that are diverse in nature and comprised of experienced and seasoned
advisors.
The Board
of Directors has determined that directors should possess the following minimum
qualifications: (a) the highest personal and professional ethics, integrity and
values; (b) commitment to representing the long-term interest of the
stockholders; (c) broad experience at the policy-making level in business and
ability to exercise sound judgment in matters that relate to our industry; and
(d) sufficient time to effectively fulfill duties as a Board member. The
Corporate Governance and Nominating Committee consider any candidates submitted
by stockholders on the same basis as any other candidate. Any stockholder
proposing a nomination should submit such candidate’s name, along with a
curriculum vitae or other summary of qualifications, experience and skills to
the Secretary, Capital Gold Corporation, 76 Beaver Street, 14th Floor,
New York, New York 10005. The request to nominate a director must be made within
the timeframe specified under “Deadline for Receipt of Stockholder Proposals”
below and accompanied by a statement by the nominee acknowledging that he or she
is willing to serve and, if elected, will owe a fiduciary obligation to the
Company and its stockholders.
The
Corporate Governance and Nominating Committee acts pursuant to the Corporate
Governance and Nominating Committee Charter as adopted by the Board. The charter
is available on our website at www.capitalgoldcorp.com, and can be found under
the Corporate Info; Corporate Governance tab. The Corporate Governance and
Nominating Committee reviews and evaluates the charter annually to ensure its
adequacy and accuracy.
Compensation
Committee
The
Compensation Committee currently consists of John W. Cutler, Chairman, Leonard
J. Sojka and Stephen M. Cooper. Each is a “non-employee director,” as defined in
Rule 16b-3 of the Exchange Act and an “outside director,” as defined in Section
162(m) of the Internal Revenue Code, as amended. The Compensation Committee met
on three occasions in fiscal 2009. All committee members were present at the
meetings.
The
Compensation Committee acts pursuant to the Compensation Committee Charter as
adopted by the Board. The charter is available on our website at
www.capitalgoldcorp.com, and can be found under the Corporate Info; Corporate
Governance tab. The Compensation Committee reviews and evaluates the charter
annually to ensure its adequacy and accuracy.
The
Compensation Committee is responsible for determining the compensation for the
Chairman and Chief Executive Officer (“CEO”), the President and Chief Operating
Officer (“COO”) and Chief Financial Officer (“CFO”) as well as approving the
compensation structure for other executives of the Company. Further, the
Compensation Committee approves broad-based and special compensation plans
across the Company.
As set
forth in its charter, the Compensation Committee’s authority and responsibility
include but are not limited to:
116
|
·
|
Review executive officer
compensation for compliance with Section 16 of the Exchange Act and
Section 162(m) of the Internal Revenue Code, as each may be amended from
time to time, and any other applicable laws, rules and
regulations.
|
|
·
|
In consultation with the CEO, the
COO and the CFO, review the talent development process within the Company
to ensure it is effectively
managed.
|
|
·
|
Annually review employee
compensation strategies, benefits and equity
programs.
|
|
·
|
Annually review the share usage,
dilution and proxy
disclosures.
|
|
·
|
Review and approve employment
agreements, severance arrangements and change in control agreements and
provisions when, and if, appropriate, as well as any special supplemental
benefits.
|
|
·
|
Annually review the Company’s
progress in meeting diversity goals with respect to the employee
population
|
The
Compensation Committee has the authority to engage independent compensation
consultants or advisors, as it may deem appropriate in its sole discretion, and
to approve related fees and retention terms of such consultants or advisors. In
2007, the Compensation Committee engaged Mosteller & Associates, Inc.
(“Mosteller”) as its independent executive compensation consulting firm.
Mosteller conducted a review of the total compensation of Capital Gold’s
executive officers and prepared reports for the review of the Compensation
Committee that were subsequently used in determining the appropriate levels of
compensation for each executive officer. In April 2009, the Compensation
Committee engaged the Hay Group as its independent executive compensation
consulting firm for the purpose of helping the Compensation Committee evaluate
its current compensation programs. The Hay Group conducted its review of the
total compensation of Capital Gold’s executive officers and presented its
results for the review of the Compensation Committee. The Compensation Committee
will use these results in assisting in determining the appropriate levels of
compensation for each executive officer on a going forward basis.
The Chief
Executive Officer attends the Compensation Committee meetings as management’s
representative. No other executives participate in the compensation process or
attend the Compensation Committee meetings. The CEO evaluates and provides
performance assessments and compensation recommendations for each of the
executive officers other than himself to the Compensation Committee. The
Compensation Committee considers these recommendations in its deliberations to
set executive compensation. The Compensation Committee reviews the compensation
package of the CEO and determines the compensation package of the CEO in an
executive session that the CEO does not attend. The CEO does not engage in
discussions with the Compensation Committee or the Compensation Committee’s
independent compensation consulting firm regarding his compensation
package.
Compensation
Committee Interlocks and Insider Participation
Throughout
fiscal 2009, Mr. Shaw, Mr. Postle and Mr. Nesbitt served on the Compensation
Committee. None of the members of the Compensation Committee was at any time
during fiscal 2009 an officer or employee of Capital Gold.
No
executive officer of Capital Gold during fiscal 2009 served as a member of the
Board of Directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company’s Board of Directors or
Compensation Committee.
Our
President and COO, John Brownlie, currently serves on the board of directors of
Palladon Ventures Ltd., a mining exploration and development company. John W.
Cutler is currently serving as the President, Chief Executive Officer and a
director of Palladon Ventures Ltd. and Leonard J. Sojka serves as a director,
corporate secretary and chief financial officer for Palladon Ventures
Ltd.
Compensation
Risks
Capital
Gold believes that risks arising from its compensation policies and practices
for its employees are not reasonably likely to have a material adverse effect on
it. In addition, the Compensation Committee believes that the mix and design of
the elements of compensation do not encourage employees to assume excessive
risks because (1) as a mining business, Capital Gold does not face the same
level of risks associated with compensation for employees at financial services
(traders and instruments with a high degree of risk) or technology companies
(rapidly changing markets) and (2) the Compensation Committee’s compensation
decisions include subjective considerations, which restrain the influence of
formulae or objective factors on excessive risk taking.
117
Corporate
Governance
The
Company has adopted the independence definitions and requirements of the NYSE
AMEX. The discussion below reflects such standards of independence. In addition,
the Company has adopted Corporate Governance Guidelines that outline important
policies and practices regarding the governance of the Company. Each of the
committees has also adopted a charter outlining responsibilities and operations.
The Corporate Governance Guidelines and the charters are available at www.capitalgoldcorp.com
and are available in print upon request to the Investor Relations Department,
Capital Gold Corporation, 76 Beaver Street, 14th Floor New York, NY
10005.
Communication
with the Board of Directors
Interested
parties wishing to contact the Capital Gold Board of Directors may do so by
writing to the following address: Board of Directors, Capital Gold Corporation,
76 Beaver Street, 14th Floor, New York, NY 10005, Attn: Christopher M. Chipman,
Secretary. All letters received will be categorized and processed by Mr. Chipman
and then forwarded to the Board of Directors.
Code
of Ethics and Business Conduct
Capital
Gold adopted a Code of Ethics that applies to its officers, directors and
employees, including its principal executive officer, principal financial
officer and principal accounting officer. The Code of Ethics is publicly
available on Capital Gold’s website at www.capitalgoldcorp.com, where it may be
found under the Corporate Info; Corporate Governance tab. You also may obtain a
copy of this code by written request to Capital Gold’s Office Manager at 76
Beaver Street, 14th Floor, New York, NY 10005. Capital Gold’s Board of Directors
is required to approve any substantive amendments to this code of ethics or
grant any waiver, including any implicit waiver, from a provision of the code to
its chief executive officer, principal financial officer or principal accounting
officer and it will disclose the nature of such amendment or waiver in a report
on Form 8-K within four business days.
Compliance
with Section 16(a) of the Exchange Act
To
Capital Gold’s knowledge, during the fiscal year ended July 31, 2009, based
solely on a review of such materials as are required by the SEC, no officer,
director or beneficial holder of more than ten percent of its issued and
outstanding shares of Common Stock failed to timely file with the SEC any form
or report required to be so filed pursuant to Section 16(a) of the Exchange
Act.
Compensation
of Directors
During
the fiscal year ended July 31, 2009, Capital Gold’s independent directors, Ian
Shaw, John Postle and Mark Nesbitt, each received a fee of $2,000 per month.
Non-independent directors, Robert Roningen and Roger Newell, each received
$1,000 per month. Directors are reimbursed for their accountable expenses
incurred in attending meetings and conducting their duties.
On
January 20, 2009, at the recommendation of the Compensation Committee and on the
approval by the Board of Directors, the non-executive directors were granted
275,000 stock options under its 2006 Equity Incentive Plan as incentive
compensation. The stock options were awarded as follows: Ian Shaw – 75,000, John
Postle – 50,000, Mark T. Nesbitt – 50,000, Roger Newell -50,000 and Robert
Roningen – 50,000. The
stock options have a term of five years and vest as follows: one-third vested
upon issuance and the balance vest on a one-third basis annually thereafter. The
exercise price of the stock options is $0.49 per share (per the Plan, the
closing price on the Toronto Stock Exchange on the trading day immediately prior
to the day of determination converted to U.S. Dollars). In the event of a
termination of continuous service (other than as a result of a change of
control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall be the lesser of
the original expiration date or one year from the date continuous service
terminates. Upon a change of control, all unvested stock options and unvested
restricted stock grants immediately vest. The Company utilized the Black-Scholes
method to fair value the 275,000 options received by these individuals. The
grant date fair value of each stock option was $0.28.
118
The
following tables set forth the compensation paid to our directors for the fiscal
year ended July 31, 2009:
|
|
Fees
Earned or
Paid in
Cash ($)(2)
|
Stock
Awards
($)
|
Option
Awards
($) (1)
|
All Other
Compensation
($)
|
Total
|
|||||||||||||||
|
Ian
A. Shaw
|
76,000
|
-
|
21,000
|
-
|
97,000
|
|||||||||||||||
|
John
Postle
|
54,000
|
-
|
14,000
|
-
|
68,000
|
|||||||||||||||
|
Mark
T. Nesbitt
|
66,000
|
-
|
14,000
|
-
|
80,000
|
|||||||||||||||
|
Roger
Newell
|
51,000
|
-
|
14,000
|
-
|
65,000
|
|||||||||||||||
|
Robert
Roningen(3)
|
12,000
|
-
|
14,000
|
8,000
|
34,000
|
|||||||||||||||
|
(1)
|
Amounts
shown reflect the aggregate grant date fair value of option awards
computed in accordance with FASB ASC Topic 718. The fair value of each
option award is estimated on the date of grant using the Black-Scholes
option-pricing model and include amounts from stock option awards granted
in fiscal 2009. Refer to Note 15 to Capital Gold’s Consolidated Financial
Statements for a discussion of assumptions made in the valuation of option
awards. During fiscal 2009, option awards were comprised of: 1) 75,000
stock options issued to Ian Shaw at an exercise price of $0.49, 2) 50,000
stock options each issued to John Postle, Mark T. Nesbitt, Roger Newell
and Robert Roningen at an exercise price of
$0.49.
|
|
(2)
|
Amounts
shown for Ian Shaw, John Postle, Mark Nesbitt and Roger Newell also
includes committee fees earned with respect to Amalgamation and
acquisition activity during the fiscal year ended July 31, 2009. Ian Shaw
acted as committee chair. Fees earned were $52,000, $30,000, $42,000 and
$39,000 for Mr. Shaw, Mr. Postle, Mr. Nesbitt and Mr. Newell,
respectively.
|
|
(3)
|
Amount
shown for Robert Roningen represents fees for legal and consulting
services provided.
|
On January 19, 2010, at the
recommendation of the Compensation Committee of the Board of Directors, Capital
Gold’s Board of Directors approved the issuance of 50,000 options each to
Leonard J. Sojka, John Cutler and Steven Cooper, respectively, aggregating
150,000 stock options under our 2006 Equity Incentive Plan. The stock options
for Leonard J. Sojka, John Cutler, and Steven Cooper have a term of five years
and vest 25,000 on January 19, 2010, 12,500 on January 19, 2011 and 12,500 on
January 19, 2012. The exercise price of the stock options is $3.60 per share
(per the Plan, the closing price on the Toronto Stock Exchange on the trading
day immediately prior to the day of determination converted to U.S. Dollars). In
the event of a termination of continuous service (other than as a result of a
change of control, as defined in the Plan), unvested stock options shall
terminate and, with regard to vested stock options, the exercise period shall be
the lesser of the original expiration date or one year from the date continuous
service terminates. Upon a change of control, all unvested stock options and
unvested restricted stock grants immediately vest. Capital Gold utilized the
Black-Scholes method to fair value the 150,000 options received by this
individual totaling $324. The grant date fair value of each stock option was
$2.16.
Executive Compensation of Capital Gold
Compensation
Discussion and Analysis
The
Compensation Discussion and Analysis (the “CD&A”) discusses the compensation
of our named executive officers for the fiscal year ended July 31, 2009. The
named executive officers are Gifford A. Dieterle, Chief Executive Officer,
Director, Chairman and Treasurer, John Brownlie, President, Chief Operating
Officer and Director, Christopher Chipman, Secretary and Chief Financial
Officer, Jeffrey Pritchard, former Executive Vice President and J. Scott
Hazlitt, Vice President – Mine Development (collectively, the “named executive
officers”).
119
Objectives
and Philosophy of Executive Compensation
The
primary objectives of the Compensation Committee with respect to executive
compensation are to attract and retain the most talented and dedicated
executives possible, to tie annual and long-term cash and stock incentives to
achievement of measurable performance objectives, and to align executives'
incentives with stockholder value creation. To achieve these objectives, the
Compensation Committee strives to implement and maintain compensation plans that
tie a substantial portion of executives' overall compensation to the experience
level of the executive or employee, the complexity and amount of responsibility
of the employee’s job, key strategic financial and operational goals such as the
establishment and maintenance of key strategic relationships, the development
and operation of our mining projects, the identification and possible
development of additional mining properties and the performance of our common
stock price. The Compensation Committee evaluates individual executive
performance with the goal of setting compensation at levels the Compensation
Committee believes are comparable with executives in other companies of similar
size and stage of development operating in the mining industry while taking into
account our relative performance and our own strategic goals.
The
Compensation Committee engaged Mosteller & Associates, Inc. (“Mosteller”),
an independent executive compensation consulting firm, to provide advice and
assistance in the area of executive and director compensation. Mosteller
conducted a review of the total compensation of Capital Gold’s named executive
officers and prepared reports for the review of the Compensation Committee that
were subsequently used in determining the appropriate levels of compensation for
each executive officer. Specifically, in accordance with the scope directed by
the Compensation Committee, Mosteller reviewed the compensation packages paid to
the Company’s executives in 2006 and 2007, selected peer sources against which
to compare the data and analyzed comparable compensation packages using
appropriate regression analyses.
To
evaluate Capital Gold’s compensation packages, Mosteller identified four sources
of comparison: (1) mining companies with revenues less than $10 million and less
than 100 employees that are headquartered in the northeastern United States; (2)
mining and natural resources divisions of utility companies with revenues less
than $50 million and less than 100 employees that are headquartered in the
States; (3) energy companies with revenues less than $50 million that are
headquartered in the United States; and (4) a custom peer group of mining
companies that included Golden Star Resources, LTD, Miramar, Northgate, Royal
Gold, Inc., Coeur d’Alene Mines Corp., and Meridian Gold. Capital Gold believes
that the companies in this custom peer group provide a good basis of comparison
because, similar to the Company, they are operational, are producing product and
have sizable assets and revenue streams.
In April
2009, the Compensation Committee engaged the Hay Group as its independent
executive compensation consulting firm for the purpose of helping the
Compensation Committee evaluate its current compensation programs. The Hay Group
conducted its review of the total compensation of the Company’s executive
officers and presented its results for the review of the Compensation Committee.
The Compensation Committee will use these results in assisting in determining
the appropriate levels of compensation for each executive officer on a going
forward basis.
The Chief
Executive Officer attends the Compensation Committee meetings as management’s
representative. No other executives participate in the compensation process or
attend the Compensation Committee meetings. The CEO evaluates and provides
performance assessments and compensation recommendations for each of the
executive officers other than himself to the Compensation Committee. The
Compensation Committee considers these recommendations in its deliberations to
set executive compensation. The Compensation Committee reviews the compensation
package of the CEO and determines the compensation package of the CEO in an
executive session that the CEO does not attend. The CEO does not engage in
discussions with the Compensation Committee or the Compensation Committee’s
independent compensation consulting firm regarding his compensation
package.
Elements
of Executive Compensation
Over
the past two years, Capital Gold was able to successfully develop and build the
El Chanate mine on time and within budget. In addition, during the first year of
operations, Capital Gold maintained operating costs significantly below the
industry average disclosing positive cash flow from operations and net earnings
per share. Also, Capital Gold funded all capital expenditures during fiscal 2008
and 2009 from operating cash flow generated at the mine. As a result of these
accomplishments, the Compensation Committee seeks to target a total compensation
program (including base salary, annual bonus, and the grant value of equity
incentives) at the 75% percentile of comparable market practices. In the view of
the Compensation Committee, this is the proper level to target because the
market for executive talent in the mining industry is exceptionally competitive.
In addition, other natural resource and materials companies are typically more
diverse than the Company and therefore face lower potential volatility in
performance results. The Compensation Committee believes that an above market
pay positioning strategy is appropriate to compensate for the additional
performance risk of being tied exclusively to gold.
120
Regular
Compensation
Regular
compensation, or base salary, is reviewed annually, and adjusted from time to
time to realign salaries with market levels after taking into account individual
responsibilities, performance and experience. This review will occur in the
fourth fiscal quarter of each year. The target base pay positioning of the 75%
percentile of the applicable benchmark as stated above for each position is
intended to be a guideline, and the Compensation Committee makes its decisions
within the context of market practices. However, this is not intended to be an
exact science. Other factors such as an individual’s performance, tenure and
experience, the performance of Capital Gold overall, any retention concerns and
the individual’s historical compensation and comparisons to peers at the Company
impact the decision-making process. The Compensation Committee does not weigh
any of these factors more heavily than others and does not use any formula to
assess these factors, but rather considers each factor in its judgment and at
its discretion.
On July
23, 2009, our named executive officers salaries were reviewed by the
Compensation Committee. It was determined that the salary levels were consistent
with the target pay positioning as stated above. The base pay for the named
executives is at the following levels:
|
Name
|
Base Pay
|
|||
|
Gifford
A. Dieterle
|
$ | 287,500 | ||
|
John
Brownlie
|
$ | 258,750 | ||
|
Jeffrey
Pritchard
|
$ | 224,250 | ||
|
Christopher
M. Chipman
|
$ | 201,250 | ||
|
J.
Scott Hazlitt
|
$ | 155,250 | ||
Annual
Bonus
The
compensation program for named executive officers includes eligibility for both
an annual performance-based cash bonus and equity incentive award. Capital Gold
did not formally establish corporate or individual performance targets prior to,
or at the beginning of, fiscal year 2009. At the conclusion of fiscal 2009, the
Compensation Committee reviewed the performance of Capital Gold and each
executive during fiscal 2009. The Compensation Committee noted several
achievements, including, but not limited to, the increase in ore mined, the
increase in ounces produced, the increase in the proceeds from sales of gold and
silver, the increase in gold reserves, and the completion of certain capital and
plant upgrades.
On
January 20, 2009, at the recommendation of the Compensation Committee and on the
approval by the Board of Directors, Capital Gold’s executive officers and
directors were granted 2,000,000 stock options under our 2006 Equity Incentive
Plan as incentive compensation. The stock options have a term of five years and
vest as follows: one-third vested upon issuance and the balance vest on a
one-third basis annually thereafter. The exercise price of the stock options is
$0.49 per share (per the Plan, the closing price on the Toronto Stock Exchange
on the trading day immediately prior to the day of determination converted to
U.S. Dollars). In the event of a termination of continuous service (other than
as a result of a change of control, as defined in the Plan), unvested stock
options shall terminate and, with regard to vested stock options, the exercise
period shall be the lesser of the original expiration date or one year from the
date continuous service terminates. Upon a change of control, all unvested stock
options and unvested restricted stock grants immediately vest. Capital Gold
utilized the Black-Scholes method to fair value the 2,000,000 options received
by these individuals totaling $569,000. The grant date fair value of each stock
option was $0.29.
|
Executive Officers
|
Stock Options
|
|||
|
Gifford
Dieterle
|
500,000 | |||
|
John
Brownlie
|
500,000 | |||
|
Jeff
Pritchard
|
500,000 | |||
|
Christopher
Chipman
|
250,000 | |||
|
Scott
Hazlitt
|
250,000 | |||
121
On July
23, 2009, at the recommendation of the Compensation Committee and upon approval
by the Board of Directors, Capital Gold’s executive officers were awarded cash
bonuses. The specific cash bonuses and awards are set forth below.
|
Executive Officers
|
Cash Bonus
|
|||
|
Gifford
Dieterle
|
187,500 | |||
|
John
Brownlie
|
187,500 | |||
|
Jeff
Pritchard
|
168,750 | |||
|
Christopher
Chipman
|
168,750 | |||
|
Scott
Hazlitt
|
75,000 | |||
The
stock options awarded on January 20, 2009 were granted as a method to provide
incentive compensation to the Company’s named executive officers. The
Compensation Committee believes that the recipients are motivated by the
potential appreciation of the stock price over time and will remain committed to
Capital Gold while the grants vest.
On January 19, 2010, at the
recommendation of the Compensation Committee of the Board of Directors, Capital
Gold’s Board of Directors approved the issuance of 500,000 options to John
Brownlie under the 2006 Equity Incentive Plan. The stock options for John
Brownlie have a term of five years and vest as follows: one-third vested upon
issuance and the balance vests on a one-third basis annually thereafter. The
exercise price of the stock options is $3.60 per share (per the Plan, the
closing price on the Toronto Stock Exchange on the trading day immediately prior
to the day of determination converted to U.S. Dollars). In the event of a
termination of continuous service (other than as a result of a change of
control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall be the lesser of
the original expiration date or one year from the date continuous service
terminates. Upon a change of control, all unvested stock options and unvested
restricted stock grants immediately vest. Capital Gold utilized the
Black-Scholes method to fair value the 500,000 options received by these
individuals totaling $1,081. The grant date fair value of each stock option was
$2.16.
The stock
options awarded on January 19, 2010 were granted as a method to provide
incentive compensation to Capital Gold’s named executive officers. The
Compensation Committee believes that the recipients are motivated by the
potential appreciation of the stock price over time and will remain committed to
Capital Gold while the grants vest.
On a
going forward basis, the Compensation Committee will determine the cash bonus
and/or equity incentive award based on the level of achievement of the financial
and operational goals of Capital Gold and for the level of achievement of annual
performance objectives of each individual named executive officer. These
objectives may vary depending on the individual executive, but will relate
generally to strategic factors such as establishment and maintenance of key
strategic relationships, the development and operation of our mining projects,
the identification and possible development of additional mining properties, and
to financial factors such as raising capital and improving our results of
operations. Bonuses, if awarded, are determined at the sole discretion of the
Board of Directors as recommended by the Compensation
Committee.
2006
Equity Incentive Plan
The 2006
Equity Incentive Plan (the “Plan”) is intended to attract and retain individuals
of experience and ability, to provide incentive to our employees, consultants,
and non-employee directors, to encourage employee and director proprietary
interests in us, and to encourage employees to remain in our employ. Each of the
named executive officers is eligible for annual equity awards, which are granted
pursuant to the Plan.
The Plan
authorizes the grant of non-qualified and incentive stock options, stock
appreciation rights and restricted stock awards (each, an “Award”). A maximum of
10,000,000 shares of common stock are reserved for potential issuance pursuant
to Awards under the Plan. Unless sooner terminated, the Plan will continue in
effect for a period of 10 years from its effective date.
122
The Plan
is administered by our Board of Directors which has delegated the administration
to our Compensation Committee. The Plan provides for Awards to be made to such
of our employees, directors and consultants and our affiliates as the Board may
select.
Stock
options awarded under the Plan may vest and be exercisable at such times (not
later than 10 years after the date of grant) and at such exercise prices (not
less than Fair Market Value at the date of grant) as the Board may determine.
Unless otherwise determined by the Board, stock options shall not be
transferable except by will or by the laws of descent and distribution. The
Board may provide for options to become immediately exercisable upon a “change
in control,” as defined in the Plan. We believe this single-trigger is
appropriate to ensure that continuing employees are treated the same as
terminated employees with respect to outstanding equity grants. No options may
be granted under the Plan after the tenth anniversary of its effective date.
Unless the Board determines otherwise, there are certain continuous service
requirements and the options are not transferable. On July 23, 2009, at the
recommendation of the Compensation Committee and upon approval by the Board of
Directors, Capital Gold amended the 2006 Equity Incentive Plan to provide for
cashless exercises of options by participants under the Plan. Payment of the
option exercise price may be made (i) in cash or by check payable to Capital
Gold, (ii) in shares of Common Stock duly owned by the optionholder (and for
which the optionholder has good title free and clear of any liens and
encumbrances), valued at the Fair Market Value on the date of exercise, or (iii)
by delivery back to Capital Gold from the shares acquired on exercise of the
number of shares of Common Stock equal to the exercise price, valued at the Fair
Market Value on the date of exercise.
The Plan
provides the Board with the general power to amend the Plan, or any portion
thereof at any time in any respect without the approval of our stockholders,
provided however, that the stockholders must approve any amendment which
increases the fixed maximum percentage of shares of common stock issuable
pursuant to the Plan, reduces the exercise price of an Award held by a director,
officer or ten percent stockholder or extends the term of an Award held by a
director, officer or ten percent stockholder. Notwithstanding the foregoing,
stockholder approval may still be necessary to satisfy the requirements of
Section 422 of the Code, Rule 16b-3 of the Exchange Act or any applicable stock
exchange listing requirements. The Board may amend the Plan in any respect it
deems necessary or advisable to provide eligible Employees with the maximum
benefits provided or to be provided under the provisions of the Code and the
regulations promulgated thereunder relating to Incentive Stock Options and/or to
bring the Plan and/or Incentive Stock Options granted under it into compliance
therewith. Rights under any Award granted before amendment of the Plan cannot be
impaired by any amendment of the Plan unless the Participant consents in
writing. The Board is empowered to amend the terms of any one or more Awards;
provided, however, that the rights under any Award shall not be impaired by any
such amendment unless the applicable Participant consents in writing and further
provided that the Board cannot amend the exercise price of an option, the Fair
Market Value of an Award or extend the term of an option or Award without
obtaining the approval of the stockholders if required by the rules of the TSX
or any stock exchange upon which the common stock is listed.
Although
non-cash compensation is utilized by us to prevent placing strains on liquidity,
care is taken by management to avoid materially diluting investors.
In the
event of a termination of continuous service (other than as a result of a change
of control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall end on the
earlier of the original expiration date or one year from the date continuous
service terminates. Upon a change of control, all unvested stock options and
unvested restricted stock grants immediately vest.
Employment
Agreements
Capital
Gold has entered into employment or engagements agreements with each of its
named executive officers. The agreements provide for certain payments if the
named executive officers are terminated without cause or leave Capital Gold due
to a material breach of the employment agreement by Capital Gold. In connection
with the employment/engagement agreements, Capital Gold also entered into change
of control agreements with each of the named executive officers, which provides
for certain payments upon a termination in connection with a change in control.
Capital Gold believes this is in the best interest of the stockholders because
it encourages the continued attention and dedication of the named executive
officers during a change in control. These agreements are described in greater
detail in the section entitled “Employment Agreements and Change in Control
Agreements.”
123
On
January 19, 2010, the Compensation Committee of the Board of Directors of
Capital Gold approved a new employment agreement (the “Agreement”) for John
Brownlie, its President, Chief Operating Officer and a Director. The term of the
agreement is for three years commencing January 19, 2010, and will automatically
extend for consecutive one-year terms unless Mr. Brownlie or we notify the other
party that it does not wish to extend the Agreement. The Agreement provides for
an initial base salary to Mr. Brownlie of $275 plus an immediate payment of $375
for reaching certain milestones. The Agreement provides for an additional
payment of $375 upon the accomplishment of other goals. The Agreement also
grants Mr. Brownlie 500,000 stock options. The exercise price of the stock
options is $3.60 per share (per the Plan, the closing price on the Toronto Stock
Exchange on the trading day immediately prior to the day of determination
converted to U.S. Dollars). In the event of a termination of continuous service
(other than as a result of a change of control, as defined in the Plan),
unvested stock options shall terminate and, with regard to vested stock options,
the exercise period shall be the lesser of the original expiration date or one
year from the date continuous service terminates. Upon a change of control, all
unvested stock options and unvested restricted stock grants immediately vest.
Capital Gold utilized the Black-Scholes method to fair value the 500,000
options. For the six months ended January 31, 2010, Capital Gold recorded
approximately $373 in equity compensation expense on the vested portion of these
stock options. The grant date fair value of each stock option was $2.16. The
stock options have a term of five years and vest as follows: one-third vested
upon issuance and the balance vests on a one-third basis annually
thereafter.
Tax
and Accounting Implications
As part
of its role, the Compensation Committee considers the deductibility of executive
compensation under Section 162(m) of the Internal Revenue Code, which provides
that Capital Gold may not deduct non-performance based compensation of more than
$1 million that is paid to certain executives. The Compensation Committee has
considered the $1 million limit for federal income tax purposes on deductible
executive compensation that is not performance based and believes that the
compensation paid is generally fully deductible for federal income tax purposes.
However, in certain situations, the Compensation Committee may approve
compensation that will not meet these requirements in order to ensure
competitive levels of total compensation for Capital Gold’s executive
officers.
Summary
Compensation Table
The
following tables set forth the total compensation paid to or earned by Capital
Gold’s named executive officers for fiscal years ended July 31, 2009, 2008 and
2007, respectively (in thousands):
|
Name &
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
(1)
|
Option
Awards
(2)
|
Non-Equity
Incentive
Plan
Compen-
sation
|
Non-
qualified
Deferred
Compen-
sation
Earnings
|
All Other
Compen-
sation
($)
|
Total
($)
|
|||||||||||||||||||||||||
|
Gifford
A. Dieterle,
|
2009
|
$
|
288
|
$
|
188
|
$
|
-
|
$
|
142
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
618
|
|||||||||||||||||
|
Director,
Chairman,
|
2008
|
$
|
244
|
$
|
325
|
$
|
228
|
$
|
168
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
965
|
|||||||||||||||||
|
Treasurer and
CEO
|
2007
|
$
|
180
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
180
|
|||||||||||||||||
|
John
Brownlie,(3)
|
2009
|
$
|
259
|
$
|
188
|
$
|
-
|
$
|
142
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
589
|
|||||||||||||||||
|
Director,
President
|
2008
|
$
|
275
|
$
|
318
|
$
|
228
|
$
|
168
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
989
|
|||||||||||||||||
|
and
COO
|
2007
|
$
|
150
|
$
|
-
|
$
|
225
|
$
|
34
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
409
|
|||||||||||||||||
|
Jeffrey
Pritchard,
|
2009
|
$
|
224
|
$
|
169
|
$
|
-
|
$
|
142
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
535
|
|||||||||||||||||
|
Executive
Vice
|
2008
|
$
|
189
|
$
|
284
|
$
|
228
|
$
|
168
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
869
|
|||||||||||||||||
|
President
(4)
|
2007
|
$
|
120
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
120
|
|||||||||||||||||
|
Christopher
M.
|
2009
|
$
|
201
|
$
|
169
|
$
|
-
|
$
|
71
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
441
|
|||||||||||||||||
|
Chipman,
CFO
|
2008
|
$
|
189
|
$
|
278
|
$
|
228
|
$
|
168
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
863
|
|||||||||||||||||
|
2007
|
$
|
118
|
$
|
-
|
$
|
-
|
$
|
79
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
197
|
||||||||||||||||||
|
J.
Scott Hazlitt,
|
2009
|
$
|
155
|
$
|
75
|
$
|
-
|
$
|
71
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
301
|
|||||||||||||||||
|
Vice
President –
|
2008
|
$
|
134
|
$
|
141
|
$
|
82
|
$
|
118
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
475
|
|||||||||||||||||
|
Mine
Development
|
2007
|
$
|
105
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
105
|
|||||||||||||||||
|
(1)
|
Amounts
shown represent the fair value of Capital Gold’s stock on the date of
grant and include amounts from restricted stock awards granted in fiscal
2008. Refer to Note 15 to Capital Gold’s Consolidated Financial Statements
for a discussion of assumptions made in the valuation of restricted stock
awards. During 2009, Stock Awards comprised of the vested portion of
restricted stock awards issued during fiscal 2008. During fiscal 2008,
restricted stock awards were comprised of: 1) 250,000 shares of restricted
stock issued each to Gifford A. Dieterle, John Brownlie, Jeffrey Pritchard
and Christopher M. Chipman as well as 75,000 shares of restricted stock
issued to J. Scott Hazlitt at the fair value of Capital Gold’s stock on
the date of grant of $0.63, 2) 100,000 shares of restricted stock issued
each to Gifford A. Dieterle, John Brownlie, Jeffrey Pritchard and
Christopher M. Chipman as well as 50,000 shares of restricted stock to J.
Scott Hazlitt at the fair value of Capital Gold’s stock on the date of
grant of $0.70. During fiscal 2007, restricted stock awards were comprised
of 500,000 shares of restricted stock issued to John Brownlie at the fair
value of Capital Gold’s stock on the date of grant of
$0.45.
|
124
|
(2)
|
Amounts
shown reflect amounts of option awards recognized for financial statement
reporting purposes in accordance with ASC guidance for compensation—stock
compensation, using the Black-Scholes option-pricing model and include
amounts from stock option awards granted in fiscal 2008 and 2009. Refer to
Note 15 to Capital Gold’s Consolidated Financial Statements in Capital
Gold’s annual report on Form 10-K filed with the SEC on October 14, 2009
for a discussion of assumptions made in the valuation of option awards.
During fiscal 2009, option awards were comprised of: 1) 500,000 stock
options issued each to Gifford A. Dieterle, John Brownlie and Jeffrey
Pritchard at an exercise price of $0.49; and 2) 250,000 stock options
issued to Christopher M. Chipman and J. Scott Hazlitt at an exercise price
of $0.49 that vested during the period. During fiscal 2008, option awards
were comprised of: 1) 500,000 stock options issued each to Gifford A.
Dieterle, John Brownlie, Christopher M. Chipman and Jeffrey Pritchard at
an exercise price of $0.63; 350,000 options issued to J. Scott Hazlitt at
an exercise price of $0.63, 2) 150,000 stock options issued to John
Brownlie at an exercise price of $0.34 that vested during the period.
During fiscal 2007, option awards were comprised of: 1) 250,000 and
100,000 stock options issued to John Brownlie and Christopher M. Chipman,
respectively, at an exercise price of $0.36, 2) 500,000 stock options
issued to Christopher M. Chipman at an exercise price of
$0.38.
|
|
(3)
|
On
April 29, 2010, Mr. Brownlie and Capital Gold entered into a Severance
Agreement and General Release, pursuant to which Mr. Brownlie employment
agreement will terminate and he will resign as President and Chief
Operating Officer effective upon the consummation of the Business
combination. Pursuant to the Severance Agreement, Mr. Brownlie
will be entitled to severance payments in the aggregate amount of
approximately $1.7 million, payable over a six month period. A
copy of the Severance Agreement has been filed as Exhibit 10.24 to the
registration statement of which this proxy statement/prospectus is a
part.
|
|
(4)
|
On
September 17, 2009, Capital Gold terminated Jeffrey W. Pritchard as
Executive Vice President and Secretary without cause pursuant to a
restructuring of its corporate investor relations functions. The
termination was effective September 15, 2009. Mr. Pritchard also resigned
as a Director effective September 29,
2009.
|
Grant
of Plan Based Awards Table
The
following table sets forth information with respect to option awards and
restricted stock awards during the fiscal year ended July 31, 2009 to Capital
Gold’s named executive officers:
|
Name
|
Grant
Date
|
All Other Stock
Awards(1)
(#)
|
All Other Option
Awards: Number
Of Securities
Underlying Options(1)
(# )
|
Exercise or
base price
of award(2)
($/Sh)
|
Grant Date
Fair Value of
Stock and
Option Awards (3)
($)
|
|||||||||||||
|
Gifford A. Dieterle
|
12/20/07
|
-
|
500,000
|
0.63
|
168,000
|
|||||||||||||
|
|
12/20/07
|
250,000
|
-
|
0.63
|
158,000
|
|||||||||||||
|
7/17/08
|
100,000
|
-
|
0.70
|
70,000
|
||||||||||||||
|
1/20/09
|
-
|
500,000
|
0.49
|
142,000
|
||||||||||||||
|
John Brownlie
|
12/20/07
|
-
|
500,000
|
0.63
|
168,000
|
|||||||||||||
|
|
12/20/07
|
250,000
|
-
|
0.63
|
158,000
|
|||||||||||||
|
7/17/08
|
100,000
|
-
|
0.70
|
70,000
|
||||||||||||||
|
1/20/09
|
-
|
500,000
|
0.49
|
142,000
|
||||||||||||||
|
Jeffrey Pritchard
|
12/20/07
|
-
|
500,000
|
0.63
|
168,000
|
|||||||||||||
|
|
12/20/07
|
250,000
|
-
|
0.63
|
158,000
|
|||||||||||||
|
7/17/08
|
100,000
|
-
|
0.70
|
70,000
|
||||||||||||||
|
1/20/09
|
-
|
500,000
|
0.49
|
142,000
|
||||||||||||||
|
Christopher Chipman
|
12/20/07
|
-
|
500,000
|
0.63
|
168,000
|
|||||||||||||
|
|
12/20/07
|
250,000
|
-
|
0.63
|
158,000
|
|||||||||||||
|
7/17/08
|
100,000
|
-
|
0.70
|
70,000
|
||||||||||||||
|
1/20/09
|
-
|
250,000
|
0.49
|
71,000
|
||||||||||||||
|
J. Scott Hazlitt
|
12/20/07
|
-
|
350,000
|
0.63
|
118,000
|
|||||||||||||
|
|
12/20/07
|
75,000
|
-
|
0.63
|
47,000
|
|||||||||||||
|
7/17/08
|
50,000
|
-
|
0.70
|
35,000
|
||||||||||||||
|
1/20/09
|
-
|
250,000
|
0.49
|
71,000
|
||||||||||||||
|
(1)
|
Refer
to the Compensation Discussion and Analysis beginning on page 23 for
a description of the terms of and criteria for making these
awards.
|
|
(2)
|
Exercise
price or base price of the awards (per the 2006 Equity Incentive Plan) are
based upon the closing price on the Toronto Stock Exchange on the trading
day immediately prior to the day of determination converted to U.S.
Dollars.
|
125
|
(3)
|
Reflects
the dollar amount Capital Gold would expense in its financial statements
over the award vesting schedule recognized for financial reporting
purposes in accordance with ASC guidance for compensation—stock
compensation. Assumptions used in the calculation of these
amounts are included in Note 2 to Capital Gold’s Annual Report on
Form 10-K, filed with the Securities Exchange Commission on October 14,
2009.
|
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth certain information with respect to outstanding
options and restricted stock previously awarded to Capital Gold’s named
executive officers as of July 31, 2009.
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|||||||||||||
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|||||||||||
|
|
|
Securities
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
||||||||||
|
|
|
Underlying
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
||||||||||
|
|
|
Unexercised
|
|
|
Underlying
|
|
|
Option
|
|
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|||||||||
|
|
|
Options(1)
|
|
|
Unexercised
|
|
|
Exercise
|
|
|
Option
|
|
|
Option
|
|
|
Have
|
|
|
Have
|
|
|||||||
|
|
|
(#)
|
|
|
Options(2) (#)
|
|
|
Price
|
|
|
Grant
|
|
|
Expiration
|
|
|
Not Vested(3)
|
|
|
Not Vested
|
|
|||||||
|
Name
|
Exercisable
|
Unexercisable
|
($)
|
Date
|
Date
|
(#)
|
($)(4)
|
|||||||||||||||||||||
|
Gifford
A. Dieterle
|
250,000
|
250,000
|
$
|
0.63
|
12/20/2007
|
12/20/2014
|
||||||||||||||||||||||
|
250,000
|
250,000
|
$
|
0.49
|
01/20/2009
|
01/20/2014
|
|||||||||||||||||||||||
|
115,525
|
$
|
70,000
|
||||||||||||||||||||||||||
|
John
Brownlie
|
250,000
|
250,000
|
$
|
0.63
|
12/20/2007
|
12/20/2014
|
||||||||||||||||||||||
|
250,000
|
250,000
|
$
|
0.49
|
01/20/2009
|
01/20/2014
|
|||||||||||||||||||||||
|
115,525
|
$
|
70,000
|
||||||||||||||||||||||||||
|
Jeffrey
Pritchard
|
250,000
|
250,000
|
$
|
0.63
|
12/20/2007
|
12/20/2014
|
||||||||||||||||||||||
|
250,000
|
250,000
|
$
|
0.49
|
01/20/2009
|
01/20/2014
|
|||||||||||||||||||||||
|
115,525
|
$
|
70,000
|
||||||||||||||||||||||||||
|
Christopher
M. Chipman
|
250,000
|
250,000
|
$
|
0.63
|
12/20/2007
|
12/20/2014
|
||||||||||||||||||||||
|
125,000
|
125,000
|
$
|
0.49
|
01/20/2009
|
01/20/2014
|
|||||||||||||||||||||||
|
115,525
|
$
|
70,000
|
||||||||||||||||||||||||||
|
J.
Scott Hazlitt
|
175,000
|
175,000
|
$
|
0.63
|
12/20/2007
|
12/20/2014
|
||||||||||||||||||||||
|
125,000
|
125,000
|
$
|
0.49
|
01/20/2009
|
01/20/2014
|
|||||||||||||||||||||||
|
34,658
|
$
|
21,000
|
||||||||||||||||||||||||||
|
(1)
|
Stock
options are generally granted one time per
year.
|
|
(2)
|
Stock
options issued on 12/20/07 vest at the rate of 20% upon grant date and 20%
per year thereafter. Stock options issued on 1/20/09 vest at the rate of
one-third upon issuance and the balance vest on a one-third basis annually
thereafter.
|
|
(3)
|
Restricted
stock vests equally over a three year
period.
|
|
(4)
|
Assumes
stock price of $0.61 the closing price on July 31,
2009.
|
Option
Exercised and Stock Vested Table
The
following table sets forth certain information concerning options exercised and
the vesting of Capital Gold’s common stock during the fiscal year ended July 31,
2009.
126
|
|
Option Awards
|
Stock Awards
|
||||||||||||||
|
Name
(a)
|
Number of
Shares
Acquired on
Exercise (#)
(b)
|
Value
Realized on
Exercise ($)
(c)
|
Number of
Shares
Acquired on
Vesting (#)
(d)
|
Value of
Realized on
Vesting ($)
(e)
|
||||||||||||
|
Gifford
A. Dieterle, Director, Chairman,
Treasurer and
CEO
|
-
|
$
|
-
|
83,333
|
$
|
51,000
|
||||||||||
|
John
Brownlie, Director, President and COO
|
100,000
|
$
|
1,000
|
83,333
|
$
|
51,000
|
||||||||||
|
Jeffrey
Pritchard, Director and Executive Vice President
|
-
|
$
|
-
|
83,333
|
$
|
51,000
|
||||||||||
|
Christopher
M. Chipman, CFO
|
555,729
|
$
|
114,000
|
83,333
|
$
|
51,000
|
||||||||||
|
J.
Scott Hazlitt, Vice President – Mine Development
|
-
|
$
|
-
|
25,000
|
$
|
15,000
|
||||||||||
Employment
Agreements and Change in Control Agreements
Capital
Gold entered into employment agreements with Mr. Gifford Dieterle and engagement
agreements with Mr. Christopher Chipman, Mr. John Brownlie and Mr. Scott
Hazlitt. Capital Gold amended and restated each of the agreements effective
January 1, 2009 to provide that each of the agreements expire on December 31,
2011 and automatically renew for successive one-year periods unless either party
provides written notice of its intent not to review at least 30 days prior to
the expiration of the then-current term, to comply with Section 409A of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder.
Each of
the agreements provide that the named executive officer is entitled to a base
salary or base fee, payable in monthly installments, and to participate in any
annual incentive bonus opportunity offered by Capital Gold. If Capital Gold
awards bonuses, it must be paid within 90 days of the end of Capital Gold’s
fiscal year for which the bonus is earned. If the named executive officer is
terminated without cause, or terminates employment because of a material,
uncured breach of the agreement by Capital Gold, the named executive officer is
entitled to a pro rata portion of any bonus.
Each of
the named executive officers has agreed to maintain the confidentiality of
Capital Gold’s proprietary information. In addition, for 180 days following
termination of employment (regardless of the reason for termination), each of
the named executive officers has agreed not to compete with Capital Gold,
solicit Capital Gold’s suppliers, vendors, business associates, independent
consultants or employees, or make any disparaging remarks about Capital
Gold.
If the
named executive officer is terminated for “cause,” or the executive resigns,
dies or becomes disabled, the executive is entitled only to the fees and
reasonable and necessary business expenses incurred by him in connection with
the agreement. Cause includes the failure or refusal to perform the services
required under the agreement, a material breach by the executive of any term of
the agreement, or the conviction of a crime that results in imprisonment or
involves embezzlement, dishonesty, or activities injurious to Capital Gold or
its reputation.
If the
named executive officer is terminated without “cause” or leaves Capital Gold due
to a material, uncured breach by Capital Gold of the agreement, the named
executive officer is entitled a cash payment equal to the greater of the
executive’s base salary or base rate in effect on the date of termination or the
balance of the base salary or base rate remaining in the then current term of
the agreement, payable in equal monthly installments. These payments will
terminate if the executive breaches the confidentiality and non-competition
provisions of the agreement.
On
September 17, 2009, Capital Gold terminated Jeffrey W. Pritchard as Executive
Vice President and Secretary of Capital Gold without cause pursuant to a
restructuring of its corporate investor relations functions. The termination was
effective September 15, 2009. Mr. Pritchard also resigned as a Director
effective September 29, 2009. As part of the settlement, Mr. Pritchard received
a lump sum payment of approximately $426,000, and will receive an additional
payment of approximately $65,000, if Mr. Pritchard fulfills certain terms of the
termination agreement. Mr. Pritchard was entitled to change in control benefits
should Capital Gold enter into a transaction as of December 31, 2009 with
certain entities that would result in a “Change in Control” as defined in his
Change in Control Agreement with Capital Gold. There was no such transaction as
of this date.
127
On March
11, 2010, Capital Gold entered into an agreement with Gifford A. Dieterle, the
Chief Executive Officer (“CEO”) of Capital Gold and Chairman of the Board,
pursuant to which Mr. Dieterle resigned his position as CEO and Chairman of the
Board, effective March 18, 2010. Pursuant to the agreement, Mr. Dieterle is to
receive lump sum payments totaling approximately $376 in September 2010, and
additional payments totaling approximately $288 during 2011. In addition, Mr.
Dieterle will receive $100 in shares of Capital Gold's common stock in September
2010.
Change
in Control Agreements
Capital
Gold has entered into an Agreement Regarding Change in Control with each of the
named executive officers. Capital Gold amended and restated each of the change
in control agreements effective January 1, 2009 to provide that each of the
agreements expire on December 31, 2011 and automatically renew for successive
one-year periods unless Capital Gold provides written notice of its intent not
to renew. However, if a change in control occurs during the term of the change
in control agreements, the term shall continue through and terminate on the
first anniversary of the date on which the change in control occurs. In
addition, Capital Gold removed a provision that provided that, upon a change in
control, the exercise of all outstanding options would decrease to
$0.01.
Capital
Gold believes it is essential to the best interests of the shareholders to
foster the continuous efforts of its key management team during significant
transactions such as a change in control. Capital Gold believes that there will
likely be consolidation within its industry and believes it is important to
incent its executives to remain with Capital Gold during any potential corporate
transaction.
Each of
the named executive officers are entitled to change in control benefits if their
employment is terminated after a change in control either (1) by Capital Gold
for any reason other than permanent disability or cause, as defined in the
agreement, (2) by the executive for good reason, as defined in the agreement or,
(3) by the executive for any reason during the 30 day period commencing on the
first date which is six months after the date of the change in control. The
named executive officers are also entitled to change in control benefits if a
potential change in control (as defined below) occurs and Capital Gold
terminates the executive’s employment for any reason other than due to permanent
disability or cause.
The
change in control benefits include a lump sum payment in an amount equal to
three times (1) the executive’s base salary in effect on the date of the change
in control, or, if greater, as in effect immediately prior to the change in
control; and (2) the executive’s bonus award for the year immediately preceding
the change in control. All unvested options immediately become vested. In
addition, Capital Gold will pay for outplacement services and tax and financial
counseling services through the end of the second tax year following
termination. Each agreement also provides that the executive is entitled to a
payment to make him whole for any federal excise tax imposed on change in
control or severance payments received by him.
A “change
of control” is deemed to occur on the earlier of (1) the date any person is or
becomes the beneficial owner of securities representing 30% or more of the
voting power of Capital Gold’s then outstanding securities; (2) the date on
which the following individuals cease for any reason to constitute a majority of
the number of directors then serving: (i) individuals who, as of the date of the
change in control agreement, constitute the Board and (ii) any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of Capital Gold) whose
appointment or election by the Board or nomination for election by Capital
Gold’s stockholders was approved or recommended by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors on the
date of the change of control agreement or whose appointment, election or
nomination for election was previously so approved or recommended; (3) the
consummation of a Amalgamation or consolidation of Capital Gold or any direct or
indirect subsidiary with another entity, other than a transaction where the
individuals serving on the board of directors constitute at least a majority of
the combined entity and the outstanding securities continue to represent at
least 50% of the combined voting power of the combined entity or a transaction
to effect a recapitalization of Capital Gold where no person is or becomes the
holder of securities representing 30% or more of the combined voting power; (4)
the approval by the stockholders of Capital Gold or a plan of complete
liquidation or dissolution of Capital Gold; or (5) the sale or disposition or
all or substantially all of Capital Gold’s assets, other than a sale or
disposition to an entity of which 50% the combined voting power is held by
Capital Gold’s stockholders.
128
However,
a change in control will not be deemed to occur if the record holders of Capital
Gold’s stock continue to have substantially the same proportionate ownership of
Capital Gold following such transaction or series of transactions.
A
“potential change in control” occurs when (1) Capital Gold enters into an
agreement, the consummation of which would result in a change in control; (2) a
person publicly announces an intention to take or to consider taking actions,
the consummation of which would result in a change in control, which
announcement has not been rescinded; (3) a person becomes the beneficial owner
of securities representing 20% or more of outstanding shares of common stock of
Capital Gold or the combined voting power of its then outstanding securities; or
(4) the Board adopts a resolution that a potential change in control exists,
which resolution has not been modified.
Potential
Payments upon Termination
The table
at the end of this section describes the estimated potential payments upon
termination or change in control of Capital Gold for the Named Executive
Officers based upon the agreements that were then in effect. The table assumes
that the termination or change in control occurred on July 31, 2009. Capital
Gold amended and restated each of the executive’s agreements effective January
1, 2009 to provide that each of the agreements expire on December 31, 2011. The
following disclosure information reflects the terms of our agreements with the
Named Executive Officers currently in effect rather than those in effect on July
31, 2009 which the table is based upon. Please refer to “Employment Agreements
and Change in Control Agreements” section above for more details on the
provisions within these agreements. The actual amounts to be paid can only be
determined at the time of such executive’s separation from Capital
Gold.
Retirement
Benefits
Capital
Gold currently does not offer any employee benefit plans to all
employees.
Voluntary
Termination or Expiration of Agreement
A Named
Executive Officer would receive no payments or other benefits upon voluntary
termination or the expiration of his agreement, except for accrued base salary
or fees, vacation time or any reasonable and necessary business expenses
incurred in connection with his duties prior to termination.
Termination
Without Cause
Capital
Gold provides for benefits in the case of termination without cause based upon
an amount equal to the greater of a Named Executive Officer’s base annual salary
or fees in effect upon the date of termination or the balance of the base salary
or fees remaining in the then current term of the Named Executive Officer’s
agreement. Please see the Employment Agreements and Change of Control Agreement
section above beginning on page 33 for a description of the terms of these
agreements. Each Named Executive Officer also is entitled to accrued base salary
or fees, vacation time or any reasonable and necessary business expenses
incurred in connection with his duties prior to termination. In the event that a
Named Executive Officer’s employment terminates without cause prior to the last
day of the fiscal year for which the bonus applies, he will be entitled to a
bonus prorated for the period from the beginning of that fiscal year to the date
of termination.
Termination
for Cause
No
additional benefits are payable to any Named Executive Officer in any case of
termination for cause other than accrued base salary or fees, vacation time and
any reasonable and necessary business expenses incurred in connection with his
duties prior to termination. Capital Gold generally defines cause as: (a)
failure or refusal to perform the services required; (b) a material breach by
the Named Executive Officer of any of the terms of their applicable agreement;
or (c) conviction of a crime that either results in imprisonment or involves
embezzlement, dishonesty, or activities injurious to Capital Gold or its
reputation.
129
Change
in Control
Capital
Gold’s 2006 Equity Incentive Plan provides for immediate vesting of unvested
restricted stock and stock options upon a change in control of Capital Gold.
Capital Gold also provides change of control benefits to its Named Executive
Officers pursuant to Change in Control agreements. These Agreements run through
December 31, 2011 and automatically renew for one year periods thereafter,
unless Capital Gold notifies the executive prior to any extension date that the
agreement term is not being extended. A change of control is generally defined
as:
|
1)
|
The date any person acquires
beneficial ownership of 30% or more, directly or indirectly, of the
combined voting power of the then outstanding securities of Capital Gold
entitled to vote; or
|
|
2)
|
The date on which the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: individuals who, on the date of the Change In
Control Agreement, constitute the Board and any new director (other than
one whose initial assumption of office in connection with an actual or
threatened election contest) whose appointment or election by the Board or
nomination for election by Capital Gold’s stockholders was approved or
recommended by a vote of at least 2/3 of the directors then still in
office who either were directors on the date of the Change In Control
Agreement or whose appointment, election or nomination for election was
previously so approved or recommended;
or
|
|
3)
|
The date on which there is
consummated a merger or consolidation of Capital Gold or any direct or
indirect subsidiary of it with any other corporation or other entity,
other than (i) a merger or consolidation (A) immediately following which
the individuals who comprise the Board immediately prior thereto
constitute at least a majority of the board of directors of Capital Gold,
the entity surviving such merger or consolidation or, if Capital Gold or
the entity surviving such merger or consolidation is then a subsidiary,
the ultimate parent thereof and (B) which results in the voting securities
of Capital Gold outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity or any
parent thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of Capital
Gold or any subsidiary of it, at least 50% of the combined voting power of
the securities of Capital Gold or such surviving entity or any parent
thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of
Capital Gold (or similar transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of Capital Gold
representing 30% or more of the combined voting power of Capital Gold’s
then outstanding securities;
or
|
|
4)
|
The date on which the
stockholders of Capital Gold approve a plan of complete liquidation or
dissolution of it or there is consummated an agreement for the sale or
disposition by Capital Gold of all or substantially all of its assets,
other than a sale or disposition by Capital Gold of all or substantially
all of its assets to an entity, at least 50% of the combined voting power
of the voting securities of which are owned by stockholders of Capital
Gold, in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of Capital Gold or any
subsidiary of it, in substantially the same proportions as their ownership
of Capital Gold immediately prior to such
sale.
|
Change
of Control Benefits
The Named
Executive Officers shall be entitled to change in control benefits if their
engagement by Capital Gold is terminated during their applicable agreement term
but after a Change in Control (i) by Capital Gold for any reason other than
permanent disability or cause, (ii) by the Named Executive Officer for good
reason or (iii) by the Named Executive Officer for any reason during the 30-day
period commencing on the first date which is six months after the date of the
Change in Control. Capital Gold defines good reason as any of the following
without the executive’s prior consent: (a) a significant adverse change in the
nature, scope or status of the executive’s position, authorities or services
from those in effect immediately prior to the Change in Control; (b) the failure
by Capital Gold to pay the executive any portion of the executive’s current
compensation; (c) a reduction in the executive’s annual base compensation (or a
material change in the frequency of payment) as in effect immediately prior to
the Change in Control; (d) the failure by Capital Gold to award the Executive an
annual bonus in any year which is at least equal to the annual bonus awarded to
the Executive for the year immediately preceding the year of the Change in
Control; (e) the failure by Capital Gold to award the Executive equity-based
incentive compensation (such as stock options, shares of restricted stock, or
other equity-based compensation) on a periodic basis consistent with Capital
Gold’s practices with respect to timing, value and terms prior to the Change in
Control; (f) the failure of Capital Gold to award the Executive incentive
compensation of any nature based on attained milestones when such milestones are
attained; or (g) the failure of Capital Gold to obtain a satisfactory agreement
from any successor to it to assume and agree to perform the Change In Control
agreement.
130
If an
executive is eligible for termination benefits under the Change of Control
provisions within such executive’s agreement, the executive is entitled to, in
addition to any amounts he is entitled to under his employment
agreement:
|
·
|
an amount equal to three times
the executive’s base salary or fees in effect on the date of the Change in
Control or, if greater, as in effect immediately prior to the date of
termination;
|
|
·
|
an amount equal to three times
the executive’s bonus award for the year immediately preceding the year of
the Change in Control;
|
|
·
|
all unvested Capital Gold options
shall immediately become vested, and any exercise must occur no later than
March 15 of the calendar year after the date of
termination;
|
|
·
|
outplacement services and tax and
financial counseling suitable to such executive’s position through the end
of the second taxable year after the taxable year of his or her separation
from service with Capital Gold (or earlier if such executive gains
employment); and
|
|
·
|
certain gross-up payments for
excise taxes on the change of control
payment.
|
Death
Upon the
death of a Named Executive Officer, his agreement terminates. Capital Gold will
pay the executive’s estate or beneficiary, as applicable, all accrued base
salary, all accrued vacation time and any reasonable and necessary business
expenses incurred by executive in connection with his duties, all to the date of
termination.
Disability
Capital
Gold can terminate a Named Executive Officer’s employment if such executive is
disabled, generally upon at least thirty 30 days’ written notice. For most of
the Named Executive Officers, disability means that he is prevented by illness,
accident or other disability (mental or physical) from performing the essential
functions of the position for one or more periods cumulatively totaling three
months during any consecutive 12 month period. For Messrs. Brownlie and Chipman,
disability means either executive’s inability effectively to substantially
provide their services by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than 12 months.
In the event the executive’s agreement is terminated, Capital Gold shall pay to
the executive all accrued base salary or fees, all accrued vacation time and any
reasonable and necessary business expenses incurred by him in connection with
his duties, all to the date of termination. In addition, if Messrs. Dieterle,
Pritchard or Hazlitt is terminated due to their disability, Capital Gold shall
pay to them severance payments in an amount equal to one month of their
respective base annual salaries.
Termination
by the Named Executive Officer Due to Material Breach by Company
The Named
Executive Officer can terminate his agreement due to a material breach of such
agreement by Capital Gold upon 30 days written notice specifying the breach, and
failure of Capital Gold to either (i) cure or diligently commence to cure the
breach within the 30-day notice period, or (ii) dispute in good faith the
existence of the material breach. In the event of such a termination, the Named
Executive Officer is entitled to the same termination benefits described in
“Termination Without Cause” above.
Accelerated
Vesting of Restricted Stock and Stock Options
The
amounts shown below assume vesting as of July 31, 2009 of restricted stock or
stock options at the year-end closing price of $0.61.
131
280G
Tax Gross-Up
Upon a
change in control of Capital Gold, our executives may be subject to certain
excise taxes pursuant to Section 280G of the Internal Revenue Code. Capital Gold
has agreed to reimburse our executives for all excise taxes that are imposed on
the executive under Section 280G. Any 280G tax gross-up amounts reflected in the
tables below assume that such executive is entitled to a full reimbursement by
Capital Gold of any (a) excise taxes that are imposed on the executive as a
result of the change in control, (b) any income and excise taxes imposed on the
executive as a result of Capital Gold’s reimbursement of the excise tax amount,
and (c) any additional income taxes and excise taxes that are imposed on the
executive as a result of Capital Gold’s reimbursement of the executive for any
excise or income taxes. The calculation of the 280G gross-up amount in the
tables below is based upon a 280G excise tax rate of 20%, a 35% federal income
tax rate, a 1.45% Medicare tax rate and a 6.85% state income tax
rate.
For
purposes of the Section 280G calculation, it is assumed that no amounts will be
discounted as attributable to reasonable compensation and no value will be
attributed to the executive executing a non-competition agreement.
|
Name
|
Termination
WithoutCause (1)
($)
|
Change in
Control
($)
|
Death
($)
|
Disability
($)
|
||||||||||||
|
Gifford A. Dieterle (2)
|
||||||||||||||||
|
Base
Benefit
|
694,792 | - | - | - | ||||||||||||
|
Bonus
|
- | - | - | - | ||||||||||||
|
Change
in Control Payment
|
- | 1,425,000 | - | - | ||||||||||||
|
Accelerated
Vesting of Restricted Stock
|
- | 70,000 | - | - | ||||||||||||
|
Accelerated
Vesting of Stock Options
|
- | 25,000 | - | - | ||||||||||||
|
Disability
Coverage
|
- | - | - | 23,958 | ||||||||||||
|
Outplacement
Services
|
- | 10,000 | - | - | ||||||||||||
|
280G
Tax Gross-Up
|
- | 698,458 | - | - | ||||||||||||
|
Total
|
694,792 | 2,228,458 | - | 23,958 | ||||||||||||
|
John Brownlie
|
||||||||||||||||
|
Base
Benefit
|
625,313 | - | - | - | ||||||||||||
|
Bonus
|
- | - | - | - | ||||||||||||
|
Change
in Control Payment
|
- | 1,338,750 | - | - | ||||||||||||
|
Accelerated
Vesting of Restricted Stock
|
- | 70,000 | - | - | ||||||||||||
|
Accelerated
Vesting of Stock Options
|
- | 25,000 | - | - | ||||||||||||
|
Disability
Coverage
|
- | - | - | - | ||||||||||||
|
Outplacement
Services
|
- | 10,000 | - | - | ||||||||||||
|
280G
Tax Gross-Up
|
- | 588,033 | - | - | ||||||||||||
|
Total
|
625,313 | 2,031,783 | - | - | ||||||||||||
|
Christopher M. Chipman
|
||||||||||||||||
|
Base
Benefit
|
486,354 | - | - | - | ||||||||||||
|
Bonus
|
- | - | - | - | ||||||||||||
|
Change
in Control Payment
|
- | 1,110,000 | - | - | ||||||||||||
|
Accelerated
Vesting of Restricted Stock
|
- | 70,000 | - | - | ||||||||||||
|
Accelerated
Vesting of Stock Options
|
- | 10,000 | - | - | ||||||||||||
|
Disability
Coverage
|
- | - | - | - | ||||||||||||
|
Outplacement
Services
|
- | 10,000 | - | - | ||||||||||||
|
280G
Tax Gross-Up
|
- | 475,543 | - | - | ||||||||||||
|
Total
|
486,354 | 1,675,543 | - | - | ||||||||||||
|
J. Scott Hazlitt
|
||||||||||||||||
|
Base
Benefit
|
375,188 | - | - | - | ||||||||||||
|
Bonus
|
- | - | - | - | ||||||||||||
|
Change
in Control Payment
|
- | 690,750 | - | - | ||||||||||||
|
Accelerated
Vesting of Restricted Stock
|
- | 21,000 | - | - | ||||||||||||
|
Accelerated
Vesting of Stock Options
|
- | 11,500 | - | - | ||||||||||||
|
Disability
Coverage
|
- | - | - | 12,938 | ||||||||||||
|
Outplacement
Services
|
- | 10,000 | - | - | ||||||||||||
|
280G
Tax Gross-Up
|
- | 303,256 | - | - | ||||||||||||
|
Total
|
375,188 | 1,036,506 | - | 12,938 | ||||||||||||
|
(1)
|
Termination
without cause payments for Named Executives Officers were based upon
employment and engagement agreements in effect as of July 31,
2009. All Named Executive Officers were eligible to receive a
cash payment equal to the greater of (i) the executive’s base salary or
base rate in effect on the date of termination or (ii) the balance of the
base salary or base rate remaining in the then current term of the
agreement.
|
|
(2)
|
On
March 18, 2010, Gifford A. Dieterle resigned as a Chairman of the Board
and CEO, and therefore, no longer subject to change of control
benefits.
|
132
Compensation
Committee Report
Our
Committee has reviewed and discussed the Compensation Discussion and Analysis
contained in this Annual Report with management. Based on our
Committee’s review of and the discussions with management with respect to the
Compensation Discussion and Analysis, our Committee recommended to the board of
directors that the Compensation Discussion and Analysis be included in the our
Annual Report on Form 10-K for the fiscal year ended July 31, 2009 for filing
with the SEC.
|
COMPENSATION
COMMITTEE
|
|
John
W. Cutler, Committee Chairman
|
|
Leonard
J. Sojka
|
|
Stephen
M. Cooper
|
The
foregoing Compensation Committee report shall not be deemed incorporated by
reference into any filings under the Securities Act or the Exchange Act, and
shall not otherwise be deemed filed under these acts, except to the extent we
specifically incorporate this report by reference into such
filings.
Audit
Committee Report
The
primary responsibility of the Audit Committee (the “Committee”) is to assist the
Board of Directors in discharging its oversight responsibilities with respect to
financial matters and compliance with laws and regulations. The primary methods
used by the Committee to fulfill its responsibility with respect to financial
matters are:
|
·
|
To appoint, evaluate, and, as the
Committee may deem appropriate, terminate and replace Capital Gold’s
independent registered public
accountants;
|
|
·
|
To monitor the independence of
Capital Gold’s independent registered public
accountants;
|
|
·
|
To determine the compensation of
Capital Gold’s independent registered public
accountants;
|
|
·
|
To pre-approve any audit
services, and any non-audit services permitted under applicable law, to be
performed by Capital Gold’s independent registered public
accountants;
|
|
·
|
To review Capital Gold’s risk
exposures, the adequacy of related controls and policies with respect to
risk assessment and risk
management;
|
|
·
|
To monitor the integrity of
Capital Gold’s financial reporting processes and systems of control
regarding finance, accounting, legal compliance and information systems;
and
|
|
·
|
To facilitate and maintain an
open avenue of communication among the Board of Directors, management and
Capital Gold’s independent registered public
accountants.
|
133
In
discharging its responsibilities relating to internal controls, accounting and
financial reporting policies and auditing practices, the Committee discussed
with Capital Gold’s independent registered public accountants, Wolinetz, Lafazan
& Company, P.C., the overall scope and process for its audit. The Committee
has met with Wolinetz, Lafazan & Company, P.C., with and without management
present, to discuss the results of its examinations and the overall quality of
Capital Gold’s financial reporting.
The
Committee has discussed with Wolinetz, Lafazan & Company, P.C. its judgments
about the quality, in addition to the acceptability, of the Capital Gold’s
accounting principles as applied in Capital Gold’s financial reporting, as
required by Statement on Auditing Standards No. 90 “Communications with Audit
Committees.”
The
Committee also has received a letter from Wolinetz, Lafazan & Company, P.C.
that is required by applicable requirements of the Public Company Accounting
Oversight Board regarding the independent accountant's communications with the
audit committee concerning independence, and has discussed with Wolinetz,
Lafazan & Company, P.C. their independence.
The
Committee has met and held discussions with management. The Committee has
reviewed and discussed with management Capital Gold’s audited consolidated
financial statements as of and for the fiscal years ended July 31, 2009 and
2008.
Based on
the reviews and discussions referred to above, the Committee recommended to the
Board of Directors that the audited financial statements referred to above be
included in Capital Gold’s Annual Report for the year ended July 31,
2009.
This
report is respectfully submitted by the members of the Audit Committee of the
Board of Directors.
|
AUDIT
COMMITTEE
|
|
Leonard
J. Sojka, Committee Chairman
|
|
John
W. Cutler
|
|
Stephen
M. Cooper
|
Change
of Auditors
As a
result of a review process undertaken by the Audit Committee of the Board of
Directors (the “Audit Committee”) of Capital Gold Corporation (the “Company”),
on January 19, 2010, Capital Gold notified Wolinetz, Lafazan & Company, P.C.
(“Wolinetz”) that it was dismissed as Capital Gold’s independent registered
public accounting firm. The change in accountants did not result from any
dissatisfaction with the quality of professional services rendered by
Wolinetz.
The
reports of Wolinetz on Capital Gold’s financial statements for the fiscal years
ended July 31, 2009 and 2008 contained no adverse opinion or disclaimer of
opinion, were not qualified or modified as to uncertainty, audit scope or
accounting principles.
During
Capital Gold’s fiscal years ended July 31, 2009 and 2008, and through January
19, 2010, there have been no disagreements with Wolinetz on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedure, which disagreements, if not resolved to the satisfaction of
Wolinetz, would have caused Wolinetz to make reference thereto in its reports on
the financial statements.
The
Company has engaged BDO Seidman, LLP (“BDO”) as its new independent registered
public accounting firm as of January 22, 2010. During the fiscal years ended
July 31, 2009 and 2008, and through January 22, 2010, Capital Gold did not
consult with BDO regarding any of the matters described in Item 304(a)(2)(i) and
(ii) of Regulation S-K. In deciding to select BDO, the Audit Committee reviewed
auditor independence issues and existing commercial relationships with BDO and
concluded that BDO has no commercial relationship with Capital Gold that would
impair its independence.
Beneficial
Ownership of Capital Gold’s Securities
The
following table sets forth as of March 29, 2010, the number and percentage of
outstanding shares of Common Stock beneficially owned by:
134
|
·
|
Each person, individually or as a
group, known to us to be deemed the beneficial owners of five percent or
more of our issued and outstanding Common
Stock;
|
|
·
|
Each of our Directors and the
Named Executives; and
|
|
·
|
All of our officers and Directors
as a group.
|
As of the
foregoing date, there were no other persons, individually or as a group, known
to us to be deemed the beneficial owners of five percent or more of the issued
and outstanding Common Stock.
This
table is based upon information supplied by Schedules 13D and 13G, if any, filed
with the SEC, and information obtained from our directors and named executives.
For purposes of this table, a person or group of persons is deemed to have
“beneficial ownership” of any shares of Common Stock which such person has the
right to acquire within 60 days of March 29, 2010. For purposes of computing the
percentage of outstanding shares of Common Stock held by each person or group of
persons named in the table, any security which such person or persons has or
have the right to acquire within such date is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, Capital Gold believes,
based on information supplied by such persons, that the persons named in this
table have sole voting and investment power with respect to all shares Common
Stock which they beneficially own.
|
Pre-Transaction
|
Post-Transaction
|
|||||||||||||||
|
Name and Address of Beneficial
Owner
|
Amount
and
Nature
of
Beneficial
Ownership
|
Approximate
Percentage of
Beneficial
Ownership (1)
|
Amount and
Nature of
Beneficial
Ownership
|
Approximate
Percentage of
Beneficial
Ownership
|
||||||||||||
|
Sprott
Asset Management, Inc.
|
7,534,250 | 15.5 | % | 7,534,250 | 12.4 | % | ||||||||||
|
Suite
2700, South Tower
|
||||||||||||||||
|
Royal
Bank Plaza
|
||||||||||||||||
|
Toronto,
ON M5J 2J1
|
||||||||||||||||
|
Canada
|
||||||||||||||||
|
Van
Eck Associates Corporation
|
4,193,000 | (2) | 8.6 | % | 4,193,000 | 6.9 | % | |||||||||
|
335
Madison Ave., 19th
Flr
|
||||||||||||||||
|
New
York, NY 10017
|
||||||||||||||||
|
Sprott
Canadian Equity Fund
|
2,884,275 | 5.9 | % | 2,884,275 | 4.8 | % | ||||||||||
|
Suite
2700, South Tower
|
||||||||||||||||
|
Royal
Bank Plaza
|
||||||||||||||||
|
Toronto,
ON M5J 2J1
|
||||||||||||||||
|
Canada
|
||||||||||||||||
|
John
Brownlie*
|
981,125 | (3) | 2.0 | % | 981,125 | 1.6 | % | |||||||||
|
6040
Puma Ridge
|
||||||||||||||||
|
Littleton,
CO 80124
|
||||||||||||||||
|
Christopher
M. Chipman*
|
312,500 | (3) | ** | 312,500 | ** | |||||||||||
|
826
Fayette Street
|
||||||||||||||||
|
Conshohocken,
PA 19428
|
||||||||||||||||
|
Scott
Hazlitt*
|
437,500 | (3) | ** | 437,500 | ** | |||||||||||
|
9428
W. Highway 50
|
||||||||||||||||
|
Salida,
CO 81201
|
||||||||||||||||
|
Leonard
J. Sojka*
|
56,585 | (3) | ** | 56,585 | ** | |||||||||||
|
1460
Spring Valley Road
|
||||||||||||||||
|
Golden
Valley, MN 55422
|
||||||||||||||||
|
John
W. Cutler*
|
68,950 | (3) | ** | 68,950 | ** | |||||||||||
|
4190
Lively Lane
|
||||||||||||||||
|
Dallas,
TX
|
||||||||||||||||
|
Stephen
M. Cooper*
|
51,815 | (3) | ** | 51,815 | ** | |||||||||||
|
10475
Park Meadows Drive
|
||||||||||||||||
|
Suite
600
|
||||||||||||||||
|
Lone
Tree, CO 80124
|
||||||||||||||||
|
All
Officers and Directors as a Group (6 persons)
|
1,908,475 | (3) | 3.8 | % | 1,908,475 | 3.1 | % | |||||||||
* Officer
and/or Director of Capital Gold Corporation
** Less
than 1%
|
(1)
|
Based
upon 48,497,173 shares issued and outstanding as of March 29,
2010.
|
|
(2)
|
Represents
shares held within mutual funds and other client accounts managed by Van
Eck Associates Corporation, none of which owns more than 5% of Capital
Gold’s outstanding shares of Common
Stock.
|
|
(3)
|
For
Messrs. Brownlie, Chipman and Hazlitt includes, respectively, 750,000
shares, 187,500 shares and 150,000 shares issuable upon exercise of
options. For Messrs. Sojka, Cutler and Cooper includes 50,000 shares each
issuable upon exercise of options.
|
|
(4)
|
Based
upon 60,596,308 shares issued and outstanding post-transaction shares
issued upon consummation of the business combination with
Nayarit.
|
135
Interest
of Capital Gold’s Stockholders in the Transaction
Upon
consummation of the Business Combination, the current holders of Capital Gold
common stock will hold approximately 80.03% of Capital Gold’s common stock
assuming (i) no holders of Nayarit common stock exercise their dissenters’
rights; and (ii) no holder of Capital Gold or Nayarit stock options or warrants
exercise any of such options or warrants.
Certain
Relationships and Related Transactions of Capital Gold
In August
2002, Capital Gold purchased marketable equity securities of a related company.
Capital Gold recorded approximately $6,000, $6,000 and $9,000 in expense
reimbursements including office rent from this entity for the years ended July
31, 2009, 2008 and 2007, respectively (see Notes 3 and 11 to the Notes to the
Consolidated Financial Statements of Capital Gold).
Capital
Gold utilizes Caborca Industrial, a Mexican corporation that is 100% owned by
Gifford A. Dieterle, Capital Gold’s former Chief Executive Officer, and
Jeffrey W. Pritchard, Capital Gold’s former Executive Vice President, for mining
support services. These services include but are not limited to the payment of
mining salaries and related costs. Caborca Industrial bills us for these
services at slightly above cost. Mining expenses charged by Caborca Industrial
and eliminated upon consolidation amounted to approximately $4,767,000,
$3,775,000 and $702,000 for the years ended July 31, 2009, 2008 and 2007,
respectively.
During
the years ended July 31, 2009, 2008 and 2007, Capital Gold paid Jack Everett,
its former Vice President, Exploration and Director, consulting fees of $0,
$100,000 and $0, respectively. In addition, this individual earned wages of
$120,000 during the year ended July 31, 2007. During the years ended July 31,
2009, 2008 and 2007, Capital Gold paid Robert Roningen, a director, legal and
consulting fees of $8,000, $35,000 and $24,000, respectively.
Certain
Relationships and Related Transactions with Nayarit
None.
Description
of Securities of Capital Gold
Capital
Gold’s authorized capital stock consists of 75,000,000 shares of stock, $.0001
par value. 48,497,173 shares of common stock were issued and outstanding as of
the date of this joint proxy statement/prospectus. The following description
summarizes the material terms of Capital Gold’s share capital. Because it is
only a summary, it may not contain all the information that is important to you.
For a complete description you should refer to our certificate of incorporation,
as amended, which are exhibits to the registration statement of which this joint
proxy statement/prospectus is a part, and to the applicable provisions of the
DGCL.
136
On
January 25, 2010, Capital Gold effected a reverse stock split, with every four
(4) shares of common stock issued and outstanding being converted into one (1)
share of common stock to meet minimum share price requirements in connection
with its NYSE AMEX listing application. The reverse split was originally
approved by stockholders at the Annual Meeting of Stockholders held on October
31, 2008 and subsequently ratified by stockholders at the recent Annual Meeting
of Stockholders held on January 19, 2010. No fractional common shares were
issued in connection with the reverse split. A holder of Capital Gold common
stock, who otherwise would have been entitled to receive a fractional share as a
result of the reverse split, will receive an amount in cash equal to US$
multiplied by such fractional entitlement.
Common
Stock
Shares of
Capital Gold’s common stock are entitled to one vote per share, either in person
or by proxy, on all matters that may be voted upon by the owners of Capital
Gold’s shares at meetings of its stockholders. There is no provision for
cumulative voting with respect to the election of directors by the holders of
common stock. Therefore, the holders of more than 50% of Capital Gold’s shares
of outstanding common stock can, if they choose to do so, elect all of Capital
Gold’s directors. In this event, the holders of the remaining shares of common
stock will not be able to elect any directors.
The
holders of Capital Gold common stock:
|
|
·
|
have equal rights to dividends
from funds legally available therefore, when and if declared by Capital
Gold’s Board of Directors;
|
|
|
·
|
are entitled to share ratably in
all of our assets available for distribution to holders of common stock
upon liquidation, dissolution or winding up of Capital Gold’s affairs;
and
|
|
|
·
|
do not have preemptive rights,
conversion rights, or redemption of sinking fund
provisions.
|
Anti-Takeover
Provisions
Capital
Gold is subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a “Business Combination” with an
“interested stockholder” for a period of three years from the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained this status with the approval of the board of
directors or unless the Business Combination is approved in a prescribed manner.
A “Business Combination” includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
exceptions, an “interested stockholder” is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation’s voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire
us.
Provisions
of Capital Gold’s certificate of incorporation and bylaws also may make it more
difficult to acquire control of Capital Gold.
Capital
Gold’s amended by-laws: (i) require stockholders that seek to bring business
before a meeting of stockholders, including nominations of candidates for
election as directors, to provide notice of such business to Capital Gold, and
certain other information, within a specified period prior to the meeting; (ii)
authorize the Board of Directors to determine the record date applicable to any
proposed stockholder action to be taken by written consent without a meeting,
and require Capital Gold to appoint an independent inspector to the review the
validity and sufficiency of any consents received in connection with any such
proposed action; and (iii) do not permit stockholders to call special
stockholders' meetings.
These
provisions may make it more difficult for someone to acquire control of Capital
Gold or for Capital Gold’s stockholders to remove existing management, and might
discourage a third party from offering to acquire Capital Gold, even if a change
in control or in management would be beneficial to Capital Gold’s stockholders.
In addition, the foregoing provisions could deprive stockholders of the
opportunity to realize a premium on the shares of common stock owned by
them.
137
Transfer Agent and Warrant Agent
The transfer agent for Capital Gold’s
shares is American Stock Transfer & Trust Company. The address of the
transfer agent is 59 Maiden Lane, Plaza Level, New York, New York
10038.
Price
Range of Capital Gold Shares and Dividend Policy
Shares of
Capital Gold’s common stock have been listed for trading on the NYSE AMEX since
February 2, 2010 under the symbol “CGC.” Prior to that date the common stock was
quoted on the OTC Bulletin Board under the symbol “CGLD.”
The table
below sets forth, for the fiscal quarters indicated, the high and low closing
prices of Capital Gold’s shares of common stock as reported on the NYSE AMEX or
the OTCBB, as applicable. All prices have been adjusted to reflect the 4 for 1
reverse stock split Capital Gold effected on January 25, 2010.
|
Common Stock
|
||||||||
|
Quarter
Ended
|
High
|
Low
|
||||||
|
USD$
|
USD$
|
|||||||
|
January
31, 2010
|
$ | 4.24 | $ | 2.94 | ||||
|
October 31,
2009
|
3.12 | 2.36 | ||||||
|
July 31,
2009
|
2.88 | 2.12 | ||||||
|
April 30,
2009
|
2.84 | 2.08 | ||||||
|
January 31,
2009
|
2.52 | 1.20 | ||||||
|
October
31, 2008
|
2.60 | 1.08 | ||||||
|
July
31, 2008
|
2.80 | 1.08 | ||||||
|
April
30, 2008
|
3.12 | 2.48 | ||||||
Capital
Gold’s common stock also trades on the Toronto Stock Exchange under the symbol
“CGC.” All share prices have been reflected in Canadian dollars as
the Toronto Stock Exchange is quoted in Canadian dollars. The high and low
closing prices for its common stock for the fiscal quarters indicated below,
adjusted for the reverse stock split are as follows:
|
Common Stock
|
||||||||
|
Quarter
Ended
|
High
|
Low
|
||||||
|
CDN$
|
CDN$
|
|||||||
|
January
31, 2010
|
$ | 4.40 | $ | 3.12 | ||||
|
October 31,
2009
|
3.32 | 2.56 | ||||||
|
July 31,
2009
|
3.16 | 2.48 | ||||||
|
April 30,
2009
|
3.60 | 2.52 | ||||||
|
January 31,
2009
|
3.04 | 1.40 | ||||||
|
October
31, 2008
|
2.72 | 1.28 | ||||||
|
July
31, 2008
|
2.84 | 2.40 | ||||||
|
April
30, 2008
|
3.32 | 2.48 | ||||||
On
February 10, 2010, the business day before the public announcement of the
execution of the Business Combination Agreement, the high and low sale prices of
shares of Capital Gold’s common stock reported on the NYSE AMEX were USD $3.70
and USD $3.48, respectively. On the same trading day, the high and low sale
prices of shares of Capital Gold common stock as reported on the Toronto Stock
Exchange were CDN $3.74 and CDN $3.71, respectively. On the record date, Capital
Gold’s common stock closed at $[ ] on the
NYSE AMEX and CDN $[ ] on the TSX.
Capital Gold and Nayarit stockholders are advised to obtain current market
quotations for Capital Gold common stock as well as Nayarit common
stock. The market price of Capital Gold common stock and Nayarit
common stock will fluctuate between the date of this joint proxy
statement/prospectus and the completion of the Business
Combination. No assurance can be given relating to the market price
of Capital Gold common stock before or after the effective time of the Business
Combination.
As of the
record date, there were [ ]
holders of record of Capital Gold’s common stock.
138
Dividend
Policy
Capital
Gold has not paid any dividends on its common stock to date. The payment of
dividends in the future will depend on Capital Gold’s financial status and
contemplated financial requirements. The payment of any dividends will be within
the discretion of Capital Gold’s Board of Directors. It is the present intention
of the board of directors to retain any earnings for use in business operations
and, accordingly, Capital Gold does not anticipate the board of directors
declaring any dividends in the foreseeable future.
139
INFORMATION
ABOUT NAYARIT
Name
and Incorporation
Nayarit
Gold Inc. (“Nayarit”) was amalgamated pursuant to the laws of Ontario on May 2,
2005. Its business as currently constituted, began as of that date.
The
registered office of Nayarit is located at 76 Temple Terrace, Suite 150, Lower
Sackville, Nova Scotia B4C 0A7. The principal office of Nayarit Gold is located
at 76 Temple Terrace, Suite 150, Lower Sackville, Nova Scotia B4C
0A7.
Intercorporate
Relationships
Nayarit has one wholly-owned
subsidiary, being Nayarit Gold de Mexico S.A. de C.V., a private Mexican company
incorporated on April 1, 2004. The following diagram illustrates the
inter-corporate relationships of Nayarit:
Description of
Business
Nayarit is a junior mineral exploration
company that was incorporated in November, 2003 and became a public company by
virtue of its amalgamation with Canhorn Chemical Corporation on May 2, 2005.
Management's strategy for building Nayarit into a profitable resource company
and maximizing stockholder value is through successful exploration, focusing on
cost-effective examination and early drill testing of high quality precious
metal targets within prolific mining districts in Mexico.
Nayarit is exploring its Orion Gold
Project in the State of Nayarit, Mexico. The original exploration focus was on
the known mineralization of the La Estrella property, one of the original
properties making up the Orion Gold Project. With expansion of the property area
by almost 1200% in 2005 and 2006, other targets were identified and the strategy
has taken on more of a district approach. A reconnaissance drill program
initiated in 2007 throughout a small portion of the northern area in the
concession resulted in the discovery of the Animas System, which was the focus
of Nayarit's diamond drill program.
Portions
of the following disclosure relating to the Orion Gold Project have been derived
from two independent technical reports prepared for Nayarit entitled “National
Instrument 43-101 Technical Report on Resources – Nayarit Gold Inc. – Orion
Project, State of Nayarit, Mexico” dated December 29, 2009, and “National
Instrument 43-101 Preliminary Economic Assessment – Nayarit Gold Inc. – Orion
Project, Animas/Del Norte Zone, State of Nayarit, Mexico” dated February 5, 2010
authored by Jeffery Volk, CPG, FAusIMM, MSc and other qualified persons
(collectively, the “Authors”) of SRK Consulting, 7175 W. Jefferson Avenue, Suite
3000, Lakewood, CO 80235. These technical reports have
been completed in accordance with the terms of National Instrument 43-101 and
the Authors are “qualified persons” within the meaning of National Insturment
43-101 and are independent of Nayarit and Capital Gold. The technical
reports are available for inspection during regular business hours at the
corporate head office of Nayarit at 76 Temple Terrace, Suite 150, Lower
Sackville, Nova Scotia, Canada B4C 0A7. The technical reports may
also be reviewed under Nayarit’s profile on the SEDAR website at www.sedar.com. The
disclosure in the prospectus has been reviewed by Mr. Ramon Hiram Luna Espinoza,
P. Geonga, a consultant to Nayarit who is a "qualified person" under National
Instrument 4-3-101 and is not independent of Nayarit.
Property
Description and Location
The Orion
Project lies in the prolific Sierra Madre Occidental, which hosts numerous
multi-million ounce gold-silver deposits. The Orion Project is one of the larger
contiguous concessions in the Sierra Madre, composed of 104,500ha. The Orion
Project is located on the SE flank of the Sierra Madre, about 125km south of the
famous Tayoltita district which has reserves reported to be +20 million gold
equivalent ounces.
The
concessions are located approximately 110km north–northwest of Tepic, state
capital of Nayarit, México, 150km southeast of Mazatlan, Sinaloa. The Orion
Project is located 13 km south–southeast of the town of Acaponeta, Nayarit, in
the Motaje Mining District as identified by the Servicio Geologico Mexicano
(formerly the Consejo de Recursos Minerales).
140
Figure 1.
Concessions outlined on Nayarit State.
Royalties,
Agreements and Encumbrances
Nayarit
Gold de Mexico, S.A. de C.V. (“Nayarit Mexico”) has the exclusive right to
explore and, as the case may be, exploit the “La Estrella” (title 196009) mining
concession, in accordance with the terms of an exploration agreement (the
“Exploration Agreement”) dated November 28, 2003 which was entered into by and
between Mr. Adrian Evodio Prado Gomez and Minera Portree de Zacatecas, S.A. de
C.V., which conveyed its rights to Nayarit Mexico in accordance with the terms
of a Conveyance Agreement dated May 20, 2004 (the “Conveyance Agreement”) and
amendments thereto dated May 17, 2004, July 29, 2004, November 28, 2007,
November 28, 2008 and a letter of intent for a new amendment dated December 4,
2009 (the “Estrella Amendments”).
