SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement, as amended
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
DAKOTA MINING CORPORATION
(Name of Registrant as Specified In Its Charter)
DAKOTA MINING CORPORATION
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2) or
Item 22(a)(2) of Schedule 14A [ ] $500 per each party to the controversy
pursuant to Exchange Act Rule 14a-6(i)(3) [X] Fee computed on table below per
Exchange Act Rules 14a-6(i)(4) and 0-11
1) Title of each class of securities to which transaction applies Common
Shares, no par value per share, of Dakota Mining Corporation ("Dakota
Common Shares")
------------------------------------------------
2) Aggregate number of securities to which transaction applies: 15,621,984
shares of Dakota Common Shares (including shares of Dakota Common Shares
issuable (i) in the merger assuming the maximum number of shares of USMX
Common Stock to be exchanged and (ii) to Peak Oilfield Service Co. as
partial payment for construction services.
------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 .$1.125 (based on the average of the High and low
prices on April 18, 1997 as reported on the American Stock Exchange of the
Dakota Common Shares
------------------------------------------------
<PAGE>
4) Proposed maximum aggregate value of transaction:
$17,574,732.00
------------------------------------------------
5) Total fee paid: $6,595.05
------------------------------------------------
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $6,595.05
------------------------------------------------
2) Form, Schedule or Registration State No.: Registration Statement S-4 (File
No. 333-23453)
------------------------------------------------
3) Filing Party: Dakota Mining Corporation
------------------------------------------------
4) Date Filed: March 17, 1997
------------------------------------------------
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement, as amended
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
USMX, INC.
(Name of Registrant as Specified In Its Charter)
USMX, INC
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2) or
Item 22(a)(2) of Schedule 14A [ ] $500 per each party to the controversy
pursuant to Exchange Act Rule 14a-6(i)(3) [X] Fee computed on table below per
Exchange Act Rules 14a-6(i)(4) and 0-11
1) Title of each class of securities to which transaction applies Common
Shares, no par value per share, of Dakota Mining Corporation ("Dakota
Common Shares")
------------------------------------------------
2) Aggregate number of securities to which transaction applies: 15,621,984
shares of Dakota Common Shares (including shares of Dakota Common Shares
issuable (i) in the merger assuming the maximum number of shares of USMX
Common Stock to be exchanged and (ii) to Peak Oilfield Service Co. as
partial payment for construction services.
------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 .$1.125 (based on the average of the High and low
prices on April 18, 1997 as reported on the American Stock Exchange of the
Dakota Common Shares
------------------------------------------------
<PAGE>
4) Proposed maximum aggregate value of transaction:
$17,574,732.00
------------------------------------------------
5) Total fee paid:
$6,595.05
------------------------------------------------
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $6,595.05
------------------------------------------------
2) Form, Schedule or Registration State No.: Registration Statement S-4 (File
No. 333-23453)
------------------------------------------------
3) Filing Party: Dakota Mining Corporation
------------------------------------------------
4) Date Filed: March 17, 1997
------------------------------------------------
<PAGE>
As filed with the Securities and Exchange Commission on April 23, 1997.
Registration No. 333-23453
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------------------------
Dakota Mining Corporation
(Exact name of Registrant as specified in its charter)
Canada 1040 84-1094683
(State or other jur (Primary Standard I (I.R.S. Employer
isdiction of ndustrial Identification
incorporation Classification number)
or organization) Code Number)
Robert R. Gilmore, Chief
410 Seventeenth Street, Suite Financial Officer
2450 410 Seventeenth Street,
Denver, Colorado 80202 Suite 2450
(303) 573-0221 Denver, Colorado 80202
(Address, including zip code, (303) 573-0221
and telephone number, (Name, address, including
including area code, of zip code, and telephone number,
Registrant's principal including area code, of
executive office) agent for service of process)
Copies to:
Richard F. Mauro, Esq. Robert M. Bearman, Esq.
Parcel, Mauro, Hultin & Spaans Bearman Talesnick & Clowdus
tra, P.C. Professional Corporation
1801 California Street, Suite 1200 17th Street, Suite 2600
3600 Denver, Colorado 80202
Denver, Colorado 80202 (303) 572-6500
(303) 292-6400
Approximate date of commencement of proposed sale to the public: Upon
consummation of the transactions contemplated under the Agreement and Plan of
Merger (the "Merger Agreement") described in the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement.
-----------------------------------
If the only 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. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Titles of each c Amount to maximum maximum Amount of
lass of be offering aggregate registration
securities to be registered price per offering fee (2)
registered share (1) price
Common Shares, no
no nominal
or par value(3) 15,621,984 $1.125 $17,574,732 $5,325.67(4)
(See footnotes on the following page)
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 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
(1) Pursuant to Rule 457(c) of the rules and regulations promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), the proposed
maximum offering price per share is the average of the high and low prices as
quoted on The American Stock Exchange on April 18, 1997.
(2) Calculated pursuant to Section 457(c) of the Securities Act.
(3) Upon consummation of the transactions contemplated under the Merger
Agreement, approximately 14,712,893 of these shares will be issued to holders
of Common Stock, par value $.001 per share, of USMX, Inc. ("USMX Common
Stock") as of April 16, 1997. The remaining 909,091 shares will be issuable to
Peak Oilfield Service Co. ("Peak") in exchange for 1,000,000 USMX Common Stock
issuable by USMX to Peak upon finalization of a Settlement Agreement to be
executed upon USMX Shareholder approval of the Merger. The USMX Common Stock
will be issued to Peak as partial payment for construction services provided
to the Illinois Creek Project.
(4) In its initial filing of this Registration Statement, the Registrant
registered 15,828,121 shares of its Common Stock and paid a registration fee
of $6,595.05, based on a proposed per share maximum offering price of $1.375
using a March 14, 1997 date calculated pursuant to Rule 457(c).
<PAGE>
DAKOTA MINING CORPORATION
Cross-Reference Sheet Between Items in
Form S-4 and the Joint Proxy/Prospectus Pursuant to
Item 501(b) of Regulation S-K
Item No. Form S-4 Caption Heading in Joint Proxy
Statement/Prospectus
Item 1 Forepart of Registration Outside Cover Page
Statement and Outside Front
Cover Page of Prospectus
Item 2 Inside Front and Outside Back Inside Front Cover Page; Available
Cover Pages of Prospectus Information; Enforceability of
Certain Civil Liabilities; Table
of Contents
Item 3 Risk Factors, Ratio of Summary; Risk Factors;
Earnings to Fixed Charges and Capitalization and Description of
Other Information Dakota Securities; Description of
USMX Capital Stock
Item 4 Terms of the Transaction Summary; The Merger; Terms of the
Merger; United States Federal
Income Tax Considerations of the
Merger; Anticipated Accounting
Treatment; Resale Restrictions;
Regulatory Matters; Management and
Operations after the Merger
Item 5 Pro Forma Financial Selected Pro Form Consolidated
Information Financial Information of Dakota
Corporation
Item 6 Material Contacts with the The Merger
Company Being Acquired
Item 7 Additional Information Not Applicable
Required for Reoffering by
Persons and Parties Deemed to
Be Underwriters
Item 8 Interests of Named Experts Legal Matters; Experts
and Counsel
Item 9 Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act
Liabilities
Item 10 Information with Respect to S- Not Applicable
3 Registrants
Item 11 Incorporation of Certain Not Applicable
Information by Reference
Item 12 Information with Respect to S- Not Applicable
2 or S-3 Registrants
Item 13 Incorporation of Certain Not Applicable
Information by Reference
Item 14 Information with Respect to Summary; Business and Properties of
Registrants Other Than S-3 or Dakota; Dakota Management's
S-2 Registrants Discussion and Analysis of
Financial Condition and Results of
Operations; Capitalization and
Description of Dakota Securities;
Dakota Financial Statements; Dakota
Selected Consolidated Financial
Information
<PAGE>
Item 15 Information with Respect to S- Not Applicable
3 Companies
Item 16 Information with Respect to S- Not Applicable
2 or S-3 Companies
Item 17 Information with Respect to Summary; USMX Security Ownership
Companies Other Than S-3 or S- of Certain Beneficial Owners; USMX
2 Companies Summary Consolidated Financial
Information; USMX Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business and
Properties of USMX; Description of
USMX Capital Stock
Item 18 Information if Proxies, Dakota Annual and Special Meeting;
Consents or Authorizations Dakota Management; Dakota Security
are to be Solicited Ownership of Certain Beneficial
Owners; Dakota Certain Relationships
and Related Transactions;
Capitalization and Description of
Dakota Securities; The USMX Annual
Meeting; USMX Security Ownership of
Certain Beneficial Owners; USMX
Certain Relationships and Related
Transactions; Description of USMX
Capital Stock
Item 19 Information if Proxies, Not Applicable
Consents or Authorizations
are not to be Solicited or in
an Exchange Offer
<PAGE>
LETTER TO SHAREHOLDERS OF DAKOTA MINING CORPORATION
April 29, 1997
Dear Shareholder:
An annual and special Meeting of shareholders of Dakota Mining
Corporation ("Dakota") will be held on May 29 1997, at 8:00 a.m., local time, at
the Royal York Hotel, 100 Front Street West, Toronto, Ontario for the purpose of
voting on the approval and adoption of an agreement and plan of merger (the
"Merger Agreement") dated February 5, 1997, as amended April 21, 1997, among
Dakota, Dakota Merger Corporation ("Merger Corp."), a wholly-owned subsidiary of
Dakota, and USMX, Inc. ("USMX"), including the issuance of common shares of
Dakota to effect the merger, and all other matters properly coming before an
annual general meeting. If the merger contemplated by the Merger Agreement is
consummated, Merger Corp. will be merged with and into USMX and USMX, as the
surviving corporation, will become a wholly-owned subsidiary of Dakota. Each 1.1
outstanding shares of common stock of USMX will be converted into one Dakota
Common Share.
Details of the merger and other important information are set forth in
the accompanying Joint Proxy Statement/Prospectus, which you are urged to read
carefully. A copy of the Merger Agreement is attached as Appendix A to the
accompanying Joint Proxy Statement/Prospectus.
Your Board of Directors has carefully reviewed and considered the terms
and conditions of the Merger Agreement. In addition, the Board of Directors has
received the opinion of its financial adviser, Canaccord Capital Corporation,
that the Merger is fair to the shareholders of Dakota from a financial point of
view.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER.
Only holders of Dakota Common Shares of record as of the close of
business on April 17, 1997, have the right to receive notice of and to vote at
the meeting.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ENVELOPE PROVIDED AS SOON AS POSSIBLE. IF YOU ATTEND THE MEETING IN PERSON, YOU
MAY WITHDRAW YOUR PROXY AND VOTE YOUR SHARES. THE BOARD OF DIRECTORS OF DAKOTA
RECOMMENDS THAT YOU MARK YOUR PROXY IN FAVOR OF APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND MERGER.
Sincerely,
DAKOTA MINING CORPORATION
ALAN R. BELL
President and Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
OF DAKOTA MINING CORPORATION
To Be Held May 29, 1997
To the Shareholders of Dakota Mining Corporation:
NOTICE IS HEREBY GIVEN that an annual and special meeting (the "Dakota
Meeting") of the shareholders of Dakota Mining Corporation ("Dakota") will be
held on May 29, 1997, at the Royal York Hotel, 100 Front Street West, Toronto,
Ontario commencing at 8:00 a.m., local time, for the following purposes:
1. To consider and to approve and adopt the agreement and plan of merger
dated February 5, 1997, as amended April 21, 1997 (the "Merger
Agreement") among Dakota, Dakota Merger Corporation and USMX, Inc.
("USMX"), and to approve the transactions contemplated thereby,
including the issuance of additional common shares in the capital of
Dakota ("Dakota Common Shares"). A copy of the Merger Agreement is
attached as Appendix A to the accompanying Joint Proxy
Statement/Prospectus.
2. To consider and to approve a resolution to ratify an amendment to
Dakota's Share Incentive Plan increasing the number of Dakota Common
Shares issuable thereunder from 3,000,000 to 6,000,000.
3. To approve the issuance of up to 4,884,550 Dakota Common Shares
issuable upon conversion of Debentures issuable upon the exercise of
outstanding Series B Special Warrants of Dakota.
4. To elect directors to the Board of Directors of Dakota.
5. To appoint, and approve the remuneration of, auditors for Dakota.
6. To transact such other business as may properly come before the Dakota
Meeting or any adjournment thereof.
Only those shareholders of record at the close of business on April 17,
1997 will be entitled to notice of, and to vote at, the Dakota Meeting or any
adjournment thereof, except to the extent that a person has transferred Dakota
Common Shares after that date and the new holder of such shares establishes
proper ownership and requests, not later than 10 days before the Dakota Meeting,
to be included in the list of shareholders eligible to vote at the Dakota
Meeting.
THE BOARD OF DIRECTORS OF DAKOTA UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE DAKOTA
MEETING. Proxies are revocable at any time prior to the time they are voted and
shareholders who are present at the Dakota Meeting may withdraw their proxies
and vote in person if they so desire.
Denver, Colorado.
DATED April 29, 1997.
By Order of the Board of Directors
DAKOTA MINING CORPORATION
ROBERT R. GILMORE
Vice President, Finance, Chief Financial
Officer and Secretary
<PAGE>
LETTER TO STOCKHOLDERS OF USMX, INC.
April 29, 1997
Dear Stockholder:
An annual meeting of stockholders of USMX, Inc. ("USMX") will be held
on May 27, 1997, at 9:00 a.m., local time, in Denver, Colorado (the "USMX
Meeting").
At the USMX Meeting, you will be asked to approve certain matters
related to an agreement and plan of merger (the "Merger Agreement") dated
February 5, 1997 as amended April 21, 1997, among Dakota Mining Corporation
("Dakota"), Dakota Merger Corporation ("Merger Corp."), a wholly-owned
subsidiary of Dakota, and USMX. Upon completion of the merger of Merger Corp.
with and into USMX, USMX, as the surviving corporation, will become a
wholly-owned subsidiary of Dakota. Pursuant to the terms of the Merger
Agreement, each 1.1 outstanding shares of USMX common stock will be converted
into one common share of Dakota. You will also be asked to approve an agreement
regarding the sale of USMX's royalty interest in the Montana Tunnels Mine to
Pegasus Gold Corporation (the "Montana Tunnels Royalty Agreement").
The Board of Directors of USMX negotiated the terms of the Merger
Agreement by taking into consideration a number of factors, including USMX's and
Dakota's recent financial results, current financial conditions, future
prospects and synergies. Newcrest Capital Inc., USMX's financial advisor, has
provided the Board of Directors with its opinion that the consideration to be
received by USMX stockholders in the Merger is fair from a financial point of
view.
A Notice of Meeting and a Joint Proxy Statement/Prospectus containing
detailed information accompany this letter. The Merger Agreement and Montana
Tunnels Property Agreement are attached as Appendix A and Appendix F,
respectively, to the Joint Proxy Statement/Prospectus. We urge you to read this
material carefully.
THE BOARD OF DIRECTORS OF USMX HAS DETERMINED THAT THE MERGER AND SALE
OF THE MONTANA TUNNELS ROYALTY INTEREST ARE FAIR TO AND IN THE BEST INTERESTS OF
THE HOLDERS OF SHARES OF USMX COMMON STOCK. ACCORDINGLY, THE BOARD RECOMMENDS
THAT YOU VOTE FOR BOTH PROPOSALS.
If the Merger Agreement is approved and the merger is consummated, you
will be sent a letter of transmittal with instructions for surrendering your
certificates representing shares of USMX common stock. Please do not send your
share certificates until you receive these materials.