For the
exploration rights of La Estrella as described above, Nayarit Mexico has paid up
to date the amount of US$525,000 plus applicable Value Added Tax, and shall pay
the following amounts in the dates indicated below, after which payment, Nayarit
Mexico will acquire 100% interest to La Estrella concession:
|
|
(i)
|
US$25,000
plus applicable Value Added Tax, in June 8,
2010;
|
|
|
(ii)
|
US$100,000
plus applicable Value Added Tax, in December 8,
2010;
|
|
|
(iii)
|
US$100,000
plus applicable Value Added Tax, in June 8,
2011;
|
|
|
(iv)
|
US$175,000
plus applicable Value Added Tax, in December 8;
2011
|
|
|
(v)
|
US$175,000
plus applicable Value Added Tax, in June 8, 2012;
and
|
|
|
(vi)
|
US$350,000
plus applicable Value Added Tax, in December 8,
2012.
|
The
Exploration Agreement and Amendments thereto may be terminated by Nayarit Mexico
at any time through a written communication addressed to Prado.
141
Nayarit Mexico has the unlimited right
to explore the following mining concessions (“Huajicari Concessions”), in
accordance with the terms of and Exploration and Assignment Option Agreement of
Mining Concessions (the “Option Agreement”) dated May 8, 2008, which was entered
into by and between Compañía Minera Huajicari, S.A. de C.V. (“Huajicari”) and
Nayarit Mexico and amendment thereto, dated December 10,
2009:
|
CLAIM
|
TITLE NUMBER
|
|
|
“San
Juan Fracc. I”
|
205392
|
|
|
“San
Juan Fracc. II”
|
205393
|
|
|
“San
Francisco Tres”
|
203136
|
|
|
“San
Juan I”
|
221365
|
|
|
“Isis”
|
214395
|
|
|
“San
Miguel”
|
224392
|
The term granted to Nayarit Mexico for
the exploration of the abovementioned mining is of 2 years commencing as of the
date of execution of the Option Agreement but Nayarit Mexico may terminate the
agreement at any time through a written communication addressed to
Huajicari.
Nayarit Mexico has the option to acquire
100% interest to the Huajicari Concessions at any time as of the date of
execution of the Option Agreement, provided it complies with the obligations set
forth in the Option Agreement. Nayarit
Gold Inc. purchased the Orion Concession by Asset Purchase Agreement dated
January 30, 2004. With respect to the Orión concession, Nayarit has granted a
3.5 percent net smelter return royalty payable to Belitung Limited, an Ontario
incorporated company. Nayarit may purchase the royalty outright at any time for
CDN$250,000 in cash or non-assessable common shares. In addition, Nayarit is
also subject to a net profits interest on Orión of 10% payable to a previous
property owner.
All of
the mining concessions owned by Nayarit are in full force and effect, and free
of any liens or encumbrances whatsoever.
Table:
Mining Concessions Controlled by Nayarit Gold de Mexico, SA de CV
|
Concession Name
|
Title
|
File No.
|
Owner
|
Surface (ha)
|
|||||
|
BONANZA
I
|
227603
|
6923
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
200.00
|
|||||
|
EL
DORADO
|
228887
|
7013
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
23,001.85
|
|||||
|
EL
MAGNIFICO
|
221592
|
6758
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
7,595.74
|
|||||
|
EL
MAGNIFICO F-I
|
221588
|
6758
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
6.90
|
|||||
|
EL
MAGNIFICO F-II
|
221589
|
6758
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
32.00
|
|||||
|
EL
MAGNIFICO F-III
|
221590
|
6758
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
6.96
|
|||||
|
EL
MAGNIFICO F-IV
|
221591
|
6758
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
8.84
|
|||||
|
GROSS
F I
|
228826
|
7002
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
67,148.77
|
|||||
|
GROSS
F- II
|
228827
|
7002
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
16.00
|
|||||
|
ORION
|
205616
|
6253
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
527.50
|
|||||
|
REESE
|
227775
|
6980
|
NAYARIT
GOLD DE MÉXICO SA de CV
|
3,104.29
|
|||||
|
SAN
JUAN I
|
221365
|
3/1/639
|
COMPAÑIA
MINERA HUAJICARI SA de CV
|
45.63
|
|||||
|
SAN
FRANCISCO 3
|
203136
|
3/1.3/243
|
COMPAÑIA
MINERA HUAJICARI SA de CV
|
32.75
|
|||||
|
SAN
JUAN F - II
|
205393
|
6250
|
COMPAÑIA
MINERA HUAJICARI SA de CV
|
0.81
|
|||||
|
ISIS
|
214395
|
6617
|
COMPAÑIA
MINERA HUAJICARI SA de CV
|
101.34
|
|||||
|
SAN
JUAN F-I
|
205392
|
6250
|
COMPAÑIA
MINERA HUAJICARI SA de CV
|
1,339.01
|
|||||
|
SAN
MIGUEL
|
224392
|
3/1/723
|
COMPAÑIA
MINERA HUAJICARI SA de CV
|
1,177.38
|
|||||
|
LA
ESTRELLA
|
|
196009
|
|
3/1.3/232
|
|
ADRIAN
EVODIO PRADO GÓMEZ
|
|
146.35
|
142
Environmental
Liabilities and Permitting
Nayarit
Gold has initiated the generation of an environmental impact assessment (the
“EIA”) which is substantially complete. There are no known environmental
liabilities on the Concession.
Accessibility,
Climate, Local Resources, Infrastructure and Physiography
Access
to Property
Access to
the Orion Project site is from Tepic, state capital of Nayarit, Mexico via 220km
of multi-lane paved toll road to Acaponeta near the Nayarit–Sinaloa state
border. Primary access to the Orion Project is located 10km to the east, towards
the El Motaje ranch, where a secondary dirt road passes northward towards the La
Estrella mineralized area. A second access road connecting the Motaje ranch and
the La Estrella zone has been maintained by Nayarit Gold since 2005. A 1,000m
long, unpaved fixed wing airstrip and two bus depots for local and external
transportation are also available in Acoponeta.
Power and Water Supplies
Low
voltage residential electrical power services are available at El Resbalón,
Motaje and El Carrizo, while a major 115kV line which is part of the
interconnected National Power line Net crosses the El Magnífico claim 2 km west
of the La Estrella zone. Water for industrial purposes has not been adequately
investigated in the region, however surface water is abundant.
Climate
and Length of Operating Season
The
general climate in the region is warm and sub-humid with a well-defined primary
rainy season between June and September, and which commonly extends through
October. Average annual rainfall is in the order of 1,307mm, of which 92% falls
from July to September. The annual mean temperature is 26.7°C. Exploration work
can be carried out year round at the Orion Project.
Surface
Rights
According
to Mexican legislation, surface rights are not part of mining concessions and
require that specific purchase or rental agreements with property owners must be
fulfilled. At Animas/Del Norte, La Estrella, San Francisco and most of the
northern exploration targets within the Orion Project surface rights are held by
the Indigenous Community of
San Blasito and annexes of the Acaponeta municipality based in the
village of Motaje, southeast of La Estrella. Nayarit Gold has established
private agreements with local communities to obtain permission for exploration
activities. In all cases, the main responsibility agreed to by Nayarit Gold is
to give priority to the local population for the non-specialized jobs created by
the advancement of the Orion Project, provide them with mandatory Social
Security registration and assist with mobile equipment support for improvement
of access roads to the neighboring communities.
Topography,
Elevation and Vegetation
Topography
at the Motate Carrizo is characterized by moderate relief, with elevations
ranging between 60m to a maximum of 620m above sea level (masl). In the area of
the concessions, more than 40 different species of plants have been identified
and can be generally grouped as oak tree forests and sub-caducifolia and
sub-perennifolia scrub trees and bush forest. The main use of vegetation in the
region is for human consumption, wood for fuel, fence poles, furniture making
and a few edibles. It has been observed in some reports that local vegetation
has partially been altered due to forest fires, as well as deforestation
resulting from agriculture and the raising of cattle.
Physiography
The Orion
project is located on the western flank of the Sierra Madre Occidental, a
mountain range that comprises the central spine of northern Mexico. The
north-northwest-trending Sierra Madre Occidental is composed of a relatively
flat-lying sequence of Tertiary volcanic rocks that forms a volcanic plateau.
The Sierra Madre Occidental gives way to the west to an extensional terrane that
represents the southward continuation of the Basin and Range Province of the
western United States, and then further west to the coastal plain of western
Mexico. The property lies at the boundary of the Mexican Basin and Range
Province and the coastal plain. The Orion project area is hilly, but not
mountainous, with densely vegetated, steep-sided slopes. The hills are cut by a
number of intermittent streams that flood in the June – September rainy
season.
143
The area
is sparsely populated and cattle raising, and cultivation of market crops, are
the main district land use. Agricultural produced from the area
includes corn, beans, nuts, sorghum, avocados and a variety of other fruits and
vegetables. Local activities in the municipality of Acaponeta include
agriculture with 18,000ha of corn, beans, sorghum, chili pepper, avocado and
mango production, cattle raising (32,000ha) and forestry (7,000ha) with minor
artisanal mining activities.
History
Past
Exploration and Development
The Orion
project area lies within the Motaje mining district in the Municipality of
Acaponeta, Nayarit, Mexico. The district is reported to have had
moderate but unknown quantities of gold and silver production dating from
Spanish colonial times, possibly as early as the late 1500’s. Many
small adits and superficial workings along the district’s two main mineralized
structural trends, the La Estrella – Animas - Pantaleona and the El Rey - La
Escondida - Bonanza trends, attest to past mining activity.
A small,
5t/d, operation was carried out between 1955 and 1970 at La Estrella. In 1973 a
total of 15,000 tons was produced from the Bonanza Mine, 4.7 km east of La
Estrella, while the Las Animas Mine was operated around 1998. Currently,
Minerales Vane , S.A. de C.V. is carrying out small scale mining of 1500 TPM at
the Diablito high grade mine in the neighboring Las Lumbres District, located
16km southwest of La Estrella.
Mineral
exploration was carried out at La Estrella Concession area by Lac Minerals (USA)
in 1993 – 1994 including the completion of 21 drill holes. Prior to that in
1986-1987 exploration was carried out on San Francisco - La Sebastaina mine
areas, just south of La Estrella, when 21 drill holes were completed by Minas
Caopas.
Geologic
Setting
Regional Geology
The
Sierra Madre Occidental metallogenic province, in which the Orión Gold Project
is located, is one of the world’s largest epithermal precious metal terrains and
hosts most of Mexico’s gold and silver deposits. The general geology
of the Orión Gold Project area is characterized by Early to Mid-Tertiary
volcanic rocks, which can be divided geologically into two main units referred
to as the Upper and Lower Volcanic Groups. The Lower Volcanic Group
is of a generally andesitic composition and hosts most of the mineral
deposits. The Upper Volcanic Group is of a generally dacitic to
rhyolitic composition and covers the Lower Volcanic Groups except where erosion
has removed it entirely, or deep river valleys have cut down to expose the
underlying lower volcanics. Between the time of deposition of the Upper and
Lower volcanics, the rocks were intruded by shallow, fine-grained to porphyritic
igneous rocks of a generally felsic composition. This assemblage is typical and
extends through the Sierra Madre Occidental in eastern Sonora, western
Chihuahua, Durango, Sinaloa and Nayarit states.
144
Figure 2.
Regional geologic map illustrating geology, the Animas/Del Norte Resource area
and various targets throughout the concession. A more detailed view of the
Animas/Del Norte area is illustrated in Figure 3.
Local
and Property Geology
The
northern portion of Nayarit Gold’s concessions includes a number of epithermal
veins which are developed along east-west fracture systems. Mineralized veins
form two discrete mineralized corridors separated by about 2km from one another.
Animas/Del Norte is the southernmost of two major mineralized corridors defined
at the project, each more than 4 kilometers long. The southern mineralized
corridor includes the Animas/Del Norte veins and the Pantaleona, San Francisco
and La Estrella veins, which generally dip to the north and is more than 4 km
long, as is the northern vein. The La Estrella structure is a
northwest striking splay off the Del Norte vein. The northern
corridor includes the El Rey, La Escondida, El Carmen, Bonanza 1 veins, which
generally dip to the south and includes the previously producing Bonanza mine,
which is in a competitor owned mining concession internal to Nayarit Gold’s land
package.
145
Figure 3.
Northern portion of the concession where most of the exploration has been
carried out to date. The mapped veins are illustrated in red with the various
targets.
Exploration
Nayarit
Gold has been exploring the Orion Project since 2004. Exploration to
date has focused in the northern portion of the concession where the company has
identified two +4km parallel vein sets, which hosts most of the known mineral
zones to date (see above image). Most of the focus has been on the Las
Animas/Del Norte system, in the southern vein, which hosts the majority of
mineral resources found to date. Exploration was initiated by underground and
surface sampling and mapping of the Las Animas structure. Rock and soil programs
over the area were carried out which was followed by a series of drill hole
programs. All mapping and sampling was carried out by company personnel while
drilling was contracted to HD Drilling.
To the
east and west Animas/Del Norte the company has also explored several known zones
and advanced exploration to an initial drill phase. These zones include San
Francisco and San Sebastiana to the west and Pantaleona to the east. Drilling
has identified mineral zones in all locations, although not as prominent as that
at Animas/Del Norte. More work is necessary especially at San Sebastiana and
Pantaleona areas.
The
northern vein set which is host to El Rey, Escondida, Bonanza, El Carmen,
Bonanza 1 has also been explored by surface and underground sampling and
mapping, and drilling. Surface samples have shown promise in the area, however,
drilling to date has been less consistent. More exploration is necessary to
determine the best drill targets.
Nayarit
has also completed exploration on select targets throughout the southern portion
of its Orion Concession (see Figure 2 for locations of the following targets).
At Lazaro Cardenas, 22 km S-SE of Animas/Del Norte and Rosa Amarilla, 19 km
south of Animas/Del Norte, the company has completed surface work and drilling,
with drill results showing promise. Both areas show considerable promise and
further exploration and drilling is needed.
At El
Frontal, 22 km southeast of Animas/Del Norte, the company has carried out a
surface and minor underground sampling program. This target is a historic mine
which according to COREMI, 1994, has 1.5 km of underground development. As with
other targets, this one is an epithermal gold-silver prospect and needs
additional exploration followed by drilling to assess its potential. Grab
samples in the underground workings collected by Nayarit geologists assayed up
to 6.18 g/t gold and 179 g/t silver.
Other
targets that have been sampled but not drilled throughout the southern
concession include El Chinacate (28 km southeast of the Animas/Del Norte), Las
Camillas (22.5 km south from the Las Animas/Del Norte) and La Paloma (16 km
south of the Animas/Del Norte). All zones have shown gold and silver grades from
surface veins.
146
In
general, Nayarit has not completed any significant exploration throughout the
southern concession area, expect for the known historic target zones listed
above.
All
sampling and drilling has been carried out in such a manner that its reliability
is high. A QA/QC program for sampling including rocks, soils and drill core
samples are submitted with commercial standards for assay check as well as
blanks and duplicates.
Mineralization
The
mineralized zones at Animas/Del Norte are composed of a series of 2 to 4m wide
discrete quartz veins within a zone of dense quartz stockwork and breccias,
averaging 12m wide and reaching widths greater than 25m, generally enveloped in
andesites of the lower volcanic series. Epithermal textures ranging from
colloform banding in chalcedonic quartz to cockade texture in crystalline quartz
are common. Nayarit Gold personnel have observed that two different
mineral assemblages occur in the veins and that one assemblage is more favorable
for high-grade mineralization. An early district wide event resulted
in the formation of crystalline quartz and pyrite, observed in all the known
veins in the district. This event is characterized by well
crystallized pyrite and low silver: gold ratios. The event is gold
dominant and does have potentially economically mineable grades in several
drillholes in the La Estrella area. A later event, characterized by
very finely crystalline to chalcedonic quartz, is accompanied by very fine
pyrite, acanthite/argentite, light colored sphalerite and very minor
chalcopyrite and galena. Dark, sulphide rich bands (ginguro bands)
and breccia fragments containing remnants of such bands are
common. This event has high silver: gold ratios and is the dominant
style of mineralization observed in the Del Norte and Pantaleona areas, and is
less well developed in the San Francisco area. Only traces of the
younger fine-grained quartz/argentite event have been observed at La
Estrella. The more favorable silver rich event is present along the
northern mineralized corridor, but has not been identified in significant
volumes along at El Rey, La Escondida and Bonanza 1. It is noted that
along the northern vein system, the Bonanza mine appears to have this mineral
assemblage well developed on rocks taken from the dumps.
Relevant
Geological Controls
The
principal geologic controls to mineralization at Animas/Del Norte are a
favorable, dilatant structural flexure and favorable host rocks. The
highest-grade mineralization for gold and silver in the Animas/Del Norte veins
is localized in a 200m vertical range from 100m above sea level to 100m below
sea level. A mineral assemblage including argentite/ginguro, light colored
sphalerite and low temperature quartz locally alternates with a mineral
assemblage including hypogene hematite (evidence of an oxidizing fluid) and
kaolinite. The hematite and kaolinite are best developed in zones
with very high gold and silver grades.
A major
bend in the mapped veins crossing the Animas hill is known as the Animas/Del
Norte Flexure. Most movement on the faults hosting the veins was
normal dip slip movement, but a small component of left lateral movement formed
a dilatant, permeable zone. The widest and highest grade portions of
the Animas/Del Norte deposit are in and adjacent to this structural
flexure.
The
andesite crystal-lithic tuff unit is an andesite lithic tuff with a sufficiently
competent matrix to fracture well, and is favorable for
mineralization. This rock occurs in the hangingwall of the Del Norte
vein throughout the vertical extent of the favorable horizon. The
rock unit is also present in the hangingwall at Pantaleona and is likely to
occur at depth at La Estrella.
Drilling
Type
and Extent of Drilling
Two
hundred sixty-four diamond core holes, ten reverse circulation holes and eight
holes started with reverse circulation and finished with core have been drilled
by Nayarit Gold on the Orion Project. A total of 51,927m of core have
been drilled and a total of 11,860m of reverse circulation have been
drilled. Nayarit Gold’s database maintains information on hole
diameter indicating which portions of each hole were drilled by reverse
circulation, HQ diameter core or NQ diameter core. Of the total
meters drilled, 55,782m were included in the resource model and 8,005m were
drilled on targets outside of the resource area.
147
Procedures
All drill
sites were pre-selected by Nayarit Gold management before
drilling. Sites were located in the field by handheld GPS units and
drill pads constructed using a D-7 Caterpillar tractor. Drill
alignment was established on the drill pads by handheld Brunton compass before
the rig was moved onto the pad and alignment and inclination checked by the rig
geologist before drilling commenced. For diamond core drilling, all
drill operations were carried out by the drill contractor’s
personnel. Rig geologists visited the drill a minimum of two times
per day and were required to be present at the rig when difficult drilling or
bad ground conditions were encountered. Core is retrieved from the
drill string using conventional wireline techniques. Core is removed
from the core tube by HD drilling personnel and carefully placed in plastic core
boxes. Filled core boxes are removed from the drill site twice daily
(early morning and evening) by Nayarit Gold personnel to the secure core logging
facility in Acaponeta, Nayarit, 40 km from the Orion Project
site. For reverse circulation drilling, the rig geologist was present
at the drill during all drilling operations. All drillhole collars
have been surveyed with differential GPS for location and have down hole surveys
to measure hole deviation at approximately 50m intervals taken with a Reflex EZ
Shot digital survey tool. All project coordinates are maintained in
WGS 84 UTM zone 13R.
At the
core logging facility, the core is cleaned and the broken core pieces
reassembled to a best fit. For logging and sample interval marking,
the core is laid out on workbenches. A technician, under supervision
of the drill geologist, completes a hardcopy geotechnical log of the core
including recovery and RQD. The drill geologist then logs the core
and creates a hardcopy geologic log including a graphic representation of rock
type, vein orientation, and mineralized zones and a detailed descriptive log
including rock type, alteration, structure, mineralization and vein
density/percentage. Digital photographs are taken of all
cores.
Interpretation of Results
Drilling
has confirmed what surface exploration has determined, which is the project is
host to a series of epithermal gold-silver veins. These veins have been traded
for lengths up to +4 km in length along surface, with deeper drilling showing
the veins consistently present up to 400 metres below surface. Mineralization is
not ubiquitous throughout the veins and structural and geochemical parameters
play an important part in the deposition of metals at levels considered to be
potentially economic. Of the rock types observed in drill core, the andesite
crystal-lithic tuff illustrates the tendency for fracturing and thus prime
target for mineralization, especially where the unit shows dilatant
flexure.
Sampling
and Analysis
Sample
Methods and Location
Core is
transported from the drill site to Nayarit Gold’s secure core logging facility
in Acaponeta by company personnel. Core box numbers are checked and
core is cleaned and re-assembled by technicians prior to measurement of total
core recovery. Technicians measure total core recovery, RQD, fracture
characteristics and rock strength as estimated using the method from as 1726
geotechnical site investigation code 1993. After re-assembly and
geotechnical logging geologists make a geological log of the core and mark the
sample intervals directly on the core. Geologists are instructed to
collect sample lengths with a minimum length of 0.5m and a maximum length of
1.5m sample with a nominal 1m interval adjusting based on rock type changes so
that wall rock is not mixed with vein material except in cases of small,
isolated veins. Sample intervals are adjusted to vein and breccia
zone boundaries and rock type changes. Sample intervals are marked on
the core and adjacent to the core in the box. A cut line is drawn
along the length of the core by the geologists. All sampled core is
sawn in half and returned to the box. After sawing core samples were
collected by technicians always taking the left hand side of the core and
leaving the right hand side in the box. Samples have an approximate
4kg weight. Samples were shipped to ALS Chemex using a commercial
freight service contracted by ALS Chemex. All core handling from
retrieval from the core tube through washing, re-assembly, geotechnical and
geologic logging and sampling is done under the supervision of Nayarit Gold’s
geologists. Nayarit Gold has implemented a QA-QC procedure as
described below.
Factors
Impacting Accuracy of Results
As with
all drill programs recovery issues can impact accuracy of results. Drilling of
mineralized zones, such as the Del Norte zone, which is clay altered in places
can result in loss of heavier fractions and lower percentage core recoveries,
which can affect the obtained results. Generally, Nayarit has not observed such
recovery issues that would raise concern except for several drill holes at
Lazaro where core recoveries through what was believed a mineralized zone were
low.
148
Sample
Quality, Parameters, geologic controls and cut-off grades
It is
Nayarit’s belief that the parameters for sampling and the quality of the samples
collected were done so with diligence to include known mineralized zones and
with care that the quality of the sampling program is very high. To eliminate
sampling biases especially through the mineral zones, geologists were instructed
to sample along mineral features versus sticking to a particular width.
Geologists were also instructed to ‘sample-break’ at geologic rock type, and
alteration changes. Cut-off grades are not determinable at the sampling stage,
so geologists were instructed to sample mineralized zones accordingly, and then
complete sampling beyond the zone of interest to what was believed to be barren
rock.
Quality
Controls and Quality Assurance
Prior to
May 2008, Nayarit Gold’s Quality Assurance/Quality Control (QA/QC) sample
program consisted of blank and duplicate samples. After this date
Nayarit Gold implemented a program that included blank, duplicate and standard
samples. Approximately 10% of all samples submitted to the primary
assay laboratory are for QA/QC purposes.
The QA/QC
program includes insertion of commercially prepared gold and silver pulp
standards at a frequency of 4 per 100 samples. Standards used cover a
range of gold and silver concentrations. The standard samples have
color-coded tags which are placed in the core boxes and in the sample number
booklets which can be used to confirm which standard was submitted for any
specific sample number.
Security
of Samples
Samples
are shipped from Nayarit Gold’s core processing facility in Acaponeta, Nayarit
to ALS Laboratory Group (ALS) located in Hermosillo, Sonora
Mexico. Sample shipment from the Orion Project to this facility is
part of the service provided by ALS and is contracted by ALS to a third party
shipping company. At ALS Hermosillo, samples are entered into the
Laboratory Information Management System (LIMS) and prepared for
analysis. Once sample preparation is completed, the sample pulps are
shipped on to ALS Vancouver for analysis by Fire Assay and inductively coupled
atomic emission spectrometry (ICP-AES).
ALS
Hermosillo and ALS Vancouver are in compliance for the requirements of ISO
9001:2000 through February 12, 2011 (ALS Laboratory Group, 2009). ALS
Vancouver is accredited through the Standards Council of Canada (SCC) for
Metallic Ores and Products Mineral Analysis testing for several techniques
including Fire Assay with an Atomic Absorption (AA) finish, Fire Assay with a
gravimetric finish and ICP-AES using a four acid digestion. This is
under CAN-P-1579 Guidelines for the Accreditation of Mineral Analysis Testing
Laboratories and CAN-P-4E (ISO/IEC 17025) General Requirements for the
Competence of Testing and Calibration Laboratories. This
accreditation is valid through May 18, 2013 (Standards Council of Canada,
2009).
Samples
are in the custody and control of Nayarit Gold, the shipping contractor or ALS
at all times.
On
arrival at ALS Hermosillo, samples are inventoried, weighed, assigned a barcode
and entered into the LIMS. Once these activities are completed the
samples are prepared for as follows: 1. Samples are dried in a drying oven, 2.
The entire sample is crushed to 90% passing -2mm; 3. A 1,000g split
is pulverized to 85% -75 microns; and 4. This pulp is sent to ALS Vancouver for
analysis.
ALS
Chemex returns all pulps and coarse rejects to Nayarit Gold. Pulps
and rejects are stored in the company warehouse in Acaponeta,
Nayarit. It is Nayarit Gold’s intention to discard all coarse rejects
collected through the end of 2008 upon completion of preliminary metallurgical
studies and publication of this technical report.
Mineral
Resources and Mineral Reserve Estimates
SRK
Consulting (U.S.), Inc (“SRK”) was contracted by the Company to complete a
Canadian National Instrument (“NI”) 43-101 compliant Preliminary Economic
Assessment (“PEA”) for the Company's Animas/Del Norte Deposit.
149
This
study is based extraction of indicated and inferred resources using underground
mining methods with milling and tank leaching for processing. The Orion Resource
Statement (using an underground extraction based assessment with a 2.0 g/t gold
equivalent cutoff) as estimated by SRK is 1.107 million tonnes with a gold grade
of 3.66 g/t and silver grade of 309 g/t in the Indicated category, and an
additional 0.181 million tonnes with a gold grade of 3.33 g/t and silver grade
of 95 g/t in the Inferred category.
The
results of the PEA have identified the underground mining of 1.182 million
tonnes with a gold grade of 2.79 g/t and silver grade of 267 g/t.
Assuming
100% equity financing, the PEA indicates a pre-tax Internal Rate of Return
(“IRR”) of 38%. The estimated payback period is approximately 2.3 years (Base
Case).
The
following table illustrates the Base Case data and NPVs at various discount
rates.
PEA base
data:
|
Base
Case
|
|||
|
Life-of-Mine
Mill Recovered Equivalent Gold Ounces*
|
246k
oz AuEq
|
||
|
Production
Rate
|
750
tpd
|
20k
oz Au/yr
|
1.785M
oz Ag/yr
|
|
Development
Timeline
|
2
Years
|
||
|
Initial
Capital
|
US$35
Million
|
||
|
Cash
Costs
|
US$320/gold
equivalent ounce
|
||
|
Payback
Period (NPV 8% Case)
|
2.3
years
|
||
|
Mine
Life
|
5
years
|
||
|
Gold
Price
|
US$900/oz
|
||
|
Silver
Price
|
US$15/oz
|
||
|
NPV’s
and IRR
|
|||
|
Pre-tax
NPV 0%
|
US$71.3
million
|
||
|
Pre-tax
NPV 3%
|
US$55.3
million
|
||
|
Pre-tax
NPV 5%
|
US$46.5
million
|
||
|
Pre-tax
NPV 8%
|
US$35.4
million
|
||
|
Pre-tax
IRR
|
38%
|
||
*Gold
Equivalent Values were calculated based on 60 ounces of silver = 1 ounce of
gold. Metallurgical recoveries for mill processing are based on previous
metallurgical analysis and are 92% for gold and 88% for silver.
The PEA
is founded on underground resources at the Animas/Del Norte Deposit. SRK
examined different mining and procession options, and trade-off scenarios to
identify the optimum mining scenario. This examination determined that an
underground bulk mining method as the optimized mining method for the Animas/Del
Norte Deposit. The deposit has an Indicated resource of 967,000 tonnes with a
gold grade of 3.63 g/t and a silver grade of 347 g/t (or 9.42 g/t gold
equivalent) containing 113,000 ounces of gold and 10.79M ounces of silver (or
293,000 gold equivalent ounces). An additional Inferred resource contains 39,000
tonnes with 3.74 g/t Au and 349 g/t silver (or 9.55 g/t gold equivalent)
containing 5,000 ounces of gold and 436,000 ounces of silver (or 12,000 gold
equivalent ounces). These resources are based on a 2.0 g/t gold equivalent
cutoff and a gold price of US$850/oz and a silver price of
US$13/oz.
The
Deposit is located within and surrounded by high-priority exploration targets,
where the company believes additional mineralization will be discovered which
could enhance the project economics. The Deposit is in a very favorable location
with excellent infrastructure with access to industrial power, roads and a
skilled work force.
Mining
Operations
There are
no mining operations on the Orion Project.
150
Exploration
and Development
The Orion Project remains virtually
unexplored outside of the main showings brought to the company’s attention by
the Nayarit Mining Monograph (COREMI, 1994) and local prospectors. The
exploration potential to discover other mineralized zones similar to those
observed at Animas/Del Norte is considered excellent. Future work will focus on
examining and documenting known prospects, with concurrent work focused on
systematic, district-wide exploration. Regionally, as stream sediment program
has started and will continue until all the watersheds in the concession have
been sampled.
On a target level, Nayarit has
already identified a series of targets within a 4 to 5 km radius of the
Animas/Del Norte Deposit. These targets will be further advanced with mapping,
soil and rock sampling prior to drilling. Crews will rotate from target to
target, building a docket of high priority targets for
drilling.
Price
Range of Capital Gold Share and Dividend Policy
Shares of Nayarit’s common stock
have been listed for trading on the TSXV since 2005 under the symbol
“NYG.”
The table below sets forth, for the
fiscal quarters indicated, the high and low closing prices of Nayarit’s shares
of common stock as reported on the TSXV.
|
Common Stock
|
||||||||
|
Quarter
Ended
|
High
|
Low
|
||||||
|
CDN$
|
CDN$
|
|||||||
|
March
31, 2010
|
0.69 | 0.40 | ||||||
|
December
31, 2009
|
0.73 | 0.40 | ||||||
|
September
30, 2009
|
0.57 | 0.40 | ||||||
|
June
30, 2009
|
0.66 | 0.43 | ||||||
|
March
31, 2009
|
0.66 | 0.42 | ||||||
|
December
31, 2008
|
0.77 | 0.25 | ||||||
|
September
30, 2008
|
0.80 | 0.56 | ||||||
|
June
30, 2008
|
0.67 | 0.41 | ||||||
|
March
31, 2008
|
0.56 | 0.32 | ||||||
On February 10, 2010, the business
day before the public announcement of the execution of Business Combination
Agreement, the high and low sale prices of shares of Nayarit’s common stock
reported on the TSXV were CDN$ 0.55 and CDN$0.52, respectively. On
the record date, Nayarit’s common stock closed at CDN$[●] on the TSXV. Capital
Gold and Nayarit stockholders are advised to obtain current market quotations
for Nayarit common stock as well as Capital Gold common stock. The
market place of Nayarit common stocks and Capital Gold common stocks will
fluctuate between the date of this joint proxy statement/prospectus and the
completion of Business Combination. No assurance can be given
relating to the market price of Capital Gold common stock before or after the
effective time of the Business Combination.
As of the record date, there were
[●] holders of record of Nayarit’s common stock.
Dividends
or Distributions
Nayarit has never declared or paid cash
dividends or distributions on its common shares. If the Business Combination is
not consummated, Nayarit
intends to retain any
future earnings to fund the development and growth of its business and will pay dividends
and/or distributions in the future, if any, as the directors see
fit.
Selected
Financial Information
The consolidated financial
statements of Nayarit are prepared in accordance with Canadian generally
accepted accounting principles (“Canadian GAAP”). The following table sets out
selected financial data of Nayarit in U.S. dollars and U.S. GAAP derived from
the audited financial statements for the years ended September 30, 2009 and
2008, and the unaudited interim financial statements for the three months ended
December 31, 2009. This summary of financial data should be read together with
“Nayarit Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the financial statements of Nayarit and notes thereto
contained in this joint proxy statement/prospectus.
|
For
Three
Months
Ended
December 31,
2009
|
Fiscal
Year
Ended
September 30,
2009
|
Fiscal
Year
Ended September 30, 2008
|
||||||||||
|
Revenue
|
$ | 0 | $ | 0 | $ | 0 | ||||||
|
Current
Assets
|
$ | 2,557,266 | $ | 3,411,793 | $ | 5,454,359 | ||||||
|
Total
Assets
|
$ | 6,815,777 | $ | 7,039,826 | $ | 7,113,098 | ||||||
|
Current
Liabilities
|
$ | 402,898 | $ | 348,752 | $ | 920,173 | ||||||
|
Total
Liabilities
|
$ | 402,898 | $ | 348,752 | $ | 920,173 | ||||||
|
Other
income (expense)
|
$ | 2,394 | $ | 49,646 | $ | 44,087 | ||||||
|
Net
Loss
|
$ | (902,099 | ) | $ | (8,136,340 | ) | $ | (8,264,093 | ) | |||
|
Net
loss per Nayarit Gold Share (basic and diluted)
|
$ | (0.01 | ) | $ | (0.10 | ) | $ | (0.16 | ) | |||
Nayarit
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Year Ended September 30, 2009
The following discussion and
analysis which has been prepared is based on information available to Nayarit as
at September 30, 2009, discloses the results of operations of Nayarit for the
twelve-month period ended on September 30, 2009 (audited), the twelve month
period ended September 30, 2008 (audited) and the three month interim period
ended December 31, 2009 (unaudited). This discussion should be read in
conjunction with the financial statements of Nayarit for such periods, together
with the accompanying notes, contained in this joint proxy
statement/prospectus.
The following discussion and
analysis provides a summary of the audited financial information of Nayarit
contained elsewhere herein. This discussion contains forward looking
statements that involve risks and uncertainties. See "Cautionary Note Regarding
Forward-Looking Statements."
Results
of Operations
Nayarit
is engaged in the acquisition and exploration of precious and base metal
properties. Nayarit has the rights to explore and develop three precious and
base metal exploration projects in the State of Nayarit on the Pacific coast of
the Republic of Mexico totaling approximately 257,000 acres (104,000 hectares)
herein referred to as the “Orion Gold Project.” See “Risk Factors.” As is typical
with such companies, losses are incurred in the exploration stages, which are
typically funded through equity financing.
151
Capital
Resources
As the Orion Gold Project is at the
exploration stage, Nayarit has no sources of revenue. The availability of equity
capital, and the price at which additional equity could be issued, is dependent
upon the success of Nayarit's exploration activities, and upon the state of the
capital markets generally. Additional financing may not be available on terms
favourable to Nayarit or at all.
If the Business Combination is not
consummated and if Nayarit does not receive future financing, it may not be
possible for Nayarit to advance the exploration and development of the Orion
Gold Project. If Nayarit is not able to fund the minimum expenditures, its
interest in the Orion Gold Project may be diluted.
Off-Balance
Sheet Arrangements
Nayarit does not have any
off-balance sheet arrangements.
Transactions
with Related Parties
Transactions with related parties
are discussed under “Information About Nayarit
– Interest of Informed Persons in
Material Transactions.”
Proposed
Transactions
Nayarit has not entered into, and
has no plans to enter into, any asset or business acquisitions or dispositions
other than the Business Combination.
Critical
Accounting Estimates
Critical
accounting estimates used in the preparation of the financial statements include
Nayarit’s estimate of recoverable value of its mineral properties and related
deferred expenses as well as the value of stock-based compensation. Both of
these estimates involve considerable judgment and are, or could be, affected by
significant factors that are out of Nayarit’s control.
The
factors affecting stock-based compensation include estimates of when stock
options and compensation warrants might be exercised and stock price volatility.
The timing for exercise of options is out of Nayarit’s control and will depend
on a variety of factors, including the market value of Nayarit’s shares and
financial objectives of the stock-based instrument holders. Nayarit used
historical data to determine volatility in accordance with the Black-Scholes
model. However, the future volatility is uncertain and the model has its
limitations.
Nayarit’s
recoverability of its recorded value of its mineral properties and associated
deferred expenses is based on current market conditions for minerals, underlying
mineral resources associated with the properties and future costs that may be
required for ultimate realization through mining operations or by sale. Nayarit
operates in an industry that is dependent on a number of factors including
environmental, legal and political risks, the existence of economically
recoverable reserves, the ability of Nayarit to obtain necessary financing to
complete the development, and future profitable production or the proceeds of
disposition thereof.
Changes
in Accounting Policies and Recent Pronouncements – Canadian GAAP
Recently
Adopted Accounting Pronouncements
General Standards of
Financial Statements Presentation
In June
2007, the CICA amended Handbook Section 1400, “General Standards of Financial
Statement Presentation”, to assess an entity’s ability to continue as a going
concern and disclose any material uncertainties that cast doubt on its ability
to continue as a going concern. Section 1400 is effective for interim and annual
reporting periods beginning on or after January 1, 2008. Such disclosure is
contained in Note 1 to the consolidated financial statements.
152
Mining Exploration
Costs
In March
2009, the Emerging Issues Committee of the CICA issued EIC-174, “Mining
Exploration Costs”. This abstract provides additional guidance on determining
when exploration costs related to mining properties can be capitalized as well
as clarification on impairment indicators for exploration costs that have
previously been capitalized. The adoption of this standard did not have any
effect on Nayarit's consolidated financial statements.
Goodwill and Intangible
Assets
In
February 2008, the Accounting Standards Board ("AcSB") issued Section 3064,
“Goodwill and Intangible Assets”, to replace Section 3062, “Goodwill and Other
Intangible Assets”. This new section establishes standards for the recognition,
measurement, presentation and disclosure of goodwill and intangible assets by
profit-oriented enterprises. The adoption of this new section on October 1, 2008
had no impact on Nayarit’s financial statements.
Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities
In
January 2009, the Emerging Issues Committee of the CICA issued EIC-173, Credit
Risk and the Fair Value of Financial Assets and Financial Liabilities. This
abstract requires that credit risk be taken into account in determining the fair
value of financial instruments and financial liabilities, including derivative
instruments. The adoption of this standard did not have an impact on Nayarit’s
financial statements.
Future
Accounting Changes – Canadian GAAP
Financial
Instruments
In June
2009, the Canadian Accounting Standards Board issued amendments to Section 3862,
Financial Instruments - Disclosures, to improve disclosure requirements on fair
value measurement and liquidity risk. The amendments are effective for Nayarit's
September 30, 2010 annual financial statements. As the amendments only concern
disclosure requirements, they will not have a significant impact on results or
financial position.
Business Combinations,
Consolidated Financial Statements and Non-controlling
Interests
In
January 2009, the CICA issued Section 1582, Business Combinations, Section 1601,
Consolidated Financial Statements, and Section 1602, Non-controlling interests
which replace Section 1581, Business Combinations and Section 1600, Consolidated
Financial Statements. Section 1582 establishes standards for the accounting for
business combinations that is equivalent to the business combination accounting
standard under International Financial Reporting Standards (“IFRS”). Section
1582 is applicable for business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after January 1, 2011. Early adoption of this section is permitted. Section 1601
together with Section 1602 establishes standards for the preparation of
consolidated financial statements. Section 1601 is applicable for Nayarit’s
interim and annual consolidated financial statements for fiscal years beginning
on or after January 1, 2011. Early adoption of this section is permitted. If
Nayarit chooses to early adopt any one of these sections, the other two sections
must also be adopted at the same time.
International Financial
Reporting Standards (“IFRS”)
In 2006,
the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan
that will significantly affect financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of Canadian GAAP
with IFRS over an expected five year transitional period. In February 2008, the
AcSB announced that the changeover date for publicly-listed companies to use
IFRS, replacing Canada’s own GAAP is for interim and annual financial statements
relating to the fiscal year beginning on or after January 1, 2011. Accordingly,
Nayarit will begin reporting under IFRS for its interim and annual periods for
the year ended September 30, 2012. Nayarit’s transition date will be October 1,
2010, which will require restatement for comparative purposes of amounts
reported by Nayarit for the year ended September 30, 2011.
153
Nayarit
is currently completing a preliminary diagnostic and will develop an IFRS
conversion implementation plan, which will include a detailed assessment of the
impact of the conversion on the consolidated financial statements and related
disclosures. The plan will also consider the impact of the conversion of
Nayarit’s information technology systems, internal controls over financial
reporting, disclosure controls and procedures and other business activities that
may be influenced by GAAP measurements.
Recently
Issued Accounting Pronouncements – U.S. GAAP
The Accounting Standards
Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) established the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
GAAP to be applied by nongovernmental entities. The ASC is a new structure which
took existing accounting pronouncements and organized them by accounting topic.
Relevant authoritative literature issued by the Securities and Exchange
Commission (“SEC”) and select SEC staff interpretations and administrative
literature was also included in the ASC. All other accounting guidance not
included in the ASC is non-authoritative. The ASC is effective for annual or
interim periods ending after September 15, 2009. The adoption of the ASC did not
have an impact on Nayarit’s consolidated financial position, results of
operations or cash flows.
Fair Value
Accounting
In
September 2006, the ASC guidance for fair value measurements and disclosure was
updated to define fair value, establish a framework for measuring fair value,
and expand disclosures about fair value measurements. This guidance does not
require any new fair value measurements but rather eliminates inconsistencies in
guidance found in various prior accounting pronouncements. The provisions of the
updated guidance were adopted October 1, 2008. In February 2008, the FASB staff
issued an update to the guidance which delayed the effective date for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The
adoption of guidance is not expected to have a significant impact on
Nayarit.
In
October 2008, the guidance was further updated to provide guidance on how the
fair value of a financial asset is to be determined when the market for that
financial asset is inactive. The guidance states that determining fair value in
an inactive market depends on the facts and circumstances, requires the use of
significant judgment and, in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. The guidance was effective upon
issuance. The adoption of guidance did not have a significant impact on
Nayarit
Fair Value
Option
In
February 2007, the ASC issued guidance that permits entities to choose to
measure many financial instruments and certain other items at fair value, with
the objective of improving financial reporting by mitigating volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. The guidance was
adopted October 1, 2008. Nayarit did not elect the Fair Value Option for any of
its financial assets or liabilities, and therefore, the adoption of the guidance
had no impact on Nayarit’s consolidated financial position, results of
operations or cash flows.
Accounting for the Useful
Life of Intangibles
In April
2008, the ASC updated guidance on the determination of the useful life of
intangible assets which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The guidance is effective for Nayarit’s fiscal
year beginning October 1, 2009 and will be applied prospectively to intangible
assets acquired after the effective date. Nayarit does not expect the adoption
of the guidance to have a material impact on Nayarit’s consolidated financial
position, results of operations or cash flows.
Business
Combinations
In
December 2007, the ASC guidance for business combinations was updated to provide
new guidance for recognizing and measuring identifiable assets and goodwill
acquired, liabilities assumed, and any non-controlling interest in the acquiree.
The updated guidance also provides disclosure requirements to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of the updated guidance is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after October 1, 2009. Nayarit will apply
the guidance to all future business combinations.
154
Equity Method
Investment
In
November 2008, the ASC updated guidance which clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. The intent of the changes is to provide guidance on (i) determining
the initial measurement of an equity method investment, (ii) recognizing
other-than-temporary impairments of an equity method investment and (iii)
accounting for an equity method investee’s issuance of shares. The updated
guidance will be effective for Nayarit’s fiscal year beginning October 1, 2009
and is not expected to have an impact on Nayarit’s consolidated financial
position or results of operations.
Variable Interest
Entities
In June
2009, the ASC guidance for consolidation accounting was updated to require an
entity to perform a qualitative analysis to determine whether the enterprise’s
variable interest gives it a controlling financial interest in a variable
interest entity (“VIE”). This analysis identifies a primary beneficiary of a VIE
as the entity that has both of the following characteristics: i) the power to
direct the activities of a VIE that most significantly impact the entity’s
economic performance and ii) the obligation to absorb losses or receive benefits
from the entity that could potentially be significant to the VIE. The updated
guidance also requires ongoing reassessments of the primary beneficiary of a
VIE. The provisions of the updated guidance are effective for Nayarit’s fiscal
year beginning October 1, 2010. Nayarit does not expect the adoption of this
guidance to have an impact on consolidated financial position, results of
operations or cash flows.
Management’s
Responsibility for Financial Statements
The
information provided in this proxy statement/prospectus, including the financial
statements, is the responsibility of management. In the preparation of these
statements, estimates are sometimes necessary to make a determination of future
values for certain assets or liabilities. Management believes such estimates
have been based on careful judgments and have been properly reflected in the
financial statements.
Management
maintains a system of internal controls to provide reasonable assurance that
Nayarit’s assets are safeguarded and to facilitate the preparation of relevant
and timely information.
Risks
and Uncertainties
Nayarit does not have any policies
for controlling risks associated with its financial instruments.
The principal activity of Nayarit is
mineral exploration, which is inherently risky. Exploration is also capital
intensive and Nayarit currently has no source of income other than the sale of
gold from small scale mine pre-production. Only the skills of its management and
staff in mineral exploration and exploration financing serve to mitigate these
risks and therefore are one of the main assets of Nayarit. See "Risk Factors."
Outstanding
Shares
Nayarit
has an authorized share capital of an unlimited number of Nayarit Shares, of
which 90,259,548 Nayarit Gold Shares are issued and outstanding as fully paid
and non-assessable as of February 11, 2010. See “Information About Nayarit –
Description of Securities” below.
Description
of Securities
Share Capital
Nayarit
stockholders are entitled to receive notice of any meetings of stockholders of
Nayarit, and to attend and to cast one vote per Nayarit Share at all such
meetings. Nayarit Stockholders do not have cumulative voting rights with respect
to the election of directors and, accordingly, a majority of the Nayarit
Stockholders entitled to vote in any election of directors may elect all
directors standing for election. Nayarit Stockholders are entitled to receive on
a pro rata basis such dividends, if any, as and when declared by Nayarit's board
of directors at its discretion from funds legally available therefor, and upon
the liquidation, dissolution or winding up of Nayarit are entitled to receive on
a pro rata basis the net assets of Nayarit after payment of debts and other
liabilities, in each case subject to the rights, privileges, restrictions and
conditions attaching to any other series or class of shares ranking senior in
priority to or on a pro rata basis with the holders of Nayarit Shares with
respect to dividends or liquidation. The Nayarit Shares do not carry any
pre-emptive, subscription, redemption or conversion rights, nor do they contain
any sinking or purchase fund provisions.
155
Capitalization
The following table sets forth the
capitalization of Nayarit derived from the unaudited financial statements of
Nayarit for the three months ended December 31, 2009 and as at September 30,
2009 (audited).
|
Designation of Security
|
Amount Authorized
or to be Authorized
|
Amount Outstanding as
at December 31, 2009
|
Amount Outstanding as
at September 30, 2009
|
|||||||||
|
Nayarit
Gold Shares
|
Unlimited
|
90,259,548 | 89,509,548 | |||||||||
|
Nayarit
Gold Warrants
|
Unlimited
|
33,564,800 | 33,564,800 | |||||||||
|
Nayarit
Gold Stock Options
|
11,300,000 | 9,089,286 | 9,089,286 | |||||||||
|
Nayarit
Gold Financing Compensation Options
|
Unlimited
|
2,474,000 | 2,474,000 | |||||||||
|
Debt
|
Unlimited
|
$ | 0 | $ | 0 | |||||||
Fully
Diluted Share Capital
The
following table states the diluted share capital of Nayarit before giving effect
to the Business Combination:
|
Description
|
Number of Issued and
Outstanding as of
March 29, 2010
|
|||
|
Nayarit
Gold Shares issued and outstanding
|
91,459,665 | |||
|
Nayarit
Gold Shares reserved for issuance pursuant to Nayarit Gold Warrants(1)
|
36,011,500 | |||
|
Nayarit
Gold Shares reserved for issuance pursuant to Nayarit Gold Stock
Options(2)
|
7,769,286 | |||
|
Fully
Diluted Nayarit Gold Shares
|
135,240,451 | |||
|
|
(1)
|
See
“Information About
Nayarit – Description of Securities – Prior
Sales.”
|
|
|
(2)
|
See
“Information About
Nayarit – Executive
Compensation.”
|
Options
to Subscribe for Securities
The following table sets out
details of outstanding Nayarit Stock Options as of December 31, 2009 all of
which are held by executive officers, directors and consultants and all of which
were granted pursuant to the Stock Option Plan (see “Information About
Nayarit - Executive Compensation.”):
156
|
Holder
|
Number of
Nayarit Gold
Shares Under
Option (1) (3)
|
Date of Grant
|
Expiry Date
|
Exercise
Price
(CAD)
|
Market Value
of Nayarit
Gold Shares
on Date of
Grant (2)
(CAD)
|
||||||||||
|
All
(3) executive officers and past executive officers of Nayarit as a
group
|
2,010,000
|
(1)
|
May
17, 2007
to
August 29, 2008
|
May
17, 2012
to
August 29, 2013
|
$ | 0.50 - $0.98 | $ | 0.48 - $1.00 | |||||||
|
All
(5) directors and past directors of Nayarit who are not also executive
officers as a group
|
1,550,000
|
(1)
|
May
18, 2005
to
February 10, 2009
|
May
18, 2010
to
February 10, 2014
|
$ | 0.35 - $1.30 | $ | 0.35 - $1.33 | |||||||
|
All
(3) employees and past employees of Nayarit as a group
|
465,000
|
(1)
|
September
7, 2007
to
April 25,
2008
|
September
7,
2012
to April
25,
2013
|
$ | 0.44 - $0.60 | $ | 0.44 - $0.60 | |||||||
|
All
(16) consultants and past consultants of Nayarit as a
group
|
5,064,286
|
(1)
|
May
18, 2005
to
April 6, 2009
|
May
18, 2010
to
April 6, 2014
|
$ | 0.35 - $1.33 | $ | 0.35 - $1.43 | |||||||
|
9,089,286
|
May
18, 2005
to
April 6, 2009
|
May
18, 2010
to
April 6, 2014
|
$ | 0.35 - $1.33 | $ | 0.35 - $1.43 | |||||||||
|
(1)
|
Stock
options are granted with an exercise price determined by the Board of
Directors. Options shall not be granted for a term exceeding five years.
Options vest over a period of at least 18 months and must be released in
equal stages on a quarterly basis and options issued to Investor Relations
Consultants must vest in stages of not less than twelve months with no
more than one-quarter of the options vesting in any three month
period.
|
|
(2)
|
The
market value was determined on the basis of closing share price on the
date of grant.
|
|
(3)
|
Each
of these Nayarit Stock Options entitles the holder thereof to purchase one
(1) Nayarit share at any time for a period of five years from the date of
grant.
|
Prior
Sales
The
following table contains details of the prior sales of securities by Nayarit
from the date of its original amalgamation (May 2, 2005) to December 31,
2009:
|
Date
|
Number and
Type of Securities
|
Consideration
|
Price
(CAD)
|
Gross Proceeds
/Total Value
(CAD)
|
||||||||
|
May
2, 2005
|
9,500,001 common
shares (1)
|
Cash
|
$ | 0.08 | $ | 780,001 | ||||||
|
May
2, 2005
|
9,479,073common
shares (2)
|
$Nil
|
$ |
Nil
|
$ |
Nil
|
||||||
|
May
2, 2005
|
6,428,567 common
shares (3)
|
Cash
|
$ | 0.35 | $ | 2,250,000 | ||||||
|
March
20, 2006
|
4,056,000 common
shares (4)
|
Cash
|
$ | 0.75 | $ | 3,042,000 | ||||||
|
January
1, 2006 to March 31, 2006
|
4,897,002 common
shares (5)
|
Cash
|
$ | 0.15 | $ | 743,001 | ||||||
|
January
1, 2006 to March 31, 2006
|
133,332 common shares
(6)
|
Cash
|
$ | 0.35 | $ | 46,666 | ||||||
|
April
1, 2006 to June 30, 2006
|
1,271,431 common
shares (5)
|
Cash
|
$ | 0.39 | $ | 491,522 | ||||||
|
April
1, 2006 to June 30, 2006
|
50,000 common
shares(6)
|
Cash
|
$ | 0.38 | $ | 19,000 | ||||||
|
October
1, 2006 to December 31, 2006
|
577,856 common shares
(5)
|
Cash
|
$ | 0.27 | $ | 155,036 | ||||||
|
February
22, 2007
|
2,811,500 common
shares (7)
|
Cash
|
$ | 0.70 | $ | 1,968,050 | ||||||
|
February
22, 2007
|
70,000 common shares
(8)
|
Finder’s
fee
|
$ | 0.70 | $ | 49,000 | ||||||
|
January
1, 2007 to March 31, 2007
|
750,000 common shares
(5)
|
Cash
|
$ | 0.25 | $ | 187,500 | ||||||
157
|
Date
|
Number and
Type of Securities
|
Consideration
|
Price
(CAD)
|
Gross Proceeds
/Total Value
(CAD)
|
||||||||
|
January
1, 2007 to March 31, 2007
|
75,000 common
shares(6)
|
Cash
|
$ | 0.35 | $ | 26,250 | ||||||
|
April
1, 2007 to June 30, 2007
|
2,203,000 common
shares (5)
|
Cash
|
$ | 0.41 | $ | 927,964 | ||||||
|
April
1, 2007 to June 30, 2007
|
775,000 common
shares(6)
|
Cash
|
$ | 0.35 | $ | 272,750 | ||||||
|
July
1, 2007 to September 30, 2007
|
115,000 common
shares(6)
|
Cash
|
$ | 0.38 | $ | 43,700 | ||||||
|
January
11, 2008
|
5,682,500 common
shares
(9)
|
Cash
|
$ | 0.40 | $ | 2,273,000 | ||||||
|
April
1, 2008 to June 30, 2008
|
125,000 common
shares(6)
|
Cash
|
$ | 0.35 | $ | 43,750 | ||||||
|
July
25, 2008
|
17,900,000 common
shares (10)
|
Cash
|
$ | 0.56 | $ | 10,024,000 | ||||||
|
July
25, 2008
|
500,000 common shares
(11)
|
Property
|
$ | 0.61 | $ | 305,000 | ||||||
|
July
1, 2008 to September 30, 2008
|
45,000 common
shares(5)
|
Cash
|
$ | 0.60 | $ | 27,000 | ||||||
|
July
1, 2008 to September 30, 2008
|
425,000 common
shares(6)
|
Cash
|
$ | 0.35 | $ | 148,750 | ||||||
|
December
16, 2008
|
750,000 common shares
(11)
|
Property
|
$ | 0.45 | $ | 337,500 | ||||||
|
March
24, 2009
|
20,000,000 common
shares
(12)
|
Cash
|
$ | 0.50 | $ | 10,000,000 | ||||||
|
January
1, 2009 to March 31, 2009
|
139,286 common
shares(6)
|
Cash
|
$ | 0.48 | $ | 67,500 | ||||||
|
July
15, 2009
|
750,000 common shares
(11)
|
Property
|
$ | 0.45 | $ | 337,500 | ||||||
|
December
9, 2009
|
750,000 common shares
(11)
|
Property
|
$ | 0.48 | $ | 360,000 | ||||||
|
(1)
|
Opening
balance of common shares upon amalgamation of Canhorn Chemical Corporation
with Nayarit Gold Inc.
|
|
(2)
|
Shares
issued upon consummation of reverse
takeover.
|
|
(3)
|
Private
placement in conjunction with amalgamation of Canhorn Chemical Corporation
with Nayarit Gold Inc. Units consisted of one common
share and one-half of one warrant. Each whole common share
purchase warrant entitled the holder to acquire one common share for $0.40
until April 30, 2006 and $0.45 until April 30,
2007.
|
|
(4)
|
Units
consisted of one common share and one-half of one common share purchase
warrant. Each whole warrant entitled the holder to acquire one
common share for $1.25 until March 20,
2007.
|
|
(5)
|
Common
shares issued upon exercise of
warrants.
|
|
(6)
|
Common
shares issued upon exercise of stock
options.
|
|
(7)
|
Units
consisted of one common share and one-half of one common share purchase
warrant. Each whole warrant entitled the holder to acquire one
common share for $1.00 until January 29,
2008.
|
|
(8)
|
70,000
common shares were issued as finder’s fees in conjunction with the
February 22, 2007 private placement valued at $0.70 for a deemed total of
$49,000.
|
|
(9)
|
Units
consisted on one common share and one common share purchase
warrant. Each whole warrant entitled the holder to acquire one
common share for $0.60 until January 11, 2009 and for $0.70 until January
11, 2010. The term of these warrants was extended by six
months; accordingly, the new expiry date is now July 11,
2010.
|
158
|
(10)
|
Units
consisted on one common share and one common share purchase
warrant. Each whole warrant entitles the holder to acquire one
common share for $0.75 until July 25,
2010.
|
|
(11)
|
On
July 25, 2008, Nayarit entered into an option agreement with Compania
Minera Huajicari, S.A. de D.V. to acquire six additional mining
concessions. Consideration included aggregate payments of
USD$2,500,000 and the issuance of 3,500,000 common shares of Nayarit Gold
Inc., of which 500,000 was due upon closing (issued), 750,000 was due six
months from closing (issued), 750,000 was due twelve months from closing
(issued), 750,000 are due eighteen months from closing (issued), and
750,000 are due twenty-four months from closing. Compania
Minera Hujicari has the option to acquire an additional 500,000 common
shares of the Company by foregoing and in lieu of receiving the final cash
payment of USD$500,000.
|
|
(12)
|
Units
consisted on one common share and one-half of one common share purchase
warrant. Each whole warrant entitles the holder to acquire one
common share for $0.65 until March 24,
2011.
|
Escrowed
Securities
To the knowledge of Nayarit, there
are no securities of Nayarit which are subject to escrow or other pooling
arrangements. If the Amalgamation becomes effective, Amalco Shares
will be subject to escrow as described in “Part V – Information Concerning the
Resulting Issuer – Escrowed Securities”.
Principal
Holders of Securities
As of
March 29, 2010, to the knowledge of the directors and officers of Nayarit there
are no persons who beneficially own, or control or direct, directly or
indirectly, Nayarit Shares carrying more than 10% of the voting rights attached
to the Nayarit Shares.
Directors and
Officers
The following table sets forth the
name and municipality of residence of each director and executive officer of
Nayarit, as well as such individual's age, position with Nayarit, principal
occupation within the five preceding years and period of service as a director
(if applicable). Each of the directors of Nayarit will hold office
until completion of the Business Combination or the next annual meeting of
stockholders and until such director's successor is elected and qualified, or
until the director's earlier death, resignation or removal. For
information relating to the directors of Capital Gold upon completion of the
Business Combination, see “Management of Capital Gold Following
the Business Combination.”
|
Name and
Municipality of
Residence
|
Age
|
Position
with
Nayarit
|
Principal Occupation for Five
Preceding
Years
|
Director
/ Officer
Since
|
Number
of Nayarit
Shares
Held (%)
|
||||||||
|
Colin
Sutherland
Halifax,
NS
|
39
|
President,
Chief Executive Officer and Director
|
President,
Chief Executive Officer and Director of Nayarit since 2007; Chief
Financial Officer and director of Gammon Gold Inc. from 2004 to
2007. Chief Financial Officer and director of Mexgold Resources
Inc. from 2004 to 2006.
|
2007
|
0.1 | % | |||||||
|
Paul F. Saxton
(3)
Furry
Creek, BC
|
63
|
Chairman
and Director
|
Chairman
and Director of Nayarit since 2007. Chief Executive Officer and
President of Lincoln Gold Corp. since 2007 and Chairman and Chief
Operating Officer of Pinnacle Mines Ltd. since 2003.
|
2007
|
0 | % | |||||||
|
Megan
Spidle
Halifax,
NS
|
33
|
Chief
Financial Officer
|
Chief
Financial Officer of Nayarit since 2008. Senior Manager –
Assurance & Advisory of Deloitte & Touche, LLP from 2007 to
2008. Manager – Financial Accounting and Reporting of Duke
Energy from 2004 to 2006.
|
2008
|
0 | % | |||||||
159
|
Name and
Municipality of
Residence
|
Age
|
Position
with
Nayarit
|
Principal Occupation for Five
Preceding
Years
|
Director
/
Officer
Since
|
Number
of Nayarit
Shares
Held (%)
|
||||||||
|
J. Trevor Eyton(1)(2)(3)(4)
Caledon,
ON
|
75
|
Director
|
Member
of the Senate of Canada and a director of Brookfield Asset Management Inc.
and Coca-Cola Enterprises Inc. Chairman of Canada's Sports Hall
of Fame and a Governor of the Canadian Olympic Foundation and Junior
Achievement of Canada. Co-Founder and Co-Chairman of the
Canada/Mexico Retreat.
|
2005
|
0 | % | |||||||
|
R. Glen
MacMullin(1)(2)(4)(5)
Ottawa,
ON
|
40
|
Director
|
Vice-President,
Finance for Minto Commercial Properties Inc. Managing Director
of Xavier Sussex, LLC from 2004 to 2007.
|
2007
|
0 | % | |||||||
|
Donald
F. Flemming(1)(2)(3)(4)
Halifax,
NS
|
69
|
Director
|
Director
and Special Committee member of Mexgold Resources Inc. from 2005 to 2006.
President of Don Flemming Insurance since 1980.
|
2007
|
0 | % | |||||||
|
|
(1)
|
Independent
Director.
|
|
|
(2)
|
Member
of the Corporate Governance & Nominating
Committee.
|
|
|
(3)
|
Member
of the Compensation Committee.
|
|
|
(4)
|
Member
of the Audit Committee.
|
|
|
(5)
|
Chairman
of the Audit Committee
|
The directors and executive officers
of Nayarit, as a group, beneficially own, directly and indirectly, and exercise
control or direction over, a total of 121,200 Nayarit Shares, representing 0.1%
of all issued and outstanding Nayarit Shares as of the date of March 22,
2010.
Profiles of each of the executive
officers and directors of Nayarit (including details with regard to their
principal occupations for the last five years) are set forth below:
Colin
Sutherland, C.A., President, Chief Executive Officer and Director
Prior to joining Nayarit, Mr.
Sutherland was a Director and Chief Financial Officer of Gammon Gold Inc.
("Gammon") from 2004 to 2007, where he was involved in Gammon's growth from an
exploration stage company to a producing mining company with a market
capitalization of over Cdn $2 billion. Mr. Sutherland also was a
Director and Chief Financial Officer of Mexgold Resources Inc. from 2004 to
2006. Mr. Sutherland has extensive experience in financing mineral
exploration. Mr. Sutherland is a Chartered Accountant and a graduate
of Saint Francis Xavier University in Antigonish, Nova Scotia.
Paul
F. Saxton, B.Sc. (Engineering), M.B.A., Chairman and Director
Mr.
Saxton is a mining engineer and has been active in the mining industry since
1969. He began his career with Cominco Ltd. and since then has held
senior management positions with a number of Canadian mining companies,
including Lincoln Gold Corp. (President and Director), Pinnacle Mines Ltd.
(Chief Operating Officer and Director), Zazu Metals Corporation (Director),
Mascot Gold Mines Ltd. (President), Corona Corporation (Vice-President), Viceroy
Resource Corporation (Senior Vice President), Standard Mining Corp. (President
until it merged with Doublestar Resources Ltd. in 2001), Loki Gold Corporation
(President), Baja Gold Inc. (President), Goldcliff Resource Corporation
(Director) and 0373849 B.C. Ltd. (Director). In addition to holding a
B.Sc. (Engineering) degree from Queen's University, in Kingston, Ontario, Mr.
Saxton also earned an M.B.A. from the University of Western Ontario in London,
Ontario.
160
Megan
Spidle, C.A., Chief Financial Officer
Ms.
Spidle is a Chartered Accountant with over 10 years experience in public
practice, most recently as a Senior Manager of Assurance and Advisory Services
at Deloitte & Touche, LLP. Ms Spidle also worked as Manager of
Financing Reporting for Duke Energy, and was responsible for the financial
accounting and reporting including the oversight of the quarterly and annual
financial statements. Ms. Spidle is a David Hope Honour Role
Recipient and was the Nova Scotia Bronze medalist for the Canadian Institute of
Chartered Accountants Uniform Final Examination.
J.
Trevor Eyton, B.A., S.J.D. (Law), Director
Mr. Eyton is a Member of the Senate
of Canada and a director of Brookfield Asset Management Inc., Brookfield
Infrastructure Partners L.P., Tudorcroft Investments Inc., Ivernia Inc., Silver
Bear Resources Inc. and Coca-Cola Enterprises Inc. He is also
Chairman of Canada's Sports Hall of Fame and a Governor of the Canadian Olympic
Foundation and Junior Achievement of Canada. In 2002 he was awarded
Mexico's Aguila Azteca – the highest award given to foreigners by the government
of Mexico. Senator Eyton is also the co-founder and co-chairman of
the Canada/Mexico Retreat, an organization formed in 1990 around the NAFTA
discussions and now dedicated to promoting two-way trade and investment at the
most senior levels in the two countries. Senator Eyton earned a B.A.
from the University of Toronto in 1957 and a S.J.D. from the University of
Toronto, School of Law in 1960.
R.
Glen MacMullin, B.A. (Business Administration), Director
R. Glen MacMullin is currently a
Vice President with the Minto Group, an integrated real estate development,
construction and management company. Prior to his current position, Mr.
MacMullin was a Managing Director with Xavier Sussex, LLC, a private investment
firm he co-founded in 2004. Prior to 2004, he was a Director and Chief
Operating Officer with the proprietary trading division of Deutsche Bank in New
York. He previously served in various positions with Deutsche Bank
Offshore in the Cayman Islands including Head of Investment Funds. Mr.
MacMullin began his career in public accounting with Coopers & Lybrand in
Ottawa, Canada and KPMG in the Cayman Islands. He holds a Bachelor of
Business Administration degree from Saint Francis Xavier University in
Antigonish, Nova Scotia and is a member of the Canadian Institute of Chartered
Accountants.
Donald
F. Flemming, B.A., Director
Mr. Flemming was previously a
director and special committee member of Mexgold Resources Inc. He
has been the President of Don Flemming Insurance since 1980. From
1970 to 1980 he served in different capacities for John Deere. He is
a graduate of St. Mary's University of Halifax, Nova Scotia.
Committees
of the Board of Directors
The board of directors has
established an Audit Committee to oversee the retention, performance and
compensation of Nayarit’s independent auditors, and to oversee and establish
procedures concerning systems of internal accounting and control. The
Audit Committee is currently comprised of Messrs. J. Trevor Eyton, R. Glen
MacMullin (Chairman) and Donald F. Flemming.
The board of directors of Nayarit
has also established a Compensation Committee to assist the board in settling
the compensation of directors and senior executives, and developing and
submitting to the board recommendations with regard to other employee
benefits. The Compensation Committee is currently comprised of
Messrs. J. Trevor Eyton, Paul Saxton and Donald F. Flemming
(Chairman).
The board of directors has
established a Corporate Governance & Nominating Committee which is charged
with performing an annual evaluation of the effectiveness of the board of
directors as a whole, the committees of the board and the contributions of
individual directors. The Corporate Governance & Nominating
Committee is currently comprised of Messrs. J. Trevor Eyton (Chairman), R. Glen
MacMullin and Donald F. Flemming.
161
Corporate
Cease Trade Orders or Bankruptcies
Except as
disclosed elsewhere herein (see below, “Penalties or Sanctions”), no director,
officer, promoter or principal stockholder of Nayarit is, or has been within the
past ten years, a director, officer or promoter of any person or company that,
while such person was acting in that capacity: (i) was the subject of a cease
trade order or similar order or an order that denied the company access to any
exemptions under securities legislation for a period of more than 30 consecutive
days; or (ii) became bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold its assets.
Individual
Bankruptcies
No director, officer, promoter or
principal stockholder of Nayarit is or has, within ten years prior to the date
hereof, become bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency, or become subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold the assets of that individual.
Penalties
or Sanctions
No director, officer, promoter or
principal stockholder of Nayarit has: (i) been the subject of any penalties or
sanctions imposed by a court relating to Canadian securities legislation or by a
Canadian securities regulatory authority or has entered a settlement agreement
with a Canadian securities regulatory authority; or (ii) been the subject of any
other penalties or sanctions imposed by a court or regulatory body, including a
self-regulatory body, that would be likely to be considered to be important to a
reasonable investor making a decision about the Business Decision.
Executive
Compensation
Named
Executive Officers
For the
purposes of this joint proxy statement/prospectus, a Named Executive Officer
(“NEO”) of Nayarit means each of the following individuals:
|
|
(a)
|
a
chief executive officer (“CEO”) of
Nayarit;
|
|
|
(b)
|
a
chief financial officer (“CFO”) of
Nayarit;
|
|
|
(c)
|
each
of Nayarit’s three most highly compensated executive officers, or the
three most highly compensated individuals acting in a similar capacity,
other than the CEO and CFO, at the end of the most recently completed
financial year whose total compensation was, individually, more than
CDN$150,000, for that financial year;
and
|
|
|
(d)
|
each
individual who would be a NEO under paragraph (c) above but for the fact
that the individual was neither an executive officer of Nayarit Gold, nor
acting in a similar capacity, at the end of that financial
year.
|
Nayarit
currently has the following two NEO’s: Colin Sutherland (President
and Chief Executive Officer) and Megan Spidle (Chief Financial
Officer).
Compensation
Discussion and Analysis
The
Compensation Committee of Nayarit’s board is responsible for ensuring that
Nayarit has in place an appropriate plan for executive compensation and for
making recommendations to the board with respect to the compensation of
Nayarit’s executive officers. The Compensation Committee ensures that
total compensation paid to all NEO’s is fair and reasonable and is consistent
with Nayarit’s compensation philosophy.
Compensation
plays an important role in achieving short and long-term business objectives
that ultimately drive business success. Nayarit’s compensation philosophy is to
foster entrepreneurship at all levels of the organization through, among other
things, the granting of stock options, a significant component of executive
compensation. This approach is based on the assumption that the performance of
Nayarit’s common share price over the long term is an important indicator of
long term performance.
162
Nayarit’s
compensation philosophy is based on the following fundamental
principles:
1. Compensation programs align with
stockholder interests – Nayarit aligns the goals of executives with
maximizing long term stockholder value;
2. Performance sensitive –
compensation for executive officers should be linked to operating and market
performance of Nayarit and fluctuate with the performance; and
3. Offer market competitive
compensation to attract and retain talent – the compensation program
should provide market competitive pay in terms of value and structure in order
to retain existing employees who are performing according to their objectives
and to attract new individuals of the highest caliber.
The
objectives of the compensation program in compensating all NEO’s were developed
based on the above-mentioned compensation philosophy and are as
follows:
|
|
•
|
to
attract and retain highly qualified executive
officers;
|
|
•
|
to
align the interests of executive officers with stockholders’ interests and
with the execution of Nayarit’s business
strategy;
|
|
•
|
to
evaluate executive performance on the basis of key measurements of
exploration management and business plan implementation that correlate to
long-term stockholder value;
and
|
|
•
|
to
tie compensation directly to those measurements and rewards based on
achieving and exceeding predetermined
objectives.
|
Competitive
Compensation
Aggregate
compensation for each NEO is designed to be competitive. The
Compensation Committee reviews compensation practices of similarly situated
companies in determining appropriate compensation. Although the Compensation
Committee reviews each element of compensation for market competitiveness, and
it may weigh a particular element more heavily based on the NEO’s role within
Nayarit, it is primarily focused on remaining competitive in the market with
respect to total compensation.
The
Compensation Committee reviews data related to compensation levels and programs
of various companies that are similar in size to Nayarit and operate within the
mining exploration and development industry, prior to making its
decisions. Examples of these companies are Ventana Gold Corp.,
Greystar Resources Ltd. and Colombian Mines Corporation. These
companies are used as Nayarit’s primary peer group because they have similar
business characteristics or because they compete with Nayarit for employees and
investors. The Compensation Committee also relies on the experience of its
members as officers and/or directors at other companies in similar lines of
business as Nayarit in assessing compensation levels.
The
purpose of this process is to:
|
•
|
understand
the competitiveness of current pay levels for each executive position
relative to companies with similar revenues and business
characteristics;
|
|
•
|
identify
and understand any gaps that may exist between actual compensation levels
and market compensation levels;
and
|
|
•
|
establish
a basis for developing salary adjustments and short-term and long-term
incentive awards for the Compensation Committee’s
approval.
|
Aligning
the Interests of the NEO’s with the Interests of Nayarit’s
Stockholders
Nayarit
believes that transparent, objective and easily verified corporate goals,
combined with individual performance goals, play an important role in creating
and maintaining an effective compensation strategy for the
NEO’s. Nayarit’s objective is to establish benchmarks and targets for
its NEO’s which, if achieved, will enhance stockholder value. These
benchmarks relate to completion of exploration programs on the basis of
pre-established budgets and exploration success, as well as completion of equity
financings on terms beneficial to Nayarit.
163
A
combination of fixed and variable compensation is used to motivate executives to
achieve overall corporate goals. For the 2009 financial year, the three basic
components of executive officer compensation program were:
|
|
•
|
fixed
salary;
|
|
|
•
|
annual
incentives (cash bonus); and
|
|
|
•
|
option
based compensation.
|
Fixed
salary comprises a portion of the total cash-based compensation; however, annual
incentives and option based compensation represent compensation that is “at
risk” and thus may or may not be paid to the respective executive officer
depending on: (i) whether the executive officer is able to meet or exceed his or
her applicable performance targets; and (ii) success in financing Nayarit and
market performance of Nayarit Shares. To date, no specific formulae
have been developed to assign a specific weighting to each of these
components. Instead, the board considers each performance target and
Nayarit’s performance and assigns compensation based on this assessment and the
recommendations of the Compensation Committee.
Base
Salary
The
Compensation Committee and the board approve the salary ranges for the
NEO’s. The base salary review for each NEO is based on an assessment
of factors such as current competitive market conditions, compensation levels
within the peer group and particular skills, such as leadership ability and
management effectiveness, experience, responsibility and proven or expected
performance of the particular individual. Comparative data for
Nayarit’s peer group is also accumulated from a number of external sources
including independent consultants. Nayarit’s policy for determining
salary for executive officers is consistent with the administration of salaries
for all other employees.
Annual
Incentives
Nayarit,
in its discretion, may award annual incentives by way of cash bonuses in order
to motivate executives to achieve short-term corporate goals. The Compensation
Committee and the board approve annual incentives.
The
success of NEO’s in achieving their individual objectives and their contribution
to Nayarit in reaching its overall goals are factors in the determination of
their annual bonus. The Compensation Committee assesses each NEO's
performance on the basis of his or her respective contribution to the
achievement of the predetermined corporate objectives, as well as to needs of
Nayarit that arise on a day to day basis. This assessment is used by
the Compensation Committee in developing its recommendations to the Board with
respect to the determination of annual bonuses for the NEO’s. Where
the Compensation Committee cannot unanimously agree, the matter is referred to
the full board for decision. The board relies heavily on the
recommendations of the Compensation Committee in granting annual
incentives.
Compensation
and Measurements of Performance
The Board
approves targeted amounts of annual incentives for each NEO at the beginning of
each financial year. The targeted amounts are determined by the
Compensation Committee based on a number of factors, including comparable
compensation of similar companies.
Achieving
predetermined individual and/or corporate targets and objectives, as well as
general performance in day to day corporate activities, will trigger the award
of a bonus payment to the NEO. The NEO will receive a partial or full
incentive payment depending on the number of the predetermined targets met and
the Compensation Committee’s and the board’s assessment of overall
performance. The determination as to whether a target has been met is
ultimately made by the board and the board reserves the right to make positive
or negative adjustments to any bonus payment if they consider them to be
appropriate.
164
Long
Term Compensation
Nayarit currently has no long-term
incentive plans, other than stock options granted from time to time by the Board
under the provisions of Nayarit’s Stock Option Plan.
Compensation
Summary
The table below sets forth information
concerning the compensation paid, awarded or earned by each of the NEO’s for
services rendered in all capacities to Nayarit during the fiscal years ended
September 30, 2009, September 30, 2008 and September 30, 2007.
|
Non-Equity Incentive Plan
Compensation
($)
|
||||||||||||||||||||||||||||||||||
|
Name of NEO
and Principal
Position
|
Year
|
Salary
($)(1)
|
Share-Based
Awards
($)
|
Option-
Based
Awards(2)
($)
|
Annual
Incentive
Plans
|
Long-Term
Incentive
Plans
|
Pension
Value
($)
|
All Other
Compen-
sation
($)
|
Total
Compen-
sation
($)
|
|||||||||||||||||||||||||
|
Colin Sutherland
|
2009
|
$ | 250,000 | N/A |
Nil
|
$ | 41,917 | N/A | N/A | $ | 12,274 | $ | 304,191 | |||||||||||||||||||||
|
CEO(3)
|
2008
|
$ | 184,589 | N/A | $ | 380,000 |
Nil
|
N/A | N/A | $ | 3,069 | $ | 567,658 | |||||||||||||||||||||
|
|
2007
|
$ | 51,923 | N/A | $ | 408,000 |
Nil
|
N/A | N/A |
Nil
|
$ | 459,923 | ||||||||||||||||||||||
|
Paul
F. Saxton
|
2009
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
CEO(3)
|
2008
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
|
2007
|
$ | 6,844 | N/A | $ | 163,200 |
Nil
|
N/A | N/A |
Nil
|
$ | 170,044 | ||||||||||||||||||||||
|
Michael A. Dehn(3)
|
2009
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
CEO
|
2008
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
|
2007
|
$ | 48,000 | N/A | N/A |
Nil
|
NA
|
N/A |
Nil
|
$ | 48,000 | |||||||||||||||||||||||
|
Megan Spidle (4)
|
2009
|
$ | 100,000 | N/A |
Nil
|
$ | 4,167 | N/A | N/A |
Nil
|
$ | 104,167 | ||||||||||||||||||||||
|
CFO
|
2008
|
$ | 37,149 | N/A | $ | 57,000 |
Nil
|
N/A | N/A |
Nil
|
$ | 94,149 | ||||||||||||||||||||||
|
2007
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||
|
Dennis H. Waddington (4)
|
2009
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
CFO
|
2008
|
$ | 38,660 | N/A | N/A |
Nil
|
N/A | N/A |
Nil
|
$ | 38,660 | |||||||||||||||||||||||
|
|
2007
|
$ | 64,880 | N/A | N/A |
Nil
|
N/A | N/A |
Nil
|
$ | 64,880 | |||||||||||||||||||||||
|
Hall
Stewart,
|
2009
|
$ | 177,010 | N/A |
Nil
|
$ | 42,105 | N/A | N/A |
Nil
|
$ | 219,115 | ||||||||||||||||||||||
| Vice-President of |
2008
|
$ | 4,344 | N/A | $ | 194,400 |
Nil
|
N/A | N/A |
Nil
|
$ | 198,744 | ||||||||||||||||||||||
| Exploration |
2007
|
N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
|
(1)
|
Messrs.
Saxton, Dehn and Waddington were engaged as consultants rather than
employees. The amounts listed here reflect consulting fees
received in accordance with their respective
contracts.
|
|
(2)
|
Options
to purchase common shares of Nayarit granted pursuant to Nayarit's Stock
Option Plan.
|
|
(3)
|
Mr.
Sutherland was appointed Chief Executive Officer of Nayarit and a member
of the Board of Directors on September 21, 2005, serving in the first
capacity until April 22, 2007 until Mr. Sutherland took over on June 6,
2007. Mr. Dehn was appointed as Chief Executive Officer and a
member of the Board of Directors until September 21,
2005.
|
|
(4)
|
Ms.
Spidle was appointed Chief Financial Officer of Nayarit on May 12,
2008. Mr. Waddington served as Chief Financial Officer until
May 12, 2008.
|
|
(5)
|
Mr.
Stewart served as Vice-President of Exploration of Nayarit from October 6,
2008 until February 15, 2010.
|
Incentive
Plan Awards
Stock Option
Plan
On April 7, 2005, the stockholders
of Nayarit adopted a stock option plan which provided for 4,938,000 shares to be
issued under the Plan. The stock option plan was further amended on
June 23, 2006 to increase the number of shares to 7,160,000, on April 17, 2008
to increase the number of shares to 9,775,000 and on March 31, 2009 to increase
the number of shares to 11,300,000.
165
The purpose of the plan is to
encourage ownership of the Nayarit shares by the persons who are primarily
responsible for the management and profitable growth of Nayarit’s business, as
well as provide additional incentive for superior performance by such persons
and attract and retain valued personnel. The plan provides that
eligible persons thereunder include any director, senior officer, consultant or
employee of Nayarit. A consultant is defined as an individual who is
engaged by Nayarit, under a written contract, to provide services on an ongoing
basis and spends a significant amount of time on Nayarit’s business and
affairs. The definition of consultant also includes an individual
whose services are engaged through a personal holding corporation.
The plan is administered by the
board of directors of Nayarit, who have the authority to determine, among other
things, subject to the terms of the plan and the requirements of regulatory
authorities having jurisdiction, the terms, limitations, restrictions and
conditions respecting the grant of options and issuance of Nayarit shares
thereunder.
The maximum number of Nayarit shares
reserved for issuance under the plan from time to time must not exceed the
amount equal to 5% of Nayarit’s issued and outstanding shares at the time of
grant. The maximum number of Nayarit shares that may be reserved for
issuance to any one insider under the plan and any other share compensation
arrangement may not exceed 5% of the issued and outstanding Nayarit shares at
the time of grant (on a non-diluted basis). The plan also provides
that the maximum number of Nayarit shares that may be reserved for issuance to
insiders under the plan and any other share compensation arrangement shall not
exceed 20% of the Nayarit shares outstanding at the time of grant (on a
non-diluted basis) and the maximum number of Nayarit shares that may be issued
to insiders under the plan or any other share compensation arrangement within a
one-year period shall not exceed 10% of the Nayarit shares outstanding at the
time of grant.
The board of directors of Nayarit
has the authority under the plan to establish the option price at the time each
option is granted, which price shall not be less than the market price of the
Nayarit shares at the time of grant. Options granted under the stock
option plan are exercisable over a period not exceeding five (5) years from the
date of grant, subject to earlier termination if the optionee ceases to be an
eligible person by reason of termination of employment, retirement, disability
or death. The options granted under the plan are not transferable or
assignable other than by will or the laws of descent and
distribution. Options will be subject to such vesting schedule as
determined by the board of directors and any applicable regulatory
requirements.
Outstanding
Option-Based and Share-based Awards
The
following table sets out for each NEO, the incentive stock options (option-based
awards) and share-based awards outstanding as at September 30,
2009.
|
Option-based Awards(1)
|
|||||||||||||
|
Name
|
Number of
securities
underlying
unexercised options
(#)
|
Option
exercise
price
($)
|
Option expiration
date
|
Value of unexercised
in-the-money options
($)
|
|||||||||
|
Colin
Sutherland
|
500,000
1,000,000
|
0.98
0.50
|
May
17, 2012
April
25, 2013
|
-
50,000
|
|||||||||
|
Hall
Stewart
|
360,000 | 0.68 |
August
29, 2013
|
- | |||||||||
|
Megan
Spidle
|
150,000 | 0.50 |
April
25, 2013
|
7,500 | |||||||||
|
|
(1)
|
The
Stock Option Plan is a “rolling” stock option plan whereby the maximum
number of common shares that may be reserved for issuance pursuant to the
Stock Option Plan will not exceed 5% of the issued common shares at the
time of grant. As at the date hereof 11,300,000 Nayarit
shares may be reserved for issuance pursuant to the Stock Option
Plan.
|
The following table sets forth, as at
September 30, 2009, aggregate information in respect to compensation plans of
Nayarit under which equity securities of Nayarit are authorized for
issuance.
166
Securities
Authorized for Issuance Under Equity Compensation Plans
|
Plan Category(1)
|
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options
|
Weighted Average
Exercise Price of
Outstanding
Options
|
Securities Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
|
|||||||||
|
Equity
compensation plans approved by security holders (the only such plan is the
Nayarit Gold stock option plan)
|
9,089,286 | $ | 0.65 | 2,210,714 | ||||||||
|
Equity
compensation plans not approved by security holders (Nayarit Gold does not
have any such plan)
|
N/A | N/A | N/A | |||||||||
|
(1)
|
The
only equity compensation plan of Nayarit is the Nayarit stock option plan,
which has been approved by the Nayarit
Stockholders.
|
Value Vested or Earned During the
Year
The
following table sets forth, for each NEO, the value of all incentive plan awards
that vested during the year ended September 30, 2009.
|
Name
|
Option-based
awards-Value vested
during the year(1) (2)
($)
|
Share-based
awards-Value vested
during the year
($)
|
Non-equity incentive
plan compensation-
Value earned during
the year
($)
|
|||
|
Colin
Sutherland
|
Nil
|
N/A
|
N/A
|
|||
|
Hall
Stewart
|
Nil
|
N/A
|
N/A
|
|||
|
Megan
Spidle
|
Nil
|
N/A
|
N/A
|
|
(1)
|
Summarizes
for each of the NEO’s the aggregate value that would have been realized if
the options had been exercised on the vesting date during the financial
year ended September 30, 2009. As these options were not
necessarily exercised, or exercised on such vesting date, by the NEO’s,
these amounts do not necessarily reflect amounts realized by the NEO’s
during the year ended September 30,
2009.
|
|
(2)
|
On
each date during the year in which the stock options vested, the closing
prices of Nayarit’s shares were lower than the option exercise prices.
Therefore, the options which had vested were
not-in-the-money.
|
Employment
Agreements – Termination and Change of Control Benefits
Colin
Sutherland
Effective July 1, 2008, Nayarit
entered into an Employment Agreement with Colin Sutherland, the President and
Chief Executive Officer of Nayarit Gold, which provides, among other things, for
a base salary of Cdn $250,000 per annum. Mr. Sutherland dedicates
100% of his time to Nayarit and has not entered into a non-competition or
non-disclosure agreement with Nayarit Gold. Mr. Sutherland shall be
eligible for consideration of an annual bonus (up to 150% of his base
salary). Mr. Sutherland shall also be eligible to receive stock
options at the discretion of the Board of Directors of Nayarit. In
the event of a change of control of Nayarit, Mr. Sutherland may within 90 days
of learning about the change of control give notice to Nayarit and such leaving
shall be treated for all purposes as a termination by Nayarit. The
employment agreement may be terminated by either party upon 90 days' written
notice, and Mr. Sutherland (or his representatives, as applicable) shall be
entitled to receive all accrued and unpaid salary and bonuses, and a lump sum
payment equal to 3.0 times his annual salary and bonus, less any statutorily
required deductions. In the event of termination by Nayarit Gold by
reason of death or incapacity prior to the initial term, Mr. Sutherland shall be
entitled to receive the balance of the unpaid compensation (including any
incentive compensation) not covered by insurance. Mr. Sutherland has
agreed with Nayarit that the Business Combination will not trigger the
termination payment associated with a change in control.
167
Megan Spidle
Effective October 17, 2008, Nayarit
entered into am Employment Agreement with Megan Spidle, the Chief Financial
Officer of Nayarit, which provides, among other things, for a base fee of
CDN$100,000 per annum. Ms. Spidle dedicates 100% of her time to
Nayarit and has not entered into a non-competition or non-disclosure agreement
with Nayarit. Ms. Spidle shall be eligible for consideration of an
annual bonus (up to 150% of her base salary). Ms. Spidle shall also
be eligible to receive stock options at the discretion of Nayarit. In
the event of a change of control of Nayarit, Ms. Spidle may within 90 days of
learning about the change of control give notice to Nayarit and such leaving
shall be treated for all purposes as a termination by Nayarit. The
employment agreement may be terminated by either party upon 90 days' written
notice, and Ms. Spidle (or her representatives, as applicable) shall be entitled
to receive all accrued and unpaid salary and bonuses, and a lump sum payment
equal to 2.0 times her annual salary and bonus, less any statutorily required
deductions. In the event of termination by Nayarit by reason of death
or incapacity prior to the initial term, Ms. Spidle shall be entitled to receive
the balance of the unpaid compensation (including any incentive compensation)
not covered by insurance. Pursuant to the Business Combination Agreement Ms.
Spidle will be entitled to the termination payment associated with a change in
control if her employment agreement is terminated pursuant the terms of the
Business Combination Agreement.
Pension
Plan Benefits
Nayarit
does not have a pension plan or deferred compensation plan.
Director
Compensation
The
following table sets out, for each director (other than Colin Sutherland who is
an NEO) compensation received for the fiscal year ended September 30,
2009.
168
|
Name
|
Fees Earned
($)
|
Option-Based
Awards(1)
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Pension
Value
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||
|
Paul F.
Saxton
|
Nil
|
Nil
|
N/A | N/A | N/A |
Nil
|
||||||||||||||||
|
J.
Trevor Eyton
|
Nil
|
Nil
|
N/A | N/A | N/A |
Nil
|
||||||||||||||||
|
R.
Glen MacMullin
|
Nil
|
$ | 9,250 | N/A | N/A | N/A | $ | 9,250 | ||||||||||||||
|
Donald
F. Flemming
|
Nil
|
$ | 9,250 | N/A | N/A | N/A | $ | 9,250 | ||||||||||||||
|
(1)
|
The
fair value of share-based awards is calculated as at the date of grant
using the Black-Scholes Option Pricing Model. Option-pricing
models require the use of highly subjective estimates and assumptions
including the expected stock price volatility. Changes in the
underlying assumptions can materially affect the fair value estimates and
therefore, in management’s opinion, existing models do not necessarily
provide a reliable measure of the fair value of Nayarit’s share and
option-based awards.
|
Directors of Nayarit (other than Colin
Sutherland who is an NEO) are remunerated for their services as
follows:
|
Annual fee per director
|
Aggregate annual fee
|
||
|
Annual
fee paid to each director
|
Nil
|
Nil
|
|
|
Vice-Chairman
of the board of directors
|
N/A
|
N/A
|
|
|
Chairman
of audit committee
|
Nil
|
Nil
|
|
|
Chairmen
of other committees
|
Nil
|
Nil
|
Directors may also be compensated
for services provided to Nayarit as consultants or experts on the same basis and
at the same rate as would be payable if such services were provided by a third
party, arm's length service provider. To date, no such services have
been provided to Nayarit by any of its directors.
Directors
and Officers Liability Insurance
Nayarit maintains directors’ and
officers’ liability insurance.
Outstanding
Option-Based and Share-Based Awards
The
following table sets out, for each director (other than Colin Sutherland who is
an NEO) the stock options (option-based awards) outstanding as at September 30,
2009.
|
Name
|
Number of Securities
Underlying
Unexercised Options
|
Option Exercise Price
($)
|
Option Expiration
Date
|
Value of Unexercised
In-The-Money Options
($)(1)
|
|||||||||
|
Paul
F. Saxton
|
200,000 | $ | 0.98 |
May
17, 2012
|
Nil
|
||||||||
|
J.
Trevor Eyton
|
400,000 | $ | 0.35 |
May
18, 2010
|
$ | 80,000 | |||||||
| 250,000 | $ | 1.30 |
May
3, 2011
|
Nil
|
|||||||||
|
R.
Glen MacMullin
|
50,000 | 0.90 |
June
6, 2012
|
Nil
|
|||||||||
| 25,000 | 0.50 |
February
10,2014
|
1,250 | ||||||||||
|
Donald
F. Flemming
|
50,000 | 0.90 |
August
1, 2012
|
Nil
|
|||||||||
169
|
Name
|
Number of Securities
Underlying
Unexercised Options
|
Option Exercise Price
($)
|
Option Expiration
Date
|
Value of Unexercised
In-The-Money Options
($)(1)
|
|||||||||
| 25,000 | 0.50 |
February
10,2014
|
1,250 | ||||||||||
|
(1)
|
Calculated
as the closing price of the Company's shares on the Toronto Stock Exchange
Venture Exchange at September 30,
2009.
|
Value
Vested or Earned During the Year
The
following table sets forth, for each director (other than Colin Sutherland who
is an NEO) the value of all incentive plan awards that vested during the year
ended September 30, 2009.
|
Name
|
Option-based
awards-Value vested
during the year(1)
($)
|
Share-based
awards-Value
vested during the
year(1)
($)
|
Non-equity incentive
plan compensation-
Value earned during the
year
($)
|
|||||||||
|
Paul
F. Saxton
|
Nil
|
N/A | N/A | |||||||||
|
J.
Trevor Eyton
|
Nil
|
N/A | N/A | |||||||||
|
R.
Glen MacMullin
|
$ | 3,750 | N/A | N/A | ||||||||
|
Donald
F. Flemming
|
$ | 3,750 | N/A | N/A | ||||||||
|
(1)
|
Summarizes
for each of the directors who is not a NEO the aggregate value that would
have been realized if the options had been exercised on the vesting date
during the financial year ended September 30, 2009. As these
options were not necessarily exercised, or exercised on such vesting date,
by such directors, these amounts do not necessarily reflect amounts
realized by such directors during the year ended September 30,
2009.
|
Indebtedness
of Directors and Executive Officers
None of
the directors, executive officers or employees of Nayarit or any of its
subsidiaries and former directors, executive officers and employees of Nayarit
or any of its subsidiaries had any indebtedness outstanding to Nayarit or any of
its subsidiaries as at the date hereof except as disclosed below. In
addition, no indebtedness of these individuals to another entity has been the
subject of a guarantee, support agreement, letter of credit or similar
arrangement or understanding of Nayarit or any of its subsidiaries.
Statement
of Corporate Governance Practices
Board and
senior management consider good corporate governance to be central to the
effective and efficient operation of Nayarit. The Board has confirmed
the strategic objective of Nayarit is seeking out and exploring mineral bearing
deposits with the intention of developing and mining the deposit or proving the
feasibility of mining the deposit for others.
Canadian
National Instrument 58-101 - Disclosure of Corporate Governance
Practices (“NI 58-101”) requires Nayarit to disclose its corporate
governance practices by providing in this document the disclosure required by
Form 58-101F1. Canadian National Instrument 58-201 – Corporate Governance
Guidelines (“NI 58-201”) establishes corporate governance guidelines
which apply to all public companies. Nayarit has reviewed its own corporate
governance practices in light of these guidelines. In certain cases, Nayarit’s
practices comply with the guidelines; however, the Board considers that some of
the guidelines are not suitable for Nayarit at its current stage of development
and therefore these guidelines have not been adopted. If the Business
Combination is not consummated, Nayarit will continue to review and implement
corporate governance guidelines as the business of Nayarit progresses and
becomes more active in operations.
170
Form
58-101 F1 – Corporate Governance Disclosure (TSX Issuers)
Board
of Directors
The Board
is currently composed of five (5) directors. Form 58-101F1 suggests
that the board of directors of every listed company should be constituted with a
majority of individuals who qualify as "independent" directors under Canadian
Multilateral Instrument 52-110 - Audit Committees (“MI
52-110),” which provides that a director is independent if he or she has no
direct or indirect “material relationship” with the
company. “Material relationship” is defined as a relationship which
could, in the view of the company’s board of directors, be reasonably expected
to interfere with the exercise of a director’s independent judgment and,
specifically in addition to other circumstances, excludes “independence” where
the individual has received more than $75,000 in direct compensation during a
twelve month period in the prior three years.
Colin
Sutherland (President and Chief Executive Officer) and Paul Saxton (Chairman)
are not “independent” under MI 52-110 because they are "insider" or management
directors and accordingly are not considered “independent" as a result of this
relationship.
The remaining three (3) directors, J.
Trevor Eyton, R. Glen MacMullin and Donald F. Flemming, are considered by the
Board to be "independent", within the meaning of MI 52-110. In
assessing Form 58-101F1 and making the foregoing determinations, the
circumstances of each director has been examined in relation to a number of
factors as noted above.
A
majority of the directors are independent, as three of the five directors are
independent as noted above. To facilitate the functioning of the
board of directors independently of management, the following structures and
processes are in place:
|
|
·
|
when
appropriate, members of management, are not present for the discussion and
determination of certain matters at meetings of the board of directors.
During the most recently completed financial year, one meeting of the
independent directors was held, and it is Nayarit’s policy to hold at
least one meeting of the independent board of directors during each
financial year;
|
|
|
·
|
under
the by-laws of Nayarit, any two directors may call a meeting of the board
of directors;
|
|
|
·
|
the
Audit Committee, the Nominating and Corporate Governance Committee and the
Compensation Committee consist of a majority of independent directors who
meet independent of management directors;
and
|
|
|
·
|
in
addition to the above standing Committees of the board of directors,
independent committees are appointed from time to time, when
appropriate.
|
Each of
the directors of Nayarit attended each meeting of the board of directors held
since May 2, 2005, with the exception of directors who are not independent in
the case of meetings of the independent directors. The following
table sets forth the directors of Nayarit who currently hold directorships
and/or are officers with other reporting issuers:
|
Name of Director
|
Reporting Issuer
|
|
|
Colin
Sutherland
|
Not
Applicable.
|
|
|
Paul
F. Saxton
|
Goldcliff
Resource Corporation, Zazu Metals Corporation, Lincoln Gold Corporation,
0373849 B.C. Ltd., Pinnacle Mines Ltd.
|
|
|
J.
Trevor Eyton
|
Richview
Resources Inc., Brookfield Asset Management Inc.,
Ivernia
Inc., Silver Bear Resources Inc., Brookfield Infrastructure Partners
L.P.
|
|
|
R.
Glen MacMullin
|
Silver
Dragon Resources Inc.
|
|
|
Donald
F. Flemming
|
Not
Applicable.
|
Mandate
of the Board of Directors
The
duties and responsibilities of the board of directors are:
171
|
|
·
|
to
supervise the management of the business and affairs of Nayarit;
and
|
|
|
·
|
to
act with a view towards the best interests of
Nayarit.
|
In
discharging its mandate, the Board of Directors is responsible for the oversight
and review of the development of, among other things, the following
matters:
|
|
·
|
the
strategic planning process of
Nayarit;
|
|
|
·
|
identifying
the principal risks of Nayarit’s business and ensuring the implementation
of appropriate systems to manage these
risks;
|
|
|
·
|
succession
planning, including appointing, training and monitoring senior
management;
|
|
|
·
|
a
communications policy for Nayarit to facilitate communications with
investors and other interested parties;
and
|
|
|
·
|
the
integrity of Nayarit’s internal control and management information
systems.
|
The Board
of Directors also has the mandate to assess the effectiveness of the Board of
Directors as a whole, its committees and the contribution of individual
directors.
Position
Descriptions
The Board
of Directors of Nayarit has developed written position descriptions for the
Chairman, the Chairman of each Board Committee, the Chief Executive Officer, the
President and the Chief Financial Officer.
Orientation
and Continuing Education
When new
directors are appointed, they receive an orientation on the role of the board,
its Committees and its directors, and the nature and operation of Nayarit’s
business, which consists of the following:
|
|
·
|
an
orientation session with senior officers to overview Nayarit’s business
and affairs;
|
|
|
·
|
an
orientation session with the Chairman and the Chairperson of each standing
Committee; and
|
|
|
·
|
an
orientation session with legal counsel and the representatives of
Nayarit’s auditors.
|
Continuing
education is provided to directors through provision of literature regarding
current developments. Additionally, historically board members have
been nominated who are familiar with Nayarit and the nature of its
business. The Corporate Governance & Nominating Committee take
primary responsibility for the orientation and continuing education of directors
and officers.
Ethical
Business Conduct
The board
of directors of Nayarit has adopted a written code for the directors, officers
and employees of Nayarit. Copies of the code of conduct are available
upon written request from the Chief Financial Officer of Nayarit. The
Audit Committee is responsible for ensuring compliance with Nayarit’s code of
conduct. There have been no departures from Nayarit’s code of conduct during the
most recently completely financial year.
In
addition to those matters which, by law, must be approved by the board of
directors, the approval of the board of directors is required for:
|
|
·
|
Nayarit’s
annual business plan and budget;
|
|
|
·
|
major
acquisitions or dispositions by Nayarit;
and
|
|
|
·
|
transactions
which are outside of Nayarit’s existing
business.
|
172
To ensure
the directors exercise independent judgment in considering transactions and
agreements in which a director or officer has a material interest, all such
matters are considered and approved by the independent directors.
Nayarit
believes that it has adopted corporate governance procedures and policies which
encourage ethical behavior by Nayarit’s directors, officers and
employees.
Nomination
of Directors
The
Corporate Governance & Nominating Committee has oversight of all board
corporate governance matters, and undertakes the process for recruitment and
review of nominees for the board of directors. The recruitment of new
directors has generally resulted from recommendations made by directors and
stockholders in a process which is managed by the Corporate Governance &
Nominating Committee. The assessment of the contributions of
individual directors has principally been the responsibility of the board. Prior
to standing for election, new nominees to the board are reviewed by the entire
board based on recommendations formulated by the Corporate Governance &
Nominating Committee.
Other
Board Committees
There are
no board committees other than the Audit Committee, the Corporate Governance
& Nominating Committee and a Compensation Committee and the Compensation
Committee.
Assessments
Currently
the board takes responsibility for monitoring and assessing its effectiveness
and the performance of individual directors, its committees, including reviewing
the board’s decision-making processes and the quality of information provided by
management, and among other things:
|
·
|
overseeing
strategic planning;
|
|
·
|
monitoring
the performance of Nayarit’s
assets;
|
|
·
|
evaluating
the principal risks and opportunities associated with Nayarit’s business
and overseeing the implementation of appropriate systems to manage these
risks;
|
|
·
|
approving
specific acquisitions and
divestitures;
|
|
·
|
evaluating
senior management; and
|
|
·
|
overseeing
Nayarit’s internal control and management information
systems.
|
Audit
Committee Information
The Audit
Committee of Nayarit’s board of directors is principally responsible
for:
|
|
·
|
recommending
to Nayarit’s board of directors the external auditor to be nominated for
election by Nayarit’s stockholders at each annual meeting and negotiating
the compensation of such external
auditor;
|
|
|
·
|
overseeing
the work of the external auditor;
|
|
|
·
|
reviewing
Nayarit’s annual and interim financial statements, Management’s Discussion
and Analysis and press releases regarding earnings before they are
reviewed and approved by the board of directors and publicly disseminated
by Nayarit; and
|
|
|
·
|
reviewing
Nayarit’s financial reporting procedures to ensure adequate procedures are
in place for Nayarit’s public disclosure of financial information
extracted or derived from its financial statements, other than disclosure
described in the previous
paragraph.
|
173
Canadian
Multilateral Instrument 52-110 – Audit Committees (“MI 52-110”) requires that
certain information regarding the Audit Committee be included in the management
information circular sent to stockholders in connection with the issuer’s annual
meeting.
Audit
Committee Charter
The full
text of the charter of Nayarit’s Audit Committee is available upon request and
may be downloaded from the Ontario Securities Commission’s SEDAR web
site.
Composition
of the Audit Committee
The Audit
Committee members are J. Trevor Eyton, R. Glen MacMullin and Donald F.
Flemmings, each of whom is a director and considered “financially literate” and
“independent” in accordance with MI 52-110. Mr. MacMullin is the
Chairman of the Audit Committee.
Relevant
Education and Experience
The
relevant education and/or experience of each member of the Audit Committee are
as follows:
|
Name of Member
|
Education
|
Experience
|
||
|
J.
Trevor Eyton
|
Mr.
Eyton earned a B.A. from the University of Toronto and a S.J.D. from the
University of Toronto School of Law.
|
Mr.
Eyton is a Member of Senate of Canada. He is also Chairman of
Canada's Sports Hall of Fame and a Governor of the Canadian Olympic
Foundation and Junior Achievement of Canada. Senator Eyton is
also the co-founder and co-chairman of the Canada/Mexico Retreat, an
organization form in 1990 around the NAFTA which promotes two-way trade
and investment at the most senior levels in the two
countries.
|
||
|
R.
Glen MacMullin
|
Mr.
MacMullin holds a Bachelor of Business Administration degree from Saint
Francis Xavier University of Antigonish, Nova Scotia and is a member of
the Canadian Institute of Chartered Accountants.
|
R.
Glen MacMullin is currently a Vice President with the Minto Group, an
integrated real estate development, construction and management
company. Prior to his current position, Mr. MacMullin was a Managing
Director with Xavier Sussex, LLC, a private investment firm he co-founded
in 2004. Prior to 2004, he was a Director and Chief Operating
Officer with the proprietary trading division of Deutsche Bank in New
York. He previously served in various positions with Deutsche Bank
Offshore in the Cayman Islands including Head of Investment Funds.
Mr. MacMullin began his career in public accounting with Coopers
& Lybrand in Ottawa, Canada and KPMG in the Cayman
Islands
|
||
|
Donald
F. Flemming
|
Mr.
Flemming is a graduate of St. Mary's University in Halifax, Nova
Scotia.
|
Mr.
Flemming has been the President of Don Flemming Insurance since
1980.
|
Reliance
on Exemptions in MI 52-110
Since the commencement of Nayarit’s
most recently completed financial year, Nayarit Gold has not relied on an
exemption from MI 52-110.
174
Audit
Committee Oversight
Since the commencement of Nayarit’s
most recently completed financial year, there has not been a recommendation of
the Audit Committee to nominate or compensate an external auditor which was not
adopted by Nayarit’s Board.
Pre-Approval
Policies and Procedures
The Audit
Committee has adopted specific policies and procedures for the engagement of
non-audit services as described in the Charter. Pursuant to the Charter for the
Audit Committee, the Audit Committee has the responsibility to review and
approve the fees charged by the external auditors for audit services, and to
review and approve all services other than audit services to be provided by the
external auditors, and associated fees.
Audit
Fees
The
following table provides detail in respect of audit, audit related, tax and
other fees paid by Nayarit to the external auditor for professional
services:
|
Audit Fees
|
Audit-Related Fees
|
Tax Fees
|
All Other Fees
|
|||||||
|
Year
ended
September
30, 2009
|
$ | 45,000 |
Nil
|
$ | 5,000 |
Nil
|
||||
|
Year
ended
September
30, 2008
|
$ | 59,000 |
Nil
|
$ | 5,000 |
Nil
|
||||
Audit
Fees – Audit fees were paid for professional services rendered by the auditor
for the audit of Nayarit’s annual financial statements as well as services
provided in connection with statutory and regulatory filings.
Audit-Related
Fees – Audit-related fees were paid for professional services rendered by the
auditor and consisted primarily of file quality review fees and fees for the
review of quarterly financial statements and related documents.
Tax Fees
– Tax fees were paid for tax compliance, tax advice and tax planning
professional services. These services included reviewing tax returns and
assisting in responses to government tax authorities.
All Other
Fees – No other fees were billed by the auditor of Nayarit.
Legal
Proceedings and Regulatory Actions
Nayarit
is not a party to and none of its property is the subject of any legal
proceedings as at the date of this joint proxy statement/prospectus and Nayarit
knows of no such legal proceedings currently contemplated.
Nayarit
is not the subject of any penalties or sanctions imposed against it by a court
relating to provincial and territorial securities legislation or by a securities
regulatory authority as at the date of this joint proxy statement/prospectus or
from the date of incorporation. Nayarit Gold is not the subject of
any other penalties or sanctions imposed by a court or regulatory body against
it necessary for the joint proxy statement/prospectus to contain full, true and
plain disclosure of all material facts relating to Nayarit. Nayarit
has not entered into any settlement agreements before a court relating to
provincial and territorial securities legislation or with a securities
regulatory authority as at the date of this joint proxy statement/prospectus or
from the date of incorporation.
Conflicts
of Interest
Certain
directors and officers of Nayarit may serve from time to time as directors,
officers, promoters and members of management of other public companies and
therefore it is possible that a conflict may arise between their duties as a
director or officer of Nayarit and their duties as a director, officer, promoter
or member of management of such other companies. In accordance with
the Business Corporations
Act (Ontario), directors must keep the board of Nayarit advised, on an
ongoing basis, of any interest that could potentially conflict with those of
Nayarit. Nayarit has also established protocols setting
out:
175
|
|
•
|
the
structures and procedures which are in place to ensure that the
consideration by the Board and management of Nayarit’s business and the
business of its subsidiaries is undertaken free from any actual, or the
appearance of any, conflict of interest;
and
|
|
|
•
|
the
requirement and process for each director to declare any interest he or
she has in the matter being considered by the board of Nayarit and
appropriate measures to be taken upon that
declaration.
|
Where the
board of Nayarit believes a significant conflict exists, the director concerned
does not receive the relevant board of Nayarit documentation and is not present
at the Nayarit board of directors meeting whilst the item is
considered.
Other
than as set out herein, to the best of its respective knowledge, Nayarit is not
aware of the existence of any existing or potential material conflicts of
interest between Nayarit and any of its directors.
Interest
of Certain Persons in Matters to be Acted Upon
Other
than as described herein, Nayarit is not aware of any material interest, direct
or indirect, in any matter to be acted upon at the Nayarit Special Meeting, by
way of beneficial ownership of securities or otherwise, of any director or
executive officer (or any associated or affiliate thereof) of
Nayarit.
Interest
of Informed Persons in Material Transactions
No Informed Person of Nayarit, or
any associate or affiliate of any of the foregoing person has any material
interest, direct or indirect, in any transaction which has occurred since the
amalgamation of Nayarit, or in any proposed transaction that has materially
affected or would materially affect Nayarit, except for the
following:
|
(a)
|
It
is currently anticipated that Colin Sutherland, a nominee of Nayarit, will
serve as director of Capital Gold following the Business Combination and
that Bradley Langille and Colin Sutherland will join Capital Gold as
senior officers.
|
|
(b)
|
For
a period of thirty-six (36) months following the Effective Time of the
Business Combination, Capital Gold and Nayarit have agreed that they shall
cause their nominees on the Board of Directors to execute and deliver an
undertaking whereby such nominees agree to: (i) nominate the agreed upon
individuals for re-election at each annual meeting of the stockholders of
Capital Gold; and (ii) cause any successors chosen by such nominees to
comply with the foregoing provision at each annual meeting of the
stockholders of Capital Gold.
|
|
(c)
|
As
a condition to closing the Business Combination, Capital Gold and Nayarit
have agreed that the employment agreements between Nayarit, on one hand,
and each of Colin Sutherland and Bradley Langille, on the other hand,
shall either have been (i) terminated prior to the Effective Date in
accordance with the terms thereof, including payment of all termination
payments prescribed therein (except for any payments relating to the
change of control of Nayarit), or (ii) terminated with no payment of
change of control benefits in consideration for the execution of a new
employment agreement with Parent on terms comparable to the other senior
officers of Parent.
|
Non-Arm's
Length Party Transactions
Other
than as disclosed in this joint proxy statement/prospectus, in connection with
any transaction completed within the previous two years prior to the date
hereof, Nayarit has not provided or proposed to provide any assets or services
to or obtained or proposed to obtain any assets or services from any director or
officer of Nayarit, any principal security holder disclosed elsewhere in this
joint proxy statement/prospectus, or any associates or affiliates of the
foregoing.
176
Registrar and
Transfer
Agent
The
registrar and transfer agent of Nayarit is Computershare Trust Company of Canada
at 1969 Upper Water Street, Purdy’s Wharf II, Suite 2008, Halifax, NS B3J
3R7.
Material
Contracts
The only material contracts entered
into by Nayarit, other than in the ordinary course of business, since the date
of incorporation are as follows:
|
|
(a)
|
Letter of Intent dated
December 17,
2009, 2010 between
Nayarit and Capital Gold respecting the Business Combination of Nayarit and
Capital Gold;
|
|
|
(b)
|
Business
Combination Agreement dated as of February
10, 2010
between Nayarit and Capital
Gold;
|
|
|
(c)
|
N143-101 Preliminary Assessment
Nayarit Gold Inc., Orion Project, Del Norte Zone, State of Nayarit, Mexico
dated January 25, 2010, prepared by SRK Consulting, Engineers and
Scientists (the "Orion Project
Report");
|
|
|
(d)
|
the 10% net profits interest with
respect to the Orion Concession held by Portree Inc. dated November 30,
1999;
|
|
|
(e)
|
the 3.5% net smelter return
royalty with respect to the Orion Concession held by Belitung Limited
dated January 30, 2004;
|
|
|
(f)
|
the Option Agreement with respect
to the La Estrella Property dated November 28, 2003;
and
|
|
|
(g)
|
the Option Agreement with respect
to the Huajicari Property dated May 8,
2008.
|
Experts
and Interests of Experts
Certain
legal matters relating to the securities offered hereby will be passed upon on
behalf of Nayarit by Peterson Law Professional Corporation, Barristers &
Solicitors, Toronto, Ontario. The foregoing professional firm, its
partners, employees and associates, as a group, own beneficially, directly or
indirectly, less than one percent of the securities of Nayarit.
Technical information concerning the
Orion Gold Project is based on the Orion Project Report which provides an
independent technical review of this project. The Orion Project
Report was prepared by SRK Consulting. Peter Clarke, B.Sc., MBA,
P.Eng., is a “Qualified Person” as such term is defined in NI
43-101. SRK Consulting and Peter Clarke are independent of Nayarit
Gold within the meaning of NI 43-101. Peter Clarke and the directors,
officers and employees of SRK Consulting, do not own any securities of
Nayarit.
Other
Material Facts
Other than as set forth below and as
disclosed elsewhere in this joint proxy statement/prospectus regarding Nayarit,
there are no material facts about the Business Combination that are necessary to
be disclosed in order for this joint proxy statement/prospectus to contain full,
true and plain disclosure of all material facts relating to the Business
Combination.
Approvals
The
contents relating to Nayarit only and the sending of this joint proxy
statement/prospectus to Nayarit stockholders has been approved by the board of
directors of Nayarit.
177
MANAGEMENT OF CAPITAL GOLD FOLLOWING THE
BUSINESS COMBINATION
Directors
and Executive Officers
Pursuant
to the terms of the Business Combination Agreement, the board of directors of
Capital Gold shall consist of either five (5) or seven (7) directors, in either
event to include Stephen M. Cooper, John W. Cutler, Leonard J. Sojka, each a
current director of Capital Gold, and Colin Sutherland, a nominee of
Nayarit. Bradley Langille and Colin Sutherland will join Capital Gold as
senior officers. For a period of thirty-six (36) months following the Effective
Time, Capital Gold and Nayarit have agreed that they shall cause their nominees
on the board of directors to execute and deliver an undertaking whereby such
nominees agree to: (i) nominate the foregoing individuals for re-election at
each annual meeting of the stockholders of Capital Gold; and (ii) cause any
successors chosen by such nominees to comply with the foregoing provision at
each annual meeting of the stockholders of Capital
Gold. Capital Gold and Nayarit intend to appoint an independent
director as chair of the board of directors of Capital
Gold. Immediately following the Business Combination, Capital Gold’s
directors and executive officers will be as follows:
|
Name
|
Age
|
Position
|
||
|
Leonard
J. Sojka
|
53
|
Director
|
||
|
John
W. Cutler
|
60
|
Director
|
||
|
Stephen
M. Cooper
|
46
|
Director
|
||
|
Christopher
Chipman
|
37
|
Chief
Financial Officer
|
||
|
J.
Scott Hazlitt
|
57
|
Vice
President – Mine Development
|
||
|
Bradley
Langille
|
49
|
Senior
Vice President, Business Development
|
||
|
Colin
Sutherland
|
39
|
Director
and Senior Vice President, Finance & Corporate
Development
|
See “Information About Capital
Gold—Management of Capital Gold” for biographical information of Messrs.
Brownlie, Cooper, Cutler, Sojka, Chipman and Hazlitt. See “Information About Nayarit—Directors
and Officers” for biographical information of Mr.
Sutherland. Mr. Langille’s biographical information
follows:
BRADLEY
LANGILLE. Mr.
Langille is the co-founder of both Gammon Gold Inc. and Mexgold Resources Inc.,
both of which are gold and silver producers in Mexico. Mr. Langille
served as a Director and Chief Executive Officer of both companies from 2003 to
2006, and successfully built both companies from its grass roots state to
commercial production, raising in excess of $500 million for the development and
construction of both mines. Mr. Langille has been an integral part of the growth
and success of Gammon Gold Inc., and has directed the growth and development of
the properties since 1997.
Committees
of the Board of Directors
The members of the committees of
Capital Gold’s board of directors will not be appointed until Capital Gold’s
board of directors is fully constituted and holds its initial meeting. At that
time, Capital Gold’s board of directors will make determinations with respect to
each committee member’s independence in accordance with the NYSE Amex listing
standards and SEC rules and regulations and each committee will adopt its
committee charter.
Following
the Business Combination, Capital Gold intends to post any amendments or
revisions to the committee charters on its website at
www.capitalgoldcorp.com.
178
Audit
Committee
The audit
committee will at all times be composed of exclusively independent directors who
are “financially literate,” meaning they are able to read and understand
fundamental financial statements, including Capital Gold’s balance sheet, income
statement and cash flow statement. In addition, the committee will
have at least one member who qualifies as an “audit committee financial expert”
as defined in rules and regulations of the SEC. Immediately prior to the
Business Combination, Capital Gold’s board of directors will also make
determinations regarding the financial literacy and financial expertise of each
member of the audit committee in accordance with the NYSE Amex listing standards
and SEC Rule 10A-3.
The
principal duties and responsibilities of Capital Gold’s audit committee will be
to engage Capital Gold’s independent auditors, oversee the quality and integrity
of Capital Gold’s financial reporting and the audit of Capital Gold’s financial
statements by its independent auditors and in fulfilling its obligations,
Capital Gold’s audit committee will review with Capital Gold’s management and
independent auditors the scope and result of the annual audit, the auditors’
independence and Capital Gold’s accounting policies.
The audit
committee will be required to report regularly to Capital Gold’s board of
directors to discuss any issues that arise with respect to the quality or
integrity of Capital Gold’s financial statements, its compliance with legal or
regulatory requirements, the performance and independence of Capital Gold’s
independent auditors, or the performance of the internal audit
function.
Once the
board holds its initial meeting, Capital Gold will identify which members of the
Board of Directors will serve on the audit committee and which member of the
audit committee will be designated as the audit committee financial
expert.
Compensation
Committee
The
compensation committee will at all times be composed of exclusively independent
directors. Among other functions, the compensation committee will
oversee the compensation of Capital Gold’s chief executive officer and other
executive officers and senior management, including plans and programs relating
to cash compensation, incentive compensation, equity-based awards and other
benefits and perquisites and administers any such plans or programs as required
by the terms thereof.
Compensation
Committee Interlocks and Insider Participation
Once the
board holds its initial meeting, Capital Gold will identify which, if any,
members of the compensation committee have had any relationships with Capital
Gold of the type required to be disclosed by Item 404 of Regulation S-K of the
SEC rules and regulations. None of the individuals who will be an executive
officer of Capital Gold following the Business Combination has served as a
member of the board of directors, or as a member of the compensation or similar
committee, of any entity that has one or more executive officers who will serve
on Capital Gold’s board of directors immediately following the Business
Combination.
Our
President and COO, John Brownlie, currently serves on the board of directors of
Palladon Ventures Ltd., a mining exploration and development company and on the
board of directors of Ely Gold & Minerals, Inc., a private mining
exploration and development company. John W. Cutler is currently
serving as the President, Chief Executive Officer and a director of Palladon
Ventures Ltd. and Leonard J. Sojka serves as a director, corporate secretary and
chief financial officer for Palladon Ventures Ltd.
Corporate
Governance Committee
The
corporate governance committee will at all times be composed of exclusively
independent directors. The principal duties and responsibilities of
Capital Gold’s corporate governance committee will be to identify qualified
individuals to become board members, recommend to the board of directors
individuals to be designated as nominees for election as directors at the annual
meetings of stockholders, and develop and recommend to the board of directors
Capital Gold’s corporate governance guidelines.
Once the
board holds its initial meeting, Capital Gold will identify which members of the
Board of Directors will serve on the corporate governance
committee.
179
Code
of Conduct and Ethics
Capital
Gold’s Board of Directors adopted a Code of Ethics that applies to our officers,
directors and employees, including our principal executive officer, principal
financial officer and principal accounting officer. The Code of Ethics is
publicly available on Capital Gold’s website at www.capitalgoldcorp.com, where
it may be found under the Corporate Info; Corporate Governance tab. You also may
obtain a copy of this code by written request to our Office Manager at 76 Beaver
Street, 14th Floor, New York, NY 10005. Capital Gold’s Board of Directors is
required to approve any substantive amendments to this code of ethics or grant
any waiver, including any implicit waiver, from a provision of the code to its
chief executive officer, principal financial officer or principal accounting
officer and Capital Gold will disclose the nature of such amendment or waiver in
a report on Form 8-K within four business days.
Director
Compensation
Capital
Gold’s independent directors each receive a fee of $2,000 per
month. Non-independent directors each receive $1,000 per
month. Directors are reimbursed for their accountable expenses
incurred in attending meetings and conducting their
duties. Independent directors can earn additional committee fees if
serving on a form of sub-committee of the board of directors.
Executive
Compensation
Capital
Gold is currently reevaluating the executive compensation structures and systems
that Capital Gold will provide for its named executive officers, with attention
to instituting equity awards under the equity incentive plan with attention to
encouraging long-term sustained performance.
Employment
Agreements
In
connection with the consummation of the Business Combination and as a condition
to closing, Capital Gold intends to negotiate new employment agreements with
Colin Sutherland and Bradley Langille.
Corporate
Headquarters
The
corporate headquarters of the combined company following consummation of the
Business Combination will be located in New York, New York. Capital
Gold will maintain a satellite office in Halifax, Canada and corporate financial
offices in Philadelphia, Pennsylvania.
180
GLOSSARY
OF TERMS
Technical
Terms
|
Reserve:
|
That
part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination. Reserves
must be supported by a feasibility study done to bankable standards that
demonstrates the economic extraction ("Bankable standards" implies
that the confidence attached to the costs and achievements developed in
the study is sufficient for the project to be eligible for external debt
financing.) A reserve includes adjustments to the in-situ tonnes and grade
to include diluting materials and allowances for losses that might occur
when the material is mined.
|
|
Proven
Reserve:
|
Reserves
for which (a) quantity is computed from dimensions revealed in outcrops,
trenches, workings or drill holes; grade and/or quality are computed from
the results of detailed sampling and (b) the sites for inspection,
sampling and measurement are spaced so closely and the geologic character
is so well defined that size, shape depth and mineral content of reserves
are well-established.
|
|
Probable
Reserve:
|
Reserves
for which quantity and grade and/or quality are computed from information
similar to that used for proven (measured) reserves, but the sites for
inspection, sampling, and measurement are farther apart or are otherwise
less adequately spaced. The degree of assurance, although lower than that
for proven reserves, is high enough to assume continuity between points of
observation.
|
|
Mineralized
Material:
|
The
term “mineralized material” refers to material that is not included in the
reserve as it does not meet all of the criteria for adequate demonstration
for economic or legal extraction.
|
|
Non-reserves:
|
The
term “non-reserves” refers to mineralized material that is not included in
the reserve as it does not meet all of the criteria for adequate
demonstration for economic or legal extraction.
|
|
Exploration
Stage:
|
An
“exploration stage” prospect is one which is not in either the development
or production stage.
|
|
Development
Stage:
|
A
“development stage” project is one which is undergoing preparation of an
established commercially mineable deposit for its extraction but which is
not yet in production. This stage occurs after completion of a
feasibility study.
|
|
Production
Stage:
|
A
“production stage” project is actively engaged in the process of
extraction and beneficiation of mineral reserves to produce a marketable
metal or mineral product.
|
Additional
Definitions
|
Caliche:
|
Sediment
cemented by calcium carbonate near surface.
|
|
Diorite:
|
Igneous
Rock (Rock formed from magma or molten rock).
|
|
Dore:
|
Bars
of low purity precious metal (Gold & Silver) which represents final
product of a gold mine typically weighing 25 kg per
bar.
|
|
Dikes:
|
Tabular,
vertical bodies of igneous rock.
|
|
Fissility:
|
Shattered,
broken nature of rock.
|
|
Fracture
Foliations:
|
Fracture
pattern in rock, parallel orientation, resulting from
pressure.
|
181
|
Heap
Leaching:
|
Broken
and crushed ore on a pile subjected to dissolution of metals by leach
solution.
|
|
Hydrometallurgical
Plant:
|
A
metallurgical mineral processing plant that uses water to leach or
separate and concentrate elements or minerals.
|
|
Intercalated:
|
Mixed
in.
|
|
Lithostatic
Pressure:
|
Pressure
brought on by weight of overlaying rocks.
|
|
Major
Intrusive Center:
|
An
area where large bodies of intrusive igneous rock exist and through which
large amounts of mineralizing fluids rose.
|
|
Mesothermal:
|
A
class of hydrothermal ore deposit formed at medium temperatures and a
depth over one mile in the earth’s crust.
|
|
Microporphyritic
Latite:
|
Extremely
fine grained siliceous igneous rock with a distribution of larger crystals
within.
|
|
Mudstone:
|
Sedimentary
bed composed primarily of fine grained material such as clay and
silt.
|
|
PPM:
|
Part
per million.
|
|
Pyritized:
|
Partly
replaced by the mineral pyrite.
|
|
Reverse
Circulation Drilling
(or
R.C. Drilling):
|
Type
of drilling using air to recover cuttings for sampling through the middle
of the drilling rods rather than the outside of the drill rods, resulting
in less contamination of the sampled interval.
|
|
Sericitized:
|
Rocks
altered by heat, pressure and solutions resulting in formation of the
mineral sericite, a very fine grained mica.
|
|
Siltstone:
|
A
sedimentary rock composed of clay and silt sized
particles.
|
|
Silicified:
|
Partly
replaced by silica.
|
|
Stockwork
Breccia:
|
Earth's
crust broken by two or more sets of parallel faults converging from
different directions.
|
|
Stockwork:
|
Ore,
when not in strata or in veins but in large masses, so as to be worked in
chambers or in large blocks.
|
|
Surface
Mine:
|
Surface
mining by way of an open pit without shafts or underground
working.
|
182
LEGAL MATTERS
The validity of the shares of Capital
Gold common stock to be issued in connection with the Business Combination will
be passed upon for Capital Gold by Ellenoff Grossman & Schole, LLP, 150 East
42nd Street, New York, New
York. Kavinoky Cook LLP, 726 Exchange Street, Buffalo, New York,
14210 serves as counsel for Nayarit. Peterson Law Professional Corporation,
120 Adelaide Street West, Suite 2500, Toronto, Ontario, M5H1T1 serves as
Canadian counsel to Nayarit. Hodgson Russ LLP, 140 Pearl Street, Suite 100,
Buffalo, NY, 14202, serves as tax counsel to Nayarit.
EXPERTS
The financial statements of Capital Gold
for the years ended July 31, 2009, 2008 and 2007, incorporated by
reference in this joint proxy statement/prospectus and in the
registration statement have been incorporated by reference in
reliance upon the report of Wolinetz, Lafazan & Company, P.C. an
independent registered public accounting firm, given on the authority of such
firm as experts in accounting and auditing.
The
financial statements of Nayarit as at September 30, 2009 and for the year ended
September 30, 2009 included in this joint proxy statement/prospectus and in the
registration statement have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent auditors, given on the authority of said
firm as experts in auditing and accounting.
The
financial statements of Nayarit as at September 30, 2008 and for the year ended
September 30, 2008 included in this joint proxy statement/prospectus and in the
registration statement have been so included in reliance upon the report of
McGovern, Hurley, Cunningham, LLP, independent auditors, given on the authority
of said firm as experts in auditing and accounting.
OTHER MATTERS
Neither the Capital
Gold board of directors nor the Nayarit board of directors know of any matters
to be presented at their respective special meetings other than the proposals
described in this joint proxy statement/prospectus. If any other matters are
properly brought before either special meeting or any adjournment of either
meeting, the enclosed proxy will be deemed to confer discretionary authority on
the individuals named as proxies to vote the shares represented by the proxy as
to any such matters.
DEADLINE
FOR RECEIPT OF CAPITAL GOLD STOCKHOLDER PROPOSALS
Proposals
of stockholders to be considered for inclusion in the Proxy Statement and proxy
card for Capital Gold’s 2010 Annual Meeting of Stockholders must be received by
Capital Gold’s Secretary, at Capital Gold Corporation, 76 Beaver Street, 14th
Floor, New York, NY 10005 no later than August 17, 2010, which is 120 days prior
to the first anniversary of the mailing date of the proxy statement relating
to the Annual Meeting.
Pursuant
to Capital Gold’s Amended and Restated By-laws, all stockholder proposals may be
brought before an annual meeting of stockholders only upon timely notice thereof
in writing having been given to the Secretary of Capital Gold. To be
timely, a stockholder’s notice, for all stockholder proposals shall be delivered
to the Secretary at Capital Gold’s principal executive offices not less than
ninety (90) nor more than one hundred twenty (120) days prior to the date of the
meeting; provided, however, that in the event that the annual meeting date is
publicly disclosed less than one hundred twenty (120) days prior to the date of
the meeting, the stockholders’ notice, in order to be timely, must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was publicly
disclosed. All such stockholders must be stockholders of record on both the date
such stockholders provide notice of their proposals and on the record date for
the determination of stockholders entitled to vote at such meeting. In addition,
all stockholder proposals must contain all of the information required under our
Amended and Restated By-laws, a copy of which is available upon written request,
at no charge, from the Secretary at our New York office. Capital Gold reserves
the right to reject, rule out of order, or take other appropriate action with
respect to any proposal that does not comply with these and other applicable
requirements.
183
DELIVERY
OF MATERIALS TO STOCKHOLDERS WITH SHARED ADDRESSES
Stockholders
who own their shares through a broker, bank or other nominee and who share an
address with another such beneficial owner are only being sent one set of proxy
materials, unless such holders have provided contrary instructions. If you wish
to receive a separate copy of these materials or if you are receiving multiple
copies and would like to receive a single copy, please contact investor
relations by phone at (212) 344-2785 or write to us at Capital Gold Corporation,
76 Beaver Street, 14th floor, New York, New York 10005.
WHERE
YOU CAN FIND MORE INFORMATION
This joint proxy statement/prospectus
forms part of a registration statement on Form S-4 filed by Capital Gold with
the U.S. Securities and Exchange Commission (the “SEC”). It
constitutes a prospectus of Capital Gold under Section 5 of the Securities Act
or 1933, as amended (the “Securities Act”) and the rules thereunder, with
respect to the common stock and convertible securities of Capital Gold to be
issued or issuable to holders of securities of Nayarit in the Business
Combination. In addition, it constitutes a proxy statement under
Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) and the rules thereunder, and a notice of special meeting, with respect to
a meeting of the stockholders of Capital Gold to consider and vote upon the
Business Combination. It also constitutes proxy statement of Nayarit
in compliance with the rules of the Ontario Business Corporations
Act and a notice of special
meeting, with respect to a meeting of the stockholders of Nayarit to consider
and vote upon the Business Combination.
Capital Gold has supplied all
information contained in or incorporated by reference into this joint proxy
statement/prospectus relating to Capital Gold, all pro forma financial
information and all information related to the operation of the combined company
following the merger. Nayarit has supplied all information contained
in this joint proxy statement/prospectus relating to Nayarit and its
properties.
Capital Gold files reports, proxy
statements, and other information with the SEC. You may inspect or copy these
materials at the Public Reference Room at the SEC at Room 1580,
100 F Street, N.E., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the operation of the SEC public
reference room. Capital Gold’s public filings are also available to
the public from commercial document retrieval services and at the Internet web
site maintained by the SEC at http://www.sec.gov.
Nayarit’s public
filings are available at www.sedar.com.
When deciding how to cast your vote, you
should rely only on the information contained in this joint proxy
statement/prospectus and, if you are a Nayarit stockholder, the Nayarit
Supplement which will accompany this joint proxy
statement/prospectus. We have not authorized anyone to provide you
with information that is different from what is contained in this joint proxy
statement/prospectus. This joint proxy statement/prospectus is dated
[ ],
2010. You should not assume that the information contained in this joint proxy
statement/prospectus is accurate as of any date other than such date, and
neither the mailing of this joint proxy statement/prospectus to stockholders nor
the issuance of Capital Gold’s common stock shall create any implication to the
contrary.
This joint proxy statement/prospectus
does not constitute an offer to sell, or a solicitation of an offer to purchase,
the securities offered by this joint proxy statement/prospectus, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom or
from whom it is unlawful to make such offer, solicitation of an offer or proxy
solicitation in such jurisdiction. Neither the delivery of this joint proxy
statement/prospectus nor any distribution of securities pursuant to this joint
proxy statement/prospectus, under any circumstances, creates any implication
that there has been no change in the information set forth or incorporated into
this joint proxy statement/prospectus by reference or in our affairs since the
date of this joint proxy statement/prospectus. The information contained in this
joint proxy statement/prospectus with respect to Capital Gold was provided by
Capital Gold and the information contained in this joint proxy
statement/prospectus with respect to Nayarit was provided by
Nayarit.
You can
obtain additional information about Capital Gold or Nayarit by requesting such
information from the appropriate company at the following addresses and
telephone numbers:
|
CAPITAL
GOLD CORPORATION
|
NAYARIT
GOLD INC.
|
|
|
76
Beaver Street, 14th Floor
|
76
Temple Terrace, Suite 150
|
|
|
New
York, NY 10005
|
Lower
Sackville, Nova Scotia B4C 0A7
|
|
|
Tel: (212)
344-2785
|
Tel:
902 252-3833
|
|
|
Attn:
Investor Relations
|
Attn:
Investor Relations
|
184
Nayarit Gold Inc.
(AN EXPLORATION STAGE
COMPANY)
CONSOLIDATED FINANCIAL
STATEMENTS
FOR
THE YEARS ENDED
SEPTEMBER
30, 2009 AND 2008
(Expressed
in Canadian Dollars)
F2-1
Nayarit
Gold Inc. (An Exploration Stage Company)
Consolidated
Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
Table
of Contents
|
F2-3
|
|
|
Report
of Independent Auditors
|
F2-4
|
|
Comments
by Auditors for U.S. readers on Canada-U.S. Reporting
Difference
|
F2-5
|
|
Consolidated
Balance Sheets
|
F2-6
|
|
Consolidated
Statements of Loss, Comprehensive Loss and Deficit
|
F2-7
|
|
Consolidated
Statements of Cash Flows
|
F2-8
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
|
F2-9
|
|
Notes
to the Consolidated Financial Statements
|
F2-10-F2-34
|
F2-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders of
Nayarit
Gold Inc. (an exploration stage company)
We have
audited the accompanying consolidated balance sheet of Nayarit Gold Inc. (an
exploration stage company) as at September 30, 2008 and the related consolidated
statements of loss, comprehensive loss and deficit, cash flows and changes in
shareholders’ equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States of America). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as at September
30, 2008 and the results of its operations and its cash flows for the year then
ended in accordance with Canadian generally accepted accounting
principles.
(signed) “McGOVERN, HURLEY,
CUNNINGHAM, LLP”
Chartered Accountants
Licensed Public
Accountants
Toronto,
Ontario
December
22, 2008, except for Note 16,
which is
as at January 5, 2009
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA - U.S. REPORTING CONFLICT
Reporting standards of the Public
Company Accounting Oversight Board (United States) require the addition of an
explanatory paragraph following the opinion paragraph when the financial
statements are affected by conditions and events that raise substantial doubt
about the Company’s ability to continue as a going concern, such as those
described in Note 1 to the consolidated financial
statements. Generally accepted auditing standards in Canada do not
permit a reference to such events and conditions in the auditors’ report when
these are adequately disclosed in the financial statements.
(signed) “McGOVERN, HURLEY,
CUNNINGHAM, LLP”
Chartered
Accountants
Licensed
Public Accountants
Toronto,
Ontario
December
22, 2008, except for Note 16,
which is
as at January 5, 2009
F2-4
Report
of Independent Auditors
To
the Board of Directors and Shareholders of Nayarit Gold Inc.
We have
audited the accompanying consolidated balance sheet of Nayarit Gold Inc. and its
subsidiaries as of September 30, 2009, and the related consolidated statements
of loss, comprehensive loss and deficit, cash flows and changes in shareholders’
equity for the year then ended. 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 audit. The
consolidated financial statements of the Company as of September 30, 2008 and
for the year then ended were audited by other auditors whose report dated
December 22, 2008, except for Note 16, which was as of January 5, 2009,
expressed an unqualified opinion on those statements.
We
conducted our audit in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe our audit provides a
reasonable basis for our opinion.
In our
opinion, the 2009 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nayarit Gold Inc.
and its subsidiaries at September 30, 2009, and the results of their operations
and their cash flows for the year then ended in conformity with Canadian
generally accepted accounting principles.
(signed)
“PricewaterhouseCoopers
LLP”
Chartered
Accountants
Halifax,
Nova Scotia
March 29,
2010
Comments
by Auditors for U.S. Readers on Canada – U.S. Reporting Difference
In the United States, reporting
standards for auditors require the addition of an explanatory
paragraph (following the opinion
paragraph) when the financial statements are
affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a
going concern, such as those described in Note 1 to the consolidated financial
statements. Our report to the Board of Directors and shareholders dated March 29, 2010 is expressed in accordance with
Canadian reporting standards which do not permit a reference to such
events and conditions in the auditors’ report when these are adequately
disclosed in the financial statements.
(signed)
“PricewaterhouseCoopers
LLP”
Chartered
Accountants
Halifax,
Nova Scotia
March 29,
2010
F2-5
Nayarit
Gold Inc. (An Exploration Stage Company)
Consolidated
Balance Sheets
(Expressed
in Canadian Dollars)
|
As at September 30,
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,481,433 | $ | 5,356,166 | ||||
|
Short-term
investments
|
8,614 | 5,046 | ||||||
|
Prepaids
and sundry receivables (Note 7)
|
53,618 | 299,185 | ||||||
| 2,543,665 | 5,660,397 | |||||||
|
Property,
plant and equipment (Note 5)
|
244,463 | 293,294 | ||||||
|
Exploration
property interests (Note 6)
|
22,408,137 | 12,118,796 | ||||||
| $ | 25,196,265 | $ | 18,072,487 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (Note 7)
|
$ | 378,613 | $ | 954,933 | ||||
|
Shareholders'
Equity
|
||||||||
|
Share
capital (Note 8)
|
26,272,181 | 18,969,087 | ||||||
|
Warrants
(Note 9)
|
5,325,976 | 3,283,451 | ||||||
|
Contributed
surplus (Note 10)
|
6,838,609 | 5,783,716 | ||||||
|
Deficit
|
(13,619,114 | ) | (10,918,700 | ) | ||||
| 24,817,652 | 17,117,554 | |||||||
| $ | 25,196,265 | $ | 18,072,487 | |||||
Going
Concern (Note 1)
Commitments
and Contingencies (Note 12)
Subsequent
Events (Note 15)
Approved
on behalf of the Board:
Signed "R. Glen MacMullin" ,
Director
Signed "Donald Flemming",
Director
The
accompanying notes are an integral part of these consolidated financial
statements.
F2-6
Nayarit
Gold Inc. (An Exploration Stage Company)
Consolidated
Statements of Loss, Comprehensive Loss and Deficit
(Expressed
in Canadian dollars)
|
For the years ended September 30,
|
2009
|
2008
|
||||||
|
Operating
Expenses
|
||||||||
|
Management
and consulting fees
|
$ | 869,236 | $ | 530,458 | ||||
|
Stock-based
compensation (Note 8(c))
|
535,008 | 1,456,930 | ||||||
|
Investor
relations
|
367,728 | 332,755 | ||||||
|
Travel
& entertainment
|
310,487 | 235,377 | ||||||
|
Professional
fees
|
279,134 | 258,340 | ||||||
|
Amortization
|
78,580 | 47,909 | ||||||
|
Communications
|
55,602 | 34,608 | ||||||
|
Insurance
expense
|
46,777 | 59,963 | ||||||
|
Office
and general
|
40,899 | 72,066 | ||||||
|
Occupancy
cost
|
40,251 | 37,205 | ||||||
|
Transfer
agent, listing and filing fees
|
33,588 | 88,726 | ||||||
|
Interest
and bank charges
|
19,633 | 11,843 | ||||||
|
General
exploration expense
|
1,984 | 22,929 | ||||||
|
Foreign
exchange loss (gain)
|
79,860 | (9,889 | ) | |||||
| 2,758,767 | 3,179,220 | |||||||
|
Loss
before the undernoted
|
(2,758,767 | ) | (3,179,220 | ) | ||||
|
Other
Income (Expense)
|
||||||||
|
Gain
on disposal of asset
|
15,153 | - | ||||||
|
Unrealized
gain in market value of investments
|
3,491 | - | ||||||
|
Write-off
of exploration property interests (Note 6)
|
- | (143,131 | ) | |||||
|
Interest
income
|
39,709 | 44,423 | ||||||
|
Net
Loss and Comprehensive Loss
|
$ | (2,700,414 | ) | $ | (3,277,928 | ) | ||
|
Deficit,
beginning
|
(10,918,700 | ) | (7,640,772 | ) | ||||
|
Deficit,
ending
|
$ | (13,619,114 | ) | $ | (10,918,700 | ) | ||
|
Loss
Per Share - basic and diluted
|
$ | (0.03 | ) | $ | (0.06 | ) | ||
|
Weighted
Average Outstanding Shares
|
||||||||
|
‑ basic and
diluted
|
79,126,397 | 50,758,673 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F2-7
Nayarit
Gold Inc. (An Exploration Stage Company)
Consolidated
Statements of Cash Flows
(Expressed
in Canadian dollars)
|
For the years ended September 30,
|
2009
|
2008
|
||||||
|
Cash
(Used In) Provided By:
|
||||||||
|
Operating
Activities
|
||||||||
|
Net
loss for the period
|
$ | (2,700,414 | ) | $ | (3,277,928 | ) | ||
|
Items
not involving cash
|
||||||||
|
Stock-based
compensation
|
535,008 | 1,456,930 | ||||||
|
Amortization
|
78,580 | 47,909 | ||||||
|
Gain
on disposal of asset
|
(15,153 | ) | - | |||||
|
Unrealized
gain in market value of investments
|
(3,491 | ) | - | |||||
|
Write-off
of exploration property interests
|
- | 143,131 | ||||||
|
Accrued
interest income
|
(77 | ) | (46 | ) | ||||
|
Change
in non‑cash
operating working capital
|
||||||||
|
Prepaids
and sundry receivables
|
245,568 | (216,264 | ) | |||||
|
Accounts
payable and accrued liabilities
|
(140,574 | ) | 85,504 | |||||
| (2,000,553 | ) | (1,760,764 | ) | |||||
|
Financing
Activities
|
||||||||
|
Issuance
of private placement units, net of costs
|
8,995,803 | 11,332,135 | ||||||
|
Exercise
of warrants
|
- | 27,000 | ||||||
|
Exercise
of options
|
17,500 | 192,500 | ||||||
| 9,013,303 | 11,551,635 | |||||||
|
Investing
Activities
|
||||||||
|
Short
term investments
|
- | 52,013 | ||||||
|
Purchase
(sale) of property, plant and equipment
|
(14,596 | ) | (152,310 | ) | ||||
|
Exploration
property expenditures
|
(9,872,887 | ) | (5,697,938 | ) | ||||
| (9,887,483 | ) | (5,798,235 | ) | |||||
|
Change
in cash and cash equivalents
|
(2,874,733 | ) | 3,992,636 | |||||
|
Cash
and cash equivalents, opening
|
$ | 5,356,166 | $ | 1,363,530 | ||||
|
Cash
and cash equivalents, closing
|
$ | 2,481,433 | $ | 5,356,166 | ||||
|
Cash
and cash equivalents consist of:
|
||||||||
|
Cash
on hand and balances with banks
|
$ | 267,468 | $ | 328,550 | ||||
|
Investments
|
2,213,965 | 5,027,616 | ||||||
| $ | 2,481,433 | $ | 5,356,166 | |||||
Supplemental
Cash Flow Information (Note 13)
The
accompanying notes form an integral part of these consolidated financial
statements.
F2-8
Nayarit
Gold Inc. (An Exploration Stage Company)
Consolidated
Statements of Changes in Shareholders' Equity
(Expressed
in Canadian dollars)
|
Common Shares
|
Contributed
|
Accumulated
|
||||||||||||||||||||||
|
Number
|
Amount
|
Warrants
|
Surplus
|
Deficit
|
Total
|
|||||||||||||||||||
|
Balance,
September 30, 2007
|
43,192,762 | $ | 10,251,307 | $ | 375,204 | $ | 4,096,178 | $ | (7,640,772 | ) | $ | 7,081,917 | ||||||||||||
|
Private
placements
|
23,582,500 | 12,297,000 | 12,297,000 | |||||||||||||||||||||
|
Warrant
valuation
|
- | (3,322,974 | ) | 3,326,030 | - | - | 3,056 | |||||||||||||||||
|
Finders'
fees
|
- | - | 311,460 | - | - | 311,460 | ||||||||||||||||||
|
Exercise
of warrants
|
45,000 | 37,800 | (10,800 | ) | - | - | 27,000 | |||||||||||||||||
|
Expiry
of warrants
|
- | - | (375,204 | ) | 375,204 | - | - | |||||||||||||||||
|
Cost
of issue
|
- | (936,142 | ) | (343,239 | ) | - | - | (1,279,381 | ) | |||||||||||||||
|
Shares
issued for
|
||||||||||||||||||||||||
|
acquisition
of property
|
500,000 | 305,000 | - | - | - | 305,000 | ||||||||||||||||||
|
Stock-based
compensation
|
- | - | - | 1,456,930 | - | 1,456,930 | ||||||||||||||||||
|
Exercise
of stock options
|
550,000 | 337,096 | - | (144,596 | ) | - | 192,500 | |||||||||||||||||
|
Net
loss for the year
|
- | - | - | - | (3,277,928 | ) | (3,277,928 | ) | ||||||||||||||||
|
Balance,
September 30, 2008
|
67,870,262 | $ | 18,969,087 | $ | 3,283,451 | $ | 5,783,716 | $ | (10,918,700 | ) | $ | 17,117,554 | ||||||||||||
|
Private
placements
|
20,000,000 | 10,000,000 | - | - | - | 10,000,000 | ||||||||||||||||||
|
Warrant
valuation
|
- | (1,789,000 | ) | 1,789,000 | - | - | - | |||||||||||||||||
|
Finders'
fees
|
- | - | 622,000 | - | - | 622,000 | ||||||||||||||||||
|
Cost
of issue
|
- | (1,677,722 | ) | (368,475 | ) | - | - | (2,046,197 | ) | |||||||||||||||
|
Shares
issued for
|
||||||||||||||||||||||||
|
acquisition
of property
|
1,500,000 | 675,000 | - | - | - | 675,000 | ||||||||||||||||||
|
Stock-based
compensation
|
- | - | - | 535,008 | - | 535,008 | ||||||||||||||||||
|
Stock-based
compensation recorded as
|
||||||||||||||||||||||||
|
share
and warrant issue costs
|
- | - | - | 420,000 | - | 420,000 | ||||||||||||||||||
|
Stock-based
compensation recorded as
|
||||||||||||||||||||||||
|
exploration
property interests
|
- | - | - | 126,423 | - | 126,423 | ||||||||||||||||||
|
Exercise
of stock options
|
139,286 | 94,816 | - | (26,538 | ) | - | 68,278 | |||||||||||||||||
|
Net
loss for the period
|
- | - | - | - | (2,700,414 | ) | (2,700,414 | ) | ||||||||||||||||
|
Balance,
September 30, 2009
|
89,509,548 | $ | 26,272,181 | $ | 5,325,976 | $ | 6,838,609 | $ | (13,619,114 | ) | $ | 24,817,652 | ||||||||||||
F2-9
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
1.
|
Nature
of Business and Going Concern
|
Nature of
Business
Nayarit
Gold Inc. (the "Company" or "Nayarit") is a Canadian mineral exploration company
engaged in locating, acquiring and exploring for gold, silver and base metals
primarily in Mexico and has not yet determined whether its exploration property
interests contain mineral reserves that are economically recoverable. The
Company's continuing operations and the underlying value and recoverability of
the amounts shown for exploration property interests are dependent upon the
existence of economically recoverable mineral reserves, the ability of the
Company to obtain the necessary financing to complete the exploration and
development of its exploration property interests, and on future profitable
production or proceeds from the disposition of the exploration property
interests. The Company was incorporated pursuant to the laws of
Ontario on November 27, 2003. To date, the Company has not earned any revenue
and is considered to be in the development stage as defined by the Canadian
Institute of Chartered Accountants (“CICA”) Accounting Guideline 11 "Enterprises
in the Development Stage".
The
Company's operations comprise a single reporting operating segment engaged in
mineral exploration in Mexico (2008 – same). As the operations comprise a single
reporting segment, amounts disclosed in the consolidated statements of loss for
the period also represent segment amounts. At September 30, 2009
(2008 – same), all of the Company's mineral properties are located in Mexico and
substantially all cash is on deposit with Canadian chartered banks.
All of
the Company’s mining assets are located outside of Canada and are subject to the
risk of foreign investments, including increase in taxes and royalties,
renegotiation of contracts, currency exchange fluctuations and political
uncertainty.
Although
the Company has taken steps to verify title to the properties on which it is
conducting exploration and in which it has an interest, in accordance with
industry standards for the current stage of exploration of such properties,
these procedures do not guarantee the Company’s title. Property title
may be subject to unregistered prior agreements and non-compliance with
regulatory requirements.
Going
Concern
These
consolidated financial statements have been prepared using Canadian generally
accepted accounting principles (“Canadian GAAP”) applicable to a going concern,
which assumes continuity of operations and realization of assets and settlement
of liabilities and commitments in the normal course of business. In assessing
whether the going concern assumption is appropriate, management takes into
account all available information about the future, which is at least, but is
not limited to, twelve months from the end of the reporting period. Management
is aware, in making its assessment, of material uncertainties related to events
or conditions that cast substantial doubt on the Company’s ability to
continue as a going concern, as described in the following paragraph. These
consolidated financial statements do not reflect the adjustments to the carrying
values of assets and liabilities and the reported expenses and balance sheet
classifications that would be necessary were the going concern assumption
inappropriate. These adjustments could be material.
F2-10
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
1.
|
Nature
of Business and Going Concern
(continued)
|
The
Company is in the exploration stage and is subject to the risks and challenges
similar to other companies in a comparable stage of exploration. These risks
include, but are not limited to, dependence on key individuals, successful
exploration results and the ability to secure adequate financing to meet
the minimum capital required to successfully complete the project and continue
as a going concern. As at September 30, 2009, the Company had
positive working capital of approximately $2.2 million, including cash and cash
equivalents of approximately $2.5 million; however, management estimates that
these funds may not be sufficient to meet the Company's obligations and budgeted
expenditures through September 30, 2010. Any funding shortfall may be met in the
future in a number of ways including, but not limited to, the sale of equity or
debt securities, further expenditure reductions, renegotiation of the amount and
timing of exploration property payments and/or the introduction of joint venture
partners. There is, however, no assurance that these sources of funding or
initiatives will be available to the Company, or that they will be available on
terms which are acceptable to the Company.
|
2.
|
Summary
of Significant Accounting Policies
|
These
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and their basis of application is
consistent with that of the previous year, except as disclosed below, and
reflect the following significant accounting policies:
(a)
Recently Adopted Accounting Pronouncements
General
Standards of Financial Statements Presentation
In June
2007, the CICA amended Handbook Section 1400, “General Standards of Financial
Statement Presentation”, to assess an entity’s ability to continue as a
going concern and disclose any material uncertainties that cast doubt on its
ability to continue as a going concern. Section 1400 is effective for
interim and annual reporting periods beginning on or after January 1,
2008. Such disclosure is contained in Note 1 to the consolidated financial
statements.
Mining
Exploration Costs
In March
2009, the Emerging Issues Committee of the CICA issued EIC-174, “Mining
Exploration Costs”. This abstract provides additional guidance on determining
when exploration costs related to mining properties can be capitalized as well
as clarification on impairment indicators for exploration costs that have
previously been capitalized. The adoption of this standard did not have any
effect on the Company's consolidated financial statements.
Goodwill
and Intangible Assets
In
February 2008, the Accounting Standards Board ("AcSB") issued Section 3064,
“Goodwill and Intangible Assets”, to replace Section 3062, “Goodwill and Other
Intangible Assets”. This new section establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and intangible
assets by profit-oriented enterprises. The adoption of this new section on
October 1, 2008 had no impact on the Company’s consolidated financial
statements.
Credit
Risk and the Fair Value of Financial Assets and Financial
Liabilities
In
January 2009, the Emerging Issues Committee of the CICA issued EIC-173, “Credit
Risk and the Fair Value of Financial Assets and Financial Liabilities”. This
abstract requires that credit risk be taken into account in determining the fair
value of financial instruments and financial liabilities, including derivative
instruments. The adoption of this standard did not have an impact on the
Company’s financial statements.
F2-11
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
(b)
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary Nayarit Gold De Mexico, S.A. de C.V. All material
inter-company balances and transactions have been eliminated. All
references to the Company should be treated as references to the
Company and its subsidiary.
(c)
Cash and Cash Equivalents
Cash and
equivalents include cash on hand, balances with banks and highly liquid
investments with original maturities of three months or less. The Company
invests cash in term deposits maintained in high credit quality
institutions. As at September 30, 2009, cash equivalents consisted of
cashable Canadian GICs held with a major Canadian banking institution with an
average interest rate of 0.8% (2008 – 3.2%).
(d)
Short-Term Investments
Short-term
investments are highly liquid investments with an original maturity greater than
three months and less than twelve months. These investments qualify as held
for trading and are measured at fair value with change in fair values recorded
in the Consolidated Statement of Loss. As at September 30, 2009,
short-term investments consisted of Canadian GICs held with a major Canadian
banking institution with an average interest rate of 0.5% (2008 –
2.05%).
(e)
Property, Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated amortization.
Amortization is being provided for on the declining balance basis at an
annual rate of 30% on computer equipment, 20% on furniture and
equipment, 100% on software, 30% on vehicles and 5% on
building. Leasehold improvements are being amortized on a
straight-line basis over the lesser of their useful lives or the term of the
lease.
(f)
Exploration Property Interests
Property
acquisition costs and related direct exploration costs, less recoveries, are
deferred until such time as the properties are either placed into
commercial production, sold, determined not to be economically viable, or
abandoned. General exploration expenditures, which do not relate to
specific resource properties, are written off in the year incurred. These
deferred costs will be amortized on the unit-of-production basis over the
estimated useful lives of the properties following the commencement of
production, or written-off if the properties are sold, allowed to lapse or
abandoned.
The cost
of exploration properties includes cash consideration paid, and the fair market
value of shares issued, if any, on the acquisition of property interests.
Acquisition costs of properties acquired under option agreements, whereby
payments are made at the discretion of the Company, are recorded in the
accounts when the payments are made. The recorded amounts of property
claim acquisition costs and their related deferred exploration costs
represent actual expenditures incurred and are not intended to reflect
present or future values.
F2-12
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
(g)
Impairment of Long Lived Assets
The
Company assesses the impairment of long-lived assets, which consist primarily of
exploration property interests and property, plant and equipment, whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss will be recognized if the carrying
amount of a long-lived asset is not recoverable. The carrying amount of a
long-lived asset is not recoverable if the carrying amount exceeds the sum of
the undiscounted cash flows expected to result from its use and eventual
disposition. The impairment loss to be recognized is measured as the amount by
which the carrying amount of the long-lived asset exceeds its fair
value.
Annually,
or when events or circumstances indicate that the carrying amount may not be
recoverable, the Company reviews the carrying value of its mining interests. The
recoverability of the book value of each property is assessed for indicators of
impairment such as adverse changes to the estimated recoverable ounces of gold,
estimated future commodity prices, and estimated expected future operating
costs, capital expenditures and reclamation expenditures. If it is determined
that the deferred costs related to a property are not recoverable over its
productive life, those costs will be written down to fair value as a charge to
operations in the period in which the determination is made. The amounts at
which mining interests and the related deferred costs are recorded do not
necessarily reflect present or future values.
(h)
Asset Retirement Obligations
The fair
values of asset retirement obligations are recorded as liabilities on a
discounted basis when they are incurred. Amounts recorded for the related
assets are increased by the amount of these obligations. Over time, the
liabilities will be accreted for the change in their present value and the
initial capitalized costs will be depleted and amortized over the useful
lives of the related assets. As of September 30, 2009 and 2008, there were
no asset retirement obligations.
(i)
Income Taxes
The
Company follows the asset and liability method of accounting for income taxes in
accordance with the recommendations of the CICA. Future income taxes
are recorded to reflect the expected consequences of differences between
the carrying amounts of balance sheet items and their corresponding tax
values. Future tax assets are recognized only to the extent that, in the
opinion of management, it is more likely than not that the future income tax
assets will be realized. Future income tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
substantive enactment.
(j)
Stock Based Compensation
The
Company records compensation cost based on the fair value method of accounting
for stock based compensation. The fair value of stock options is determined
using the Black-Scholes option pricing model. The fair value of the options
is recognized over the vesting period as compensation and contributed surplus.
When options are exercised, the proceeds received, together with any
related amount in contributed surplus, will be credited to capital stock.
The Company's stock-based compensation plan is described in Note
8(c).
F2-13
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
(k)
Loss per Share (“LPS”)
Basic
loss per share is computed by dividing the loss for the period by the weighted
average number of common shares outstanding during the period, including
contingently issuable shares, which are included when the conditions
necessary for issuance have been met. Diluted loss per share is calculated
in a similar manner, except that the weighted average number of common
shares outstanding is increased to include potentially issuable common
shares from the assumed exercise of stock options and warrants, if
dilutive. The number of additional shares included in the calculation
is based on the treasury stock method for stock options and warrants. The
effect of potential issuances of shares under stock options and warrants
would be anti-dilutive, and accordingly basic and diluted LPS are the
same. See Notes 8(c) and 9 for potentially dilutive
securities.
(l)
Translation of Foreign Currencies
The
functional currency of the Company is the Canadian dollar (“CAD”). Monetary
assets and liabilities of the Company’s integrated foreign operations
are translated into Canadian dollars at the rate of exchange in effect at
the balance sheet date, and non-monetary assets, and liabilities are
translated at the historical rate of exchange. Expenses are translated at
the average exchange rates for the period. Foreign currency gains and
losses arising from the translation of integrated foreign operations as well as
foreign currency transactions within the Company are included in the
determination of results of operations.
(m)
Measurement Uncertainty
The
preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 revenue and expenses
during the reporting period. The most significant estimates are related to
the recoverability of exploration property interests, valuation of
stock-based compensation, and valuation of future tax assets and
liabilities. Included in exploration property interests as of September 30, 2009
are Mexican input tax credits (“IVA”) of $1,043,579 (September 30, 2008 -
$944,527), which management believes are fully recoverable. Actual
results could differ from those estimates. These estimates are reviewed
periodically, and, as adjustments become necessary, they are reported in
earnings in the period in which they become known.
(n)
Capital Disclosures
Handbook
Section 1535 specifies the disclosure of (i) an entity’s objectives, policies
and processes for managing capital; (ii) quantitative data about what the entity
regards as capital; (iii) whether the entity has complied with any capital
requirements; and (iv) if it has not complied, the consequences of such
noncompliance. The Company adopted Section 1535 effective October 1, 2007
and has included disclosures recommended by the new Handbook section in Note 3
to these consolidated financial statements.
(o)
Financial Instruments, Comprehensive Income and Hedges
Effective
October 1, 2006, the Company adopted four new accounting standards issued by the
CICA: (i) Section 3855, “Financial Instruments – Recognition and
Measurement”, (ii) Section 1530, “Comprehensive Income”, (iii) Section 3861
"Financial Instruments - Disclosure and Presentation" and, (iv) Section
3865, “Hedges”.
Effective
October 1, 2007, the Company adopted Section 3862, Financial Instruments –
Disclosures, and Section 3863, Financial Instruments – Presentation. These
sections replaced existing Section 3861, Financial Instruments – Disclosure and
Presentation.
F2-14
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
(o)
Financial Instruments, Comprehensive Income and Hedges
(continued)
Section
3855 prescribes when a financial instrument is to be recognized on the balance
sheet and at what amount. It also specifies how financial instrument gains
and losses are to be presented. This Section requires that:
|
•
|
All
financial assets be measured at fair value on initial recognition and
certain financial assets are measured at fair value subsequent to initial
recognition;
|
|
•
|
All
financial liabilities are measured at fair value if they are classified as
held for trading purposes. Other financial liabilities are measured at
amortized cost using the effective interest method;
and
|
|
•
|
All
derivative financial instruments be measured at fair value on the balance
sheet, even when they are part of an effective hedging
relationship.
|
Section
1530 requires that certain gains and losses from changes in fair value be
temporarily presented outside net income. It includes unrealized gains and
losses, such as: changes in the currency translation adjustment relating to
self-sustaining foreign operations; unrealized gains or losses on
available-for-sale investments; and the effective portion of gains or losses on
derivatives designated as cash flow hedges or hedges of the net investment
in self-sustaining foreign operations. The Company does not currently
have self-sustaining foreign operations, available-for-sale investments or
hedges.
Sections
3862 establishes standards of presentation which carried forward from Section
3861 unchanged. Section 3863 introduces new disclosures to improve the
information about financial instruments. This standard requires the disclosure
of qualitative and quantitative information about the exposure to risks arising
from financial instruments, including a sensitivity analysis for market risk.
The adoption of these standards did not have any effect on the financial
position or performance of the Company. See Note 4 for further
information.
Under
adoption of these new standards, the Company designated its cash equivalents and
short-term investments as held-for-trading, which are measured at fair
value. Sundry receivables are classified as loans and receivables, which
are measured at amortized cost. Accounts payable and accrued
liabilities are classified as other financial liabilities, which are
measured at amortized cost. The Company evaluated the impact of these new
standards on its consolidated financial statements and determined that no
adjustments were required at the time of adoption.
(p)
Future Accounting Changes
Financial
Instruments
In June
2009, the Canadian Accounting Standards Board issued amendments to Section 3862,
“Financial Instruments – Disclosures”, to improve disclosure requirements on
fair value measurement and liquidity risk. The amendments are effective for the
Company's September 30, 2010 annual financial statements. As the amendments only
concern disclosure requirements, they will not have a significant impact on
results or financial position.
F2-15
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
(p)
Future Accounting Changes (continued)
Business Combinations,
Consolidated Financial Statements and Non-controlling
Interests
In
January 2009, the CICA issued Section 1582, “Business Combinations”, Section
1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling
Interests” which replace Section 1581, “Business Combinations” and Section 1600,
“Consolidated Financial Statements". Section 1582 establishes standards
for the accounting for business combinations that is equivalent to the business
combination accounting standard under International Financial Reporting
Standards (“IFRS”). Section 1582 is applicable for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. Early adoption of this
section is permitted. Section 1601 together with Section 1602 establishes
standards for the preparation of consolidated financial statements. Section 1601
is applicable for the Company’s interim and annual consolidated financial
statements for fiscal years beginning on or after January 1, 2011. Early
adoption of this section is permitted. If the Company chooses to early adopt any
one of these sections, the other two sections must also be adopted at the same
time.
International Financial
Reporting Standards (“IFRS”)
In 2006,
the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan
that will significantly affect financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of
Canadian GAAP with IFRS over an expected five year transitional
period. In February 2008, the AcSB announced that the changeover date
for publicly-listed companies to use IFRS, replacing Canada’s own GAAP is for
interim and annual financial statements relating to the fiscal year beginning on
or after January 1, 2011. Accordingly, the Company will begin
reporting under IFRS for its interim and annual periods for the year ended
September 30, 2012. The Company’s transition date will be October 1,
2010, which will require restatement for comparative purposes of amounts
reported by the Company for the year ended September 30, 2011. While
the Company has begun assessing the adoption of IFRS, the financial reporting
impact of the transition to IFRS cannot be reasonably estimated at this
time.
|
3.
|
Capital
Management
|
The
Company considers the items included in consolidated Shareholders’ Equity as
capital. Accordingly, the capital of the Company is $24.8 million and
$17.1 million as at September 30, 2009 and 2008, respectively. The
Company manages its capital structure and makes adjustments to it, based on the
funds available to the Company, in order to support the acquisition, exploration
and development of mineral properties. The Board of Directors does not establish
quantitative return on capital criteria for management, but rather relies on the
expertise of the Company's management to sustain future development of the
business.
The
properties in which the Company currently has an interest are in the exploration
stage; as such the Company is dependent on external financing to fund its
activities. In order to carry out the planned exploration and pay for
administrative costs, the Company will spend its existing working capital and
raise additional amounts as needed. The Company will continue to assess new
properties and seek to acquire an interest in additional properties if it feels
there is sufficient geologic or economic potential and if it has adequate
financial resources to do so.
Management
reviews its capital management approach on an ongoing basis and believes that
this approach, given the relative size of the Company, is
reasonable.
There
were no changes in the Company's approach to capital management during the year
ended September 30, 2009. Neither the Company nor its subsidiary is subject
to externally imposed capital requirements.
F2-16
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
4.
|
Financial
Risk Factors
|
The
Company's risk exposures and the impact on the Company's consolidated financial
instruments are summarized below:
Credit
Risk
The
Company's credit risk is primarily attributable to short-term investments and
receivables. The Company has no significant concentration of credit risk arising
from operations. Short-term investments consist of guaranteed investment
certificates, which have been invested with reputable financial institutions,
from which management believes the risk of loss to be remote. Financial
instruments included in prepaids and sundry receivables are comprised of goods
and services tax due from the Federal Government of Canada and receivables from
unrelated companies. Financial instruments included in exploration
property interests consist of estimated IVA amounts recoverable. Management
believes that the credit risk concentration with respect to financial
instruments in these areas is remote.
Liquidity
Risk
The
Company's approach to managing liquidity risk is to ensure that it will have
sufficient liquidity to meet liabilities when due. As at September 30, 2009, the
Company had a cash and cash equivalents balance of $2,481,433 (September 30,
2008 - $5,356,166) to settle current liabilities of $378,613 (September 30, 2008
- $954,933). All of the Company's accounts payable and accrued
liabilities have contractual maturities of less than 30 days and are subject to
normal trade terms.
Market
Risk
|
(a)
|
Interest
Rate Risk
|
The
Company has cash and cash equivalents. The Company's current policy is to invest
excess cash in investment grade short-term deposit certificates issued by its
banking institutions. The Company periodically monitors the investments it makes
and is satisfied with the credit ratings of its banks.
|
(b)
|
Foreign
Currency Risk
|
The
Company's functional currency is the Canadian dollar and major purchases are
transacted in Canadian dollars. The Company funds certain operations,
exploration and administrative expenses in Mexican Pesos (MXN) or US Dollars
(USD) on a cash call basis using MXN or USD currencies converted from its
Canadian dollar bank accounts held in Canada. Financial instruments included in
exploration property interests consist of estimated IVA amounts recoverable
which are recoverable in Mexican Pesos. The estimated IVA amounts
recoverable balance was $1,043,579CAD ($13,005,720MXN) and $944,527CAD
($12,029,156 MXN) as at September 30, 2009 and 2008,
respectively. Management believes the foreign exchange risk derived
from currency conversions is slight and therefore does not hedge its foreign
exchange risk.
|
(c)
|
Price
Risk
|
The
Company is exposed to price risk with respect to commodity prices. The Company
closely monitors commodity prices to determine the appropriate course of action
to be taken by the Company.
|
(d)
|
Property
Risk
|
See Note 1.
F2-17
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
4.
|
Financial
Risk Factors (continued)
|
Sensitivity
Analysis
The
Company has designated its cash and cash equivalents and short term investments
as held-for-trading, and measured them at fair value. Financial instruments
included in prepaids and sundry receivables are classified as loans and
receivables, which are measured at amortized cost. Accounts payable and accrued
liabilities are classified as other financial liabilities, which are measured at
amortized cost.
As at
September 30, 2009, the carrying and fair value amounts of the Company's
financial instruments are approximately the same. Based on
management's knowledge and experience of the financial markets, the Company
believes movements in interest rates, foreign exchange, and commodity prices are
reasonably possible over a three month period.
Short
term investments include deposits at call which are at variable rates.
Sensitivity to a plus or minus 1% change in rates would affect net loss by
$nil.
The
Company has IVA amounts recoverable in Mexican Pesos that give rise to exposure
to foreign exchange risk. The impact of a 10% increase in the Mexican
Peso relative to the Canadian Dollar is an increase in the consolidated net loss
and other comprehensive loss of $94,871CAD. The impact of a 10%
decrease in the Mexican Peso relative to the Canadian Dollar is a decrease in
the consolidated net loss and other comprehensive loss of
$115,953CAD.
Price
risk is remote at this time since the Company is not a producing
entity.
|
5.
|
Property,
Plant and Equipment
|
|
September 30, 2009
|
||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Computer
equipment
|
43,362 | 19,215 | 24,147 | |||||||||
|
Furniture
and equipment
|
15,000 | 6,360 | 8,640 | |||||||||
|
Software
|
136,127 | 115,157 | 20,970 | |||||||||
|
Vehicle
|
68,800 | 27,864 | 40,936 | |||||||||
|
Leasehold
improvements
|
34,448 | 12,169 | 22,279 | |||||||||
|
Building
|
99,860 | 13,009 | 86,851 | |||||||||
|
Land
|
40,640 | - | 40,640 | |||||||||
| 438,237 | 193,774 | 244,463 | ||||||||||
|
September 30, 2008
|
||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Computer
equipment
|
50,996 | 14,283 | 36,713 | |||||||||
|
Furniture
and equipment
|
45,614 | 12,279 | 33,335 | |||||||||
|
Software
|
117,294 | 109,630 | 7,664 | |||||||||
|
Vehicle
|
68,800 | 10,320 | 58,480 | |||||||||
|
Leasehold
improvements
|
28,880 | 2,888 | 25,992 | |||||||||
|
Building
|
99,860 | 9,390 | 90,470 | |||||||||
|
Land
|
40,640 | - | 40,640 | |||||||||
| 452,084 | 158,790 | 293,294 | ||||||||||
F2-18
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
6.
|
Exploration
Property Interests
|
|
September 30, 2009
|
||||||||||||||||
|
Orion
|
IVA
|
Advances
|
Total
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Beginning
balance
|
11,110,355 | 944,527 | 63,914 | 12,118,796 | ||||||||||||
|
Additions
during the year
|
||||||||||||||||
|
Acquisition
costs
|
1,964,012 | - | - | 1,964,012 | ||||||||||||
|
Assays
and analysis
|
863,120 | - | - | 863,120 | ||||||||||||
|
Environmental
|
50,943 | - | - | 50,943 | ||||||||||||
|
Drilling
|
4,956,907 | - | - | 4,956,907 | ||||||||||||
|
Exploration
support
|
430,006 | - | - | 430,006 | ||||||||||||
|
Field
supplies & equipment
|
114,328 | - | - | 114,328 | ||||||||||||
|
Geological
|
242,983 | - | - | 242,983 | ||||||||||||
|
Mapping
& surveying
|
11,144 | - | - | 11,144 | ||||||||||||
|
Metallurgical
|
46,499 | - | - | 46,499 | ||||||||||||
|
Mining
duties, permits and fees
|
213,506 | - | - | 213,506 | ||||||||||||
|
Transportation
|
93,843 | - | - | 93,843 | ||||||||||||
|
Wages
and consulting fees
|
1,215,294 | - | - | 1,215,294 | ||||||||||||
| 10,202,585 | - | - | 10,202,585 | |||||||||||||
|
Collected
during the year
|
- | (1,009,585 | ) | (12,296 | ) | (1,021,881 | ) | |||||||||
|
Increase
during the year
|
- | 1,108,637 | - | 1,108,637 | ||||||||||||
|
Ending
balance
|
21,312,940 | 1,043,579 | 51,618 | 22,408,137 | ||||||||||||
|
September 30, 2008
|
||||||||||||||||||||
|
Orion
|
Evaristo
|
IVA
|
Advances
|
Total
|
||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
Beginning
balance
|
4,847,029 | 128,037 | 473,293 | 257,046 | 5,705,405 | |||||||||||||||
|
Additions
during the year
|
||||||||||||||||||||
|
Acquisition
costs
|
1,364,190 | - | - | - | 1,364,190 | |||||||||||||||
|
Assays
and analysis
|
576,662 | - | - | - | 576,662 | |||||||||||||||
|
Drilling
|
2,664,364 | - | - | - | 2,664,364 | |||||||||||||||
|
Exploration
support
|
236,537 | - | - | - | 236,537 | |||||||||||||||
|
Field
supplies & equipment
|
87,036 | - | - | - | 87,036 | |||||||||||||||
|
Geological
|
39,764 | - | - | - | 39,764 | |||||||||||||||
|
Mining
duties, permits and fees
|
142,481 | 15,094 | - | - | 157,575 | |||||||||||||||
|
Transportation
|
257,066 | - | - | - | 257,066 | |||||||||||||||
|
Wages
and consulting fees
|
895,226 | - | - | - | 895,226 | |||||||||||||||
|
Write-off
|
- | (143,131 | ) | - | - | (143,131 | ) | |||||||||||||
| 6,263,326 | (128,037 | ) | 6,135,289 | |||||||||||||||||
|
Collected
during the year
|
- | - | - | (193,132 | ) | (193,132 | ) | |||||||||||||
|
Increase
during the year
|
- | - | 471,234 | - | 471,234 | |||||||||||||||
|
Ending
balance
|
11,110,355 | - | 944,527 | 63,914 | 12,118,796 | |||||||||||||||
F2-19
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
6.
|
Exploration
Property Interests (continued)
|
Orion
The Orion
Gold Project consists of several mineral concessions containing a total area of
approximately 105,000 hectares located in the state of Nayarit, on the Pacific
coast of the Republic of Mexico.
The El
Magnifico concession, which formed part of the Company’s initial land holdings,
was staked for the Company and is not subject to any royalty or other
agreements. The Bonanza I, Reese, Gross and El Dorado concessions, staked at
various times since September, 2005 by the Company, are likewise not subject to
any royalty or other agreements.
The
following concessions are subject to a royalty or option agreement:
|
(a)
|
Orion
|
The Orion
concession is made up of one concession comprising approximately 528 hectares.
The Orion concession is subject to a 3.5% net smelter royalty, which may be
purchased at any time for $250,000 and a 10% net profits interest.
|
(b)
|
La
Estrella
|
Pursuant
to an option agreement dated November 28, 2003, the Company can acquire a 100%
interest in the La Estrella concession. The La Estrella concession is
made up of one claim comprising approximately 146
hectares. Consideration for the acquisition of the concessions is as
follows:
|
|
§
|
Aggregate
payments of USD$1,450,000 (CAD$1,527,984) over six years with an initial
payment of USD$25,000 (CAD$24,870) (paid) and payments in year one -
USD$50,000 (CAD$49,740) (paid); year two - USD$75,000 (CAD$74,610) (paid);
year three - USD$100,000 (CAD$134,628) (paid); year four - USD$100,000
(CAD$102,072) (paid); year five - US$100,000 (CDN$115,420) (paid); year
six - US$1,000,000 (CDN$1,156,000).
|
On May
22, 2004, an amending agreement was entered into with the owner of La Estrella
concession whereby the option payments due to the owner in November 2004 and
2005 were reduced by the amount paid by the Company to settle outstanding mining
taxes and to discharge a lien registered against the property. The Company
settled approximately US$20,000 (CDN$19,896) of mining taxes during June 2004
and negotiated a settlement of a lien against the property of approximately
US$40,000 (CDN$39,792).