Your vote is very important, regardless of the number of shares you
own. In order for the merger to proceed, the Merger Agreement must be approved
by the holders of at least a majority of the outstanding shares of common stock
of USMX entitled to vote. Consequently, a failure to vote or an abstention will
have the same effect as a vote against the Merger Agreement. On behalf of the
Board of Directors, I urge you to mark, date, sign and return the enclosed Proxy
as soon as possible, regardless of whether you plan to attend the meeting.
Sincerely,
USMX, INC.
Gregory Pusey
President and Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS OF USMX, INC.
To Be Held May 27, 1997
To the Stockholders of USMX, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting (the "USMX Meeting") of
the stockholders of USMX, Inc. ("USMX") will be held on May 27, 1997, at the
Westin Tabor Center, 1672 Lawrence Street, Denver, Colorado, commencing at 9:00
a.m. local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
agreement and plan of merger dated February 5, 1997, as amended April
21, 1997, (the "Merger Agreement") among Dakota Mining Corporation,
Dakota Merger Corporation and USMX and to approve the transactions
contemplated thereby. A copy of the Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus.
2. To consider and vote upon a proposal to approve and adopt the
agreement dated March 17, 1997 (the "Montana Tunnels Royalty
Agreement") among USMX, USMX of Montana, Inc. and Pegasus Gold
Corporation and to approve the sale of the royalty interest in the
Montana Tunnels Mine contemplated thereby. A copy of the Montana
Tunnels Royalty Agreement is attached as Appendix F to the
accompanying Joint Proxy Statement/Prospectus.
3. To elect two directors to Group III of the Board of Directors of USMX.
4. To transact such other business as may properly come before the USMX
Meeting or any adjournment thereof.
Only those stockholders of record at the close of business on April 16,
1997 will be entitled to notice of and to vote at the USMX Meeting or any
adjournments thereof.
THE BOARD OF DIRECTORS OF USMX UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MONTANA TUNNELS
ROYALTY AGREEMENT.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY, WHICH IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF USMX, AS
SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE USMX MEETING.
Proxies are revocable at any time prior to the time they are voted and
stockholders who are present at the meeting may withdraw their proxies and vote
in person if they so desire.
DATED April 29, 1997.
By Order of the Board of Directors USMX, INC.
Gregory Pusey
President and Chief Executive Officer
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 29, 1997
DAKOTA MINING CORPORATION
AND
USMX, INC.
MANAGEMENT INFORMATION CIRCULAR AND JOINT PROXY STATEMENT
----------------------------
DAKOTA MINING CORPORATION
PROSPECTUS
----------------------------
This Joint Proxy Statement/Prospectus and Management Information
Circular ("Joint Proxy Statement/Prospectus") is being furnished to shareholders
of Dakota Mining Corporation, a corporation organized pursuant to the laws of
Canada ("Dakota"), and to stockholders of USMX, Inc., a Delaware corporation
("USMX"), in connection with the solicitation of proxies by the Board of
Directors of each corporation for use at the Annual and Special Meeting of
Shareholders of Dakota (the "Dakota Meeting") and the Annual Meeting of
Stockholders of USMX (the "USMX Meeting"), in each case including any
adjournments or postponements thereof. The USMX Meeting is scheduled for May 27,
1997. The Dakota Meeting is scheduled for May 29, 1997. This Joint Proxy
Statement/Prospectus relates primarily to the proposed merger (the "Merger") of
Dakota Merger Corporation, a Delaware corporation and a wholly owned subsidiary
of Dakota ("Merger Corp."), with and into USMX pursuant to the Agreement and
Plan of Merger, dated February 5, 1997, as amended April 21, 1997, (the "Merger
Agreement"), among Dakota, Merger Corp. and USMX, with USMX, as the surviving
corporation in the Merger, to become a wholly owned subsidiary of Dakota.
If the Merger Agreement is approved by the shareholders of Dakota and
USMX, and the other conditions specified in the Merger Agreement are satisfied
or waived, each 1.1 outstanding shares of USMX Common Stock will be converted
into one Dakota Common Share. This Joint Proxy Statement/Prospectus constitutes
a prospectus of Dakota with respect to up to 15,621,984 Dakota Common Shares
issuable to USMX stockholders in the Merger pursuant to the Merger Agreement or
upon exercise of certain stock options of USMX which, pursuant to the Merger
Agreement and the terms of the related stock option plans, following the Merger,
will constitute options to purchase Dakota Common Shares.
The Dakota Common Shares are traded on the Toronto Stock Exchange
("TSE"), the American Stock Exchange ("AMEX") and the Berlin Stock Exchange
("BSE"). USMX Common Stock is traded on The Nasdaq Stock Market ("Nasdaq") and
the TSE.
For a description of certain factors that should be considered by
shareholders of Dakota and USMX, see "Risk Factors on page __."
All information in this Joint Proxy Statement/Prospectus concerning
Dakota has been furnished by Dakota, and all information in this Joint Proxy
Statement/Prospectus concerning USMX has been furnished by USMX.
Certain capitalized terms used herein have the meanings ascribed to
such terms under the heading "General Glossary on page __." Unless otherwise
noted, all references to currency herein are to United States dollars.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE U.S. SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED ON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is April 29, 1997,
and it is first being mailed to the shareholders of Dakota and USMX on or about
May 1, 1997.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
AVAILABLE INFORMATION.........................................................................................- 1 -
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES...................................................................- 1 -
SUMMARY .....................................................................................................- 2 -
The Corporations.....................................................................................- 2 -
Meetings of Dakota and USMX..........................................................................- 2 -
Proposed Merger......................................................................................- 4 -
Summary of Pro Forma Financial Data..................................................................- 9 -
Comparative Per Share Financial Information.........................................................- 10 -
RISK FACTORS.................................................................................................- 11 -
General Risks Related to the Mining Industry........................................................- 11 -
Specific Risks Related to Dakota....................................................................- 14 -
Specific Risks Related to USMX......................................................................- 15 -
Risks Related to the Merger.........................................................................- 19 -
CURRENCY AND GOLD PRICES.....................................................................................- 20 -
THE MERGER...................................................................................................- 21 -
General ...........................................................................................- 21 -
Background to the Merger............................................................................- 21 -
Dakota's Reasons for the Merger and Board of Directors' Recommendation..............................- 24 -
Fairness Opinion of Canaccord Capital Corporation...................................................- 26 -
USMX's Reasons for the Merger and Board of Directors' Recommendation................................- 30 -
Fairness Opinion of Newcrest Capital, Inc...........................................................- 32 -
TERMS OF THE MERGER..........................................................................................- 34 -
Consequences and Effective Time of Merger...........................................................- 35 -
Conversion of USMX Common Stock.....................................................................- 35 -
Conversion of USMX Options..........................................................................- 35 -
Exchange of Certificates............................................................................- 35 -
Conditions to the Merger............................................................................- 36 -
Termination of the Merger Agreement.................................................................- 37 -
Shareholder Approvals...............................................................................- 37 -
Representations, Warranties and Covenants under the Merger Agreement................................- 37 -
Other Agreements....................................................................................- 39 -
Interests of Certain Persons in the Merger..........................................................- 41 -
Comparison of Rights of Holders of Shares of USMX Common Stock Under Delaware and Canadian Law
..........................................................................................- 42 -
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE MERGER................................................- 47 -
Tax Free Merger.....................................................................................- 47 -
Certain United States Federal Income Tax Consequences of USMX's U.S. Stockholders Becoming Holders
of Dakota Common Shares....................................................................- 48 -
U.S. Holders........................................................................................- 48 -
- i -
<PAGE>
Certain U.S. Shareholder Filing Requirements........................................................- 48 -
Distributions on Dakota Common Shares .............................................................- 48 -
Foreign Tax Credit..................................................................................- 49 -
Disposition of Dakota Common Shares.................................................................- 49 -
Other Considerations................................................................................- 49 -
Certain Limitations on Net Operating Losses.........................................................- 50 -
Certain Non-US Shareholders.........................................................................- 50 -
ANTICIPATED ACCOUNTING TREATMENT.............................................................................- 51 -
RESALE RESTRICTIONS..........................................................................................- 51 -
REGULATORY MATTERS...........................................................................................- 51 -
MANAGEMENT AND OPERATIONS AFTER THE MERGER...................................................................- 52 -
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OF DAKOTA MINING CORPORATION........................................................................- 52 -
DAKOTA ANNUAL AND SPECIAL MEETING............................................................................- 61 -
Solicitation of Proxies.............................................................................- 61 -
Appointment and Revocation of Proxies...............................................................- 61 -
Voting of Proxies and Discretionary Authority.......................................................- 61 -
Voting Securities...................................................................................- 62 -
Approval Required...................................................................................- 62 -
Matters to be Addressed at the Dakota Meeting.......................................................- 63 -
Corporate Governance................................................................................- 68 -
Executive Officers..................................................................................- 70 -
Voting Commitments, Agreements or Understandings....................................................- 71 -
DAKOTA MANAGEMENT............................................................................................- 71 -
Executive Compensation..............................................................................- 71 -
Report on Executive Compensation....................................................................- 73 -
Directors' and Officers' Liability Insurance........................................................- 76 -
DAKOTA SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.......................................................- 76 -
DAKOTA SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE...............................................- 78 -
DAKOTA CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................- 78 -
Interests Of Management And Others In Material Transactions.........................................- 78 -
Certain Transactions Relating To Principal Shareholders.............................................- 78 -
Indebtedness of Directors and Senior Officers.......................................................- 78 -
DAKOTA SELECTED CONSOLIDATED FINANCIAL INFORMATION...........................................................- 79 -
DAKOTA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................- 80 -
Liquidity and Capital Resources.....................................................................- 80 -
Results of Operations...............................................................................- 86 -
BUSINESS AND PROPERTIES OF DAKOTA............................................................................- 90 -
- ii -
<PAGE>
Corporate Structure.................................................................................- 91 -
Business of Dakota..................................................................................- 91 -
Properties..........................................................................................- 92 -
Gilt Edge Mine.............................................................................- 92 -
Golden Reward Mine.........................................................................- 95 -
Stibnite Mine..............................................................................- 97 -
CAPITALIZATION AND DESCRIPTION OF DAKOTA SECURITIES.........................................................- 100 -
Description of Dakota Share Capital and Debentures.................................................- 101 -
Common Shares.............................................................................- 101 -
Preference Shares.........................................................................- 101 -
Debentures................................................................................- 101 -
Trading History....................................................................................- 102 -
Dividend Policy....................................................................................- 102 -
THE USMX ANNUAL MEETING.....................................................................................- 103 -
Time, Date and Place of USMX Meeting...............................................................- 103 -
Record Date........................................................................................- 103 -
Business to be Conducted at USMX Meeting...........................................................- 103 -
Vote Required......................................................................................- 103 -
Voting Commitments, Agreements or Understandings...................................................- 103 -
Voting and Revocation of Proxies...................................................................- 104 -
Solicitation of Proxies............................................................................- 104 -
Election of Directors of USMX......................................................................- 104 -
Executive Compensation.............................................................................- 106 -
USMX SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS........................................................- 110 -
USMX SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................................................- 111 -
USMX CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................................- 111 -
USMX SUMMARY CONSOLIDATED FINANCIAL INFORMATION.............................................................- 114 -
USMX MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................- 116 -
Going Concern Uncertainty..........................................................................- 116 -
Liquidity and Capital Resources....................................................................- 116 -
Results of Operations..............................................................................- 119 -
Change in the Volume of Gold Sold and Selling Price of Gold........................................- 119 -
Change in Costs Applicable to Sales................................................................- 120 -
Cost of Mineral Properties Abandoned and Provisions for Impairments of Investments in Mineral Properties
- 120 -
Asset Dispositions and Gain on Sale of Common Stock................................................- 121 -
Other Costs and Expenses...........................................................................- 121 -
BUSINESS AND PROPERTIES OF USMX.............................................................................- 123 -
Introduction.......................................................................................- 123 -
History of Operations..............................................................................- 124 -
The Illinois Creek Project.........................................................................- 125 -
The Thunder Mountain Project.......................................................................- 129 -
Montana Tunnels....................................................................................- 132 -
- iii -
<PAGE>
Exploration........................................................................................- 132 -
Mexico ..........................................................................................- 133 -
Ecuador ..........................................................................................- 135 -
DESCRIPTION OF USMX CAPITAL STOCK...........................................................................- 135 -
Certain Potential Anti-Takeover Effects............................................................- 135 -
Trading History....................................................................................- 136 -
Dividend Policy....................................................................................- 136 -
LEGAL MATTERS...............................................................................................- 137 -
EXPERTS ...................................................................................................- 137 -
SHAREHOLDER PROPOSALS.......................................................................................- 137 -
ANNUAL REPORT ON FORM 10-K..................................................................................- 137 -
- iv -
</TABLE>
<PAGE>
AVAILABLE INFORMATION
Dakota and USMX are both subject to the informational requirements of
the Exchange Act, and, in accordance therewith, they each file reports and other
information with the SEC. Reports, proxy and information statements and other
information filed by Dakota or USMX may be inspected without charge at, and
copies of which may be obtained at prescribed rates from, the public reference
facilities of the SEC's principle office at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the SEC's regional offices at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. The SEC maintains a Web site (http://www.sec.gov) that contains
such materials that have been or will be filed by Dakota and USMX.
Dakota Common Shares are listed on the TSE, AMEX and the BSE. Reports,
proxy statements and other information concerning Dakota can be inspected at the
offices of the TSE at 2 First Canadian Place, Toronto, Ontario, Canada, MSX 1J2
and at the offices of AMEX at 86 Trinity Place, New York, New York 10006.
USMX Common Stock is traded on the TSE and quoted through Nasdaq.
Reports, proxy statements and other information concerning USMX can be inspected
at the offices of the TSE at the address given above and at the offices of the
National Association of Securities Dealers, 1735 K Street, N.W., Washington,
D.C. 2006.
Dakota has filed a Registration Statement on Form S-4 under the
Securities Act with the SEC covering the Dakota Common Shares to be issued
pursuant to the Merger Agreement. This Joint Proxy Statement/Prospectus, which
constitutes a part of the Registration Statement, does not contain all
information set forth in the Registration Statement, certain items of which are
contained as schedules and exhibits to the Registration Statement, as permitted
by the rules and regulations of the SEC. For further information, please refer
to the Registration Statement, including the exhibits thereto which may be
obtained from the SEC at its principle office in Washington, D.C. Statements
contained in this Joint Proxy Statement/Prospectus relating to the contents of
any contract or other document referred to herein are not necessarily complete,
and reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY DAKOTA OR USMX. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES, NOR DOES IT CONSTITUTE THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF DAKOTA OR USMX SINCE THE DATE HEREOF OR THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
Dakota is a corporation continued under the Canada Business
Corporations Act. Certain of Dakota's directors and officers and certain experts
named herein are residents of Canada, and all or a substantial portion of the
assets of such persons and some of the assets of Dakota are located outside the
United States. Consequently, it may be difficult for United States investors to
effect service of process within the United States upon such persons, or to
realize in the United States upon judgments rendered against Dakota or such
persons by courts of the United States predicated upon civil liabilities under
United States federal securities laws. There is doubt as to the enforceability
in Canada against Dakota or any of its directors and officers or experts named
herein who are not residents of the United States, in original actions or in
actions for enforcement of judgments rendered by courts of the United States, of
liabilities predicated solely on the United States federal securities laws.