Refer to
Note 15 Subsequent Events for renegotiated terms of the La Estrella option
agreement.
|
(c)
|
San
Juan, San Francisco, San Miguel and Isis (collectively known as Huajicari
concessions)
|
On July
25, 2008, the Company entered into a definitive option agreement with Compania
Minera Huajicari, S.A. de D.V. (“Compania Minera Huajicari”) to acquire six
additional mining concessions totaling 2,730 hectares in the Orion Silver-Gold
Mining District in the State of Nayarit, Mexico. Consideration for
the acquisition of the concessions is as follows:
|
|
§
|
Aggregate
payments of USD$2,500,000 (CAD$2,588,130) with an initial payment of
USD$500,000 (CAD$511,650) (paid), and payments six months from closing -
USD$500,000 (CAD$601,900) (paid), twelve months from closing - USD$500,000
(CAD$567,408), eighteen months from closing - USD$500,000 (CAD$543,035)
and twenty-four months from closing - USD$500,000
(CAD$543,035.
|
F2-20
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
6.
|
Exploration
Property Interests (continued)
|
|
(c)
|
San
Juan, San Francisco, San Miguel and Isis (collectively known as Huajicari
concessions) (continued)
|
|
|
§
|
3,500,000
common shares of Nayarit Gold Inc., of which 500,000 was due upon closing
(issued), 750,000 was due six months from closing (issued), 750,000 was
due twelve months from closing (issued), 750,000 are due eighteen months
from closing, and 750,000 are due twenty-four months from
closing.
|
|
|
§
|
Compania
Minera Hujicari has the option to acquire an additional 500,000 common
shares of the Company by foregoing and in lieu of receiving the
USD$500,000 (CAD$543,035) payment due by May 8,
2010.
|
|
|
§
|
The
Company commits to exploration expenditures of USD$3,000,000
(CAD$3,258,210) over the next two years on the acquired
concessions.
|
|
|
§
|
3%
Net Smelter Royalty (“NSR”) on production from the acquired concessions,
however, the Company has the option to purchase the NSR for US$3,000,000
(CAD$3,258,210).
|
|
|
§
|
The
Company may early terminate the agreement without further responsibility
upon payment of 20% of the total remaining cash payments at the time of
termination.
|
Refer to
Note 15 Subsequent Events for renegotiated terms of the Huajicari option
agreement.
Evaristo
During
the year ended September 30, 2007, the Company staked the Evaristo concession,
adjacent to the optioned Dorosa property, and registered the staking application
with the Department of Mines. During the year-ended September 30,
2008, after performing initial exploration of this area, the Company made the
decision to abandon the concession; accordingly, total costs of $143,131 related
to the property have been written off. During the year ended, September 30,
2009, the Company received approval from the Department of Mines to cancel the
concession.
|
7.
|
Related
Party Transactions
|
|
(a)
|
During
the year ended September 30, 2009, the Company paid or accrued $219,116
(2008 - $148,273) consulting fees to an officer of the
Company. For the year ended September 30, 2009, $187,679 were
recorded as exploration property interests and $31,438 were recorded as
share issue costs. For the year ended September 30, 2008,
$148,273 was recorded as exploration property
interests.
|
|
(b)
|
During
the year ended September 30, 2009, the Company paid or accrued $nil (2008
- $41,743) of consulting fees to one officer of the
Company. The fees were recorded as management and consulting
fees on the Interim Consolidated Statements of Loss and Comprehensive
Loss.
|
|
(c)
|
Included
in accounts payable and accrued liabilities at September 30, 2009 is
$16,586 (September 30, 2008 - $21,560) owing to one officer of the Company
for management fees and expenses incurred on behalf of the
Company. These amounts are unsecured, non-interest bearing with
no fixed terms of repayment.
|
|
(d)
|
Included
in prepaids and sundry receivables at September 30, 2009 is $885
(September 30, 2008 - $nil) as an advance for travel costs to an officer
of the Company.
|
The above
related party transactions occurred in the normal course of operations and were
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
F2-21
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
8.
|
Share
Capital
|
|
(a)
|
Authorized
|
Unlimited
number of common shares
|
(b)
|
Issued
|
|
Number
|
Amount
|
|||||||
|
#
|
$
|
|||||||
|
Balance
at September 30, 2007
|
43,192,762 | 10,251,307 | ||||||
|
Private
placement at $0.40 per share (i)
|
5,682,500 | 2,273,000 | ||||||
|
Warrant
valuation (i)
|
- | (637,974 | ) | |||||
|
Private
placement at $0.56 per share (ii)
|
17,900,000 | 10,024,000 | ||||||
|
Warrant
valuation (ii)
|
- | (2,685,000 | ) | |||||
|
Exercise
of warrants
|
45,000 | 37,800 | ||||||
|
Exercise
of stock options
|
550,000 | 337,096 | ||||||
|
Issue
of shares for
|
||||||||
|
acquisition
of property (Note 6 (c))
|
500,000 | 305,000 | ||||||
|
Share
issue costs (i & ii)
|
- | (936,142 | ) | |||||
|
Balance
at September 30, 2008
|
67,870,262 | 18,969,087 | ||||||
|
Private
placement at $0.50 per share (iii)
|
20,000,000 | 10,000,000 | ||||||
|
Warrant
valuation (iii)
|
- | (1,789,000 | ) | |||||
|
Exercise
of stock options
|
139,286 | 94,816 | ||||||
|
Issue
of shares for
|
||||||||
|
acquisition
of property (Note 6 (c))
|
1,500,000 | 675,000 | ||||||
|
Share
issue costs (iii)
|
- | (1,677,722 | ) | |||||
|
Balance
at September 30, 2009
|
89,509,548 | 26,272,181 | ||||||
|
(i)
|
On
January 11, 2008, the Company completed a non-brokered private placement
financing of $2,273,000 comprising the sale of 5,682,500 units, sold at
$0.40 per Unit. Each Unit consisted of one common share and one common
share purchase warrant. Each whole warrant entitles the holder to acquire
one common share for $0.60 until January 11, 2009 and for $0.70 until
January 11, 2010.
|
Share
issue costs related to the financing consisted of a cash payment of $9,100 and a
total of 27,300 warrants of Nayarit with the same terms of the private placement
warrants above. Other costs associated with the private placement amounted to
$31,106. Issue costs of $12,136 were allocated to
warrants.
The fair
value of the warrants issued was determined to be $0.11 per warrant or $641,030
in the aggregate using the Black-Scholes option pricing model. The
following weighted average assumptions were used: risk-free interest rate of
2.25%, expected dividend yield of 0%, expected stock volatility of 105% and an
expected life of 2 years.
F2-22
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
8.
|
Share
Capital (continued)
|
|
(b)
|
Issued
(continued)
|
|
(ii)
|
On
July 25, 2008, the Company completed a brokered private placement
consisting of 17,900,000 units (the “Units”) in the Company at a price of
$0.56 per Unit for gross proceeds of $10,024,000. Each Unit is comprised
of one common share and one common share purchase warrant. Each warrant
entitles the holder to purchase one additional common share (“Warrant
Share”) of the Company at an exercise price of $0.75 per Warrant Share at
any time within two years from the date of closing. BMO Capital Markets
acted as lead agent in an investment dealer syndicate which also included
Evergreen Capital Partners Inc. and GMP Securities
L.P.
|
The
agents for the private placement were paid a cash commission of $501,200 and
were issued 1,074,000 warrants (the “Broker Warrants”). Each Broker Warrant is
exercisable for one Unit at $0.56 per Unit at any time within 24 months of
closing. The fair value of the Broker Warrants issued was determined
to be $0.29 per warrant or $311,460 in the aggregate using the Black-Scholes
option pricing model and was charged to share issue costs. The
following weighted average assumptions were used: risk-free interest rate of 3%,
expected dividend yield of 0%, expected stock volatility of 97% and an expected
life of 2 years. Other share issue costs totaled
$423,458. Issue costs of $331,103 were allocated to
warrants.
The fair
value of the private placement warrants issued was determined to be $0.15 per
warrant or $2,685,000 in the aggregate using the Black-Scholes option pricing
model. The following weighted average assumptions were used:
risk-free interest rate of 3%, expected dividend yield of 0%, expected stock
volatility of 97% and an expected life of 2 years.
|
(iii)
|
On
March 24, 2009, the Company completed a brokered private placement
consisting of 20,000,000 units (the “Units”) in the Company at a price of
$0.50 per Unit for gross proceeds of $10,000,000. Each Unit is comprised
of one common share and one-half of one common share purchase warrant.
Each warrant entitles the holder to purchase one additional common share
(“Warrant Share”) of the Company at an exercise price of $0.65 per Warrant
Share at any time within two years from the date of closing. Jennings
Capital Inc. and BMO Capital Markets acted as co-lead agents in an
investment dealer syndicate which included Wolverton Securities
Inc.
|
The
agents were paid a cash commission of $700,000 and were issued a total of
1,400,000 warrants (the “Broker Warrants”). Each Broker Warrant is exercisable
for one Unit at $0.50 per Unit at any time within 24 months of
closing. The fair value of the Broker Warrants issued was determined
to be $0.44 per warrant or $622,000 in the aggregate using the Black-Scholes
option pricing model and was charged to share issue costs. The
following weighted average assumptions were used: risk-free interest rate of
1.07%, expected dividend yield of 0%, expected stock volatility of 84% and an
expected life of 2 years.
Other
consultants were issued a total of 1,000,000 stock options related to the
successful completion of the financing. The fair value of the stock
options issued was determined to be $0.42 per stock options or $420,000 in the
aggregate using the Black-Scholes option pricing model and was charged to share
issue costs. The following weighted average assumptions were used:
risk-free interest rate of 2.535%, expected dividend yield of 0%, expected stock
volatility of 84% and an expected life of 5 years. Other share
issue costs totaled $305,084. Issue costs of $368,475 were allocated
to warrants.
F2-23
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
8.
|
Share
Capital (continued)
|
|
|
(b)
|
Issued
(continued)
|
The fair
value of the private placement warrants issued was determined to be $0.18 per
warrant or $1,789,000 in the aggregate using the Black-Scholes option pricing
model. The following weighted average assumptions were used:
risk-free interest rate of 1.07%, expected dividend yield of 0%, expected stock
volatility of 84% and an expected life of 2 years.
|
(c)
|
Stock
Options
|
The
Company has a stock option plan (the “Plan”) providing the Board of Directors
with the discretion to issue stock options to its directors, officers and
certain consultants of the Company. Previously, the aggregate number
of shares of the Company which could be issued and sold under the Plan should
not exceed 9,775,000. At the annual general meeting of the
shareholders in March 2009, an amendment to the Plan was approved whereby the
aggregate number of shares of the Company which may be issued and sold under the
Plan was increased to 11,300,000. Stock options are granted with an
exercise price determined by the Board of Directors. Options
shall not be granted for a term exceeding five years. Options vest
over a period of at least 18 months and must be released in equal stages on a
quarterly basis and options issued to Investor Relations Consultants must vest
in stages of not less than twelve months with no more than one-quarter of the
options vesting in any three month period.
The
following is a summary of stock option activity for the years
ended September 30, 2009 and 2008:
|
2009
|
2008
|
|||||||||||||||
|
Number of
Options
|
Weighted
Average
Exercise Price
|
Number of
Options
|
Weighted
Average
Exercise Price
|
|||||||||||||
|
#
|
$
|
#
|
$
|
|||||||||||||
|
Beginning
Balance
|
7,795,000 | 0.65 | 5,985,000 | 0.75 | ||||||||||||
|
Granted
|
1,978,572 | 0.58 | 3,140,000 | 0.52 | ||||||||||||
|
Forfeited
|
(545,000 | ) | 0.51 | (780,000 | ) | 1.04 | ||||||||||
|
Exercised
|
(139,286 | ) | 0.48 | (550,000 | ) | 0.35 | ||||||||||
|
Ending
Balance
|
9,089,286 | 0.65 | 7,795,000 | 0.65 | ||||||||||||
The
estimated fair value of options has been estimated at the grant date using the
Black-Scholes option pricing model. The weighted average assumptions
used in the pricing model to assign value to the options granted during the
period are as follows:
|
2009
|
2008
|
|||||||
|
Risk
free interest rate
|
2.17 | % | 3.04 | % | ||||
|
Expected
life
|
4.3
years
|
5.0
years
|
||||||
|
Expected
volatility
|
86 | % | 112 | % | ||||
|
Expected
dividend yield
|
- | - | ||||||
F2-24
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
8.
|
Share
Capital (continued)
|
|
(c)
|
Stock
Options (continued)
|
The
weighted average fair value of options granted whose exercise price at grant
date was greater than the market price on the grant date during the year ended
September 30, 2009 is $0.26 (year ended September 30, 2008 – $0.39). The
weighted average fair value of options granted whose exercise price at grant
date was less than the market price on the grant date during the year ended
September 30, 2009 is $0.39 (year ended September 30, 2008 –
nil).
As at
September 30, 2009, the Company has outstanding stock options entitling the
holders to acquire common shares as follows:
|
Weighted Average
Exercise Price
|
Number
Outstanding
|
Number
Exercisable
|
Weighted Average
Remaining
Contractual Life
|
|||||||||||
|
$
|
#
|
#
|
Years
|
|||||||||||
| 0.35 | 1,900,000 | 1,900,000 | 0.6 | |||||||||||
| 0.75 | 89,286 | 89,286 | 0.8 | |||||||||||
| 1.30 | 700,000 | 700,000 | 1.6 | |||||||||||
| 1.33 | 75,000 | 75,000 | 1.6 | |||||||||||
| 0.98 | 1,550,000 | 1,550,000 | 2.6 | |||||||||||
| 0.90 | 50,000 | 50,000 | 2.7 | |||||||||||
| 0.90 | 50,000 | 50,000 | 2.8 | |||||||||||
| 0.80 | 100,000 | 100,000 | 2.8 | |||||||||||
| 0.60 | 10,000 | 10,000 | 2.9 | |||||||||||
| 0.49 | 100,000 | 100,000 | 3.3 | |||||||||||
| 0.44 | 140,000 | 140,000 | 3.2 | |||||||||||
| 0.50 | 2,315,000 | 1,945,833 | 3.6 | |||||||||||
| 0.50 | 100,000 | 100,000 | 3.6 | |||||||||||
| 0.68 | 360,000 | 156,000 | 3.9 | |||||||||||
| 0.70 | 500,000 | 125,000 | 4.3 | |||||||||||
| 0.50 | 50,000 | 50,000 | 4.4 | |||||||||||
| 0.55 | 1,000,000 | 166,667 | 4.5 | |||||||||||
| 0.65 | 9,089,286 | 7,307,786 | 2.7 | |||||||||||
As at
September 30, 2009, 2,210,714 options remained available for future grants under
the plan. Options vested and exercisable at September 30, 2009
totaled 7,307,786 at an average exercise price of $0.67 per
share.
F2-25
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
9.
|
Warrants
|
The
following is a summary of warrant activity for the years ended September
30, 2009 and 2008:
|
2009
|
2008
|
|||||||||||||||||||||||
|
Number
|
Amount
|
Weighted
Average
Exercise Price
|
Number
|
Amount
|
Weighted
Average
Exercise Price
|
|||||||||||||||||||
|
#
|
$
|
$
|
#
|
$
|
$
|
|||||||||||||||||||
|
Beginning
Balance
|
24,638,800 | 3,283,451 | 0.73 | 1,405,750 | 375,204 | 1.00 | ||||||||||||||||||
|
Granted
|
11,400,000 | 2,411,000 | 0.63 | 24,683,800 | 3,637,490 | 0.73 | ||||||||||||||||||
|
Cost
of issue
|
- | (368,475 | ) | - | - | (343,239 | ) | - | ||||||||||||||||
|
Exercised
|
- | - | - | (45,000 | ) | (10,800 | ) | 0.60 | ||||||||||||||||
|
Expired
|
- | - | - | (1,405,750 | ) | (375,204 | ) | 1.00 | ||||||||||||||||
|
Ending
Balance
|
36,038,800 | 5,325,976 | 0.70 | 24,638,800 | 3,283,451 | 0.73 | ||||||||||||||||||
The
following warrants are outstanding as at September 30, 2009:
|
Number of
warrants
|
Value
|
Exercise Price
|
Expiry Date
|
|||||||||||
|
#
|
$
|
$
|
||||||||||||
| 5,664,800 | 639,033 | 0.70 |
January
11, 2010
|
|||||||||||
| 17,900,000 | 2,685,000 | 0.75 |
July
25, 2010
|
|||||||||||
| 1,074,000 | 311,460 | 0.56 |
July
25, 2010 (1)
|
|||||||||||
| 10,000,000 | 1,789,000 | 0.65 |
March
24, 2011
|
|||||||||||
| 1,400,000 | 622,000 | 0.50 |
March
24, 2011 (2)
|
|||||||||||
| 36,038,800 | 6,046,493 | |||||||||||||
|
(1)
|
Each
whole warrant entitles the holder to acquire one unit comprised of one
common share and one warrant to acquire one additional common share for
$0.75 for a period of two years.
|
|
(2)
|
Each
whole warrant entitles the holder to acquire one unit comprised of one
common share and one warrant to acquire one additional common share
for $0.65 for a period of two
years.
|
|
10.
|
Contributed
Surplus
|
|
For the year ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Beginning
Balance
|
5,783,716 | 4,096,178 | ||||||
|
Stock-based
compensation expense
|
535,008 | 1,456,930 | ||||||
|
Stock-based
compensation recorded as share and warrant issue costs
|
420,000 | - | ||||||
|
Stock-based
compensation recorded as exploration property interests
|
126,423 | - | ||||||
|
Exercise
of stock options
|
(26,538 | ) | (144,596 | ) | ||||
|
Expiration
of warrants
|
- | 375,204 | ||||||
|
Ending
Balance
|
6,838,609 | 5,783,716 | ||||||
F2-26
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
11.
|
Income
Taxes
|
|
(a)
|
Provision
for Income Taxes
|
Major
items causing the Company’s income tax rate to differ from the federal statutory
rate of 33% (2008 – 33.5%) were as follows:
|
2009
|
2008
|
|||||||
|
$
|
$
|
|
||||||
|
(Loss)
before income taxes
|
(2,700,414 | ) | (3,277,928 | ) | ||||
|
Expected
income tax recovery based on statutory rate
|
(874,900 | ) | (1,085,300 | ) | ||||
|
Adjustment
to expected income tax benefit
|
||||||||
|
Stock-based
compensation
|
176,600 | 488,100 | ||||||
|
Non-deductible
costs
|
10,800 | 14,700 | ||||||
|
Share
issue costs
|
(586,800 | ) | (323,200 | ) | ||||
|
Expiration
of non-capital losses
|
29,200 | 33,000 | ||||||
|
Change
in statutory rate
|
121,000 | 95,000 | ||||||
|
Other
|
48,100 | 17,600 | ||||||
|
Change
in valuation allowance
|
1,076,000 | 760,100 | ||||||
| - | - | |||||||
|
(b)
|
Future
Income Tax Balances
|
The tax
effects of temporary differences that give rise to future income tax assets and
liabilities at September 30, 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Future
income tax assets (liabilities):
|
||||||||
|
Non-capital
loss carry-forwards
|
2,068,100 | 1,359,200 | ||||||
|
Share
issue costs
|
598,000 | 251,700 | ||||||
|
Exploration
property interests
|
163,800 | 164,100 | ||||||
|
Other
temporary differences
|
159,700 | 138,600 | ||||||
| 2,989,600 | 1,913,600 | |||||||
|
Valuation
allowance
|
(2,989,600 | ) | (1,913,600 | ) | ||||
| - | - | |||||||
Taxable
income for the year ended September 30, 2009 is $Nil (2008 -
$Nil). Based on the lack of historical taxable income it is not more
likely than not that the Company will realize the benefits from future income
tax assets; consequently, the future recovery of losses arising from differences
in tax values and accounting values have been reduced by an equivalent valuation
allowance. The valuation allowance will be adjusted in the period
that it is determined that it is more likely than not that some portion or all
of the future tax assets will be realized.
F2-27
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
11.
|
Income
Taxes (continued)
|
The
Company has non-capital losses of approximately $7,043,000, which may be
utilized to reduce future taxable income in Canada. The non-capital
losses in Canada will expire as follows:
|
$
|
||||
|
2010
|
127,300 | |||
|
2014
|
215,700 | |||
|
2015
|
432,100 | |||
|
2026
|
999,900 | |||
|
2027
|
1,030,400 | |||
|
2028
|
1,793,100 | |||
|
2029
|
2,444,500 | |||
| 7,043,000 | ||||
The
Company has tax losses in Mexico that may be carried forward to offset future
taxable income. A full valuation allowance has been recorded to
offset the related future tax asset as realization is not considered more likely
than not.
|
12.
|
Commitments
and Contingencies
|
On
October 1, 2007, the Company entered into a lease for office space for a term of
five years ending September 30, 2012. Minimum lease commitments for
successive fiscal years ending September 30 are approximated as
follows:
|
$
|
||||
|
2010
|
22,940 | |||
|
2011
|
22,940 | |||
|
2012
|
23,680 | |||
| 69,560 | ||||
The
Company has an employment agreement with the Chief Executive Officer that
contains change of control, change of location and termination clauses under
which the Chief Executive Officer would be entitled to three times his annual
salary of $250,000 and bonus (determined by the compensation committee on an
annual basis with the bonus amount not to exceed 150% of the annual salary) and
his listed benefits would continue for a period of three years.
The
Company has an employment agreement with the Chief Financial Officer that
contains change of control, change of location and termination clauses under
which the Chief Financial Officer would be entitled to two times her annual
salary of $100,000 and bonus (determined by the compensation committee on an
annual basis with the bonus amount not to exceed 150% of the annual salary) and
her listed benefits would continue for a period of three years.
The
Company has a consulting agreement with the Vice President of Exploration that
contains change of control and termination clauses under which the Vice
President of Exploration would be entitled to one times his annual base
consulting fees of $150,000 and bonus (determined by the compensation committee
on an annual basis with the bonus amount not to exceed 150% of the annual
salary) and his listed benefits would continue for a period of six
months.
See also
Note 6(c) regarding the early termination clause with respect to the Huajicari
concessions.
F2-28
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
13.
|
Supplemental
Cash Flow Information
|
|
For the year ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Interest
paid
|
- | - | ||||||
|
Income
taxes paid
|
- | - | ||||||
|
Non-cash
investing and financing transactions:
|
||||||||
|
Acquisition
of exploration property interests for share consideration (Note
6(b))
|
675,000 | 305,000 | ||||||
|
Change
in exploration property interests payable
|
384,969 | 553,583 | ||||||
|
Reallocation
of IVA balance to Exploration support within Exploration Property
Interests
|
162,000 | - | ||||||
|
Value
of brokers' warrants included in share and warrant issue
costs
|
622,000 | 311,460 | ||||||
|
Value
of stock options included in share and warrant issue costs
|
420,000 | - | ||||||
|
Stock-based
compensation recorded as exploration property interests
|
126,423 | - | ||||||
|
Proceeds
from exercise of options previously recorded as accounts
payable
|
50,778 | - | ||||||
|
Fair
value of options exercised
|
26,538 | 144,595 | ||||||
|
Fair
value of warrants exercised
|
- | 10,800 | ||||||
|
Expiry
of warrants
|
- | 375,204 | ||||||
|
14.
|
Segmented
Information
|
The
Company’s operations comprise of a single reporting operating segment engaged in
mineral exploration in Mexico. As the operations comprise a single
reporting segment, amounts disclosed in the consolidated financial statements of
loss for the year also represent segment amounts.
As at
September 30, 2009 and, 2008, all of the Company’s exploration property
interests are located in Mexico and substantially all cash and cash equivalents
are on deposit with Canadian chartered banks.
|
15.
|
Subsequent
Events
|
Subsequent
to September 30, 2009, the Company renegotiated the property payments on the La
Estrella concession as described in Note 6 (b). The original
agreement provided for a US$1 million payment to be made on November 28, 2009;
however, the Company has restructured the payments as follows: December 8, 2009
US$75,000 (paid), June 8, 2010 US$25,000, December 8, 2010 US$100,000, June 8,
2011 US$100,000, December 8, 2011 US$175,000, June 8, 2012 US$175,000 and
December 8, 2012 US$350,000.
Subsequent
to September 30, 2009, the Company renegotiated the property payments on the
Huajicari concession as described in Note 6 (c). The original
agreement provided for a US$500,000 payment to be made on November 8, 2009;
however, the Company has restructured the payment as follows: January 31, 2010
US$250,000 and April 30, 2010 US$250,000.
F2-29
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
15.
|
Subsequent
Events (continued)
|
Subsequent
to September 30, 2009, the Company issued 750,000 shares of the Company pursuant
to the Huajicari option agreement as described in Note 6 (c).
Subsequent
to September 30, 2009, the Company obtained approval from the TSX Venture
Exchange to amend the 5,682,500 share purchase warrants which are currently
outstanding. Each share purchase warrant formerly entitled the
purchaser to acquire one common share for $0.60 until January 11, 2009 and $0.70
thereafter until January 11, 2010. These warrants were amended such that each
common share purchase warrant entitles the holder to acquire one common share
for $0.70 until July 11, 2010.
Subsequent
to September 30, 2009, the Company paid USD$250,000 pursuant to the Huajicari
option agreement as described in Note 6 (c).
Subsequent
to September 30, 2009, the Company jointly announced with Capital Gold
Corporation (“Capital Gold”) that they have entered into an agreement (the
"Agreement") with respect to a proposed business combination in an all-share
transaction subject to the completion of satisfactory due diligence, receipt of
Nayarit and Capital Gold shareholder approval, receipt by Nayarit of a fairness
opinion, regulatory approvals and the satisfaction of certain other conditions.
Pursuant to the terms of the Agreement, subject to the satisfaction or
waiver of all conditions, all of the Nayarit common shares issued and
outstanding immediately prior to the consummation of the business combination
(other than Nayarit Common Shares held by dissenting stockholders of Nayarit)
shall become exchangeable into the common stock of Capital Gold on the basis of
0.134048 shares of Capital Gold’s Company common stock for each one (1) Nayarit
Common Share. Following the business combination, the surviving entity
(the "Combined Entity") will be a wholly-owned subsidiary of Capital Gold.
|
16.
|
Differences Between Canadian
and U.S. Generally Accepted Accounting
Principles
|
These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (“Canadian
GAAP”). The following represents material adjustments to the
consolidated financial statements as at September 30, 2009 and September 30,
2008 and for the years ended September 30, 2009 and 2008 in order to conform to
accounting principles generally accepted in the United States (“US
GAAP”).
|
September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Assets
|
||||||||
|
Canadian
GAAP
|
25,196,265 | 18,072,487 | ||||||
|
Exploration
properties and deferred exploration expenditures (a)
|
(17,553,717 | ) | (10,690,692 | ) | ||||
|
US
GAAP
|
7,642,548 | 7,381,795 | ||||||
|
Future
Income Taxes
|
||||||||
|
Canadian
GAAP
|
- | - | ||||||
|
Deferred
exploration expenditures expensed (a)
|
4,915,000 | 2,993,400 | ||||||
|
Increase
in valuation allowance
|
(4,915,000 | ) | (2,993,400 | ) | ||||
|
US
GAAP
|
- | - | ||||||
|
Deficit
|
||||||||
|
Canadian
GAAP
|
(13,619,114 | ) | (10,918,700 | ) | ||||
|
Cumulative
exploration properties adjustment (a)
|
(17,553,717 | ) | (10,690,692 | ) | ||||
|
US
GAAP
|
(31,172,831 | ) | (21,609,392 | ) | ||||
F2-30
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
16.
|
Differences
Between Canadian and U.S. Generally Accepted Accounting Principles
(continued)
|
|
For
the year ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Statement
of Operations
|
||||||||
|
Net
loss under Canadian GAAP
|
(2,700,414 | ) | (3,277,928 | ) | ||||
|
Exploration
properties and deferred exploration expenditures (a)
|
(6,862,974 | ) | (5,049,201 | ) | ||||
|
Net
loss and comprehensive loss under US GAAP
|
(9,563,388 | ) | (8,327,129 | ) | ||||
|
Basic
and diluted loss per share - US GAAP
|
(0.12 | ) | (0.16 | ) | ||||
|
Statement
of Cash Flows
|
||||||||
|
Cash
flows from operating activities under
|
||||||||
|
Canadian
GAAP
|
(2,000,553 | ) | (1,760,764 | ) | ||||
|
Exploration
properties and deferred exploration expenditures (a)
|
(6,862,974 | ) | (4,673,748 | ) | ||||
|
Cash
flows from operating activities under US GAAP
|
(8,863,527 | ) | (6,434,512 | ) | ||||
|
Cash
flows from investing activities under Canadian
GAAP
|
(9,887,483 | ) | (5,798,235 | ) | ||||
|
Exploration
properties and deferred exploration expenditures (a)
|
6,862,974 | 4,673,748 | ||||||
|
Cash
flows from investing activities under US GAAP
|
(3,024,509 | ) | (1,124,487 | ) | ||||
|
(a)
|
Exploration
Expenditures
|
Under
Canadian GAAP, exploration expenditures may be capitalized during the search for
a commercially mineable body of ore and amortized later during commercial
production. Under US GAAP, exploration expenditures can only be
deferred subsequent to the determination that proven or probable mineral
reserves exist at which time costs incurred to bring the mine into production
are capitalized as development costs. Capitalized costs are then amortized on a
unit of production basis based on proven and probable reserves.
For the
purposes of the consolidated statements of cash flows, these costs are
classified as cash used in investing activities under Canadian GAAP and cash
used in operations under US GAAP.
|
(b)
|
Income
Taxes
|
Under
Canadian GAAP, future income taxes are calculated based on enacted or
substantively enacted tax rates applicable to future years. Under US GAAP, only
enacted rates are used in the calculation of future income taxes. This
difference in GAAP did not result in a difference in the financial position,
results of operations or cash flows of the Company for the years ended September
30, 2009 and 2008.
F2-31
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
16.
|
Differences
Between Canadian and U.S. Generally Accepted Accounting Principles
(continued)
|
|
(c)
|
Stock
Based Employee Compensation
|
On
November 27, 2003 (date of incorporation), the Company prospectively adopted the
fair value based method for its employee options. Consequently, there were no
differences between Canadian and US GAAP with respect to options granted since
inception. Canadian GAAP permits a choice which allows companies to
estimate forfeitures at the grant date or recognize forfeitures as they
occur. US GAAP requires forfeitures to be estimated at the grant
date. Management has evaluated the impact of estimating forfeitures
at the grant date for the purposes of this reconciliation and determined that
the impact is not material.
|
(d)
|
Uncertainty
in Income Taxes
|
In July
2006, the ASC issued guidance for Accounting for Uncertainty in Income Taxes.
The guidance prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements, uncertain
tax positions that the Company has taken or expects to take on a tax return
(including a decision whether to file or not file a return in a particular
jurisdiction). Under the guidance, the financial statements will reflect
expected future tax consequences of such positions presuming the taxing
authorities’ full knowledge of the position and all relevant facts, but without
considering time value. The guidance also revises disclosure requirements and
introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax
benefits. It is effective for fiscal years beginning after December 15, 2006.
Management has evaluated the adoption of the guidance for purposes of this
reconciliation and has determined there is no impact.
|
(e)
|
Recently
Issued Accounting Pronouncements
|
The Accounting Standards
Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) established the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
GAAP to be applied by nongovernmental entities. The ASC is a new structure which
took existing accounting pronouncements and organized them by accounting topic.
Relevant authoritative literature issued by the Securities and Exchange
Commission (“SEC”) and select SEC staff interpretations and administrative
literature was also included in the ASC. All other accounting guidance not
included in the ASC is non-authoritative. The ASC is effective for annual or
interim periods ending after September 15, 2009. The adoption of the
ASC did not have an impact on the Company’s consolidated financial position,
results of operations or cash flows.
Fair Value
Accounting
In
September 2006, the ASC guidance for fair value measurements and disclosure was
updated to define fair value, establish a framework for measuring fair
value, and expand disclosures about fair value measurements. This guidance does
not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
The provisions of the updated guidance were adopted October 1, 2008. In
February 2008, the FASB staff issued an update to the guidance which delayed the
effective date for nonfinancial assets and nonfinancial liabilities that
are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The adoption of guidance is not expected to have a
significant impact on the Company.
F2-32
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
16.
|
Differences
Between Canadian and U.S. Generally Accepted Accounting Principles
(continued)
|
|
(e)
|
Recently
Issued Accounting Pronouncements
(continued)
|
Fair Value
Accounting
(continued)
In
October 2008, the guidance was further updated to provide guidance on how the
fair value of a financial asset is to be determined when the market for that
financial asset is inactive. The guidance states that determining fair value in
an inactive market depends on the facts and circumstances, requires the use of
significant judgment and, in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. The guidance was effective upon
issuance. The adoption of guidance did not have a significant impact on the
Company
Fair Value
Option
In
February 2007, the ASC issued guidance that permits entities to choose to
measure many financial instruments and certain other items at fair value, with
the objective of improving financial reporting by mitigating volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. The guidance was
adopted October 1, 2008. The Company did not elect the Fair Value Option for any
of its financial assets or liabilities, and therefore, the adoption of the
guidance had no impact on the Company’s consolidated financial position, results
of operations or cash flows.
Accounting for the Useful
Life of Intangibles
In April
2008, the ASC updated guidance on the determination of the useful life of
intangible assets which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The guidance is effective for the
Company’s fiscal year beginning October 1, 2009 and will be applied
prospectively to intangible assets acquired after the effective
date. The Company does not expect the adoption of the guidance to
have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.
Business
Combinations
In
December 2007, the ASC guidance for business combinations was updated to provide
new guidance for recognizing and measuring identifiable assets and goodwill
acquired, liabilities assumed, and any non-controlling interest in the acquiree.
The updated guidance also provides disclosure requirements to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of the updated guidance is effective
for assets or liabilities arising from contingencies in business combinations
for which the acquisition date is on or after October 1, 2009. The Company will
apply the guidance to all future business combinations.
Equity Method
Investment
In
November 2008, the ASC updated guidance which clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. The intent of the changes is to provide guidance on (i) determining
the initial measurement of an equity method investment, (ii) recognizing
other-than-temporary impairments of an equity method investment and (iii)
accounting for an equity method investee’s issuance of shares. The updated
guidance will be effective for the Company’s fiscal year beginning October
1, 2009 and is not expected to have an impact on the Company’s consolidated
financial position or results of operations.
F2-33
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Consolidated Financial Statements
For
the Years Ended September 30, 2009 and 2008
(Expressed
in Canadian Dollars)
|
16.
|
Differences
Between Canadian and U.S. Generally Accepted Accounting Principles
(continued)
|
|
(e)
|
Recently
Issued Accounting Pronouncements
(continued)
|
Variable Interest
Entities
In June
2009, the ASC guidance for consolidation accounting was updated to require an
entity to perform a qualitative analysis to determine whether the
enterprise’s variable interest gives it a controlling financial interest in a
variable interest entity (“VIE”). This analysis identifies a primary beneficiary
of a VIE as the entity that has both of the following characteristics: i)
the power to direct the activities of a VIE that most significantly impact the
entity’s economic performance and ii) the obligation to absorb losses or
receive benefits from the entity that could potentially be significant to the
VIE. The updated guidance also requires ongoing reassessments of the
primary beneficiary of a VIE. The provisions of the updated guidance are
effective for the Company’s fiscal year beginning October 1, 2010. The
Company does not expect the adoption of this guidance to have an impact on
consolidated financial position, results of operations or cash
flows.
F2-34
|
Nayarit
Gold Inc.
|
|
(AN
EXPLORATION STAGE COMPANY)
|
|
INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
|
|
FOR
THE THREE MONTHS ENDED
|
|
DECEMBER
31, 2009 AND 2008
|
|
(UNAUDITED)
|
|
(Expressed
in Canadian Dollars)
|
F2-35
Nayarit
Gold Inc. (An Exploration Stage Company)
Interim
Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Unaudited)
(Expressed
in Canadian Dollars)
Table
of Contents
|
Managements’
Responsibility for Financial Reporting
|
F2-37
|
|
|
Interim
Consolidated Balance Sheets
|
F2-38
|
|
|
Interim
Consolidated Statements of Loss, Comprehensive Loss and
Deficit
|
F2-39
|
|
|
Interim
Consolidated Statements of Cash Flows
|
F2-40
|
|
|
Interim
Consolidated Statements of Changes in Shareholders’ Equity
|
F2-41
|
|
|
Notes
to the Unaudited Interim Consolidated Financial Statements
|
|
F2-42-F2-56
|
F2-36
February
17, 2010
Managements’
Responsibility for Financial Reporting
The
accompanying unaudited interim consolidated financial statements of Nayarit Gold
Inc. (the “Company”) are the responsibility of management and have been approved
by the Board of Directors. The unaudited interim consolidated financial
statements have been prepared by management in accordance with Canadian
generally accepted accounting principles. The unaudited interim consolidated
financial statements include some amounts and assumptions based on management’s
best estimates which have been derived with careful judgment.
In
fulfilling its responsibilities, management has developed and maintains a system
of internal accounting controls. These controls are designed to ensure that the
financial records are reliable for preparation of the financial statements. The
Audit Committee of the Board of Directors reviewed and approved the Company’s
unaudited interim consolidated financial statements, and recommended their
approval by the Board of Directors.
|
(signed) “Colin
Sutherland”
|
(signed) “Megan
Spidle”
|
|
President
& Chief Executive Officer
|
Chief
Financial Officer
|
F2-37
Nayarit
Gold Inc. (An Exploration Stage Company)
Interim
Consolidated Balance Sheets
(Unaudited)
(Expressed
in Canadian Dollars)
|
December 31,
|
September 30,
|
|||||||
|
2009
|
2009
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,416,250 | $ | 2,481,433 | ||||
|
Short-term
investments
|
7,620 | 8,614 | ||||||
|
Prepaids
and sundry receivables (Note 7)
|
43,475 | 53,618 | ||||||
| 1,467,345 | 2,543,665 | |||||||
|
Property,
plant and equipment (Note 5)
|
232,968 | 244,463 | ||||||
|
Exploration
property interests (Note 6)
|
23,363,902 | 22,408,137 | ||||||
| $ | 25,064,215 | $ | 25,196,265 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (Note 7)
|
$ | 422,684 | $ | 378,613 | ||||
|
Shareholders'
Equity
|
||||||||
|
Share
capital (Note 8)
|
26,434,868 | 26,272,181 | ||||||
|
Warrants
(Note 9)
|
5,523,289 | 5,325,976 | ||||||
|
Contributed
surplus (Note 10)
|
6,896,185 | 6,838,609 | ||||||
|
Deficit
|
(14,212,811 | ) | (13,619,114 | ) | ||||
| 24,641,531 | 24,817,652 | |||||||
| $ | 25,064,215 | $ | 25,196,265 | |||||
|
Going
Concern (Note 1)
|
||||||||
|
Commitments
and Contingencies (Note 11)
|
||||||||
|
Subsequent
Events (Note 14)
|
||||||||
|
Approved
on behalf of the Board:
|
||||||||
|
Signed
"R. Glen MacMullin" , Director
|
||||||||
|
Signed
"Donald Flemming", Director
|
||||||||
The
accompanying notes are an integral part of these unaudited interim consolidated
financial statements.
F2-38
Nayarit
Gold Inc. (An Exploration Stage Company)
Interim
Consolidated Statements of Loss, Comprehensive Loss and Deficit
(Unaudited)
(Expressed
in Canadian dollars)
|
For the three months ended December 31,
|
2009
|
2008
|
||||||
|
Operating
Expenses
|
||||||||
|
Management
and consulting fees
|
$ | 337,306 | $ | 229,804 | ||||
|
Travel
& entertainment
|
86,362 | 72,239 | ||||||
|
Investor
relations
|
48,831 | 100,083 | ||||||
|
Stock‑based
compensation (Note 8(c))
|
43,093 | 305,937 | ||||||
|
Professional
fees
|
23,328 | 33,741 | ||||||
|
Communications
|
15,122 | 16,648 | ||||||
|
Amortization
|
12,677 | 39,625 | ||||||
|
Insurance
expense
|
11,560 | 9,565 | ||||||
|
Occupancy
cost
|
9,900 | 8,565 | ||||||
|
Office
and general
|
7,874 | 12,480 | ||||||
|
Transfer
agent, listing and filing fees
|
4,506 | 6,143 | ||||||
|
Interest
and bank charges
|
1,290 | 2,036 | ||||||
|
Foreign
exchange loss (gain)
|
(5,621 | ) | (73,498 | ) | ||||
| 596,228 | 763,368 | |||||||
|
Loss
before the undernoted
|
(596,228 | ) | (763,368 | ) | ||||
|
Other
Income (Expense)
|
||||||||
|
Gain
on disposal of asset
|
- | 14,702 | ||||||
|
(Loss)
gain in market value of investments
|
(1,000 | ) | - | |||||
|
Interest
income
|
3,531 | 23,519 | ||||||
|
Net
Loss and Comprehensive Loss
|
$ | (593,697 | ) | $ | (725,147 | ) | ||
|
Deficit,
beginning
|
(13,619,114 | ) | (10,918,700 | ) | ||||
|
Deficit,
ending
|
$ | (14,212,811 | ) | $ | (11,643,847 | ) | ||
|
Loss
Per Share - basic and diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Weighted
Average Outstanding Shares
|
||||||||
|
‑ basic and
diluted
|
89,688,896 | 68,001,769 | ||||||
The
accompanying notes are an integral part of these unaudited interim consolidated
financial statements.
F2-39
Nayarit
Gold Inc. (An Exploration Stage Company)
Interim
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed
in Canadian dollars)
|
For the three months ended December
31,
|
2009
|
2008
|
||||||
|
Cash
(Used In) Provided By:
|
||||||||
|
Operating
Activities
|
||||||||
|
Net
loss for the period
|
$ | (593,697 | ) | $ | (725,147 | ) | ||
|
Items
not involving cash
|
||||||||
|
Stock-based
compensation
|
43,093 | 305,937 | ||||||
|
Amortization
|
12,677 | 39,625 | ||||||
|
Gain
on disposal of asset
|
- | (14,702 | ) | |||||
|
Loss
(gain) in market value of investments
|
1,000 | - | ||||||
|
Accrued
interest income
|
(6 | ) | (26 | ) | ||||
|
Change
in non‑cash
operating working capital
|
||||||||
|
Prepaids
and sundry receivables
|
10,143 | 213,326 | ||||||
|
Accounts
payable and accrued liabilities
|
(30,223 | ) | (138,628 | ) | ||||
| (557,013 | ) | (319,615 | ) | |||||
|
Investing
Activities
|
||||||||
|
Purchase
of property, plant and equipment
|
(1,182 | ) | (525 | ) | ||||
|
Exploration
property expenditures
|
(506,988 | ) | (3,459,011 | ) | ||||
| (508,170 | ) | (3,459,536 | ) | |||||
|
Change
in cash and cash equivalents
|
(1,065,183 | ) | (3,779,151 | ) | ||||
|
Cash
and cash equivalents, opening
|
$ | 2,481,433 | $ | 5,356,166 | ||||
|
Cash
and cash equivalents, closing
|
$ | 1,416,250 | $ | 1,577,015 | ||||
|
Cash
and cash equivalents consist of:
|
||||||||
|
Cash
on hand and balances with banks
|
$ | 298,761 | $ | 425,910 | ||||
|
Cashable
GICs
|
1,117,489 | 1,151,105 | ||||||
| $ | 1,416,250 | $ | 1,577,015 | |||||
Supplemental
Cash Flow Information (Note 12)
The
accompanying notes form an integral part of these unaudited interim consolidated
financial statements.
F2-40
Nayarit
Gold Inc. (An Exploration Stage Company)
Interim
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(Expressed
in Canadian dollars)
|
Common Shares
|
Contributed
|
Accumulated
|
||||||||||||||||||||||
|
Number
|
Amount
|
Warrants
|
Surplus
|
Deficit
|
Total
|
|||||||||||||||||||
|
Balance,
September 30, 2008
|
67,870,262 | $ | 18,969,087 | $ | 3,283,451 | $ | 5,783,716 | $ | (10,918,700 | ) | $ | 17,117,554 | ||||||||||||
|
Private
placements
|
20,000,000 | 10,000,000 | - | - | - | 10,000,000 | ||||||||||||||||||
|
Warrant
valuation
|
- | (1,789,000 | ) | 1,789,000 | - | - | - | |||||||||||||||||
|
Finders'
fees
|
- | - | 622,000 | - | - | 622,000 | ||||||||||||||||||
|
Cost
of issue
|
- | (1,677,722 | ) | (368,475 | ) | - | - | (2,046,197 | ) | |||||||||||||||
|
Shares
issued for
|
||||||||||||||||||||||||
|
acquisition
of property
|
1,500,000 | 675,000 | - | - | - | 675,000 | ||||||||||||||||||
|
Stock-based
compensation
|
- | - | - | 535,008 | - | 535,008 | ||||||||||||||||||
|
Stock-based
compensation recorded as
|
||||||||||||||||||||||||
|
share
and warrant issue costs
|
- | - | - | 420,000 | - | 420,000 | ||||||||||||||||||
|
Stock-based
compensation recorded as
|
||||||||||||||||||||||||
|
exploration
property interests
|
- | - | - | 126,423 | - | 126,423 | ||||||||||||||||||
|
Exercise
of stock options
|
139,286 | 94,816 | - | (26,538 | ) | - | 68,278 | |||||||||||||||||
|
Net
loss for the period
|
- | - | - | - | (2,700,414 | ) | (2,700,414 | ) | ||||||||||||||||
|
Balance,
September 30, 2009
|
89,509,548 | $ | 26,272,181 | $ | 5,325,976 | $ | 6,838,609 | $ | (13,619,114 | ) | $ | 24,817,652 | ||||||||||||
|
Warrant
valuation
|
- | (197,313 | ) | 197,313 | - | - | - | |||||||||||||||||
|
Shares
issued for
|
||||||||||||||||||||||||
|
acquisition
of property
|
750,000 | 360,000 | - | - | - | 360,000 | ||||||||||||||||||
|
Stock-based
compensation
|
- | - | - | 43,093 | - | 43,093 | ||||||||||||||||||
|
Stock-based
compensation recorded as
|
||||||||||||||||||||||||
|
exploration
property interests
|
- | - | - | 14,483 | - | 14,483 | ||||||||||||||||||
|
Net
loss for the period
|
- | - | - | - | (593,697 | ) | (593,697 | ) | ||||||||||||||||
|
Balance,
December 31, 2009
|
90,259,548 | $ | 26,434,868 | $ | 5,523,289 | $ | 6,896,185 | $ | (14,212,811 | ) | $ | 24,641,531 | ||||||||||||
The
accompanying notes form an integral part of these unaudited interim consolidated
financial statements.
F2-41
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
1.
|
Nature
of Business and Going Concern
|
Nature of
Business
Nayarit
Gold Inc. (the "Company" or "Nayarit") is a Canadian mineral exploration company
engaged in locating, acquiring and exploring for gold, silver and base metals
primarily in Mexico and has not yet determined whether its exploration property
interests contain mineral reserves that are economically recoverable. The
Company's continuing operations and the underlying value and recoverability of
the amounts shown for exploration property interests are dependent upon the
existence of economically recoverable mineral reserves, the ability of the
Company to obtain the necessary financing to complete the exploration and
development of its exploration property interests, and on future profitable
production or proceeds from the disposition of the exploration property
interests. The Company was incorporated pursuant to the laws of
Ontario on November 27, 2003. To date, the Company has not earned any revenue
and is considered to be in the development stage as defined by the Canadian
Institute of Chartered Accountants (“CICA”) Accounting Guideline 11 "Enterprises
in the Development Stage".
The
Company's operations comprise a single reporting operating segment engaged in
mineral exploration in Mexico (2008 – same). As the operations comprise a single
reporting segment, amounts disclosed in the consolidated statements of loss for
the period also represent segment amounts. At December 31, 2009 (2008
– same), all of the Company's mineral properties are located in Mexico and
substantially all cash is on deposit with Canadian chartered banks.
All of
the Company’s mining assets are located outside of Canada and are subject to the
risk of foreign investments, including increase in taxes and royalties,
renegotiation of contracts, currency exchange fluctuations and political
uncertainty.
Although
the Company has taken steps to verify title to the properties on which it is
conducting exploration and in which it has an interest, in accordance with
industry standards for the current stage of exploration of such properties,
these procedures do not guarantee the Company’s title. Property title
may be subject to unregistered prior agreements and non-compliance with
regulatory requirements.
Going
Concern
These
unaudited interim consolidated financial statements have been prepared using
Canadian generally accepted accounting principles (“Canadian GAAP”) applicable
to a going concern, which assumes continuity of operations and realization of
assets and settlement of liabilities and commitments in the normal course of
business. In assessing whether the going concern assumption is appropriate,
management takes into account all available information about the future, which
is at least, but is not limited to, twelve months from the end of the reporting
period. Management is aware, in making its assessment, of material uncertainties
related to events or conditions that may cast significant doubt upon the
entity’s ability to continue as a going concern, as described in the following
paragraph. These unaudited interim consolidated financial statements do not
reflect the adjustments to the carrying values of assets and liabilities and the
reported expenses and balance sheet classifications that would be necessary were
the going concern assumption inappropriate. These adjustments could be
material.
F2-42
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
1.
|
Nature
of Business and Going Concern
(continued)
|
The
Company is in the exploration stage and is subject to the risks and challenges
similar to other companies in a comparable stage of exploration. These risks
include, but are not limited to, dependence on key individuals, successful
exploration results and the ability to secure adequate financing to meet
the minimum capital required to successfully complete the project and continue
as a going concern. As at December 31, 2009, the Company had positive
working capital of approximately $1.04 million, including cash and cash
equivalents of approximately $1.4 million; however, management estimates that
these funds will not be sufficient to meet the Company's obligations and
budgeted expenditures through December 31, 2010. Any funding shortfall may
be met in the future in a number of ways including, but not limited to, the sale
of equity or debt securities, further expenditure reductions, renegotiation of
the amount and timing of exploration property payments, the introduction of
joint venture partners, and/or a business combination (see Note 14). There is,
however, no assurance that these sources of funding or initiatives will be
available to the Company, or that they will be available on terms which are
acceptable to the Company.
|
2.
|
Summary
of Significant Accounting Policies
|
The
unaudited interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles for interim
financial statements. Accordingly, they do not include all of the information
and notes to the consolidated financial statements required by Canadian
generally accepted accounting principles for annual consolidated financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the three
months ended December 31, 2009 may not necessarily be indicative of the results
that may be expected for the year ending September 30, 2010.
The
consolidated balance sheet at September 30, 2009 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by Canadian generally accepted
accounting principles for complete consolidated financial statements. The
unaudited interim consolidated financial statements have been prepared by
management in accordance with the accounting policies described in the Company's
annual audited consolidated financial statements for the year ended September
30, 2009. For further information, refer to the audited consolidated financial
statements and notes thereto for the year ended September 30, 2009.
|
(a)
|
Recently
Adopted Accounting Policies
|
Financial
Instruments
In June
2009, the AcSB issued amendments to Section 3862, “Financial Instruments –
Disclosures”, to require enhanced disclosures about the relative reliability of
the data, or “inputs”, that an entity uses in measuring the fair values of its
financial instruments. The new requirements are effective for annual financial
statements for fiscal years ending after September 30, 2009. The additional
disclosures will be included in the Company’s annual financial statements for
the year ending September 30, 2010.
F2-43
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
2.
|
Summary
of Significant Accounting Policies
|
|
(b)
|
Future
Accounting Changes
|
Business Combinations,
Consolidated Financial Statements and Non-controlling
Interests
In
January 2009, the CICA issued Section 1582, “Business Combinations”, Section
1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling
Interests” which replace Section 1581, “Business Combinations” and Section 1600,
“Consolidated Financial Statements". Section 1582 establishes standards
for the accounting for business combinations that is equivalent to the business
combination accounting standard under International Financial Reporting
Standards (“IFRS”). Section 1582 is applicable for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. Early adoption of this
section is permitted. Section 1601 together with Section 1602 establishes
standards for the preparation of consolidated financial statements. Section 1601
is applicable for the Company’s interim and annual consolidated financial
statements for fiscal years beginning on or after January 1, 2011. Early
adoption of this section is permitted. If the Company chooses to early adopt any
one of these sections, the other two sections must also be adopted at the same
time.
International Financial
Reporting Standards (“IFRS”)
In 2006,
the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan
that will significantly affect financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of
Canadian GAAP with IFRS over an expected five year transitional
period. In February 2008, the AcSB announced that the changeover date
for publicly-listed companies to use IFRS, replacing Canada’s own GAAP is for
interim and annual financial statements relating to the fiscal year beginning on
or after January 1, 2011. Accordingly, the Company will begin
reporting under IFRS for its interim and annual periods for the year ended
September 30, 2012. The Company’s transition date will be October 1,
2010, which will require restatement for comparative purposes of amounts
reported by the Company for the year ended September 30, 2011. While
the Company has begun assessing the adoption of IFRS, the financial reporting
impact of the transition to IFRS cannot be reasonably estimated at this
time.
|
3.
|
Capital
Management
|
The
Company considers the items included in consolidated Shareholders’ Equity as
capital. Accordingly, the capital of the Company is $24.6 million and
$24.8 million as at December 31, 2009 and September 30, 2009,
respectively. The Company manages its capital structure and makes
adjustments to it, based on the funds available to the Company, in order to
support the acquisition, exploration and development of mineral properties. The
Board of Directors does not establish quantitative return on capital criteria
for management, but rather relies on the expertise of the Company's management
to sustain future development of the business.
The
properties in which the Company currently has an interest are in the exploration
stage; as such the Company is dependent on external financing to fund its
activities. In order to carry out the planned exploration and pay for
administrative costs, the Company will spend its existing working capital and
raise additional amounts as needed. The Company will continue to assess new
properties and seek to acquire an interest in additional properties if it feels
there is sufficient geologic or economic potential and if it has adequate
financial resources to do so.
Management
reviews its capital management approach on an ongoing basis and believes that
this approach, given the relative size of the Company, is
reasonable.
There
were no changes in the Company's approach to capital management during the
period ended December 31, 2009. Neither the Company nor its subsidiary is
subject to externally imposed capital requirements.
F2-44
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
4.
|
Financial
Risk Factors
|
The
Company's risk exposures and the impact on the Company's unaudited interim
consolidated financial instruments are summarized below:
Credit
Risk
The
Company's credit risk is primarily attributable to short-term investments and
receivables. The Company has no significant concentration of credit risk arising
from operations. Short-term investments consist of guaranteed investment
certificates, which have been invested with reputable financial institutions,
from which management believes the risk of loss to be remote. Management
believes that the credit risk concentration with respect to financial
instruments in these areas is remote.
Liquidity
Risk
The
Company's approach to managing liquidity risk is to ensure that it will have
sufficient liquidity to meet liabilities when due. As at December 31, 2009, the
Company had a cash and cash equivalents balance of $1,416,250 (September 30,
2009 - $2,481,433) to settle current liabilities of $422,684 (September 30, 2009
- $378,613). All of the Company's accounts payable and accrued
liabilities have contractual maturities of less than 30 days and are subject to
normal trade terms.
Market
Risk
|
(a)
|
Interest
Rate Risk
|
The
Company has cash and cash equivalents. The Company's current policy is to invest
excess cash in investment grade short-term deposit certificates issued by its
banking institutions. The Company periodically monitors the investments it makes
and is satisfied with the credit ratings of its banks.
|
(b)
|
Foreign
Currency Risk
|
The
Company's functional currency is the Canadian dollar and major purchases are
transacted in Canadian dollars. The Company funds certain operations,
exploration and administrative expenses in Mexican Pesos (MXN) or US Dollars
(USD) on a cash call basis using MXN or USD currencies converted from its
Canadian dollar bank accounts held in Canada. Financial instruments included in
exploration property interests consist of estimated IVA amounts recoverable
which are recoverable in Mexican Pesos. The estimated IVA amounts
recoverable balance was $1,089,973CAD ($13,519,893MXN) and $1,043,579CAD
($13,005,720 MXN) as at December 31, 2009 and September 30, 2009,
respectively. Management believes the foreign exchange risk derived
from currency conversions is insignificant and therefore does not hedge its
foreign exchange risk.
F2-45
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
4.
|
Financial
Risk Factors (continued)
|
Market Risk
(continued)
|
(c)
|
Price
Risk
|
The
Company is exposed to price risk with respect to commodity prices. The Company
closely monitors commodity prices to determine the appropriate course of action
to be taken by the Company.
|
(d)
|
Property
Risk
|
See Note 1.
Sensitivity
Analysis
The
Company has designated its cash and cash equivalents and short term investments
as held-for-trading, and measured them at fair value. Financial instruments
included in prepaids and sundry receivables are classified as loans and
receivables, which are measured at amortized cost. Accounts payable and accrued
liabilities are classified as other financial liabilities, which are measured at
amortized cost.
As at
December 31, 2009, the carrying and fair value amounts of the Company's
financial instruments are approximately the same. Based on
management's knowledge and experience of the financial markets, the Company
believes movements in interest rates, foreign exchange, and commodity prices are
reasonably possible over a three month period.
Short
term investments include deposits at call which are at variable rates.
Sensitivity to a plus or minus 1% change in rates would affect net loss by
$nil.
The
Company has IVA amounts recoverable in Mexican Pesos that give rise to exposure
to foreign exchange risk. The impact of a 10% increase in the Mexican
Peso relative to the Canadian Dollar is an increase in the consolidated net loss
and other comprehensive loss of $99,000CAD. The impact of a 10%
decrease in the Mexican Peso relative to the Canadian Dollar is a decrease in
the consolidated net loss and other comprehensive loss of
$121,000CAD.
Price
risk is remote at this time since the Company is not a producing
entity.
|
5.
|
Property,
Plant and Equipment
|
|
December 31, 2009
|
||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Computer
equipment
|
44,544 | 20,728 | 23,816 | |||||||||
|
Furniture
and equipment
|
15,000 | 6,360 | 8,640 | |||||||||
|
Software
|
136,127 | 120,660 | 15,467 | |||||||||
|
Vehicle
|
68,800 | 30,934 | 37,866 | |||||||||
|
Leasehold
improvements
|
34,448 | 13,891 | 20,557 | |||||||||
|
Building
|
99,860 | 13,878 | 85,982 | |||||||||
|
Land
|
40,640 | - | 40,640 | |||||||||
| 439,419 | 206,451 | 232,968 | ||||||||||
F2-46
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
5.
|
Property,
Plant and Equipment (continued)
|
|
September 30, 2009
|
||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Computer
equipment
|
43,362 | 19,215 | 24,147 | |||||||||
|
Furniture
and equipment
|
15,000 | 6,360 | 8,640 | |||||||||
|
Software
|
136,127 | 115,157 | 20,970 | |||||||||
|
Vehicle
|
68,800 | 27,864 | 40,936 | |||||||||
|
Leasehold
improvements
|
34,448 | 12,169 | 22,279 | |||||||||
|
Building
|
99,860 | 13,009 | 86,851 | |||||||||
|
Land
|
40,640 | - | 40,640 | |||||||||
| 438,237 | 193,774 | 244,463 | ||||||||||
|
6.
|
Exploration
Property Interests
|
|
December 31, 2009
|
||||||||||||||||
|
Orion
|
IVA
|
Advances
|
Total
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Beginning
balance
|
21,312,940 | 1,043,579 | 51,618 | 22,408,137 | ||||||||||||
|
Additions
during the year
|
||||||||||||||||
|
Acquisition
costs
|
540,458 | - | - | 540,458 | ||||||||||||
|
Assays
and analysis
|
- | - | - | - | ||||||||||||
|
Environmental
|
52,465 | 52,465 | ||||||||||||||
|
Drilling
|
- | - | - | - | ||||||||||||
|
Exploration
support
|
18,811 | - | - | 18,811 | ||||||||||||
|
Field
supplies & equipment
|
- | - | - | - | ||||||||||||
|
Geological
|
87,066 | - | - | 87,066 | ||||||||||||
|
Mapping
& surveying
|
- | - | ||||||||||||||
|
Metallurgical
|
73,182 | 73,182 | ||||||||||||||
|
Mining
duties, permits and fees
|
596 | - | - | 596 | ||||||||||||
|
Transportation
|
9,264 | - | - | 9,264 | ||||||||||||
|
Wages
and consulting fees
|
118,623 | - | - | 118,623 | ||||||||||||
| 900,465 | - | - | 900,465 | |||||||||||||
|
Collected
during the period
|
- | - | - | - | ||||||||||||
|
Increase
during the period
|
- | 46,154 | 9,146 | 55,300 | ||||||||||||
|
Ending
balance
|
22,213,405 | 1,089,733 | 60,764 | 23,363,902 | ||||||||||||
F2-47
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
6.
|
Exploration
Property Interests (continued)
|
|
September 30, 2009
|
||||||||||||||||
|
Orion
|
IVA
|
Advances
|
Total
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Beginning
balance
|
11,110,355 | 944,527 | 63,914 | 12,118,796 | ||||||||||||
|
Additions
during the year
|
||||||||||||||||
|
Acquisition
costs
|
1,964,012 | - | - | 1,964,012 | ||||||||||||
|
Assays
and analysis
|
863,120 | - | - | 863,120 | ||||||||||||
|
Environmental
|
50,943 | - | - | 50,943 | ||||||||||||
|
Drilling
|
4,956,907 | - | - | 4,956,907 | ||||||||||||
|
Exploration
support
|
430,006 | - | - | 430,006 | ||||||||||||
|
Field
supplies & equipment
|
114,328 | - | - | 114,328 | ||||||||||||
|
Geological
|
242,983 | - | - | 242,983 | ||||||||||||
|
Mapping
& surveying
|
11,144 | - | - | 11,144 | ||||||||||||
|
Metallurgical
|
46,499 | - | - | 46,499 | ||||||||||||
|
Mining
duties, permits and fees
|
213,506 | - | - | 213,506 | ||||||||||||
|
Transportation
|
93,843 | - | - | 93,843 | ||||||||||||
|
Wages
and consulting fees
|
1,215,294 | - | - | 1,215,294 | ||||||||||||
| 10,202,585 | - | - | 10,202,585 | |||||||||||||
|
Collected
during the year
|
- | (1,009,585 | ) | (12,296 | ) | (1,021,881 | ) | |||||||||
|
Increase
during the year
|
- | 1,108,637 | - | 1,108,637 | ||||||||||||
|
Ending
balance
|
21,312,940 | 1,043,579 | 51,618 | 22,408,137 | ||||||||||||
Orion
The Orion
Gold Project consists of several mineral concessions containing a total area of
approximately 105,000 hectares located in the state of Nayarit, on the Pacific
coast of the Republic of Mexico.
The El
Magnifico concession, which formed part of the Company’s initial land holdings,
was staked for the Company and is not subject to any royalty or other
agreements. The Bonanza I, Reese, Gross and El Dorado concessions, staked at
various times since September, 2005 by the Company, are likewise not subject to
any royalty or other agreements.
The
following concessions are subject to a royalty or option agreement:
|
(a)
|
Orion
|
The Orion
concession is made up of one concession comprising approximately 528 hectares.
The Orion concession is subject to a 3.5% net smelter royalty, which may be
purchased at any time for $250,000 and a 10% net profits interest.
F2-48
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
6.
|
Exploration
Property Interests (continued)
|
|
(b)
|
La
Estrella
|
Pursuant
to an option agreement dated November 28, 2003, the Company can acquire a 100%
interest in the La Estrella concession. The La Estrella concession is
made up of one claim comprising approximately 146
hectares. Consideration for the acquisition of the concessions is as
follows:
|
|
§
|
Aggregate
payments of USD$1,450,000 (CAD$1,527,984) over six years with an initial
payment of USD$25,000 (CAD$24,870) (paid) and payments in year one -
USD$50,000 (CAD$49,740) (paid); year two - USD$75,000 (CAD$74,610) (paid);
year three - USD$100,000 (CAD$134,628) (paid); year four - USD$100,000
(CAD$102,072) (paid); year five - US$100,000 (CDN$115,420) (paid); year
six - US$1,000,000 (CDN$1,049,390).
|
|
|
§
|
On
December 8, 2009, the Company renegotiated the property payments on the La
Estrella concession. The original agreement provided for a
USD$1,000,000 (CAD$1,049,390) payment to be made on November 28, 2009;
however, the Company has restructured the payment as follows: December 8,
2009 USD$75,000 (CAD$79,240) (paid), June 8, 2010 USD$25,000 (CAD
$26,235), December 8, 2010 USD$100,000 (CAD$104,939), June 8, 2011
USD$100,000 (CAD$104,939), December 8, 2011 USD$175,000 (CAD$183,643),
June 8, 2012 USD$175,000 (CAD$183,643) and December 8, 2012 USD$350,000
(CAD$367,286).
|
|
(c)
|
San
Juan, San Francisco, San Miguel and Isis (collectively known as Huajicari
concessions)
|
On July
25, 2008, the Company entered into a definitive option agreement with Compania
Minera Huajicari, S.A. de D.V. (“Compania Minera Huajicari”) to acquire six
additional mining concessions totaling 2,730 hectares in the Orion Silver-Gold
Mining District in the State of Nayarit, Mexico. Consideration for
the acquisition of the concessions is as follows:
|
|
§
|
Aggregate
payments of USD$2,500,000 (CAD$2,588,130) with an initial payment of
USD$500,000 (CAD$511,650) (paid), and payments six months from closing -
USD$500,000 (CAD$601,900) (paid), twelve months from closing - USD$500,000
(CAD$567,408) (paid), eighteen months from closing - USD$500,000
(CAD$524,695) and twenty-four months from closing - USD$500,000
(CAD$524,695).
|
|
|
§
|
One
December 10, 2009, the Company renegotiated the property payments on the
Huajicari concession. The original agreement provided for a
USD$500,000 payment to be made on November 8, 2009; however, the Company
has restructured the payment as follows: January 31, 2010 USD$250,000
(CAD$262,348) and April 30, 2010 USD$250,000
(CAD$262,348).
|
|
|
§
|
3,500,000
common shares of Nayarit Gold Inc., of which 500,000 was due upon closing
(issued), 750,000 was due six months from closing (issued), 750,000 was
due twelve months from closing (issued), 750,000 are due eighteen months
from closing (issued), and 750,000 are due twenty-four months from
closing.
|
|
|
§
|
Compania
Minera Hujicari has the option to acquire an additional 500,000 common
shares of the Company by foregoing and in lieu of receiving the
USD$500,000 (CAD$524,695) payment due by May 8,
2010.
|
|
|
§
|
The
Company commits to exploration expenditures of USD$3,000,000
(CAD$3,148,170) over the first two years on the acquired
concessions.
|
|
|
§
|
3%
Net Smelter Royalty (“NSR”) on production from the acquired concessions,
however, the Company has the option to purchase the NSR for US$3,000,000
(CAD$3,148,170).
|
F2-49
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
6.
|
Exploration
Property Interests (continued)
|
|
(c)
|
San
Juan, San Francisco, San Miguel and Isis (collectively known as Huajicari
concessions) (continued)
|
|
|
§
|
The
Company may early terminate the agreement without further responsibility
upon payment of 20% of the total remaining cash payments at the time of
termination.
|
|
7.
|
Related
Party Transactions
|
|
(a)
|
During
the three months ended December 31, 2009, the Company paid or accrued
$39,674 (2008 - $45,828) consulting fees to an officer of the
Company. The fees were recorded as exploration property
interests. In addition, for the three months ended December 31,
2009, the Company recorded $14,483 of stock based compensation cost as
exploration property
interests.
|
|
(b)
|
Included
in accounts payable and accrued liabilities at December 31, 2009 is
$14,991 (September 30, 2009 - $16,586) owing to one officer of the
Company for management fees and expenses incurred on behalf of the
Company. These amounts are unsecured, non-interest bearing with
no fixed terms of repayment.
|
|
(c)
|
Included
in prepaids and sundry receivables at December 31, 2009 is $885 (September
30, 2009 - $885) as an advance for travel costs to an officer of the
Company.
|
The above
related party transactions occurred in the normal course of operations and were
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
|
8.
|
Share
Capital
|
|
(a)
|
Authorized
|
Unlimited
number of common shares
|
|
(b)
|
Issued
|
|
Number
|
Amount
|
|||||||
|
#
|
$
|
|||||||
|
Balance
at September 30, 2008
|
67,870,262 | 18,969,087 | ||||||
|
Private
placement at $0.50 per share (i)
|
20,000,000 | 10,000,000 | ||||||
|
Warrant
valuation (i)
|
- | (1,789,000 | ) | |||||
|
Exercise
of stock options
|
139,286 | 94,816 | ||||||
|
Issue
of shares for acquisition of property (Note 6 (c))
|
1,500,000 | 675,000 | ||||||
|
Share
issue costs (i)
|
- | (1,677,722 | ) | |||||
|
Balance
at September 30, 2009
|
89,509,548 | 26,272,181 | ||||||
|
Warrant
valuation (ii)
|
- | (197,313 | ) | |||||
|
Issue
of shares for acquisition of property (Note 6 (c))
|
750,000 | 360,000 | ||||||
|
Balance
at December 31, 2009
|
90,398,834 | 26,434,868 | ||||||
F2-50
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
8.
|
Share
Capital (continued)
|
|
|
(b)
|
Issued
(continued)
|
|
(i)
|
On
March 24, 2009, the Company completed a brokered private placement
consisting of 20,000,000 units (the “Units”) in the Company at a price of
$0.50 per Unit for gross proceeds of $10,000,000. Each Unit is comprised
of one common share and one-half of one common share purchase warrant.
Each warrant entitles the holder to purchase one additional common share
(“Warrant Share”) of the Company at an exercise price of $0.65 per Warrant
Share at any time within two years from the date of closing. Jennings
Capital Inc. and BMO Capital Markets acted as co-lead agents in an
investment dealer syndicate which included Wolverton Securities
Inc.
|
The
agents were paid a cash commission of $700,000 and were issued a total of
1,400,000 warrants (the “Broker Warrants”). Each Broker Warrant is exercisable
for one Unit at $0.50 per Unit at any time within 24 months of
closing. The fair value of the Broker Warrants issued was determined
to be $0.44 per warrant or $622,000 in the aggregate using the Black-Scholes
option pricing model and was charged to share issue costs. The
following weighted average assumptions were used: risk-free interest rate of
1.07%, expected dividend yield of 0%, expected stock volatility of 84% and an
expected life of 2 years.
Other
consultants were issued a total of 1,000,000 stock options related to the
successful completion of the financing. The fair value of the stock
options issued was determined to be $0.42 per stock options or $420,000 in the
aggregate using the Black-Scholes option pricing model and was charged to share
issue costs. The following weighted average assumptions were used:
risk-free interest rate of 2.535%, expected dividend yield of 0%, expected stock
volatility of 84% and an expected life of 5 years. Other share
issue costs totaled $305,084. Issue costs of $368,475 were allocated
to warrants.
The fair
value of the private placement warrants issued was determined to be $0.18 per
warrant or $1,789,000 in the aggregate using the Black-Scholes option pricing
model. The following weighted average assumptions were used:
risk-free interest rate of 1.07%, expected dividend yield of 0%, expected stock
volatility of 84% and an expected life of 2 years.
|
(ii)
|
On
December 31, 2009, the Company obtained approval to extend the term of
5,682,500 common share purchase warrants that were issued by the Company
as part of the January 11, 2008 private placement. The term of
these warrants was extended by six months; accordingly, the new expiry
date is now July 11, 2010. The amended fair value of
the warrants has been estimated using the Black-Scholes option pricing
model using the following assumptions: risk-free interest rate of 0.5%;
expected life of 0.53 years; expected volatility of 62%, and expected
dividend yield of 0%. The additional estimated fair value of
$197,313 was allocated to the
warrants.
|
F2-51
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
(c)
|
Stock
Options
|
The
Company has a stock option plan (the “Plan”) providing the Board of Directors
with the discretion to issue stock options to its directors, officers and
certain consultants of the Company. Previously, the aggregate number
of shares of the Company which could be issued and sold under the Plan should
not exceed 9,775,000. At the annual general meeting of the
shareholders in March 2009, an amendment to the Plan was approved whereby the
aggregate number of shares of the Company which may be issued and sold under the
Plan was increased to 11,300,000. Stock options are granted with an
exercise price determined by the Board of Directors. Options
shall not be granted for a term exceeding five years. Options vest
over a period of at least 18 months and must be released in equal stages on a
quarterly basis and options issued to Investor Relations Consultants must vest
in stages of not less than twelve months with no more than one-quarter of the
options vesting in any three month period.
The
following is a summary of stock option activity for the three months ended
December 31, 2009 and the year ended September 30, 2009:
|
Three Months Ended
|
Year Ended
|
|||||||||||||||
|
December 31, 2009
|
September 30, 2009
|
|||||||||||||||
|
Number of
Options
|
Weighted
Average
Exercise Price
|
Number of
Options
|
Weighted
Average
Exercise Price
|
|||||||||||||
|
#
|
$
|
#
|
$
|
|||||||||||||
|
Beginning
Balance
|
9,089,286 | 0.65 | 7,795,000 | 0.65 | ||||||||||||
|
Granted
|
- | - | 1,978,572 | 0.58 | ||||||||||||
|
Forfeited
|
- | - | (545,000 | ) | 0.51 | |||||||||||
|
Exercised
|
- | - | (139,286 | ) | 0.48 | |||||||||||
|
Ending
Balance
|
9,089,286 | 0.65 | 9,089,286 | 0.65 | ||||||||||||
The
estimated fair value of options has been estimated at the grant date using the
Black-Scholes option pricing model. The weighted average assumptions
used in the pricing model to assign value to the options granted during the
period are as follows:
|
Three Months Ended
|
Year Ended
|
|||||
|
December 31, 2009
|
September 30, 2009
|
|||||
|
Risk
free interest rate
|
nil
|
2.17 | % | |||
|
Expected
life
|
nil
|
4.3
years
|
||||
|
Expected
volatility
|
nil
|
86 | % | |||
|
Expected
dividend yield
|
nil
|
- | ||||
F2-52
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
8.
|
Share
Capital (continued)
|
|
(c)
|
Stock
Options (continued)
|
The
weighted average fair value of options granted whose exercise price at grant
date was greater than the market price on the grant date during the three months
ended December 31, 2009 is nil (year ended September 30, 2009 –
$0.26). The weighted average fair value of options granted whose exercise
price at grant date was less than the market price on the grant date during the
year ended December 31, 2009 is nil (year ended September 30, 2009 –
$0.39).
As at
December 31, 2009, the Company has outstanding stock options entitling the
holders to acquire common shares as follows:
|
Weighted Average
Exercise Price
|
Number
Outstanding
|
Number
Exercisable
|
Weighted Average
Remaining
Contractual Life
|
|||||||||
|
$
|
#
|
#
|
Years
|
|||||||||
|
0.35
|
1,900,000 | 1,900,000 |
0.4
|
|||||||||
|
0.75
|
89,286 | 89,286 |
0.6
|
|||||||||
|
1.30
|
700,000 | 700,000 |
1.3
|
|||||||||
|
1.33
|
75,000 | 75,000 |
1.3
|
|||||||||
|
0.98
|
1,550,000 | 1,550,000 |
2.4
|
|||||||||
|
0.90
|
50,000 | 50,000 |
2.4
|
|||||||||
|
0.90
|
50,000 | 50,000 |
2.6
|
|||||||||
|
0.80
|
100,000 | 100,000 |
2.6
|
|||||||||
|
0.60
|
10,000 | 10,000 |
2.7
|
|||||||||
|
0.44
|
140,000 | 140,000 |
2.9
|
|||||||||
|
0.49
|
100,000 | 100,000 |
3.0
|
|||||||||
|
0.50
|
2,315,000 | 2,315,000 |
3.3
|
|||||||||
|
0.50
|
100,000 | 100,000 |
3.3
|
|||||||||
|
0.68
|
360,000 | 192,000 |
3.7
|
|||||||||
|
0.70
|
500,000 | 187,500 |
4.1
|
|||||||||
|
0.50
|
50,000 | 50,000 |
4.1
|
|||||||||
|
0.55
|
1,000,000 | 333,333 |
4.3
|
|||||||||
|
0.65
|
9,089,286 | 7,942,119 |
2.5
|
|||||||||
As at
December 31, 2009, 2,210,714 options remained available for future grants
under the plan. Options vested and exercisable at December 31, 2009
totaled 7,942,119 at an average exercise price of $0.66 per
share.
F2-53
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
9.
|
Warrants
|
The
following is a summary of warrant activity for the three months ended December
31, 2009 and the year ended September 30, 2009:
|
Three Months Ended
|
Year Ended
|
|||||||||||||||||||||||
|
December 31, 2009
|
September 30, 2009
|
|||||||||||||||||||||||
|
Number
|
Amount
|
Weighted
Average
Exercise Price
|
Number
|
Amount
|
Weighted
Average
Exercise Price
|
|||||||||||||||||||
|
#
|
$
|
$
|
#
|
$
|
$
|
|||||||||||||||||||
|
Beginning
Balance
|
36,038,800 | 5,325,976 | 0.70 | 24,638,800 | 3,283,451 | 0.73 | ||||||||||||||||||
|
Granted
|
- | - | - | 11,400,000 | 2,411,000 | 0.63 | ||||||||||||||||||
|
Cost
of issue
|
- | - | - | - | (368,475 | ) | - | |||||||||||||||||
|
Extended
|
- | 197,313 | - | - | - | - | ||||||||||||||||||
|
Exercised
|
- | - | - | - | - | - | ||||||||||||||||||
|
Expired
|
- | - | - | - | - | - | ||||||||||||||||||
|
Ending
Balance
|
36,038,800 | 5,523,289 | 0.70 | 36,038,800 | 5,325,976 | 0.70 | ||||||||||||||||||
The
following warrants are outstanding as at December 31, 2009:
|
Number of
warrants
|
Value
|
Exercise Price
|
Expiry Date
|
||||||
|
#
|
$
|
$
|
|||||||
|
5,664,800
|
836,346 | 0.70 |
January
11, 2010
|
||||||
|
17,900,000
|
2,685,000 | 0.75 |
July
25, 2010
|
||||||
|
1,074,000
|
311,460 | 0.56 |
July
25, 2010 (1)
|
||||||
|
10,000,000
|
1,789,000 | 0.65 |
March
24, 2011
|
||||||
|
1,400,000
|
622,000 | 0.50 |
March
24, 2011 (2)
|
||||||
|
36,038,800
|
6,243,806 | ||||||||
|
(1)
|
Approval
for the extension of the warrants was obtained on December 31,
2009. See Note
8(b)(ii).
|
|
(2)
|
Each
whole warrant entitles the holder to acquire one unit comprised of one
common share and one warrant to acquire one additional common share
for $0.75 for a period of two
years.
|
|
(3)
|
Each
whole warrant entitles the holder to acquire one unit comprised of one
common share and one warrant to acquire one additional common share
for $0.65 for a period of two
years.
|
|
10.
|
Contributed
Surplus
|
|
Three Months Ended
|
Year ended
|
|||||||
|
December 31, 2009
|
September 30, 2009
|
|||||||
|
$
|
$
|
|||||||
|
Beginning
Balance
|
6,838,609 | 5,783,716 | ||||||
|
Stock-based
compensation expense
|
43,093 | 535,008 | ||||||
|
Stock-based
compensation recorded as share and warrant issue
costs
|
- | 420,000 | ||||||
|
Stock-based
compensation recorded as exploration property
interests
|
14,483 | 126,423 | ||||||
|
Exercise
of stock options
|
- | (26,538 | ) | |||||
|
Expiration
of warrants
|
- | - | ||||||
|
Ending
Balance
|
6,896,185 | 6,838,609 | ||||||
F2-54
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
11.
|
Commitments
and Contingencies
|
On
October 1, 2007, the Company entered into a lease for office space for a term of
five years ending September 30, 2012. Minimum lease commitments for
successive fiscal years ending September 30 are approximated as
follows:
|
$
|
||||
|
2010
|
17,205 | |||
|
2011
|
22,940 | |||
|
2012
|
23,680 | |||
| 63,825 | ||||
The
Company has an employment agreement with the Chief Executive Officer that
contains change of control, change of location and termination clauses under
which the Chief Executive Officer would be entitled to three times his annual
salary of $250,000 and bonus (determined by the compensation committee on an
annual basis with the bonus amount not to exceed 150% of the annual salary) and
his listed benefits would continue for a period of three years.
The
Company has an employment agreement with the Chief Financial Officer that
contains change of control, change of location and termination clauses under
which the Chief Financial Officer would be entitled to two times her annual
salary of $100,000 and bonus (determined by the compensation committee on an
annual basis with the bonus amount not to exceed 150% of the annual salary) and
her listed benefits would continue for a period of three years.
The
Company has a consulting agreement with the Vice President of Exploration that
contains change of control and termination clauses under which the Vice
President of Exploration would be entitled to one times his annual base
consulting fees of $150,000 and bonus (determined by the compensation committee
on an annual basis with the bonus amount not to exceed 150% of the annual
salary) and his listed benefits would continue for a period of six
months.
See also
Note 6(c) regarding the early termination clause with respect to the Huajicari
concessions.
|
12.
|
Supplemental
Cash Flow Information
|
|
Three Months Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Interest
paid
|
- | - | ||||||
|
Income
taxes paid
|
- | - | ||||||
|
Non-cash
investing and financing transactions:
|
||||||||
|
Acquisition
of exploration property interests for share consideration (Note
6(b))
|
360,000 | 337,500 | ||||||
|
Change
in exploration property interests payable
|
74,294 | 28,438 | ||||||
|
Fair
value of warrants extended
|
197,313 | - | ||||||
|
Stock-based
compensation recorded as exploration property interests
|
14,483 | - | ||||||
F2-55
Nayarit
Gold Inc. (An Exploration Stage Company)
Notes
to the Unaudited Interim Consolidated Financial Statements
For
the Three Months Ended December 31, 2009 and 2008
(Expressed
in Canadian Dollars)
|
13.
|
Segmented
Information
|
The
Company’s operations comprise of a single reporting operating segment engaged in
mineral exploration in Mexico. As the operations comprise a single
reporting segment, amounts disclosed in the consolidated financial statements of
loss for the year also represent segment amounts.
As at
December 31, 2009 and September 30, 2009, all of the Company’s exploration
property interests are located in Mexico and substantially all cash and cash
equivalents are on deposit with Canadian chartered banks.
|
14.
|
Subsequent
Events
|
Subsequent
to December 31, 2009, the Company paid USD$250,000 pursuant to the Huajicari
option agreement as described in Note 6 (c).
Subsequent
to December 31, 2009, the Company jointly announced with Capital Gold
Corporation (“Capital Gold”) that they have entered into an agreement (the
"Agreement") with respect to a proposed business combination in an all-share
transaction subject to the completion of satisfactory due diligence, receipt of
Nayarit and Capital Gold shareholder approval, receipt by Nayarit of a fairness
opinion, regulatory approvals and the satisfaction of certain other conditions.
Pursuant to the terms of the Agreement, subject to the satisfaction or
waiver of all conditions, all of the Nayarit common shares issued and
outstanding immediately prior to the consummation of the business combination
(other than Nayarit Common Shares held by dissenting stockholders of Nayarit)
shall become exchangeable into the common stock of Capital Gold on the basis of
0.134048 shares of Capital Gold’s Company common stock for each one (1) Nayarit
Common Share. Following the business combination, the surviving entity
(the "Combined Entity") will be a wholly-owned subsidiary of Capital
Gold.
F2-56
ANNEX
I
BUSINESS
COMBINATION AGREEMENT
BUSINESS
COMBINATION AGREEMENT
BY
AND BETWEEN
CAPITAL
GOLD CORPORATION
AND
NAYARIT
GOLD INC.