- 1 -
<PAGE>
SUMMARY
This Joint Proxy Statement/Prospectus contains forward-looking
statements that involve risks and uncertainties. Dakota's and USMX's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the section entitled "Risk Factors" and elsewhere in this Joint
Proxy Statement/Prospectus. The following is a summary of certain information
contained elsewhere in this Joint Proxy Statement/Prospectus. Reference is made
to, and this summary is qualified in its entirety by, the more detailed
information contained in this Joint Proxy Statement/Prospectus and the
Appendices hereto. Unless otherwise defined herein, capitalized terms used in
this summary have the respective meanings ascribed to such terms under the
heading "General Glossary." In this Joint Proxy Statement/Prospectus, all dollar
amounts are expressed in United States dollars unless otherwise indicated.
SHAREHOLDERS ARE URGED TO READ THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO IN THEIR ENTIRETY.
The Corporations
Dakota Mining Dakota is engaged in the business of investing in and operating
precious metals mining Corporation projects, producing gold and silver and
exploring for, acquiring and developing precious metals properties. Its
principal executive offices are located at 410 Seventeenth Street, Suite
2450,Denver, Colorado 80202, (303) 573-0221.
USMX,Inc. USMX is engaged in the exploration for and development of
precious metals properties and the production of gold. Its
principal executive offices are located at 141 Union
Boulevard, Suite 100, Lakewood, Colorado 80228, (303)
985-4665.
Meetings of Dakota and USMX
Dakota Meeting The Dakota Meeting is scheduled to be held on May 29, 1997
at 8:00 a.m., local time, in the Royal York Hotel, 100 Front
Street West, Toronto, Ontario.
Purpose of Dakota The purpose of the Dakota Meeting is to consider and vote
Meeting on: (i) the approval andadoption of the Merger Agreement
providing for the merger of Merger Corp. with andinto USMX
and the issuance of Dakota Common Shares in connection
therewith; (ii) a resolution to ratify an amendment to
Dakota's Share Incentive Plan increasing the number of
Dakota Common Shares issuable thereunder from 3,000,000 to
6,000,000; (iii) a resolution to approve the issuance of up
to 4,884,550 Dakota Common Shares upon conversion of certain
Debentures issuable upon exercise of outstanding Series B
Special Warrants of Dakota; (iv) the election of directors;
(v) the appointment and remuneration of auditors of Dakota;
and (vi) the transaction of any other business as may
properly be brought before the Dakota Meeting or any
adjournment thereof.
Merger Vote The affirmative vote of a majority of the Dakota Common
Required at Shares voting by proxy or in person at the Dakota Meeting is
Dakota Meeting required to approve and adopt the Merger Agreement and the
issuance of Dakota Common Shares in connection with the
Merger.
As of the Dakota Record Date, directors and officers of
Dakota and its affiliates had the right to vote
approximately 3.16% of the issued and outstanding Dakota
Common Shares entitled to vote at the Dakota Meeting. There
are no agreements, commitments or understandings between
Dakota and its directors, officers or shareholders with
respect to voting at the Dakota Meeting.
- 2 -
<PAGE>
Dakota Record The Board of Directors of Dakota has fixed the closing of
Date; Shares business on April 17, 1997 as the record date for
Entitled to Vote determining holders of Dakota Common Shares entitled to
notice of and to vote at the Dakota Meeting. As of the
Dakota Record Date, 35,479,742 Dakota Common Shares were
issued and outstanding. Dakota Common Shares are the only
class of capital stock of Dakota issued and outstanding.
Each Dakota Shareholder of record as of the close of
business on the Dakota Record Date is entitled at the Dakota
Meeting to one vote for each Dakota Common Share held.
USMX Meeting The USMX Meeting is scheduled to be held on May 27,
1997 at 9:00 a.m., local time, in Denver, Colorado.
Purpose of USMX At the USMX Meeting, USMX Stockholders will be asked to
Meeting consider and vote on (i) the approval and adoption of the
Merger Agreement and the transactions contemplated thereby;
(ii) the approval and adoption of the Montana Tunnels
Royalty Agreement and the transactions contemplated thereby;
(iii) the election of directors, and (iv) the transaction of
any other business as may properly be brought before the
USMX Meeting or any adjournments thereof.
Merger Vote The affirmative vote of a majority of the issued and
Required at outstanding shares of USMX Common Stock is required to
USMX Meeting abstentions approve and adopt the Merger Agreement. As a
result, , failures to vote and broker non-votes will have
the same effect as votes against the Merger Agreement.
As of the USMX Record Date, directors and officers of USMX
and its affiliates had the right to vote approximately 34.4%
of the outstanding shares of USMX Common Stock entitled to
vote at the USMX Meeting. Such voting rights include
approximately 29.8% of the outstanding shares of USMX which
are held by Pegasus Gold and can be considered to be held
beneficially by two directors of USMX. There are no
agreements, commitments or understandings between USMX and
its directors, officers or, except as set forth below,
stockholders with respect to voting at the USMX Meeting.
Pegasus Gold Pegasus Gold, the owner of approximately 29.8% of the
Support Agreement outstanding shares of USMX Common Stock, has entered into an
agreement with Dakota and USMX pursuant to which Pegasus
Gold has agreed to vote in favor of the Merger, subject to
the conditions set forth therein.
USMX Record Date; The Board of Directors of USMX has fixed the close of
Shares Entitled business on April 16, 1997 for the determination of USMX
to Vote Stockholders entitled to notice of and to vote at the USMX
Meeting. As of the USMX Record Date there were 16,184,182
shares of USMX Common Stock issued and outstanding.
Transfer and Montreal Trust Company of Canada is the transfer agent and
Exchange Agents registrar in respect of the Dakota Common Shares. Montreal
Trust Company of Canada will also act as the Exchange Agent
with respect to exchange of shares of USMX Common Stock for
Dakota Common Shares in connection with the Merger. American
Securities Transfer Inc. will act as the transfer agent with
respect to the USMX Meeting.
- 3 -
<PAGE>
Proposed Merger
Terms of the At the Effective Time, Merger Corp. will merge with and into
Merger USMX, and USMX will survive the Merger as a wholly-owned
subsidiary of Dakota. At the Effective Time each 1.1
outstanding shares of USMX Common Stock will be converted
into one Dakota Common Share. With respect to outstanding
shares of USMX Common Stock at the Effective Time, no
fractional Dakota Common Shares will be issued; provided
however, except with respect to derivative securities for
which no consideration shall be given for fractional shares
to be issued upon exercise thereof, if the conversion of
USMX Common Stock would result in any USMX Stockholder being
entitled to a fractional Dakota Common Share, such USMX
Stockholder will receive the next higher number of Dakota
Common Shares. All shares of USMX Common Stock owned at the
Effective Time by USMX as treasury stock or by any member of
the USMX Group or the Dakota Group will be canceled pursuant
to the terms of the Merger Agreement.
Each outstanding option to purchase USMX Common Stock will
be converted into an option to acquire Dakota Common Shares
on the basis of one Dakota Common Share for each 1.1 shares
of USMX Common Stock underlying each option.
Interests of In considering the recommendation of the USMX Board of
Certain Directors with respect to the Merger Agreement, USMX
Persons in the Stockholders should be aware that certain members of USMX
Merger management and the USMX Board of Directors have certain
interests in the Merger that are in addition to the
interests of USMX Stockholders generally. See "Terms of the
Merger - Interests of Certain Persons in the Merger."
Closing and The Closing of the Merger will take place as soon as
Effective Time possible after the later of the USMX Meeting and Dakota
Meeting has been held, provided that certain conditions to
the Merger set forth in the Merger Agreement are satisfied
or, where permissible, waived. The Merger will become
effective upon the filing of a certificate of merger with
the Secretary of State of the State of Delaware in
accordance with the DGCL. Such filing will be made as soon
as practicable after the approval of the Merger at the
Dakota Meeting and the USMX Meeting.
Conditions of the The respective obligations of USMX, Dakota, and Merger Corp.
Merger and to consummate the Merger are subject to the fulfilment or
Termination waiver (where permissible) of certain conditions set forth
in the Merger Agreement. See "Terms of the
Merger-Conditions to the Merger."
The Merger Agreement is subject to termination at the option
of either USMX or Dakota if the Effective Time has not
occurred at or before May 31, 1997, and prior to such time
upon the occurrence of certain events. See "Terms of the
Merger-Termination of the Merger Agreement."
- 4 -
<PAGE>
Recommendations of The respective Boards of Directors of
Dakota and USMX believe the terms of the the Boards of
Directors Merger are fair and reasonable to, and in the best
interests of, their respective shareholders and have
unanimously approved the Merger Agreement and the
transactions contemplated thereby. The Board of Directors of
Dakota unanimously recommends that Dakota Shareholders vote
FOR approval and adoption of the Merger Agreement and the
issuance of Dakota Common Shares as contemplated therein.
The Board of Directors of USMX unanimously recommends that
USMX Stockholders vote FOR approval and adoption of the
Merger Agreement and the transactions contemplated thereby.
The Dakota and USMX Boards of Directors' recommendations are
based upon a number of factors described in this Joint Proxy
Statement/Prospectus. In particular, see "The Merger
Dakota's Reasons for the Merger and Board of Directors'
Recommendation" and "The Merger - USMX's Reasons for the
Merger and Board of Directors' Recommendation".
Fairness Opinions Among other factors considered by the Dakota Board of
Directors in approving the Merger was the opinion of
Canaccord. Canaccord delivered a written opinion on March
14, 1997 to the Dakota Board of Directors and Dakota
Shareholders to the effect that the Merger is fair, from a
financial point of view, to Dakota shareholders. A copy of
the Canaccord opinion is attached to this Joint Proxy
Statement/Prospectus as Appendix C. The attached opinion
sets forth the assumptions made, matters considered, the
scope of limitations of the review undertaken and procedures
followed by Canaccord and should be read in its entirety.
USMX engaged Newcrest to deliver a written opinion to the
USMX Board of Directors and USMX Stockholders on the
fairness of the Merger from a financial point of view.
Newcrest delivered a written opinion on March 14, 1997 to
the USMX Board of Directors to the effect that the
consideration to be paid to holders of shares of USMX Common
Stock in connection with the Merger is fair to USMX
stockholders from a financial point of view, based upon and
subject to the matters set forth in its opinion. The full
text of the Newcrest opinion, which sets forth the
assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix D to this Joint
Proxy Statement/Prospectus. USMX stockholders are urged to
read the Newcrest opinion in its entirety.
Exchange of Share Following the Effective Date of the Merger, holders of
Certificates shares of USMX Common Stock will receive a transmittal
letter from the Exchange Agent instructing them on the
submission of their USMX Common Stock certificates in
exchange for certificates representing Dakota Common Shares.
USMX Stockholders should not surrender their certificates
for new certificates representing Dakota Common Shares until
such time.
- 5 -
<PAGE>
United States Dakota and USMX have received an opinion from Coopers &
Federal Income Lybrand L.L.P. that the Merger will, under current law, be
Tax treated as a tax-free reorganization under the Code for
Considerations United States federal income tax purposes. Accordingly,
although not entirely free from doubt, U.S. Stockholders of
USMX who exchange all of their shares of USMX Common Stock
solely for Dakota Common Shares should not recognize any
gain or loss, provided that USMX Stockholders who are U.S.
Persons and who will own or be deemed to own 5% or more of
Dakota after the Merger will be required to enter into a
gain recognition agreement with the IRS in order to further
satisfy the requirements for their own tax-free treatment in
the Merger. In addition, USMX Stockholders who are U.S.
Persons will be required to file certain notices with the
IRS in order to avoid incurring adverse tax consequences
including penalties. Neither Dakota nor USMX will recognize
gain or loss as a result of the Merger. In rendering such
opinion, Coopers & Lybrand LLP has relied upon certain
assumptions, conditions, and qualifications as set forth in
their opinion to Dakota and USMX. Each USMX Stockholder
should consult his or her tax advisor as to the specific tax
consequences of the Merger to him or her, including the
application of federal, state, local and other tax laws and
possible effects of changes in federal or other tax laws.
See "United States Federal Income Tax Considerations of the
Merger-Tax Free Merger" and "Risk Factors-Risks Related to
the Merger-United States Federal Income Tax Treatment of the
Merger."
Stock Exchange Dakota will apply to list the Dakota Common Shares issued in
Listings Resale connection with the Merger on the TSE, AMEX and the BSE. All
Restrictions Dakota Common Shares received in connection with the Merger
by USMX Stockholders will be freely transferable under
United States law, except that Dakota Common Shares received
by persons who are deemed to be "affiliates" (as such term
is defined for purposes of Rule 145 under the Securities
Act) of USMX may be resold by such persons only in certain
permitted circumstances. To the extent necessary, Dakota
will apply for rulings or orders of securities regulatory
authorities of Canada to permit resale of such shares in
Canada without restriction by a shareholder other than a
"control person" (as such term is defined under applicable
Canadian securities legislation), provided that no unusual
effort is made to prepare the market for any such resale or
to create demand for the securities and no extraordinary
commission or consideration is paid in respect thereof. See
"Terms of the Merger- Interests of Certain Persons in the
Merger-Resale of Dakota Common Shares."
Comparison of See "Terms of the Merger - Comparison of Rights of Holders
Rights of Holders of Shares of USMX Common Stock under Delaware and Canadian
Law" for a summary of the material differences between the
rights of holders of shares of USMX Common Stock and Dakota
Common Shares.
No Dissenters' Holders of Dakota Common Shares and holders of USMX Common
Rights Stock will not be entitled to any dissenters' or appraisal
rights under Canadian law or Delaware law, as the case may
be, as a result of the matters to be voted upon at the
Dakota Meeting or the USMX Meeting.
- 6 -
<PAGE>
Market Price and The Dakota Common Shares are listed for trading on the TSE
Share Exchange and AMEX under the symbol "DKT" and the BSE under the symbol
Ratio "DMC." On January 2, 1997, the day preceding the date of the
public announcement of the Merger, the closing sale price on
the TSE of Dakota Common Shares was Cdn.$1.96 per share and
on AMEX was US$1.63 per share. USMX Common Stock is listed
for trading on the TSE under the symbol "USM" and is quoted
through Nasdaq under the symbol "USMX." On January 2, 1997,
the day preceding the date of the public announcement of the
Merger, the closing sale price on Nasdaq was US$1.75 per
share. No TSE quote is furnished as the trading on that
exchange of USMX Common Stock has been limited and sporadic
in nature. In determining whether to approve the
transactions pursuant to the Merger Agreement, Dakota
Shareholders and USMX Stockholders should consider that the
price of the Dakota Common Shares at the Effective Time, as
well as the prices at the date of this Joint Proxy
Statement/Prospectus and at the date of the Dakota Meeting
or USMX Meeting, may vary as a result of changes in the
business, operations or prospects of Dakota or USMX, market
assessments of the likelihood that the Merger will be
consummated and the timing thereof, general market and
economic conditions and other factors. As the Effective Time
will occur after the Dakota Meeting and USMX Meeting, there
can be no assurance that the sale price of Dakota Common
Shares on the date of the Dakota Meeting or USMX Meeting
will be indicative of the sale price of Dakota Common Shares
at the Effective Time. The Effective Time will occur as soon
as practicable following the Dakota Meeting and the USMX
Meeting and the satisfaction or waiver of the other
conditions set forth in the Merger Agreement. See "Terms of
the Merger - Conditions to the Merger", "Capitalization and
Description of Dakota Securities-Trading History" and
"Description of USMX Capital Stock-Trading History."
Dakota Shareholders and USMX Stockholders should also
consider that the Share Exchange Ratio is a fixed ratio in
the Merger Agreement. As a result, the Share Exchange Ratio
will not be adjusted in the event of an increase or decrease
in the market price of either the Dakota Common Shares or
the USMX Common Stock, or both. The share exchange ratio is
one Dakota Common Share for each 1.1 outstanding shares of
USMX Common Stock.
Capitalization of Based on the number of Dakota Common Shares outstanding on
Dakota After the April 18, 1997 and the Share Exchange Ratio, on consummation
Merger of the Merger there will be approximately 51.0 million
Dakota Common Shares outstanding. The Dakota Common Shares
issued to stockholders of USMX pursuant to the Merger
Agreement will comprise approximately 30.3% of the total
number of Dakota Common Shares outstanding assuming all
vested options and conversion rights (other than "out of the
money" options and conversion rights and assuming no
conversion of the Debentures) are exercised (and
approximately 22.9% on a fully diluted basis). See
"Dakota-Capitalization and Description of Dakota
Securities."
- 7 -
<PAGE>
Financing Pursuant to an Agency Agreement dated as of February 5,
1997, Dakota sold by way of private placement 25,000 Special
Warrants, comprised of 16,119 Series A Special Warrants and
8,881 Series B Special Warrants, for net proceeds of
Cdn.$23.5 million (US$17.2 million). Such proceeds, less
U.S. $5 million which has been released to Dakota and
provided to USMX in the form of a line of credit (See "Terms
of the Merger-Other Agreements-$5,000,000 Loan Agreement")
are currently held in escrow pending completion of the
Merger, Dakota Shareholder approval of the issue of the
Dakota Common Shares ultimately underlying the Series B
Special Warrants and the filing of a prospectus in Canada in
respect of the Special Warrants and underlying securities.
The Special Warrants are exercisable for Cdn.$25 million
(US$18.25 million) aggregate principal amount of 7.5%
unsecured convertible debentures ("Debentures") of Dakota.
Each Cdn.$1,000 principal amount of Debentures is
convertible to 500 Dakota Common Shares, subject to
adjustment in certain circumstances. See "Dakota
Management's Discussion and Analysis of Financial Condition
and Results of Operations." The net proceeds realized by
Dakota from the sale of the Special Warrants will be
principally used to complete construction and commence
startup of USMX's Illinois Creek Mine, for development
drilling, repayment of $1.5 million of USMX's bank debt and
for general working capital purposes. At the Dakota Meeting,
Dakota Shareholders will be asked to approve the issuance of
the Series B Special Warrants.
Risk Factors For information concerning certain risk factors
that should be considered by prospective investors, see
"Risk Factors" commencing on page o.
<PAGE>
Summary of Pro Forma Financial Data
The following summary of unaudited pro forma consolidated financial
information of Dakota has been prepared in accordance with Canadian GAAP to
illustrate the estimated effect of the transactions contemplated by the Merger
Agreement and certain related transactions as if the transactions had been
completed on December 31, 1996 with respect to the balance sheet data and on
January 1, 1996 with respect to the statement of operations data. The Merger has
been accounted for using the purchase method of accounting. See "Pro Forma
Consolidated Financial Information of Dakota Mining Corporation" for the pro
forma financial statements and the assumptions related thereto in their
entirety.
<TABLE>
<CAPTION>
Summary of Dakota Pro Forma Consolidated Financial Information
($000's, except per share amounts)
(unaudited)
Balance Sheet Data: As at December 31, 1996
-------------------- -----------------------
Historical Pro forma
Dakota USMX (1) Consolidated
<S> <C> <C> <C>
Assets
Current assets................................ $ 9,361 $ 2,261 $ 27,253
Noncurrent assets............................. 22,208 47,894 75,041
------ ------ ------
31,569 50,155 102,294
====== ====== =======
Liabilities
Current liabilities........................... $ 8,355 $29,393 $ 23,102
Long-term liabilities......................... 9,755 4,221 30,792
Shareholders' equity
Share capital and other....................... 52,593 19,597 87,534
Accumulated deficit........................... (39,134) (3,056) (39,134)
------- ------ -------
$31,569 $50,155 $102,294
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Data: Year Ended December 31, 1996
--------------------------------------------
Historical Pro forma
Dakota USMX (1) Combined
<S> <C> <C> <C>
Revenue....................................... $24,556 $ -- $ 24,556
Loss before non-recurring charges or credits. (23,070) (3,302) (29,245)
Loss per common share
before non-recurring charges or credits...... (0.73) (0.22) (0.64)
Weighted average number of common shares
outstanding (in thousands)................. 31,405 15,285 47,027
<FN>
(1) The historical consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles. There are no material
differences between U.S. GAAP and Canadian GAAP with respect to USMX
financial information used to prepare the pro forma consolidated financial
information.
</FN>
</TABLE>
<PAGE>
Comparative Per Share Financial Information
The following tables present selected historical per common share data
for Dakota and USMX and pro forma data per share of Dakota Common Shares and
equivalent shares of USMX Common Stock. Based upon the terms of the Merger
Agreement and resulting attributes of the Merger, the pro forma data has been
prepared using the purchase method of accounting in accordance with Canadian
GAAP. This data should be read in conjunction with the financial statements and
other financial and pro forma financial information with respect to Dakota and
USMX included elsewhere herein.
Year Ended
December 31, 1996
Dakota
Historical
Net loss per Common Share......................................... $ (0.73)
Book value per Common Share (at period end)....................... $ 0.38
Pro Forma Combined:(1)
Net loss per Common Share............................................$ (0.64)
Book value of Common Share (at period end)........................ $ 0.95
USMX
Historical
Net loss per share of Common Stock................................ $ (0.22)
Book value per share of Common Stock (at period end).............. $ 1.02
Pro-Forma Equivalent:(2)
Net loss per share of Common Share...................................$ (0.58)
Book value per share of Common Share (at end of period)............. $ 0.86
(1)Based on pro forma combined data for Dakota and USMX after giving effect to
the Merger and related transactions at the beginning of the year for
purposes of determining net loss per common share and at the end of the
year for purposes of determining book value per share of Common Stock.
(2)The equivalent pro forma data for USMX was calculated by dividing the pro
forma combined Dakota per common share data by the Share Exchange Ratio of
1.1 shares of USMX Common Stock for one Dakota Common Share.
<PAGE>
RISK FACTORS
In evaluating the securities qualified hereunder, prospective investors
should consider the following factors among others which relate to Dakota and
USMX upon completion of the Merger. The following cautionary statements are made
pursuant to the United States Private Securities Litigation Reform Act of 1995
in order for Dakota and USMX to avail themselves of the "safe harbor" provisions
of the Act. The discussions and information in this Joint Proxy
Statement/Prospectus may contain both historical and forward-looking statements.
To the extent that this Joint Proxy Statement /Prospectus contains
forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of Dakota or USMX, please be advised that
Dakota's and USMX's actual financial conditions, operating results and business
performance may differ materially from that projected or estimated in
forward-looking statements. Dakota and USMX have attempted to identify, in
context, certain of the factors that they currently believe may cause actual
future results to differ from their current expectations. The differences may be
caused by a variety of factors, including but not limited to fluctuations in the
price of gold, adverse economic conditions, adverse government regulation, both
foreign and domestic, inadequate capital, unexpected costs, the imposition of
new, or the increase of existing, tariffs, lower revenues and net income than
forecasted, higher than anticipated labor costs, the possible acquisition of new
businesses that do not perform as anticipated, the possible fluctuation and
volatility of operating results and financial condition, inability to carry out
exploration and production plans, loss of key executives, changes in interest
rates, inflationary factors, and other specific risks that may be alluded to in
this Joint Proxy Statement/Prospectus or in other reports issued by Dakota or
USMX. Dakota and USMX caution the reader that this list of factors may not be
exhaustive.
General Risks Related to the Mining Industry
Nature of Mineral Exploration and Production. Exploration for and, if
warranted, production of minerals is highly speculative and involves greater
risks than many other businesses. Many exploration programs do not result in the
discovery of mineralization and any mineralization discovered may not be of
sufficient quantity or quality to be profitably mined. Uncertainties as to the
metallurgical amenability of any minerals discovered may not warrant the mining
of these minerals on the basis of available technology. Moreover, short-term
factors relating to the ore reserves, such as the need for orderly development
of ore bodies or the processing of new or different grades, may impair the
profitability of a mine in any particular accounting period. Mining operations
are also subject to a number of other hazards and risks such as encountering
unusual or unexpected formations, environmental pollution, industrial accidents,
rock movements and flooding, many of which cannot be insured against.
Project Development Risks. USMX and Dakota from time to time engage in
the development of new ore bodies. The ability of USMX and Dakota to sustain or
increase the present level of gold production is dependent in part on the
successful development of such new ore bodies and/or expansion of existing
mining operations. The economic feasibility of any such development project, and
all such projects collectively, is based on, among other things, estimates of
reserves, metallurgical recoveries, capital and operating costs of such projects
and future gold prices. Development projects are also subject to the successful
completion of feasibility studies, issuance of necessary permits and receipt of
adequate financing.
Development projects have no operating history upon which to base
estimates of future cash operating costs and capital requirements. In
particular, estimates of reserves, metal recoveries and cash operating costs are
to a large extent based on the interpretation of geologic data obtained from
drill holes and other sampling techniques and feasibility studies which derive
estimates of cash operating costs based on anticipated tonnage and grades of ore
to be mined and processed, the configuration of the ore body, expected recovery
rates of metals from the ore, comparable facility and equipment costs,
anticipated climate conditions and other factors. As a result, it is possible
that actual cash operating costs and economic returns of any and all development
projects may materially differ from the costs and returns initially estimated.
<PAGE>
Exploration. Mineral exploration, particularly for gold, is highly
speculative in nature, involves many risks and frequently is unsuccessful.
Dakota and USMX are seeking to expand reserves through exploration and
development at the Illinois Creek, Alaska and Thunder Mountain, Idaho properties
as well as through exploration in other parts of North America and in Latin
America. There can be no assurance that exploration efforts will result in the
discovery of gold mineralization. If reserves are developed, it may take a
number of years and substantial expenditures from the initial phases of drilling
until production is possible, during which time the economic feasibility of
production may change. No assurance can be given that the exploration programs
of Dakota and USMX will result in reserves.
Competition and Scarcity of Mineral Lands. Although many companies and
individuals are engaged in the mining business, including large established
mining companies, there is a limited supply of desirable mineral lands available
for claim staking, lease or other acquisition in the United States and other
areas where USMX and Dakota contemplate conducting exploration and/or production
activities. USMX and Dakota may be at a competitive disadvantage in acquiring
suitable mining properties as they must compete with other individuals and
companies, many of which have greater financial resources and larger technical
staffs than USMX or Dakota. As a result there can be no assurance USMX or Dakota
will be able to acquire attractive properties.
Government Regulation. Dakota's and USMX's mining operations are
subject to various laws and regulations concerning prospecting, developing,
production, exports, taxes, labor standards, occupational health, waste
disposal, toxic substances, environmental protection, mine safety and other
matters. Dakota and USMX seek to make good faith efforts to comply with all
applicable laws and regulations. Except as otherwise disclosed elsewhere in this
Prospectus, Dakota and USMX each believe that they are in substantial compliance
with all applicable material governmental regulations. Instances of
non-compliance or new laws or regulations governing operations and activities of
mining companies, however, could have a material adverse impact on the business
of Dakota and USMX.
Environmental Matters. Mining is subject to potential risks and
liabilities associated with pollution of the environment and the disposal of
waste products occurring as a result of mineral exploration and production.
Environmental liability may result from mining activities conducted by others
prior to Dakota's or USMX's ownership of a property. Insurance for environmental
risks (including potential liability for pollution or other hazards as a result
of the disposal of waste products occurring from exploration and production) is
not generally available at a reasonable price to companies within the industry.
To the extent Dakota and/or USMX is subject to environmental liabilities, the
payment of such liabilities would reduce funds otherwise available to the
companies and could have a material adverse effect on the companies.
In the context of environmental compliance and permitting, including
the approval of reclamation plans, Dakota and USMX must comply with standards,
laws and regulations which may entail greater or lesser costs and delays
depending on the nature of the activity to be permitted, constructed and
operated and how stringently the regulations are implemented by the applicable
regulatory authority. It is possible that the costs and delays associated with
compliance with such laws, regulations and permits could become such that a
company would not proceed with the development of a project or the operation or
further development of a mine. Except as otherwise disclosed elsewhere in this
Prospectus, Dakota and USMX each believe that their respective operations are in
substantial compliance with all applicable material environmental regulations.
However, laws, regulations and regulatory policies involving the protection and
remediation of the environment are constantly changing at all levels of
government and are generally becoming more restrictive and the costs imposed on
the development and operation of mineral properties are increasing as a result
of such changes. Dakota and USMX have made, and expect to make in the future,
significant expenditures to comply with such laws and regulations.
The Environmental Protection Agency ("EPA") continues the development of a solid
waste regulatory program specific to mining operations under the Resource
Conservation and Recovery Act ("RCRA"). Of particular concern to the mining
industry is a proposal by the EPA titled "Recommendation for a Regulatory
Program for Mining Waste and Materials Under Subtitle D of the Resource
Conservation and Recovery Act" ("Strawman II") which, if implemented, would
create a system of comprehensive federal regulation of the entire mine site.
Many of these requirements would be duplicative of existing state regulations.
Strawman II as currently proposed would regulate not only mine and mill
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<PAGE>
wastes but also numerous production facilities and processes which could limit
internal flexibility in operating a mine. To implement Strawman II as proposed,
the EPA must seek additional statutory authority, which is expected to be
requested in connection with Congress' reauthorization of RCRA.
Mining companies in the United States are also subject to regulations
under (i) the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") which regulates and establishes liability for the release
of hazardous substances and (ii) the Endangered Species Act ("ESA") which
identifies endangered species of plants and animals and regulates activities to
protect these species and their habitats. Revisions to CERCLA and ESA are being
considered by Congress; the impact on Dakota and USMX of these revisions is not
clear at this time. Environmental laws and regulations enacted and adopted in
the future may have a significant impact upon Dakota's and USMX's future
operations. Dakota and USMX cannot now accurately predict or estimate the impact
of any such future laws or regulations on its operations.
Mining Risks and Insurance. The business of gold mining is generally
subject to a number of risks and hazards, including environmental hazards,
industrial accidents, labor disputes, the encounter of unusual or unexpected
geological conditions, slope failures, changes in the regulatory environment and
natural phenomena such as inclement weather conditions, floods, blizzards and
earthquakes. Such occurrences could result in damage to, or destruction of,
mineral properties or production facilities, personal injury or death,
environmental damage, delays in mining, monetary losses and possible legal
liability. USMX and Dakota maintain insurance against risks that are typical in
the gold mining industry and in amounts that USMX and Dakota believe to be
reasonable, but which may not provide adequate coverage in certain unforeseen
circumstances. Insurance against certain risks (including certain liabilities
for environmental pollution or other hazards as a result of exploration and
production) is not generally available to USMX, Dakota or to other companies
within the industry.
Proposed Changes in Mining Laws. Several recent legislative
developments have affected or may in the future affect the cost of and the
ability of mining claimants to use the Mining Law of 1872, as amended, to
acquire and use federal lands for mining operations. Since October 1994, a
moratorium has been imposed on processing new patent applications for mining
claims. Also, since 1993, a rental or maintenance annual fee of $100 per claim
has been imposed by the Federal government on unpatented mining claims in lieu
of the prior requirement for annual assessment work. During the last several
Congressional sessions, bills have been repeatedly introduced in the U.S.