Dated
as of February 10, 2010
TABLE
OF CONTENTS
|
Page
|
|||
|
ARTICLE
I TERMS OF THE
AMALGAMATION
|
I-2
|
||
|
1.1
|
The
Amalgamation
|
I-2
|
|
|
1.2
|
The
Closing; Effective Time; Effect
|
I-2
|
|
|
1.3
|
Exchange
of Securities
|
I-2
|
|
|
1.4
|
Tender
and Payment; Dissent Rights
|
I-3
|
|
|
1.5
|
Governing
By-laws.
|
I-5
|
|
|
1.6
|
Directors
and Officers; Lock Up
|
I-5
|
|
|
1.7
|
Certain
Adjustments to Parent Capitalization
|
I-6
|
|
|
1.8
|
Other
Effects of the Amalgamation
|
I-6
|
|
|
1.9
|
Additional
Actions
|
I-6
|
|
|
1.10
|
Headquarters
|
I-6
|
|
|
ARTICLE II
REPRESENTATIONS AND
WARRANTIES OF NAYARIT
|
I-6
|
||
|
2.1
|
Due
Organization and Good Standing
|
I-7
|
|
|
2.2
|
Capitalization
|
I-7
|
|
|
2.3
|
Subsidiaries
|
I-8
|
|
|
2.4
|
Authorization;
Binding Agreement
|
I-9
|
|
|
2.5
|
Governmental
Approvals
|
I-9
|
|
|
2.6
|
No
Violations or Conflicts
|
I-10
|
|
|
2.7
|
Nayarit
Financial Statements
|
I-10
|
|
|
2.8
|
Absence
of Certain Changes
|
I-11
|
|
|
2.9
|
Absence
of Undisclosed Liabilities
|
I-11
|
|
|
2.10
|
Compliance
with Laws
|
I-11
|
|
|
2.11
|
Regulatory
Agreements; Permits
|
I-12
|
|
|
2.12
|
Litigation
|
I-13
|
|
|
2.13
|
Restrictions
on Business Activities
|
I-13
|
|
|
2.14
|
Material
Contracts
|
I-13
|
|
|
2.15
|
Intellectual
Property
|
I-15
|
|
|
2.16
|
Employee
Benefit Plans
|
I-16
|
|
|
2.17
|
Taxes
and Returns
|
I-17
|
|
|
2.18
|
Finders
and Investment Bankers
|
I-18
|
|
|
2.19
|
Title
to Properties; Assets
|
I-19
|
|
|
2.20
|
Employee
Matters
|
I-21
|
|
|
2.21
|
Environmental
Matters
|
I-23
|
|
|
2.22
|
Transactions
with Affiliates
|
I-24
|
|
|
2.23
|
Insurance
|
I-24
|
|
|
2.24
|
Books
and Records
|
I-25
|
|
|
2.25
|
Bankruptcy
|
I-25
|
|
|
2.26
|
Information
Supplied
|
I-25
|
|
|
2.27
|
Illegal
Payments
|
I-25
|
|
|
2.28
|
Notes
and Accounts Receivable
|
I-26
|
|
|
2.29
|
Money
Laundering Laws
|
I-26
|
|
|
2.30
|
Antitakeover
Statutes
|
I-26
|
|
i
|
2.31
|
Suppliers
|
I-26
|
|
|
2.32
|
Negotiations
|
I-26
|
|
|
2.33
|
Mineral Rights
|
I-26
|
|
|
2.34
|
Mining Reports
|
I-27
|
|
|
2.35
|
Public Filings
|
I-27
|
|
|
2.36
|
Reporting Status
|
I-28
|
|
|
2.37
|
No Cease Trade
|
I-28
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES
OF PARENT
|
I-28
|
||
|
3.1
|
Due Organization and Good
Standing
|
I-29
|
|
|
3.2
|
Capitalization of Parent
|
I-29
|
|
|
3.3
|
Subsidiaries
|
I-30
|
|
|
3.4
|
Authorization; Binding
Agreement
|
I-30
|
|
|
3.5
|
Governmental Approvals
|
I-30
|
|
|
3.6
|
No Violations or Conflicts
|
I-31
|
|
|
3.7
|
SEC Documents; Internal Controls; SEC Foreign
Issuer
|
I-31
|
|
|
3.8
|
Absence of Undisclosed
Liabilities
|
I-32
|
|
|
3.9
|
Compliance with Laws
|
I-32
|
|
|
3.10
|
Regulatory Agreements;
Permits
|
I-32
|
|
|
3.11
|
Absence of Certain Changes
|
I-33
|
|
|
3.12
|
Taxes and Returns
|
I-33
|
|
|
3.13
|
Restrictions on Business
Activities
|
I-34
|
|
|
3.14
|
Employee Benefit Plans
|
I-34
|
|
|
3.15
|
Employee Matters
|
I-34
|
|
|
3.16
|
Material Contracts
|
I-35
|
|
|
3.17
|
Litigation
|
I-36
|
|
|
3.18
|
Transactions with
Affiliates
|
I-36
|
|
|
3.19
|
Books and Records
|
I-36
|
|
|
3.20
|
Information Supplied
|
I-36
|
|
|
3.21
|
Intellectual Property
|
I-37
|
|
|
3.22
|
Real Property
|
I-37
|
|
|
3.23
|
Environmental Matters
|
I-37
|
|
|
3.24
|
Insurance
|
I-37
|
|
|
3.25
|
Bankruptcy
|
I-37
|
|
|
3.26
|
TSX/OTCBB Quotation
|
I-37
|
|
|
ARTICLE IV
COVENANTS
|
I-37
|
||
|
4.1
|
Conduct of Business of
Nayarit
|
I-37
|
|
|
4.2
|
Access and Information;
Confidentiality
|
I-41
|
|
|
4.3
|
No Solicitation
|
I-42
|
|
|
4.4
|
Stockholder Litigation
|
I-45
|
|
|
4.5
|
Conduct of Business of
Parent
|
I-45
|
|
|
4.6
|
Voting
|
I-45
|
|
|
ARTICLE
V ADDITIONAL COVENANTS OF THE
PARTIES
|
I-46
|
||
|
5.1
|
Notification of Certain
Matters
|
I-46
|
|
|
5.2
|
Commercially Reasonable
Efforts
|
I-46
|
|
|
5.3
|
Indemnification
|
I-47
|
|
|
5.4
|
Public Announcements
|
I-49
|
|
ii
|
5.5
|
Parent Registration Statement; Proxy
Statement
|
I-49
|
|
|
5.6
|
Reservation of Stock
|
I-50
|
|
|
5.7
|
Nayarit Filings
|
I-50
|
|
|
5.8
|
Nayarit Stockholder Meeting
|
I-51
|
|
|
5.9
|
Directors and Officers of
Parent
|
I-52
|
|
|
5.10
|
Hart-Scott-Rodino Filing
|
I-52
|
|
|
5.11
|
Exchange Listing
|
I-52
|
|
|
ARTICLE
VI CONDITIONS
|
I-52
|
||
|
6.1
|
Conditions to Each Party’s
Obligations
|
I-52
|
|
|
6.2
|
Conditions to Obligations of
Parent
|
I-53
|
|
|
6.3
|
Conditions to Obligations of
Nayarit
|
I-55
|
|
|
6.4
|
Frustration of Conditions
|
I-56
|
|
|
ARTICLE VII
TERMINATION AND
ABANDONMENT
|
I-56
|
||
|
7.1
|
Termination
|
I-56
|
|
|
7.2
|
Effect of Termination
|
I-58
|
|
|
7.3
|
Fees and Expenses
|
I-58
|
|
|
7.4
|
Amendment
|
I-58
|
|
|
7.5
|
Waiver
|
I-58
|
|
|
ARTICLE
IX MISCELLANEOUS
|
I-59
|
||
|
8.1
|
Survival
|
I-59
|
|
|
8.2
|
Notices
|
I-59
|
|
|
8.3
|
Binding Effect; Assignment
|
I-60
|
|
|
8.4
|
Governing Law; Jurisdiction
|
I-60
|
|
|
8.5
|
Waiver of Jury Trial
|
I-60
|
|
|
8.6
|
Counterparts
|
I-60
|
|
|
8.7
|
Interpretation
|
I-61
|
|
|
8.8
|
Entire Agreement
|
I-61
|
|
|
8.9
|
Severability
|
I-61
|
|
|
8.10
|
Specific Performance
|
I-62
|
|
|
8.11
|
Third Parties
|
I-62
|
|
|
8.12
|
Headings
|
I-62
|
|
|
EXHIBITS
|
|||
|
Exhibit
A – Amalgamation Agreement
|
|||
|
Exhibit
B – Form of Lock-Up Agreement
|
|||
iii
Index
of Defined Terms
|
Page
|
|
|
Acquisition
Proposal
|
I-42
|
|
Action
|
I-13
|
|
Affiliate
|
I-61
|
|
Agreement
|
I-1
|
|
Amalgamation
|
I-1
|
|
Amalgamation
Consideration
|
I-2
|
|
AmalgSub
|
I-1
|
|
Antitrust
Laws
|
I-9
|
|
Articles
of Amalgamation
|
I-2
|
|
Benefit
Plans
|
I-16
|
|
Break
Fee
|
I-58
|
|
Business
Day
|
I-61
|
|
Canadian
Securities Authorities
|
I-27
|
|
Canadian
Securities Laws
|
I-27
|
|
Certificate
of Incorporation
|
I-29
|
|
Claim
Notice
|
I-48
|
|
Closing
|
I-2
|
|
Closing
Date
|
I-2
|
|
Code
|
I-4
|
|
Completion
Deadline
|
I-57
|
|
Consent
|
I-9
|
|
Damages
|
I-47
|
|
Effective
Time
|
I-2
|
|
Encumbrances
|
I-10
|
|
Enforceability
Exceptions
|
I-9
|
|
Environmental
Laws
|
I-24
|
|
Exchange
Act
|
I-31
|
|
Exchange
Agent
|
I-3
|
|
GAAP
|
I-7
|
|
Governmental
Authority
|
I-9
|
|
Indebtedness
|
I-8
|
|
Indemnitee
|
I-48
|
|
Indemnitor
|
I-48
|
|
Intellectual
Property
|
I-16
|
|
Knowledge
|
I-61
|
|
Landlord
Leases
|
I-19
|
|
Law
|
I-10
|
|
Leased
Real Property
|
I-19
|
|
Leases
|
I-19
|
|
Lock
Up Agreement
|
I-5
|
|
Material
Adverse Effect
|
I-7
|
|
Merger
Sub
|
I-1
|
iv
|
Mineral
Rights
|
I-26
|
|
Nayarit
|
I-1
|
|
Nayarit
Affiliate Transaction
|
I-24
|
|
Nayarit
Common Shares
|
I-1
|
|
Nayarit
Convertible Securities
|
I-8
|
|
Nayarit
Disclosure Schedules
|
I-6
|
|
Nayarit
Dissent Rights
|
I-5
|
|
Nayarit
Dissenting Stockholders
|
I-5
|
|
Nayarit
Financials
|
I-10
|
|
Nayarit
Indemnified Party
|
I-47
|
|
Nayarit
Material Contract
|
I-13
|
|
Nayarit
Permits
|
I-12
|
|
Nayarit
Proxy Circular
|
I-50
|
|
Nayarit
Proxy Matters
|
I-51
|
|
Nayarit
Public Disclosure Record
|
I-27
|
|
Nayarit
Real Property
|
I-19
|
|
Nayarit
Stock Certificates
|
I-3
|
|
Nayarit
Stockholder
|
I-2
|
|
Nayarit
Stockholder Meeting
|
I-51
|
|
Order
|
I-13
|
|
OSC
|
I-27
|
|
OTCBB
|
I-37
|
|
Owned
Real Property
|
I-19
|
|
Parent
|
I-1
|
|
Parent
Affiliate Transaction
|
I-36
|
|
Parent
Common Stock
|
I-1
|
|
Parent
Disclosure Schedule
|
I-28
|
|
Parent
Indemnified Party
|
I-47
|
|
Parent
Material Contracts
|
I-35
|
|
Parent
Organizational Documents
|
I-29
|
|
Parent
Permits
|
I-32
|
|
Parent
Proxy Matters
|
I-49
|
|
Parent
Stock Options
|
I-29
|
|
Parent
Stock Plan
|
I-29
|
|
Parent
Stockholder Meeting
|
I-49
|
|
Party
|
I-1
|
|
Permitted
Encumbrances
|
I-19
|
|
Person
|
I-61
|
|
Proxy
Statement
|
I-49
|
|
Public
Reports
|
I-31
|
|
RCRA
|
I-23
|
|
Registration
Statement
|
I-49
|
|
Representatives
|
I-41
|
|
Required
Nayarit Vote
|
I-9
|
|
Required
Parent Vote
|
I-30
|
|
Requisite
Regulatory Approvals
|
I-46
|
v
|
Reverse
Split
|
I-1
|
|
SEC
|
I-31
|
|
SEDAR
|
I-13
|
|
Subsidiary
|
I-6
|
|
Superior
Proposal
|
I-43
|
|
Surviving
Company
|
I-1
|
|
Tax
|
I-18
|
|
Tax
Returns
|
I-17
|
|
Tenant
Leases
|
I-19
|
|
TSX
|
I-37
|
|
TSXV
|
I-27
|
|
U.S.
Securities Act
|
I-31
|
vi
BUSINESS
COMBINATION AGREEMENT
This
BUSINESS COMBINATION AGREEMENT
(this “Agreement“) is made and
entered into as of February 10, 2010 by and among Capital Gold Corporation, a
corporation organized under the laws of Delaware (“Parent”), Nayarit Gold Inc.,
(“Nayarit”), a
corporation organized under the Ontario Business Corporation Act (“OBCA”), John Brownlie (with
respect to Section 4.6 only), Colin Sutherland (with respect to Section 4.6
only) and Bradley Langille (with respect to Section 4.6 only). Parent and
Nayarit are sometimes referred to herein individually as a “Party” and collectively as the
“Parties.”
WITNESSETH:
WHEREAS, Parent and Nayarit
intend to effect an amalgamation (the “Amalgamation”) of Nayarit and
a corporation, to be organized under the OBCA as a wholly-owned subsidiary of
Parent (“Merger Sub”),
to form a combined entity (“AmalgSub” or the “Surviving Company”), with
AmalgSub continuing as the surviving entity following the Amalgamation upon the
terms and subject to the conditions set forth in this Agreement and in
accordance with the OBCA.
WHEREAS, pursuant to the
Amalgamation, all of the issued and outstanding common stock, no par value, of
Nayarit (the “Nayarit
Common Shares”), will be
exchanged for the Amalgamation Consideration (as defined herein) upon the terms
and subject to the conditions set forth in this Agreement and in accordance with
the OBCA.
WHEREAS, the Board of
Directors of each of Nayarit and Parent have approved this Agreement and the
Amalgamation and each of them have determined that this Agreement, the
Amalgamation Agreement (substantially in the form attached hereto as Exhibit A), the
Amalgamation and the other transactions contemplated hereby and thereby are
advisable and in the respective best interests of Nayarit and
Parent.
WHEREAS, the Board of
Directors of Nayarit has resolved to recommend that its stockholders approve and
adopt the Amalgamation Agreement and the Amalgamation.
WHEREAS, the Board of
Directors of Parent has resolved to recommend that its stockholders approve a
plan to effect a reverse split of the outstanding Parent common stock, par value
$0.0001 per share (the “Parent
Common Stock”), at a ratio of four (4) shares of Parent Common Stock for
every one (1) outstanding share of Parent Common Stock (the “Reverse Split”) prior to the
Effective Time (as defined herein).
NOW, THEREFORE, in
consideration of the premises set forth above, which are incorporated in this
Agreement as if fully set forth below, and the representations, warranties,
covenants and agreements contained in this Agreement, and intending to be
legally bound hereby, the Parties hereto agree as follows:
I-1
ARTICLE
I
TERMS
OF THE AMALGAMATION
1.1 The
Amalgamation. Subject to the terms and conditions of this
Agreement, and in accordance with the applicable provisions of the constating
documents of Nayarit and Parent, at the Effective Time Merger Sub and Nayarit
shall amalgamate to form AmalgSub, and continue as one company under the terms
and conditions of this Agreement. Upon consummation of the
Amalgamation, the separate existence of each of Nayarit and Merger Sub shall
thereupon cease, and AmalgSub, as the surviving company in the Amalgamation,
shall continue its corporate existence under the OBCA as a wholly-owned
subsidiary of Parent.
1.2 The Closing; Effective Time;
Effect.
(a) Unless
this Agreement shall have been terminated and the transactions contemplated
hereby shall have been abandoned pursuant to Section 7.1, and subject to the
satisfaction or waiver of the conditions set forth in Article VI hereof, the
closing of the Amalgamation (the “Closing”) shall take place at
the offices of Ellenoff Grossman & Schole LLP, 150 East 42nd Street,
11th
Floor, New York, New York 10017 at 10:00 a.m. New York City time no later than
the second Business Day after the date that all of the closing conditions set
forth in Article VI have been satisfied or waived, unless another time, date or
place is agreed upon in writing by the Parties hereto. The date on
which the Closing occurs is herein referred to as the “Closing Date.”
(b) Subject
to the terms and conditions hereof, concurrently with the Closing, the Parties
shall file with the Ontario Ministry of Government Services (Companies and
Personal Property Security Branch) articles of amalgamation in accordance with
the OBCA (referred to herein as the “Articles of Amalgamation”),
executed in accordance with the relevant provisions of the OBCA and shall make
all other filings or recordings required under the OBCA in order to effect the
Amalgamation. The Amalgamation shall become effective upon the
receipt of the Articles of Amalgamation issued under the OBCA or at such other
time as is agreed by the Parties hereto, in accordance with the OBCA and as
specified in the Articles of Amalgamation. The time when the
Amalgamation shall become effective is herein referred to as the “Effective Time.”
(c) From
and after the Effective Time, the Surviving Company shall possess all
properties, rights, privileges, powers and franchises of Nayarit and Merger Sub,
and all of the claims, obligations, liabilities, debts and duties of Nayarit and
Merger Sub shall become the claims, obligations, liabilities, debts and duties
of the Surviving Company.
1.3 Exchange of
Securities.
(a) At
the Effective Time, by virtue of the Amalgamation and without any action on the
part of Nayarit or the holders of any securities of Nayarit, all of the Nayarit
Common Shares issued and outstanding immediately prior to the Effective Time
(other than Nayarit Common Shares held by Nayarit Dissenting Stockholders (as
defined below)) shall become exchangeable into Parent Common Stock on the basis
of 0.134048 shares of Parent Common Stock for each one (1) Nayarit Common Share
(the “Amalgamation
Consideration”). The Parties acknowledge
and agree that the foregoing exchange ratio takes into effect the Reverse
Split. From and
after the Effective Time, any certificate representing the Nayarit Common Shares
shall be deemed for all purposes to represent Parent Common Stock into which
such Nayarit Common Shares represented thereby were exchanged in accordance with
the immediately preceding sentence. At the Closing, the
Amalgamation Consideration shall be effectuated to the stockholders of Nayarit
of record immediately prior to the Closing (individually, a “Nayarit Stockholder” and
collectively, the “Nayarit
Stockholders”).
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(b) Upon
the exchange of Nayarit Common Shares for shares of Parent Common Stock, all
Nayarit Common Shares shall, by virtue of the Amalgamation and without any
action on the part of the Nayarit Stockholders, be automatically cancelled and
shall cease to exist, and each Nayarit Stockholder shall cease to have any
rights with respect thereto, except the right to receive the Amalgamation
Consideration, subject to the terms and conditions of this
Agreement.
(c) Each
Nayarit Common Share in respect of which Nayarit Dissent Rights (as defined
below) have been exercised shall be deemed to be transferred by the holder
thereof, without any further formality on such holder’s part, free and clear of
all Encumbrances to Parent with Parent being obliged to pay therefor the amount
determined and payable in accordance with Section 1.4(g) hereof, and the name of
such holder will be removed from the register of holders of Nayarit Common
Shares and Parent will be recorded as the registered holder of the Nayarit
Common Shares so transferred and will be deemed to be the legal and beneficial
owner of such Nayarit Common Shares.
(d) The
Nayarit Convertible Securities (as defined below) shall be exerciseable for or
satisfied with the issuance of (and the holder thereof shall accept),
in lieu of the number of Nayarit Common Shares otherwise issuable thereunder,
the number of shares of Parent Common Stock which the holder would have been
entitled to receive as a result of the transactions contemplated by the
Amalgamation if, immediately prior to the Effective Time, such holder had been
the registered holder of the number of Nayarit Common Shares to which such
holder was theretofore entitled under such Nayarit Convertible
Securities.
1.4 Tender and Payment; Dissent
Rights.
(a) Surrender of Certificates
Via Exchange Agent. At the Effective Time, Parent shall cause
the exchange agent selected by Parent, which shall be an independent transfer
agent or trust company (the “Exchange Agent ”) to mail to
the former Nayarit Stockholders appropriate transmittal materials (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates or other instruments theretofore representing Nayarit Common Shares
(the “Nayarit Stock
Certificates”) shall pass, only upon proper delivery of such certificates
to the Exchange Agent). The Nayarit Stock Certificates so surrendered
shall be duly endorsed as the Exchange Agent may reasonably
require. In the event of a transfer of ownership of Nayarit Common
Shares represented by Nayarit Stock Certificates that are not registered in the
transfer records of Nayarit, the Amalgamation Consideration payable for such
shares as provided for herein may be issued to a transferee if the Nayarit Stock
Certificates representing such shares are delivered to the Exchange Agent,
accompanied by all documents required to evidence such transfer and by evidence
reasonably satisfactory to the Exchange Agent that such transfer is proper and
that any applicable stock transfer Taxes have been paid. In the event
any Nayarit Stock Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the Person claiming such certificate
to be lost, stolen or destroyed and the posting by such Person of a bond in such
amount as Parent may reasonably direct, or an indemnification agreement
reasonably acceptable to Parent, as indemnity against any claim that may be made
against it with respect to such certificate, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed certificate the Amalgamation
Consideration as provided for herein. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate.
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(b) Right to Receive
Amalgamation Consideration. After the Effective Time, each
holder of Nayarit Common Shares issued and outstanding at the Effective Time
shall surrender the Nayarit Stock Certificate(s) representing such shares to the
Exchange Agent and shall promptly upon surrender thereof receive in exchange
therefor the consideration provided for herein, without interest, pursuant to
this Section 1.4. Parent shall not be obligated to deliver the
consideration to which any former holder of Nayarit Common Shares is entitled as
a result of the Amalgamation until such holder surrenders such holder’s Nayarit
Stock Certificate(s) for exchange as provided in this Section
1.4. Notwithstanding any other provision of this Agreement to the
contrary, neither Parent, nor Nayarit, nor AmalgSub, nor the Exchange Agent
shall be liable to any holder of Nayarit Common Shares for any amounts paid or
properly delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat or similar Law.
(c) Fractional
Shares. No certificates or scrip representing fractional
shares of Parent Common Stock or book-entry credit of the same shall be issued
upon the surrender of the Nayarit Common Shares for exchange. Each
Nayarit Stockholder who receives any portion of the Parent Common Stock who
would otherwise have been entitled to receive a fraction of a share of Parent
Common Stock shall have such fractional share rounded down to the nearest whole
number.
(d) Transfer Books; No Further
Ownership Rights in the Nayarit Common Stock. At the Effective
Time, the transfer books of Nayarit shall be closed, and thereafter there shall
be no further registration of transfers of Nayarit Common Shares on the records
of Nayarit. From and after the Effective Time, the Nayarit Common
Shares outstanding immediately prior to the Effective Time shall be cancelled
and they shall cease to have any rights, except as otherwise provided for herein
or by applicable Law.
(e) Withholding
Taxes. Parent and the Exchange Agent shall be entitled to
deduct and withhold from the Amalgamation Consideration payable to a Nayarit
Stockholder any such amounts as are required under the Internal Revenue Code of
1986, as amended (the “Code”), or any applicable
provision of state, local or foreign Tax Law. To the extent such
amounts are so withheld by Parent or the Exchange Agent, such withheld amounts
shall be treated for all purposes as having been paid to the Nayarit
Stockholders in respect of which such deduction and withholding was made by
Parent or the Exchange Agent.
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(f) Nayarit Convertible
Securities. The Parties agree that the agreements evidencing the grant or
other obligation to issue Nayarit Common Shares pursuant to the Nayarit
Convertible Securities (as defined below) shall continue in effect on the same
terms and conditions (subject to the adjustments required after giving effect to
the Amalgamation) and that Parent or Nayarit, as applicable, shall execute any
requisite supplementary agreements and take all requisite corporate action
necessary to effect the foregoing and Parent shall to reserve for issuance a
sufficient number of shares of Parent Common Stock for delivery upon
satisfaction of the conditions for issuance of such shares of Parent Common
Stock (subject to the adjustments required after giving effect to the
Amalgamation).
(g)
Dissent
Procedures. Nayarit Stockholders may exercise rights of
dissent with respect to Nayarit Common Shares in connection with the
Amalgamation pursuant to and in the manner set forth in Section 185 of the OBCA
(“Nayarit Dissent
Rights”). A Nayarit Stockholder who duly exercises such Nayarit Dissent
Rights (including sending a notice of dissent to Nayarit) (“Nayarit Dissenting
Stockholders”) ceases to have any rights as a holder of Nayarit Common
Shares other than the right to be paid the fair value of such holder’s Nayarit
Common Shares pursuant to Section 185 of the OBCA. In any case where a Nayarit
Dissenting Stockholder withdraws the notice of dissent in accordance with
Section 185 of the OBCA or is ultimately determined not to be entitled, for any
reason, to be paid fair value for their Nayarit Common Shares, such holder shall
be deemed to have participated in the Amalgamation as of the Effective Time on
the same basis as non-Nayarit Dissenting Stockholders. In no case shall Parent,
Nayarit, Merger Sub or the Surviving Company or any other Person be required to
recognize Nayarit Dissenting Stockholders as holders of Nayarit Common Shares
after the Effective Time, and the names of such Dissenting Nayarit Stockholders
shall be deleted from the register of holders of Nayarit Common Shares at the
Effective Time.
(a) At
the Effective Time, the Board of Directors of Parent shall consist of either
five (5) or seven (7) directors, in any event to include John Brownlie, Stephen
M. Cooper, John W. Cutler, Leonard J. Sojka and one (1) nominee of
Nayarit. For a period of thirty-six (36) months following the
Effective Time, the Parties hereto agree that they shall cause their nominees on
the Board of Directors to execute and deliver an undertaking whereby such
nominees agree to: (i) nominate the foregoing individuals for re-election at
each annual meeting of the shareholders of Parent; and (ii) cause any successors
chosen by such nominees to comply with the foregoing provision at each annual
meeting of the shareholders of Parent. The Parties intend to appoint an
independent director as chair of the Board of Directors of Parent.
(b) At
the Effective Time, the officers of Parent shall include a chief of Parent, who
shall be John Brownlie, and two (2) senior executives, who shall be Bradley Langille and Colin
Sutherland.
(c) At
the Closing, John Brownlie, Colin Sutherland and Bradley Langille each shall
enter into a “lock-up” agreement substantially in the form set forth on Exhibit B attached
hereto (a “Lock Up
Agreement”) pursuant to which such Persons shall agree, for a period of
six (6) months from the Closing Date, that they each shall neither, on his, her
or its own behalf or on behalf of entities, family members or trusts affiliated
with or controlled by him, her or it, offer, issue, grant any option on, sell or
otherwise dispose of any portion of the Amalgamation Consideration issued to
such Person.
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1.8 Other Effects of the
Amalgamation. The Amalgamation shall have all further effects
as specified in the applicable provisions of the OBCA.
1.10 Headquarters. The
headquarters of Parent following the Effective Time will be located in Denver,
Colorado, and Parent shall further (so long as it sees fit) maintain satellite
or home offices in Halifax, Nova Scotia, Canada, and corporate financial offices
in Philadelphia, Pennsylvania.
REPRESENTATIONS
AND WARRANTIES OF NAYARIT
The
following representations and warranties by Nayarit to Parent are qualified by
the Nayarit disclosure schedules, which set forth certain disclosures concerning
Nayarit and its subsidiaries (each a “Subsidiary” and collectively,
the “Subsidiaries”) and
each of their divisions and businesses (the “Nayarit Disclosure
Schedules“). Except as disclosed in the Nayarit Disclosure
Schedules, Nayarit hereby represents and warrants to Parent as
follows:
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For
purposes of this Agreement, the term “Material Adverse Effect” shall
mean, with respect to a Party, any occurrence, state of facts, change, event,
effect or circumstance that, individually or in the aggregate, has, or would
reasonably be expected to have, a material adverse effect on the assets,
liabilities, business, results of operations or financial condition of such
Party and its subsidiaries, taken as a whole, or to otherwise carry on its
business as now being conducted and as proposed to be conducted following the
Effective Time, except, in each case, for any such effect attributable to:
(i) changes in laws, regulations or generally accepted accounting
principles (“GAAP”) in
the United States or Canada, as the case may be, or interpretations thereof,
(ii) the announcement or pendency of this Agreement, any actions taken in
compliance with this Agreement or the consummation of any of the transactions
contemplated by this Agreement (including the Amalgamation), or (iii) the
failure of a Party or any of its subsidiaries to take any action referred to in
Sections 4.1 or 4.5, as the case may be, due to the other Party’s unreasonable
withholding, delaying or conditioning of its consent. For purposes of
determining whether a particular change, event, circumstance or effect has a
“Material Adverse Effect,” the nature and effect of each change, event,
circumstance or effect shall be considered alone and together and along with the
detrimental impact on the properties, financial condition, business operations,
prospects or results of operations of a Party and its subsidiaries, taken as a
whole, of such change, event, circumstance or effect.
(a) The
authorized capital stock of Nayarit consists of an unlimited number of Nayarit
Common Shares. As of the date hereof, 90,259,548 Nayarit Common
Shares were issued and outstanding. Except for Nayarit Common Shares
held by the Nayarit Stockholders, no Nayarit Common Shares or preferred stock
are issued and outstanding. All of the outstanding Nayarit Common
Shares are duly authorized, validly issued, fully paid and non-assessable and
not subject to any preemptive or similar rights. None of the
outstanding securities of Nayarit has been issued in violation of any foreign,
federal or state securities Laws.
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(b) Except
as set forth in Section 2.2(b) of the
Nayarit Disclosure Schedules (collectively, the “Nayarit Convertible
Securities”), there are no: (i) outstanding options, warrants, puts,
calls, convertible securities, preemptive or similar rights, (ii) bonds,
debentures, notes or other indebtedness having general voting rights or that are
convertible or exchangeable into securities having such rights, or (iii)
subscriptions or other rights, agreements, arrangements, contracts or
commitments of any character, relating to the issued or unissued Nayarit Common
Shares or equity or partnership interest in any Subsidiary or obligating Nayarit
or any Subsidiary to issue, transfer, deliver or sell or cause to be issued,
transferred, delivered, sold or repurchased any options or Nayarit Common Stock,
or other equity interest in, Nayarit or any Subsidiary, or securities
convertible into or exchangeable for such shares or equity interests, or
obligating Nayarit or any Subsidiary to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment for such equity interests. There are no outstanding
obligations of Nayarit or any Subsidiary to repurchase, redeem or otherwise
acquire any Nayarit Common Shares or other equity interest in, Nayarit or any
Subsidiary to provide funds to make any investment (in the form of a loan,
capital contribution or otherwise) in any other entity.
(c) There
are no stockholder agreements, voting trusts or other agreements or
understandings to which Nayarit or any Subsidiary is a party with respect to the
voting of the Nayarit Common Shares or other equity interest in Nayarit or any
Subsidiary.
(d) No
Indebtedness of Nayarit or any Subsidiary contains any restriction upon:
(i) the prepayment of any of such Indebtedness, (ii) the incurrence of
Indebtedness by Nayarit or any Subsidiary, or (iii) the ability of Nayarit or
any Subsidiary to grant any Encumbrance (as defined in Section 2.6), other than
Permitted Encumbrances (as defined in Section 2.19), on its properties or
assets. As used in this Agreement, “Indebtedness” means (A) all
indebtedness for borrowed money or for the deferred purchase price of property
or services (including amounts by reason of overdrafts and amounts owed by
reason of letter of credit reimbursement agreements) including with respect
thereto, all interests, fees and costs (other than current trade liabilities
incurred in the ordinary course of business consistent with past practices and
payable in accordance with customary practices), (B) any other indebtedness that
is evidenced by a note, bond, debenture, credit agreement or similar instrument,
(C) all obligations under financing leases, (D) all obligations under
conditional sale or other title retention agreements relating to property
purchased by Nayarit or any Subsidiary, (E) all obligations under leases
required to be accounted for as capital leases under Canadian GAAP, (F) all
obligations in respect of acceptances issued or created, (G) all liabilities
secured by an Encumbrance on any property, and (H) all guarantee
obligations.
2.3 Subsidiaries. Section 2.3(a) of the
Nayarit Disclosure Schedules sets forth, a true, complete and correct list of
all Subsidiaries, the authorized capital stock and other equity interests of
each Subsidiary, the issued and outstanding capital stock and other equity
interests of each Subsidiary, their respective jurisdictions of organization and
all jurisdictions in which each Subsidiary is qualified to conduct
business. All of the capital stock and other equity interests of the
Subsidiaries are owned, directly or indirectly, by Nayarit free and clear of any
Encumbrance with respect thereto. All of the outstanding shares of
capital stock or other equity interests in each of the Subsidiaries are duly
authorized, validly issued, fully paid and non-assessable and are free of
preemptive rights and were issued in compliance with applicable Laws (as defined
in Section 2.6). No capital stock or other equity interests of any of
the Subsidiaries are or may become required to be issued or purchased by reason
of any options, warrants, rights to subscribe to, puts, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into
or exchangeable for, shares of any capital stock of, or other equity interests
in, any Subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Subsidiary is bound to issue additional shares of its
capital stock or other equity interests, or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or other equity
interests or securities convertible into or exchangeable for such shares or
interests. Neither Nayarit nor any Subsidiary owns any shares of
capital stock or other equity or voting interests in (including any securities
exercisable or exchangeable for or convertible into capital stock or other
equity or voting interests in) any other Person other than publicly traded
securities constituting less than five percent (5%) of the outstanding equity of
the issuing entity, other than capital stock or other equity interest of the
Subsidiaries owned by Nayarit or another Subsidiary.
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2.5 Governmental
Approvals. No consent, approval, waiver, authorization or
permit of, or notice to or declaration or filing (each, a “Consent”) with any government,
any state or other political subdivision thereof, or any other entity, authority
or body exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including any
governmental or regulatory authority, agency, department, board, commission,
administration or instrumentality, any court, tribunal or arbitrator or any
self-regulatory organization (each, a “Governmental Authority”), on
the part of Nayarit or any Subsidiary is required to be obtained or made in
connection with the execution, delivery or performance by Nayarit of this
Agreement or the consummation by Nayarit of the transactions contemplated hereby
(including the Amalgamation), other than: (i) the filing of the
Articles of Amalgamation in accordance with the OBCA, (ii) such
filings as may be required in any jurisdiction where Nayarit is qualified or
authorized to do business as a foreign corporation in order to maintain such
qualification or authorization, (iii) compliance with any applicable
federal or provincial securities Laws, (iv) pursuant
to any other Laws designed to prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade (“Antitrust Laws”), if
applicable, and (v) those Consents that, if they were not obtained or made,
would not reasonably be expected to have a Material Adverse
Effect.
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(a) As
used herein, the term “Nayarit
Financials” means (x) Nayarit’s audited consolidated financial statements
(including, in each case, any related notes thereto), consisting, in part, of
Nayarit’s balance sheets as of September 30, 2008 and September 30, 2009 and its
statements of operations and statements of cash flow for the fiscal years ended
September 30, 2007, September 30, 2008 and September 30, 2009, (y) any unaudited
interim financial statements of Nayarit requested by Parent, and (z) any
financial statements filed by Nayarit with SEDAR. Nayarit has made or
will make available to Parent true, correct and complete copies of the Nayarit
Financials (to include any interim financial statements of Nayarit requested by
Parent). The Nayarit Financials fairly present in all material
respects the consolidated financial condition and the results of operations,
changes in stockholders’ equity, and cash flow of Nayarit and the Subsidiaries
as at the respective dates of and for the periods referred to in such financial
statements, all in accordance with Canadian GAAP. The Nayarit
Financials, to the extent required for inclusion in the Proxy Statement, comply
in all material respects with applicable Canadian Securities Laws (as defined
below). Notwithstanding any provision in this Agreement to the
contrary, any representation and warranty in this Agreement with respect to
Nayarit’s unaudited interim financial statements for the three months six months
periods ended September 30, 2009 shall be made as of the Closing
Date. Neither Nayarit nor any Subsidiary has any off-balance sheet
arrangements.
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(b) Nayarit
has had no: (i) significant deficiencies or material weaknesses in the design or
operation of Nayarit’s internal controls over financial reporting that are
reasonably likely to adversely affect Nayarit’s ability to record, process,
summarize and report financial information and (ii) fraud, whether or not
material, that involves management or other employees who have a significant
role in Nayarit’s internal controls over financial reporting.
(c) Nayarit
and each Subsidiary has not and, to the Knowledge of Nayarit, no auditor or
accountant of Nayarit or any Subsidiary or any manager, director, officer or
consultant of Nayarit or any Subsidiary, has received any material written
complaint, allegation, assertion or claim, regarding the accounting or auditing
practices, procedures, methodologies or methods of Nayarit or any Subsidiary or
their internal accounting controls, including any complaint, allegation,
assertion or claim that Nayarit or any Subsidiary has engaged in questionable
accounting or auditing practices. No attorney representing Nayarit or
any Subsidiary has reported evidence of any violation of consumer protection
(including rules and regulations promulgated by any state or federal
Governmental Authority or with jurisdiction, oversight or regulatory control
over the conduct of the business of Nayarit or its Subsidiaries) or securities
Laws, breach of fiduciary duty or similar violation by Nayarit or any Subsidiary
or any of their respective officers, directors, managers, employees or agents to
the Board of Directors, board of managers or any committee thereof or to any
director, manager or executive officer of Nayarit or any
Subsidiary.
(a) Nayarit
and the Subsidiaries are each in compliance with all Laws applicable to it and
the conduct of its businesses as currently conducted and as proposed to be
conducted following consummation of the Amalgamation, except where the failure
to be in compliance would not reasonably be expected to have a Material Adverse
Effect. Nayarit and each Subsidiary is not in conflict with, or in
default or violation of, nor has it received any notice of any conflict with, or
default or violation of any applicable Law by which Nayarit or any Subsidiary,
or any property or asset of Nayarit or any Subsidiary, is bound or affected,
except for any such conflicts, defaults or violations that would not reasonably
be expected to have a Material Adverse Effect.
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(b) There
is no pending or, to the Knowledge of Nayarit, threatened, proceeding,
examinations, reviews or investigation to which Nayarit or any Subsidiary is
subject before any Governmental Authority regarding whether Nayarit has violated
in any material respect applicable Laws. Neither Nayarit nor any
Subsidiary has received written notice of any material violation of, or
noncompliance with, any Law applicable to Nayarit or any Subsidiary, or
directing Nayarit or any Subsidiary to take remedial action with respect to such
applicable Law or otherwise, and no deficiencies of Nayarit or any Subsidiary
have been asserted in writing by any Governmental Authority with respect to
possible violations of any applicable Laws except for such violations or
deficiencies that would not reasonably be expected to have a Material Adverse
Effect. Nayarit and each Subsidiary have filed or made all material
reports, statements, documents, registrations, notices, filings or submissions
required to be filed with any Governmental Authority, and all such reports,
statements, documents, registrations, notices, filings and submissions are in
material compliance (and materially complied at the relevant time) with
applicable Law and no material deficiencies have been asserted by any
Governmental Authority with respect to any such reports, statements, documents,
registrations, notices, filings or submissions required to be filed with any
Governmental Authority.
(a) There
are no: (i) written agreements, consent agreements, memoranda of understanding,
commitment letters, cease and desist orders, or similar undertakings to which
Nayarit or any Subsidiary is a party, on the one hand, and any Governmental
Authority is a party or addressee, on the other hand, (ii) Orders or directives
of or supervisory letters from a Governmental Authority specifically with
respect to Nayarit or any Subsidiary, or (iii) resolutions or policies or
procedures adopted by Nayarit or any Subsidiary at the request of a Governmental
Authority, that (A) limit in any material respect the ability of Nayarit or
any Subsidiary to conduct its business as currently being conducted or as
contemplated by the Parties to be conducted following the Closing, (B) in any
manner impose any requirements on Nayarit or any Subsidiary that materially add
to or otherwise materially modify in any respect the requirements imposed under
applicable Laws, (C) require Nayarit or any Subsidiary or any of its divisions
to make capital contributions or make loans to another division or Affiliate of
Nayarit or any Subsidiary or (D) in any manner relate to the ability of
Nayarit or any Subsidiary to pay dividends or otherwise materially restrict the
conduct of business of Nayarit or any Subsidiary in any respect.
(b) Nayarit
and each Subsidiary hold all material permits, licenses, franchises, grants,
authorizations, consents, exceptions, variances, exemptions, orders and other
governmental authorizations, certificates, consents and approvals necessary to
lawfully conduct its business as presently conducted and to own, lease and
operate its assets and properties (collectively, the “Nayarit Permits”), all of
which are in full force and effect, and no suspension, non-renewal, amendment,
restriction, limitation or cancellation of any of the Nayarit Permits is pending
or, to the Knowledge of Nayarit, threatened, except where the failure of any of
the Nayarit Permits to be in full force and effect, or the suspension or
cancellation of any of the Nayarit Permits, would not reasonably be expected to
have a Material Adverse Effect. To the Knowledge of Nayarit, no facts
or circumstances exist that would reasonably be expected to impact Nayarit’s or
any Subsidiary’s ability to obtain any material Nayarit Permit in the future as
may be necessary for Nayarit or any Subsidiary to continue its operations as
currently contemplated. Neither Nayarit nor any Subsidiary is in
violation in any material respect of the terms of any Nayarit
Permit.
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(c) To
the Knowledge of Nayarit each of the officers and employees of Nayarit and all
Subsidiaries are in compliance with all applicable Laws requiring any
registration, licensing or qualification, and are not subject to any liability
or disability by reason of the failure to be so registered, licensed or
qualified, except where such failure to be in compliance or such liability or
disability would not reasonably be expected to have a Material Adverse
Effect.
2.13 Restrictions on Business
Activities. There is no agreement or
Order binding upon Nayarit or any Subsidiary which has or could reasonably be
expected to have the effect of prohibiting, preventing, restricting or impairing
in any respect any business practice of Nayarit or any Subsidiary as their
business is currently conducted, any acquisition of property by Nayarit or any
Subsidiary, the conduct of business by Nayarit or any Subsidiary as currently
conducted, or restricting in any respect the ability of Nayarit or any
Subsidiary from engaging in business as currently conducted or from competing
with other parties, except where such agreement or Order would not reasonably be
expected to have a Material Adverse Effect.
2.14 Material
Contracts.
(a) Section 2.14 of the
Nayarit Disclosure Schedules sets forth a list of, and Nayarit has made
available to Parent (except for such Nayarit Material Contracts that Nayarit has
filed on the
Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) as a material
contract as required by Part 12 of National Instrument 51-102), true, correct
and complete copies of, each written contract, agreement, commitment,
arrangement, lease, license, permit or plan and each other instrument to which
Nayarit or any Subsidiary is a party or by which Nayarit or any Subsidiary is
bound as of the date hereof (each, a “Nayarit Material Contract”)
that:
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(ii) contains
covenants that materially limit the ability of Nayarit or any Subsidiary (or
which, following the consummation of the Amalgamation, could materially restrict
the ability of Parent, Nayarit, the Subsidiaries or any of their Affiliates):
(A) to compete in any line of business or with any Person or in any geographic
area or to sell, supply, price, develop or distribute any service, product or
asset, including any non-competition covenants, exclusivity restrictions, rights
of first refusal or most-favored pricing clauses or (B) to purchase or acquire
an interest in any other entity, except, in each case, for any such contract
that may be canceled without any penalty or other liability to Nayarit or any
Subsidiary upon notice of 60 days or less;
(iii) involves
any joint venture, partnership, limited liability or other similar agreement or
arrangement relating to the formation, creation, operation, management or
control of any partnership or joint venture that is material to the business of
Nayarit, taken as a whole;
(iv) involves
any exchange traded, over-the-counter or other swap, cap, floor, collar, futures
contract, forward contract, option or other derivative financial instrument or
contract, based on any commodity, security, instrument, asset, rate or index of
any kind or nature whatsoever, whether tangible or intangible, including
currencies, interest rates, foreign currency and indices;
(v) relates
to Indebtedness (whether incurred, assumed, guaranteed or secured by any asset)
having an outstanding principal amount in excess of $100,000 with respect to any
Indebtedness;
(vi) was
entered into by Nayarit or any Subsidiary and has not yet been consummated, and
involves the acquisition or disposition, directly or indirectly (by merger or
otherwise), of a substantial amount of the assets or capital stock or other
equity interests of another Person, other than the acquisition or disposition of
assets in the ordinary course of business consistent with past
practices;
(vii) by
its terms calls for aggregate payments by Nayarit or any Subsidiary under such
contract of more than $100,000 with respect to any payments;
(viii) with
respect to any material agreement for the acquisition or disposition, directly
or indirectly (by merger or otherwise), of a substantial amount of the assets or
capital stock or other equity interests of another Person, pursuant to which
Nayarit or any Subsidiary has: (A) any continuing indemnification obligations or
(B) any “earn-out” or other contingent payment
obligations;
(ix) involves
any managers, directors, executive officers or key employees of Nayarit or any
Subsidiary that cannot be cancelled by Nayarit or any Subsidiary within 60 days’
notice without liability, penalty or premium;
(x) obligates
Nayarit or any Subsidiary to provide indemnification or a guarantee in excess of
$100,000 with respect to any obligation;
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(xi) obligates
Nayarit or any Subsidiary to make any capital commitment or capital expenditure
(including pursuant to any joint venture) in excess of $100,000 with respect to
such obligation;
(xii) relates
to the development, ownership, licensing or use of any Intellectual Property (as
defined in Section 2.15) material to the business of Nayarit or any Subsidiary,
other than “shrink wrap,” “click wrap,” and
“off the shelf” software agreements and other agreements for
software commercially available on reasonable terms to the public generally,
with license, maintenance, support and other fees of less than $10,000 per
year;
(xiii) provides
for any standstill arrangements; or
(xix) Nayarit
has filed on SEDAR
as a material contract as required by Part 12 of National Instrument
51-102.
(b) With
respect to each Nayarit Material Contract: (i) each Nayarit Material
Contract is legal, valid, binding and enforceable in all material respects
against Nayarit or the Subsidiaries, as the case may be, and, to Nayarit’s
Knowledge, the other party thereto, and in full force and effect (except as such
enforcement may be limited by the Enforceability Exceptions); (ii) the
consummation of the transactions contemplated by this Agreement will not affect
the terms, validity or enforceability of such Nayarit Material Contract by the
Surviving Company or any Subsidiary and, to Nayarit’s Knowledge, the other party
thereto; (iii) neither Nayarit nor any Subsidiary is in breach or default in any
material respect, and no event has occurred which, with the passage of time or
giving of notice or both, would constitute such a breach or default by Nayarit
or any Subsidiary, or permit termination or acceleration by the other party,
under any Nayarit Material Contract; (iv) to Nayarit’s Knowledge, no other party
to any Nayarit Material Contract is in breach or default in any material
respect, and no event has occurred which, with the passage of time or giving of
notice or both, would constitute such a breach or default by such other party,
or permit termination or acceleration by Nayarit or any Subsidiary, under such
Nayarit Material Contract, (v) such Nayarit Material Contract was entered into
at arms’ length and in the ordinary course of business consistent with past
practices, and (vi) the consummation of the transactions contemplated by this
Agreement will not obligate Nayarit or any Subsidiary to make any payments
thereunder. Except as set forth in Section 2.14 of the
Nayarit Disclosure Schedules, no other powers of attorney have been granted by
the Company or any of its Subsidiaries to any Person.
(a) Neither
Nayarit nor any Subsidiary owns or licenses any Intellectual Property that are
material to the conduct of the business of Nayarit and the Subsidiaries other
than such trade names, service marks and/ or copyrights as may exist at Law or
by usage in respect of the use of the words “Nayarit” or “Nayarit Gold” in the
context of the business of Nayarit and the
Subsidiaries.
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(b) For
purposes of this Agreement, “Intellectual Property” means:
(A) United States, international and foreign patents and patent applications,
including divisionals, continuations, continuations-in-part, reissues,
reexaminations and extensions thereof and counterparts claiming priority
therefrom; utility models; invention disclosures; and statutory invention
registrations and certificates; (B) United States and foreign registered,
pending and unregistered trademarks, service marks, trade dress, logos, trade
names, corporate names and other source identifiers, domain names, Internet
sites and web pages; and registrations and applications for registration for any
of the foregoing, together with all of the goodwill associated therewith; (C)
United States and foreign registered copyrights, and registrations and
applications for registration thereof; rights of publicity; and copyrightable
works; and (D) all inventions and design rights (whether patentable or
unpatentable) and all categories of trade secrets as defined in the Uniform
Trade Secrets Act, including business, technical and financial
information.
2.16 Employee Benefit
Plans.
(a) Section 2.16(a) of
the Nayarit Disclosure Schedules lists, with respect to Nayarit, any Subsidiary
and any trade or business (whether or not incorporated) which is treated as a
single employer with Nayarit: (i) all employee benefits, (ii) loans to managers,
officers, directors or employees other than advances for expense reimbursements
incurred in the ordinary course of business consistent with past practices and
any securities option, securities stock purchase, phantom securities, securities
appreciation right, equity-related, supplemental retirement, severance,
sabbatical, medical, dental, vision care, disability, employee relocation,
cafeteria benefit or dependent care, life insurance or accident insurance plans,
programs, agreements or arrangements, (iii) all bonus, pension, retirement,
profit sharing, savings, deferred compensation or incentive plans, programs,
policies, agreements or arrangements, (iv) other fringe, perquisite, or employee
benefit plans, programs, policies, agreements or arrangements and (v) any
current or former employment, consulting, change of control, retention or
executive compensation, termination or severance plans, programs, policies,
agreements or arrangements, written or otherwise, as to which unsatisfied
liabilities or obligations (contingent or otherwise) remain for the benefit of,
or relating to, any present or former employee, consultant, manager or director,
or which could reasonably be expected to have any liabilities or obligations
(together, the “Benefit
Plans”).
(b) Except
as would not reasonably be expected to have a Material Adverse Effect: (i) each
Nayarit Benefit Plan has been administered in accordance with its terms and in
compliance with the requirements prescribed by any and all applicable Laws, and
(ii) Nayarit and each Affiliate have performed all obligations required to be
performed by them under, are not in any respect in default under or violation
of, and have no Knowledge of any default or violation by any other party to, any
of the Nayarit Benefit Plans. All contributions and premiums required
to be made by Nayarit or any Affiliate to any Nayarit Benefit Plan have been
made on or before their due dates, including any legally permitted
extensions. No Action is pending, or to the Knowledge of Nayarit or
any Subsidiary is threatened, against or with respect to any such Nayarit
Benefit Plan including any audit or inquiry by any Governmental Authority (other
than as would not reasonably be expected to have a Material Adverse
Effect).
(c) Except
as set forth in Section 2.16(c) of
the Nayarit Disclosure Schedules or as otherwise provided in this Agreement, the
consummation of the transactions contemplated by this Agreement will not, either
alone or in combination with any other event or events, (i) entitle any current
or former employee, manager, director or consultant of Nayarit or any Subsidiary
to any payment (whether of severance pay, unemployment compensation, phantom
stock plan payments, golden parachute, bonus or otherwise), (ii) accelerate,
forgive indebtedness, vest, distribute, or increase benefits or an obligation to
fund benefits with respect to any employee, manager, director or consultant of
Nayarit or any Subsidiary, or (iii) increase the amount of compensation due any
such employee, manager, director or consultant.
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(d) Except
as set forth in Section 2.16(d) of
the Nayarit Disclosure Schedules, no Nayarit Benefit Plan provides benefits,
including death or medical benefits (whether or not insured), with respect to
current or former employees, managers, directors or consultants of Nayarit or
any Subsidiary after retirement or other termination of service (other than: (i)
coverage mandated by applicable Laws, (ii) death benefits or retirement benefits
under any “employee pension benefit plan”, or (iii) benefits, the full direct
cost of which is borne by the current or former employee, manager, director or
consultant (or beneficiary thereof)).
(e) All
employees, managers, directors, and consultants are appropriately classified as
such under applicable Law in all material respects, and neither Nayarit nor any
Subsidiary is in material violation of any applicable Law in connection with
such classification or has not received notice of any possible violation from
any Governmental Authority.
2.17 Taxes and
Returns. Except as would not reasonably be expected to have a
Material Adverse Effect:
(a) Nayarit
and each Subsidiary has timely filed or will have timely filed, or caused to be
filed, all federal, provincial, state, local and foreign Tax returns and reports
required to be filed by it (taking into account all available extensions)
(collectively, “Tax
Returns”), and all such Tax Returns are true, accurate, correct and
complete in all material respects, and has paid, collected or withheld, or
caused to be paid, collected or withheld, all Taxes required to be paid,
collected or withheld, other than such Taxes that it is contesting in good faith
or for which adequate reserves in the Nayarit Financials have been established
in accordance with Canadian GAAP. There are no claims, assessments,
audits, examinations, investigations or other proceedings pending against
Nayarit or any Subsidiary in respect of any Tax, and neither Nayarit nor any
Subsidiary has been notified in writing of any proposed Tax claims, assessments
or audits against Nayarit or any Subsidiary (other than, in each case, claims or
assessments for which adequate reserves in the Nayarit Financials have been
established in accordance with Canadian GAAP or are immaterial in
amount). There are no Encumbrances with respect to any Taxes upon any
of Nayarit’s or any Subsidiary’s assets, other than: (i) Taxes, the payment of
which are not yet due, (ii) Taxes or charges being contested in good faith by
appropriate proceedings, or (iii) Taxes for which adequate reserves in the
Nayarit Financials have been established in accordance with Canadian
GAAP. No Tax Returns of Nayarit have been audited. Neither
Nayarit nor any Subsidiary has any outstanding waivers or extensions of any
applicable statute of limitations to assess any amount of
Taxes. There are no outstanding requests by Nayarit or any Subsidiary
for any extension of time within which to file any Tax Return or within which to
pay any Taxes shown to be due on any Tax Return.
(b) Neither
Nayarit nor any Subsidiary is nor has it ever been a member of any consolidated,
combined, unitary or affiliated group of corporations for any Tax purposes other
than a group of which Nayarit or such Subsidiary is or was the common parent
corporation.
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(c) Neither
Nayarit nor any Subsidiary has made any change in accounting method or received
a ruling from, or signed an agreement with, any taxing authority.
(d) Neither
Nayarit nor any Subsidiary has participated in, or sold, distributed or
otherwise promoted, any “reportable transaction,” as defined in Treasury
Regulation Section 1.6011-4 or any comparable foreign Tax Law.
(e) Neither
Nayarit nor any Subsidiary has: (i) changed any Tax accounting methods, policies
or procedures except as required by a change in Law, (ii) made, revoked or
amended any Tax election, (iii) filed any amended Tax Returns or claim for
refund or (iv) entered into any closing agreement affecting or otherwise settled
or compromised any material Tax liability or refund.
(f) Nayarit
or any Subsidiary is not a party to or bound by any Tax indemnity agreement, Tax
sharing agreement or similar contract. Nayarit or any Subsidiary is
not a party to any joint venture, partnership, or other arrangement or contract,
which could be treated as a partnership or “disregarded entity” for United
States federal income Tax purposes.
(g) Nayarit
or any Subsidiary has not been or, to Nayarit’s Knowledge, will be required to
include any material adjustment in Taxable income for any Tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax Laws as a result of transactions, events or
accounting methods employed prior to the Amalgamation other than any such
adjustments required as a result of the Amalgamation. Nayarit or any
Subsidiary has not filed any consent to have the provisions of paragraph 341(f)
of the Code (or comparable provisions of any state or foreign Tax Laws) apply to
Nayarit or any Subsidiary. Nayarit or any Subsidiary has not filed
any disclosures under Section 6662 or comparable provisions of state, local
or foreign law to prevent the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return.
(h) For
purposes of this Agreement, the following terms have the following meanings:
“Tax ” (and, with
correlative meaning, “Taxes” and “Taxable”) means (i) any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Authority responsible for the imposition of any such tax (domestic
or foreign), (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any taxable period, and
(iii) any liability for the payment of any amounts of the type described in
(i) or (ii) as a result of being a transferee of or successor to any
Person, or as a result of any express or implied obligation to indemnify any
other Person.
2.18 Finders and Investment
Bankers. Except for the fees set forth in Section 2.18 of the
Nayarit Disclosure Schedules, the fees of which will be borne by Nayarit, no
broker, finder or investment banker is entitled to any brokerage, finder’s or
other fee or commission in connection with the transactions contemplated hereby
based upon arrangements made by or on behalf of Nayarit.
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2.19 Title to Properties;
Assets.
(a) Section 2.19(a)-1 of
the Nayarit Disclosure Schedules contains a correct and complete list of all
real property owned by Nayarit or any Subsidiary or any partnership or joint
venture in which Nayarit or any Subsidiary directly or indirectly has an
interest having a fair market value in excess of $100,000 (“Owned Real
Property”). Section 2.19(a)-2 of
the Nayarit Disclosure Schedules contains a correct and complete list of all
real property leased or subleased by Nayarit or any Subsidiary as tenant or
subtenant (“Leased Real
Property”) (the Owned Real Property and the Leased Real Property are
herein sometimes collectively called the “Nayarit Real Property”). The
list set forth in Section 2.19(a)-1 of
the Nayarit Disclosure Schedules contains, with respect to each parcel of the
Owned Real Property, a description of all existing leases, licenses or other
occupancy contracts to which Nayarit or any Subsidiary is a party or by which
Nayarit or any Subsidiary is bound as a landlord, including all amendments,
modifications, extensions, renewals and supplements thereto (collectively, the
“Landlord Leases”), the
terms of which have been complied with by Nayarit or such Subsidiary in all
material respects. The list set forth in Section 2.19(a)-2 of
the Nayarit Disclosure Schedules contains, with respect to each parcel of the
Leased Real Property, a description of all existing leases, subleases, licenses
or other occupancy contracts to which Nayarit or any Subsidiary is a party or by
which Nayarit or any Subsidiary is bound as a tenant, including all amendments,
modifications, extensions, assignments, subleases, renewals and supplements
thereto (collectively, the “Tenant Leases”) (the Landlord
Leases and the Tenant Leases are herein sometimes collectively called the “Leases ”), the terms of which
have been complied with by Nayarit and such Subsidiary in all material
respects. Except as would not reasonably be expected to
have a Material Adverse Effect, Nayarit and the Subsidiaries have good, valid
and marketable title to all of the Owned Real Property and related personal
property, assets and rights, free and clear of all Encumbrances other than
Permitted Encumbrances. For purposes of this Agreement, the term
“Permitted Encumbrances”
means: (i) Encumbrances with respect to Taxes either not yet due or being
contested in good faith in appropriate proceedings or for which adequate
reserves have been set aside; (ii) mechanics’, materialmen’s or similar
statutory Encumbrances for amounts not yet due or being contested in good faith
in appropriate proceedings; (iii) any covenants, conditions, restrictions,
reservations, rights, liens, easements, encumbrances, encroachments and other
matters affecting title which are shown as exceptions on the title insurance
policies and/or title insurance commitments or reports which have been made
available to Parent; (iv) the terms and conditions of the Tenant Leases; (v)
applicable federal, state, local or tribal authority building and land use
regulations, restrictions or requirements, (vi) existing easements and
encroachments; and (vii) building code violations not caused by Nayarit or any
Subsidiary or Parent.
(b) A
correct and complete copy of each Lease has been furnished to Parent prior to
the date hereof. Nayarit or a Subsidiary, if applicable, has a valid,
binding and enforceable leasehold interest under each of the Tenant Leases and
each of the Leases is in full force and effect (except as such enforcement may
by limited by the Enforceability Exceptions or where the loss of such Lease
would not have a Material Adverse Effect) and to the extent permitted under the
terms of each Lease, grants Nayarit or a Subsidiary the concurrent right to use
and occupy the premises leased thereby. Neither Nayarit nor any
Subsidiary nor, to the Knowledge of Nayarit, any other party to any Lease is in
breach of or in default under, in any material respect, any of the Leases,
except to the extent any such breach would not have a Material Adverse
Effect. Nayarit and the Subsidiaries enjoy peaceful and undisturbed
possession under all Tenant Leases, have not received notice of any material
default, delinquency or breach on the part of any party under any Lease, and
there are no existing material defaults (with or without notice or lapse of time
or both) by Nayarit or any Subsidiary or, to the Knowledge of Nayarit, any other
party thereto. No Consent under any Lease is required in connection
with the transactions contemplated hereby, except where the failure to obtain
such Consent would not have a Material Adverse Effect.
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(c) Except
as would not reasonably be expected to have a Material Adverse Effect, neither
Nayarit nor any Subsidiary nor, to the Knowledge of Nayarit, any other party to
any Landlord Lease, is in breach of or in default under any of the Landlord
Leases.
(d) True
and complete copies of all Tenant Leases, together with all modifications,
extensions, amendments and assignments thereof, if any, affecting or relating to
the Owned Real Property have heretofore been furnished to Parent.
(e) There
is no action, suit, litigation, hearing or administrative proceeding pending or,
to Nayarit’s Knowledge, threatened against Nayarit or any Subsidiary or any
joint venture or partnership in which Nayarit or any Subsidiary owns an
interest, with respect to all or any portion of the Nayarit Real Property, in
each case which is not or would not be fully covered by insurance, except as
would not reasonably be expected to have a Material Adverse Effect.
(f) There
are no condemnation or eminent domain proceedings pending, or to Nayarit’s
Knowledge, threatened against any Owned Real Property and, to Nayarit’s
Knowledge, there are no condemnation or eminent domain proceedings pending or
threatened against any Leased Real Property.
(g) Neither
Nayarit nor any Subsidiary has granted any Person a purchase option, right of
first refusal, right of first offer or other right to purchase any Owned Real
Property.
(h) Neither
Nayarit nor any Subsidiary has sent to any holder of any mortgage or other
interest (secured or unsecured) in any Nayarit Real Property, nor has Nayarit or
any Subsidiary received from any such holder, a notice of default under any
financing, loan or other document or security agreement with respect to any
Nayarit Real Property.
(i) There
are no finder’s fees, brokerage commissions or tenant improvement allowances
outstanding with respect to any Nayarit Real Property.
(j) There
are no Tax certiorari or Tax appeal proceedings outstanding with respect to any
Owned Real Property as of the date hereof.
(k) Neither
Nayarit nor any Subsidiary has assigned its interest as lessor or lessee under
any Lease, other than to Nayarit or a Subsidiary or collateral assignments in
connection with any existing financing of any Nayarit Real
Property.
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(l) Nayarit
and each Subsidiary have insurable and marketable title to all Owned Real
Property subject to Permitted Encumbrances. Neither Nayarit nor any
Subsidiary has received notice of, or other writing referring to, any
requirements or recommendations by any insurance company that has issued a
policy covering any part of the Nayarit Real Property or by any board of fire
underwriters or other body exercising similar functions, requiring or
recommending any repairs or work to be done on any part of the Nayarit Real
Property, which repair or work has not been completed.
(m) Nayarit
has no Knowledge of any proceeding pending for the adjustment of the assessed
valuation of all or any portion of any Nayarit Real Property or abatement with
respect to all or any portion of the real estate taxes payable on any Nayarit
Real Property.
(n) The
use and operation of the Nayarit Real Property in the conduct of the business of
Nayarit and the Subsidiaries does not violate any instrument of record or
agreement affecting such Owned Real Property, except for such violations that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect. Valid policies of title insurance have been
issued insuring all fee simple title to the Owned Real Property, except where
the failure of such policies to be in full force and effect would not reasonably
be expected to have a Material Adverse Effect and such policies are in full
force and effect. No material claim has been made against any such
policy.
(o) All
Nayarit Real Property and tangible personal property of each of Nayarit and the
Subsidiaries is in generally good repair and is operational and usable in the
manner in which it is currently being utilized, subject to normal wear and tear,
technical obsolescence, repair or replacement.
2.20 Employee
Matters.
(a) There
has been: (i) to the Knowledge of Nayarit, no labor union organizing or
attempting to organize any employee of Nayarit or any Subsidiary into one or
more collective bargaining units; and (ii) no labor dispute, strike, work
slowdown, work stoppage, lock out or other collective labor action by or with
respect to any employees, managers or consultants of Nayarit or any Subsidiary
pending or, to Nayarit’s Knowledge, threatened against Nayarit or any
Subsidiary. Neither Nayarit nor any Subsidiary is a party to, or
bound by, any collective bargaining agreement or other agreement with any labor
organization applicable to the employees, managers or consultants of Nayarit or
any Subsidiary and no such agreement is currently being negotiated.
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(b) Except
as would not reasonably be expected to result in a Material Adverse Effect,
Nayarit and each Subsidiary: (i) is in compliance with all applicable Laws
respecting employment and employment practices, terms and conditions of
employment, health and safety and wages and hours, including Laws relating to
discrimination, disability, labor relations, hours of work, payment of wages and
overtime wages, pay equity, immigration, workers compensation, working
conditions, employee scheduling, occupational safety and health, family and
medical leave, and employee terminations, (ii) has not received written notice,
or to the Knowledge of Nayarit any other form of notice, that there is any
unfair labor practice charge or complaint against Nayarit or any Subsidiary
pending, (iii) is not liable for any arrears of wages or any penalty for failure
to comply with any of the foregoing, and (iv) is not liable for any payment to
any trust or other fund or to any Governmental Authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for employees (other than routine payments to be made in the
ordinary course of business and consistent with past
practice). Except as would not reasonably be expected to have a
Material Adverse Effect, there are no complaints, lawsuits, arbitrations,
administrative proceedings, or other Actions pending or, to the Knowledge of
Nayarit, threatened against Nayarit or any Subsidiary or any of their respective
employees, managers, consultants or former employees brought by or on behalf of
any applicant for employment, any current or former employee, any Person
alleging to be a current or former employee, any class of the foregoing, or any
Governmental Authority, relating to any such Law or regulation, or alleging
breach of any express or implied contract of employment, wrongful termination of
employment, or alleging any other discriminatory, wrongful or tortious conduct
in connection with the employment relationship.
(c) Nayarit
has provided Parent a list with the name, title and total annual compensation
(including projected bonus or other incentive compensation for fiscal year 2010)
of each employee and independent contractor of Nayarit and its Subsidiaries as
of the date hereof.
(d) Nayarit
and its Subsidiaries are in compliance in all material respects with all
applicable Laws, including Mexican labor Laws, respecting labor, employment,
immigration, fair employment practices, terms and conditions of employment,
workers’ compensation, occupational safety, plant closings, compensation and
benefits, and wages and hours. Neither Nayarit nor any of its
Subsidiaries is liable for any payment to any trust or other fund or to any
Governmental Authority, with respect to unemployment compensation benefits,
social security or other benefits or obligations for employees (other than
routine payments to be made in the normal course of business and consistent with
past practice). There are no material Actions pending or, to the
Knowledge of Nayarit, threatened between Nayarit or any of its Subsidiaries and
any current or former employees of Nayarit or any of its
Subsidiaries.
(e) There
has been no “mass layoff” or “plant closing” as defined by the United States
Worker Adjustment Retraining Notification Act or similar state, local or foreign
“plant closing” Law with respect to Nayarit or any of its
Subsidiaries.
(f) There
has been and is no unfair labor practice complaint against Nayarit or any of its
Subsidiaries pending or, to the Knowledge of Nayarit, threatened before any
Governmental Authority, and no pending or, to the Knowledge of Nayarit,
threatened arbitration arising out of any collective bargaining
agreement.
(g) All
material amounts due from Nayarit and its Subsidiaries, or for which any
material claim may be asserted against Nayarit and its Subsidiaries, on account
of wages and other benefits have been paid or accrued as a liability on the
books and records of each of Nayarit and its Subsidiaries.
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(h) Nayarit
and its Subsidiaries are not liable for any material liabilities, judgments,
arrearage of wages, fines or penalties for failure to comply with any applicable
labor Laws.
2.21 Environmental
Matters. Except as set forth on Section 2.21 of the
Nayarit Disclosure Schedules:
(a) Neither
Nayarit nor any Subsidiary is the subject of any pending Order, judgment or
written claim asserted or arising under any Environmental Law that has or would
reasonably be expected to have a Material Adverse Effect.
(b) Neither
Nayarit nor any Subsidiary has entered into any negotiations or agreements with
any Person under any Environmental Law, which has or would reasonably be
expected to have a Material Adverse Effect.
(c) To
the Knowledge of Nayarit, Nayarit and each Subsidiary, and the ownership and
operation of all assets in which Nayarit or any Subsidiary has an ownership
interest, are in compliance with all applicable Environmental Laws, including
obtaining and complying with all permits or authorizations required pursuant to
Environmental Laws, except where such failure to be comply with Environmental
Laws would not reasonably be expected to have a Material Adverse
Effect
(d) To
the Knowledge of Nayarit, there are no conditions existing on, in, at, under, or
about or resulting from the past or present operations of Nayarit or any
Subsidiary or any other party that may give rise to any on-site or off-site
investigation or remedial obligations of Nayarit or any Subsidiary under any
Environmental Laws, except where such investigation or remedial obligation would
not reasonably be expected to have a Material Adverse Effect.
(e) To
the Knowledge of Nayarit, neither Nayarit nor any Subsidiary currently owns or
operates, nor in the past has it owned or operated, any property that is on the
United States Environmental Protection Agency’s National Priorities List or the
Environmental Protection Agency’s CERCLIS list or any other comparable lists
promulgated by any other comparable foreign Governmental Authority;
(f) To
the Knowledge of Nayarit, all Resource Conservation and Recovery Act “RCRA” regulated hazardous
waste (or any other hazardous waste regulated by any comparable foreign Law) for
which Nayarit or any Subsidiary was the generator, has been managed in
compliance with the applicable provisions of RCRA (or such comparable foreign
Law, as the case may be) and any other Environmental Laws.
(g) To
the Knowledge of Nayarit, no lien, deed notice or use restriction has been
recorded pursuant to any Environmental Law with respect to the assets of Nayarit
or any Subsidiary;
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(h) As
used in this Agreement, the term “Environmental Laws” means all
applicable: (i) federal or foreign statutes regulating or prescribing
restrictions regarding the environment (air, water, land, animal and plant
life), including but not limited to the following, as amended: the Clean Air Act
(or other comparable foreign Law), Clean Water Act, Comprehensive Environmental
Response (or other comparable foreign Law), Compensation and Liability Act (or
other comparable foreign Law), Emergency Planning and Community Right-to-Know
Act (or other comparable foreign Law), Endangered Species Act (or other
comparable foreign Law), Hazardous Materials Transportation Act (or other
comparable foreign Law), Migratory Bird Treaty Act (or other comparable foreign
Law), National Environmental Policy Act, Occupational Safety and Health Act (or
other comparable foreign Law), Oil Pollution Act of 1990 (or other comparable
foreign Law), RCRA (or other comparable foreign Law), Safe Drinking Water Act
(or other comparable foreign Law), Mine Safety and Health Act (or other
comparable foreign Law) and Toxic Substances Control Act (or other comparable
foreign Law); (ii) any applicable regulations promulgated pursuant to such
federal statutes or other comparable foreign Law; (iii) any applicable state or
provincial Law counterparts of such federal or other comparable foreign Law
statutes and the regulations promulgated thereunder; and (iv) any other
applicable state, provincial, local statutes, rules, regulations or ordinances,
or tribal authority, regulating the use of or affecting the environment, each as
currently in effect on the date of this Agreement.
(i) Nayarit
has provided to Parent information regarding all of Nayarit’s financial
assurance obligations (including but not limited to any site restoration bonds
and environmental risk insurance) required under Environmental Laws in
connection with Nayarit’s and its Subsidiaries operations.
(j) The
transaction that is the subject of this Agreement will not require any
notification to, or approval of, any Governmental Authority, either pursuant to
Mexico’s General Law on the Prevention and Comprehensive Management of Waste
(Ley General para la
Prevención y Gestión Integral de los Residuos) and Mexico’s Regulations
to the General Law on the Prevention and Comprehensive Management of Waste
(Reglamento de la Ley General
para la Prevención y Gestión Integral de los Residuos), or otherwise
under applicable Environmental Laws.
2.22 Transactions with
Affiliates. Section 2.22 of the
Nayarit Disclosure Schedules sets forth a true, correct and complete list of the
contracts or arrangements in existence as of the date of this Agreement under
which there are any existing or future liabilities or obligations between
Nayarit or any Subsidiary, on the one hand, and, on the other hand, any: (i)
present or former employee, manager, officer or director of Nayarit or any
Subsidiary, or any family member of any of the foregoing or (ii) record or
beneficial owner of more than five percent (5%) of Nayarit’s outstanding capital
stock as of the date hereof (each, a “Nayarit Affiliate
Transaction”).
2.23 Insurance. Nayarit
and each Subsidiary are covered by valid and currently effective insurance
policies issued in favor of Nayarit or such Subsidiary that are customary for
companies of similar size in the industry and locales in which Nayarit or such
Subsidiary operates to insure their respective operations and the loss(es)
therefrom. Section 2.23 of the
Nayarit Disclosure Schedules sets forth a true, correct and complete list of all
material insurance policies, and their respective coverage amounts, premiums and
deductibles, maintained by Nayarit or any Subsidiary. With respect to
each current insurance policy: (i) the policy is in full force and effect and
all premiums due thereon have been paid, (ii) Nayarit or any Subsidiary, as
applicable, is not in any material respect, in breach of or default under, and
Nayarit or any Subsidiary, as applicable, has not taken any action or failed to
take any action which, with notice or the lapse of time or both, would
constitute such a breach or default, or permit termination or modification of,
any such policy, (iii) to the Knowledge of Nayarit, no insurer on any such
policy has been declared insolvent or placed in receivership, conservatorship or
liquidation, and (iv) no notice of cancellation or termination has been received
with respect to any such policy, and Nayarit knows of no reason any such
insurance policy would be cancelled or modified in any material respect as a
result of the transactions contemplated hereby.
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2.24 Books and
Records. All of the books and records of Nayarit and the
Subsidiaries are complete and accurate in all material respects and have been
maintained in the ordinary course consistent with past practices and in
accordance with applicable Laws and standard industry practices with regard to
the maintenance of such books and records. The records, systems,
controls, data and information of Nayarit and the Subsidiaries are recorded,
stored, maintained and operated under means (including any electronic,
mechanical or photographic process, whether computerized or not) that are under
the control of Nayarit or the applicable Subsidiary.
2.25 Bankruptcy. Neither
Nayarit nor any Subsidiary has: (i) commenced a voluntary case, or had entered
against it a petition, for relief under bankruptcy, liquidation, winding-up or
similar legislation code or any similar petition, order or decree under any
federal, provincial, or state law or statute relative to bankruptcy,
insolvency or other relief for debtors; (ii) caused, suffered or consented to
the appointment of a receiver, trustee, administrator, conservator, liquidator
or similar official in any federal, provincial, state or foreign
judicial or non judicial proceedings, to hold, administer or liquidate all or
substantially all of its property; or (iii) made an assignment for the benefit
of creditors. Nayarit and the Subsidiaries are able to pay their
debts as the same become due in the ordinary course of their respective business
consistent with past practices.
2.26 Information
Supplied. None of the information supplied or to be supplied
by Nayarit for inclusion or incorporation by reference in the Registration
Statement, Proxy Statement, Nayarit Proxy Circular (as defined below) or any
other report, form, registration, or other filing made with any Governmental
Authority with respect to the transactions contemplated hereby will, at the date
of filing of the Registration Statement or the date the Proxy Statement or
Nayarit Proxy Circular is first mailed to Parent’s stockholders and the Nayarit
Stockholders, as the case may be, or at the time of the Parent Stockholder
Meeting (as defined in Section 5.7), or Nayarit Stockholder Meeting (as defined
in Section 5.8), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Notwithstanding the foregoing, Nayarit makes no
representation, warranty or covenant with respect to any information supplied by
Parent which is contained in the Registration Statement, Proxy Statement,
Nayarit Proxy Circular or other filing made in connection with the transactions
contemplated by this Agreement.
2.27 Illegal
Payments. Neither Nayarit nor any Subsidiary or, to the
Knowledge of Nayarit, any officer, director, manager, agent or employee of
Nayarit or any Subsidiary has: (a) used any funds of Nayarit or any
Subsidiary for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; (b) made any payment in violation
of applicable Law to any foreign or domestic government official or employee or
to any foreign or domestic political party or campaign or violated any provision
of the Corruption of Foreign Officials Act (Canada), as amended; or
(c) made any other payment in violation of applicable Law.
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2.28 Notes and Accounts
Receivable. All notes and accounts receivable of Nayarit and
the Subsidiaries are reflected properly on their books and records, are valid
receivables and, to Nayarit’s Knowledge, will be collected in accordance with
their terms at their recorded amounts subject to the allowances as set forth in
the Nayarit Financials.
2.29 Money Laundering
Laws. The operations of Nayarit and the Subsidiaries are and
have been conducted at all times in compliance with laundering statutes in all
applicable jurisdictions, the rules and regulations thereunder and any related
or similar rules, regulations or guidelines, issued, administered or enforced by
any Governmental Authority and no action involving Nayarit or any Subsidiary
with respect to such statutes, rules and regulations is pending or
threatened.
2.30 Antitakeover
Statutes. The transactions contemplated by this Agreement are
not subject to the requirements of any “moratorium,” “control share,” “fair
price,” “affiliate transactions,” “business combination” or other antitakeover
Laws and regulations applicable to Nayarit or any Subsidiary.
2.31 Suppliers. No
supplier of Nayarit or any Subsidiary has cancelled or otherwise terminated any
contract with Nayarit or any Subsidiary prior to the expiration of the contract
term, or made any threat to Nayarit or any Subsidiary to cancel, reduce the
supply or otherwise terminate its relationship with Nayarit or any Subsidiary,
except for such cancellations or terminations that would not reasonably be
expected to have a Material Adverse Effect. Neither Nayarit nor any
Subsidiary has: (i) breached any material agreement with or (ii) engaged in any
fraudulent conduct with respect to, any supplier of Nayarit or any
Subsidiary.
2.32 Negotiations. Nayarit
has suspended or terminated, and has the legal right to terminate or suspend,
all negotiations and discussions of any acquisition, merger, consolidation or
sale of all or substantially all of the assets or equity interests of Nayarit or
any Subsidiary with Persons other than Parent.
2.33 Mineral
Rights. Applying customary standards in the mining industry,
each of Nayarit and the Subsidiaries has valid and sufficient registered title,
free and clear of any title defect or Encumbrance, to its Mineral Rights and
other properties (other than property as to which it is a lessee, in which case
it has a valid leasehold interest) necessary to permit the conduct of their
respective business and operations as currently conducted and as proposed to be
conducted as disclosed by Nayarit in its public filings, except to the extent
that a failure to do so would not constitute a Material Adverse
Effect. Section 2.33 of
the Nayarit Disclosure Schedules is a true and complete list of all
the concessions, surface use agreements, option agreements and other rights of
Nayarit and the Subsidiaries to conduct mining and mineral exploration and
development (collectively, “Mineral Rights”) and related
activities, and accurately depicts and describes the information therein,
including geographic location, Mineral Right identification, type of Mineral
Right, whether under application or granted, interest held, registered holder,
approximate area covered, date granted (as applicable), date of expiry (as
applicable), priority status (for applications), rent amount, all production
royalty, net profits or proceed interests, and land and surface owners’ payments
applicable thereto, and Section 2.33 of the
Nayarit Disclosure Schedules details all Encumbrances respecting such Mineral
Rights. Except as disclosed in Section 2.33 of the
Nayarit Disclosure Schedules, Nayarit or its Subsidiaries are in exclusive
possession of the included properties, Nayarit nor any of its Subsidiaries have
not received any notice of default of any of the terms or provisions of such
Mineral Rights or related contracts, such Mineral Rights and related contracts
are valid and are in full effect, and Nayarit and its Subsidiaries have timely
performed all obligations thereunder, and Nayarit has no Knowledge of any act or
omission or any condition on such properties which could be considered or
construed as a default under any such Mineral Rights or related
contract.
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2.34 Mining
Reports.
(a) The
information set forth in the SRK Consulting Preliminary Economic Assessment
report regarding the mineral resources and reserves, mineral exploration and
mining assets, properties and projected financial analysis of current and future
operations of Nayarit, its Subsidiaries and their respective mine assets
provided to Parent is accurate in all material respects at the Effective Time
and did not omit any material fact required to make such information
accurate. All information contained in the SRK Consulting Preliminary
Economic Assessment report was prepared and furnished in accordance with
appropriate industry standards and good industry practices, including, without
limitation, historical development, reserve and resource estimates, project
development costs, ownership costs, operation costs, production costs and all
other costs associated with the development of Nayarit’s and its Subsidiaries’
mining assets.
(b) The
information relating to estimates in the Nayarit Public Disclosure Record of
mineral resources has been prepared in accordance with Canada National
Instrument 43-101 Standards of
Disclosure for Mineral Projects, in all material respects and in
accordance with generally accepted engineering practices, and the information
prepared by Nayarit, upon which estimates of resources were based, is, as of the
date hereof and the Closing Date, complete and accurate in all material respects
and there have been no changes to such information since the date of delivery or
preparation thereof which would reasonably be expected to have a Material
Adverse Effect. With respect to information not prepared by Nayarit,
upon which estimates of resources were based, such information is, to Nayarit’s
Knowledge, as of the date hereof and the Closing Date, complete and accurate in
all material respects, and to Nayarit’s Knowledge, there have been no changes to
such information which would reasonably be expected to have a Material Adverse
Effect.
2.35
Public Filings.
Nayarit has filed all documents required to be filed by it in accordance with
applicable Canadian Securities Laws with the applicable Canadian Securities
Authorities and the TSXV. Except as disclosed by Nayarit in the
Nayarit Public Disclosure Record, all such documents and information comprising
the Nayarit Public Disclosure Record, as of their respective dates (and the
dates of any amendments thereto), (i) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances in which
they were made not misleading, and (ii) complied in all material respects with
the requirements of applicable Canadian Securities Laws, and any amendments to
the Nayarit Public Disclosure Record required to be made have been filed on a
timely basis with the Canadian Securities Authorities and the TSXV. Nayarit has
not filed any confidential material change reports with any Canadian Securities
Authorities that, at the date of this Agreement, remain
confidential. There are no outstanding or unresolved comments in
comment letters received from any Canadian Securities Authority and any exchange
staff with respect to the Nayarit Public Disclosure Record. To the
Knowledge of Nayarit, none of the filings comprising the Nayarit Public
Disclosure Record is the subject of ongoing review, comment or investigation by
any Canadian Securities Authority or the TSXV.For the purposes of this
Agreement, the term “Canadian
Securities Laws” means the Securities Act (Ontario) and the equivalent
legislation of the other applicable provinces of Canada and the
applicable rules and regulations promulgated thereunder; the term “Canadian Securities
Authorities” means the Ontario Securities Commission (“OSC”) and other applicable
securities regulatory authorities of the provinces of Canada, the term “TSXV” means the TSX Venture
Exchange; and the term “Nayarit
Public Disclosure Record” means all forms, reports, schedules, statements
and other documents (i) required to be filed with all applicable Canadian
Securities Authorities, the TSXV by Nayarit since January 1, 2005, and (ii) all
forms, reports, schedules, statements and other documents filed with all
applicable Canadian Securities Authorities by Nayarit accessible to the public
on SEDAR.
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2.36 Reporting
Status. Nayarit is a reporting issuer or its equivalent in the
provinces of British Columbia, Alberta and Ontario. The Nayarit
Common Shares are listed on the TSXV.
2.37 No Cease Trade.
Nayarit is not subject to any cease trade or other order of any applicable stock
exchange or Canadian Securities Authority and, to the Knowledge of Nayarit, no
investigation or other proceedings involving Nayarit which may operate to
prevent or restrict trading of any securities of Nayarit are currently in
progress or pending before any applicable stock exchange or Canadian Securities
Authority.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF PARENT
Except as
(i) disclosed in, and reasonably apparent from, Parent’s annual report on Form
10-K for the year ended October 14, 2009, Parent’s quarterly reports on Form
10-Q for the quarters ended July 31, 2009, January 31, 2009 and April 30, 2009
and the Company’s Current Reports on Form 8-K filed with the SEC on January 23,
2009, February 5, 2009, March 13, 2009, April 1, 2009, April 3, 2009, June 23,
2009, July 24, 2009, September 3, 2009, September 18, 2009, September 23, 2009,
October 15, 2009, October 29, 2009 and November 6, 2009 (excluding any
amendments thereto filed after the date hereof and any disclosures set forth in
any risk factor section and in any section relating to forward-looking
statements to the extent that they are cautionary, predictive or forward-looking
in nature), or (ii) disclosed in a correspondingly numbered section of the
disclosure schedule (the “Parent Disclosure Schedule”)
which schedule sets forth, among other things, items the disclosure of which is
necessary or appropriate either in response to an express disclosure requirement
contained in a provision hereof or as an exception to one or more
representations or warranties contained in this Article III, or to one or more
of Parent’s covenants contained herein, (provided, however, that
notwithstanding anything in this Agreement to the contrary, the mere inclusion
of any information in the Parent Disclosure Schedule shall not be deemed an
admission that any information contained therein describes or represents a
material exception or material fact, event or circumstance or that any
exception, fact, event or circumstance described in any such information has had
or would be reasonably likely to have a Material Adverse Effect), Parent hereby
represents and warrants to Nayarit as follows:
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3.1 Due Organization and Good
Standing. Parent is a corporation duly organized, validly
existing and in good standing under the Laws of the state of Delaware and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being
conducted. Parent is duly qualified or licensed and in good standing
to do business in each jurisdiction in which the character of the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure to be
so duly qualified or licensed and in good standing would not reasonably be
expected to have a Material Adverse Effect. Parent has heretofore
made available to Nayarit accurate and complete copies of Parent’s Certificate
of Incorporation, as amended (the “Certificate of Incorporation”)
and bylaws (the bylaws and the Certificate of Incorporation, collectively, the
“Parent
Organizational Documents”), each as
currently in effect. Parent is not in violation of any provision of
the Parent Organizational Documents.
3.2 Capitalization of
Parent.
(a) Taking
into effect the Reverse Split, the authorized capital stock of Parent consists
of 75,000,000 shares of Parent Common Stock of which there are, as of the date
of this Agreement, 48,497,655 shares of Parent Common Stock
outstanding. No other shares of Parent Common Stock are issued or
outstanding. Taking into effect the Reverse Split, as of the date of
this Agreement, no shares of Parent Common Stock were reserved for issuance
except for an aggregate of 1,662,500 shares of Parent Common Stock reserved for
issuance upon exercise of the issued and outstanding options to purchase shares
of Parent Common Stock (the “Parent Stock Options”) under
Parent’s equity incentive plan, dated December 13, 2006, adopted by Parent and
subsequently approved by Parent’s stockholders (the “Parent Stock Plan”) and
150,000 shares of Parent Common Stock reserved for issuance upon exercise of
warrants to purchase shares of Parent Common Stock under the Warrant Agreement
by and between Parent and Standard Bank Plc, dated as of July 10,
2008. All of the issued and outstanding shares of Parent Common Stock
have been duly authorized and validly issued and are fully paid, non-assessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof.
(b) Except
as set forth in Section 3.2(b) of the
Parent Disclosure Schedule, there are no outstanding bonds, debentures, notes,
debt securities or other indebtedness for borrowed money of Parent having the
right to vote (or convertible into or exercisable or exchangeable for securities
having the right to vote) on any matters on which the stockholders of Parent may
vote. Section 3.2(b)
of the Parent Disclosure Schedule sets forth a true and complete list of all
indebtedness for borrowed money of Parent outstanding on the date of this
Agreement.
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(c) Except
as set forth in paragraph (a) and (b) above, there are no issued, outstanding or
authorized securities (including securities convertible into or exercisable or
exchangeable for shares of capital stock or other equity or voting securities)
of Parent and (except for the issuance of the Amalgamation Consideration
contemplated by this Agreement) there are no options, warrants, calls, rights
(including “phantom” stock or stock appreciation rights), commitments,
agreements, arrangements or undertakings of any kind to which Parent is a party
or by which it is bound obligating Parent to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock or other equity
or voting securities of Parent (or securities convertible into or exercisable or
exchangeable for shares of capital stock or other equity or voting securities)
or obligating Parent to issue, grant, extend or enter into any such option,
warrant, call, right, commitment, agreement, arrangement or
undertaking. Except as contemplated by this Agreement, there are no
outstanding contractual obligations, commitments, understandings or arrangements
of Parent to repurchase, redeem or otherwise acquire or make any payment in
respect of any shares of capital stock or other equity or voting securities of
Parent or other agreements or arrangements with or among any securityholders of
Parent with respect to securities of Parent.
3.3 Subsidiaries. Except
for all of the common stock of Minera Santa Rita S. de R.L. de C.V., Oro De
Altar S. de R.L. de C.V. and Leadville Mining and Milling Holding Company,
Parent does not as of the date hereof own, directly or indirectly, any capital
stock, membership interest, partnership interest, joint venture interest or
other equity interest in any Person.
3.4 Authorization; Binding
Agreement. Parent has all requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, (i) have
been duly and validly authorized by the Board of Directors of Parent, and (ii)
no other corporate proceedings on the part of Parent are necessary to authorize
the execution and delivery of this Agreement or to consummate the transactions
contemplated hereby, other than receipt of the Required Parent
Vote. The affirmative vote of the stockholders of Parent holding at
least a majority of the issued and outstanding Parent Common Stock of Parent
(the “Required
Parent Vote”) is necessary to approve the Parent Proxy Matters (as
defined in Section 5.5). This Agreement has been duly and validly executed and
delivered by Parent and (assuming the due authorization, execution and delivery
hereof by Nayarit) constitutes the legal, valid and binding obligation of Parent
enforceable against Parent in accordance with its terms, subject to the
Enforceability Exceptions.
3.5 Governmental
Approvals. No Consent of or with any Governmental Authority on
the part of Parent is required to be obtained or made in connection with the
execution, delivery or performance by Parent of this Agreement or the
consummation by Parent of the transactions contemplated hereby other than (i)
the filing of the Articles of Amalgamation under the OBCA, (ii) such
filings as may be required with the SEC and foreign and state securities Laws
administrators, (iii) pursuant to Antitrust Laws (if applicable) and (iv) those
Consents that, if they were not obtained or made, would not reasonably be
expected to have a Material Adverse Effect.
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3.6 No Violations or
Conflicts. Except as set forth in Section 3.6 of the
Parent Disclosure Schedule, the execution and delivery by Parent of this
Agreement and the consummation by Parent of the transactions contemplated
hereby, and compliance by Parent with any of the provisions hereof, will not (i)
conflict with or violate any provision of the Parent Organizational Documents,
(ii) require any Consent under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation, amendment or acceleration)
under, any Parent Material Contract to which Parent is a party or by which its
assets are bound, (iii) result (immediately or with the passage of time or
otherwise) in the creation or imposition of any Encumbrance upon any of the
properties, rights or assets of Parent, or (iv) subject to obtaining the
Consents from Governmental Authorities, and the waiting periods referred to
therein having expired, and any condition precedent to such Consent having been
satisfied, conflict with, contravene or violate in any respect any Law to which
Parent or any of its assets or properties is subject, except, in the case of
clauses (ii), (iii) and (iv) above, for any deviations from the foregoing that
would not reasonably be expected to have a Material Adverse Effect.
3.7 SEC Documents; Internal
Controls; SEC Foreign Issuer.
(a) Parent
has filed with the Securities Exchange Commission (“SEC”) and the OSC and made
available to Nayarit all forms, reports, schedules, registration statements and
other documents required to be filed or furnished by Parent with the SEC or the
OSC since March 22, 2006 (collectively, and in each case including all
certifications, exhibits and schedules thereto and documents incorporated by
reference therein, the “Public
Reports”). As of their respective dates of filing or
furnishing (or, if amended or superseded by a subsequent filing or furnishment
prior to the date hereof, as of the date of such subsequent filing or
furnishment), the Public Reports complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the “U.S. Securities Act”), the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and/or the
Sarbanes-Oxley Act of 2002, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Public Reports, and applicable Canadian
securities Laws, and none of the Public Reports when filed or furnished
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
there are no outstanding comments from or unresolved issues raised by the SEC or
the OSC with respect to any of the Public Reports. Parent is a
“reporting issuer” under applicable Canadian securities Laws and is not in
default of any material requirements of any applicable Canadian securities
Laws.
(b) Except
as set forth in Section 3.7(b) of the
Parent Disclosure Schedule, Parent has timely filed all forms, reports,
schedules and other documents, together with any amendments required to be made
with respect thereto, that they were required to file since September 22, 2005
with any Governmental Authority (other than Public Reports) and have paid all
fees and assessments due and payable in connection therewith. Except
for normal examinations conducted by a Governmental Authority in the regular
course of the business of Parent, no Governmental Authority has initiated any
Action or, to the Knowledge of Parent, threatened an investigation into the
business or operations of Parent since September 22, 2009. There is
no material unresolved violation or exception by any Governmental Authority with
respect to any report, form, schedule or other document filed by, or relating to
any examinations by any such Governmental Authority of Parent.
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(c) Since
July 31, 2009 to the date of this Agreement (i) to the Knowledge of Parent, no
director, officer, employee, auditor, accountant or representative of Parent has
received or otherwise had or obtained knowledge of any material complaint,
allegation, assertion or claim, whether written or oral, regarding the
accounting or auditing practices, procedures, methodologies or methods of Parent
or its internal accounting controls, including any material complaint,
allegation, assertion or claim that Parent has engaged in questionable
accounting or auditing practices, and (ii) no attorney representing Parent,
whether or not employed by Parent, has reported evidence of a material violation
of securities Laws, breach of fiduciary duty or similar violation by Parent or
any of its officers, directors, employees or agents to the Board of Directors of
Parent or any committee thereof or to any director or officer of
Parent.
3.8 Absence of Undisclosed
Liabilities. Parent has not incurred any liabilities or
obligations of the type required to be reflected on a balance sheet in
accordance with United States GAAP that are not adequately reflected or reserved
on or provided for in the Public Reports, other than liabilities of the type
required to be reflected on a balance sheet in accordance with United States
GAAP that would not reasonably be expected to have a Material Adverse
Effect..
3.9 Compliance with
Laws. Parent is in compliance
with all Laws applicable to it and the conduct of its business as currently
conducted and as proposed to be conducted following consummation of the
Amalgamation. Parent is not in conflict with, or in default or
violation of, nor has it received any notice of any conflict with, or default or
violation of, (A) any applicable Law by which Parent or any of its property or
assets is bound or affected, or (B) any Parent Material Contract to which Parent
is a party or by which Parent or any property, asset or right of Parent is bound
or affected, except, in each case, for any such conflicts, defaults or
violations that would not reasonably be expected to have a Material Adverse
Effect.
3.10 Regulatory Agreements;
Permits.
(a) There
are no (1) except for The Standard Bank Plc mandates, written agreements,
consent agreements, memoranda of understanding, commitment letters, cease and
desist orders, or similar undertakings to which Parent is a party, on the one
hand, and any Governmental Authority is a party or addressee, on the other hand,
(2) Orders or directives of or supervisory letters from a Governmental Authority
specifically with respect to Parent or any property or asset owned by Parent, or
(3) resolutions or policies or procedures adopted by Parent at the request of a
Governmental Authority, that (A) limit in any material respect the ability
of Parent to conduct its business as currently being conducted or (B) in any
manner relate to the ability of Parent to pay dividends or otherwise materially
restrict the conduct of business of Parent in any respect.
(b) Except
for updated certificates on concessions, Parent holds all material permits,
licenses, franchises, grants, authorizations, consents, exceptions, variances,
exemptions, orders and other governmental authorizations, certificates, consents
and approvals necessary to lawfully conduct its business as presently conducted
and to own, lease and operate its assets and properties (collectively, the
“Parent Permits”), all
of which are in full force and effect, and no suspension, non-renewal,
amendment, restriction, limitation or cancellation of any of the Parent Permits
is pending or, to the Knowledge of Parent, threatened, except where the failure
of any of the Parent Permits to be in full force and effect, or the suspension
or cancellation of any of the Parent Permits, would not reasonably be expected
to have a Material Adverse Effect. To the Knowledge of Parent, no
facts or circumstances exist that would reasonably be expected to impact
Parent’s ability to obtain any material Parent Permit in the future as may be
necessary for Parent to continue its operations as currently
contemplated. Parent is not in violation in any material respect of
the terms of any Parent Permit.
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3.11 Absence of Certain
Changes. Except for the transactions contemplated by this
Agreement and except as set forth in Section 3.11 of the
Parent Disclosure Schedules, Parent has conducted its businesses in the ordinary
course of business consistent with past practice and there has not been any
fact, change, effect, occurrence, event, development or state of circumstances
that has had or would reasonably be expected to have a Material Adverse
Effect.
3.12 Taxes and
Returns. Except as would not reasonably be expected to have a
Material Adverse Effect:
(a) Parent
has or will have timely filed, or caused to be timely filed, all material Tax
Returns required to be filed by it (taking into account all available
extensions), which such Tax Returns are true, accurate, correct and complete in
all material respects, and has paid, collected or withheld, or caused to be
paid, collected or withheld, all material Taxes required to be paid, collected
or withheld, other than such Taxes for which adequate reserves in the Public
Reports have been established in accordance with United States
GAAP. Section 3.12 of the
Parent Disclosure Schedules sets forth each jurisdiction where Parent files or
is required to file a Tax Return. There are no claims, assessments,
audits, examinations, investigations or other proceedings pending against Parent
in respect of any Tax, and Parent has not been notified in writing of any
proposed Tax claims or assessments against Parent (other than, in each case,
claims or assessments for which adequate reserves in the Public Reports have
been established in accordance with United States GAAP or are immaterial in
amount). There are no material Encumbrances with respect to any Taxes
upon any of Parent’s assets, other than (i) Taxes, the payment of which is not
yet due, or (ii) Taxes or charges being contested in good faith by appropriate
proceedings and for which adequate reserves in the Public Reports have been
established in accordance with United States GAAP. Parent does not
have any outstanding waivers or extensions of any applicable statute of
limitations to assess any material amount of Taxes. There are no
outstanding requests by Parent for any extension of time within which to file
any Tax Return or within which to pay any Taxes shown to be due on any Tax
Return.
(b) Parent
has not constituted either a “distributing corporation” or a “controlled
corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a
distribution of securities (to any Person or entity that is not a member of the
consolidated group of which Parent is the common parent corporation) qualifying
for, or intended to qualify for, Tax-free treatment under Section 355 of the
Code (i) within the two-year period ending on the date hereof or (ii) in a
distribution which could otherwise constitute part of a “plan” or “series of
related transactions” (within the meaning of Section 355(e) of the Code) in
conjunction with the Amalgamation.
(c) Parent
is not or (i) has been at any time within the five-year period ending on the
date hereof a United States real property holding corporation within the meaning
of Section 897(c)(2) of the Code and (ii) has ever been a member of any
consolidated, combined, unitary or affiliated group of corporations for any Tax
purposes other than a group of which Parent is or was the common parent
corporation.
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(d) Parent
has not made any change in accounting method or received a ruling from, or
signed an agreement with, any taxing authority.
(e) Parent
is not a party to any contract, agreement, plan or arrangement that,
individually or collectively, could reasonably be expected to give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G or
162(m) of the Code.
(f) Parent
has not participated in, or sold, distributed or otherwise promoted, any
“reportable transaction,” as defined in Treasury Regulation Section
1.6011-4.
(g) Since
September 30, 2009, Parent has not: (i) changed any Tax accounting methods,
policies or procedures except as required by a change in Law, (ii) made,
revoked, or amended any material Tax election, (iii) filed any amended Tax
Returns or claim for refund, or (iv) entered into any closing agreement
affecting or otherwise settled or compromised any material Tax liability or
refund.
3.13 Restrictions on Business
Activities. Except for The Standard Bank Plc mandates, there
is no agreement or Order binding upon Parent which has or could reasonably be
expected to have the effect of prohibiting, preventing, restricting or impairing
in any respect any business practice of Parent as its business is currently
conducted, any acquisition of property by Parent, the conduct of business by
Parent as currently conducted, or restricting in any material respect the
ability of Parent from engaging in business as currently conducted or from
competing with other parties, except where such agreement or Order would not be
reasonably expected to have a Material Adverse Effect.
3.14 Employee Benefit
Plans. Except as set forth on Section 3.14 of the
Parent Disclosure Schedules, Parent does not maintain, and has no liability
under, any Benefit Plan, and neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (i)
result in any payment (including severance, unemployment compensation, golden
parachute, bonus or otherwise) becoming due to any director or employee of
Parent, or (ii) result in the acceleration of the time of payment or vesting of
any such benefits.
3.15 Employee
Matters.
(a) There
has been: (i) to the Knowledge of Parent, no labor union organizing or
attempting to organize any employee of Parent into one or more collective
bargaining units; and (ii) no labor dispute, strike, work slowdown, work
stoppage, lock out or other collective labor action by or with respect to any
employees, managers or consultants of Parent pending or, to Parent’s Knowledge,
threatened against Parent. Parent is not a party to, or bound by, any
collective bargaining agreement or other agreement with any labor organization
applicable to the employees, managers or consultants of Parent and no such
agreement is currently being negotiated.
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(b) Except
as would not reasonably be expected to result in a Material Adverse Effect,
Parent: (i) is in compliance with all applicable Laws respecting employment and
employment practices, terms and conditions of employment, health and safety and
wages and hours, including Laws relating to discrimination, disability, labor
relations, hours of work, payment of wages and overtime wages, pay equity,
immigration, workers compensation, working conditions, employee scheduling,
occupational safety and health, family and medical leave, and employee
terminations, (ii) has not received written notice, or to the Knowledge of
Parent any other form of notice, that there is any unfair labor practice charge
or complaint against Parent pending, (iii) is not liable for any arrears of
wages or any penalty for failure to comply with any of the foregoing, and (iv)
is not liable for any payment to any trust or other fund or to any Governmental
Authority, with respect to unemployment compensation benefits, social security
or other benefits or obligations for employees (other than routine payments to
be made in the ordinary course of business and consistent with past
practice). Except as would not reasonably be expected to have a
Material Adverse Effect, there are no complaints, lawsuits, arbitrations,
administrative proceedings, or other Actions pending or, to the Knowledge of
Parent, threatened against Parent or any of its employees, managers, consultants
or former employees brought by or on behalf of any applicant for employment, any
current or former employee, any Person alleging to be a current or former
employee, any class of the foregoing, or any Governmental Authority, relating to
any such Law or regulation, or alleging breach of any express or implied
contract of employment, wrongful termination of employment, or alleging any
other discriminatory, wrongful or tortious conduct in connection with the
employment relationship.
(c) There
has been and is no unfair labor practice complaint against Parent pending or, to
the Knowledge of Parent, threatened before any Governmental Authority, and no
pending or, to the Knowledge of Parent, threatened arbitration arising out of
any collective bargaining agreement.
(d) All
material amounts due from Parent, or for which any material claim may be
asserted against Parent, on account of wages and other benefits have been paid
or accrued as a liability on the books and records of Parent.
(e) Parent
is not liable for any material liabilities, judgments, arrearage of wages, fines
or penalties for failure to comply with any applicable labor Laws.
3.16 Material
Contracts.
(a) Except
as set forth in the Public Reports filed prior to the date hereof, there are no
contracts, agreements, leases, mortgages, indentures, notes, bonds, liens,
license, permit, franchise, purchase orders, sales orders or other
understandings, commitments or obligations (including without limitation
outstanding offers or proposals) of any kind, whether written or oral, to which
Parent is a party or by or to which any of the properties or assets of Parent
may be bound, subject or affected, which either (i) creates or imposes a
liability greater than $100,000, or (ii) may not be cancelled by Parent on less
than 60 days’ prior notice (the “Parent Material
Contracts”). All Parent Material Contracts have been made
available to Nayarit, and are set forth in Section 3.16(a) of
the Parent Disclosure Schedules other than those that are exhibits to the Public
Reports.
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(b) With
respect to each Parent Material Contract: (i) the Parent Material Contract was
entered into at arms’ length and in the ordinary course of business consistent
with past practices; (ii) the Parent Material Contract is legal, valid, binding
and enforceable in all material respects against Parent and, to Parent’s
Knowledge, the other party thereto, and in full force and effect (except as such
enforcement may be limited by the Enforceability Exceptions); (iii) Parent is
not in breach or default in any material respect, and no event has occurred that
with the passage of time or giving of notice or both would constitute such a
breach or default by Parent, or permit termination or acceleration by the other
party, under the Parent Material Contract; and (iv) to Parent’s Knowledge, no
other party to the Parent Material Contract is in breach or default in any
material respect, and no event has occurred that with the passage of time or
giving of notice or both would constitute such a breach or default by such other
party, or permit termination or acceleration by Parent, under any Parent
Material Contract.
3.17 Litigation. There
is no Action pending or, to the Knowledge of Parent, threatened before any
arbitrator, agency, court or tribunal, foreign or domestic, or, to the Knowledge
of Parent, threatened against Parent or any of its properties, rights or assets
or, any of its officers, directors, partners, managers or members (in their
capacities as such). There is no Order binding against Parent or any
of its properties, rights or assets or any of its officers, directors, partners,
managers or members (in their capacities as such). There is no
material Action that Parent has pending against other parties.
3.18 Transactions with
Affiliates. Section 3.18 of the
Parent Disclosure Schedules sets forth a true, correct and complete list of the
contracts or arrangements that are in existence as of the date of this Agreement
under which there are any existing or future liabilities or obligations between
Parent, on the one hand, and, on the other hand, any (i) present or former
director, officer, employee or Affiliate of Parent, or any family member of any
of the foregoing, or (ii) record or beneficial owner of more than five percent
(5%) of the outstanding Parent Common Stock as of the date hereof (each, a
“Parent Affiliate
Transaction”).
3.19 Books and
Records. All of the books and records of Parent are complete
and accurate in all material respects and have been maintained in the ordinary
course consistent with past practices and in accordance with applicable Laws and
standard industry practices with regard to the maintenance of such books and
records. The records, systems, controls, data and information of
Parent are recorded, stored, maintained and operated under means (including any
electronic, mechanical or photographic process, whether computerized or not)
that are under the control of Parent.
3.20 Information
Supplied. None of the information supplied or to be supplied
by Parent for inclusion or incorporation by reference in (a) any Current Report
on Form 8-K or any other report, form, registration, or other filing made with
any Governmental Authority with respect to the transactions contemplated hereby
or (b) the Registration Statement, Proxy Statement or Nayarit Proxy Circular
(with respect to information regarding Parent) will, at the date it is first
mailed to Parent’s stockholders or at the time of the Stockholder Meeting, or
Nayarit Stockholder Meeting, respectively, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, Parent makes no representation, warranty or covenant with respect to
any information supplied by Nayarit which is contained in the Registration
Statement, Proxy Statement or Nayarit Proxy Circular.
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3.21 Intellectual
Property. Other than as set forth in the Public Reports,
domain names and off-the-shelf software, Parent does not own, license or
otherwise have any right, title or interest in any Intellectual
Property.
3.22 Real
Property. Other than as set forth in the Public Reports,
Parent does not own or lease any real property, and has no commitments or
obligations to purchase or lease real property either prior to or after the
Effective Time.
3.23 Environmental
Matters. Except as set forth in the Public Reports or for such
matters that are not reasonably expected to have a Material Adverse Effect,
Parent: (i) has, to the Knowledge of Parent, complied with all applicable
Environmental Laws; (ii) has not received any notice, demand, letter, claim or
request for information alleging that Parent may be in violation of or liable
under any Environmental Law; and (iii) is not subject to any Order or other
arrangement with any Governmental Authority or subject to any indemnity or other
agreement with any third party relating to Liability under any Environmental
Law.
3.24 Insurance. Set
forth on Section
3.24 of the Parent Disclosure Schedules sets forth a correct and complete
list of all material insurance policies issued in favor of Parent, or pursuant
to which Parent is a named insured or otherwise a beneficiary. With
respect to each such insurance policy: (i) the policy is in full force and
effect and all premiums due thereon have been paid and (ii) Parent is not
in any material respect, in breach of or default under, and Parent has not taken
any action or failed to take any action which, with notice or the lapse of time
or both, would constitute such a breach or default, or permit termination or
modification of, any such policy.
3.25 Bankruptcy. Parent
has not: (i) commenced a voluntary case, or had entered against it a petition,
for relief under the federal bankruptcy code or any similar petition, order or
decree under any federal or state law or statute relative to bankruptcy,
insolvency or other relief for debtors; (ii) caused, suffered or consented to
the appointment of a receiver, trustee, administrator, conservator, liquidator
or similar official in any federal, state or foreign judicial or non judicial
proceedings, to hold, administer and/or liquidate all or substantially all of
its property; or (iii) made an assignment for the benefit of
creditors.
3.26 TSX/OTCBB
Quotation. The Parent Common Stock is traded in Canada on the
Toronto Stock Exchange (“TSX”) and simultaneously in
the United States of America listed for trading on the Over the Counter Bulletin
Board (the “OTCBB”). There is
no action or proceeding pending or, to Parent’s Knowledge, threatened against
Parent by the TSX or OTCBB with respect to any intention by such entity to
prohibit or terminate the trading or quotation of Parent’s Common
Stock on the TSX or OTCBB, respectively.
ARTICLE
IV
COVENANTS
4.1 Conduct of Business of
Nayarit.
(a) Unless
Parent shall otherwise consent in writing (such consent not to be unreasonably
withheld), during the period from the date of this Agreement to the Effective
Time, except as expressly contemplated by this Agreement or as set forth on
Section 4.1 of
the Nayarit Disclosure Schedules:
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(i) Nayarit
and the Subsidiaries shall conduct their respective business, in all material
respects, in the ordinary course of business consistent with past
practice;
(ii) Nayarit
and the Subsidiaries shall use commercially reasonable efforts consistent with
the foregoing to preserve intact, in all material respects, its business
organization, to keep available the services of its managers, directors,
officers, key employees and consultants, to maintain, in all material respects,
existing relationships with all Persons with whom it does significant business,
and to preserve the possession, control and condition of its
assets;
(iii) Nayarit
and the Subsidiaries shall use commercially reasonable efforts to keep all of
the Mineral Rights, the Nayarit Permits and the Nayarit Material Contracts in
good standing and in full force and effect and use commercially reasonable
efforts to continue to maintain, in all material respects, its respective
assets, properties, rights and operations in accordance with present practice in
a condition suitable for their current use; and
(iv) Nayarit
and the Subsidiaries shall use commercially reasonable efforts consistent with
the foregoing to conduct its business in compliance with applicable Laws in all
material respects, and to preserve intact the business organization of Nayarit
and the Subsidiaries.
(b) Without
limiting the generality of the foregoing clause (a), except as set forth on
Section 4.1 of
the Nayarit Disclosure Schedules, during the period from the date of this
Agreement to the Effective Time, and other than as contemplated hereby, neither
Nayarit nor any Subsidiary will (except as specifically contemplated by the
terms of this Agreement), without the prior written consent of Parent (such
consent not to be unreasonably withheld, conditioned or delayed):
(i) amend,
waive or otherwise change, in any respect, its constating documents or other
organizational documents or enter into any stockholder, membership, partnership
or other agreement;
(ii) authorize
for redemption or issuance, issue, grant, sell, pledge, dispose of or propose to
issue, grant, sell, pledge or dispose of any Nayarit Common Shares, any shares
of capital stock or other securities or other equity interests or any options,
warrants, commitments, subscriptions or rights of any kind to acquire or sell
Nayarit Common Shares, any shares of capital stock or other securities or other
equity interests, including any securities convertible into or exchangeable for
Nayarit Common Shares or equity interests in any Subsidiary or decrease or
increase the number of authorized shares of Nayarit Common Shares or equity
interests in any Subsidiary;
(iii) split,
combine, recapitalize or reclassify any of the Nayarit Common Shares or equity
interests in any Subsidiary or issue any other securities in respect thereof, or
declare, pay or set aside any distribution or other dividend (whether in cash,
equity or property or any combination thereof) in respect of the Nayarit Common
Shares or equity interests in any Subsidiary, or directly or indirectly redeem,
purchase or otherwise acquire or offer to acquire any of the Nayarit Common
Shares or equity interests in any Subsidiary;
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(iv) incur,
create, assume, prepay or otherwise become liable for any Indebtedness
(directly, contingently or otherwise), make a loan or advance to or investment
in any third party, or guarantee or endorse any indebtedness, liability or
obligation of any Person;
(v) increase
the wages, salaries or compensation of any of its current or former consultants,
officers, managers or directors by more than five percent (5%), or increase
bonuses for the foregoing individuals in an aggregate amount greater than one
hundred twenty percent (120%) of the amounts paid to such individuals in the
previous calendar year, or increase other benefits of any of the foregoing
individuals, or enter into, establish, amend or terminate any Nayarit Benefit
Plan or any other employment, consulting, retention, change in control,
collective bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity or equity-related,
pension, retirement, consulting, vacation, severance, separation, termination,
deferred compensation, fringe, perquisite or other compensation or benefit plan,
policy, program, agreement, trust, fund or other arrangement with, for or in
respect of any current or former consultant, officer, manager or director or
terminate the employment of any senior executive, in each case other than in the
ordinary course of business consistent with past practice or other than as
required by applicable Law or pursuant to the terms of any Nayarit Benefit Plan
or Nayarit Material Contract in effect on the date of this
Agreement;
(vi) make
or rescind any material election relating to Taxes, settle any material claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, or make any material change in its accounting or
Tax policies or procedures, in each case except as required by applicable Law or
Canadian GAAP;
(vii) transfer
or license to any Person or otherwise extend, materially amend or modify, permit
to lapse or fail to preserve any of Intellectual Property owned or licensed by
Nayarit, other than nonexclusive licenses, or disclose to any Person who has not
entered into a confidentiality agreement any material trade
secrets;
(viii) terminate
or waive or assign any material right under any Nayarit Material Contract or
enter into any Nayarit Material Contract or fail to perform any material term or
obligation of a Nayarit Material Contract;
(ix) establish
any subsidiary or enter into any new line of business;
(x) make
any capital expenditures, or commit to make capital expenditures for any period
following the Effective Time;
(xi) fail
to maintain its books, accounts and records in all material respects in the
ordinary course of business consistent with past practice;
(xii) fail
to use commercially reasonable efforts to keep in force insurance policies or
replacement or revised policies providing insurance coverage with respect to the
assets, operations and activities of Nayarit or any Subsidiary in an amount and
scope of coverage as are currently in effect;
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(xiii) other
than as required to be in compliance with Canadian Securities Authorities rules
and regulations or with Canadian GAAP, or as approved by Nayarit’s outside
auditors, revalue any of its material assets or make any change in accounting
methods, principles or practices;
(xiv) waive,
release, assign, settle or compromise any Action (including any third-party
Action relating to this Agreement or the transactions contemplated hereby,
including the Amalgamation), or otherwise pay, discharge or satisfy any claims,
liabilities or obligations other than in the ordinary course of business
consistent with past practice, unless such amount has been reserved in the
Nayarit Financials;
(xv) acquire,
including by merger, consolidation, acquisition of stock or assets, or any other
form of business combination, any corporation, partnership, limited liability
company, other business organization or any division thereof;
(xvi) adopt
a plan of complete or partial liquidation, winding up, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization, except
as otherwise permitted hereunder;
(xvii) voluntarily
incur any material liability or obligation (whether absolute, accrued,
contingent or otherwise);
(xviii) sell,
lease, license, transfer, exchange or swap, mortgage or otherwise pledge or
encumber (including securitizations), or otherwise dispose of any material
portion of its properties, assets or rights;
(xix) take
any action that would reasonably be expected to delay or impair the obtaining of
any consents or approvals of any Governmental Authority to be obtained in
connection with this Agreement;
(xx) enter
into, amend, waive or terminate (other than terminations in accordance with
their terms) any Nayarit Affiliate Transaction;
(xxi) enter
into any Benefit Plan or any employment, severance, or change of control
agreement;
(xxii) notwithstanding
anything to the contrary set forth in this Section 4.1, sell, lease, transfer,
mortgage, encumber (other than Permitted Encumbrances) or otherwise dispose of
any (i) exploration and option agreements over mining concessions owned by third
parties and similar agreements granting Nayarit and/or its Subsidiaries any
right to carry out mining related activities over mining lots and/or granting an
option to acquire such mining concessions, (ii) concessions or options over
mining concessions or (iii) any Owned Real Property;
(xxiii) sell,
lease, transfer, mortgage, encumber (other than Permitted Encumbrances) or
otherwise dispose of any of its assets or properties to any Person;
or
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(xxiv) authorize or
agree orally or in writing to do any of the foregoing actions.
(a) Between
the date of this Agreement and the Effective Time, each Party shall give, and
shall direct its accountants and legal counsel to give, the other Party and its
officer, manager, director, employee, accountant, consultant, legal counsel,
financial advisor, agent or other representative (collectively, the “Representatives”), at
reasonable times and upon reasonable intervals and notice, access to all offices
and other facilities and to all employees, properties, contracts, agreements,
commitments, books and records of or pertaining to such Party and its
subsidiaries (including Tax Returns, internal work papers, client files, client
contracts and director service agreements) and such financial and operating data
and other information, all of the foregoing as the requesting Party or its
Representatives may reasonably request regarding such Party’s business, assets,
liabilities, employees and other aspects (including unaudited financial
statements, including a consolidated quarterly balance sheet and income
statement, in the form such financial statements have been delivered to the
other Party prior to the date hereof) and instruct such Party’s Representatives
to cooperate with the requesting Party in its investigation (including by
reading available independent public accountant’s work papers) and to provide a
copy of, or make available, each material report, schedule and other document
filed or received pursuant to the requirements of applicable securities Laws;
provided that
the requesting Party shall conduct any such activities in such a manner as not
to interfere unreasonably with the business or operations of the Party providing
such information. Parent agrees to indemnify and hold Nayarit and its
Subsidiaries harmless from any and all claims and liabilities, including costs
and expenses for loss, injury to or death of any Representative of Parent and
any loss, damage to or destruction of any property owned by Nayarit or its
Subsidiaries or others (including claims or liabilities for loss of use of any
property) resulting directly or indirectly from the action or inaction of any of
Parent’s Representatives (and not resulting from the negligence or willful
misconduct of Nayarit, it Subsidiaries or their respective directors, managers,
officers, employees and agents) during any visit to the business or property
sites of Nayarit or its Subsidiaries prior to the completion of the
Amalgamation, whether pursuant to this Section 4.2 or
otherwise. Nayarit agrees to indemnify and hold Parent harmless from
any and all claims and liabilities, including costs and expenses for loss,
injury to or death of any Representative of Nayarit and any loss, damage to or
destruction of any property owned by Parent or others (including claims or
liabilities for loss of use of any property) resulting directly or indirectly
(and not resulting from the gross negligence or willful misconduct of Parent or
its directors, officers, employees and agents) from the action or inaction of
any of Nayarit’s Representatives during any visit to the business or property
sites of Parent prior to the completion of the Amalgamation, whether pursuant to
this Section 4.2 or otherwise.
(b) The
terms and conditions of this Agreement and the Amalgamation Agreement are
strictly confidential and the Parties hereby agree that they and their
respective Representatives shall not disclose to the public or to any third
party the existence or terms of this Agreement and the Amalgamation Agreement
other than with the express prior written consent of the other Party, except as
the Parties may otherwise agree or as may be required by applicable Law, rule or
regulation, or at the request of any Governmental Authority having jurisdiction
over a Party or any of its Representatives or Affiliates (including, without
limitation, the rules or regulations of the SEC), or as may be required to
defend any Action brought against such Party in connection with this Agreement
and the Amalgamation Agreement. If a Party is so required to make
such a disclosure, it must first provide to the other Party the content of the
proposed disclosure, the reasons the disclosure is required, and the time and
place that the disclosure will be made. In such event, the Parties
will work together to draft a disclosure which is acceptable to both
Parties.
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(c) If
a Party is required by applicable Laws or stock exchange listing requirements to
make public disclosure regarding the transactions contemplated by this Agreement
and the Amalgamation Agreement, it shall provide the other Party with a draft of
the proposed disclosure and, to the extent practical, obtain the consent of the
other Party prior to such disclosure.
(a) For
purposes of this Agreement, “Acquisition Proposal” means (other than
the Amalgamation) any inquiry, proposal or offer, or any indication of interest
in making an offer or proposal, from any Person or group, at any time relating
to a merger, take-over bid, amalgamation, plan of arrangement, reorganization,
recapitalization, consolidation, asset sale, share exchange, business
combination or similar transaction, including any single or multi-step
transaction or series of related transactions involving Nayarit, its
Subsidiaries or Parent, on the one hand, and any third party, on the other hand,
or acquisition or purchase of assets of or by Nayarit, its Subsidiaires or
Parent representing 50% or more of such Person’s assets or
business. Without limiting the foregoing, the term Acquisition
Proposal includes any inquiry, proposal or offer made or received by Nayarit,
its Subsidiaries or Parent or any indication of interest in same by Nayarit, its
Subsidiaries or Parent to any third-party at any time relating to a merger,
take-over bid, amalgamation, plan of arrangement, reorganization,
recapitalization, consolidation, asset sale, share exchange, business
combination or similar transaction, including any single or multi-step
transaction or series of related transactions with Nayarit, its Subsidiaries or
Parent or any of their respective Affiliates.
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(b) In
order to induce each Party to continue to expend management time and financial
resources in furtherance of the transactions contemplated hereby, from the date
hereof until the earlier of (x) the Effective Date or (y) termination of this
Agreement pursuant to Section 7.1, none of Nayarit, any Subsidiary or Parent
shall (unless otherwise required by applicable Law), directly or indirectly, and
shall not, directly or indirectly, authorize or permit any of its Representative
to: (i) solicit, encourage, assist, initiate or facilitate the making,
submission or announcement of any Acquisition Proposal, (ii) furnish any
non-public information regarding Nayarit, any Subsidiary or Parent or the
Amalgamation to any Person or group (other than a Party to this Agreement or
their Representatives) in connection with or in response to an Acquisition
Proposal, (iii) engage, participate in or continue discussions or negotiations
with any Person or group with respect to, or which could be expected to lead to,
an Acquisition Proposal, (iv) withdraw, modify or qualify, or propose publicly
to withdraw, modify or qualify, in a manner adverse to Parent, the approval of
this Agreement or the Amalgamation or the recommendation by the Board of
Directors of Nayarit or Parent that its stockholders adopt the Amalgamation
Agreement, (v) approve, endorse or recommend, or publicly propose to approve,
endorse or recommend, any Acquisition Proposal, (vi) discuss, negotiate or enter
into any letter of intent, agreement in principle, acquisition agreement or
other similar agreement related to any Acquisition Proposal, or (vii) release
any third party from, or waive any provision of, any confidentiality agreement
to which Nayarit, any Subsidiary or Parent is a
party. Notwithstanding the foregoing, this Section 4.3 shall not
prevent or restrict the directors of Nayarit or Parent from considering or
negotiating any unsolicited bona fide Acquisition Proposal that may be a
Superior Proposal or from considering, negotiating, approving, recommending to
the Nayarit Stockholders or the stockholders of Parent or entering into an
agreement in respect of a Superior Proposal from any Person if the directors of
Nayarit or Parent determine in good faith after consulting with outside counsel
that such action is necessary or advisable for such directors to act in a manner
consistent with his or her fiduciary duties under applicable
Law. “Superior
Proposal” means [A] with respect to Nayarit, an Acquisition Proposal if
such Acquisition Proposal is not conditional on obtaining financing and the
directors of Nayarit have determined in good faith, after consultation with, and
receiving advice (which may include written opinions, a copy of which shall have
been provided to Parent) from, as appropriate, the financial, legal and other
advisors to Nayarit to the effect that such Acquisition Proposal would, if
consummated in accordance with the terms thereof, but without assuming away the
risk of non-completion, result in a transaction which: (x) provides
consideration to Nayarit Stockholders that exceeds the consideration payable
under this Agreement to the Nayarit Stockholders by at least twenty five percent
(25%); and (y) is reasonably capable of being completed without undue delay,
taking into account all legal, financial, regulatory and other aspects of such
Acquisition Proposal, and [B] with respect to Parent, an Acquisition Proposal if
the directors of Parent have determined in good faith, after consultation with,
and receiving advice (which may include written opinions, a copy of which shall
have been provided to Nayarit) from, as appropriate, the financial, legal and
other advisors to Parent to the effect that such Acquisition Proposal would, if
consummated in accordance with the terms thereof, but without assuming away the
risk of non-completion, result in a transaction which is accretive to the
stockholders of Parent.
(c) Without
limiting the foregoing, Nayarit agrees it shall be responsible for the actions
of its and its Subsidiaries’ Representatives that would constitute a violation
of the restrictions set forth in this Section 4.3. Nayarit shall
promptly inform its and its Subsidiaries’ Representatives of the obligations
undertaken in this Section 4.3. Without limiting the foregoing,
Parent agrees it shall be responsible for the actions of its Representatives
that would constitute a violation of the restrictions set forth in this Section
4.3. Parent shall promptly inform its Representatives of the
obligations undertaken in this Section 4.3.
(d) Each
Party shall notify the other Party promptly (and in any event within 48 hours)
orally and in writing of the receipt by a Party or any of their respective
Representatives of: (i) any bona fide inquiries, proposals or offers, requests
for information or requests for discussions or negotiations regarding or
constituting any Acquisition Proposal or any bona fide inquiries, proposals or
offers, requests for information or requests for discussions or negotiations
that could be expected to result in an Acquisition Proposal and (ii) any request
for non-public information relating to Nayarit, any Subsidiary or Parent,
specifying in each case the material terms and conditions thereof (including a
copy thereof if in writing) and the identity of the party making such inquiry,
proposal, offer or request for information. Each Party shall keep the
other Party promptly informed of the status of any such inquiries, proposals,
offers or requests for information. From and after the date of this
Agreement, each Party shall immediately cease and cause to be terminated any
solicitations, discussions or negotiations with any Person with respect to any
Acquisition Proposal and shall direct, and use its commercially reasonable
efforts to cause, its Representatives to cease and terminate any such
solicitations, discussions or negotiations.
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(e) If
Nayarit or Parent receives a request for material non-public information from a
Person who is considering making or has made an Acquisition Proposal (the
existence and content of which have been disclosed to the other Party), and the
directors of Nayarit or Parent determine that such proposal would or does
constitute a Superior Proposal then, and only in such case, the directors of
Nayarit or Parent may, subject to the execution of a confidentiality agreement
on terms which are not more favorable to the Person mailing or considering
mailing the Acquisition Proposal than those set forth in this Agreement, provide
such Person with access to information regarding Nayarit or Parent, as the case
may be; provided, however, that the Person who is considering making the
Acquisition Proposal shall not be precluded thereunder from making the
Acquisition Proposal, and provided further that Nayarit or Parent sends a copy
of any such confidentiality agreement to the other Party immediately upon the
execution thereof and the other Party is provided with a list of or a copy of
the information, if any, provided to such Person that was not previously
provided to such other Party and such other Party is immediately provided with
access to similar information.
(f) From
the date of this Agreement until the earlier of (x) the Closing Date or (y) the
date of termination of this Agreement pursuant to Section 7.1, the directors of
Nayarit and the directors of Parent shall not accept, approve, recommend or
enter into any agreement in respect of an Acquisition Proposal (other than a
confidentiality agreement contemplated by Section 4.3(e) hereof) on the basis
that it would constitute a Superior Proposal, unless (i) it has provided
the other Party with a copy of the documents containing such Acquisition
Proposal (with such deletions as are necessary to protect any confidential
portions of such document, provided that the material terms and conditions of,
and the identity of the Person making, such Acquisition Proposal may not be
deleted) which the directors of Nayarit or Parent, as the case may be, have
determined would be a Superior Proposal pursuant to Section 4.3(b) hereof,
and (ii) if applicable, the requirements of Section 4.3(g) have been
satisfied.
(g) In
the event an Acquisition Proposal which is deemed a Superior Proposal pursuant
to Section 4.3(b) is received by Nayarit, during the five (5) Business Days
after the date Parent received notice of the determination of the directors of
Nayarit to accept, approve and recommend or enter into an agreement with respect
to such Superior Proposal, Parent shall have the opportunity, but not the
obligation, to offer in writing to amend the terms of this Agreement and the
Amalgamation. The directors of Nayarit shall promptly review any
offer by Parent to amend the terms of this Agreement and the Amalgamation in
order to determine in good faith, whether the offer of Parent upon acceptance by
Nayarit would at least match the value per Nayarit Common Share of the Superior
Proposal. If the directors of Nayarit so determine, Nayarit shall
enter into an amended agreement with Parent reflecting the amended proposal of
Parent and will promptly reaffirm its recommendation of the Amalgamation as
amended. Nayarit acknowledges and agrees that each successive
financial modification of any Acquisition Proposal shall constitute a new
Acquisition Proposal for purposes of the requirement under Section 4.3(f)
hereof and shall initiate an additional five (5) Business Day
period.
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4.5 Conduct of Business of
Parent.
(a) Unless
Nayarit shall otherwise consent in writing (such consent not to be unreasonably
withheld), during the period from the date of this Agreement to the Effective
Time, except as specifically contemplated by the terms of this Agreement, Parent
shall conduct its business in, and shall not take any action other than in, the
ordinary course of business consistent with past practice;
(b) Without
limiting the generality of the foregoing clause (a), during the period from the
date of this Agreement to the Effective Time, Parent will not (except as
specifically contemplated by this Agreement), without the prior written consent
of Nayarit (such consent not to be unreasonably withheld):
(i) except
for a $15 million 12-month revolving credit facility, make a loan or advance to
or investment in any third party other than in the ordinary course of business
consistent with past practices;
(ii) except
as contemplated by this Agreement, redeem, retire, purchase or otherwise
acquire, directly or indirectly, any shares of the capital stock of
Parent;
(iii) except
in the ordinary course of business consistent with past practices, make any
capital expenditures, or commit to make capital expenditures; or
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(iv)
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authorize
or agree to do any of the foregoing
actions.
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4.6 Voting. Subject
to Section 4.3, Colin Sutherland and Bradley Langille hereby agree to vote any
shares of Nayarit Common Shares owned by each of them at the Nayarit Stockholder
Meeting in favor of the Nayarit Proxy Matters. Subject to Section
4.3, John Brownlie hereby agrees to vote any shares of Parent Common Stock owned
by him at the Parent Stockholder Meeting in favor of the Parent Proxy
Matters.
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ARTICLE
V
ADDITIONAL
COVENANTS OF THE PARTIES
(a) Subject
to the terms and conditions of this Agreement, prior to the Effective Time, each
Party shall use commercially reasonable efforts, and shall cooperate fully with
the other Party, to take, or cause to be taken, all actions and to do, or cause
to be done, all things necessary, proper or advisable under applicable Laws and
regulations to consummate the Amalgamation and the other transactions
contemplated by this Agreement and the Registration Statement, Proxy Statement
and Nayarit Proxy Circular (including the receipt of all authorizations,
approvals and permits required to be obtained from or made with any Governmental
Authority and relevant stock exchanges in order to consummate the transactions
contemplated by this Agreement (collectively, the “Requisite Regulatory
Approvals”)), and the satisfaction, but not the waiver, of the closing
conditions set forth in Article VI), and to comply promptly with all
requirements of Governmental Authorities applicable to the transactions
contemplated by this Agreement.
(b) Parent,
Nayarit and each Subsidiary will cooperate with each other and will take all
commercially reasonable steps, and proceed diligently and in good faith:
(i) to submit any necessary filings, amendments or revisions to any
required Governmental Authority or other third party in connection with the
transactions contemplated hereby, and (ii) to promptly submit and make
other applications, notices and submissions (or amendments to any of the
foregoing previously submitted) with any Governmental Authority or other third
party which must be filed in order for Nayarit to obtain all Consents which must
be obtained prior to the Closing in order for Nayarit and the Subsidiaries to
operate their respective business as currently operated and currently intended
by the Parties to be operated following the Closing. All such filings
shall be made, if not already made, as promptly as practicable and Parent shall
supply as promptly as reasonably practicable any additional information and
documentary material that may be requested by Nayarit in connection with such
Consents.
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(c) In
furtherance and not in limitation of the covenants of the Parties contained in
Sections 5.2(a) and (b), if any objections are asserted with respect to the
transactions contemplated hereby under any applicable Law or if any suit is
instituted (or threatened to be instituted) by any applicable Governmental
Authority or any private party challenging any of the transactions contemplated
hereby as violative of any applicable Law or which would otherwise prevent,
materially impede or materially delay the consummation of the transactions
contemplated hereby, Parent and Nayarit shall use their commercially reasonable
efforts to resolve any such objections or suits so as to permit consummation of
the transactions contemplated by this Agreement, including in order to resolve
such objections or suits which, in any case if not resolved, could reasonably be
expected to prevent, materially impede or materially delay the consummation of
the transactions contemplated hereby (including the Amalgamation).
(d) In
the event any Action is instituted (or threatened to be instituted) by a
Governmental Authority or private party challenging the Amalgamation or any
other transaction contemplated by this Agreement, or any other agreement
contemplated hereby, Parent and Nayarit shall cooperate in all respects with
each other and use their respective commercially reasonable efforts to contest
and resist any such action or proceeding and to have vacated, lifted, reversed
or overturned any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent, that is in effect and that prohibits,
prevents or restricts consummation of the transactions contemplated by this
Agreement.
(e) Notwithstanding
anything herein to the contrary, neither Parent nor Nayarit shall be required to
agree to any term, condition or modification with respect to obtaining any
Consents in connection with the Amalgamation or the consummation of the
transactions contemplated by this Agreement that would result in, or would be
reasonably likely to result in: (i) a Material Adverse Effect of either Party or
(ii) Parent or Nayarit having to cease, sell or otherwise dispose of any assets
or business (including the requirement that any such assets or business be held
separate).
(a) Indemnification by
Nayarit. From the date of this Agreement through the Closing
Date, Nayarit shall indemnify and hold harmless each of Parent and its
Affiliates and each of their respective successors and assigns, and their
respective officers, directors, employees and agents (each, a “Parent Indemnified Party”)
from and against any liabilities, claims (including claims by third parties),
demands, judgments, losses, costs, damages or expenses whatsoever (including
reasonable attorneys’, consultants’ and other professional fees and
disbursements of every kind, nature and description) (collectively, “Damages”) such Parent
Indemnified Party may sustain, suffer or incur and that result from, arise out
of or relate to: (i) any breach by Nayarit or any Subsidiary of any of their
representations, warranties, covenants or agreements contained in this Agreement
or in any agreement or certificate delivered in connection with this Agreement
and/or (ii) any negligence, willful misconduct or fraud committed in connection
with the execution and delivery of, or the performance under, this Agreement by
Nayarit or any Subsidiary.
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(b) Indemnification by
Parent. From the date of this Agreement through the Closing
Date, Parent shall indemnify and hold harmless Nayarit and its respective
Affiliates and each of their respective successors and assigns, and their
respective officers, directors, employees and agents (each, a “Nayarit Indemnified Party”)
from and against any Damages such Nayarit Indemnified Party may sustain, suffer
or incur and that result from, arise out of or relate to: (i) any breach by
Parent of any of its representations, warranties, covenants or agreements
contained in this Agreement or in any agreement or certificate delivered in
connection with this Agreement and/or (ii) any negligence, willful misconduct or
fraud committed the execution and delivery of, or the performance under, this
Agreement by Parent.
(c) Indemnification
Procedures. A Person seeking indemnification under this
Section 5.3 (the “Indemnitee”) must give timely
written notice to the Person from whom indemnification is sought (the “Indemnitor”) as soon as
practical after the Indemnitee becomes aware of any condition or event that
gives rise to Damages for which indemnification is sought under this Section
5.3. The failure of the Indemnitee to give timely notice shall not
affect the Indemnitee’s rights to indemnification hereunder except to the extent
the Indemnitor demonstrates it was materially prejudiced by such
failure. In the event a claim or demand is made by a party against an
Indemnitee, the Indemnitee shall promptly notify the Indemnitor of such claim or
demand, specifying the nature and the amount of the Damages (the “Claim Notice”). The
Indemnitor shall notify the Indemnitee within twenty (20) days after receipt of
the Claim Notice whether the Indemnitor will undertake, conduct and control,
through counsel of its own choosing and at its expense, the settlement or
defense thereof, and Indemnitee shall cooperate with Indemnitor in connection
therewith, provided that if Indemnitor undertakes such defense: (i) Indemnitor
shall not thereby permit to exist any Encumbrance or other adverse charge upon
any asset of Indemnitee or settle such action without first obtaining the
consent of Indemnitee, except for settlements solely covering monetary matters
for which Indemnitor has acknowledged responsibility for payment; (ii)
Indemnitor shall permit Indemnitee (at Indemnitee’s sole cost and expense) to
participate in such settlement or defense through counsel chosen by Indemnitee;
and (iii) Indemnitor shall agree promptly to reimburse Indemnitee for the full
amount of any Damages resulting from such claim, except for those costs
expressly assumed by the Indemnitee hereunder. The Indemnitee agrees
to preserve and provide access to all evidence that may be useful in defending
against such claim and to provide reasonable cooperation in the defense thereof
or in the prosecution of any action against a third party in connection
therewith. The Indemnitor’s defense of any claim or demand shall not
constitute an admission or concession of liability therefor or otherwise operate
in derogation of any rights Indemnitor may have against Indemnitee or any third
party. So long as Indemnitor is reasonably contesting any such claim
in good faith, Indemnitee shall not pay or settle any such claim. If
Indemnitor does not notify Indemnitee within twenty (20) days after receipt of
Indemnitee’s Claim Notice that it elects to undertake the defense thereof,
Indemnitee shall have the right to contest the claim in the exercise of its
exclusive, reasonable discretion at the expense of the Indemnitor (provided the
Indemnitor shall not be required to pay Indemnitee's expenses for the defense,
settlement or compromise of claims which are not covered by Indemnitor’s
obligations under this Section 5.3 or which Indemnitor has not consented
to).
(d) Insurance
Effect. Notwithstanding the foregoing, to the extent any
Damages that are subject to indemnification pursuant to this Agreement are
covered by insurance, the Indemnitee shall use commercially reasonable efforts
to obtain the maximum recovery under such insurance. If the
Indemnitee receives payment from the Indemnitor for indemnification under this
Section 5.3 and later receives proceeds from insurance or other amounts in
respect of such Damages, then it shall hold such proceeds or other amounts in
trust for the benefit of the Indemnitor and shall pay to the Indemnitor, as
promptly as practicable after receipt, a sum equal to the amount of the proceeds
or other amount received, up to the aggregate amount of any payments received
from the Indemnitor pursuant to this Agreement in respect of such
Damages.
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(e) Exclusive
Remedy. Except with respect to any claims for negligence,
willful misconduct or fraud, the rights of any Parent Indemnified Party or
Nayarit Indemnified Party for indemnification relating to this Agreement or the
transactions contemplated hereby shall be strictly limited to those contained in
this Section 5.3, and, except as specifically set forth in Section 8.10, such
indemnification rights and the right to terminate this Agreement pursuant to
Section 7.1 and the right to receive the Break Fee, if applicable, shall be the
sole and exclusive remedies of such Parent Indemnified Party or Nayarit
Indemnified Party, as applicable, with respect to this Agreement or any matter
arising under or in connection with this Agreement. To the maximum
extent permitted by applicable Law, the Parent Indemnified Parties and the
Nayarit Indemnified Parties hereby waive all other rights and remedies, and
release all claims against each other, with respect to this Agreement or any
matter arising under or in connection with this Agreement, whether under any
applicable Law, at common law or otherwise.
5.5 Parent Registration
Statement; Proxy Statement.
(a) Promptly
after the date of this Agreement, (i) Parent shall prepare and file with
the SEC a registration statement on Form S-4 (or other appropriate form), which
shall include the Proxy Statement, for the purpose of registering the
Amalgamation Consideration to be issued to the Nayarit Stockholders pursuant to
the Amalgamation (the “Registration Statement”), and
(ii) Parent shall prepare and file with the SEC a proxy statement on
Schedule 14A (the “Proxy
Statement”) for the purpose of, among other things, soliciting proxies
from holders of Parent Common Stock to vote, at a meeting of the holders of
Parent Common Stock to be called for such purpose (the “Parent Stockholder Meeting”), in
favor of, among other things, [I] the issuance of the Amalgamation
Consideration, [II] any other proposals the Parties deem necessary to effectuate
the effectiveness of the Registration Statement, and [III] an adjournment
proposal (collectively, the “Parent Proxy
Matters”). For purposes of this Agreement, “Proxy Statement”
means the letter to Parent’s Stockholders, the notices of meeting, the proxy
statement and forms of proxies to be distributed to Parent’s Stockholders in
connection with the Parent Proxy Matters and any additional solicitation
materials required to be filed with the SEC in connection
therewith.
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(b) Parent,
with the assistance of Nayarit, shall promptly respond to any SEC comments on
the Registration Statement and shall use reasonable best efforts to cause such
Registration Statement to be declared effective by the SEC as soon after filing
as practicable. Parent, with the assistance of Nayarit, shall
promptly respond to any SEC comments on the Proxy Statement and shall use
reasonable best efforts to have the Proxy Statement cleared by the SEC under the
Exchange Act as soon after filing as practicable.
(c) Parent
will advise Nayarit, promptly after it receives notice thereof, of the time when
the Registration Statement has been declared effective by the SEC or any
supplement or amendment to the Registration Statement has been filed, or any
request by the SEC for amendment of the Registration Statement or comments
thereon and responses thereto or requests by the SEC for additional
information. Parent will advise Nayarit, promptly after it receives
notice thereof, of the time when the Proxy Statement has been cleared by the SEC
under the Exchange Act or any supplement or amendment to the Proxy Statement has
been filed, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
(d) If
at any time prior to the Effective Time, any information relating to Parent,
Nayarit or any of their respective subsidiaries, affiliates, officers or
directors, should be discovered by Parent or Nayarit, as applicable, that should
be set forth in an amendment or supplement to the Registration Statement or the
Proxy Statement, so that such documents would not include any misstatement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the Party which discovers such information shall promptly notify
the other Party hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the stockholders of Parent.
(e) All
reasonable out-of-pocket expenses (including all reasonable fees and expenses of
counsel, accountants and advisors) incurred by Parent or its Affiliates in
connection with or related to the preparation, printing, filing and mailing of
the Registration Statement and Proxy shall be equally shared by Parent and
Nayarit.
5.6 Reservation of
Stock. Parent hereby agrees there shall be, or Parent shall
cause to be, reserved for issuance and delivery such number of shares of Parent
Common Stock as shall be required for issuance and delivery of the Amalgamation
Consideration and upon the exercise, conversion or exchange of Nayarit
Convertible Securities.
5.7 Nayarit
Filings.
(a) Nayarit
shall prepare, in consultation with Parent, a proxy circular, in the form and
containing the information required by applicable corporate and Canadian
Securities Laws and TSXV requirements (the “Nayarit Proxy Circular”),
together with any other documents required by such requirements, and not
containing any misrepresentation (as defined under applicable securities
legislation and requirements) with respect thereto, other than with respect to
any information relating to and provided by Parent (all of which shall be in a
form satisfactory to Parent, acting reasonably).
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(b) Nayarit
shall, as soon as practicable file, with the TSXV an application for conditional
acceptance of the Amalgamation, and enclosing a draft of the Proxy Circular and,
with the assistance of Parent, shall promptly respond to any comments on the
application or Nayarit Proxy Circular and shall use reasonable best efforts to
cause such conditional acceptance to be obtained and the Nayarit Proxy Circular
to be cleared for mailing by the TSXV as soon after filing as
practicable. Nayarit will advise Parent, promptly after it receives
notice thereof, of the time when the Nayarit Proxy Circular has been cleared by
the TSXV for mailing or any request by the TSXV for amendment of the Nayarit
Proxy Circular or comments thereon and responses thereto or requests by the TSXV
for additional information.
(c) As
soon as is practicable after the TSXV has conditionally accepted the
Amalgamation and advised that the Nayarit Proxy Circular may be mailed to
Nayarit Stockholders, Nayarit shall file and mail the Nayarit Proxy Circular in
accordance with all applicable corporate and securities Laws and TSXV
requirements, in and to all jurisdictions where the Nayarit Proxy Circular is
required to be filed and mailed.
(e) If
at any time after mailing of the Nayarit Proxy Circular and prior to the Nayarit
Stockholder Meeting, any information relating to Parent, Nayarit or any of their
respective subsidiaries, affiliates, officers or directors, should be discovered
by Parent or Nayarit, as applicable, that should be set forth in the Nayarit
Proxy Circular, so that such document would not include any misstatement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the Party which discovers such information shall promptly notify
the other Party hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with the appropriate Canadian
Securities Authority and exchange and, to the extent required by law,
disseminated to the Nayarit Stockholders.
(a) duly
call, give notice of, convene and hold a special meeting of the stockholders of
Nayarit (the “Nayarit
Stockholder Meeting”) for the purposes of considering and taking action
upon the approval of the Amalgamation;
(b) (i)
use commercially reasonable efforts to solicit the approvals required by the
Nayarit Stockholders and (ii) include in the Nayarit Proxy Circular: (A) the
recommendation of the Board of Directors of Nayarit to the Nayarit Stockholder
that they vote in favor the Amalgamation and (B) all other requests or approvals
necessary to consummate the transactions contemplated by this Agreement
(collectively, the “Nayarit
Proxy Matters”). Notwithstanding the foregoing, Nayarit may adjourn or
postpone the Nayarit Stockholder Meeting as and to the extent required by
applicable Law. Nayarit shall use its commercially reasonable efforts to cause
the Nayarit Proxy Circular to be mailed to the Nayarit Stockholders promptly as
practicable after TSXV clearance is received. Parent shall make its directors,
officers, employees and consultants available to Nayarit and its counsel in
connection with the drafting of the Nayarit Proxy Circular. If, prior to the
Effective Time, any event occurs with respect to Parent, or any change occurs
with respect to other information supplied by Parent for inclusion in the
Nayarit Proxy Circular, Parent shall promptly notify Nayarit of such event, and
Nayarit and Parent shall cooperate in the prompt preparation and distribution of
any necessary amendment or supplement to the Nayarit Proxy Circular and, as
required by Law, in disseminating the information contained in such amendment or
supplement to the Nayarit Stockholders; and
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(c) promptly
transmit any amendment or supplement to the Nayarit Stockholders, if at any time
prior to the Nayarit Stockholder Meeting, there shall be discovered any
information that should be set forth in an amendment or supplement to the
Nayarit Proxy Circular.
5.9 Directors and Officers of
Parent.
(a) Subject
to any limitation imposed under applicable Laws, the Parties shall take all
necessary actions so that the persons identified in Section 1.6(b) are
elected to the positions of officers of Parent effective immediately after the
Closing.
(b) Subject
to any limitation imposed under applicable Laws, the Parties shall take all
necessary actions so that the persons identified in Section 1.6(a) are
elected to the positions of directors of Parent effective immediately after the
Closing.
5.10 Hart-Scott-Rodino
Filing. If required pursuant to the Hart-Scott-Rodino Act, as
promptly as practicable after the date of this Agreement, Parent and Nayarit
shall each prepare and file the notifications required of them thereunder in
connection with the transactions contemplated by this Agreement and shall
promptly and in good faith respond to all information requested of them by the
Federal Trade Commission and Department of Justice in connection with such
notification and otherwise cooperate in good faith with each other and such
Governmental Authorities. Parent and Nayarit shall (a) promptly
inform the other of any communication to or from the Federal Trade Commission,
the Department of Justice or any other Governmental Authority regarding the
transactions contemplated by this Agreement, (b) give the other prompt notice of
the commencement of any action, suit, litigation, arbitration, proceeding or
investigation by or before any Governmental Authority with respect to such
transactions and (c) keep the other reasonably informed as to the status of any
such action, suit, litigation, arbitration, proceeding or
investigation. Parent and Nayarit shall split equally all filing fees
relating to such filing.
5.11 Exchange
Listing. Parent shall use commercially
reasonable efforts to have the Parent Common Stock be publicly listed in the
United States on the New York Stock Exchange Amex.
ARTICLE
VI
CONDITIONS
I-52
(a) Parent Stockholder
Approval. The Required Parent Vote with respect to the Parent
Proxy Matters as set forth in the Proxy Statement shall have been obtained in
accordance with the DGCL.
(b) Nayarit Stockholder
Approval. The Required Nayarit Vote with respect to the
Nayarit Proxy Matters as set forth in the Nayarit Proxy Circular shall have been
obtained in accordance with the OCBA and all applicable local, federal and
securities Laws.
(c) Antitrust
Laws. If applicable, the required waiting period (and any
extension thereof) under any Antitrust Laws, if any, shall have expired or been
terminated.
(d) Requisite Regulatory
Approvals and Consents. The Requisite Regulatory Approvals and
all Consents from third parties required in connection with the transactions
contemplated by this Agreement, shall have been obtained or made, including for
greater certainty, Requisite Regulatory Approvals and Consents from the New York
Stock Exchange Amex, the TSX and the TSXV.
(e) Effective Registration
Statement. The Registration Statement shall have been declared
effective by the SEC and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for that purpose
shall be pending before or threatened by the SEC.
(f) No Law or
Order. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any Law (whether temporary, preliminary or
permanent) or Order that is then in effect and has the effect of making the
Amalgamation illegal or otherwise preventing or prohibiting consummation of the
Amalgamation.
(g) Updating of Disclosure
Schedules. Final versions of the Parent Disclosure Schedules
and Nayarit Disclosure Schedules shall have been delivered by the appropriate
Party to the other Party and such schedules shall have been certified as the
final, true, correct and complete schedules of such Party.
(h) Litigation. There
shall be no pending Action against any Party or any of its Affiliates, or any of
their respective properties or assets, or any officer, director, partner, member
or manager, in his or her capacity as such, of any Party or any of their
Affiliates, with respect to the consummation of the Amalgamation or the
transactions contemplated thereby which could reasonably be expected to have a
Material Adverse Effect.
(a) Representations and
Warranties. Each of the representations and warranties of
Nayarit and the Subsidiaries set forth in this Agreement shall be true and
correct as of the date of this Agreement and as of the Effective Time as though
made as of the Effective Time (except to the extent that any of such
representations and warranties expressly speaks only as of an earlier
date).
I-53
(b) Agreements and
Covenants. Nayarit shall have performed, in all material
respects, all of its obligations and complied with, in all material respects,
all of its agreements and covenants to be performed or complied with by it under
this Agreement at or prior to the Effective Time.
(c) Officer
Certificate. Nayarit shall have delivered to Parent a
certificate, dated the Closing Date, signed by the chief executive officer or
chief financial officer of Nayarit, certifying in such capacity as to the
satisfaction of the conditions specified in Sections 6.2(a), (b) and
(e).
(d) Secretary’s
Certificate. Nayarit shall have delivered to Parent a true
copy of the resolutions of the Board of Directors of Nayarit authorizing the
execution of this Agreement and the consummation of the Amalgamation and
transactions contemplated herein, certified by the Secretary of Nayarit or
similar officer.
(e) Material Adverse
Effect. No Material Adverse Effect shall have occurred with
respect to Nayarit’s or its Subsidiaries’ business since the date of this
Agreement.
(f)
Legal
Opinion. Parent shall have received an opinion of Nayarit’s
counsel, Peterson Law, in form and substance reasonably acceptable to Parent,
dated as of the Closing Date.
(g) Title
Opinion. Parent shall have received an opinion covering the
Mineral Rights from Nayarit’s Mexican counsel, Bufete Tecrcero y Mejia, S.C., in
form and substance reasonably acceptable to Parent, dated as of the Closing
Date.
(h) Lock Up
Agreements. Parent shall have received the Lock Up Agreements
duly executed by each of Colin Sutherland and Bradley Langille.
(i)
Financials. Nayarit
shall have filed with the SEDAR all financial statements that are required
pursuant to applicable OSC Rules / National Instruments and Canadian Securities
Laws.
(j)
Nayarit Stockholder
Dissenters Rights. In connection with the Amalgamation, no
more than five percent (5%) of Nayarit Stockholders shall have exercised their
right to dissent and undertake the Nayarit Dissent Rights under the
OBCA.
(k) SRK Consulting
Report. Parent shall have received from Nayarit a final report
from SRK Consulting and such final report shall not be materially different from
the preliminary SRK Consulting report provided to Parent.
(l)
Due
Diligence. On or prior to February 15, 2010, Parent shall not
have notified Nayarit that Parent is not satisfied, in its sole discretion, with
its due diligence review of Nayarit’s or the Subsidiaries’ business, operations,
properties, assets and financial condition.
(m) Resignation of Nayarit
Officers and Directors. Except for those executive officers
and directors continuing in their capacities after the Effective Time as set
forth in the Nayarit Proxy Circular, each executive officer and director of
Nayarit and its Subsidiaries shall have tendered his or her resignation and full
and final release effective as of the Effective Time.
I-54
(n) Nayarit Convertible
Securities. All Nayarit Convertible Securities and all other
agreements or instruments pursuant to which Nayarit Common Shares were issuable
prior to the Closing Date shall provide only for the issuance of Parent Common
Stock upon the due exercise or issuance of securities thereunder, on the
exchange basis set forth in the Amalgamation Agreement.
(o) Parent Fairness
Opinion. If required by the Board of Directors of Parent,
Parent shall have received a fairness opinion with respect to the transactions
contemplated by this Agreement and the Amalgamation Agreement.
(p) Nayarit Fairness
Opinion. Nayarit shall have received a fairness opinion from its
investment banking advisors with respect to the transactions contemplated by
this Agreement and the Amalgamation Agreement.
(q) Employment
Agreements. The employment agreements between Nayarit,
on one hand, and each of Colin Sutherland and Bradley Langille, on the other
hand, shall either have been (i) terminated prior to the Effective Date in
accordance with the terms thereof, including payment of all termination payments
prescribed therein (except for any payments relating to the change of control of
Nayarit), or (ii) terminated with no payment of change of control benefits in
consideration for the execution of a new employment agreement with Parent on
terms comparable to the other senior officers of Parent.
(r)
SRK Consulting
Certification. Parent shall have received a certificate from
SRK Consulting certifying that Nayarit’s representation and warranty set forth
in Section 2.34(a) is true and correct as of the date of this Agreement and as
of the Effective Time.
(a) Representations and
Warranties. Each of the representations and warranties of
Parent set forth in this Agreement shall be true and correct as of the date of
this Agreement and as of the Effective Time as though made as of the Effective
Time (except to the extent that any of such representations and warranties
expressly speaks only as of an earlier date).
(b) Agreements and
Covenants. Parent shall have performed, in all material
respects, its obligations and complied with, in all material respects, its
agreements and covenants to be performed or complied with by it under this
Agreement at or prior to the Effective Time, including, without limitation, the
resignation from the Board of Directors of Parent of those persons currently on
the Board of Directors of Parent who are not named as directors following the
Effective Time in the Proxy Statement.
(c) Officer
Certificate. Parent shall have delivered to Nayarit a
certificate, dated the Closing Date, signed by the chief executive officer or
chief financial officer of Parent, certifying in such capacity as to the
satisfaction of the conditions specified in Sections 6.3(a), (b) and
(e).
I-55
(d) Secretary’s
Certificate. Parent shall have delivered to Nayarit a true
copy of the resolutions of the Board of Directors of Parent authorizing the
execution of this Agreement and the consummation of the Amalgamation and
transactions contemplated herein, certified by the Secretary of Parent or
similar officer.
(e) Material Adverse
Effect. No Material Adverse Effect shall have occurred with
respect to Parent’s business since the date of this Agreement.
(f) Legal
Opinion. Nayarit shall have received opinions of Parent’s
counsel, Ellenoff Grossman & Schole LLP, in form and substance reasonably
acceptable to Nayarit, dated as of the Closing Date.
(g) Resignation of Parent
Officers and Directors. Except for those executive officers
and directors continuing in their capacities after the Effective Time as set
forth in the Proxy Statement, each executive officer and director of Parent
shall have tendered his or her resignation effective as of the Effective
Time.
(h) Exchange
Agent. Parent shall have entered into an agreement with the
Exchange Agent with respect to the exchange of the Nayarit Stock Certificates in
exchange for the Amalgamation Consideration.
(i)
Due
Diligence. On or prior to February 15, 2010, Nayarit shall not
have notified Parent that Nayarit is not satisfied, in its sole discretion, with
its due diligence review of Parent’s business, operations, properties, assets
and financial condition.
(j)
Title
Opinion. Nayarit shall have received an opinion covering
Parent’s subsidiaries’ title to their mining assets in Mexico from Parent’s
counsel, Tapia, Robles y Cabrera S.C., in form and substance reasonably
acceptable to Nayarit, dated as of the Closing Date.
(k) Lock Up
Agreements. Nayarit shall have received the Lock Up Agreement
duly executed by John Brownlie.
6.4 Frustration of
Conditions. Notwithstanding anything contained herein to the
contrary, neither Parent nor Nayarit may rely on the failure of any condition
set forth in this Article VI to be satisfied if such failure was caused by the
action or inaction of such Party or its Affiliates.
TERMINATION
AND ABANDONMENT
I-56
(a) by
mutual written consent of Nayarit and Parent, as duly authorized by the Board of
Directors of Parent and the Board of Directors of Nayarit;
(b) by
written notice by either Parent or Nayarit if the Closing conditions set forth
in Section 6.1 have not been satisfied by Nayarit or Parent, as the case may be
(or waived by Parent or Nayarit as the case may be) by 120 days after the date
of this Agreement (the “Completion
Deadline”). Notwithstanding the foregoing, the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
Party whose action or inaction is the primary cause of, or resulted in, any such
condition set forth in Section 6.1 to fail to be fulfilled;
(c) by
written notice by either Parent or Nayarit, if any Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any Order or Law that is,
in each case, then in effect and is final and nonappealable and has the effect
of permanently restraining, enjoining or otherwise preventing or prohibiting the
transactions contemplated by this Agreement (including the Amalgamation); provided, however, the right
to terminate this Agreement under this Section 7.1(c) shall not be available to
any Party whose failure to fulfill any obligation under this Agreement has been
the primary cause of, or resulted in, any such Order or Law to have been
enacted, issued, promulgated, enforced or entered;
(d) by
written notice by Parent, if: (i) there has been a breach by Nayarit of any of
its representations, warranties, covenants or agreements contained in this
Agreement, or if any material representation or warranty of Nayarit shall have
become untrue or inaccurate, and (ii) the breach or inaccuracy is incapable of
being cured prior to the Closing or is not cured within twenty (20) days of
notice of such breach or inaccuracy;
(e) by
written notice by Nayarit, if: (i) there has been a breach by Parent of any of
its representations, warranties, covenants or agreements contained in this
Agreement, or if any material representation or warranty of Parent shall have
become untrue or inaccurate, and (ii) the breach or inaccuracy is incapable of
being cured prior to the Closing or is not cured within twenty (20) days of
notice of such breach or inaccuracy;
(f) by
written notice by Parent if the Closing conditions set forth in Section 6.2,
other than Sections 6.2(a) and 6.2(b) (which are addressed by Section 7.1(d)),
have not been satisfied by Nayarit (or waived by Parent) by the Completion
Deadline. Notwithstanding the foregoing, the right to terminate this
Agreement under this Section 7.1(f) shall not be available to Parent if Parent
is in material breach of any representation, warranty or covenant contained in
this Agreement, and such breach has primarily caused the Closing conditions set
forth in Section 6.2 to not be satisfied; or
(g) by
written notice by Nayarit if the Closing conditions set forth in Section 6.3,
other than Sections 6.3(a) and 6.3(b) (which are addressed by Section 7.1(e)),
have not been satisfied by Parent (or waived by Nayarit) by the Completion
Deadline. Notwithstanding the foregoing, the right to terminate this
Agreement under this Section 7.1(g) shall not be available to Nayarit if Nayarit
is in material breach of any representation, warranty or covenant contained in
this Agreement, and such breach has primarily caused the Closing conditions set
forth in Section 6.3 to not be satisfied.
I-57
I-58
MISCELLANEOUS
|
(i)
|
if
to Nayarit, to:
|
Nayarit Gold Inc.
76 Temple
Terrace
Suite
150
Lower
Sackville, NS
B4C
0A7
Canada
Attention: Colin
P. Sutherland
Facsimile:
(902) 252-3836
with a
copy to (but which shall not constitute notice to Nayarit):
Peterson Law
120
Adelaide Street West, Suite 2500
Toronto,
Ontario M5H 1T1
Attention: Dennis H. Peterson,
Esq.
Facsimile: (416) 352-5693
|
(ii)
|
if
to Parent, to:
|
Capital
Gold Corporation
76 Beaver
Street, 14th floor
New York,
New York 10005
Attention:
John Brownlie
Facsimile:
(212) 344-4537
with a
copy to (but which shall not constitute notice to Parent):
Ellenoff Grossman & Schole
LLP
I-59
|
|
150
East 42nd
Street
|
|
|
New
York, New York 10017
|
|
|
Attention: Barry
I. Grossman, Esq.
|
|
|
Facsimile:
(212) 370-7889
|
8.5 Waiver of Jury
Trial. Each of the Parties hereby waives to the fullest extent
permitted by applicable Law any right it may have to a trial by jury with
respect to any Action directly or indirectly arising out of, under or in
connection with this Agreement or the transactions contemplated
hereby. Each of the Parties: (a) certifies that no representative,
agent or attorney of the other Party has represented, expressly or otherwise,
that such other Party would not, in the event of any Action, seek to enforce the
foregoing waiver and (b) acknowledges that it and the other Party has been
induced to enter into this Agreement by, among other things, the mutual waivers
and certifications in this Section 8.5.
I-60
8.7 Interpretation. The
article and section headings contained in this Agreement are solely for the
purpose of reference, are not part of the agreement of the Parties and shall not
in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement: (a) the term “Person” shall mean and include
an individual, a partnership, a joint venture, a corporation, a limited
liability company, a trust, an association, an unincorporated organization, a
Governmental Authority and any other entity, (b) unless otherwise specified
herein, the term “Affiliate,” with respect to
any Person, shall mean and include any Person, directly or indirectly, through
one or more intermediaries controlling, controlled by or under common control
with such Person, (c) the term “Knowledge,” when used with
respect to Nayarit, shall mean the actual knowledge, after reasonable inquiry of
the executive officers and directors of Nayarit, and, when used with respect to
Parent, shall mean the actual knowledge, after reasonable inquiry, of the
executive officers and directors of Parent, and (d) the term “Business Day” means any day on
which the principal offices of the SEC in Washington, D.C. are open to accept
filings, or, in the case of determining a date when any payment is due, any day
on which banks are not required or authorized to close in the City of New
York. Whenever the words “include,” “includes”
or “including” are used in this
Agreement, they shall be deemed to be followed by the words “without limitation.” The words “hereof,”
“herein,” “hereby”
and “hereunder” and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. The
Parties have participated jointly in the negotiation and drafting of this
Agreement. Consequently, in the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any provision
of this Agreement.
I-61
8.11 Third
Parties. Nothing contained in this Agreement or in any
instrument or document executed by any Party in connection with the transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of, any Person that is not a party hereto or thereto or
a successor or permitted assign of such a Party other than Section 5.3 hereof
(which is intended to be for the benefit of the Persons covered thereby and may
be enforced by such Persons).
8.12 Headings. The
headings herein are inserted for convenience of reference only and are not
intended to be part of, or to affect the meaning or interpretation of, this
Agreement.
[Signature
Page Follows]
I-62
IN WITNESS WHEREOF, the
Parties hereto have caused this Agreement and Plan of Amalgamation to be signed
and delivered by their respective duly authorized officers as of the date first
above written.
|
CAPITAL
GOLD CORPORATION
|
||
|
By:
|
/s/ John Brownlie
|
|
|
Name:
John Brownlie
|
||
|
Title:
President
|
||
|
NAYARIT
GOLD INC.
|
||
|
By:
|
/s/
Colin Sutherland
|
|
|
Name:
Colin Sutherland
|
||
|
Title:
President and CEO
|
||
|
/s/ John Brownlie
|
|
|
John
Brownlie
|
|
|
(with
respect to Section 4.6 only)
|
|
|
/s/ Colin Sutherland
|
|
|
Colin
Sutherland
|
|
|
(with
respect to Section 4.6 only)
|
|
|
/s/ Bradley Langille
|
|
|
Bradley
Langille
|
|
|
(with
respect to Section 4.6
only)
|
I-63
AGREEMENT
AND PLAN OF AMALGAMATION
BY
AND BETWEEN
CAPITAL
GOLD CORPORATION
AND
NAYARIT
GOLD, INC.
Dated
as of ________________, 2010
I-64
TABLE
OF CONTENTS
[to
be updated]
Page
| ARTICLE I TERMS OF THE AMALGAMATION |
1
|
|
|
1.1
|
The
Amalgamation
|
2
|
|
1.2
|
The
Closing; Effective Time; Effect
|
2
|
|
1.3
|
Exchange
of Securities
|
2
|
|
1.4
|
Tender
and Payment
|
3
|
|
1.5
|
Certificate
of Incorporation and Governing Documents
|
4
|
|
1.6
|
Directors
and Officers; Lock Up
|
4
|
|
1.7
|
Certain
Adjustments to Parent Capitalization
|
5
|
|
1.8
|
Other
Effects of the Amalgamation
|
5
|
|
1.9
|
Additional
Actions
|
5
|
|
1.10
|
Headquarters
|
5
|
| ARTICLE II REPRESENTATIONS AND WARRANTIES OF NAYARIT |
5
|
|
|
2.1
|
Due
Organization and Good Standing
|
5
|
|
2.2
|
Capitalization
|
6
|
|
2.3
|
Subsidiaries
|
7
|
|
2.4
|
Authorization;
Binding Agreement
|
8
|
|
2.5
|
Governmental
Approvals
|
8
|
|
2.6
|
No
Violations or Conflicts
|
8
|
|
2.7
|
Nayarit
Financial Statements
|
9
|
|
2.8
|
Absence
of Certain Changes
|
10
|
|
2.9
|
Absence
of Undisclosed Liabilities
|
10
|
|
2.10
|
Compliance
with Laws
|
10
|
|
2.11
|
Regulatory
Agreements; Permits
|
11
|
|
2.12
|
Litigation
|
12
|
|
2.13
|
Restrictions
on Business Activities
|
12
|
|
2.14
|
Material
Contracts
|
12
|
|
2.15
|
Intellectual
Property
|
14
|
|
2.16
|
Employee
Benefit Plans
|
15
|
|
2.17
|
Taxes
and Returns
|
17
|
|
2.18
|
Finders
and Investment Bankers
|
19
|
|
2.19
|
Title
to Properties; Assets
|
19
|
|
2.20
|
Employee
Matters
|
22
|
|
2.21
|
Environmental
Matters
|
23
|
|
2.22
|
Transactions
with Affiliates
|
24
|
|
2.23
|
Insurance
|
25
|
|
2.24
|
Books
and Records
|
25
|
|
2.25
|
Bankruptcy
|
25
|
|
2.26
|
Information
Supplied
|
25
|
|
2.27
|
Illegal
Payments
|
26
|
|
2.28
|
Notes
and Accounts Receivable
|
26
|
|
2.29
|
Money
Laundering Laws
|
26
|
|
2.30
|
Antitakeover
Statutes
|
26
|
I-65
|
2.31
|
Suppliers
|
26
|
|
2.32
|
Negotiations
|
26
|
|
2.33
|
The
Mines
|
|
|
2.43
|
Mining Reports | |
| ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT |
28
|
|
|
3.1
|
Due
Organization and Good Standing
|
28
|
|
3.2
|
Capitalization
of Parent
|
29
|
|
3.3
|
Subsidiaries
|
30
|
|
3.4
|
Authorization;
Binding Agreement
|
30
|
|
3.5
|
Governmental
Approvals
|
30
|
|
3.6
|
No
Violations or Conflicts
|
30
|
|
3.8
|
Absence
of Undisclosed Liabilities
|
32
|
|
3.7
|
SEC
Documents; Internal Controls; SEC Foreing Issuer
|
32
|
|
3.9
|
Compliance
with Laws
|
32
|
|
3.10
|
Regulatory
Agreements; Permits
|
32
|
|
3.11
|
Absence
of Certain Changes
|
33
|
|
3.12
|
Taxes
and Returns
|
33
|
|
3.13
|
Restrictions
on Business Activities
|
34
|
|
3.14
|
Employee
Benefit Plans
|
34
|
|
3.15
|
Employee
Matters
|
34
|
|
3.16
|
Material
Contracts
|
35
|
|
3.17
|
Litigation
|
36
|
|
3.18
|
Transactions
with Affiliates
|
36
|
|
3.19
|
Books
and Records
|
36
|
|
3.20
|
Information
Supplied
|
36
|
|
3.21
|
Intellectual
Property
|
37
|
|
3.22
|
Real
Property
|
37
|
|
3.23
|
Environmental
Matters
|
37
|
|
3.24
|
Insurance
|
37
|
|
3.25
|
Bankruptcy
|
37
|
|
3.26
|
TSX/OTCBB
Quotation
|
37
|
| ARTICLE IV COVENANTS |
37
|
|
|
4.1
|
Conduct
of Business of Nayarit
|
37
|
|
4.2
|
Access
and Information; Confidentiality
|
41
|
|
4.3
|
No
Solicitation
|
42
|
|
4.4
|
Stockholder
Litigation
|
43
|
|
4.5
|
Conduct
of Business of Parent
|
43
|
| ARTICLE V ADDITIONAL COVENANTS OF THE PARTIES |
44
|
|
|
5.1
|
Notification
of Certain Matters
|
44
|
|
5.2
|
Commercially
Reasonable Efforts
|
45
|
|
5.3
|
Indemnification
|
46
|
|
5.4
|
Public
Announcements
|
48
|
|
5.5
|
Parent
Regisration Statement; Proxy Statement
|
48
|
|
5.6
|
Reservation
of Stock
|
49
|
|
5.7
|
Nayarit
Filings
|
49
|
|
5.8
|
Nayarit
Stockholder Meeting
|
50
|
I-66
|
5.9
|
Directors
and Officers of Parent
|
50
|
|
5.10
|
Hart-Scott-Rodino
Filing
|
51
|
|
5.10
|
Exchange
Listing
|
|
| ARTICLE VI CONDITIONS |
51
|
|
|
6.1
|
Conditions
to Each Party’s Obligations
|
51
|
|
6.2
|
Conditions
to Obligations of Parent
|
52
|
|
6.3
|
Conditions
to Obligations of Nayarit
|
53
|
|
6.4
|
Frustration
of Conditions
|
54
|
| ARTICLE VII TERMINATION AND ABANDONMENT |
54
|
|
|
7.1
|
Termination
|
54
|
|
7.2
|
Effect
of Termination
|
55
|
|
7.3
|
Fees
and Expenses
|
56
|
|
7.4
|
Amendment
|
56
|
|
7.5
|
Waiver
|
56
|
|
ARTICLE
VIII MISCELLANEOUS
|
57
|
|
|
8.1
|
Survival
|
57
|
|
8.2
|
Notices
|
57
|
|
8.3
|
Binding
Effect; Assignment
|
58
|
|
8.4
|
Governing
Law; Jurisdiction
|
58
|
|
8.5
|
Waiver
of Jury Trial
|
58
|
|
8.6
|
Counterparts
|
58
|
|
8.7
|
Interpretation
|
58
|
|
8.8
|
Entire
Agreement
|
59
|
|
8.9
|
Severability
|
59
|
|
8.10
|
Specific
Performance
|
59
|
|
8.11
|
Third
Parties
|
60
|
|
8.12
|
Headings
|
60
|
I-67
EXHIBITS
Exhibit
A – Certificate of Amalgamation
Exhibit
B – Form of Lock-Up Agreement
Exhibit
C – Amended and Restated Certificate of Incorporation
I-68
Index
of Defined Terms
[to
be updated]
Page
|
Acquisition
Proposal
|
43
|
|
Action
|
12
|
|
Affiliate
|
59
|
|
Agreement
|
1
|
|
Amalgamation
|
1
|
|
Amalgamation
Consideration
|
2
|
|
AmalgSub
|
1
|
|
Antitrust
Laws
|
8
|
|
Benefit
Plans
|
16
|
|
Break
Fee
|
56
|
|
Business
Day
|
59
|
|
Certificate
of Incorporation
|
29
|
|
Certificate
of Amalgamation
|
2
|
|
Claim
Notice
|
47
|
|
Closing
|
2
|
|
Closing
Date
|
2
|
|
Code
|
4
|
|
Nayarit
Intellectual Property
|
14
|
|
Nayarit
Material Contract
|
12
|
|
Nayarit
Real Property
|
20
|
|
Parent
Stock Options
|
29
|
|
Parent
Stock Plan
|
29
|
|
Consent
|
8
|
|
Damages
|
46
|
|
DOL
|
16
|
|
Effective
Time
|
2
|
|
Encumbrances
|
9
|
|
Enforceability
Exceptions
|
8
|
|
Environmental
Laws
|
24
|
|
ERISA
|
15
|
|
ERISA
Affiliate
|
15
|
|
Exchange
Act
|
31
|
|
Exchange
Agent
|
3
|
|
GAAP
|
6
|
|
Governmental
Authority
|
8
|
|
Indebtedness
|
7
|
|
Indemnitee
|
47
|
|
Indemnitor
|
47
|
|
Intellectual
Property
|
15
|
|
IRS
|
16
|
|
Knowledge
|
59
|
|
Landlord
Leases
|
20
|
I-69
|
Law
|
9
|
|
Leased
Real Property
|
19
|
|
Leases
|
20
|
|
Licensed
Intellectual Property
|
14
|
|
Lock
Up Agreement
|
4
|
|
Material
Adverse Effect
|
6
|
|
Merger
Sub
|
1
|
|
Mine
|
28
|
|
Nayarit
|
1
|
|
Nayarit
Affiliate Transaction
|
25
|
|
Nayarit
Common Stock
|
1
|
|
Nayarit
Disclosure Schedules
|
5
|
|
Nayarit
Financials
|
9
|
|
Nayarit
Indemnified Party
|
47
|
|
Nayarit
Permits
|
11
|
|
Nayarit
Proxy Matters
|
50
|
|
Nayarit
Stock Certificates
|
3
|
|
Nayarit
Stockholder
|
3
|
|
Nayarit
Stockholder Meeting
|
50
|
|
NDA
|
42
|
|
OBCA
|
1
|
|
Off-the-Shelf
Software Agreements
|
14
|
|
Order
|
12
|
|
0SC
|
9
|
|
OTCBB
|
38
|
|
Owned
Real Property
|
19
|
|
Parent
|
1
|
|
Parent
Affiliate Transaction
|
36
|
|
Parent
Common Stock
|
1
|
|
Parent
Disclosure Schedule
|
29
|
|
Parent
Indemnified Party
|
46
|
|
Parent
Material Contracts
|
36
|
|
Parent
Organizational Documents
|
29
|
|
Parent
Permits
|
33
|
|
Parent
Proxy Matters
|
49
|
|
Parent
Stockholder Meeting
|
48
|
|
Party
|
1
|
|
Permitted
Encumbrances
|
20
|
|
Person
|
59
|
|
Proxy
Statement
|
48
|
|
Public
Reports
|
31
|
|
RCRA
|
24
|
|
Registration
Statement
|
48
|
|
Representatives
|
41
|
|
Required
Nayarit Vote
|
8
|
|
Required
Parent Vote
|
30
|
I-70
|
Requisite
Regulatory Approvals
|
45
|
|
Reverse
Split
|
1
|
|
SEC
|
31
|
|
U.S.
Securities Act
|
31
|
|
Subsidiary
|
5
|
|
Surviving
Company
|
1
|
|
Tax
|
19
|
|
Tax
Returns
|
17
|
|
Tenant
Leases
|
20
|
|
TSX
|
38
|
I-71
AGREEMENT
AND PLAN OF AMALGAMATION
This
AGREEMENT AND PLAN OF
AMALGAMATION (this “Agreement“) is made and
entered into as of _______________, 2010 by and among Capital Gold Corporation,
a corporation organized under the laws of Delaware (“Parent”) and Nayarit Gold,
Inc., (“Nayarit”), a
corporation organized under the Ontario Business Corporation Act (“OBCA”). Parent and Nayarit are
sometimes referred to herein individually as a “Party” and collectively as the
“Parties.”
WITNESSETH:
WHEREAS, Parent and Nayarit
intend to effect an amalgamation of Nayarit and [CGC Subsidiary], a corporation
to be organized under the OBCA as a wholly-owned subsidiary of Parent (“Merger Sub”), into [AmalgSub]
(“AmalgSub” or the
“Surviving Company”), a
corporation to be organized under the OBCA (the “Amalgamation”), with AmalgSub
continuing as the surviving entity following the Amalgamation upon the terms and
subject to the conditions set forth in this Agreement and in accordance with the
OBCA.
WHEREAS, as the result of the
Amalgamation, all of the issued and outstanding common stock, par value $[0.001]
per share, of Nayarit (the “Nayarit Common Stock”), will
automatically be exchanged into the right to receive the Amalgamation
Consideration (as defined herein) upon the terms and subject to the conditions
set forth in this Agreement and in accordance with the OBCA.
WHEREAS, the Board of
Directors of Nayarit and the Board of Directors of Parent have [unanimously]
approved this Agreement and the Amalgamation and each of them have determined
that this Agreement, the Amalgamation and the other transactions contemplated
hereby are advisable and in the respective best interests of Nayarit and
Parent.
WHEREAS, the Board of
Directors of Nayarit has resolved to recommend that its stockholders approve and
adopt this Agreement and the Amalgamation.
WHEREAS, the Board of
Directors of Parent has resolved to recommend that its stockholders approve a
plan to effect a reverse split of the outstanding Parent common stock, par value
$[0.0001] per share (the “Parent Common Stock”), at a
ratio of four (4) shares of Parent Common Stock for every one (1) outstanding
share of Parent Common Stock (the “Reverse Split”) prior to the
Effective Time (as defined herein).
NOW, THEREFORE, in
consideration of the premises set forth above, which are incorporated in this
Agreement as if fully set forth below, and the representations, warranties,
covenants and agreements contained in this Agreement, and intending to be
legally bound hereby, the Parties hereto agree as follows:
ARTICLE
I
TERMS
OF THE AMALGAMATION
I-72
1.1 The
Amalgamation. Pursuant and subject to the terms and conditions
of this Agreement, and in accordance with the applicable provisions of the
constating documents of Nayarit and Parent, at the Effective Time Merger Sub and
Nayarit shall amalgamate into AmalgSub, and continue as one company under the
terms and conditions of this Agreement. Upon consummation of the
Amalgamation, the separate existence of each of Nayarit and Merger Sub shall
thereupon cease, and AmalgSub, as the surviving company in the Amalgamation,
shall continue its corporate existence under the OBCA as a wholly-owned
subsidiary of Parent.
1.2 The Closing; Effective Time;
Effect.
(a) Unless
this Agreement shall have been terminated and the transactions contemplated
hereby shall have been abandoned pursuant to Section 7.1, and subject to the
satisfaction or waiver of the conditions set forth in Article VI hereof, the
closing of the Amalgamation (the “Closing”) shall take place at
the offices of Ellenoff Grossman & Schole LLP, 150 East 42nd Street,
11th
Floor, New York, New York 10017 at 10:00 a.m. New York City time no later than
the second Business Day after the date that all of the closing conditions set
forth in Article VI have been satisfied or waived, unless another time, date or
place is agreed upon in writing by the Parties hereto. The date on
which the Closing occurs is herein referred to as the “Closing
Date.”
(b) Subject
to the terms and conditions hereof, concurrently with the Closing, the Parties
shall file with the [Ontario Ministry of Government Services (Companies and
Personal Property Security Branch)] a certificate of
amalgamation in accordance with the OBCA substantially in the form of Exhibit A attached
hereto (referred to herein as the “Certificate of Amalgamation”),
executed in accordance with the relevant provisions of the OBCA and shall make
all other filings or recordings required under the OBCA in order to effect the
Amalgamation. The Amalgamation shall become effective upon the filing
of the Certificate of Amalgamation or at such other time as is agreed by the
Parties hereto, in accordance with the OBCA and as specified in the Certificate
of Amalgamation. The time when the Amalgamation shall become
effective is herein referred to as the “Effective
Time.” The Certificate of Amalgamation shall specify the name
of the Surviving Company to be
“[ ],
Inc.”
(c) From
and after the Effective Time, the Surviving Company shall possess all
properties, rights, privileges, powers and franchises of Nayarit and Merger Sub,
and all of the claims, obligations, liabilities, debts and duties of Nayarit and
Merger Sub shall become the claims, obligations, liabilities, debts and duties
of the Surviving Company.