Congress which would supplant or radically alter the General Mining Law. As of
the end of 1996, no such bills had been passed. Such bills have proposed, among
other things, to permanently eliminate or greatly limit the right to a mineral
patent, impose royalties, and impose new federal reclamation, environmental
control and other restoration requirements. Recently, the Secretary of the
Interior directed the Bureau of Land Management to form a task force to prepare
and publish for public comment revisions to the hardrock mining surface
management regulations implemented in 1981. The Secretary suggested that such
revised regulations address implementation of a technology based standard in
conduct of hardrock mining, development of performance standards for hardrock
mining and reclamation, increasing regulation of operations of less than five
acres, and increasing coordination with state regulators. As of March 17, 1997,
no such bills have been passed or regulations proposed or promulgated. If
enacted or promulgated, such legislation or regulations could impair the ability
of Dakota to economically develop mineral resources on federal lands. The extent
of the changes, if any, which may be made by Congress to the General Mining Law
or by the Bureau of Land Management to the surface mining regulations is not
presently known and the potential impact on Dakota as a result of future
Congressional action is not presently determinable.
Need for Substantial Capital. The business of precious metals mining
requires very large capital expenditures in advance of anticipated revenues from
operations. There is no assurance that Dakota or USMX will be able to obtain all
of the financing that they require on acceptable terms and conditions.
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<PAGE>
Specific Risks Related to Dakota
Fluctuation in the Price of Gold. Because Dakota's revenues are or will
be derived primarily from the sale of gold, Dakota's earnings are directly
related to gold prices. Gold prices fluctuate widely and are affected by
numerous factors beyond Dakota's control, including expectations for inflation,
the relative exchange rate of the dollar, global and regional demand, political
and economic conditions, expectations for inflation and production costs in
major gold producing regions including South Africa and Russia. In addition,
gold prices have on occasion been subject to very rapid short-term changes due
to speculative activities of investors. Gold prices are also affected by
world-wide production levels, which have increased in recent years. Market price
fluctuations of gold may render uneconomic the mining of mineral deposits
containing relatively lower grades of mineralization. If the market price of
gold falls significantly below Dakota's production costs and remains at such a
level for any sustained period, Dakota will experience substantial cash losses,
may not be able to recover its investment in its properties, and may be required
to discontinue its operations. Only a portion of Dakota's expected gold
production is hedged in forward sales contracts.
Uncertainty of Title. Certain of Dakota's mining properties are
unpatented mining claims, and Dakota has only possessory title with respect to
such properties. The validity of unpatented mining claims is often uncertain and
may be contested. Although Dakota has attempted to acquire satisfactory title to
its properties, Dakota, in accordance with mining industry practices, has not
obtained title opinions and title insurance, with the attendant risk that title,
particularly on undeveloped properties, may be defective.
Lack of Profitability. Dakota's operating history has resulted in
losses from operations in each of its last five fiscal years. No assurance can
be given that Dakota will ever operate at a profit. While certain of Dakota's
mining properties may be operated at a profit during a given fiscal year,
Dakota's operations as a whole may be unprofitable due to exploration,
development, and operating costs on other properties. Other items that may
adversely effect profitability include selling expenses, general and
administrative costs, allowances for depreciation, depletion and amortization of
assets, and interest expense.
Working Capital and Financing Requirements. Dakota has a limited
working capital. If Dakota's continuing exploration activities indicate
economically minable properties now owned or hereafter acquired by Dakota,
Dakota will be required to expend potentially large sums to put such properties
into production. There can be no assurance that Dakota will be able to obtain
such additional funding.
Market Price of Dakota Shares. Assuming that all of the Dakota Common
Shares to be issued in respect to the Merger (including Common Shares issuable
upon the exercise of USMX stock options) are issued, a total of 16.3 million
additional Common Shares will be available for trading in the public market. The
increase in the number of Dakota Common Shares in the market and the possibility
of sales of such shares may have a depressive effect on the price of Dakota's
Common Shares. See "Capitalization and Description of Dakota Securities."
Dividend Policy. No dividends have been paid by Dakota to date. For the
foreseeable future, it is anticipated that Dakota will use earnings to finance
its growth and that dividends will not be paid to shareholders. See "Business of
Dakota Mining Corporation-Dividend Policy."
Joint Ventures. Some of the mines in which Dakota owns an interest are
operated through joint ventures with other mining companies. Any failure of such
other companies to meet their obligations to Dakota or to third parties could
have a material adverse effect on the joint ventures.
Environmental Matters. Reclamation plans which are approved by various
environmental regulatory authorities are subject to on-going review and
modification. Although Dakota believes that the reclamation plans developed and
implemented for its mine sites are reasonable under current conditions, any
future re-determination of reclamation conditions or requirements could
significantly increase Dakota's costs of implementation of such plans.
- 14 -
<PAGE>
Permitting Matters. The ultimate Anchor Hill open pit design
contemplates that approximately 37 acres of public lands will be disturbed,
principally for pit wall layback and waste removal. Accordingly, Dakota is
required to complete an Environmental Impact Statement (the "Gilt Edge EIS").
The Gilt Edge EIS, which has been underway since January 1994, was delayed in
1995 pending receipt of the state and county operating permits. Dakota now
expects to finalize the Gilt Edge EIS by the Spring of 1997 If, however, the
Gilt Edge EIS is not completed in a timely manner, Gilt Edge Mine operations
scheduled to commence in 1998 will be delayed.
Operations at Stibnite Mine after 1997 are subject to the completion of
an Environmental Impact Statement (the "Stibnite EIS"). Completion of the
Stibnite EIS was delayed during 1996 as a result of prioritizing completion of
the development of the Meadow Creek Plan. Dakota now expects the EIS to be
completed in the fall of 1997. If, however, the Stibnite EIS is not completed in
a timely manner, Stibnite Mine operations scheduled to commence in 1998 will be
delayed.
Royalties. Dakota's mining properties are subject to various royalty
and land payment agreements. Failure by Dakota to meet its payment obligations
under these agreements could result in the loss of Dakota's related property
interests.
Matters Affecting Golden Reward Mine. A significant portion of proven
and probable reserves located at Golden Reward Mine, are encumbered by surface
rights and facilities some of which are owned by third parties. In order to
access these reserves and mineral resources, Golden Reward Mine will be required
to relocate its existing crushing facility and to possibly reduce its existing
leach pad capacity by 25% or to require or otherwise compensate the third
parties for their facilities. No assurance can be given that Golden Reward Mine
will be successful in its efforts to remove these encumbrances.
No operations at Golden Reward Mine are planned for 1997. Before
operations can recommence, Golden Reward Mine will be required to obtain new
operating permits in order to mine certain of these encumbered reserves. Dakota
estimates that it will take between nine to 15 months from commencement of the
application process to obtain said permits. There can be no assurance that such
permits will be obtained within such time periods, if at all. The owners have
disagreed regarding certain operational and financial matters for the Golden
Reward Mine, including planned future operations and related funding
requirements. The resolution of these matters is not presently determinable.
Specific Risks Related to USMX
Going Concern Uncertainty of USMX; Illinois Creek Project Commitments.
At December 31, 1996, USMX had a working capital deficiency of $27.1 million.
During 1996 USMX devoted or committed substantially all of its liquid resources
to development of the Illinois Creek Project. During 1996, the estimated
development costs for the Illinois Creek Project increased substantially,
principally due to weather-related delays and other problems arising from the
complexities of developing a mine in Alaska using only air transport. At
December 31, 1996, USMX had unpaid commitments to suppliers and contractors of
approximately $5.7 million for work completed in 1996. USMX has also expended
$1.8 million of the $5 million Dakota loan (discussed below) for additional
construction work at Illinois Creek. USMX estimates that an additional $7
million, including $3.2 million of working capital, will be required to bring
the mine to production. USMX's lending arrangements with Rothschild, its
principal lender, require it to maintain minimum balances in a Proceeds Account
for use only in connection with the Illinois Creek Project and to maintain
certain financial ratios related to such Project and to USMX. USMX was required
to deposit $1.5 million to the Proceeds Account by September 30, 1996, which
requirement was not satisfied. USMX is also not in compliance with other
covenants of the Rothschild Credit Agreements. USMX's auditors have included an
explanatory paragraph in their report that states that these matters, among
others, raise substantial doubt about USMX's ability to continue as a going
concern and that the financial statements of USMX do not include any adjustments
that might result from the outcome of this uncertainty.
In connection with the Merger, USMX obtained a $5 million line of credit
from Dakota. In addition,
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<PAGE>
Rothschild has agreed with Dakota to forbear from exercising its rights to
declare and enforce defaults (except payment or bankruptcy defaults) of USMX
until the latest of consummation of the Merger, termination of the $5 million
line of credit from Dakota or June 30, 1997. See"Terms of the Merger-Other
Agreements - $5,000,000 Loan Agreement."
If USMX is unable to maintain compliance with its credit obligations to
Rothschild, it risks a possible foreclosure of Rothschild's security interest in
the Illinois Project and legal action for monetary damages against USMX. USMX
does not presently have capital resources available to satisfy its obligations
to Rothschild. Accordingly, if the Merger is not consummated, USMX will need to
obtain other financing or attempt to merge or engage in another form of business
combination with an entity with available cash resources or sell assets. USMX
has made no such arrangements and there can be no assurance that USMX would be
successful in obtaining any such arrangements. See USMX Management's Discussion
and Analysis of Financial Condition and Results of Operations."
USMX commenced mining operations at the Illinois Project in late 1996,
but postponed gold production due to the onset of Winter. If the Merger is
completed by the end of May 1997, USMX forecasts achieving gold production in
the Summer of 1997. Any revenues from gold sales as well as any other funds
deposited to the Proceeds Account by USMX may not be withdrawn for USMX's
general corporate purposes until "Completion" has occurred. As defined in the
Rothschild Credit Agreements, the requirements for Completion include the
construction of the Project facilities, which facilities and equipment thereon
must be mechanically complete and electrically operable ("Mechanical
Completion"), the achievement of production amounts and grades, costs and
reserves similar to the development plan, and the absence of any default in the
credit agreements. Completion has not occurred, and there can be no assurance
that the conditions for Completion will be satisfied. Moreover, USMX projects
that the earliest date the conditions could be satisfied would be in the Fall of
1997. Accordingly, USMX could be severely constrained in its ability to conduct
operations and to pursue other mining opportunities pending "Completion." There
can be no assurance that "Completion" will be achieved or that there will not be
a significant delay in achieving "Completion."
Profitability. Although USMX reported net income for each of the six
years ended December 31, 1994, USMX reported a net loss of $3.3 million for the
year ended December 31, 1996 and a net loss of $6.9 million for the year ended
December 31, 1995 and at December 31, 1996 had an accumulated deficit of $3.1
million. USMX does not anticipate obtaining operating revenues in 1997 from any
mine other than Illinois Creek. If USMX fails to put the mine in operation or
the operations do not achieve expected levels of production, USMX's ability to
generate revenues will be materially adversely affected. Future profitability is
also dependent upon USMX successfully locating, acquiring, financing,
constructing, and operating additional mines at a cost that is sufficiently less
than the prevailing price of the commodity being mined, of which there can be no
assurance.
Certain Illinois Creek Project Risks. Completion and operation of the
Illinois Creek Project involve numerous risks, including the following:
Pre-Production Work and Testing. The development of the mine
and construction of the related facilities were substantially completed in
October 1996. In the Fall of 1996, the mining contractor placed approximately
115,000 tons of overliner material and run-of-mine ore on the leach pad. USMX is
required to successfully complete a test to demonstrate that the synthetic pad
liner does not leak. After completion of this test to the satisfaction of
appropriate regulatory authorities, which is expected to occur in late May or
June of 1997, USMX would begin placing cyanide solutions to the heap with gold
production anticipated shortly thereafter. However, there are numerous risks
associated with the start-up of a new mine and there can be no assurance that
gold production will be achieved as forecasted.
Reserves. Ore reserves for the Illinois Creek Project which
are presented in this Joint Proxy Statement/Prospectus are estimates made by
USMX which have been reviewed by Roscoe Postle Associates Inc. ("RPA"), an
independent mining consulting firm. USMX has not commenced production at the
Illinois Creek Project, and there can be no assurance that the indicated amount
of gold will be recovered. The reserves have been calculated from drill-hole
assay results. Several programs of trenching, diamond drilling and
reverse-circulation drilling have been carried out on the Illinois Creek
Project. Assay results have been analyzed and several checks of the assay data
have
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<PAGE>
been conducted as a quality control procedure. Modeling is used to yield
estimates in reserves determined by optimum economic mining limits. In the
opinion of RPA, the Illinois Creek Project reserves are estimated in accordance
with standard engineering methods and the estimation approach and procedures
used are in keeping with standard industry practice. However, RPA has noted that
there are some issues which can impact on the estimate of the average grade,
including the handling of high-gold assays, which may result in the
overestimation of the average grade of the deposit in the order of 10%. RPA has
noted that differences of this magnitude in gold grades are not unusual. RPA
also has stated its belief that most of the reserves should be classified as
probable. Reserve estimates may require revisions based on actual production
experience. Fluctuations in the market price of gold, as well as increased
production costs or reduced recovery rates, may render reserves containing
relatively lower grades of mineralization uneconomical to recover and may
ultimately result in a restatement of reserves. The reserves for the Illinois
Creek Project have been calculated assuming a realizable price for gold of $400
per ounce. The price of $400 per ounce was selected based on trading on the gold
spot market and the gold forward market. USMX has entered into certain hedging
arrangements. See "Risk Factors-Specific Risks Related to USMX-Hedging
Activities." However, there can be no assurance with respect to the future price
of gold and its effect on USMX's reserves and operations.
Transportation. The Illinois Creek Project site is located in
the southern Kaiyuh Mountains in the western interior of Alaska. The Illinois
Creek Project is located approximately 57 miles southwest of Galena and 23 miles
east of the Yukon River. It is equidistant from Fairbanks and Anchorage which
lie approximately 320 miles to the east and southeast of such Project,
respectively.
Access to the site is by air. Equipment and supplies are transported to
the site by land, sea and air. The most economical way to transport freight to
the site is from Seattle, Washington to Anchorage, Alaska by barge. From
Anchorage, freight moves by truck or rail to Nenana. From Nenana, it is moved
down river on barge to Galena. From Galena, it is flown to the site. When it is
not possible to use the Yukon River, freight must be flown to the site from
Anchorage at a higher cost. The mine site is connected to the personnel camp and
the airstrip by a 6.5 mile road.
Weather. The climate is subarctic and characterized by large
seasonal extremes in temperature and daylight. Significant periods of inclement
weather could adversely affect future construction and operations at the
Illinois Creek Project which would, in turn, delay production and related cash
flow from such Project. Based on expected weather conditions, USMX presently
intends to conduct mining during May through October.
Environment. Mining is subject to potential risks and
liabilities associated with pollution of the environment and the disposal of
waste products occurring as a result of mineral exploration and production. The
Illinois Creek Project is permitted as a "zero discharge facility". As such,
operation will require strict control of the water balance to ensure that no
discharge occurs. Upon closure, reclamation activities will be closely monitored
and effluent from the decommissioned facility will be required to meet strict
water quality standards.
Community Relations. USMX has established good relations with
residents of the local area. If USMX were unable to continue this rapport, the
Illinois Creek Project could be negatively impacted.