1.3 Exchange of
Securities.
(a) At
the Effective Time, by virtue of the Amalgamation and without any action on the
part of Nayarit or the holders of any securities of Nayarit, all of the Nayarit
Common Stock issued and outstanding immediately prior to the Effective Time
shall become exchangeable into Parent Common Stock at a ratio of [0.2261] share
of Parent Common Stock for each one (1) share of Nayarit Common Stock (the
“Amalgamation
Consideration”). From and after the
Effective Time, any certificate representing the Nayarit Common Stock shall be
deemed for all purposes to represent Parent Common Stock into which such shares
of Nayarit Common Stock represented thereby were exchanged in accordance with
the immediately preceding sentence. At the Closing, the
Amalgamation Consideration shall be effectuated to the stockholders of Nayarit
of record immediately prior to the Closing (individually, a “Nayarit Stockholder” and
collectively, the “Nayarit
Stockholders”).
I-73
(b) Upon
the exchange of Nayarit Common Stock into shares of Parent Common Stock, all
Nayarit Common Stock shall, by virtue of the Amalgamation and without any action
on the part of the Nayarit Stockholders, be automatically cancelled and shall
cease to exist, and each Nayarit Stockholder shall cease to have any rights with
respect thereto, except the right to receive the Amalgamation Consideration,
subject to the terms and conditions of this Agreement.
1.4 Tender and
Payment.
(a) Surrender of Certificates
Via Exchange Agent. At the Effective Time, Parent shall cause
the exchange agent selected by Parent, which shall be an independent transfer
agent or trust company (the “Exchange Agent ”) to mail to
the former Nayarit Stockholders appropriate transmittal materials (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates or other instruments theretofore representing shares of
Nayarit Common Stock (the “Nayarit Stock Certificates”)
shall pass, only upon proper delivery of such certificates to the Exchange
Agent). The Nayarit Stock Certificates so surrendered shall be duly
endorsed as the Exchange Agent may reasonably require. In the event
of a transfer of ownership of shares of Nayarit Common Stock represented by
Nayarit Stock Certificates that are not registered in the transfer records of
Nayarit, the Amalgamation Consideration payable for such shares as provided for
herein may be issued to a transferee if the Nayarit Stock Certificates
representing such shares are delivered to the Exchange Agent, accompanied by all
documents required to evidence such transfer and by evidence reasonably
satisfactory to the Exchange Agent that such transfer is proper and that any
applicable stock transfer Taxes have been paid. In the event any
Nayarit Stock Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such certificate to
be lost, stolen or destroyed and the posting by such Person of a bond in such
amount as Parent may reasonably direct, or an indemnification agreement
reasonably acceptable to Parent, as indemnity against any claim that may be made
against it with respect to such certificate, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed certificate the Amalgamation
Consideration as provided for herein. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate.
(b) After
the Effective Time, each holder of shares of Nayarit Common Stock issued and
outstanding at the Effective Time shall surrender the Nayarit Stock
Certificate(s) representing such shares to the Exchange Agent and shall promptly
upon surrender thereof receive in exchange therefore the consideration provided
for herein, without interest, pursuant to this Section 1.4. Parent
shall not be obligated to deliver the consideration to which any former holder
of Nayarit Common Stock is entitled as a result of the Amalgamation until such
holder surrenders such holder’s Nayarit Stock Certificate(s) for exchange as
provided in this Section 1.4. Notwithstanding any other provision of
this Agreement to the contrary, neither Parent, nor Nayarit, nor Amalgsub, nor
the Exchange Agent shall be liable to any holder of Nayarit Common Stock for any
amounts paid or properly delivered in good faith to a public official pursuant
to any applicable abandoned property, escheat or similar Law.
I-74
(c) Fractional
Shares. No certificates or scrip representing fractional
shares of Parent Common Stock or book-entry credit of the same shall be issued
upon the surrender of the Nayarit Common Stock for exchange. Each
Nayarit Stockholder who receives any portion of the Parent Common Stock who
would otherwise have been entitled to receive a fraction of a share of Parent
Common Stock shall have such fractional share rounded down to the nearest whole
number.
(d) Transfer Books; No Further
Ownership Rights in the Nayarit Common Stock. At the Effective
Time, the transfer books of Nayarit shall be closed, and thereafter there shall
be no further registration of transfers of Nayarit Common Stock on the records
of Nayarit. From and after the Effective Time, the Nayarit Common
Stock outstanding immediately prior to the Effective Time shall be cancelled and
they shall cease to have any rights, except as otherwise provided for herein or
by applicable Law.
(e) Withholding
Taxes. Parent and the Exchange Agent shall be entitled to
deduct and withhold from the Amalgamation Consideration payable to a Nayarit
Stockholder any such amounts as are required under the Internal Revenue Code of
1986, as amended (the “Code”), or any applicable
provision of state, local or foreign Tax Law. To the extent such
amounts are so withheld by Parent or the Exchange Agent, such withheld amounts
shall be treated for all purposes as having been paid to the Nayarit
Stockholders in respect of which such deduction and withholding was made by
Parent or the Exchange Agent.
1.5 [Certificate of
Incorporation] and Governing Documents. At and after the
Effective Time and by virtue of the Amalgamation, and until the same have been
duly amended, the [certificate of incorporation] and [bylaws] of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the [certificate of
incorporation] and [bylaws] of the Surviving Company.
(a) At
the Effective Time, the Board of Directors of Parent shall consist of five (5)
directors, of which a majority shall be independent within the meaning of
Section 803 of the New York Stock Exchange Amex Company Guide.
(b) At
the Effective Time the officers of Parent shall be appointed by the Parent Board
of Directors referenced in Section 1.6(a) above, it being understood that the
Parent Board of Directors will appoint at least two (2) former officers or
consultants of Nayarit as officers of Parent.
(c) At
the Closing, [officers and directors of Parent] shall enter into a “lock-up”
agreement substantially in the form set forth on Exhibit B attached
hereto (a “Lock Up
Agreement”) pursuant to which such Persons shall agree, for a period of
one (1) year from the Closing Date, that they each shall neither, on his, her or
its own behalf or on behalf of entities, family members or trusts affiliated
with or controlled by him, her or it, offer, issue, grant any option on, sell or
otherwise dispose of any portion of the Amalgamation Consideration issued to
such Person.
I-75
1.8 Other Effects of the
Amalgamation. The Amalgamation shall have all further effects
as specified in the applicable provisions of the OBCA.
1.10 Headquarters. The
headquarters of Parent following the Effective Time will be located at [],
Denver, Colorado, and Parent shall further maintain satellite or home offices in
Halifax, Canada, and corporate financial offices in Philadelphia,
Pennsylvania.
REPRESENTATIONS
AND WARRANTIES OF NAYARIT
The
following representations and warranties by Nayarit to Parent are qualified by
the Nayarit disclosure schedules, which set forth certain disclosures concerning
Nayarit and its subsidiaries (each a “Subsidiary” and collectively,
the “Subsidiaries“) and
each of their divisions and businesses (the “Nayarit Disclosure
Schedules“). Except as disclosed in the Nayarit Disclosure
Schedules, Nayarit hereby represents and warrants to Parent as
follows:
I-76
For
purposes of this Agreement, the term “Material Adverse Effect” shall
mean, with respect to a Party, any occurrence, state of facts, change, event,
effect or circumstance that, individually or in the aggregate, has, or would
reasonably be expected to have, a material adverse effect on the assets,
liabilities, business, results of operations or financial condition of such
Party and its subsidiaries, taken as a whole, or to otherwise carry on its
business as now being conducted and as proposed to be conducted following the
Effective Time, except, in each case, for any such effect attributable to:
(i) changes in laws, regulations or generally accepted accounting
principles [in the United States / Canada] (“GAAP”), as the case may be, or
interpretations thereof, (ii) the announcement or pendency of this
Agreement, any actions taken in compliance with this Agreement or the
consummation of any of the transactions contemplated by this Agreement
(including the Amalgamation), or (iii) the failure of a Party or any of
its subsidiaries to take any action referred to in Sections 4.1 or 4.5, as the
case may be, due to the other Party’s unreasonable withholding, delaying or
conditioning of its consent. For purposes of determining whether a
particular change, event, circumstance or effect has a “Material Adverse
Effect,” the nature and effect of each change, event, circumstance or effect
shall be considered alone and together and along with the detrimental impact on
the properties, financial condition, business operations, prospects or results
of operations of a Party and its subsidiaries, taken as a whole, of such change,
event, circumstance or effect.
(a) The
authorized capital stock of Nayarit consists of (i)
[ ]
shares of Nayarit Common Stock and (ii)
[ ]
shares of preferred stock, no par value. As of the date hereof,
[ ]
shares of Nayarit Common Stock were issued and outstanding. Except
for Nayarit Common Stock held by the Nayarit Stockholders, no Nayarit Common
Stock or preferred stock is issued and outstanding. All of the
outstanding Nayarit Common Stock is duly authorized, validly issued, fully paid
and non-assessable and not subject to any preemptive or similar
rights. None of the outstanding securities of Nayarit has been issued
in violation of any foreign, federal or state securities Laws.
(b) There
are no: (i) outstanding options, warrants, puts, calls, convertible securities,
preemptive or similar rights, (ii) bonds, debentures, notes or other
indebtedness having general voting rights or that are convertible or
exchangeable into securities having such rights, or (iii) subscriptions or other
rights, agreements, arrangements, contracts or commitments of any character,
relating to the issued or unissued Nayarit Common Stock or equity or partnership
interest in any Subsidiary or obligating Nayarit or any Subsidiary to issue,
transfer, deliver or sell or cause to be issued, transferred, delivered, sold or
repurchased any options or Nayarit Common Stock, or other equity interest in,
Nayarit or any Subsidiary, or securities convertible into or exchangeable for
such shares or equity interests, or obligating Nayarit or any Subsidiary to
grant, extend or enter into any such option, warrant, call, subscription or
other right, agreement, arrangement or commitment for such equity
interests. There are no outstanding obligations of Nayarit or any
Subsidiary to repurchase, redeem or otherwise acquire any Nayarit Common Stock
or other equity interest in, Nayarit or any Subsidiary to provide funds to make
any investment (in the form of a loan, capital contribution or otherwise) in any
other entity.
I-77
(c) There
are no stockholder agreements, voting trusts or other agreements or
understandings to which Nayarit or any Subsidiary is a party with respect to the
voting of the Nayarit Common Stock or other equity interest in Nayarit or any
Subsidiary.
(d) No
Indebtedness of Nayarit or any Subsidiary contains any restriction upon:
(i) the prepayment of any of such Indebtedness, (ii) the incurrence of
Indebtedness by Nayarit or any Subsidiary, or (iii) the ability of Nayarit or
any Subsidiary to grant any Encumbrance (as defined in Section 2.6), other than
Permitted Encumbrances (as defined in Section 2.19), on its properties or
assets. As used in this Agreement, “Indebtedness” means (A) all
indebtedness for borrowed money or for the deferred purchase price of property
or services (including amounts by reason of overdrafts and amounts owed by
reason of letter of credit reimbursement agreements) including with respect
thereto, all interests, fees and costs (other than current trade liabilities
incurred in the ordinary course of business consistent with past practices and
payable in accordance with customary practices), (B) any other indebtedness that
is evidenced by a note, bond, debenture, credit agreement or similar instrument,
(C) all obligations under financing leases, (D) all obligations under
conditional sale or other title retention agreements relating to property
purchased by Nayarit or any Subsidiary, (E) all obligations under leases
required to be accounted for as capital leases under [Canadian] GAAP, (F) all
obligations in respect of acceptances issued or created, (G) all liabilities
secured by an Encumbrance on any property, and (H) all guarantee
obligations.
2.3 Subsidiaries. Section 2.3(a) of the
Nayarit Disclosure Schedules sets forth, a true, complete and correct list of
all Subsidiaries, the authorized capital stock and other equity interests of
each Subsidiary, the issued and outstanding capital stock and other equity
interests of each Subsidiary, their respective jurisdictions of organization and
all jurisdictions in which each Subsidiary is qualified to conduct
business. All of the capital stock and other equity interests of the
Subsidiaries are owned, directly or indirectly, by Nayarit free and clear of any
Encumbrance with respect thereto. All of the outstanding shares of
capital stock or other equity interests in each of the Subsidiaries are duly
authorized, validly issued, fully paid and non-assessable and are free of
preemptive rights and were issued in compliance with applicable Laws (as defined
in Section 2.6). No capital stock or other equity interests of any of
the Subsidiaries are or may become required to be issued or purchased by reason
of any options, warrants, rights to subscribe to, puts, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into
or exchangeable for, shares of any capital stock of, or other equity interests
in, any Subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Subsidiary is bound to issue additional shares of its
capital stock or other equity interests, or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or other equity
interests or securities convertible into or exchangeable for such shares or
interests. Neither Nayarit nor any Subsidiary owns any shares of
capital stock or other equity or voting interests in (including any securities
exercisable or exchangeable for or convertible into capital stock or other
equity or voting interests in) any other Person other than publicly traded
securities constituting less than five percent (5%) of the outstanding equity of
the issuing entity, other than capital stock or other equity interest of the
Subsidiaries owned by Nayarit or another Subsidiary.
I-78
2.5 Governmental
Approvals. No consent, approval, waiver, authorization or
permit of, or notice to or declaration or filing with (each, a “Consent”), any government, any
state or other political subdivision thereof, or any other entity, authority or
body exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, including any governmental or
regulatory authority, agency, department, board, commission, administration or
instrumentality, any court, tribunal or arbitrator or any self-regulatory
organization (each, a “Governmental Authority”), on
the part of Nayarit or any Subsidiary is required to be obtained or made in
connection with the execution, delivery or performance by Nayarit of this
Agreement or the consummation by Nayarit of the transactions contemplated hereby
(including the Amalgamation), other than: (i) the filing of the Certificate of
Amalgamation in accordance with the OBCA, (ii) such filings as may be required
in any jurisdiction where Nayarit is qualified or authorized to do business as a
foreign corporation in order to maintain such qualification or authorization,
(iii) compliance with any applicable federal or provincial securities Laws, (iv) pursuant to any other Laws designed to
prohibit, restrict or regulate actions having the purpose or effect of
monopolization or restraint of trade (“Antitrust Laws”), if
applicable, and (v) those Consents that, if they were not obtained or made,
would not reasonably be expected to have a Material Adverse
Effect.
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(a) As
used herein, the term “Nayarit
Financials” means (x) Nayarit’s audited consolidated financial statements
(including, in each case, any related notes thereto), consisting, in part, of
Nayarit’s balance sheets as of September 30, 2008 and September 30, 2009 and its
statements of operations and statements of cash flow for the fiscal years ended
September 30, 2007, September 30, 2008 and September 30, 2009, and (y) the
unaudited interim financial statements of Nayarit for the three and six month
periods ended December 31, 2009 and March 31, 2010 and for the three months and
six months periods ended March 31, 2010. Nayarit has made or will
make available to Parent true, correct and complete copies of the Nayarit
Financials. The Nayarit Financials fairly present in all material
respects the consolidated financial condition and the results of operations,
changes in stockholders’ equity, and cash flow of Nayarit and the Subsidiaries
as at the respective dates of and for the periods referred to in such financial
statements, all in accordance with: (i) [Canadian] GAAP and (ii) [applicable
Canadian regulations]. The Nayarit Financials, to the extent required
for inclusion in the Proxy Statement, comply in all material respects with the
[Securities Act (Canadian)], as amended, and the published general rules and
regulations of the Ontario Securities Commission (the “OSC”). Notwithstanding
any provision in this Agreement to the contrary, any representation and warranty
in this Agreement with respect to Nayarit’s unaudited interim financial
statements for the three months six months periods ended March 31, 2010 shall be
made as of the Closing Date. Neither Nayarit nor any Subsidiary has
any off-balance sheet arrangements.
(b) Nayarit
has had no: (i) significant deficiencies or material weaknesses in the design or
operation of Nayarit’s internal controls over financial reporting that are
reasonably likely to adversely affect Nayarit’s ability to record, process,
summarize and report financial information and (ii) fraud, whether or not
material, that involves management or other employees who have a significant
role in Nayarit’s internal controls over financial reporting.
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(c) Nayarit
and each Subsidiary has not and, to the Knowledge of Nayarit, no auditor or
accountant of Nayarit or any Subsidiary or any manager, director, officer or
consultant of Nayarit or any Subsidiary, has received any material written
complaint, allegation, assertion or claim, regarding the accounting or auditing
practices, procedures, methodologies or methods of Nayarit or any Subsidiary or
their internal accounting controls, including any complaint, allegation,
assertion or claim that Nayarit or any Subsidiary has engaged in questionable
accounting or auditing practices. No attorney representing Nayarit or
any Subsidiary has reported evidence of any violation of consumer protection
(including rules and regulations promulgated by any state or federal
Governmental Authority or with jurisdiction, oversight or regulatory control
over the conduct of the business of Nayarit or its Subsidiaries) or securities
Laws, breach of fiduciary duty or similar violation by Nayarit or any Subsidiary
or any of their respective officers, directors, managers, employees or agents to
the Board of Directors, board of managers or any committee thereof or to any
director, manager or executive officer of Nayarit or any
Subsidiary.
(a) Nayarit
and the Subsidiaries are each in compliance with all Laws applicable to it and
the conduct of its businesses as currently conducted and as proposed to be
conducted following consummation of the Amalgamation, except where the failure
to be in compliance would not reasonably be expected to have a Material Adverse
Effect. Nayarit and each Subsidiary is not in conflict with, or in
default or violation of, nor has it received any notice of any conflict with, or
default or violation of any applicable Law by which Nayarit or any Subsidiary,
or any property or asset of Nayarit or any Subsidiary, is bound or affected,
except for any such conflicts, defaults or violations that would not reasonably
be expected to have a Material Adverse Effect.
(b) There
is no pending or, to the Knowledge of Nayarit, threatened, proceeding,
examinations, reviews or investigation to which Nayarit or any Subsidiary is
subject before any Governmental Authority regarding whether Nayarit has violated
in any material respect applicable Laws. Neither Nayarit nor any
Subsidiary has received written notice of any material violation of, or
noncompliance with, any Law applicable to Nayarit or any Subsidiary, or
directing Nayarit or any Subsidiary to take remedial action with respect to such
applicable Law or otherwise, and no deficiencies of Nayarit or any Subsidiary
have been asserted in writing by any Governmental Authority with respect to
possible violations of any applicable Laws except for such violations or
deficiencies that would not reasonably be expected to have a Material Adverse
Effect. Nayarit and each Subsidiary have filed or made all material
reports, statements, documents, registrations, notices, filings or submissions
required to be filed with any Governmental Authority, and all such reports,
statements, documents, registrations, notices, filings and submissions are in
material compliance (and materially complied at the relevant time) with
applicable Law and no material deficiencies have been asserted by any
Governmental Authority with respect to any such reports, statements, documents,
registrations, notices, filings or submissions required to be filed with any
Governmental Authority.
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(a) There
are no: (i) written agreements, consent agreements, memoranda of understanding,
commitment letters, cease and desist orders, or similar undertakings to which
Nayarit or any Subsidiary is a party, on the one hand, and any Governmental
Authority is a party or addressee, on the other hand, (ii) Orders or directives
of or supervisory letters from a Governmental Authority specifically with
respect to Nayarit or any Subsidiary, or (iii) resolutions or policies or
procedures adopted by Nayarit or any Subsidiary at the request of a Governmental
Authority, that (A) limit in any material respect the ability of Nayarit or
any Subsidiary to conduct its business as currently being conducted or as
contemplated by the Parties to be conducted following the Closing, (B) in any
manner impose any requirements on Nayarit or any Subsidiary that materially add
to or otherwise materially modify in any respect the requirements imposed under
applicable Laws, (C) require Nayarit or any Subsidiary or any of its divisions
to make capital contributions or make loans to another division or Affiliate of
Nayarit or any Subsidiary or (D) in any manner relate to the ability of
Nayarit or any Subsidiary to pay dividends or otherwise materially restrict the
conduct of business of Nayarit or any Subsidiary in any
respect.
(b) Nayarit
and each Subsidiary hold all material permits, licenses, franchises, grants,
authorizations, consents, exceptions, variances, exemptions, orders and other
governmental authorizations, certificates, consents and approvals necessary to
lawfully conduct its business as presently conducted and to own, lease and
operate its assets and properties (collectively, the “Nayarit Permits”), all of
which are in full force and effect, and no suspension, non-renewal, amendment,
restriction, limitation or cancellation of any of the Nayarit Permits is pending
or, to the Knowledge of Nayarit, threatened, except where the failure of any of
the Nayarit Permits to be in full force and effect, or the suspension or
cancellation of any of the Nayarit Permits, would not reasonably be expected to
have a Material Adverse Effect. To the Knowledge of Nayarit, no facts
or circumstances exist that would reasonably be expected to impact Nayarit’s or
any Subsidiary’s ability to obtain any material Nayarit Permit in the future as
may be necessary for Nayarit or any Subsidiary to continue its operations as
currently contemplated. Neither Nayarit nor any Subsidiary is in
violation in any material respect of the terms of any Nayarit
Permit.
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(c) To
the Knowledge of Nayarit each of the officers and employees of Nayarit and all
Subsidiaries are in compliance with all applicable Laws requiring any
registration, licensing or qualification, and are not subject to any liability
or disability by reason of the failure to be so registered, licensed or
qualified, except where such failure to be in compliance or such liability or
disability would not reasonably be expected to have a Material Adverse
Effect.
2.13 Restrictions on Business
Activities. There is no
agreement or Order binding upon Nayarit or any Subsidiary which has or could
reasonably be expected to have the effect of prohibiting, preventing,
restricting or impairing in any respect any business practice of Nayarit or any
Subsidiary as their business is currently conducted, any acquisition of property
by Nayarit or any Subsidiary, the conduct of business by Nayarit or any
Subsidiary as currently conducted, or restricting in any respect the ability of
Nayarit or any Subsidiary from engaging in business as currently conducted or
from competing with other parties, except where such agreement or Order would
not reasonably be expected to have a Material Adverse
Effect.
2.14 Material
Contracts.
(a) Except
for such Nayarit Material Contracts that Nayarit has filed with the [Ontario
Securities Commission] [SEDAR] as a material contract as required by, Section 2.14 of the
Nayarit Disclosure Schedules sets forth a list of, and Nayarit has made
available to Parent, true, correct and complete copies of, each written
contract, agreement, commitment, arrangement, lease, license, permit or plan and
each other instrument to which Nayarit or any Subsidiary is a party or by which
Nayarit or any Subsidiary is bound as of the date hereof (each, a “Nayarit Material Contract”)
that:
(ii) contains
covenants that materially limit the ability of Nayarit or any Subsidiary (or
which, following the consummation of the Amalgamation, could materially restrict
the ability of Parent, Nayarit, the Subsidiaries or any of their Affiliates):
(A) to compete in any line of business or with any Person or in any geographic
area or to sell, supply, price, develop or distribute any service, product or
asset, including any non-competition covenants, exclusivity restrictions, rights
of first refusal or most-favored pricing clauses or (B) to purchase or acquire
an interest in any other entity, except, in each case, for any such contract
that may be canceled without any penalty or other liability to Nayarit or any
Subsidiary upon notice of 60 days or less;
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(iii) involves
any joint venture, partnership, limited liability or other similar agreement or
arrangement relating to the formation, creation, operation, management or
control of any partnership or joint venture that is material to the business of
Nayarit, taken as a whole;
(iv) involves
any exchange traded, over-the-counter or other swap, cap, floor, collar, futures
contract, forward contract, option or other derivative financial instrument or
contract, based on any commodity, security, instrument, asset, rate or index of
any kind or nature whatsoever, whether tangible or intangible, including
currencies, interest rates, foreign currency and indices;
(vi) relates
to Indebtedness (whether incurred, assumed, guaranteed or secured by any asset)
having an outstanding principal amount in excess of $100,000 with respect to any
Indebtedness;
(vii) was
entered into by Nayarit or any Subsidiary and has not yet been consummated, and
involves the acquisition or disposition, directly or indirectly (by merger or
otherwise), of a substantial amount of the assets or capital stock or other
equity interests of another Person, other than the acquisition or disposition of
assets in the ordinary course of business consistent with past
practices;
(viii) by
its terms calls for aggregate payments by Nayarit or any Subsidiary under such
contract of more than $100,000 with respect to any payments;
(ix)
with respect to any material agreement for the acquisition or disposition,
directly or indirectly (by merger or otherwise), of a substantial amount of the
assets or capital stock or other equity interests of another Person, pursuant to
which Nayarit or any Subsidiary has: (A) any continuing indemnification
obligations or (B) any “ earn-out” or other contingent
payment obligations;
(x)
involves any managers, directors, executive officers or key employees of Nayarit
or any Subsidiary that cannot be cancelled by Nayarit or any Subsidiary within
60 days’ notice without liability, penalty or premium;
(xi)
obligates Nayarit or any Subsidiary to provide indemnification or a guarantee in
excess of $100,000 with respect to any obligation;
(xii) obligates
Nayarit or any Subsidiary to make any capital commitment or capital expenditure
(including pursuant to any joint venture) in excess of $100,000 with respect to
such obligation;
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(xiii) relates
to the development, ownership, licensing or use of any Intellectual Property (as
defined in Section 2.15) material to the business of Nayarit or any Subsidiary,
other than “ shrink wrap,” “ click wrap,” and “ off the shelf”
software agreements and other agreements for software commercially available on
reasonable terms to the public generally, with license, maintenance, support and
other fees of less than $10,000 per year (collectively, “Off-the-Shelf Software
Agreements”);
(xiv) provides
for any standstill arrangements; or
(xv) Nayarit
has filed as a material contract with the [OSC] pursuant to [Item 601(b)(10) of
Regulation S-K].
(b) With
respect to each Nayarit Material Contract: (i) each Nayarit Material
Contract is legal, valid, binding and enforceable in all material respects
against Nayarit or the Subsidiaries, as the case may be, and, to Nayarit’s
Knowledge, the other party thereto, and in full force and effect (except as such
enforcement may be limited by the Enforceability Exceptions); (ii) the
consummation of the transactions contemplated by this Agreement will not affect
the terms, validity or enforceability of such Nayarit Material Contract by the
Surviving Company or any Subsidiary and, to Nayarit’s Knowledge, the other party
thereto; (iii) neither Nayarit nor any Subsidiary is in breach or default in any
material respect, and no event has occurred which, with the passage of time or
giving of notice or both, would constitute such a breach or default by Nayarit
or any Subsidiary, or permit termination or acceleration by the other party,
under any Nayarit Material Contract; (iv) to Nayarit’s Knowledge, no other party
to any Nayarit Material Contract is in breach or default in any material
respect, and no event has occurred which, with the passage of time or giving of
notice or both, would constitute such a breach or default by such other party,
or permit termination or acceleration by Nayarit or any Subsidiary, under such
Nayarit Material Contract, and (v) the consummation of the transactions
contemplated by this Agreement will not obligate Nayarit or any Subsidiary to
make any payments thereunder.
(a) Section 2.15(a) of
the Nayarit Disclosure Schedules contains a list of: (A) all material
Intellectual Property that is owned by Nayarit or any Subsidiary (the “Nayarit Intellectual
Property”) and (B) all material Intellectual Property, other than
Off-the-Shelf Software Agreements, licensed, used or held for use by Nayarit or
any Subsidiary in the conduct of its business (“Licensed Intellectual
Property”). Except where the failure to own, license or
otherwise possess such rights has not had and would not reasonably be expected
to have a Material Adverse Effect, Nayarit and each Subsidiary has: (i) all
right, title and interest in and to all Nayarit Intellectual Property owned by
it, free and clear of all Encumbrances, other than Permitted Encumbrances and
(ii) all necessary proprietary rights in and to all of its Licensed Intellectual
Property, free and clear of all Encumbrances, other than Permitted
Encumbrances. Neither Nayarit nor any Subsidiary has received any
notice alleging Nayarit or any Subsidiary has infringed, diluted or
misappropriated, or, by conducting its business as proposed, would infringe,
dilute or misappropriate, the Intellectual Property rights of any Person, and,
to the Knowledge of Nayarit, there is no valid basis for any such
allegation. Neither the execution nor delivery of this Agreement nor
the consummation of the transactions contemplated hereby will impair or
materially alter Nayarit’s or any Subsidiary’s rights to any Nayarit
Intellectual Property or Licensed Intellectual Property. To the
Knowledge of Nayarit, there is no unauthorized use, infringement or
misappropriation of the Nayarit Intellectual Property by any
Person. Neither Nayarit nor any Subsidiary is engaged in any
unauthorized use, infringement or misappropriation of any Intellectual Property
owned by any Person that would reasonably be expected to have a Material Adverse
Effect. All of the rights within the Nayarit Intellectual Property
are valid, enforceable and subsisting (except as such enforcement may be limited
by the Enforceability Exceptions). There is no Action pending or, to
Nayarit’s Knowledge, threatened which challenges the rights of Nayarit or any
Subsidiary in respect of any Nayarit Intellectual Property or the validity,
enforceability or effectiveness thereof. The Nayarit Intellectual
Property and the Licensed Intellectual Property constitute all material
Intellectual Property used in or necessary for the operation by Nayarit or any
Subsidiary of its business as currently conducted. Neither Nayarit
nor any Subsidiary is in breach or default in any material respect (or would
with the giving of notice or lapse of time or both be in such breach or default)
under any license to use any of the Licensed Intellectual
Property.
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(b) For
purposes of this Agreement, “Intellectual Property” means:
(A) United States, international and foreign patents and patent applications,
including divisionals, continuations, continuations-in-part, reissues,
reexaminations and extensions thereof and counterparts claiming priority
therefrom; utility models; invention disclosures; and statutory invention
registrations and certificates; (B) United States and foreign registered,
pending and unregistered trademarks, service marks, trade dress, logos, trade
names, corporate names and other source identifiers, domain names, Internet
sites and web pages; and registrations and applications for registration for any
of the foregoing, together with all of the goodwill associated therewith; (C)
United States and foreign registered copyrights, and registrations and
applications for registration thereof; rights of publicity; and copyrightable
works; and (D) all inventions and design rights (whether patentable or
unpatentable) and all categories of trade secrets as defined in the Uniform
Trade Secrets Act, including business, technical and financial
information.
2.16 Employee Benefit
Plans.
(a) Section 2.16(a) of
the Nayarit Disclosure Schedules lists, with respect to Nayarit and any trade or
business (whether or not incorporated) which is treated as a single employer
with Nayarit within the meaning of Section 414(b), (c), (m) or (o) of the Code
(an “ERISA Affiliate”):
(i) all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), (ii) loans to
managers, officers, directors or employees other than advances for expense
reimbursements incurred in the ordinary course of business consistent with past
practices and any securities option, securities stock purchase, phantom
securities, securities appreciation right, equity-related, supplemental
retirement, severance, sabbatical, medical, dental, vision care, disability,
employee relocation, cafeteria benefit (Code Section 125) or dependent care
(Code Section 129), life insurance or accident insurance plans, programs,
agreements or arrangements, (iii) all bonus, pension, retirement, profit
sharing, savings, deferred compensation or incentive plans, programs, policies,
agreements or arrangements, (iv) other fringe, perquisite, or employee benefit
plans, programs, policies, agreements or arrangements and (v) any current or
former employment, consulting, change of control, retention or executive
compensation, termination or severance plans, programs, policies, agreements or
arrangements, written or otherwise, as to which unsatisfied liabilities or
obligations (contingent or otherwise) remain for the benefit of, or relating to,
any present or former employee, consultant, manager or director, or which could
reasonably be expected to have any liabilities or obligations (together, the
“Benefit
Plans”).
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(b) Any
Nayarit Benefit Plan intended to be qualified under Section 401(a) of the Code
has either obtained from the Internal Revenue Service (“IRS”) a current favorable
determination letter as to its qualified status under the Code, or has applied
to the IRS for such a determination letter prior to the expiration of the
requisite period under applicable Treasury Regulations or IRS pronouncements in
which to apply for such determination letter and to make any amendments
necessary to obtain a favorable determination or has been established under a
standardized prototype plan for which an IRS opinion letter has been obtained by
the plan sponsor and is valid as to the adopting employer.
(c) To
the Knowledge of Nayarit, there has been no “ prohibited
transaction,” as such term is defined in Section 406 of ERISA and Section 4975
of the Code, by Nayarit or any Subsidiary or by any trusts created thereunder,
any trustee or administrator thereof or any other Person, with respect to any
Nayarit Benefit Plan. Except as would not reasonably be expected to
have a Material Adverse Effect: (i) each Nayarit Benefit Plan has been
administered in accordance with its terms and in compliance with the
requirements prescribed by any and all applicable Laws (including ERISA and the
Code), and (ii) Nayarit and each ERISA Affiliate have performed all obligations
required to be performed by them under, are not in any respect in default under
or violation of, and have no Knowledge of any default or violation by any other
party to, any of the Nayarit Benefit Plans. All contributions and
premiums required to be made by Nayarit or any ERISA Affiliate to any Nayarit
Benefit Plan have been made on or before their due dates, including any legally
permitted extensions. No Action is pending, or to the Knowledge of
Nayarit or any Subsidiary is threatened, against or with respect to any such
Nayarit Benefit Plan, including any audit or inquiry by the IRS, United States
Department of Labor (the “DOL”) or other Governmental
Authority (other than as would not reasonably be expected to have a Material
Adverse Effect). Each Nayarit Benefit Plan that is a “ nonqualified deferred compensation plan” within the meaning of
Section 409A of the Code and any awards thereunder, in each case that is subject
to Section 409A of the Code, has been operated in good faith compliance, in all
material respects, with Section 409A of the Code since January 1,
2007.
(d) Except
as set forth in Section 2.16(d) of
the Nayarit Disclosure Schedules or as otherwise provided in this Agreement, the
consummation of the transactions contemplated by this Agreement will not, either
alone or in combination with any other event or events, (i) entitle any current
or former employee, manager, director or consultant of Nayarit or any Subsidiary
to any payment (whether of severance pay, unemployment compensation, phantom
stock plan payments, golden parachute, bonus or otherwise), (ii) accelerate,
forgive indebtedness, vest, distribute, or increase benefits or an obligation to
fund benefits with respect to any employee, manager, director or consultant of
Nayarit or any Subsidiary, or (iii) increase the amount of compensation due any
such employee, manager, director or consultant.
(e) Except
as set forth in Section 2.16(e) of
the Nayarit Disclosure Schedules, any amounts payable under any of the Nayarit
Benefit Plans or any other contract, agreement or arrangement with respect to
which Nayarit or any Subsidiary may have any liability will be deductible for
federal income Tax purposes by virtue of Section 162(m) or Section 280G of the
Code. None of the Nayarit Benefit Plans contains any provision
requiring a gross-up pursuant to Section 280G or 409A of the Code or similar Tax
provisions.
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(f) Except
as set forth in Section 2.16(f) of
the Nayarit Disclosure Schedules, no Nayarit Benefit Plan provides benefits,
including death or medical benefits (whether or not insured), with respect to
current or former employees, managers, directors or consultants of Nayarit or
any Subsidiary after retirement or other termination of service (other than: (i)
coverage mandated by applicable Laws, (ii) death benefits or retirement benefits
under any “ employee pension benefit plan,” as that term
is defined in Section 3(2) of ERISA, or (iii) benefits, the full direct cost of
which is borne by the current or former employee, manager, director or
consultant (or beneficiary thereof)).
(g) Neither
Nayarit nor any Subsidiary nor any ERISA Affiliate has any liability with
respect to any: (i) employee pension benefit plan (within the meaning of Section
3(2) of ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA,
Title IV of ERISA or Section 412 of the Code, (ii) “ multiemployer plan” as defined in Section 3(37) of ERISA or
(iii) “ multiple employer plan” within the meaning of
Sections 4063 and 4064 of ERISA or Section 413(c) of the
Code.
(h) Neither
Nayarit nor any Subsidiary nor any of its ERISA Affiliates has used the services
or workers provided by third party contract labor suppliers, temporary
employees, “ leased employees” (as that term is defined
in Section 414(n) of the Code), or individuals who have provided services as
independent contractors to an extent that would reasonably be expected to result
in the disqualification of any of the Nayarit Benefit Plans or the imposition of
penalties or excise Taxes with respect to the Nayarit Benefit Plans by the IRS
or the DOL.
(i) All
employees, managers, directors, and consultants are appropriately classified as
such under applicable Law in all material respects, and neither Nayarit nor any
Subsidiary is in material violation of any applicable Law in connection with
such classification or has not received notice of any possible violation from
any Governmental Authority.
(a) Nayarit
and each Subsidiary has timely filed or will have timely filed, or caused to be
filed, all federal, state, local and foreign Tax returns and reports required to
be filed by it (taking into account all available extensions) (collectively,
“Tax Returns”), and all
such Tax Returns are true, accurate, correct and complete in all material
respects, and has paid, collected or withheld, or caused to be paid, collected
or withheld, all Taxes required to be paid, collected or withheld, other than
such Taxes that it is contesting in good faith or for which adequate reserves in
the Nayarit Financials have been established in accordance with [Canadian]
GAAP. There are no claims, assessments, audits, examinations,
investigations or other proceedings pending against Nayarit or any Subsidiary in
respect of any Tax, and neither Nayarit nor any Subsidiary has been notified in
writing of any proposed Tax claims, assessments or audits against Nayarit or any
Subsidiary (other than, in each case, claims or assessments for which adequate
reserves in the Nayarit Financials have been established in accordance with
[Canadian] GAAP or are immaterial in amount). There are no
Encumbrances with respect to any Taxes upon any of Nayarit’s or any Subsidiary’s
assets, other than: (i) Taxes, the payment of which are not yet due, (ii) Taxes
or charges being contested in good faith by appropriate proceedings, or (iii)
Taxes for which adequate reserves in the Nayarit Financials have been
established in accordance with [Canadian] GAAP. No Tax Returns of
Nayarit have been audited. Neither Nayarit nor any Subsidiary has any
outstanding waivers or extensions of any applicable statute of limitations to
assess any amount of Taxes. There are no outstanding requests by
Nayarit or any Subsidiary for any extension of time within which to file any Tax
Return or within which to pay any Taxes shown to be due on any Tax
Return.
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(b) Neither
Nayarit nor any Subsidiary has constituted either a “ distributing corporation” or a “ controlled corporation” (within the meaning of Section
355(a)(1)(A) of the Code) in a distribution of securities (to any Person or
entity that is not a member of the consolidated group of which Nayarit or any
Subsidiary is the common parent corporation) qualifying for, or intended to
qualify for, Tax-free treatment under Section 355 of the Code: (i) within the
two-year period ending on the date hereof or (ii) in a distribution which could
otherwise constitute part of a “ plan” or “ series of related transactions” (within the meaning of Section
355(e) of the Code) in conjunction with the Amalgamation.
(c) Neither
Nayarit nor any Subsidiary is nor has it ever been a member of any consolidated,
combined, unitary or affiliated group of corporations for any Tax purposes other
than a group of which Nayarit or such Subsidiary is or was the common parent
corporation.
(d) Neither
Nayarit nor any Subsidiary has made any change in accounting method or received
a ruling from, or signed an agreement with, any taxing
authority.
(e) Neither
Nayarit nor any Subsidiary has participated in, or sold, distributed or
otherwise promoted, any “ reportable transaction,” as
defined in Treasury Regulation Section 1.6011-4.
(f) Neither
Nayarit nor any Subsidiary has: (i) changed any Tax accounting methods, policies
or procedures except as required by a change in Law, (ii) made, revoked or
amended any Tax election, (iii) filed any amended Tax Returns or claim for
refund or (iv) entered into any closing agreement affecting or otherwise settled
or compromised any material Tax liability or refund.
(g) Nayarit
or any Subsidiary is not a party to or bound by any Tax indemnity agreement, Tax
sharing agreement or similar contract. Nayarit or any Subsidiary is
not a party to any joint venture, partnership, or other arrangement or contract,
which could be treated as a partnership or “disregarded entity” for United
States federal income Tax purposes.
(h) Nayarit
or any Subsidiary is not obligated under any agreement, contract or arrangement
that may result in the payment of any amount that would not be deductible by
reason of Sections 162(m) or 280G of the Code.
(i) Nayarit
or any Subsidiary has not been or, to Nayarit’s Knowledge, will be required to
include any material adjustment in Taxable income for any Tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax Laws as a result of transactions, events or
accounting methods employed prior to the Amalgamation other than any such
adjustments required as a result of the Amalgamation. Nayarit or any
Subsidiary has not filed any consent to have the provisions of paragraph 341(f)
of the Code (or comparable provisions of any state Tax Laws) apply to Nayarit or
any Subsidiary. Nayarit or any Subsidiary has not filed any
disclosures under Section 6662 or comparable provisions of state, local or
foreign law to prevent the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return.
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(j) For
purposes of this Agreement, the following terms have the following meanings:
“Tax ” (and, with
correlative meaning, “Taxes” and “Taxable”) means (i) any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Authority responsible for the imposition of any such tax (domestic
or foreign), (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any taxable period, and
(iii) any liability for the payment of any amounts of the type described in
(i) or (ii) as a result of being a transferee of or successor to any
Person, or as a result of any express or implied obligation to indemnify any
other Person.
(a) Section 2.19(a)-1 of
the Nayarit Disclosure Schedules contains a correct and complete list of all
real property owned by Nayarit or any Subsidiary or any partnership or joint
venture in which Nayarit or any Subsidiary directly or indirectly has an
interest having a fair market value in excess of $100,000 (“Owned Real
Property”). Section 2.19(a)-2 of
the Nayarit Disclosure Schedules contains a correct and complete list of all
real property leased or subleased by Nayarit or any Subsidiary as tenant or
subtenant (“Leased Real
Property”) (the Owned Real Property and the Leased Real Property are
herein sometimes collectively called the “Nayarit Real Property”). The
list set forth in Section 2.19(a)-1 of
the Nayarit Disclosure Schedules contains, with respect to each parcel of the
Owned Real Property, a description of all existing leases, licenses or other
occupancy contracts to which Nayarit or any Subsidiary is a party or by which
Nayarit or any Subsidiary is bound as a landlord, including all amendments,
modifications, extensions, renewals and supplements thereto (collectively, the
“Landlord Leases”), the
terms of which have been complied with by Nayarit or such Subsidiary in all
material respects. The list set forth in Section 2.19(a)-2 of
the Nayarit Disclosure Schedules contains, with respect to each parcel of the
Leased Real Property, a description of all existing leases, subleases, licenses
or other occupancy contracts to which Nayarit or any Subsidiary is a party or by
which Nayarit or any Subsidiary is bound as a tenant, including all amendments,
modifications, extensions, assignments, subleases, renewals and supplements
thereto (collectively, the “Tenant Leases”) (the Landlord
Leases and the Tenant Leases are herein sometimes collectively called the “Leases ”), the terms of which
have been complied with by Nayarit and such Subsidiary in all material
respects. Except as would not reasonably be expected to
have a Material Adverse Effect, Nayarit and the Subsidiaries have good, valid
and marketable title to all of the Owned Real Property and related personal
property, assets and rights, free and clear of all Encumbrances other than
Permitted Encumbrances. For purposes of this Agreement, the term
“Permitted Encumbrances”
means: (i) Encumbrances with respect to Taxes either not yet due or being
contested in good faith in appropriate proceedings or for which adequate
reserves have been set aside; (ii) mechanics’, materialmen’s or similar
statutory Encumbrances for amounts not yet due or being contested in good faith
in appropriate proceedings; (iii) any covenants, conditions, restrictions,
reservations, rights, liens, easements, encumbrances, encroachments and other
matters affecting title which are shown as exceptions on the title insurance
policies and/or title insurance commitments or reports which have been made
available to Parent; (iv) the terms and conditions of the Tenant Leases; (v)
applicable federal, state, local or tribal authority building and land use
regulations, restrictions or requirements, (vi) existing easements and
encroachments; and (vii) building code violations not caused by Nayarit or any
Subsidiary or Parent.
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(b) A
correct and complete copy of each Lease has been furnished to Parent prior to
the date hereof. Nayarit or a Subsidiary, if applicable, has a valid,
binding and enforceable leasehold interest under each of the Tenant Leases and
each of the Leases is in full force and effect (except as such enforcement may
by limited by the Enforceability Exceptions or where the loss of such Lease
would not have a Material Adverse Effect) and to the extent permitted under the
terms of each Lease, grants Nayarit or a Subsidiary the concurrent right to use
and occupy the premises leased thereby. Neither Nayarit nor any
Subsidiary nor, to the Knowledge of Nayarit, any other party to any Lease is in
breach of or in default under, in any material respect, any of the Leases,
except to the extent any such breach would not have a Material Adverse
Effect. Nayarit and the Subsidiaries enjoy peaceful and undisturbed
possession under all Tenant Leases, have not received notice of any material
default, delinquency or breach on the part of any party under any Lease, and
there are no existing material defaults (with or without notice or lapse of time
or both) by Nayarit or any Subsidiary or, to the Knowledge of Nayarit, any other
party thereto. No Consent under any Lease is required in connection
with the transactions contemplated hereby, except where the failure to obtain
such Consent would not have a Material Adverse Effect.
(c) Except
as would not reasonably be expected to have a Material Adverse Effect, neither
Nayarit nor any Subsidiary nor, to the Knowledge of Nayarit, any other party to
any Landlord Lease, is in breach of or in default under any of the Landlord
Leases.
(d) True
and complete copies of all Tenant Leases, together with all modifications,
extensions, amendments and assignments thereof, if any, affecting or relating to
the Owned Real Property have heretofore been furnished to
Parent.
(e) There
is no action, suit, litigation, hearing or administrative proceeding pending or,
to Nayarit’s Knowledge, threatened against Nayarit or any Subsidiary or any
partnership in which Nayarit or any Subsidiary owns an interest, with respect to
all or any portion of the Nayarit Real Property, in each case which is not or
would not be fully covered by insurance, except as would not reasonably be
expected to have a Material Adverse Effect.
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(f) There
are no condemnation or eminent domain proceedings pending, or to Nayarit’s
Knowledge, threatened against any Owned Real Property and, to Nayarit’s
Knowledge, there are no condemnation or eminent domain proceedings pending or
threatened against any Leased Real Property.
(g) Neither
Nayarit nor any Subsidiary has granted any Person a purchase option, right of
first refusal, right of first offer or other right to purchase any Owned Real
Property.
(h) Neither
Nayarit nor any Subsidiary has sent to any holder of any mortgage or other
interest (secured or unsecured) in any Nayarit Real Property, nor has Nayarit or
any Subsidiary received from any such holder, a notice of default under any
financing, loan or other document or security agreement with respect to any
Nayarit Real Property.
(i) There
are no finder’s fees, brokerage commissions or tenant improvement allowances
outstanding with respect to any Nayarit Real Property.
(j) There
are no Tax certiorari or Tax appeal proceedings outstanding with respect to any
Owned Real Property as of the date hereof.
(k) Neither
Nayarit nor any Subsidiary has assigned its interest as lessor or lessee under
any Lease, other than to Nayarit or a Subsidiary or collateral assignments in
connection with any existing financing of any Nayarit Real
Property.
(l) Nayarit
and each Subsidiary have insurable and marketable title to all Owned Real
Property subject to Permitted Encumbrances. Neither Nayarit nor any
Subsidiary has received notice of, or other writing referring to, any
requirements or recommendations by any insurance company that has issued a
policy covering any part of the Nayarit Real Property or by any board of fire
underwriters or other body exercising similar functions, requiring or
recommending any repairs or work to be done on any part of the Nayarit Real
Property, which repair or work has not been completed.
(m) Nayarit
has no Knowledge of any proceeding pending for the adjustment of the assessed
valuation of all or any portion of any Nayarit Real Property or abatement with
respect to all or any portion of the real estate taxes payable on any Nayarit
Real Property.
(n) The
use and operation of the Nayarit Real Property in the conduct of the business of
Nayarit and the Subsidiaries does not violate any instrument of record or
agreement affecting such Owned Real Property, except for such violations that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect. Valid policies of title insurance have been
issued insuring all fee simple title to the Owned Real Property, except where
the failure of such policies to be in full force and effect would not reasonably
be expected to have a Material Adverse Effect and such policies are in full
force and effect. No material claim has been made against any such
policy.
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(a) There
has been: (i) to the Knowledge of Nayarit, no labor union organizing or
attempting to organize any employee of Nayarit or any Subsidiary into one or
more collective bargaining units; and (ii) no labor dispute, strike, work
slowdown, work stoppage, lock out or other collective labor action by or with
respect to any employees, managers or consultants of Nayarit or any Subsidiary
pending or, to Nayarit’s Knowledge, threatened against Nayarit or any
Subsidiary. Neither Nayarit nor any Subsidiary is a party to, or
bound by, any collective bargaining agreement or other agreement with any labor
organization applicable to the employees, managers or consultants of Nayarit or
any Subsidiary and no such agreement is currently being
negotiated.
(b) Except
as would not reasonably be expected to result in a Material Adverse Effect,
Nayarit and each Subsidiary: (i) is in compliance with all applicable Laws
respecting employment and employment practices, terms and conditions of
employment, health and safety and wages and hours, including Laws relating to
discrimination, disability, labor relations, hours of work, payment of wages and
overtime wages, pay equity, immigration, workers compensation, working
conditions, employee scheduling, occupational safety and health, family and
medical leave, and employee terminations, (ii) has not received written notice,
or to the Knowledge of Nayarit any other form of notice, that there is any
unfair labor practice charge or complaint against Nayarit or any Subsidiary
pending, (iii) is not liable for any arrears of wages or any penalty for failure
to comply with any of the foregoing, and (iv) is not liable for any payment to
any trust or other fund or to any Governmental Authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for employees (other than routine payments to be made in the
ordinary course of business and consistent with past
practice). Except as would not reasonably be expected to have a
Material Adverse Effect, there are no complaints, lawsuits, arbitrations,
administrative proceedings, or other Actions pending or, to the Knowledge of
Nayarit, threatened against Nayarit or any Subsidiary or any of their respective
employees, managers, consultants or former employees brought by or on behalf of
any applicant for employment, any current or former employee, any Person
alleging to be a current or former employee, any class of the foregoing, or any
Governmental Authority, relating to any such Law or regulation, or alleging
breach of any express or implied contract of employment, wrongful termination of
employment, or alleging any other discriminatory, wrongful or tortious conduct
in connection with the employment relationship.
(c) Nayarit
has provided Parent a list with the name, title and total annual compensation
(including projected bonus or other incentive compensation for fiscal year 2010)
of each employee and independent contractor of Nayarit and its Subsidiaries as
of the date hereof.
(d) Nayarit
and its Subsidiaries are in compliance in all material respects with all
applicable Laws, including Mexican labor Laws, respecting labor, employment,
immigration, fair employment practices, terms and conditions of employment,
workers’ compensation, occupational safety, plant closings, compensation and
benefits, and wages and hours. Neither Nayarit nor any of its
Subsidiaries is liable for any payment to any trust or other fund or to any
Governmental Authority, with respect to unemployment compensation benefits,
social security or other benefits or obligations for employees (other than
routine payments to be made in the normal course of business and consistent with
past practice). There are no material Actions pending or, to the
Knowledge of Nayarit, threatened between Nayarit or any of its Subsidiaries and
any current or former employees of Nayarit or any of its
Subsidiaries.
I-93
(e) There
has been no “mass layoff” or “plant closing” as defined by the [Worker
Adjustment Retraining Notification Act] or similar state or local “plant
closing” Law with respect to Nayarit or any of its
Subsidiaries.
(f) There
has been and is no unfair labor practice complaint against Nayarit or any of its
Subsidiaries pending or, to the Knowledge of Nayarit, threatened before any
Governmental Authority, and no pending or, to the Knowledge of Nayarit,
threatened arbitration arising out of any collective bargaining
agreement.
(g) All
material amounts due from Nayarit and its Subsidiaries, or for which any
material claim may be asserted against Nayarit and its Subsidiaries, on account
of wages and other benefits have been paid or accrued as a liability on the
books and records of each of Nayarit and its Subsidiaries.
(h) Nayarit
and its Subsidiaries are not liable for any material liabilities, judgments,
arrearage of wages, fines or penalties for failure to comply with any applicable
labor Laws.
2.21 Environmental
Matters. Except as set forth on Section 2.21 of the
Nayarit Disclosure Schedules:
(a) Neither
Nayarit nor any Subsidiary is the subject of any pending Order, judgment or
written claim asserted or arising under any Environmental Law that has or would
reasonably be expected to have a Material Adverse Effect.
(b) Neither
Nayarit nor any Subsidiary has entered into any negotiations or agreements with
any Person under any Environmental Law, which has or would reasonably be
expected to have a Material Adverse Effect.
(c) To
the Knowledge of Nayarit, Nayarit and each Subsidiary, and the ownership and
operation of all assets in which Nayarit or any Subsidiary has an ownership
interest, are in compliance with all applicable Environmental Laws, including
obtaining and complying with all permits or authorizations required pursuant to
Environmental Laws, except where such failure to be comply with Environmental
Laws would not reasonably be expected to have a Material Adverse
Effect
(d) To
the Knowledge of Nayarit, there are no conditions existing on, in, at, under, or
about or resulting from the past or present operations of Nayarit or any
Subsidiary or any other party that may give rise to any on-site or off-site
investigation or remedial obligations of Nayarit or any Subsidiary under any
Environmental Laws, except where such investigation or remedial obligation would
not reasonably be expected to have a Material Adverse Effect.
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(e) To
the Knowledge of Nayarit, neither Nayarit nor any Subsidiary currently owns or
operates, nor in the past has it owned or operated, any property that is on the
United States Environmental Protection Agency’s National Priorities List or the
Environmental Protection Agency’s CERCLIS list;
(f) To
the Knowledge of Nayarit, all Resource Conservation and Recovery Act “RCRA” regulated hazardous
waste for which Nayarit or any Subsidiary was the RCRA generator, has been
managed in compliance with the applicable provisions of RCRA and any other
Environmental Laws.
(g) To
the Knowledge of Nayarit, no lien, deed notice or use restriction has been
recorded pursuant to any Environmental Law with respect to the assets of Nayarit
or any Subsidiary;
(h) As
used in this Agreement, the term “Environmental Laws” means all
applicable: (i) federal statutes regulating or prescribing restrictions
regarding the environment (air, water, land, animal and plant life), including
but not limited to the following, as amended: the Clean Air Act, Clean Water
Act, Comprehensive Environmental Response, Compensation and Liability Act,
Emergency Planning and Community Right-to-Know Act, Endangered Species Act,
Hazardous Materials Transportation Act, Migratory Bird Treaty Act, National
Environmental Policy Act, Occupational Safety and Health Act, Oil Pollution Act
of 1990, RCRA, Safe Drinking Water Act, and Toxic Substances Control Act; (ii)
any applicable regulations promulgated pursuant to such federal statutes; (iii)
any applicable state law counterparts of such federal statutes and the
regulations promulgated thereunder; and (iv) any other applicable state, local
statutes, rules, regulations or ordinances, or tribal authority, regulating the
use of or affecting the environment, each as currently in effect on the date of
this Agreement.
(j) Nayarit
has provided to Parent information regarding all of Nayarit’s financial
assurance obligations (including but not limited to any site restoration bonds
and environmental risk insurance) required under Environmental Laws in
connection with Nayarit’s and its Subsidiaries operations.
(k) The
transaction that is the subject of this Agreement will not require any
notification to, or approval of, any Governmental Authority, either pursuant to
Mexico’s General Law on the Prevention and Comprehensive Management of Waste
(Ley General para la
Prevención y Gestión Integral de los Residuos) and Mexico’s Regulations
to the General Law on the Prevention and Comprehensive Management of Waste
(Reglamento de la Ley General
para la Prevención y Gestión Integral de los Residuos), or otherwise
under applicable Environmental Laws.
I-95
2.25 Bankruptcy. Neither
Nayarit nor any Subsidiary has: (i) commenced a voluntary case, or had entered
against it a petition, for relief under the federal bankruptcy code or any
similar petition, order or decree under any federal or state law or statute
relative to bankruptcy, insolvency or other relief for debtors; (ii) caused,
suffered or consented to the appointment of a receiver, trustee, administrator,
conservator, liquidator or similar official in any federal, state or foreign
judicial or non judicial proceedings, to hold, administer or liquidate all or
substantially all of its property; or (iii) made an assignment for the benefit
of creditors. Nayarit and the Subsidiaries are able to pay their
debts as the same become due in the ordinary course of their respective business
consistent with past practices.
2.26 Information
Supplied. None of the information supplied or to be supplied
by Nayarit for inclusion or incorporation by reference in the Registration
Statement, Proxy Statement, [Nayarit Proxy Statement] or any other report, form,
registration, or other filing made with any Governmental Authority with respect
to the transactions contemplated hereby will, at the date of filing of the
Registration Statement or the date the Proxy Statement or [Nayarit Proxy
Statement] is first mailed to Parent’s stockholders and the Nayarit
Stockholders, as the case may be, or at the time of the Parent Stockholder
Meeting (as defined in Section 5.7), or Nayarit Stockholder Meeting (as defined
in Section 5.8), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Notwithstanding the foregoing, Nayarit makes no
representation, warranty or covenant with respect to any information supplied by
Parent which is contained in the Registration Statement, Proxy Statement,
[Nayarit Proxy Statement] or other filing made in connection with the
transactions contemplated by this Agreement.
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2.27 Illegal
Payments. Neither Nayarit nor any Subsidiary or, to the
Knowledge of Nayarit, any officer, director, manager, agent or employee of
Nayarit or any Subsidiary has: (a) used any funds of Nayarit or any
Subsidiary for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; (b) made any payment in violation
of applicable Law to any foreign or domestic government official or employee or
to any foreign or domestic political party or campaign or violated any provision
of the [Foreign Corrupt Practices Act of 1977], as amended; or (c) made any
other payment in violation of applicable Law.
2.28 Notes and Accounts
Receivable. All notes and accounts receivable of Nayarit and
the Subsidiaries are reflected properly on their books and records, are valid
receivables and, to Nayarit’s Knowledge, will be collected in accordance with
their terms at their recorded amounts subject to the allowances as set forth in
the Nayarit Financials.
2.29 Money Laundering
Laws. The operations of Nayarit and the Subsidiaries are and
have been conducted at all times in compliance with laundering statutes in all
applicable jurisdictions, the rules and regulations thereunder and any related
or similar rules, regulations or guidelines, issued, administered or enforced by
any Governmental Authority and no action involving Nayarit or any Subsidiary
with respect to such statutes, rules and regulations is pending or
threatened.
2.30 Antitakeover
Statutes. The transactions contemplated by this Agreement are
not subject to the requirements of any “moratorium,” “control share,” “fair
price,” “affiliate transactions,” “business combination” or other antitakeover
Laws and regulations applicable to Nayarit or any Subsidiary.
2.31 Suppliers. No
supplier of Nayarit or any Subsidiary has cancelled or otherwise terminated any
contract with Nayarit or any Subsidiary prior to the expiration of the contract
term, or made any threat to Nayarit or any Subsidiary to cancel, reduce the
supply or otherwise terminate its relationship with Nayarit or any Subsidiary,
except for such cancellations or terminations that would not reasonably be
expected to have a Material Adverse Effect. Neither Nayarit nor any
Subsidiary has: (i) breached any material agreement with or (ii) engaged in any
fraudulent conduct with respect to, any supplier of Nayarit or any
Subsidiary.
2.32 Negotiations. Nayarit
has suspended or terminated, and has the legal right to terminate or suspend,
all negotiations and discussions of any acquisition, merger, consolidation or
sale of all or substantially all of the assets or equity interests of Nayarit or
any Subsidiary with Persons other than Parent.
I-97
2.33 The Mine
(a) Nayarit
and its Subsidiaries are the sole valid and legal and beneficial holders of the
mining concession titles listed in Sections 2.19-1 and
2.19-2 of the
Nayarit Disclosure Schedule.
(b) Nayarit
and its Subsidiaries have the legally binding right to explore and an option to
acquire all rights and obligations related to the mining lots covered by the
mining concession titles included in Sections 2.19-1 and
2.19-2 of the
Nayarit Disclosure Schedule.
(c) Neither
Nayarit nor any of its Subsidiaries is obligated, by virtue of any prepayment
under any contract providing for the sale by Nayarit or any of its Subsidiaries
of gold or other minerals sold by Nayarit or any of its Subsidiaries as of the
Closing which contains a “take or pay” clause or under any similar arrangement,
to deliver gold or such other minerals at some future time without then or
thereafter receiving full payment therefore.
(d) Assuming
the existence of gold or other minerals as reflected in studies provided by
Nayarit to Parent and assuming the existence of reasonable mining conditions
(i.e., the lack of geological or physical conditions which would prohibit or
inhibit the mining process from continuing in a continuous manner), there are no
deficiencies in title to the gold or other minerals or to the interest that
gives rise to the right of Nayarit or any of its Subsidiaries to mine the gold
or other minerals with respect to that part of the Nayarit Real Property or any
of its Subsidiaries upon or in which mining operations are conducted that would,
other than pursuant to the expiration of mining rights in the Permits for such
Mine in accordance with their terms, prevent Parent or its Affiliates from
continuing to mine the Mine as such mining is currently
conducted. There has been no reduction in reserves or production
capacity of the Mine from the amounts provided to Parent except for (i) such
reductions in reserves that have resulted from production in the ordinary course
of business; and (ii) such reductions that, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse
Effect.
(e) Except
as set forth in Section 2.33(e) of
the Nayarit Disclosure Schedule, all obligations related to the Mine and derived
from any Permits have been duly complied with, in all material respects,
including but not limited to, the obligations of payment of mining duties and
filing of annual reports of proof of mining works with the corresponding
Governmental Authority. No letter or communication has been received
from any Governmental Authority informing Nayarit or any of its Subsidiaries of
the initiation of any procedure to cancel any Permit for failure to pay any
mining duties, file any annual report of proof of mining works or comply with
any other obligation related to any Permit.
(f) Except
as identified in Section 2.33(f) of
the Nayarit Disclosure Schedule, there are no property payments, royalties, fees
or monies payable or required to be paid to any Person with regard to the Mine
and there are no outstanding agreements relating to or options to acquire any
part of or all of the Mine.
(g) For
purposes of this Agreement, the term the “Mine” shall mean all real
property, including subsurface, surface and the fixtures associated therewith,
as well as all mining concession titles and exploration and/or exploitation
agreements of Nayarit or any of its Subsidiaries that are used for mining or
extracting or for which Nayarit or any of its Subsidiaries has the right to
explore for and/or extract gold or any other minerals in the State of [],
Mexico.
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2.34 Mining
Reports.
(a) The information set
forth in the [SRK Report] regarding the mining assets, properties and operations
of Nayarit and its Subsidiaries provided to Parent is accurate in all material
respects when furnished and did not omit any material fact required to make such
information accurate. All such information was prepared and furnished
in accordance with customary industry practices, including, without limitation,
historical development and production costs.
(b)
The estimated, indicated, measured and inferred mineral resources disclosed in
the [SRK Report] have been prepared and disclosed in all material respects in
accordance with all applicable Laws, including [National Instrument 43-101-
Standards of Disclosure for
Mineral Projects]. There has been no material reduction in the aggregate
amount of estimated mineral reserves or estimated mineral resources of Nayarit
or any of its Subsidiaries, taken as a whole, from the amounts disclosed in
[Nayarit’s Public Reports] other than as a result of mining activities
undertaken in the ordinary course.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF PARENT
Except
as (i) disclosed in, and reasonably apparent from, Parent’s annual report on
Form 10-K for the year ended October 14, 2009, Parent’s quarterly reports on
Form 10-Q for the quarters ended July 31, 2009, January 31, 2009 and April 30,
2009 and the Company’s Current Reports on Form 8-K filed with the SEC on January
23, 2009, February 5, 2009, March 13, 2009, April 1, 2009, April 3, 2009, June
23, 2009, July 24, 2009, September 3, 2009, September 18, 2009, September 23,
2009, October 15, 2009, October 29, 2009 and November 6, 2009 (excluding any
amendments thereto filed after the date hereof and any disclosures set forth in
any risk factor section and in any section relating to forward-looking
statements to the extent that they are cautionary, predictive or forward-looking
in nature), or (ii) disclosed in a correspondingly numbered section of the
disclosure schedule (the “Parent Disclosure Schedule”)
delivered by Parent to the Nayarit on the date hereof (which schedule sets
forth, among other things, items the disclosure of which is necessary or
appropriate either in response to an express disclosure requirement contained in
a provision hereof or as an exception to one or more representations or
warranties contained in this Article III, or to one or more of Parent’s
covenants contained herein), provided, however, that
notwithstanding anything in this Agreement to the contrary, the mere inclusion
of any information in the Parent Disclosure Schedule shall not be deemed an
admission that any information contained therein describes or represents a
material exception or material fact, event or circumstance or that any
exception, fact, event or circumstance described in any such information has had
or would be reasonably likely to have a Material Adverse Effect), Parent hereby
represents and warrants to Nayarit as follows:
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(a) The
authorized capital stock of Parent consists of 300,000,000 shares of Parent
Common Stock of which there are, as of the date of this Agreement, 193,990,620
shares of Parent Common Stock outstanding. No other shares of Parent
Common Stock are issued or outstanding. As of the date of this
Agreement, no shares of Parent Common Stock were reserved for issuance except
for an aggregate of 3,900,000 shares of Parent Common Stock reserved for
issuance upon exercise of the issued and outstanding options to purchase shares
of Parent Common Stock (the “Parent Stock Options”) under
Parent’s equity incentive plan, dated December 13, 2006, adopted by Parent and
subsequently approved by Parent’s stockholders (the “Parent Stock Plan”), 2,926,704
shares of Parent Common Stock available for issuance under the Parent Stock Plan
and 600,000 shares of Parent Common Stock reserved for issuance upon exercise of
warrants to purchase shares of Parent Common Stock under the Warrant Agreement
by and between Parent and Standard Bank Plc, dated as of July 10,
2008. All of the issued and outstanding shares of Parent Common Stock
have been duly authorized and validly issued and are fully paid, non-assessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof.
(b) Except
as set forth in Section 3.3(b) of the
Parent Disclosure Schedule, there are no outstanding bonds, debentures, notes,
debt securities or other indebtedness for borrowed money of Parent having the
right to vote (or convertible into or exercisable or exchangeable for securities
having the right to vote) on any matters on which the stockholders of Parent may
vote. Section 3.3(b)
of the Parent Disclosure Schedule sets forth a true and complete list of all
indebtedness for borrowed money of Parent outstanding on the date of this
Agreement.
(c) Except
as set forth in paragraph (a) and (b) above, there are no issued, outstanding or
authorized securities (including securities convertible into or exercisable or
exchangeable for shares of capital stock or other equity or voting securities)
of Parent and (except for the issuance of the Amalgamation Consideration
contemplated by this Agreement) there are no options, warrants, calls, rights
(including “phantom” stock or stock appreciation rights), commitments,
agreements, arrangements or undertakings of any kind to which Parent is a party
or by which it is bound obligating Parent to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock or other equity
or voting securities of Parent (or securities convertible into or exercisable or
exchangeable for shares of capital stock or other equity or voting securities)
or obligating Parent to issue, grant, extend or enter into any such option,
warrant, call, right, commitment, agreement, arrangement or
undertaking. Except as contemplated by this Agreement, there are no
outstanding contractual obligations, commitments, understandings or arrangements
of Parent to repurchase, redeem or otherwise acquire or make any payment in
respect of any shares of capital stock or other equity or voting securities of
Parent or other agreements or arrangements with or among any securityholders of
Parent with respect to securities of Parent. [Parent is not party to
any securityholders, voting or other agreements relating to the rights and
obligations of Parent’s securityholders.]
I-100
3.3 Subsidiaries. Except
for all of the common stock of Minera Santa Rita, Oro De Altar and Leadville
Mining and Milling Holding Company, Parent does not as of the date hereof own,
directly or indirectly, any capital stock, membership interest, partnership
interest, joint venture interest or other equity interest in any
Person.
3.4 Authorization; Binding
Agreement. Parent has all requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, (i) have
been duly and validly authorized by the Board of Directors of Parent, and (ii)
no other corporate proceedings on the part of Parent are necessary to authorize
the execution and delivery of this Agreement or to consummate the transactions
contemplated hereby, other than receipt of the Required Parent
Vote. The affirmative vote of the stockholders of Parent holding at
least [a majority] of the issued and outstanding Parent Common Stock of Parent
(the “Required
Parent Vote”) is necessary to approve the Parent Proxy Matters (as
defined in Section 5.5). This Agreement has been duly and validly executed and
delivered by Parent and (assuming the due authorization, execution and delivery
hereof by Nayarit) constitutes the legal, valid and binding obligation of Parent
enforceable against Parent in accordance with its terms, subject to the
Enforceability Exceptions.
3.5 Governmental
Approvals. No Consent of or with any Governmental Authority on
the part of Parent is required to be obtained or made in connection with the
execution, delivery or performance by Parent of this Agreement or the
consummation by Parent of the transactions contemplated hereby other than (i)
the filing of the Certificate of Amalgamation with the OBCA, (ii) such filings
as may be required with the SEC and foreign and state securities Laws
administrators, (iii) pursuant to Antitrust Laws and (iv) those Consents that,
if they were not obtained or made, would not reasonably be expected to have a
Material Adverse Effect.
I-101
3.7 SEC Documents; Internal
Controls; SEC Foreign Issuer
(a) Parent
has filed with the Securities Exchange Commission (“SEC”) and the OSC and made
available to Nayarit all forms, reports, schedules, registration statements and
other documents required to be filed or furnished by Parent with the SEC or the
OSC since [March 22, 2006] (collectively, and in each case including all
certifications, exhibits and schedules thereto and documents incorporated by
reference therein, the “Public
Reports”). As of their respective dates of filing or
furnishing (or, if amended or superseded by a subsequent filing or furnishment
prior to the date hereof, as of the date of such subsequent filing or
furnishment), the Public Reports complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the “U.S. Securities Act”), the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and/or the
Sarbanes-Oxley Act of 2002, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Public Reports, and applicable Canadian
securities Laws, and none of the Public Reports when filed or furnished
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
there are no outstanding comments from or unresolved issues raised by the SEC or
the OSC with respect to any of the Public Reports. Parent is a
“reporting issuer” under applicable Canadian securities Laws and is not in
default of any material requirements of any applicable Canadian securities
Laws.
(b) Except
as set forth in Section 3.7(b) of the
Parent Disclosure Schedule, Parent has timely filed all forms, reports,
schedules and other documents, together with any amendments required to be made
with respect thereto, that they were required to file since September 22, 2005
with any Governmental Authority (other than Public Reports) and have paid all
fees and assessments due and payable in connection therewith. Except
for normal examinations conducted by a Governmental Authority in the regular
course of the business of Parent, no Governmental Authority has initiated any
Action or, to the Knowledge of Parent, threatened an investigation into the
business or operations of Parent since September 22, 2009. There is
no material unresolved violation or exception by any Governmental Authority with
respect to any report, form, schedule or other document filed by, or relating to
any examinations by any such Governmental Authority of Parent.
(c) Since
July 31, 2009 to the date of this Agreement (i) to the Knowledge of Parent, no
director, officer, employee, auditor, accountant or representative of Parent has
received or otherwise had or obtained knowledge of any material complaint,
allegation, assertion or claim, whether written or oral, regarding the
accounting or auditing practices, procedures, methodologies or methods of Parent
or its internal accounting controls, including any material complaint,
allegation, assertion or claim that Parent has engaged in questionable
accounting or auditing practices, and (ii) no attorney representing Parent,
whether or not employed by Parent, has reported evidence of a material violation
of securities Laws, breach of fiduciary duty or similar violation by Parent or
any of its officers, directors, employees or agents to the Board of Directors of
Parent or any committee thereof or to any director or officer of
Parent.
(d) [Parent
is, and has been at all times since March 22, 2006, an “SEC foreign issuer”, as
such term is defined in National Instrument 71-102 – Continuous Disclosure and Other
Exemptions Relating to Foreign Issuers of the Canadian Securities
Administrators (“NI
71-102”).]
I-102
(e) As
of April 30, 2009, less than twenty percent (20%) of the Parent Common Stock was
held by persons or companies whose last address as shown on the books of Parent
is in Canada.
(f) As
of the date of the Amalgamation, Parent will satisfy the criteria set out in
subsections 12.1(1)(a), (b) and (c) of NI-71-101.
3.8 Absence of Undisclosed
Liabilities. Parent has not incurred any liabilities or
obligations of the type required to be reflected on a balance sheet in
accordance with United States GAAP that are not adequately reflected or reserved
on or provided for in the Public Reports, other than liabilities of the type
required to be reflected on a balance sheet in accordance with United States
GAAP that would not reasonably be expected to have a Material Adverse
Effect..
3.9 Compliance with
Laws. Parent is in compliance
with all Laws applicable to it and the conduct of its business as currently
conducted and as proposed to be conducted following consummation of the
Amalgamation. Parent is not in conflict with, or in default or
violation of, nor has it received any notice of any conflict with, or default or
violation of, (A) any applicable Law by which Parent or any of its property or
assets is bound or affected, or (B) any Parent Material Contract to which Parent
is a party or by which Parent or any property, asset or right of Parent is bound
or affected, except, in each case, for any such conflicts, defaults or
violations that would not reasonably be expected to have a Material Adverse
Effect.
3.10 Regulatory Agreements;
Permits.
(a) There
are no (1) [except for standard bank mandates,] written agreements, consent
agreements, memoranda of understanding, commitment letters, cease and desist
orders, or similar undertakings to which Parent is a party, on the one hand, and
any Governmental Authority is a party or addressee, on the other hand, (2)
Orders or directives of or supervisory letters from a Governmental Authority
specifically with respect to Parent or any property or asset owned by Parent, or
(3) resolutions or policies or procedures adopted by Parent at the request of a
Governmental Authority, that (A) limit in any material respect the ability
of Parent to conduct its business as currently being conducted or (B) in any
manner relate to the ability of Parent to pay dividends or otherwise materially
restrict the conduct of business of Parent in any respect.
(b) Parent
holds all material permits, licenses, franchises, grants, authorizations,
consents, exceptions, variances, exemptions, orders and other governmental
authorizations, certificates, consents and approvals necessary to lawfully
conduct its business as presently conducted and to own, lease and operate its
assets and properties (collectively, the “Parent Permits”), all of which
are in full force and effect, and no suspension, non-renewal, amendment,
restriction, limitation or cancellation of any of the Parent Permits is pending
or, to the Knowledge of Parent, threatened, except where the failure of any of
the Parent Permits to be in full force and effect, or the suspension or
cancellation of any of the Parent Permits, would not reasonably be expected to
have a Material Adverse Effect. To the Knowledge of Parent, no facts
or circumstances exist that would reasonably be expected to impact Parent’s
ability to obtain any material Parent Permit in the future as may be necessary
for Parent to continue its operations as currently
contemplated. Parent is not in violation in any material respect of
the terms of any Parent Permit. [Note that Parent is awaiting
updated certificates on concessions.]
I-103
3.11 Absence of Certain
Changes. Except for the transactions contemplated by this
Agreement and except as set forth in Section 3.11 of the
Parent Disclosure Schedules, Parent has conducted its businesses in the ordinary
course of business consistent with past practice and there has not been any
fact, change, effect, occurrence, event, development or state of circumstances
that has had or would reasonably be expected to have a Material Adverse
Effect.
3.12 Taxes and
Returns. Except as would not reasonably be expected to have a
Material Adverse Effect:
(a) Parent
has or will have timely filed, or caused to be timely filed, all material Tax
Returns required to be filed by it (taking into account all available
extensions), which such Tax Returns are true, accurate, correct and complete in
all material respects, and has paid, collected or withheld, or caused to be
paid, collected or withheld, all material Taxes required to be paid, collected
or withheld, other than such Taxes for which adequate reserves in the Public
Reports have been established in accordance with United States
GAAP. Section 3.12 of the
Parent Disclosure Schedules sets forth each jurisdiction where Parent files or
is required to file a Tax Return. There are no claims, assessments,
audits, examinations, investigations or other proceedings pending against Parent
in respect of any Tax, and Parent has not been notified in writing of any
proposed Tax claims or assessments against Parent (other than, in each case,
claims or assessments for which adequate reserves in the Public Reports have
been established in accordance with United States GAAP or are immaterial in
amount). There are no material Encumbrances with respect to any Taxes
upon any of Parent’s assets, other than (i) Taxes, the payment of which is not
yet due, or (ii) Taxes or charges being contested in good faith by appropriate
proceedings and for which adequate reserves in the Public Reports have been
established in accordance with United States GAAP. Parent does not
have any outstanding waivers or extensions of any applicable statute of
limitations to assess any material amount of Taxes. There are no
outstanding requests by Parent for any extension of time within which to file
any Tax Return or within which to pay any Taxes shown to be due on any Tax
Return.
(b) Parent
has not constituted either a “distributing corporation” or a “controlled
corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a
distribution of securities (to any Person or entity that is not a member of the
consolidated group of which Parent is the common parent corporation) qualifying
for, or intended to qualify for, Tax-free treatment under Section 355 of the
Code (i) within the two-year period ending on the date hereof or (ii) in a
distribution which could otherwise constitute part of a “plan” or “series of
related transactions” (within the meaning of Section 355(e) of the Code) in
conjunction with the Amalgamation.
(c) Parent
is not or (i) has been at any time within the five-year period ending on the
date hereof a United States real property holding corporation within the meaning
of Section 897(c)(2) of the Code and (ii) has ever been a member of any
consolidated, combined, unitary or affiliated group of corporations for any Tax
purposes other than a group of which Parent is or was the common parent
corporation.
I-104
(d) Parent
has not made any change in accounting method or received a ruling from, or
signed an agreement with, any taxing authority.
(e) Parent
is not a party to any contract, agreement, plan or arrangement that,
individually or collectively, could reasonably be expected to give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G or
162(m) of the Code.
(f) Parent
has not participated in, or sold, distributed or otherwise promoted, any
“reportable transaction,” as defined in Treasury Regulation Section
1.6011-4.
(g) Since
September 30, 2009, Parent has not: (i) changed any Tax accounting methods,
policies or procedures except as required by a change in Law, (ii) made,
revoked, or amended any material Tax election, (iii) filed any amended Tax
Returns or claim for refund, or (iv) entered into any closing agreement
affecting or otherwise settled or compromised any material Tax liability or
refund.
3.13 Restrictions on Business
Activities. [Except for standard bank mandates,] There is no
agreement or Order binding upon Parent which has or could reasonably be expected
to have the effect of prohibiting, preventing, restricting or impairing in any
respect any business practice of Parent as its business is currently conducted,
any acquisition of property by Parent, the conduct of business by Parent as
currently conducted, or restricting in any material respect the ability of
Parent from engaging in business as currently conducted or from competing with
other parties, except where such agreement or Order would not be reasonably
expected to have a Material Adverse Effect.
3.14 Employee Benefit
Plans. Except as set forth on Section 3.14 of the
Parent Disclosure Schedules, Parent does not maintain, and has no liability
under, any Benefit Plan, and neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (i)
result in any payment (including severance, unemployment compensation, golden
parachute, bonus or otherwise) becoming due to any director or employee of
Parent, or (ii) result in the acceleration of the time of payment or vesting of
any such benefits.
3.15 Employee
Matters.
(a) There
has been: (i) to the Knowledge of Parent, no labor union organizing or
attempting to organize any employee of Parent into one or more collective
bargaining units; and (ii) no labor dispute, strike, work slowdown, work
stoppage, lock out or other collective labor action by or with respect to any
employees, managers or consultants of Parent pending or, to Parent’s Knowledge,
threatened against Parent. Parent is not a party to, or bound by, any
collective bargaining agreement or other agreement with any labor organization
applicable to the employees, managers or consultants of Parent and no such
agreement is currently being negotiated.
I-105
(b) Except
as would not reasonably be expected to result in a Material Adverse Effect,
Parent: (i) is in compliance with all applicable Laws respecting employment and
employment practices, terms and conditions of employment, health and safety and
wages and hours, including Laws relating to discrimination, disability, labor
relations, hours of work, payment of wages and overtime wages, pay equity,
immigration, workers compensation, working conditions, employee scheduling,
occupational safety and health, family and medical leave, and employee
terminations, (ii) has not received written notice, or to the Knowledge of
Parent any other form of notice, that there is any unfair labor practice charge
or complaint against Parent pending, (iii) is not liable for any arrears of
wages or any penalty for failure to comply with any of the foregoing, and (iv)
is not liable for any payment to any trust or other fund or to any Governmental
Authority, with respect to unemployment compensation benefits, social security
or other benefits or obligations for employees (other than routine payments to
be made in the ordinary course of business and consistent with past
practice). Except as would not reasonably be expected to have a
Material Adverse Effect, there are no complaints, lawsuits, arbitrations,
administrative proceedings, or other Actions pending or, to the Knowledge of
Parent, threatened against Parent or any of its employees, managers, consultants
or former employees brought by or on behalf of any applicant for employment, any
current or former employee, any Person alleging to be a current or former
employee, any class of the foregoing, or any Governmental Authority, relating to
any such Law or regulation, or alleging breach of any express or implied
contract of employment, wrongful termination of employment, or alleging any
other discriminatory, wrongful or tortious conduct in connection with the
employment relationship.
(c) There
has been and is no unfair labor practice complaint against Parent pending or, to
the Knowledge of Parent, threatened before any Governmental Authority, and no
pending or, to the Knowledge of Parent, threatened arbitration arising out of
any collective bargaining agreement.
(d) All
material amounts due from Parent, or for which any material claim may be
asserted against Parent, on account of wages and other benefits have been paid
or accrued as a liability on the books and records of Parent.
(e) Parent
is not liable for any material liabilities, judgments, arrearage of wages, fines
or penalties for failure to comply with any applicable labor
Laws.
3.16 Material
Contracts.
(a) Except
as set forth in the Public Reports filed prior to the date hereof, there are no
contracts, agreements, leases, mortgages, indentures, notes, bonds, liens,
license, permit, franchise, purchase orders, sales orders or other
understandings, commitments or obligations (including without limitation
outstanding offers or proposals) of any kind, whether written or oral, to which
Parent is a party or by or to which any of the properties or assets of Parent
may be bound, subject or affected, which either (i) creates or imposes a
liability greater than $100,000, or (ii) may not be cancelled by Parent on less
than 60 days’ prior notice (the “Parent Material
Contracts”). All Parent Material Contracts have been made
available to Nayarit, and are set forth in Section 3.16(a) of
the Parent Disclosure Schedules other than those that are exhibits to the Public
Reports.
I-106
(b) With
respect to each Parent Material Contract: (i) the Parent Material Contract was
entered into at arms’ length and in the ordinary course of business consistent
with past practices; (ii) the Parent Material Contract is legal, valid, binding
and enforceable in all material respects against Parent and, to Parent’s
Knowledge, the other party thereto, and in full force and effect (except as such
enforcement may be limited by the Enforceability Exceptions); (iii) Parent is
not in breach or default in any material respect, and no event has occurred that
with the passage of time or giving of notice or both would constitute such a
breach or default by Parent, or permit termination or acceleration by the other
party, under the Parent Material Contract; and (iv) to Parent’s Knowledge, no
other party to the Parent Material Contract is in breach or default in any
material respect, and no event has occurred that with the passage of time or
giving of notice or both would constitute such a breach or default by such other
party, or permit termination or acceleration by Parent, under any Parent
Material Contract.
3.18 Transactions with
Affiliates. Section 3.18 of the
Parent Disclosure Schedules sets forth a true, correct and complete list of the
contracts or arrangements that are in existence as of the date of this Agreement
under which there are any existing or future liabilities or obligations between
Parent, on the one hand, and, on the other hand, any (i) present or former
director, officer, employee or Affiliate of Parent, or any family member of any
of the foregoing, or (ii) record or beneficial owner of more than five percent
(5%) of the outstanding Parent Common Stock as of the date hereof (each, a
“Parent Affiliate
Transaction”).
3.19 Books and
Records. All of the books and records of Parent are complete
and accurate in all material respects and have been maintained in the ordinary
course consistent with past practices and in accordance with applicable Laws and
standard industry practices with regard to the maintenance of such books and
records. The records, systems, controls, data and information of
Parent are recorded, stored, maintained and operated under means (including any
electronic, mechanical or photographic process, whether computerized or not)
that are under the control of Parent.
. 3.20 Information
Supplied. None of the information supplied or to be supplied
by Parent for inclusion or incorporation by reference in (a) any Current Report
on Form 8-K or any other report, form, registration, or other filing made with
any Governmental Authority with respect to the transactions contemplated hereby
or (b) the Registration Statement, Proxy Statement or [Nayarit Proxy Statement]
(with respect to information regarding Parent) will, at the date it is first
mailed to Parent’s stockholders or at the time of the Stockholder Meeting, or
Nayarit Stockholder Meeting, respectively, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, Parent makes no representation, warranty or covenant with respect to
any information supplied by Nayarit which is contained in the Registration
Statement, Proxy Statement or [Nayarit Proxy Statement].
I-107
3.21 Intellectual
Property. Parent does not own, license or otherwise have any
right, title or interest in any Intellectual Property. [Please
confirm]
3.22 Real
Property. Other than as set forth in the Public Reports,
Parent does not own or lease any real property, and have no commitments or
obligations to purchase or lease real property either prior to or after the
Effective Time. [Please
confirm]
3.23 Environmental
Matters. Except for such matters that are not reasonably
expected to have a Material Adverse Effect, Parent: (i) has, to the Knowledge of
Parent, complied with all applicable Environmental Laws; (ii) has not received
any notice, demand, letter, claim or request for information alleging that
Parent may be in violation of or liable under any Environmental Law; and (iii)
is not subject to any Order or other arrangement with any Governmental Authority
or subject to any indemnity or other agreement with any third party relating to
Liability under any Environmental Law.
3.24 Insurance. Set
forth on Section
3.27 of the Parent Disclosure Schedules sets forth a correct and complete
list of all material insurance policies issued in favor of Parent, or pursuant
to which Parent is a named insured or otherwise a beneficiary. With
respect to each such insurance policy: (i) the policy is in full force and
effect and all premiums due thereon have been paid and (ii) Parent is not
in any material respect, in breach of or default under, and Parent has not taken
any action or failed to take any action which, with notice or the lapse of time
or both, would constitute such a breach or default, or permit termination or
modification of, any such policy.
3.25 Bankruptcy. Parent
has not: (i) commenced a voluntary case, or had entered against it a petition,
for relief under the federal bankruptcy code or any similar petition, order or
decree under any federal or state law or statute relative to bankruptcy,
insolvency or other relief for debtors; (ii) caused, suffered or consented to
the appointment of a receiver, trustee, administrator, conservator, liquidator
or similar official in any federal, state or foreign judicial or non judicial
proceedings, to hold, administer and/or liquidate all or substantially all of
its property; or (iii) made an assignment for the benefit of
creditors.
3.26 TSX/OTCBB
Quotation. The Parent Common Stock is traded in Canada on the
Toronto Stock Exchange (“TSX”) and simultaneously in
the United States of America listed for trading on the Over the Counter Bulletin
Board (the “OTCBB”). There is
no action or proceeding pending or, to Parent’s Knowledge, threatened against
Parent by the TSX or OTCBB with respect to any intention by such entity to
prohibit or terminate the trading or quotation of Parent’s Common
Stock on the TSX or OTCBB, respectively.
COVENANTS
I-108
(a) Unless
Parent shall otherwise consent in writing (such consent not to be unreasonably
withheld), during the period from the date of this Agreement to the Effective
Time, except as expressly contemplated by this Agreement or as set forth on
Section 4.1 of
the Nayarit Disclosure Schedules:
(i) Nayarit
and the Subsidiaries shall conduct their respective business, in all material
respects, in the ordinary course of business consistent with past
practice;
(ii) Nayarit
and the Subsidiaries shall use commercially reasonable efforts consistent with
the foregoing to preserve intact, in all material respects, its business
organization, to keep available the services of its managers, directors,
officers, key employees and consultants, to maintain, in all material respects,
existing relationships with all Persons with whom it does significant business,
and to preserve the possession, control and condition of its
assets;
(iii) Nayarit
and the Subsidiaries shall use commercially reasonable efforts to continue to
maintain, in all material respects, its respective assets, properties, rights
and operations in accordance with present practice in a condition suitable for
their current use; and
(iv) Nayarit
and the Subsidiaries shall use commercially reasonable efforts consistent with
the foregoing to conduct its business in compliance with applicable Laws in all
material respects, and to preserve intact the business organization of Nayarit
and the Subsidiaries.