Thunder Mountain Project, Uncertainty of Future Financing. USMX has
filed a Notice of Intent to Operate with the Idaho Department of Lands
describing USMX's proposed gold and silver mining activities in the Thunder
Mountain Project. Depending upon USMX's progress in obtaining the necessary
permits, the market price of gold, feasibility study and other factors, USMX may
determine to seek to develop the Thunder Mountain Project. Management estimates
that substantial capital will be required for construction of facilities and
other development activities at Thunder Mountain. USMX has no commitments for
outside financing for the Thunder Mountain Project and there can be no assurance
such financing would be available, or, if available, that the terms would be
beneficial to USMX.
USMX's ability to obtain outside financing for the Thunder Mountain
Project or other future projects will depend, among other things, upon the price
of gold and perceptions of future prices. Therefore, availability of funding is
dependent largely upon factors outside USMX's control, and cannot be predicted.
USMX does not know from what
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<PAGE>
specific sources it will be able to derive any required funding. Any such
financing, if available, could increase the indebtedness of USMX or dilute
current stockholders' positions. If USMX acquires such funding through debt a
substantial portion of USMX's cash flow may need to be devoted to the payment of
principal and interest on such debt which could render USMX more vulnerable to
competitive pressure or economic downturns. If USMX is not able to raise
additional funds (and there can be no assurance that it can, or that if it can,
such funds will be on terms acceptable to USMX) it will not be able to fund
certain exploration and development activities on its own.
Hedging Activities. Although USMX has historically used, and plans to
use in the future, spot deferred contracts in its hedging program to protect
earnings and cash flows from the impact of gold price fluctuations. USMX was
required pursuant to its lending arrangements with Rothschild to enter into
hedging transactions. In 1996 USMX hedged approximately 140,900 ounces of the
expected gold production from the Illinois Creek Project at an average selling
price of $409 per ounce. Spot deferred contracts that are designated as hedges
of the price of future production are accounted for as such. Spot deferred
contracts that are not identified as hedges of specific anticipated future
production are marked to market with unrealized gains or losses recognized in
earnings as they occur.
Spot deferred contracts are agreements between a seller and a
counterparty whereby the seller commits to deliver a set quantity of gold, at an
established date in the future and at agreed prices. The established price is
equal to the spot price for gold plus "contango." Contango is equal to the
difference between the prevailing market rate for dollar deposits less the gold
lease rate, for comparable periods, and represents compensation to the seller
for holding gold until a future date. Contango rates ranged from approximately
0% to 5 1/2% during 1996.
At the scheduled future delivery date, the seller may, at the option of
the counterparty, deliver into the contract or defer the delivery to a future
date. This option allows the seller to maximize the price realized by selling at
the spot market price if such price at that time were to be higher than the
forward contract price. Each time the seller defers delivery, the forward sales
price is increased by the then prevailing contango for the next period.
Generally, the counterparty will allow the seller to continue to defer contract
deliveries providing that there is sufficient scheduled production from proven
and probable reserves to fulfill the commitment.
Risk of loss with these spot deferred contracts arises from the
possible inability of a counterparty to honor contracts and from changes in
USMX's anticipated production of gold. However, nonperformance by any party to
such financial instruments is not anticipated.
USMX is typically required by the counterparties to maintain a margin
account. Should the cumulative liquidation cost of USMX's spot deferred
positions exceed the cumulative value of such positions by an amount in excess
of the margin account, USMX could be subject to margin call. The liquidation
cost is what USMX would have to pay on the liquidation date to purchase fixed
forward delivery contracts to meet its spot deferred deliveries. The cost of
fixed forward delivery contracts is based on the spot price on the liquidation
date plus contango through the delivery date. As of December 31, 1996, the
liquidation cost of USMX's existing hedge position was not material. The
aggregate unrealized excess of the net market value of USMX's forward sales
contracts over the spot gold price of $368 per ounce as of December 31, 1996, is
approximately $5,875,000. The aggregate unrealized gain of USMX's forward sales
contracts accounted for as hedges of future production were approximately
$5,033,000 at December 31, 1996.
USMX has also written silver call options expiring at various dates
over the next forty months, which if exercised, would become spot deferred
contracts with delivery deferred as previously described. At December 31, 1996
USMX had sold 825,300 ounces of silver call option contracts all at a strike
price of $5.50 per ounce expiring on dates ranging from September 28, 1997
through December 29, 1999. Call options premiums received amounted to
approximately $424,000. These contracts are marked to market with unrealized
gains or losses recognized in earnings as they occur.
Title to Properties. Certain of USMX's mineral rights consist of
unpatented mining claims. Unpatented mining claims are unique property interests
that are generally considered to be subject to greater title risk than other
real property interests. The greater title risk results from the unpatented
mining claims being dependent on strict compliance
- 18 -
<PAGE>
with a complex body of federal and state statutory and decisional law, much of
which compliance involves physical activities on the land, and from the lack of
public records which definitively control the issues of validity and ownership.
No Dividends. USMX anticipates that it will use its earnings, if any,
to finance its operations and growth. USMX does not anticipate paying dividends
and, because of certain debt covenants, is restricted from paying any dividends
to its stockholders.
Volatility of Price for Common Stock. The market prices for shares of
the USMX Common Stock have been highly volatile in recent years. See
"Description of USMX Capital Stock-Trading History." The market price may be
highly volatile in the future depending on news announcements of USMX, gold
price volatility and changes in general market conditions.
Risks Related to the Merger
Operations of the Combined Company. Although the initial members of the
Board of Directors and the senior management of the combined company resulting
from the Merger have been identified, most operational and strategic decisions
with respect to the combined company have not yet been made and no formal
business plan for the combined company exists at this time. The timing and
manner of the implementation of decisions made with respect to the ongoing
business of the combined company following the Merger will materially affect the
operations of the combined company. Given the range of potential outcomes
arising from such decisions and the interrelationships among decisions to be
made, in many cases, it is not possible to quantify the impact of such decisions
on the results of operations and financial condition of the combined company.
Any integration, consolidation, reconfiguration or other modification of Dakota
and USMX would involve several significant risks, including, but not limited to,
the following:
Management. Restructuring or integration of the operations of
Dakota and USMX will require the dedication of management resources, which could
distract attention from the day-to-day operations of the separate businesses of
each company. If the management of the combined company is unable to effectively
manage any such restructuring or integration, the operating results and
financial condition of the combined company could be materially adversely
affected. In the event that the operations of Dakota and USMX are restructured
or integrated, there can be no assurance that the combined company will be able
to retain the key personnel currently employed in the separate operations of
each company.
Expenses. The integration, consolidation or restructuring of
the business operations of Dakota and USMX could result in the incurrence of
significant expenses by the combined company following the Merger, which could
have a material adverse effect on the operating results of the combined company.
No Dissenters Rights. Under the DGCL and CBCA, neither USMX
Stockholders nor Dakota Shareholders will have any appraisal or dissenters
rights in connection with the Merger.
United States Federal Income Tax Treatment of the Merger. Dakota and
USMX have received an opinion from Coopers & Lybrand L.L.P., that the Merger
will, under current law, be treated as a tax-free reorganization under the Code
for United States federal income tax purposes, provided that all of the
assumptions and conditions set forth in the opinion are met. The opinions
expressed by Coopers & Lybrand L.L.P. regarding the United States federal income
tax consequences for USMX Stockholders are not entirely free from doubt. Neither
USMX nor Dakota will seek a private letter ruling to this effect from the IRS
and there can be no assurance that the IRS will not challenge such
reorganization or tax-free treatment to USMX Shareholders and ultimately prevail
in such challenge. A successful challenge by the IRS would result in the holders
of shares of USMX Common Stock recognizing a taxable gain or loss in an amount
equal to the difference between the fair market value of the Dakota Common
Shares received in the Merger and the shareholder's tax basis in the shares of
USMX Common Stock surrendered in exchange therefor. Any USMX Stockholder who is
a U.S. Person and who will own or be deemed to own at least 5% of Dakota
following the Merger will not be entitled to tax-free receipt of the Dakota
Common Shares in exchange for shares of USMX Common
- 19 -
<PAGE>
Stock unless such shareholder executes a "gain recognition agreement" to be
filed with the IRS. All USMX Stockholders who are U.S. Persons will be required
to file certain notices with the IRS regarding the Merger in order to avoid
incurring adverse tax consequences including penalties. IF THE SHARES OF USMX
ARE DETERMINED TO CONSTITUTE A USRPI, FOREIGN PERSONS EXCHANGING THEIR SHARES OF
USMX FOR SHARES IN DAKOTA MAY BE SUBJECT TO TAX, ABSENT AN EXCEPTION.
STOCKHOLDERS OF USMX ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE TAX
CONSEQUENCES TO THEM OF THE MERGER AND OF ACQUIRING, OWNING AND DISPOSING OF
DAKOTA COMMON SHARES. See "United States Federal Income Tax Considerations of
the Merger."
CURRENCY AND GOLD PRICES
The exchange rates of the Canadian dollar to the United States dollar
determined as the buying rate in New York City for cable transfers in Canadian
dollars as certified by the Federal Reserve Bank of New York and gold prices
reported on the afternoon fixing on the London Bullion Market at the end of the
calendar years 1992 through 1996 and the period from January 1, 1997 to April
18, 1997 were as follows:
<TABLE>
<CAPTION>
Currency
January 1 to Year Ended December 31,
April 18, -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- ---- ---- ---- ---- ----
(Cdn. $ per U.S. $1.)
<S> <C> <C> <C> <C> <C> <C>
High $1.3738 $1.3860 $1.4070 $1.4028 $1.3449 $1.2938
Low $1.3368 $1.3306 $1.3415 $1.3240 $1.2423 $1.1401
End of Period $1.3437 $1.3636 $1.3645 $1.4028 $1.3240 $1.2709
</TABLE>
<TABLE>
<CAPTION>
Gold Prices
January 1 to Year Ended December 31,
April 18, -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- ---- ---- ---- ---- ----
($ per ounce)
<S> <C> <C> <C> <C> <C> <C>
High $367 $415 $397 $396 $398 $360
Low $338 $367 $372 $370 $327 $330
End of Period $342 $369 $387 $383 $386 $333
</TABLE>
<PAGE>
THE MERGER
General
The Merger provides for the business combination of USMX and Dakota
through the merger of Merger Corp., a wholly-owned subsidiary of Dakota, with
and into USMX, provided that all conditions to consummation of the Merger as
provided in the Merger Agreement are satisfied or waived. Upon completion of the
Merger, USMX will be the Surviving Corporation and, as a consequence thereof,
will become a wholly-owned Subsidiary of Dakota. It is contemplated that the
Effective Time for the Merger will occur as soon as practicable after the Dakota
Meeting and the USMX Meeting and on satisfaction or waiver of all of the other
conditions set forth in the Merger Agreement. The Effective Time is presently
anticipated to occur on or about May 29, 1997. See "Terms of the Merger
- -Conditions to the Merger."
ackground to the Merger
In late 1995, Dakota was nearing completion of a two year process to
permit and expand mining operations at its Gilt Edge Mine located in South
Dakota. The mine had been substantially shut-down for over two years prior to
that time. Recommencing mining activities at Gilt Edge Mine, was preceded by the
recommencement of mining operations at Dakota's Stibnite Mine in the summer of
1995. Stibnite Mine had also been shut down for approximately two years prior to
that time while awaiting new permits. With the reactivating of both of Dakota's
100% owned mining operations imminent, the Company began to implement a new
growth strategy.
As a part of its strategic long-term business plan, Dakota determined
that it would seek a merger, acquisition, amalgamation or other business
combination with a company having comparable gold producing properties in or
nearing production in order to increase the ounces of gold under production
thereby improving operating cash flows. Management of Dakota believes that the
development of a larger gold production base will establish a critical mass of
operations that will facilitate future financings and enhance the opportunity to
acquire additional gold properties thereby increasing shareholder value.
In 1996, USMX devoted a substantial portion of its capital resources
and management focus on the development of its Illinois Creek Project in Alaska.
Although USMX believes that it has several promising exploration projects in the
U.S., Mexico and Ecuador, and is presently engaged in a feasibility study of its
Thunder Mountain Project in Idaho, management of USMX determined in early 1996
that it would be beneficial to USMX to consider merger and acquisition
opportunities to provide an immediate diversified base of gold producing and
revenue generating properties. Management believes that a larger combined
company would be in a better position to command a higher market valuation and
to obtain additional funding for USMX's existing and future projects. Moreover,
USMX's liquidity concerns intensified during 1996 which provided greater impetus
to explore merger opportunities and other strategic alternatives.
The following chronology summarizes the events leading to the Merger
proposal:
<PAGE>
(a) In October 1995, representatives of Dakota met with
representatives of Canaccord in Vancouver, Canada to investigate
utilizing the services of Canaccord to initiate Dakota's
strategic business plan.
(b) On November 13, 1995, Dakota engaged Canaccord to act as its
exclusive financial advisor for a possible business combination
with certain identified candidates located in Australia. The
scope of the services included identification of business
opportunities, assistance in evaluating candidates and providing
advice on possible business combinations.
(c) During a two week period in December 1995, representatives of
Dakota and Canaccord visited Australia and met with several
Australian gold mining companies identified by Canaccord as
possible candidates.
<PAGE>
(d) As a result of the visit to Australia, Dakota evaluated and held
preliminary discussions with a short list of merger or
acquisition candidates. However, no reasonable possibility of a
business combination emerged.
(e) In February 1996, the USMX Board approved development of the
Illinois Creek Project, and USMX received a commitment for a $22
million financing facility for this Project from Rothschild.
(f) On March 21, 1996, Dakota held a strategic planning session with
Canaccord at Dakota's offices to review past and future
strategies in maximizing value for Dakota's shareholders and to
focus Dakota's efforts to locate a suitable candidate for a
possible business combination. Dakota commenced a new assessment
of merger or acquisition candidates. Due to its cash position and
limited number of key management personnel, Dakota also
determined that its primary focus would initially be on companies
with mining operations located either in North or Central
America.
(g) On April 9, 1996, Alan R. Bell, President and Chief Executive
Officer of Dakota, met with James Knox, then President and Chief
Executive Officer of USMX and commenced preliminary discussions
regarding a possible business combination. The two companies
thereafter exchanged public information concerning their
businesses.
(h) On April 30, 1996, Dakota and USMX signed a Confidentially
Agreement. Technical due diligence was then conducted over a
period of several months whereby the management of and
consultants representing each company visited each other's
mineral properties and mining operations. Detailed business
plans, budgets, ore reserve calculations, production plans,
reclamation liability assessments and other pertinent information
were reviewed and evaluated.
(i) On May 23, 1996, USMX engaged Newcrest to act as its exclusive
financial advisor in connection with potential transactions with
other mining companies.
(j) In May and June of 1996, officers and other employees of USMX
made site visits to Dakota's Gilt Edge, Golden Reward and
Stibnite properties and representatives of Dakota visited USMX's
Illinois Creek property.
(k) In June 1996, both parties completed their due diligence
investigations.
(l) On July 11, 1996, USMX entered into the Rothschild Credit
Agreements, a $22 million credit facility to finance the
construction and development of the Illinois Creek Project.
(m) Dakota and USMX suspended their merger discussions on July 24,
1996. Dakota was concerned about the delays in construction of
the Illinois Creek Project and the consequential financing
requirements that would be required. Dakota determined that it
would not be prudent to embark upon a business combination with
USMX at that time. USMX was concerned about the definition of the
ore reserves at Dakota's Gilt Edge and Stibnite mines and the
extent of the reclamation liabilities at Stibnite.
(n) Between August and October, 1996, USMX and Newcrest identified
several potential merger candidates. USMX entered into a
confidentiality agreement with one candidate, conducted extensive
due diligence and discussed exchange ratios. However, due to the
deterioration in the gold equity market, USMX was advised by
Newcrest that it would be difficult to obtain sufficient funds to
provide for the expected needs of both companies. Merger
discussions were terminated with that candidate in October, 1996.