(b) Without
limiting the generality of the foregoing clause (a), except as set forth on
Section 4.1 of
the Nayarit Disclosure Schedules, during the period from the date of this
Agreement to the Effective Time, and other than as contemplated hereby, neither
Nayarit nor any Subsidiary will (except as specifically contemplated by the
terms of this Agreement), without the prior written consent of Parent (such
consent not to be unreasonably withheld, conditioned or
delayed):
(i) amend,
waive or otherwise change, in any respect, its [certificate of incorporation],
[bylaws], or other organizational documents or enter into any stockholder,
membership, partnership or other agreement;
(ii) authorize
for redemption or issuance, issue, grant, sell, pledge, dispose of or propose to
issue, grant, sell, pledge or dispose of any Nayarit Common Stock, any shares of
capital stock or other securities or other equity interests or any options,
warrants, commitments, subscriptions or rights of any kind to acquire or sell
Nayarit Common Stock, any shares of capital stock or other securities or other
equity interests, including any securities convertible into or exchangeable for
Nayarit Common Stock or equity interests in any Subsidiary or decrease or
increase the number of authorized shares of Nayarit Common Stock or equity
interests in any Subsidiary;
(iii) split,
combine, recapitalize or reclassify any of the Nayarit Common Stock or equity
interests in any Subsidiary or issue any other securities in respect thereof, or
declare, pay or set aside any distribution or other dividend (whether in cash,
equity or property or any combination thereof) in respect of the Nayarit Common
Stock or equity interests in any Subsidiary, or directly or indirectly redeem,
purchase or otherwise acquire or offer to acquire any of the Nayarit Common
Stock or equity interests in any Subsidiary;
I-109
(iv) incur,
create, assume, prepay or otherwise become liable for any Indebtedness
(directly, contingently or otherwise), make a loan or advance to or investment
in any third party, or guarantee or endorse any indebtedness, liability or
obligation of any Person.;
(v) increase
the wages, salaries or compensation of any of its current or former consultants,
officers, managers or directors by more than five percent (5%), or increase
bonuses for the foregoing individuals in an aggregate amount greater than one
hundred twenty percent (120%) of the amounts paid to such individuals in the
previous calendar year, or increase other benefits of any of the foregoing
individuals, or enter into, establish, amend or terminate any Nayarit Benefit
Plan or any other employment, consulting, retention, change in control,
collective bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity or equity-related,
pension, retirement, consulting, vacation, severance, separation, termination,
deferred compensation, fringe, perquisite or other compensation or benefit plan,
policy, program, agreement, trust, fund or other arrangement with, for or in
respect of any current or former consultant, officer, manager or director or
terminate the employment of any senior executive, in each case other than in the
ordinary course of business consistent with past practice or other than as
required by applicable Law or pursuant to the terms of any Nayarit Benefit Plan
or Nayarit Material Contract in effect on the date of this
Agreement;
(vi) make
or rescind any material election relating to Taxes, settle any material claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, or make any material change in its accounting or
Tax policies or procedures, in each case except as required by applicable Law or
[Canadian] GAAP;
(vii) other
than in the ordinary course of business consistent with past practice, transfer
or license to any Person or otherwise extend, materially amend or modify, permit
to lapse or fail to preserve any of the Nayarit Intellectual Property or
Licensed Intellectual Property, other than nonexclusive licenses, or disclose to
any Person who has not entered into a confidentiality agreement any material
trade secrets;
(viii) other
than in the ordinary course of business consistent with past practice, terminate
or waive or assign any material right under any Nayarit Material Contract or
enter into any Nayarit Material Contract;
(ix) other
than in the ordinary course of business consistent with past practice, establish
any subsidiary or enter into any new line of business;
(x) other
than in the ordinary course of business consistent with past practice, make any
capital expenditures, or commit to make capital expenditures for any period
following the Effective Time;
(xi) fail
to maintain its books, accounts and records in all material respects in the
ordinary course of business consistent with past practice;
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(xii) fail
to use commercially reasonable efforts to keep in force insurance policies or
replacement or revised policies providing insurance coverage with respect to the
assets, operations and activities of Nayarit or any Subsidiary in an amount and
scope of coverage as are currently in effect;
(xiii) other
than as required to be in compliance with [Canadian Securities Administrators /
OSC] rules and regulations or with [Canadian] GAAP, or as approved by Nayarit’s
outside auditors, revalue any of its material assets or make any change in
accounting methods, principles or practices;
(xiv) other
than in the ordinary course of business consistent with past practice, waive,
release, assign, settle or compromise any Action (including any third-party
Action relating to this Agreement or the transactions contemplated hereby,
including the Amalgamation), or otherwise pay, discharge or satisfy any claims,
liabilities or obligations other than in the ordinary course of business
consistent with past practice, unless such amount has been reserved in the
Nayarit Financials;
(xv) acquire,
including by merger, consolidation, acquisition of stock or assets, or any other
form of business combination, any corporation, partnership, limited liability
company, other business organization or any division thereof, other than in the
ordinary course of business consistent with past practice;
(xvi) adopt
a plan of complete or partial liquidation, winding up, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization, except
as otherwise permitted hereunder;
(xvii) voluntarily
incur any material liability or obligation (whether absolute, accrued,
contingent or otherwise) other than in the ordinary course of business
consistent with past practice and except as otherwise permitted
hereunder;
(xviii) sell,
lease, license, transfer, exchange or swap, mortgage or otherwise pledge or
encumber (including securitizations), or otherwise dispose of any material
portion of its properties, assets or rights, other than in the ordinary course
of business consistent with past practice;
(xix) take
any action that would reasonably be expected to delay or impair the obtaining of
any consents or approvals of any Governmental Authority to be obtained in
connection with this Agreement;
(xx) other
than transactions entered into in the ordinary course of business, enter into,
amend, waive or terminate (other than terminations in accordance with their
terms) any Nayarit Affiliate Transaction;
(xxi) enter
into any Benefit Plan or any employment, severance, or change of control
agreement;
(xxii) notwithstanding
anything to the contrary set forth in this Section 4.1, sell, lease, transfer,
mortgage, encumber (other than Permitted Encumbrances) or otherwise dispose of
any (i) exploration and option agreements over mining concessions owned by third
parties and similar agreements granting Nayarit and/or its Subsidiaries any
right to carry out mining related activities over mining lots and/or granting an
option to acquire such mining concessions, (ii) concessions or options over
mining concessions or (iii) any Owned Real Property;
I-111
(xxiii) sell,
lease, transfer, mortgage, encumber (other than Permitted Encumbrances) or
otherwise dispose of any of its assets or properties to any Person (other than a
wholly-owned Subsidiary of the Company) in an amount in excess of
$[ ] in
the aggregate; or
(xxiv)
authorize or agree orally or in writing to do any of the foregoing
actions.
(a) Between
the date of this Agreement and the Effective Time, each Party shall give, and
shall direct its accountants and legal counsel to give, the other Party and its
officer, manager, director, employee, accountant, consultant, legal counsel,
financial advisor, agent or other representative (collectively, the “Representatives”), at
reasonable times and upon reasonable intervals and notice, access to all offices
and other facilities and to all employees, properties, contracts, agreements,
commitments, books and records of or pertaining to such Party and its
subsidiaries (including Tax Returns, internal work papers, client files, client
contracts and director service agreements) and such financial and operating data
and other information, all of the foregoing as the requesting Party or its
Representatives may reasonably request regarding such Party’s business, assets,
liabilities, employees and other aspects (including unaudited financial
statements, including a consolidated quarterly balance sheet and income
statement, in the form such financial statements have been delivered to the
other Party prior to the date hereof) and instruct such Party’s Representatives
to cooperate with the requesting Party in its investigation (including by
reading available independent public accountant’s work papers) and to provide a
copy of, or make available, each material report, schedule and other document
filed or received pursuant to the requirements of applicable securities Laws;
provided that
the requesting Party shall conduct any such activities in such a manner as not
to interfere unreasonably with the business or operations of the Party providing
such information. Parent agrees to indemnify and hold Nayarit and its
Subsidiaries harmless from any and all claims and liabilities, including costs
and expenses for loss, injury to or death of any Representative of Parent and
any loss, damage to or destruction of any property owned by Nayarit or its
Subsidiaries or others (including claims or liabilities for loss of use of any
property) resulting directly or indirectly from the action or inaction of any of
Parent’s Representatives (and not resulting from the gross negligence or willful
misconduct of Nayarit, it Subsidiaries or their respective directors, managers,
officers, employees and agents) during any visit to the business or property
sites of Nayarit or its Subsidiaries prior to the completion of the
Amalgamation, whether pursuant to this Section 4.2 or
otherwise. Nayarit agrees to indemnify and hold Parent harmless from
any and all claims and liabilities, including costs and expenses for loss,
injury to or death of any Representative of Nayarit and any loss, damage to or
destruction of any property owned by Parent or others (including claims or
liabilities for loss of use of any property) resulting directly or indirectly
(and not resulting from the gross negligence or willful misconduct of Parent or
its directors, officers, employees and agents) from the action or inaction of
any of Nayarit’s Representatives during any visit to the business or property
sites of Parent prior to the completion of the Amalgamation, whether pursuant to
this Section 4.2 or otherwise.
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(b) All
information obtained by Nayarit, on the one hand, and Parent, on the other hand,
pursuant to this Agreement shall be kept confidential in accordance with and
subject to that certain Mutual Non-Disclosure Agreement and Waiver, dated [],
between Parent and Nayarit (the “NDA”). The Parties
acknowledge and agree that the provisions, terms, conditions, restrictions and
limitations of the NDA: (i) shall continue in full force and effect
notwithstanding the execution of this Agreement and (ii) are fully incorporated
into and made a part of this Agreement as if fully set forth
herein.
(c) The
terms and conditions of the Amalgamation are strictly confidential and the
Parties hereby agree that they and their respective representatives, including
without limitation, shareholders, directors, officers, members, employees,
partners, representatives or advisors, shall not disclose to the public or to
any third party the existence or terms of the Amalgamation other than with the
express prior written consent of the other Party, except as the Parties may
otherwise agree or as may be required by applicable Law, rule or regulation, or
at the request of any governmental, judicial, regulatory or supervisory
authority having jurisdiction over a party or any of its representatives,
control persons or Affiliates (including, without limitation, the rules or
regulations of the SEC), or as may be required to defend any action brought
against such party in connection with the Amalgamation. If a Party is
so required to make such a disclosure, it must first provide to the other Party
the content of the proposed disclosure, the reasons the disclosure is required,
and the time and place that the disclosure will be made. In such
event, the Parties will work together to draft a disclosure which is acceptable
to both parties.
(a) For
purposes of this Agreement, “Acquisition Proposal” means (other than
the Amalgamation) any inquiry, proposal or offer, or any indication of interest
in making an offer or proposal, from any Person or group, at any time relating
to a merger, reorganization, recapitalization, consolidation, asset sale, share
exchange, business combination or similar transaction, including any single or
multi-step transaction or series of related transactions involving Nayarit or
any of its Subsidiaries, on the one hand, and any third party, on the other
hand, or acquisition or purchase of assets of or by Nayarit or any of its
Subsidiaires representing 50% or more of such Person’s assets or
business. Without limiting the foregoing, the term Acquisition
Proposal includes any inquiry, proposal or offer made or received by Nayarit or
any of its Subsidiaries or any indication of interest in same by Nayarit or any
of its Subsidiaries to any third-party at any time relating to a merger,
reorganization, recapitalization, consolidation, asset sale, share exchange,
business combination or similar transaction, including any single or multi-step
transaction or series of related transactions with Nayarit or any of its
Subsidiaries or any of their respective Affiliates.
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(b) In
order to induce Parent to continue to expend management time and financial
resources in furtherance of the transactions contemplated hereby, from the date
hereof until [120 days after the date of this Agreement], none of Nayarit or any
Subsidiary shall (unless otherwise required by applicable Law), directly or
indirectly, and shall not, directly or indirectly, authorize or permit any of
its Representative to: (i) solicit, encourage, assist, initiate or facilitate
the making, submission or announcement of any Acquisition Proposal, (ii) furnish
any non-public information regarding Nayarit or any Subsidiary or the
Amalgamation to any Person or group (other than a Party to this Agreement or
their Representatives) in connection with or in response to an Acquisition
Proposal, (iii) engage, participate in or continue discussions or negotiations
with any Person or group with respect to, or which could be expected to lead to,
an Acquisition Proposal, (iv) withdraw, modify or qualify, or propose publicly
to withdraw, modify or qualify, in a manner adverse to Parent, the approval of
this Agreement or the Amalgamation or the recommendation by the Board of
Directors of Nayarit that its stockholders adopt this Agreement, (v) approve,
endorse or recommend, or publicly propose to approve, endorse or recommend, any
Acquisition Proposal, (vi) discuss, negotiate or enter into any letter of
intent, agreement in principle, acquisition agreement or other similar agreement
related to any Acquisition Proposal, or (vii) release any third party from, or
waive any provision of, any confidentiality agreement to which Nayarit or any
Subsidiary is a party (except as may be permitted pursuant to the
NDA). Without limiting the foregoing, Nayarit agrees it shall be
responsible for the actions of its and its Subsidiaries’ Representatives that
would constitute a violation of the restrictions set forth in this Section
4.3. Nayarit shall promptly inform its and its Subsidiaries’
Representatives of the obligations undertaken in this Section
4.3.
(c) Nayarit
shall notify Parent hereto promptly (and in any event within 48 hours) orally
and in writing of the receipt by Nayarit or any of their respective
Representatives of: (i) any bona fide inquiries, proposals or offers, requests
for information or requests for discussions or negotiations regarding or
constituting any Acquisition Proposal or any bona fide inquiries, proposals or
offers, requests for information or requests for discussions or negotiations
that could be expected to result in an Acquisition Proposal and (ii) any request
for non-public information relating to Nayarit or any Subsidiary, specifying in
each case the material terms and conditions thereof (including a copy thereof if
in writing) and the identity of the party making such inquiry, proposal, offer
or request for information. Nayarit shall keep Parent hereto promptly
informed of the status of any such inquiries, proposals, offers or requests for
information. From and after the date of this Agreement, Nayarit shall
immediately cease and cause to be terminated any solicitations, discussions or
negotiations with any parties with respect to any Acquisition Proposal and shall
direct, and use its commercially reasonable efforts to cause, its
Representatives to cease and terminate any such solicitations, discussions or
negotiations.
4.5 Conduct of Business of
Parent.
(a) Unless
Nayarit shall otherwise consent in writing (such consent not to be unreasonably
withheld), during the period from the date of this Agreement to the Effective
Time, except as specifically contemplated by the terms of this Agreement, Parent
shall conduct its business in, and shall not take any action other than in, the
ordinary course of business consistent with past practice;
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(b) Without
limiting the generality of the foregoing clause (a), during the period from the
date of this Agreement to the Effective Time, Parent will not (except as
specifically contemplated by this Agreement), without the prior written consent
of Nayarit (such consent not to be unreasonably withheld):
(i) except
for the [$15 million 12-month revolving credit facility], make a loan or advance
to or investment in any third party other than in the ordinary course of
business consistent with past practices;
(ii)
except as contemplated by this Agreement, redeem, retire, purchase or otherwise
acquire, directly or indirectly, any shares of the capital stock of
Parent;
(iii) except
in the ordinary course of business consistent with past practices, make any
capital expenditures, or commit to make capital expenditures;
or
4.6 [Voting. [Management
of Nayarit] hereby agree to vote any shares of Nayarit Common Stock owned by
each of them at the Nayarit Stockholder Meeting in favor of the Nayarit Proxy
Matters (as defined in Section 5.8(b)).]
ARTICLE
V
ADDITIONAL
COVENANTS OF THE PARTIES
I-115
(a) Subject
to the terms and conditions of this Agreement, prior to the Effective Time, each
Party shall use commercially reasonable efforts, and shall cooperate fully with
the other Party, to take, or cause to be taken, all actions and to do, or cause
to be done, all things necessary, proper or advisable under applicable Laws and
regulations to consummate the Amalgamation and the other transactions
contemplated by this Agreement and the Registration Statement, Proxy Statement
and [Nayarit Proxy Statement] (including the receipt of all
authorizations, approvals and permits required to be obtained from or made with
any Governmental Authority in order to consummate the transactions contemplated
by this Agreement (collectively, the “Requisite Regulatory
Approvals”)), and the satisfaction, but not the waiver, of the closing
conditions set forth in Article VI), and to comply promptly with all
requirements of Governmental Authorities applicable to the transactions
contemplated by this Agreement.
(b) Parent,
Nayarit and each Subsidiary will cooperate with each other and will take all
commercially reasonable steps, and proceed diligently and in good faith:
(i) to submit any necessary filings, amendments or revisions to any
required Governmental Authority or other third party in connection with the
transactions contemplated hereby, and (ii) to promptly submit and make
other applications, notices and submissions (or amendments to any of the
foregoing previously submitted) with any Governmental Authority or other third
party which must be filed in order for Nayarit to obtain all Consents which must
be obtained prior to the Closing in order for Nayarit and the Subsidiaries to
operate their respective business as currently operated and currently intended
by the Parties to be operated following the Closing. All such filings
shall be made, if not already made, as promptly as practicable and Parent shall
supply as promptly as reasonably practicable any additional information and
documentary material that may be requested by Nayarit in connection with such
Consents.
(c) In
furtherance and not in limitation of the covenants of the Parties contained in
Sections 5.2(a) and (b), if any objections are asserted with respect to the
transactions contemplated hereby under any applicable Law or if any suit is
instituted (or threatened to be instituted) by any applicable Governmental
Authority or any private party challenging any of the transactions contemplated
hereby as violative of any applicable Law or which would otherwise prevent,
materially impede or materially delay the consummation of the transactions
contemplated hereby, Parent and Nayarit shall use their commercially reasonable
efforts to resolve any such objections or suits so as to permit consummation of
the transactions contemplated by this Agreement, including in order to resolve
such objections or suits which, in any case if not resolved, could reasonably be
expected to prevent, materially impede or materially delay the consummation of
the transactions contemplated hereby (including the
Amalgamation).
(d) In
the event any Action is instituted (or threatened to be instituted) by a
Governmental Authority or private party challenging the Amalgamation or any
other transaction contemplated by this Agreement, or any other agreement
contemplated hereby, Parent and Nayarit shall cooperate in all respects with
each other and use their respective commercially reasonable efforts to contest
and resist any such action or proceeding and to have vacated, lifted, reversed
or overturned any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent, that is in effect and that prohibits,
prevents or restricts consummation of the transactions contemplated by this
Agreement.
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(e) Notwithstanding
anything herein to the contrary, neither Parent nor Nayarit shall be required to
agree to any term, condition or modification with respect to obtaining any
Consents in connection with the Amalgamation or the consummation of the
transactions contemplated by this Agreement that would result in, or would be
reasonably likely to result in: (i) a Material Adverse Effect of either Party or
(ii) Parent or Nayarit having to cease, sell or otherwise dispose of any assets
or business (including the requirement that any such assets or business be held
separate).
(a) Indemnification by
Nayarit. From the date of this Agreement through the two (2)
year anniversary of the Closing Date, [the Nayarit Stockholders jointly and
severally] shall indemnify and hold harmless each of Parent and its Affiliates
and each of their respective successors and assigns, and their respective
officers, directors, employees and agents (each, a “Parent Indemnified Party”)
from and against any liabilities, claims (including claims by third parties),
demands, judgments, losses, costs, damages or expenses whatsoever (including
reasonable attorneys’, consultants’ and other professional fees and
disbursements of every kind, nature and description) (collectively, “Damages”) such Parent
Indemnified Party may sustain, suffer or incur and that result from, arise out
of or relate to: (i) any breach by Nayarit or any Subsidiary of any of their
representations, warranties, covenants or agreements contained in this Agreement
or in any agreement or certificate delivered in connection with this Agreement
and/or (ii) any gross negligence, willful misconduct or fraud committed in
connection with the execution and delivery of, or the performance under, this
Agreement by Nayarit or any Subsidiary.
(b) Indemnification by
Parent. From the date of this Agreement through the Closing
Date, Parent shall indemnify and hold harmless Nayarit and its respective
Affiliates and each of their respective successors and assigns, and their
respective officers, directors, employees and agents (each, a “Nayarit Indemnified Party”)
from and against any Damages such Nayarit Indemnified Party may sustain, suffer
or incur and that result from, arise out of or relate to: (i) any breach by
Parent of any of its representations, warranties, covenants or agreements
contained in this Agreement or in any agreement or certificate delivered in
connection with this Agreement and/or (ii) any gross negligence, willful
misconduct or fraud committed the execution and delivery of, or the performance
under, this Agreement by Parent.
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(c) Indemnification
Procedures. A Person seeking indemnification under this
Section 5.3 (the “Indemnitee”) must give timely
written notice to the Person from whom indemnification is sought (the “Indemnitor”) as soon as
practical after the Indemnitee becomes aware of any condition or event that
gives rise to Damages for which indemnification is sought under this Section
5.3. The failure of the Indemnitee to give timely notice shall not
affect the Indemnitee’s rights to indemnification hereunder except to the extent
the Indemnitor demonstrates it was materially prejudiced by such
failure. In the event a claim or demand is made by a party against an
Indemnitee, the Indemnitee shall promptly notify the Indemnitor of such claim or
demand, specifying the nature and the amount of the Damages (the “Claim Notice”). The
Indemnitor shall notify the Indemnitee within twenty (20) days after receipt of
the Claim Notice whether the Indemnitor will undertake, conduct and control,
through counsel of its own choosing and at its expense, the settlement or
defense thereof, and Indemnitee shall cooperate with Indemnitor in connection
therewith, provided that if Indemnitor undertakes such defense: (i) Indemnitor
shall not thereby permit to exist any Encumbrance or other adverse charge upon
any asset of Indemnitee or settle such action without first obtaining the
consent of Indemnitee, except for settlements solely covering monetary matters
for which Indemnitor has acknowledged responsibility for payment; (ii)
Indemnitor shall permit Indemnitee (at Indemnitee’s sole cost and expense) to
participate in such settlement or defense through counsel chosen by Indemnitee;
and (iii) Indemnitor shall agree promptly to reimburse Indemnitee for the full
amount of any Damages resulting from such claim, except for those costs
expressly assumed by the Indemnitee hereunder. The Indemnitee agrees
to preserve and provide access to all evidence that may be useful in defending
against such claim and to provide reasonable cooperation in the defense thereof
or in the prosecution of any action against a third party in connection
therewith. The Indemnitor’s defense of any claim or demand shall not
constitute an admission or concession of liability therefor or otherwise operate
in derogation of any rights Indemnitor may have against Indemnitee or any third
party. So long as Indemnitor is reasonably contesting any such claim
in good faith, Indemnitee shall not pay or settle any such claim. If
Indemnitor does not notify Indemnitee within twenty (20) days after receipt of
Indemnitee’s Claim Notice that it elects to undertake the defense thereof,
Indemnitee shall have the right to contest the claim in the exercise of its
exclusive, reasonable discretion at the expense of the Indemnitor (provided the
Indemnitor shall not be required to pay Indemnitee's expenses for the defense,
settlement or compromise of claims which are not covered by Indemnitor’s
obligations under this Section 5.3 or which Indemnitor has not consented
to).
(d) Insurance
Effect. Notwithstanding the foregoing, to the extent any
Damages that are subject to indemnification pursuant to this Agreement are
covered by insurance, the Indemnitee shall use commercially reasonable efforts
to obtain the maximum recovery under such insurance. If the
Indemnitee receives payment from the Indemnitor for indemnification under this
Section 5.3 and later receives proceeds from insurance or other amounts in
respect of such Damages, then it shall hold such proceeds or other amounts in
trust for the benefit of the Indemnitor and shall pay to the Indemnitor, as
promptly as practicable after receipt, a sum equal to the amount of the proceeds
or other amount received, up to the aggregate amount of any payments received
from the Indemnitor pursuant to this Agreement in respect of such
Damages.
(e) Exclusive
Remedy. Except with respect to any claims for gross
negligence, willful misconduct or fraud, the rights of any Parent Indemnified
Party or Nayarit Indemnified Party for indemnification relating to this
Agreement or the transactions contemplated hereby shall be strictly limited to
those contained in this Section 5.3, and, except as specifically set forth in
Section 8.10, such indemnification rights and the right to terminate this
Agreement pursuant to Section 7.1 and the right to receive the Break Fee, if
applicable, shall be the sole and exclusive remedies of such Parent Indemnified
Party or Nayarit Indemnified Party, as applicable, with respect to this
Agreement or any matter arising under or in connection with this
Agreement. To the maximum extent permitted by applicable Law, the
Parent Indemnified Parties and the Nayarit Indemnified Parties hereby waive all
other rights and remedies, and release all claims against each other, with
respect to this Agreement or any matter arising under or in connection with this
Agreement, whether under any applicable Law, at common law or
otherwise.
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5.5 Parent Registration
Statement; Proxy Statement.
(a) Promptly
after the date of this Agreement, (i) Parent shall prepare and file with
the SEC a registration statement on Form S-4 (or other appropriate form), which
shall include the Proxy Statement, for the purpose of registering the
Amalgamation Consideration to be issued to the Nayarit Stockholders pursuant to
the Amalgamation (the “Registration Statement”), and
(ii) Parent shall prepare and file with the SEC a proxy statement [on
Schedule 14A] (the “Proxy
Statement”) for the purpose of, among other things, soliciting proxies
from holders of Parent Common Stock to vote, at a meeting of the holders of
Parent Common Stock to be called for such purpose (the “Parent Stockholder Meeting”), in
favor of, among other things, [I] the issuance of the Amalgamation
Consideration, [II] any other proposals the Parties deem necessary to effectuate
the effectiveness of the Registration Statement, and [III] an adjournment
proposal (collectively, the “Parent Proxy
Matters”). For purposes of this Agreement, “Proxy Statement”
means the letter to Parent’s Stockholders, the notices of meeting, the proxy
statement and forms of proxies to be distributed to Parent’s Stockholders in
connection with the Parent Proxy Matters and any additional solicitation
materials required to be filed with the SEC in connection
therewith.
(b) Parent,
with the assistance of Nayarit, shall promptly respond to any SEC comments on
the Registration Statement and shall use reasonable best efforts to cause such
Registration Statement to be declared effective by the SEC as soon after filing
as practicable. Parent, with the assistance of Nayarit, shall
promptly respond to any SEC comments on the Proxy Statement and shall use
reasonable best efforts to have the Proxy Statement cleared by the SEC under the
Exchange Act as soon after filing as practicable.
(c) Parent
will advise Nayarit, promptly after it receives notice thereof, of the time when
the Registration Statement has been declared effective by the SEC or any
supplement or amendment to the Registration Statement has been filed, or any
request by the SEC for amendment of the Registration Statement or comments
thereon and responses thereto or requests by the SEC for additional
information. Parent will advise Nayarit, promptly after it receives
notice thereof, of the time when the Proxy Statement has been cleared by the SEC
under the Exchange Act or any supplement or amendment to the Proxy Statement has
been filed, or any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
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(d) If
at any time prior to the Effective Time, any information relating to Parent,
Nayarit or any of their respective subsidiaries, affiliates, officers or
directors, should be discovered by Parent or Nayarit, as applicable, that should
be set forth in an amendment or supplement to the Registration Statement or the
Proxy Statement, so that such documents would not include any misstatement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the Party which discovers such information shall promptly notify
the other Party hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the Parent Stockholders.
(e) [All
reasonable out-of-pocket expenses (including all reasonable fees and expenses of
counsel, accountants and advisors) incurred by Parent or its Affiliates in
connection with or related to the preparation, printing, filing and mailing of
the Registration Statement and Proxy shall be equally shared by Parent and
Nayarit.]
5.6 Reservation of
Stock. Parent hereby agrees there shall be, or Parent shall
cause to be, reserved for issuance and delivery such number of shares of Parent
Common Stock as shall be required for issuance and delivery of the Amalgamation
Consideration. Parent covenants it will authorize or cause to be
authorized such number of shares of Parent Common Stock as shall be sufficient
to issue the Amalgamation Consideration.
5.7 Nayarit
Filings.
(a) [Reserved]
(b) Nayarit,
with the assistance of Parent, shall promptly respond to any [OSC] comments on
the [Nayarit Proxy Statement] and shall use reasonable best efforts to cause
such [Nayarit Proxy Statement] to be declared effective by the [OSC] as soon
after filing as practicable. Nayarit, with the assistance of Parent,
shall promptly respond to any [OSC] comments on the [Nayarit Proxy Statement]
and shall use reasonable best efforts to have the [Nayarit Proxy Statement]
cleared by the [OSC] under the [Canadian Laws] as soon after filing as
practicable.
(c) Nayarit
will advise Parent, promptly after it receives notice thereof, of the time when
the [Nayarit Proxy Statement] has been declared effective by the [OSC] or any
supplement or amendment to the [Nayarit Proxy Statement] has been filed, or any
request by the [OSC] for amendment of the [Nayarit Proxy Statement] or comments
thereon and responses thereto or requests by the [OSC] for additional
information. Nayarit will advise Parent, promptly after it receives
notice thereof, of the time when the [Nayarit Proxy Statement] has been cleared
by the [OSC] under the [Canadian Laws] or any supplement or amendment to the
[Nayarit Proxy Statement] has been filed, or any request by the [OSC] for
amendment of the [Nayarit Proxy Statement] or comments thereon and responses
thereto or requests by the [OSC] for additional information.
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(d) If
at any time prior to the Effective Time, any information relating to Parent,
Nayarit or any of their respective subsidiaries, affiliates, officers or
directors, should be discovered by Parent or Nayarit, as applicable, that should
be set forth in an amendment or supplement to the [Nayarit Proxy Statement], so
that such documents would not include any misstatement of a material fact or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, the Party
which discovers such information shall promptly notify the other Party hereto
and an appropriate amendment or supplement describing such information shall be
promptly filed with the [OSC] and, to the extent required by law, disseminated
to the Nayarit Stockholders.
(a) duly
call, give notice of, convene and hold a special meeting of the stockholders of
Parent (the “Nayarit
Stockholder Meeting”) for the purposes of considering and taking action
upon the approval of the Amalgamation;
(b) (i)
use commercially reasonable efforts to solicit the approvals required by the
Nayarit Stockholders and (ii) include in the [Nayarit Proxy Statement]: (A) the
recommendation of the Board of Directors of Nayarit to the Nayarit Stockholder
that they vote in favor the Amalgamation and (B) all other requests or approvals
necessary to consummate the transactions contemplated by this Agreement
(collectively, the “Nayarit
Proxy Matters”). Notwithstanding the foregoing, Nayarit may
adjourn or postpone the Nayarit Stockholder Meeting as and to the extent
required by applicable Law. Nayarit shall use its commercially
reasonable efforts to cause the [Nayarit Proxy Statement] to be mailed to the
Nayarit Stockholders promptly as practicable after the date
hereof. Parent shall make its directors, officers, employees and
consultants available to Nayarit and its counsel in connection with the drafting
of the [Nayarit Proxy Statement]. If, prior to the Effective Time,
any event occurs with respect to Parent, or any change occurs with respect to
other information supplied by Parent for inclusion in the [Nayarit Proxy
Statement], Parent shall promptly notify Nayarit of such event, and Nayarit and
Parent shall cooperate in the prompt preparation and distribution of any
necessary amendment or supplement to the [Nayarit Proxy Statement] and, as
required by Law, in disseminating the information contained in such amendment or
supplement to the Nayarit Stockholders; and
(c) promptly
transmit any amendment or supplement to the Nayarit Stockholders, if at any time
prior to the Nayarit Stockholder Meeting, there shall be discovered any
information that should be set forth in an amendment or supplement to the
[Nayarit Proxy Statement].
5.9 Directors and Officers of
Parent.
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(a) Subject
to any limitation imposed under applicable Laws, the Parties shall take all
necessary actions so that the persons identified in Section 5.8 of the
Parent Disclosure Schedules are elected to the positions of officers of Parent
effective immediately after the Closing.
(b) Subject
to any limitation imposed under applicable Laws, the Parties shall take all
necessary actions so that the persons identified in the Proxy Statement are
elected to the positions of directors of Parent effective immediately after the
Closing.
5.10 Hart-Scott-Rodino
Filing. If required pursuant to the Hart-Scott-Rodino Act, as
promptly as practicable after the date of this Agreement, Parent and Nayarit
shall each prepare and file the notifications required of them thereunder in
connection with the transactions contemplated by this Agreement and shall
promptly and in good faith respond to all information requested of them by the
Federal Trade Commission and Department of Justice in connection with such
notification and otherwise cooperate in good faith with each other and such
Governmental Authorities. Parent and Nayarit shall (a) promptly
inform the other of any communication to or from the Federal Trade Commission,
the Department of Justice or any other Governmental Authority regarding the
transactions contemplated by this Agreement, (b) give the other prompt notice of
the commencement of any action, suit, litigation, arbitration, proceeding or
investigation by or before any Governmental Authority with respect to such
transactions and (c) keep the other reasonably informed as to the status of any
such action, suit, litigation, arbitration, proceeding or
investigation. Parent and Nayarit shall split equally all filing fees
relating to such filing.
5.11 Exchange
Listing. Parent shall use commercially reasonable efforts to have
the Parent Common Stock be publicly listed in the United States on the New York
Stock Exchange Amex.
ARTICLE
VI
CONDITIONS
(a) Parent Stockholder
Approval.
(1) The
Required Parent Vote with respect to the Parent Proxy Matters as set forth in
the Proxy Statement shall have been obtained in accordance with the DGCL,
and
(2) The
Amended and Restated Certificate of Incorporation shall have been filed with and
accepted by the Delaware Secretary of State to amend the Certificate of
Incorporation and effectuate the Reverse Split.
(b) Nayarit Stockholder
Approval. The Required Nayarit Vote with respect to the
Nayarit Proxy Matters as set forth in the [Nayarit Proxy Statement] shall have
been obtained in accordance with the OCBA and all applicable local, federal and
securities Laws.
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(c) Antitrust
Laws. If applicable, the required waiting period (and any
extension thereof) under any Antitrust Laws, if any, shall have expired or been
terminated.
(d) Requisite Regulatory
Approvals and Consents. The Requisite Regulatory Approvals and
all Consents from third parties required in connection with the transactions
contemplated by this Agreement, shall have been obtained or
made.
(e) Effective Registration
Statement. The Registration Statement shall have been declared
effective by the SEC and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for that purpose
shall be pending before or threatened by the SEC.
(f) No Law or
Order. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any Law (whether temporary, preliminary or
permanent) or Order that is then in effect and has the effect of making the
Amalgamation illegal or otherwise preventing or prohibiting consummation of the
Amalgamation.
(g) Updating of Disclosure
Schedules. Final versions of the Parent Disclosure Schedules
and Nayarit Disclosure Schedules shall have been delivered by the appropriate
Party to the other Party and such schedules shall have been certified as the
final, true, correct and complete schedules of such Party.
(h) Litigation. There
shall be no pending Action against any Party or any of its Affiliates, or any of
their respective properties or assets, or any officer, director, partner, member
or manager, in his or her capacity as such, of any Party or any of their
Affiliates, with respect to the consummation of the Amalgamation or the
transactions contemplated thereby which could reasonably be expected to have a
Material Adverse Effect.
(a) Representations and
Warranties. Each of the representations and warranties of
Nayarit and the Subsidiaries set forth in this Agreement shall be true and
correct as of the date of this Agreement and as of the Effective Time as though
made as of the Effective Time (except to the extent that any of such
representations and warranties expressly speaks only as of an earlier
date).
(b) Agreements and
Covenants. Nayarit shall have performed, in all material
respects, all of its obligations and complied with, in all material respects,
all of its agreements and covenants to be performed or complied with by it under
this Agreement at or prior to the Effective Time.
(c) Officer
Certificate. Nayarit shall have delivered to Parent a
certificate, dated the Closing Date, signed by the chief executive officer or
chief financial officer of Nayarit, certifying in such capacity as to the
satisfaction of the conditions specified in Sections 6.2(a), (b) and
(e).
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(d) Secretary’s
Certificate. Nayarit shall have delivered to Parent a true
copy of the resolutions of the Board of Directors of Nayarit authorizing the
execution of this Agreement and the consummation of the Amalgamation and
transactions contemplated herein, certified by the Secretary of Nayarit or
similar officer.
(e) Material Adverse
Effect. No Material Adverse Effect shall have occurred with
respect to Nayarit’s or its Subsidiaries’ business since the date of this
Agreement.
(f) Legal
Opinion. Parent shall have received an opinion of Nayarit’s
counsel, [], in form and substance reasonably acceptable to Parent, dated as of
the Closing Date.
(g) Lock Up
Agreements. Parent shall have received the Lock Up Agreements
duly executed by [].
(h) Financials. Nayarit
shall have filed with the SEDAR all financial statements that are required
pursuant to [applicable OSC Rules / National Instruments] and the General Rules
and Regulations of [applicable Canadian Securities Act].
(i) Nayarit Stockholder
Dissenters Rights. In connection with the Amalgamation, no
more than five percent (5%) of Nayarit Stockholders shall have exercised their
right to dissent and undertake the [Dissent Procedures] under the
OBCA.
(j) [SRK
Report]. Parent shall have received from Nayarit the final
[SRK Report].
(a) Representations and
Warranties. Each of the representations and warranties of
Parent set forth in this Agreement shall be true and correct as of the date of
this Agreement and as of the Effective Time as though made as of the Effective
Time (except to the extent that any of such representations and warranties
expressly speaks only as of an earlier date).
(b) Agreements and
Covenants. Parent shall have performed, in all material
respects, its obligations and complied with, in all material respects, its
agreements and covenants to be performed or complied with by it under this
Agreement at or prior to the Effective Time, including, without limitation, the
resignation from the Board of Directors of Parent of those persons currently on
the Board of Directors of Parent who are not named as directors following the
Effective Time in the Proxy Statement.
(c) Officer
Certificate. Parent shall have delivered to Nayarit a
certificate, dated the Closing Date, signed by the chief executive officer or
chief financial officer of Parent, certifying in such capacity as to the
satisfaction of the conditions specified in Sections 6.3(a), (b) and
(e).
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(d) Secretary’s
Certificate. Parent shall have delivered to Nayarit a true
copy of the resolutions of the Board of Directors of Parent authorizing the
execution of this Agreement and the consummation of the Amalgamation and
transactions contemplated herein, certified by the Secretary of Parent or
similar officer.
(e) Material Adverse
Effect. No Material Adverse Effect shall have occurred with
respect to Parent’s business since the date of this Agreement.
(f) Legal
Opinion. Nayarit shall have received opinions of Parent’s
counsel, Ellenoff Grossman & Schole LLP, in form and substance reasonably
acceptable to Nayarit, dated as of the Closing Date.
(g) Resignation of Parent
Officers and Directors. Except for those executive officers
and directors continuing in their capacities after the Effective Time as set
forth in the Proxy Statement, each executive officer and director of Parent
shall have tendered his or her resignation effective as of the Effective
Time.
(h) Exchange
Agent. Parent shall have entered into an agreement with the
Exchange Agent with respect to the exchange of the Nayarit Stock Certificates in
exchange for the Amalgamation Consideration.
(i) Lock Up
Agreements. Nayarit shall have received the Lock Up Agreements
duly executed by
[ ].
6.4 Frustration of
Conditions. Notwithstanding anything contained herein to the
contrary, neither Parent nor Nayarit may rely on the failure of any condition
set forth in this Article VI to be satisfied if such failure was caused by the
action or inaction of such Party or its Affiliates.
TERMINATION
AND ABANDONMENT
(a) by
mutual written consent of Nayarit and Parent, as duly authorized by the Board of
Directors of Parent and the Board of Directors of Nayarit;
(b) by
written notice by either Parent or Nayarit if the Closing conditions set forth
in Section 6.1 have not been satisfied by Nayarit or Parent, as the case may be
(or waived by Parent or Nayarit as the case may be) by [120 days after the date
of this Agreement]. Notwithstanding the foregoing, the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
Party whose action or inaction is the primary cause of, or resulted in, any such
condition set forth in Section 6.1 to fail to be fulfilled;
I-125
(c) by
written notice by either Parent or Nayarit, if any Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any Order or Law that is,
in each case, then in effect and is final and nonappealable and has the effect
of permanently restraining, enjoining or otherwise preventing or prohibiting the
transactions contemplated by this Agreement (including the Amalgamation); provided, however, the right
to terminate this Agreement under this Section 7.1(c) shall not be available to
any Party whose failure to fulfill any obligation under this Agreement has been
the primary cause of, or resulted in, any such Order or Law to have been
enacted, issued, promulgated, enforced or entered;
(d) by
written notice by Parent, if: (i) there has been a breach by Nayarit of any of
its representations, warranties, covenants or agreements contained in this
Agreement, or if any material representation or warranty of Nayarit shall have
become untrue or inaccurate, and (ii) the breach or inaccuracy is incapable of
being cured prior to the Closing or is not cured within twenty (20) days of
notice of such breach or inaccuracy;
(e) by
written notice by Nayarit, if: (i) there has been a breach by Parent of any of
its representations, warranties, covenants or agreements contained in this
Agreement, or if any material representation or warranty of Parent shall have
become untrue or inaccurate, and (ii) the breach or inaccuracy is incapable of
being cured prior to the Closing or is not cured within twenty (20) days of
notice of such breach or inaccuracy;
(f) by
written notice by Parent if the Closing conditions set forth in Section 6.2,
other than Sections 6.2(a) and 6.2(b) (which are addressed by Section 7.1(d)),
have not been satisfied by Nayarit (or waived by Parent) by [120 days after the
date of this Agreement]. Notwithstanding the foregoing, the right to
terminate this Agreement under this Section 7.1(f) shall not be available to
Parent if Parent is in material breach of any representation, warranty or
covenant contained in this Agreement, and such breach has primarily caused the
Closing conditions set forth in Section 6.2 to not be satisfied;
or
(g) by
written notice by Nayarit if the Closing conditions set forth in Section 6.3,
other than Sections 6.3(a) and 6.3(b) (which are addressed by Section 7.1(e)),
have not been satisfied by Parent (or waived by Nayarit) by [120 days after the
date of this Agreement]. Notwithstanding the foregoing, the right to
terminate this Agreement under this Section 7.1(g) shall not be available to
Nayarit if Nayarit is in material breach of any representation, warranty or
covenant contained in this Agreement, and such breach has primarily caused the
Closing conditions set forth in Section 6.3 to not be
satisfied.
I-126
I-127
MISCELLANEOUS
(i) if
to Nayarit, to:
Nayarit, Inc.
76
Temple Terrace
Suite
150
Sackville,
NS
B4C
0A7
Canada
Attention:
Facsimile:
(902) 252-3836
with a
copy to (but which shall not constitute notice to Nayarit):
[ ]
Attention:
Facsimile:
(ii) if
to Parent, to:
[Capital
Gold Corporation
76
Beaver Street, 14th floor
New
York, New York 10005
Attention:
Facsimile:
(212) 344-4537]
with a
copy to (but which shall not constitute notice to Parent):
Ellenoff Grossman & Schole
LLP
150 East 42nd
Street
New York, New York
10017
Attention: Barry I.
Grossman, Esq.
Facsimile: (212)
370-7889
I-128
8.5 Waiver of Jury
Trial. Each of the Parties hereby waives to the fullest extent
permitted by applicable Law any right it may have to a trial by jury with
respect to any Action directly or indirectly arising out of, under or in
connection with this Agreement or the transactions contemplated
hereby. Each of the Parties: (a) certifies that no representative,
agent or attorney of the other Party has represented, expressly or otherwise,
that such other Party would not, in the event of any Action, seek to enforce the
foregoing waiver and (b) acknowledges that it and the other Party has been
induced to enter into this Agreement by, among other things, the mutual waivers
and certifications in this Section 8.5.
8.7 Interpretation. The
article and section headings contained in this Agreement are solely for the
purpose of reference, are not part of the agreement of the Parties and shall not
in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement: (a) the term “Person” shall mean and include
an individual, a partnership, a joint venture, a corporation, a limited
liability company, a trust, an association, an unincorporated organization, a
Governmental Authority and any other entity, (b) unless otherwise specified
herein, the term “Affiliate,” with respect to
any Person, shall mean and include any Person, directly or indirectly, through
one or more intermediaries controlling, controlled by or under common control
with such Person, (c) the term “Knowledge,” when used with
respect to Nayarit, shall mean the actual knowledge, after reasonable inquiry of
the executive officers and directors of Nayarit, and, when used with respect to
Parent, shall mean the actual knowledge, after reasonable inquiry, of the
executive officers and directors of Parent, and (d) the term “Business Day” means any day on
which the principal offices of the SEC in Washington, D.C. are open to accept
filings, or, in the case of determining a date when any payment is due, any day
on which banks are not required or authorized to close in the City of New
York. Whenever the words “ include,” “ includes” or “ including” are used in this
Agreement, they shall be deemed to be followed by the words “ without limitation.” The words “ hereof,” “ herein,” “ hereby”
and “ hereunder” and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. The
Parties have participated jointly in the negotiation and drafting of this
Agreement. Consequently, in the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any provision
of this Agreement.
I-129
I-130
8.11 Third
Parties. Nothing contained in this Agreement or in any
instrument or document executed by any Party in connection with the transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of, any Person that is not a party hereto or thereto or
a successor or permitted assign of such a Party other than Section 5.3 hereof
(which is intended to be for the benefit of the Persons covered thereby and may
be enforced by such Persons).
8.12 Headings. The
headings herein are inserted for convenience of reference only and are not
intended to be part of, or to affect the meaning or interpretation of, this
Agreement.
[Signature
Page Follows]
I-131
IN WITNESS WHEREOF, the
Parties hereto have caused this Agreement and Plan of Amalgamation to be signed
and delivered by their respective duly authorized officers as of the date first
above written.
CAPITAL
GOLD CORPORATION
By:
________________________________
Name:
Title:
NAYARIT,
INC.
By:
________________________________
Name:
Title:
61
I-132
AMENDMENT
TO BUSINESS COMBINATION AGREEMENT
THIS
AMENDMENT (this “Amendment”) to the
Business Combination Agreement dated as of February 10, 2010 by and among
Capital Gold Corporation, a Delaware corporation (“Parent”), Nayarit
Gold Inc., a corporation organized under the Ontario Business Corporation Act
(“Nayarit”),
John Brownlie, Colin Sutherland and Bradley Langille (the “Agreement”) is
entered into by the Parties hereto as of this 29th day of
April, 2010.
RECITALS:
A. The
Parties desire to amend and modify the Agreement as set forth in this
Amendment.
B. The
boards of directors of each of Parent and Nayarit have determined that it is
advisable and in the best interests of each of Parent and Nayarit, and their
respective shareholders, that the Agreement be amended and modified as set forth
in this Amendment.
NOW,
THEREFORE, in consideration of the premises, the mutual promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows:
1.
All capitalized terms used and not defined herein shall have the meanings
ascribed thereto in the Agreement.
2.
Section 1.6 of the Agreement is hereby amended in its entirety to read as
follows:
“1.6 Directors and Officers; Lock
Up.
(a) At
the Effective Time, the Board of Directors of Parent shall consist of either
five (5) or seven (7) directors, in any event to include Stephen M. Cooper, John
W. Cutler, Leonard J. Sojka, one (1) nominee of Parent and one (1) nominee of
Nayarit. For a period of thirty-six (36) months following the
Effective Time, the Parties hereto agree that they shall cause their nominees on
the Board of Directors to execute and deliver an undertaking whereby such
nominees agree to: (i) nominate the foregoing individuals for re-election at
each annual meeting of the shareholders of Parent; and (ii) cause any successors
chosen by such nominees to comply with the foregoing provision at each annual
meeting of the shareholders of Parent. The Parties intend to appoint an
independent director as chair of the Board of Directors of
Parent.
(b) At
the Effective Time, the officers of Parent shall include a chief executive
officer of Parent, who shall be determined by the Board of Directors and at
least two senior executive officers, two of whom shall be Colin Sutherland
Bradley Langille.
(c) At
the Closing, Colin Sutherland and Bradley Langille each shall enter into a
“lock-up” agreement substantially in the form set forth on Exhibit B attached
hereto (a “Lock Up
Agreement”) pursuant to which such Persons shall agree, for a period of
six (6) months from the Closing Date, that they each shall neither, on his, her
or its own behalf or on behalf of entities, family members or trusts affiliated
with or controlled by him, her or it, offer, issue, grant any option on, sell or
otherwise dispose of any portion of the Amalgamation Consideration issued to
such Person.”
I-133
3. Section
1.10 of the Agreement is hereby amended in its entirety to read as
follows:
“1.10 Headquarters. The
headquarters of Parent following the Effective Time will be located in
Philadelphia, Pennsylvania, and Parent shall further (so long as it sees fit)
maintain satellite or home offices in Halifax, Nova Scotia,
Canada.”
4. Section
6.3(k) of the Agreement is deleted in its entirety.
5. Section
7.1(b) of the Agreement is hereby amended in its entirety to read as
follows:
“(b) by
written notice by either Parent or Nayarit if the Closing conditions set forth
in Section 6.1 have not been satisfied by Nayarit or Parent, as the case may be
(or waived by Parent or Nayarit as the case may be) by 150 days after the date
of this Agreement (the “Completion
Deadline”). Notwithstanding the foregoing, the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
Party whose action or inaction is the primary cause of, or resulted in, any such
condition set forth in Section 6.1 to fail to be fulfilled;”
6. The
first part of Section 8.2(ii) of the Agreement is hereby amended in its entirety
to read as follows:
“if to Parent, to:
Capital Gold
Corporation
76
Beaver Street, 14th
Floor
New
York, New York 10005
Attention: Chief
Executive Officer
Facsimile: (212)
344-4537”
7. The
Parties hereto hereby ratify and reaffirm the Agreement, as amended and modified
by this Amendment.
* * *
*
[Remainder
of Page Left Blank – Signature Page Follows]
I-134
IN WITNESS WHEREOF, the
Parties hereto have caused this Amendment to be signed and delivered by their
respective duly authorized officers as of the date first above
written.
| CAPITAL GOLD CORPORATION | |||
|
|
By:
|
/s/ Christopher Chipman | |
| Name: Christopher Chipman | |||
| Title: Chief Financial Officer | |||
| NAYARIT GOLD INC. | |||
|
|
By:
|
/s/ Colin Sutherland | |
| Name: Colin Sutherland | |||
| Title: President and CEO | |||
|
|
/s/ Colin Sutherland | ||
|
Colin
Sutherland
(with
respect to Section 1.6(c) of the Agreement only)
|
|||
|
|
/s/ Bradley Langille | ||
|
Bradley
Langille
(with
respect to Section 1.6(c) of the Agreement only)
|
|||
[Signature
Page to Amendment to Business Combination
Agreement]
I-135
ANNEX
II
RIGHTS
OF DISSENTING STOCKHOLDERS
PURSUANT
TO THE
BUSINESS
CORPORATIONS ACT (ONTARIO)
|
|
(a)
|
amend
its articles under section 168 to add, remove or change restrictions on
the issue, transfer or ownership of shares of a class or series of the
shares of the corporation;
|
|
|
(b)
|
amend
its articles under section 168 to add, remove or change any restriction
upon the business or businesses that the corporation may carry on or upon
the powers that the corporation may
exercise;
|
|
|
(c)
|
amalgamate
with another corporation under sections 175 and
176;
|
|
|
(d)
|
be
continued under the laws of another jurisdiction under section 181;
or
|
|
|
(e)
|
sell,
lease or exchange all or substantially all its property under subsection
184(3),
|
a holder
of shares of any class or series entitled to vote on the resolution may dissent.
R.S.O. 1990, c. B.16, s. 185 (1).
Idem
|
If
a corporation resolves to amend its articles in a manner referred to in
subsection 170 (1), a holder of shares of any class or series
entitled to vote on the amendment under section 168 or 170 may dissent,
except in respect of an amendment referred to
in,
|
|
|
(a)
|
clause
170 (1) (a), (b) or (e) where the articles provide that the
holders of shares of such class or series are not entitled to dissent;
or
|
|
(b)
|
subsection
170 (5) or (6). R.S.O. 1990, c. B.16,
s. 185 (2).
|
One
class of shares
|
The
right to dissent described in subsection (2) applies even if there is only
one class of shares. 2006, c. 34, Sched. B,
s. 35.
|
Exception
|
A
stockholder of a corporation incorporated before the 29th day of July,
1983 is not entitled to dissent under this section in respect of an
amendment of the articles of the corporation to the extent that the
amendment,
|
|
|
(a)
|
amends
the express terms of any provision of the articles of the corporation to
conform to the terms of the provision as deemed to be amended by section
277; or
|
|
|
(b)
|
deletes
from the articles of the corporation all of the objects of the corporation
set out in its articles, provided that the deletion is made by the 29th
day of July, 1986. R.S.O. 1990, c. B.16,
s. 185 (3).
|
Stockholder’s
right to be paid fair value
|
In
addition to any other right the stockholder may have, but subject to
subsection (30), a stockholder who complies with this section is entitled,
when the action approved by the resolution from which the stockholder
dissents becomes effective, to be paid by the corporation the fair value
of the shares held by the stockholder in respect of which the stockholder
dissents, determined as of the close of business on the day before the
resolution was adopted. R.S.O. 1990, c. B.16,
s. 185 (4).
|
No
partial dissent
|
A
dissenting stockholder may only claim under this section with respect to
all the shares of a class held by the dissenting stockholder on behalf of
any one beneficial owner and registered in the name of the dissenting
stockholder. R.S.O. 1990, c. B.16,
s. 185 (5).
|
Objection
|
A
dissenting stockholder shall send to the corporation, at or before any
meeting of stockholders at which a resolution referred to in subsection
(1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the stockholder of the
purpose of the meeting or of the stockholder’s right to dissent. R.S.O.
1990, c. B.16,
s. 185 (6).
|
II-1
Idem
|
The
execution or exercise of a proxy does not constitute a written objection
for purposes of subsection (6). R.S.O. 1990, c. B.16,
s. 185 (7).
|
Notice
of adoption of resolution
|
The
corporation shall, within ten days after the stockholders adopt the
resolution, send to each stockholder who has filed the objection referred
to in subsection (6) notice that the resolution has been adopted, but such
notice is not required to be sent to any stockholder who voted for the
resolution or who has withdrawn the objection. R.S.O. 1990, c. B.16,
s. 185 (8).
|
Idem
|
A
notice sent under subsection (8) shall set out the rights of the
dissenting stockholder and the procedures to be followed to exercise those
rights. R.S.O. 1990, c. B.16,
s. 185 (9).
|
Demand
for payment of fair value
|
A
dissenting stockholder entitled to receive notice under subsection (8)
shall, within twenty days after receiving such notice, or, if the
stockholder does not receive such notice, within twenty days after
learning that the resolution has been adopted, send to the corporation a
written notice containing,
|
|
(a)
|
the
stockholder’s name and address;
|
|
(b)
|
the
number and class of shares in respect of which the stockholder dissents;
and
|
|
(c)
|
a
demand for payment of the fair value of such shares. R.S.O. 1990,
c. B.16,
s. 185 (10).
|
Certificates
to be sent in
|
Not
later than the thirtieth day after the sending of a notice under
subsection (10), a dissenting stockholder shall send the certificates
representing the shares in respect of which the stockholder dissents to
the corporation or its transfer agent. R.S.O. 1990, c. B.16,
s. 185 (11).
|
Idem
|
A
dissenting stockholder who fails to comply with subsections (6), (10) and
(11) has no right to make a claim under this section. R.S.O. 1990,
c. B.16,
s. 185 (12).
|
Endorsement
on certificate
|
A
corporation or its transfer agent shall endorse on any share certificate
received under subsection (11) a notice that the holder is a dissenting
stockholder under this section and shall return forthwith the share
certificates to the dissenting stockholder. R.S.O. 1990, c. B.16,
s. 185 (13).
|
Rights
of dissenting stockholder
|
On
sending a notice under subsection (10), a dissenting stockholder ceases to
have any rights as a stockholder other than the right to be paid the fair
value of the shares as determined under this section except
where,
|
|
|
(a)
|
the
dissenting stockholder withdraws notice before the corporation makes an
offer under subsection (15);
|
|
|
(b)
|
the
corporation fails to make an offer in accordance with subsection (15) and
the dissenting stockholder withdraws notice;
or
|
|
|
(c)
|
the
directors revoke a resolution to amend the articles under subsection
168 (3), terminate an amalgamation agreement under subsection
176 (5) or an application for continuance under subsection
181 (5), or abandon a sale, lease or exchange under subsection
184 (8),
|
in which
case the dissenting stockholder’s rights are reinstated as of the date the
dissenting stockholder sent the notice referred to in subsection (10), and the
dissenting stockholder is entitled, upon presentation and surrender to the
corporation or its transfer agent of any certificate representing the shares
that has been endorsed in accordance with subsection (13), to be issued a new
certificate representing the same number of shares as the certificate so
presented, without payment of any fee. R.S.O. 1990, c. B.16,
s. 185 (14).
II-2
Offer
to pay
|
A
corporation shall, not later than seven days after the later of the day on
which the action approved by the resolution is effective or the day the
corporation received the notice referred to in subsection (10), send to
each dissenting stockholder who has sent such
notice,
|
|
|
(a)
|
a
written offer to pay for the dissenting stockholder’s shares in an amount
considered by the directors of the corporation to be the fair value
thereof, accompanied by a statement showing how the fair value was
determined; or
|
|
|
(b)
|
if
subsection (30) applies, a notification that it is unable lawfully to pay
dissenting stockholders for their shares. R.S.O. 1990, c. B.16,
s. 185 (15).
|
Idem
|
Every
offer made under subsection (15) for shares of the same class or series
shall be on the same terms. R.S.O. 1990, c. B.16,
s. 185 (16).
|
Idem
|
Subject
to subsection (30), a corporation shall pay for the shares of a dissenting
stockholder within ten days after an offer made under subsection (15) has
been accepted, but any such offer lapses if the corporation does not
receive an acceptance thereof within thirty days after the offer has been
made. R.S.O. 1990, c. B.16,
s. 185 (17).
|
Application
to court to fix fair value
|
Where
a corporation fails to make an offer under subsection (15) or if a
dissenting stockholder fails to accept an offer, the corporation may,
within fifty days after the action approved by the resolution is effective
or within such further period as the court may allow, apply to the court
to fix a fair value for the shares of any dissenting stockholder. R.S.O.
1990, c. B.16,
s. 185 (18).
|
Idem
|
If
a corporation fails to apply to the court under subsection (18), a
dissenting stockholder may apply to the court for the same purpose within
a further period of twenty days or within such further period as the court
may allow. R.S.O. 1990, c. B.16,
s. 185 (19).
|
Idem
|
A
dissenting stockholder is not required to give security for costs in an
application made under subsection (18) or (19). R.S.O. 1990,
c. B.16,
s. 185 (20).
|
Costs
|
If
a corporation fails to comply with subsection (15), then the costs of a
stockholder application under subsection (19) are to be borne by the
corporation unless the court otherwise orders. R.S.O. 1990, c. B.16,
s. 185 (21).
|
Notice
to stockholders
|
Before
making application to the court under subsection (18) or not later than
seven days after receiving notice of an application to the court under
subsection (19), as the case may be, a corporation shall give notice to
each dissenting stockholder who, at the date upon which the notice is
given,
|
|
(a)
|
has
sent to the corporation the notice referred to in subsection (10);
and
|
|
|
(b)
|
has
not accepted an offer made by the corporation under subsection (15), if
such an offer was made,
|
of the
date, place and consequences of the application and of the dissenting
stockholder’s right to appear and be heard in person or by counsel, and a
similar notice shall be given to each dissenting stockholder who, after the date
of such first mentioned notice and before termination of the proceedings
commenced by the application, satisfies the conditions set out in clauses (a)
and (b) within three days after the dissenting stockholder satisfies such
conditions. R.S.O. 1990, c. B.16, s. 185 (22).
Parties
joined
|
All
dissenting stockholders who satisfy the conditions set out in clauses
(22)(a) and (b) shall be deemed to be joined as parties to an application
under subsection (18) or (19) on the later of the date upon which the
application is brought and the date upon which they satisfy the
conditions, and shall be bound by the decision rendered by the court in
the proceedings commenced by the application. R.S.O. 1990, c. B.16,
s. 185 (23).
|
II-3
Idem
|
Upon
an application to the court under subsection (18) or (19), the court may
determine whether any other person is a dissenting stockholder who should
be joined as a party, and the court shall fix a fair value for the shares
of all dissenting stockholders. R.S.O. 1990, c. B.16,
s. 185 (24).
|
Appraisers
|
The
court may in its discretion appoint one or more appraisers to assist the
court to fix a fair value for the shares of the dissenting stockholders.
R.S.O. 1990, c. B.16,
s. 185 (25).
|
Final
order
|
The
final order of the court in the proceedings commenced by an application
under subsection (18) or (19) shall be rendered against the corporation
and in favour of each dissenting stockholder who, whether before or after
the date of the order, complies with the conditions set out in clauses
(22) (a) and (b). R.S.O. 1990, c. B.16,
s. 185 (26).
|
Interest
|
The
court may in its discretion allow a reasonable rate of interest on the
amount payable to each dissenting stockholder from the date the action
approved by the resolution is effective until the date of payment. R.S.O.
1990, c. B.16,
s. 185 (27).
|
Where
corporation unable to pay
|
Where
subsection (30) applies, the corporation shall, within ten days after the
pronouncement of an order under subsection (26), notify each dissenting
stockholder that it is unable lawfully to pay dissenting stockholders for
their shares. R.S.O. 1990, c. B.16,
s. 185 (28).
|
Idem
|
Where
subsection (30) applies, a dissenting stockholder, by written notice sent
to the corporation within thirty days after receiving a notice under
subsection (28), may,
|
|
|
(a)
|
withdraw
a notice of dissent, in which case the corporation is deemed to consent to
the withdrawal and the stockholder’s full rights are reinstated;
or
|
|
|
(b)
|
retain
a status as a claimant against the corporation, to be paid as soon as the
corporation is lawfully able to do so or, in a liquidation, to be ranked
subordinate to the rights of creditors of the corporation but in priority
to its stockholders. R.S.O. 1990, c. B.16,
s. 185 (29).
|
Idem
|
A
corporation shall not make a payment to a dissenting stockholder under
this section if there are reasonable grounds for believing
that,
|
|
|
(a)
|
the
corporation is or, after the payment, would be unable to pay its
liabilities as they become due; or
|
|
|
(b)
|
the
realizable value of the corporation’s assets would thereby be less than
the aggregate of its liabilities. R.S.O. 1990, c. B.16,
s. 185 (30).
|
Court
order
|
Upon
application by a corporation that proposes to take any of the actions
referred to in subsection (1) or (2), the court may, if satisfied that the
proposed action is not in all the circumstances one that should give rise
to the rights arising under subsection (4), by order declare that those
rights will not arise upon the taking of the proposed action, and the
order may be subject to compliance upon such terms and conditions as the
court thinks fit and, if the corporation is an offering corporation,
notice of any such application and a copy of any order made by the court
upon such application shall be served upon the Commission. 1994,
c. 27, s. 71 (24).
|
Commission
may appear
|
The
Commission may appoint counsel to assist the court upon the hearing of an
application under subsection (31), if the corporation is an offering
corporation. 1994, c. 27,
s. 71 (24).
|
II-4
ANNEX
III
FAIRNESS OPINION OF BLAIR FRANKLIN
CAPITAL PARTNERS INC.
March 25,
2010
The Board
of Directors
Nayarit
Gold Incorporated
76 Temple
Terrace, Suite 150
Sackville,
Nova Scotia
B4C
0A7
|
Attention:
|
Mr.
Colin Sutherland
|
President
and Chief Executive Officer
To the
Board:
Blair
Franklin Capital Partners Inc. (“Blair Franklin”) understands that Nayarit Gold
Inc. (“Nayarit” or the “Company”) has entered into an agreement (the
“Agreement”) with Capital Gold Corporation (“Capital Gold”) with respect to a
proposed business combination in an all-share transaction (“Transaction”)
subject to receipt of Nayarit and Capital Gold shareholder
approval. Pursuant to the terms of the Agreement, subject to the
satisfaction or waiver of all conditions, all of the Nayarit common shares (the
“Nayarit Common Shares”) issued and outstanding immediately prior to the
consummation of the business combination shall become exchangeable into the
common stock of Capital Gold on the basis of .134048 shares of Capital Gold
common stock for each Nayarit Common Share (the “Consideration”). Following the
Transaction, the surviving entity (the “Combined Entity”) will be a wholly-owned
subsidiary of Capital Gold and Nayarit shareholders will own approximately 20%
of the issued and outstanding shares of Capital Gold common stock.
The
Transaction is subject to Nayarit receiving a fairness opinion. The
Board of Directors of Nayarit (the “Board”) retained Blair Franklin to provide
its opinion (the “Opinion”) as to the fairness, from a financial point of view,
of the Consideration to be offered pursuant to the Transaction, to the
shareholders of Nayarit. Blair Franklin has not been asked to prepare, and has
not prepared, a formal valuation of Nayarit, Capital Gold or any of their
securities or assets and the Opinion should not be construed as
such.
Engagement
of Blair Franklin
The Board
retained Blair Franklin effective January 18, 2010 and the Board and Blair
Franklin executed an engagement agreement dated January 18, 2010 (the
“Engagement Agreement”). The Engagement Agreement provides for the payment to
Blair Franklin of fees in respect of the preparation and delivery of its
Opinion. Our fees are not contingent on the completion of the
Transaction nor on the conclusions reached herein. In addition, Blair Franklin
is to be reimbursed for its reasonable out-of-pocket expenses and is to be
indemnified by the Company in certain circumstances.
Blair
Franklin Capital Partners Inc.
Commerce
Court West, Suite 1905, 199 Bay Street, P.O. Box 147, Toronto, Ontario M5L
1E2
T.
416.368.1211 F.
416.368.3752 www.blairfranklin.com
Relationship
with Related Parties
Blair
Franklin is not an insider, associate or affiliate (as such terms are defined in
the Securities Act
(Ontario)) of Nayarit or Capital Gold or any of its respective associates or
affiliates. Blair Franklin has not provided any financial advisory services or
participated in any financing involving Nayarit or Capital Gold or any of their
respective associates or affiliates within the past twenty-four months, other
than services provided under the Engagement Agreement.
Credentials
of Blair Franklin
Blair
Franklin is an independent investment bank. We advise on mergers, acquisitions
and divestitures, related party transactions, financings, restructurings, risk
management and governance issues, and undertake valuations and fairness
opinions, on behalf of corporate, private, institutional and public sector
clients. Partners of Blair Franklin have participated in a significant number of
transactions involving private and public companies and have extensive
experience in preparing fairness opinions. The Opinion expressed herein is the
opinion of Blair Franklin as a firm.
Scope
of Review:
In
preparing the Opinion, Blair Franklin has reviewed and relied upon, among other
things:
|
|
1.
|
Consolidated
financial statements for Nayarit for the years ended September 30,
2009 and 2008;
|
|
|
2.
|
Consolidated
financial statements for Capital Gold for the year ended July 31, 2009 and
2008;
|
|
|
3.
|
Quarterly
reports for Nayarit for the three-month periods ended December 31, 2009
and 2008;
|
|
|
4.
|
Quarterly
reports for Capital Gold for the six-month periods ended January 31, 2009
and 2008;
|
|
|
5.
|
Public
information relating to the business, operations, financial performance
and share price trading history of Nayarit, Capital Gold and other
selected public companies whose businesses we believe to be
relevant;
|
|
|
6.
|
Business
Combination Agreement by and between Capital Gold and Nayarit dated
February 10, 2010;
|
|
|
7.
|
Draft
Form-S4 related to the Transaction;
|
|
|
8.
|
Certain
internal financial analyses and forecasts prepared by the management of
Nayarit and Capital;
|
III-2
|
|
9.
|
Preliminary
Economic Assessment for Animas/Del Norte deposit (part of the Orion
project) dated February 2010;
|
|
10.
|
43-101
resource estimate for the Orion project dated November
2009;
|
|
11.
|
43-101
Technical Report for the El Chanate Gold Mine dated November
2009;
|
|
12.
|
Mine
site visit of the El Chanate Gold
Mine;
|
|
13.
|
Discussions
with Nayarit and Capital Gold management concerning their respective
business operations, financial condition, results and
prospects;
|
|
14.
|
Comparable
trading multiples and comparable transaction multiples for selected
companies / businesses considered
relevant;
|
|
15.
|
Industry
and financial market information;
|
|
16.
|
Other
publicly available information considered
relevant;
|
|
17.
|
A
certificate provided to us by senior officers of Nayarit as to certain
factual matters;
|
|
18.
|
A
certificate provided to us by senior officers of Capital Gold as to
certain factual matters; and
|
|
19.
|
Such
other information, documentation, analyses and discussions that we
considered relevant in the
circumstances.
|
Blair
Franklin has not, to the best of its knowledge, been denied access by Nayarit or
Capital Gold to any information that has been requested.
Blair
Franklin has conducted such analyses, investigations and testing of assumptions
as were considered by Blair Franklin to be appropriate in the circumstances for
the purposes of arriving at its opinion as to the fairness, from a financial
point of view, of the Consideration to be offered pursuant to the Transaction,
to the shareholders of Nayarit.
Assumptions
and Limitations
The
Opinion is subject to the assumptions, explanations and limitations hereinbefore
described and as set forth below.
We have
not been asked to prepare, and have not prepared, a formal valuation or
appraisal of Nayarit or Capital Gold or any of their respective securities or
assets and this Opinion should not be construed as such. We have, however,
conducted such analyses as we considered necessary in the circumstances. In
addition, the Opinion is not, and should not be construed as, advice as to the
price at which Nayarit common shares or Capital Gold common shares may trade at
any future date.
III-3
With the
Board’s approval and as provided in the Engagement Agreement, Blair Franklin has
relied, without independent verification, upon the completeness, accuracy and
fair presentation in all material respects of all financial information and the
completeness and accuracy of the other information, data, advice, opinions and
representations obtained by it from public sources, management of Nayarit and
Capital Gold and their respective associates and affiliates and advisors or
otherwise (collectively, the “Information”) and we have assumed that the
historical information included in the Information did not omit to state any
material fact or any fact necessary to be stated or necessary to make that
Information not misleading in light of the circumstances in which it was made.
This Opinion is conditional upon the completeness, accuracy and fair
presentation of such Information. Subject to the exercise of professional
judgment and except as described herein, Blair Franklin has not attempted to
verify independently the completeness, accuracy or fair presentation of any of
the Information. With respect to the forecasts, projections or estimates
provided to Blair Franklin and used in the analysis supporting the Opinion, we
have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of management of Nayarit and
Capital Gold as to the matters covered thereby at the time of preparation and,
in rendering the Opinion, we express no view as to the reasonableness of such
forecasts or budgets or the assumptions on which they are based.
Representatives
of each of Nayarit and Capital Gold have represented to Blair Franklin in a
certificate delivered as at the date hereof, among other things, that (i) the
Information provided orally by, or in writing by, their company or any of their
subsidiaries or their respective agents to Blair Franklin relating to their
Company for the purpose of preparing this Opinion was, at the date that the
Information was provided to Blair Franklin, and is, at the date hereof, together
with all other documents which have been filed by Nayarit and Capital Gold in
compliance with its obligations under applicable securities laws (and to the
extent not superseded by a subsequent filing), complete, true and correct in all
material respects and did not and does not contain any untrue statement of a
material fact in respect of Nayarit or Capital Gold and did not and does not
omit to state a material fact in respect of Nayarit or Capital Gold necessary to
make the Information not misleading in light of the circumstances under which
the Information was made or provided; and that (ii) since those dates on which
the Information was provided to Blair Franklin, except as was disclosed in
writing to Blair Franklin, or as publicly disclosed, there has been no material
change, financial or otherwise, in the financial condition, assets, liabilities
(contingent or otherwise), business or operations of Nayarit or Capital Gold and
no material change has occurred in the Information or any part thereof which
would have, or which would reasonably be expected to have, a material effect on
the Opinion.
Blair
Franklin has made several assumptions in connection with its Opinion that it
considers reasonable, including that, the conditions required to implement the
Transaction will be met.
The
Opinion is rendered on the basis of the securities markets, economic, financial
and general business conditions prevailing as at the date hereof and the
conditions, financial and otherwise, of Nayarit, and its respective subsidiaries
and affiliates, as they were reflected in the Information and as they were
represented to Blair Franklin in discussions with management of Nayarit. In its
analyses and in preparing the Opinion, Blair Franklin made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Blair Franklin or any
party involved in the Transaction.
III-4
The
Opinion has been provided to the Board of Nayarit for their use and may not be
used or relied upon by any other person without the express prior written
consent of Blair Franklin.
The
Opinion is given as of the date hereof and Blair Franklin disclaims any
undertaking or obligation to advise any person of any change in any fact or
matter affecting the Opinion which may come or be brought to the attention of
Blair Franklin after the date hereof. Without limiting the foregoing, in the
event that there is any material change in any fact or matter affecting the
Opinion after the date hereof, Blair Franklin reserves the right to change,
modify or withdraw the Opinion.
Blair
Franklin believes that its analyses must be considered as a whole and that
selecting portions of the analyses or the factors considered by it, without
considering all factors and analyses together, could create a misleading view of
the process underlying the Opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Any attempt to do so could lead to undue emphasis on any
particular factor or analysis.
Fairness
Conclusion
Based
upon and subject to the foregoing and such other matters as we considered
relevant, Blair Franklin is of the opinion that, as of the date hereof the
Consideration to be offered pursuant to the Transaction, is fair from a
financial point of view to the shareholders of Nayarit.
Yours
very truly,
Blair
Franklin Capital Partners Inc.
III-5
Part II
Information Not
Required in Prospectus
|
Item 20.
|
Indemnification
of Directors and Officers.
|
Our certificate of incorporation
provides that all our directors, officers, employees and agents shall be
entitled to be indemnified by us to the fullest extent permitted under the
Delaware General Corporation Law, provided that they acted in good faith and
that they reasonably believed their conduct or action was in, or not opposed to,
the best interest of our company.
Our bylaws provide for indemnification
of our officers, directors and others who become a party to an action on our
behalf by us to the fullest extent not prohibited under the Delaware General
Corporation Law. Further, we maintain officer and director liability
insurance.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers, and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment of expenses
incurred or paid by a director, officer or controlling person in a successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to the court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
|
Item 21.
|
Exhibits
and Financial Statement
Schedules.
|
See the Exhibit Index immediately
following the signature page hereof.
|
Item 22.
|
Undertakings.
|
(a) The undersigned registrant
hereby undertakes:
|
(1)
|
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration
statement:
|
|
(i)
|
To include any prospectus required
by Section 10(a)(3) of the Securities Act of
1933;
|
|
(ii)
|
To reflect in the prospectus any
facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the effective
registration
statement.
|
|
(iii)
|
To include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; provided, however,
that:
|
|
(A)
|
Paragraphs (a)(1)(i) and
(a)(1)(ii) of this section do not apply if the registration statement is
on Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in reports filed
with or furnished to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement;
and
|
II-1
|
(B)
|
Paragraphs
(a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the
registration statement is on Form S-3 or Form F-3 and the information
required to be included in a post-effective amendment by those paragraphs
is contained in reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement, or is contained in a form of prospectus filed
pursuant to Rule 424(b) that is part of the registration
statement.
|
|
(2)
|
That, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof;
|
|
(3)
|
To remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the
offering.
|
|
(4)
|
That, for the purpose of
determining liability under the Securities Act of 1933 to any
purchaser:
|
|
(i)
|
If the registrant is relying on
Rule 430B:
|
|
(A)
|
Each prospectus filed by the
registrant pursuant to Rule 424(b)(3) shall be deemed to be part of
the registration statement as of the date the filed prospectus was deemed
part of and included in the registration statement;
and
|
|
(B)
|
Each prospectus required to be
filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the
purpose of providing the information required by section 10(a) of the
Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall
be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. Provided, however,
that no statement made in a registration statement or prospectus that is
part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such effective date,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such effective
date; or
|
|
(ii)
|
If the registrant is subject to
Rule 430C; each prospectus filed pursuant to Rule 424(b) as part
of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of contract
of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first
use.
|
II-2
|
(5)
|
That,
for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities: The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such
purchaser:
|
|
(i)
|
Any preliminary prospectus of the
undersigned registrant relating to the offering required to be filed
pursuant to
Rule 424;
|
|
(ii)
|
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned
registrant;
|
|
(iii)
|
The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by
or on behalf of the undersigned
registrant; and
|
|
(iv)
|
Any other communication that is an
offer in the offering made by the undersigned registrant to the
purchaser.
|
|
(b)
|
The undersigned hereby undertakes
to provide to the underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
|
|
(c)
|
Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as may be amended,
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such
issue.
|
|
(d)
|
The undersigned registrant hereby
undertakes that:
|
|
(1)
|
For purposes of determining any
liability under the Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed
by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared
effective.
|
|
(2)
|
For the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide
offering
thereof.
|
II-3
SIGNATURES
In
accordance with the requirements of the Securities Act, the Registrant has only
caused authorized this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 30th day of April, 2010.
|
CAPITAL
GOLD CORPORATION
|
||
|
By:
|
||
|
/s/ John Brownlie
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||
|
John
Brownlie, President
|
||
|
(Principal
Executive Officer)
|
||
POWER
OF ATTORNEY
KNOW
ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Christopher
Chimpan , with the power to act without the other, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or in his name, place and stead, in any and all
capacities to sign any and all amendments or post-effective amendments to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, and in connection with any registration
of additional securities pursuant to Rule 462(b) under the Securities Act, as
amended, to sign any abbreviated registration statements and any and all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, in each case, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act, this registration statement has been
signed by the following persons in the capacities and on the dates
indicated.
|
Person
|
Capacity
|
Date
|
|
|
|
|
||
|
/s/ Stephen M. Cooper
|
Chairman
of the Board
|
April
30, 2010
|
|
|
Stephen
M. Cooper
|
|||
|
/s/ John Brownlie
|
President,
Director
|
April
30, 2010
|
|
|
John Brownlie
|
(Principal
Executive Officer)
|
|
|
|
/s/ Leonard J. Sojka
|
Director
|
April
30, 2010
|
|
|
Leonard J. Sojka
|
|
||
|
|
|||
|
/s/ John Cutler
|
Director
|
April
30, 2010
|
|
|
John Cutler
|
|
||
|
|
|
||
|
/s/ Christopher
Chipman
|
Chief
Financial Officer, Secretary
|
April
30, 2010
|
|
|
Christopher Chipman
|
(Principal
Accounting Officer)
|
|
II-4
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
1.1
|
Collateral
Agreement dated January as of 25, 2010 (Incorporated by reference to
Exhibit 10.a to the Company’s Current Report on Form 8-K filed on January
25, 2010)
|
|
|
2.1
|
Business
Combination Agreement by and between Capital Gold Corporation and Nayarit
Gold Inc. dated as of February 10, 2010*+
|
|
|
3.1
|
Certificate
of Incorporation of the Company dated September 22, 2005 (Incorporated by
reference to Exhibit 3.3 to the Company’s Registration Statement on Form
SB-2 (File No. 333-129939) filed on November 23, 2005), as amended by the
Certificate of Amendment dated February 26, 2007 (Incorporated by
reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB
for the quarterly period ended January 31, 2007 and filed on March 19,
2007), as further amended by the Certificate of Amendment dated January
24, 2008 (Incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed on January 30, 2008) as further
amended by the Certificate of Amendment dated January 19, 2010 attached
hereto as Exhibit 3.1
|
|
|
3.2
|
Amended
and Restated By-Laws of the Company dated September 1, 2009 (Incorporated
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed on September 3, 2009)
|
|
|
4.1
|
Specimen
stock certificate for shares of common stock, par value $0.0001 per share
(Incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form SB-2, filed on March 9, 2005)
|
|
|
4.2
|
Form
of Warrant for Common Stock of the Company, issued to Standard Bank, PLC
on July 8, 2009 (Incorporated by reference to Exhibit 4.7 to the Company’s
Annual Report on Form 10-K for the year ended July 31, 2008 and filed on
October 29, 2008)
|
|
|
5.1
|
Opinion
of Ellenoff Grossman & Schole LLP
|
|
|
10.1
|
Stock
Purchase Option Agreement by and among AngloGold (Jerritt Canyon) Corp.,
AngloGold North America Inc., Leadville Mining and Milling Corporation and
Leadville, effective December 15, 2000 (subsequently transferred to Royal
Gold, Inc.) (Incorporated by reference to Exhibit 10.a to the Company’s
Quarterly Report on Form 10-QSB for the quarterly period ended January 31,
2001 and filed on March 16, 2001)
|
|
|
10.2
|
Stock
Sales and Security Agreement by and between Leadville Mining and Milling
Corporation, Leadville and Inmobiliaria Ruba S.A. de C.V., dated March 30,
2002 (Incorporated by reference to Exhibit 10.a to the Company’s Quarterly
Report on Form 10-QSB for the quarterly period ended April 30, 2002 and
filed on June 20, 2002)
|
|
|
10.3
|
English
translation of the Minera Chanate Agreement (Incorporated by reference to
Exhibit 10.b to the Company’s Quarterly Report on Form 10-QSB for the
quarterly period ended April 30, 2002 and filed on June 20,
2002)
|
|
|
10.4
|
English
summary of the El Charro Agreement between Antonio Vargas Coronado and Oro
de Altar S. de R. L. de C.V., signed on May 25, 2005 (Incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB
for the quarterly period ended April 30, 2005 and filed on June 20,
2005)
|
|
|
10.5
|
Mining
Contract for the Contract Mining at El Chanate Gold Mine by and between
Minera Santa Rita S. de R.L. de C.V. and Sinergia Obras Civiles y Mineras,
S.A. de C.V. dated November 24, 2005 (the “Mining Agreement”)
(Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-QSB for the quarterly period ended October 31 2005 and
filed on December 15, 2005)
|
|
|
10.6
|
Letter
of Amendment to the Mining Agreement, dated August 2, 2006 (Incorporated
by reference to Exhibit 10.12 to the Company’s Annual Report on Form
10-KSB for the year ended July 31, 2006 and filed on November 1,
2006)
|
|
|
10.7
|
2006
Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-QSB for the quarterly period ended
October 31, 2006 and filed on December 19, 2006)
|
|
|
10.8
|
Amendment
2009-1 to the 2006 Equity Incentive Plan (Incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 24,
2009)
|
II-5
|
Exhibit
No.
|
Description
|
|
|
10.9
|
Amended
and Restated Credit Agreement among Minera Santa Rita S. de R.L. de C.V.
and Oro de Altar S. de R.L. de C.V. (as borrowers), Capital Gold
Corporation (as guarantor), and Standard Bank PLC (as lender), dated as of
July 17, 2008 (Incorporated by reference to Exhibit 10.31 to the Company’s
Annual Report on Form 10-K for the year ended July 31, 2008 and filed on
October 29, 2008)
|
|
|
10.10
|
Service
Agreement between Caborca Industrial S.A. de C.V. and Minera Santa Rita,
S. de R.L. de C.V., dated January 1, 2008 (Incorporated by reference to
Exhibit 10.32 to the Company’s Amended Annual Report on Form 10-K/A for
the year ended July 31, 2008 and filed on February 13,
2009)
|
|
|
10.11
|
Mining
Exploration Agreement between Roberto Preciado, Bertha Elena Martinez
Espinoza and Oro de Altar S. de R.L. de C.V., dated April 4, 2008
(Incorporated by reference to Exhibit 4.7 to the Company’s Annual Report
on Form 10-K for the year ended July 31, 2009 and filed on October 14,
2009)
|
|
|
10.12
|
Amended
and Restated Engagement Agreement between the Company and John Brownlie,
effective as of January 1, 2009 (Incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 2009 and filed on March 12, 2009)
|
|
|
10.13
|
Amended
and Restated Engagement Agreement between the Company and Christopher
Chipman, effective as of January 1, 2009 (Incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 2009 and filed on March 12,
2009)
|
|
|
10.14
|
Amended
and Restated Engagement Agreement between the Company and Scott Hazlitt,
effective as of January 1, 2009 (Incorporated by reference to Exhibit 10.3
to the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 2009 and filed on March 12, 2009)
|
|
|
10.15
|
Executive
Employment Agreement between the Company and Gifford Dieterle, effective
as of January 1, 2009 (Incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 2009 and filed on March 12, 2009)
|
|
|
10.16
|
Executive
Employment Agreement between the Company and Jeffrey Pritchard, effective
as of January 1, 2009 (Incorporated by reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 2009 and filed on March 12, 2009)
|
|
|
10.17
|
Indemnity
Agreement between the Company and John Brownlie, effective November 17,
2008 (Incorporated by reference to Exhibit 10.6 to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 2009 and
filed on March 12, 2009)
|
|
|
10.18
|
Indemnity
Agreement between the Company and Scott Hazlitt, effective September 18,
2008 (Incorporated by reference to Exhibit 10.7 to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 2009 and
filed on March 12, 2009)
|
|
|
10.19
|
Indemnity
Agreement between the Company and Christopher Chipman, effective September
18, 2008 (Incorporated by reference to Exhibit 10.8 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended January 31,
2009 and filed on March 12, 2009)
|
|
|
10.20
|
Employment
Agreement between the Company and John Brownlie effective as of January
19, 2010 (Incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on January 22,
2010)***
|
|
|
10.21
|
Severance
Agreement and General Release dated March 11, 2010 (Incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended January 31, 2010 and filed on March 12,
2010)
|
|
|
10.22
|
Severance
Agreement and Release between the Company and Jeffrey Pritchard dated
September 29, 2009 (Incorporated by reference to Exhibit 10.20
to the Company’s Annual Report on Form 10-K for the year ended July 31,
2009 and filed on October 14,
2009)***
|
II-6
|
Exhibit
No.
|
Description
|
|
|
10.23
|
Business Combination Agreement dated February 10, 2010 by and between Capital Gold Corporation and Nayarit Gold, Inc.* | |
|
10.24
|
Severance
Agreement and Release between the Company and Gilford A. Dieterle dated
March 11, 2010 (Incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q/A filed on March 17,
2010)
|
|
|
10.25
|
Severance
Agreement and Release between the Company and John Brownlie dated April
29, 2010
|
|
|
10.26
|
Amendment
to Business Combination Agreement dated April 29,
2010
|
|
|
16.1
|
Letter
of Wolinetz, Lafazon & Company P.C. dated January 22, 2010, regarding
change in independent registered public accounting firm (Incorporated by
reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K
filed on January 22, 2010)
|
|
|
21
|
Subsidiaries
of Capital Gold Corporation (Incorporated by reference to Exhibit 21.1 to
the Company’s Annual Report on Form 10-KSB filed on November 14,
2005)
|
|
|
23.1
|
Consent
of Wolinetz, Lafazan & Company P.C.
|
|
|
23.2
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
23.3
|
Consent
of McGovern, Hurley, Cunningham, LLP
|
|
|
23.4
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit
5.1)
|
|
|
99.1
|
Form
of Capital Gold Stockholder Proxy Card
|
|
|
99.2
|
Form
of Nayarit Stockholder Proxy Card
|
|
|
99.3
|
Consent
of Blair Franklin Capital Partners Inc.
|
|
|
99.4
|
Consent
of John Brownlie**
|
|
|
99.5
|
Consent
of Stephen M. Cooper**
|
|
|
99.6
|
Consent
of John W. Cutler**
|
|
|
99.7
|
Consent
of Leonard J. Sojka**
|
|
|
99.8
|
Consent
of Colin Sutherland**
|
|
|
*
|
Attached
as an Annex to the proxy statement of the Registrant and prospectus for
the common stock of the Registrant
|
|
|
**
|
Previously
filed
|
|
|
***
|
Confidential
treatment has been requested for exhibits marked with a triple
asterisk
|
|
|
+
|
Schedules
to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation
S-K under the Securities Act of 1933, as amended. The Registrant hereby
agrees to furnish a copy of any omitted schedules to the Commission upon
request.
|
II-7