(o) On October 31, 1996, USMX announced that it had modified the
Rothschild Credit Agreements whereby Rothschild agreed to waive
<PAGE>
certain covenants under the credit agreements provided that USMX
raised new equity of not less than $9 million by way of a sale of
USMX Common Stock. USMX also announced that it intended to make
filings with regulatory authorities for a public offering of USMX
Common Stock to raise proceeds of $10.0 to $11.5 million.
(p) From October to mid-December of 1996, USMX engaged in discussions
with several investment banking firms in the United States and
Canada concerning participation as underwriters or dealers in the
then contemplated public offering of USMX Common Stock.
(q) On November 7, 1996, USMX announced that it had made filings with
regulatory agencies in Canada and the United States for a
proposed public offering of USMX Common Stock.
(r) On November 14, 1996, USMX announced that it had decided to defer
commencement of gold production at its Illinois Creek Mine from
1996 until Spring of 1997. As a result USMX received no revenues
from production in 1996.
(s) During November and December, 1996, USMX contacted approximately
15 mining companies that either were well funded or had potential
to provide additional funding. USMX also held discussions with
several companies regarding the possible sale of royalties on, or
the purchase of, certain USMX properties. No merger proposals
were received. A royalty sale proposal was received, but it was
not adequate to meet USMX's financing needs.
(t) On November 19, 1996, Robert R. Gilmore, Vice-President, Finance
and Chief Financial Officer of Dakota, met with Donald Bellum,
President and Chief Executive Officer of USMX, to discuss USMX's
financing needs and to revisit the general concepts relating to a
merger or business combination. It was agreed to have a
subsequent meeting.
(u) On December 6, 1996, the executive management of Dakota and USMX
met to update one another on each respective company's business
affairs since July 1996 when previous discussions had been
suspended. It was agreed to proceed with further evaluations.
(v) From December 9, 1996 to December 20, 1996, Dakota and USMX
updated their previously completed technical due diligence. USMX
concluded that Dakota's environmental problems at Stibnite had
been mitigated to USMX's satisfaction and that, although Dakota
had experienced gold production problems during 1996, these
problems should not recur in 1997. During this same time period,
Canaccord prepared a pro forma analysis of a merger transaction
based upon a combination of public information together with
current mine production forecasts. A combined company business
plan was then developed which outlined the financing needs to
complete the construction and startup of USMX's Illinois Creek
Mine, including quantifying the cash requirements that would be
necessary to fund construction costs and those expenditures that
had been incurred by USMX but which remained unpaid.
(w) Following the completion of due diligence, and development of the
combined company business plan with plans for additional
financing, the parties were of the view that there was a basis to
continue merger discussions. Accordingly, the executive
management of both companies met several times from December 16,
1996 to January 6, 1997 to negotiate the Merger and the Share
Exchange Ratio. Each company developed and made reference to its
own views with respect to the net asset value of each company
together with the per share equivalents for each company. Dakota
and USMX specifically considered using the net asset value and
relative net market value approaches, current and expected future
operations of each company, the potential for improving
operational efficiencies, development and exploration potential
of each company's developed property holdings, the extensive
exploration land holdings of USMX in Alaska, Mexico, and
elsewhere, and the ability of the combined company to
<PAGE>
successfully complete a financing to provide the combined
enterprise with greater cash resources to meet its obligations
including completion of capital improvements. USMX determined
that there was a greater prospect for success in completing a
financing in connection with the Merger than a public offering of
USMX Common Stock.
(x) An agreement in principle was executed on January 3, 1997 by
Dakota and USMX and the terms of the Merger were publicly
announced the same day. At the same time, Dakota engaged
Canaccord, ScotiaMcLeod Inc. and Newcrest to market in January
1997, on a best efforts basis, a private placement of Special
Warrants representing gross proceeds to Dakota of up to Cdn $40
million. The offering was subject to the completion of the
Merger.
(y) On January 29, 1997, the Board of Directors of Dakota met with
Canaccord and Canaccord provided an oral opinion that the Merger
had merit according to its terms and could be financed. Dakota's
Board of Directors unanimously approved the terms of the Merger
and the terms of the private placement of Special Warrants
representing gross proceeds to Dakota of Cdn $25 million.
(z) On February 2,1997 the USMX Board discussed the Merger, including
the oral fairness opinion of Newcrest, and approved the Merger
Agreement.
(aa) On February 6, 1997, the Special Warrant financing closed for
gross proceeds of Cdn. $25 million.
(bb) On February 6, 1997, the Merger Agreement was executed. A public
announcement on the signing of the Merger Agreement was released
the same day.
(cc) On February 10, 1997, Dakota engaged Canaccord to act as its
exclusive financial advisor in connection with the proposed USMX
business combination. The scope of Canaccord's engagement
included evaluation of USMX's assets, providing advice as to
financial and market perspectives of the proposed transaction
and, if so requested, to render an opinion to Dakota's Board of
Directors as to whether the proposed transaction would be fair to
the Dakota Shareholders from a financial point of view.
(dd) On March 11, 1997, Rothschild provided its consent to the Merger.
(ee) On the date of this Joint Proxy Statement/Prospectus, Canaccord
confirmed that the terms of the merger remained fair from a
financial point of view to Dakota Shareholders and Newcrest
confirmed that the terms of the merger remained fair from a
financial point of view to USMX Stockholders.
Dakota's Reasons for the Merger and Board of Directors' Recommendation
The Board of Directors of Dakota believes that the Merger is fair and
reasonable to and in the best interests of Dakota and the Dakota Shareholders
and unanimously recommends that the Dakota Shareholders vote FOR the approval
and adoption of the Merger Agreement and the issuance of Dakota Common Shares
contemplated as part of the Merger.
In evaluating the Merger, the Dakota Board of Directors considered a
variety of factors, including the following:
(a) The view that the addition of the Illinois Creek Mine to Dakota's
100% owned Gilt Edge and the Stibnite Mines would dramatically
increase Dakota's annual gold production and reserve life and
would give Dakota a more diversified asset base, all of which
were objectives in Dakota's strategic planning;
(b) Technical expertise and management capabilities of the USMX
organization which would bring complementary executive, and
<PAGE>
technical skills to the merged company;
(c) The opportunity to participate in USMX's exploration property
portfolio in Alaska, Idaho and Mexico which would add a new
grass-roots exploration potential to Dakota and could advance
future growth;
(d) The belief that the combination of the two corporations would
allow them to combine their individual resources, assets and
expertise to enhance their ability to compete within and profit
from, the global mining industry and, through greater size and
increased financial strength, be able to be more effective in
competing internationally for exploration, development and
acquisition opportunities than either corporation would be
independently;
(e) The potential financial flexibility afforded by a strengthened
balance sheet resulting from an increase in cash and cash
equivalents and a relatively lower debt level and the
availability of future increased cash flow from operations, to
provide Dakota with the financial ability to move forward with
exploration and acquisition programs;
(f) The merged corporation would be expected to have a stronger
credit standing, which should allow it to access credit markets
on more favorable terms;
(g) Larger stock market float and potential enhancement of trading
liquidity for Dakota Shareholders;
(h) The view that operational efficiencies could be achieved in the
merged entity through the combination of the technical and
executive expertise of Dakota and USMX and the distribution of
the costs over the three producing mining operations;
(i) The belief that the potential for future reserve growth would be
strengthened by combining the complementary exploration programs
of Dakota and USMX and the belief that the respective technical
and executive expertise in the two corporations should result in
a broader skill base from which to access and seek to capitalize
on international exploration and development opportunities;
(j) Potential cost savings and synergies that might result from the
combination of the two corporations, including potential cost
savings at the corporate level and potential synergies in
exploration efforts;
(k) The consideration would be Dakota Common Shares which would allow
Dakota to use its cash resources to continue exploration and
acquisition programs;
(l) The consideration and relative assessment of other alternatives
available to Dakota to achieve its strategic objectives including
the assessment by Dakota's management of other potential parties
to effect a merger, the preliminary view of the merits of those
mergers, the timing relative thereto and analysis and discussion
regarding potential partners with Canaccord; and
(m) The fairness opinion provided to the Board of Directors by
Canaccord together with their support of the analysis of the net
asset values of each corporation and per share equivalents which
were developed by management.
In reaching its determination, the Dakota Board of Directors also
considered and evaluated information discussed with the Board by the management
of Dakota with respect to the Merger. In this regard, the Dakota Board of
Directors considered, among other things, (i) information concerning the results
of operations, performance, financial condition and prospects of Dakota and USMX
on a company-by-company basis and on a combined basis, (ii) the reserve levels,
asset quality and cost structure of Dakota's and USMX's businesses, (iii) the
results and scope of the due diligence review conducted by members of Dakota's
management with respect to USMX's business and operations, (iv) information with
respect to recent and historical trading prices and trading multiples of USMX
<PAGE>
Common Stock and Dakota Common Shares, (v) information with respect to recent
and historical prices and price trends of gold and the potential impact thereof
on each of Dakota and the combined entity, and (vi) current economic, industry,
market and world political conditions affecting USMX and Dakota.
The Dakota Board of Directors also considered (i) the terms of the
Merger Agreement and the other agreements contemplated thereby, (ii) the
structure of the Merger including the expectation that the Merger would be
accounted for as a purchase of USMX, (iii) the tax consequences of the Merger,
(iv) the presentation by, and the opinion of Canaccord as described below, (vi)
the fact that the Dakota Shareholders would, based on the Share Exchange Ratio
of 1.1, retain approximately 69.7% of the equity of the combined company (and
approximately 77.1% of the combined company on a fully diluted basis), (vii) the
fact that current directors of Dakota would constitute five of the eight
directors of Dakota after the Merger, (ix) the fact that the headquarters of the
combined company would be in Denver, Colorado, and (x) the potential impact of
the Merger on the employees, customers and suppliers of Dakota and on the
communities in which Dakota operates.
Based on all of these matters, and such other matters as the Dakota
Board of Directors deemed relevant, the Dakota Board of Directors unanimously
approved the Merger Agreement and the transactions contemplated thereby.
The foregoing discussion of the information and factors considered and
given weight by the Dakota Board of Directors is not intended to be exhaustive
but is believed to include all material factors considered by the Dakota Board.
In view of the wide variety of information and factors considered by the Dakota
Board of Directors, the Board found it impracticable to, and therefore did not,
quantify or otherwise assign any relative weight to the specific information or
factors which were considered, and individual directors may have given differing
weights to different factors. The Dakota Board of Directors is, however,
unanimous in its recommendation to the Dakota Shareholders that the Merger
Agreement and the transactions contemplated thereby, including the issuance of
Dakota Common Shares, be approved.
The Dakota Board of Directors realized that there are certain risks
associated with the Merger, including that some of the potential benefits set
forth above may not be realized or that there may be high costs associated with
realizing such benefits and also the factors set forth in this Joint Proxy
Statement/Prospectus under "Risk Factors." However, the Dakota Board of
Directors believes that the positive factors should outweigh any negative
factors, although there can be no assurances in this regard.
THE BOARD OF DIRECTORS OF DAKOTA UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF
DAKOTA APPROVE THE MERGER PROPOSAL.
Fairness Opinion of Canaccord Capital Corporation
The Board of Directors of Dakota retained Canaccord on February 10,
1997 to render an opinion to the Board of Directors of Dakota and Dakota
Shareholders as to the fairness of the Merger, from a financial point of view,
to the shareholders of Dakota. On January 29, 1997 at the request of Dakota,
Canaccord rendered a preliminary opinion to the Board of Directors of Dakota
that the Merger had merit according to its terms and could be financed.
Canaccord subsequently delivered a written opinion dated March 14, 1997
confirming its previous opinion. Canaccord has provided their written consent to
the inclusion of their opinion in this Joint Proxy Statement/Prospectus and the
wording of their opinion is not intended to limit reliance by shareholders on
the opinion or any limitation of their rights with respect to the opinion.
Canaccord is an independent Canadian investment firm specializing in
corporate finance services for, and the sale and trading of equity securities
of, resource and industrial companies. Canaccord also provides investment
research and trading services to financial institutions. Canaccord and its
principals have prepared numerous valuations and fairness opinions and have
participated in a significant number and variety of transactions involving
private and publicly traded companies.
- 26 -
<PAGE>
The complete text of the written opinion dated March 14, 1997 is
attached to this Joint Proxy Statement as Appendix C and the summary of the
opinions set forth in this Joint Proxy Statement/Prospective is qualified in its
entirety by reference to such opinion. Dakota shareholders are urged to read the
opinion carefully and in its entirety for a description of the procedures
followed and the factors considered by Canaccord with particular regard to the
limitations and qualifications discussed therein.
Under the agreement between Dakota and Canaccord pursuant to which
Canaccord was engaged to provide its fairness opinion, Dakota agreed to pay
Canaccord a fee of $200,000 upon delivery of the fairness opinion. In addition,
Dakota agreed to reimburse Canaccord for its reasonable out-of-pocket expenses
and agreed to indemnify Canaccord against certain liabilities arising out of its
advisory services and the rendering of its opinion. Canaccord has provided other
investment banking services to Dakota in the last 24 months by acting as lead
underwriter in connection with the issue by Dakota on February 14, 1996 of
certain special warrants and on February 5, 1997 of the currently outstanding
special warrants of Dakota. For these services, Canaccord received a share of
the 6% underwriting fee approximately proportionate to the amount which was
underwritten by them. Canaccord has not provided any of these services to USMX.
Canaccord is a full service securities firm, and in the course of its normal
trading activities may from time to time effect transactions and hold positions
in securities of Dakota or USMX.
In arriving at its opinion, Canaccord reviewed and relied upon certain
financial and operational information provided by the respective managements of
Dakota and USMX, reports prepared on behalf of Dakota and USMX, discussions and
investigations and certain publicly available information concerning Dakota and
USMX. The opinion sets forth the assumptions made, matters considered, the scope
of the limitations of the review undertaken and procedures followed by Canaccord
and should be read carefully by Dakota Shareholders in its entirety as the
discussion of that opinion herein is a summary only.
In addition Canaccord had (i) discussions with senior management and
members of the Board of Directors of both Dakota and USMX with respect to the
information presented to Canaccord and those Boards' assessment of the
historical, current and prospective operations, assets, investments and
financial position of the respective companies and the merged company; (ii) a
draft copy of the Joint Proxy Statement; (iii) a copy of the Merger Agreement;
(iv) current and historical stock market trading information relating to Dakota
and USMX; and (v) other industry, corporate, economic and market data, as well
as such other investigations, site visits and financial analysis considered
necessary or appropriate by Canaccord in the circumstances. Dakota and USMX have
each represented to Canaccord, in certificates dated as of March 14, 1997,
amongst other things, that the information, data and other material provided to
Canaccord was at the date provided, complete, true and correct in all material
respects and did not contain any untrue statement of material fact or omit to
state any material fact necessary to make the statements therein not misleading
in light of the circumstances in which such statements were made. Each of Dakota
and USMX has represented to Canaccord that since the date that any information,
data or other material were provided to Canaccord, except as disclosed in
writing to Canaccord, to the best of their knowledge, information and belief
after reasonable inquiry there has been no material change, financial or
otherwise, in the business, operations or prospects of either Dakota or USMX
respectively, or any of their subsidiaries not disclosed to Canaccord which
would reasonably be expected to have a material affect on the Fairness Opinion.
In connection with its opinion, Canaccord relied upon and assumed the
completeness, accuracy and fair presentation of all the financial and other
information, data, advice, opinions and representations obtained by it from
public sources, or provided to it by Dakota or USMX or their or affiliates.
Canaccord assumed that the business plans, financial estimates and projections
provided to it by the management of Dakota and USMX represent their best
estimates of the most probable results for their respective companies for the
periods therein. Subject to the exercise of professional judgment and except as
expressly described herein, Canaccord did not attempt to verify independently
the accuracy or completeness of any of such information, data, advice, opinions,
representations, business plans, forecasts and projections. Dakota and USMX each
represented to Canaccord, in certificates, that the information, data, advice,
opinions and representations provided to Canaccord were complete, true and
correct in all material respects and did not contain any untrue material fact or
omit to state any material fact and that since the date the relevant information
was provided, there had been no material changes in Dakota or USMX or any of
their subsidiaries and no material change
- 27 -
<PAGE>
had occurred in the information or any part thereof which would have a material
effect on the opinion of Canaccord; and with respect to any portions of the
information that constituted forecasts, projections or estimates, such
forecasts, projections or estimates were prepared using the assumptions
identified therein, which in the reasonable belief of Dakota and USMX are
reasonable in the circumstances, and are not misleading in any material respect
in light of the assumptions used therefor. Canaccord also assumed the disclosure
provided in the Joint Proxy Statement is accurate in all material respects. The
opinions are rendered on the basis of securities markets, economic and general
business and financial conditions prevailing as of the date the opinions are
given and the condition and prospects, financial and otherwise, of Dakota and
USMX as they were reflected in the information and documents reviewed by
Canaccord and as they were represented to Canaccord in its discussions with
management of Dakota and USMX.
Canaccord believes that its analyses must be considered as a whole and
that considering any portions of such analyses and the factors considered,
without considering all analyses and factors, could create a misleading view of
the process underlying its opinions. Any attempt to consider portions of the
opinions only could lead to undue emphasis on any particular factor or analysis.
Canaccord has made numerous assumptions which Dakota Shareholders must carefully
consider with respect to performance, general business and economic conditions
and other matters, many of which factors are beyond the control of Dakota or
USMX. The Fairness Opinion is not intended to be and does not constitute a
recommendation to any shareholder of Dakota as to whether or not such
shareholder should vote in favor of the Merger, but rather represents
Canaccord's assessment of the fairness, from a financial point of view, of the
Merger to the Dakota Shareholders.
Methodology. Canaccord reviewed and considered different methodologies
and approaches to assess the fairness from a financial point of view of the
Merger to shareholders of Dakota. Canaccord was of the view that of particular
importance was a comparison of the Share Exchange Ratio with their assessment of
the relative values of Dakota and USMX using consistent assumptions and
techniques for both corporations. No formal valuation of either Dakota or USMX
was requested or prepared by Canaccord.
In the preparation of the opinions, Canaccord reviewed stock market
trading prices whereby the relative stock market trading prices of Dakota Common
Shares and shares of USMX Common Stock were considered. Canaccord also
considered the net asset value approach whereby estimates of value for the
assets and liabilities for each of Dakota and USMX are determined in the
aggregate and on a per share basis using assumptions which are consistent and
appropriate for both companies. The relative values determined using these
approaches were then considered with reference to the Share Exchange Ratio as
part of its analysis.
Canaccord also considered other approaches commonly used to compare
publicly traded gold companies in the development and/or production stage such
as adjusted stock market capitalization per ounce of recoverable reserves.
Canaccord further considered certain qualitative aspects of the Merger
including a comparison of the attributes of Dakota on a stand alone basis with
those of Dakota subsequent to the Merger.
Stock Market Trading Approach. Canaccord reviewed the relative
stock market performance of Dakota and USMX, for the periods prior to and after
the announcement of the execution of the agreement in principle on January 6,
1997. Based on a comparison of the weighted average stock market trading prices
of shares of USMX Common Stock to the imputed prices for USMX Common Stock using
the Share Exchange Ratio, Canaccord concluded that the imputed prices of the
USMX Common Stock were at slight discounts for twelve month period prior to the
announcement date and at a slight discount for the 60 day period prior to the
announcement date. With respect to share trading volume, Dakota had trading
volume of approximately 100,000 to 250,000 shares per day for the twelve month
period prior to the announcement date. This compares to approximately 75,000 to
100,000 shares per day for USMX Common Stock during the same period.
Net Asset Value Approach. The Net Asset Value approach allows
for the separate valuation of each of the individual assets and liabilities
using the most appropriate valuation methodology for the individual asset.
Sufficient information existed to utilize a discounted cash
flow approach ("DCF") in conjunction with current balance sheets, and review of
exploration properties to determine the net asset value for both Dakota and
USMX. For the purposes of the net asset value approach, Canaccord made the
following assumptions:
<PAGE>
(a) The balance sheets for Dakota and USMX were dated December 31,
1996;
(b) The price of unhedged gold would remain constant at US $370/oz;
(c) The price of silver would remain constant at US $5/oz;
(d) Net present values for the operating mines were calculated based
on after-tax discounted cashflows;
(e) Further exploration programs and assumptions to increase the gold
reserves were not factored into the DCF model;
(f) The applied discount rates ranged from 0% to 5%. In addition, no
premium to the NAV was assigned;
(g) USMX would require additional equity financing amounting to US$10
million at US$1.00 per common share should the Merger not be
completed.
With respect to the discounted cash flow analysis, Canaccord
employed a number of assumptions including the following: (i) discount rates
ranging from 0% to 5%; (ii) constant 1996 dollars; and (iii) for unhedged gold
production, an unhedged gold price of U.S.$370 per ounce of gold was used.
Based on the net asset value approach, Canaccord derived a
range of relative values for Dakota Common Shares and USMX Common Shares which
were essentially consistent with the Share Exchange Ratio.
Comparable Companies Approach. Dakota and USMX were analyzed
in comparison to similar publicly traded companies, based on several criteria
including property locations, relative reserve development of those properties,
and the timing and magnitude of future gold production for each of the
companies. Canaccord reviewed the market capitalization per ounce of gold
equivalent production and per ounce of gold reserve for each of the selected
comparable companies. The results of the analysis indicate that Dakota and USMX
are trading in reasonable ranges relative to the selected comparable companies.
Comparable Transactions Approach. Canaccord analyzed recent
comparable publicly disclosed transactions of both gold companies and individual
properties. This approach was not a material determinant of value due to, among
other things, the difficulty in identifying companies that had properties in
similar geographic locations and that were in equivalent stages of production
and reserve development, and the different forms of consideration paid.
Other Considerations. In reaching its conclusions in this
Fairness Opinion, Canaccord reviewed and considered other qualitative factors
that would be relevant to the Dakota Shareholders including, but not limited to
market presence, market liquidity, geographic diversity, financing leverage,
financial strength and management depth. These considerations included the
following:
(a) Increased Market Liquidity. On a pro forma basis, after taking
into consideration the Merger, Dakota Shareholders will benefit
from increased market presence and liquidity inherent in the
merged company. Specifically, the combined company will benefit
from the following attributes: (i) have a market capitalization
exceeding $150 million; (ii) be a multiple listed company and
(iii) have an increased shareholder base.
(b) Increased Access to Capital. The merged company will have greater
access to capital in North American given its larger size and
market liquidity. In addition, there are opportunities to
increase financial leverage as the larger merged company will be
better able to secure debt, especially when certain projects are
brought into operation.
<PAGE>
(c) Increased Production and Reserve Profile. The merged company will
have approximate annual production in excess of 200,000 ounces of
gold in 1998 and 1.7 million ounces of proven and probable
reserves. This should result in the merged company receiving a
higher market capitalization per ounce of production and
reserves.
(d) Complementary Management Teams. Dakota and USMX have
complementary management teams possessing operating expertise,
both open pit and underground. Dakota will provide additional
experience and expertise in operating cold whether heap leach
operations.
(e) Enhanced Exploration Potential. Dakota and USMX in particular
have exciting exploration potential which should contribute to
increased reserves upon undertaking a comprehensive exploration
program.
(f) Gold Hedging Program. Dakota and USMX in particular have employed
an excellent gold hedging program of approximately 10,300 ounces
and 145,000 ounces of gold hedged at an average price of US $389
and US $410 respectively.
(g) Cost Rationalization. The merged company will be able to reduce
general, administrative and overhead costs resulting from
overlapping responsibilities and redundant costs.
USMX's Reasons for the Merger and Board of Directors' Recommendation
The USMX Board of Directors has determined that the terms of the Merger
Agreement and the transactions contemplated thereby, which were established
through arm's-length negotiation with Dakota, are fair to, and in the best
interests of, USMX and its stockholders. Accordingly, the USMX Board of
Directors has unanimously approved the Merger Agreement and unanimously
recommends that the stockholders of USMX vote FOR approval and adoption of the
Merger Agreement. In reaching its determination, the USMX Board of Directors
considered a number of factors including the following:
<PAGE>
(a) The belief that the Merger will result in a combined entity
stronger than the sum of Dakota and USMX as separate entities
with an enhanced ability to provide financing to resolve USMX's
liquidity problems;
(b) The belief that the Merger would result in a combined entity with
greater financial resources to compete and pursue growth
opportunities in the capital intensive mining industry;
(c) An assessment of USMX's strategic alternatives, including
acquisitions and other arrangements with third parties. In this
regard, the USMX Board believes that the terms of the Merger
Agreement provide the highest immediate value for holders of
shares of USMX Common Stock among the alternatives known and
anticipated to be available to USMX and the Merger will provide
holders of shares of USMX Common Stock with the opportunity to
continue to participate in the equity ownership of an entity with
complementary business operations;
(d) The structure of the Merger as a transaction intended to be
non-taxable to USMX Stockholders for United States federal income
tax purposes;
(e) An assessment of information relating to the financial
performance, prospects and business operations of each of Dakota
and USMX (which information included the historical financial
information contained in the periodic public reports of USMX and
Dakota and the descriptions of their lines of business contained
in such reports, all of which provided background information and
support for the belief of the USMX Board of Directors described
in (a) above);
(f) The presentation by Newcrest of its opinion to the effect that,
as of March 14, 1997 based upon the assumptions made, matters
considered and limits of review as set forth in such opinion, the
<PAGE>
consideration to be received by the holders of shares of USMX
Common Stock pursuant to the Merger Agreement is fair to such
holders from a financial point of view; for a summary of Newcrest
opinion, including the assumptions made, matters considered and
limits of review, see "The Merger -- Fairness Opinion of Newcrest
Capital, Inc.;
(g) The larger stock market float and potential enhancement of
trading liquidity for USMX Stockholders;
(h) The belief that each of Dakota and USMX has very capable
management teams that have an established track record, and that,
by combining the expertise of these managements, the combined
company should be well positioned to take advantage of
opportunities created by the Merger and the evolving mining
industry;
(i) The belief that the "No-Solicitation" provisions in the Merger
Agreement provide appropriate protection to USMX because of the
time and effort expended in considering other potential
combinations, and in conducting due diligence on and evaluating
Dakota prior to entering the Merger Agreement;
(j) The view that the combined corporation should be able to compete
more effectively for exploration and development activities;
(k) The belief that the combined corporation will have greater
geographic diversification in its operating and exploration
properties than either corporation now has by itself;
(l) The fact that holders of USMX Common Shares will own
approximately 30.3% of the equity of the combined company (and
approximately 22.9% on a fully diluted basis); and
(m) The belief that USMX and Dakota have complementary capabilities
and characteristics.
In reaching its determination, the USMX Board of Directors also
considered and evaluated, among other things, (i) information concerning the
results of operations, performance, financial condition and prospects of Dakota
and USMX on a company-by-company basis, and on a combined basis, (ii) the
reserve levels, asset quality and cost structure of USMX's and Dakota's
businesses, (iii) the results and scope of the due diligence review conducted by
members of USMX's management with respect to Dakota's business and operations,
(iv) information with respect to recent and historical trading prices and
trading multiples of USMX Common Stock and Dakota Common Shares, (v) information
with respect to recent and historical prices and price trends of gold and the
potential impact thereof on each of USMX, Dakota and the combined entity, and
(vi) current economic industry, market and world political conditions affecting
USMX and Dakota.
The USMX Board of Directors also considered (i) the terms of the Merger
Agreement, (ii) the structure of the Merger, (iii) the fact that directors
nominated by USMX would constitute three of the directors of Dakota after the
Merger, and (iv) the potential impact of the Merger on the employees, customers
and suppliers of USMX and on the communities in which USMX operates.
Based on all of these matters, and such other matters as the members of
the USMX Board deemed relevant, the USMX Board unanimously approved the Merger
Agreement and the transactions contemplated thereby.
This discussion of the information and factors considered and given
weight by the USMX Board of Directors is not intended to be exhaustive but is
believed to include all material factors considered by the USMX Board. In
addition, in reaching the determination to approve and recommend the Merger
Agreement, the USMX Board of Directors did not assign any relative or specific
weights to the foregoing factors which were considered, and individual directors
may have given differing weights to different factors. The USMX Board of
Directors is, however, unanimous in its recommendation to the holders of USMX
Common Stock that the Merger Agreement and the transactions contemplated thereby
<PAGE>
be approved.
The USMX Board of Directors realized that there are certain risks
associated with the Merger including that some of the potential benefits set
forth above may not be realized or that there may be high costs associated with
realizing such benefits and also the factors set forth in this Joint Proxy
Statement/Prospectus under "Risk Factors." However, the USMX Board of Directors
believes that the positive factors should outweigh any negative factors,
although there can be no assurances in this regard.
In connection with its deliberations at its February 2, 1997 meeting,
the USMX Board of Directors was aware of the potential benefits to be received
in the Merger by USMX's directors and officers, as detailed in the Merger
Agreement and specifically described under "Terms of The Merger -- Interests of
Certain Persons in the Merger."
The USMX Board of Directors believes that USMX and its stockholders
will receive reasonable protection from a change in circumstances between the
date of this Joint Proxy Statement/Prospectus and the Effective Time through the
inclusion in the Merger Agreement of a representation, required to be true in
all material respects at the Effective Time, to the effect that since December
31, 1996, there has been no material adverse change in the results of operations
or financial condition of the Dakota Group (taken as a whole).
In reaching its conclusion that the terms of the Merger Agreement are
fair to, and in the best interests of USMX and its stockholders, the USMX Board
of Directors considered Newcrest's opinion that the consideration to be received
by the holders of shares of USMX Common Stock pursuant to the Merger Agreement
is fair to such stockholders, from a financial point of view, as well as the
numerous other factors including those outlined above.
THE USMX BOARD UNANIMOUSLY RECOMMENDS THAT USMX STOCKHOLDERS VOTE TO APPROVE AND
ADOPT THE MERGER AGREEMENT.
Fairness Opinion of Newcrest Capital, Inc.
Newcrest was retained at the request of USMX's Board of Directors to
render a fairness opinion with regard to the fairness of the Merger, from a
financial viewpoint, to the USMX Board of Directors and Stockholders.
Newcrest is an independent investment dealer headquartered in Toronto,
Ontario, which specializes in equity investments in publicly traded Canadian
companies. Newcrest does specialized and comprehensive research on a variety of
different industries and is an active underwriter and financial advisor to
Canadian companies. In particular, Newcrest has participated in a significant
number of transactions involving financings, fairness opinions and valuations of
mining companies.
Newcrest is independent of both USMX and Dakota and does not have any
understandings, commitments or agreements with USMX or Dakota with respect to
future business dealings. However, Newcrest acts as a trader and dealer, both as
principal and agent, in major Canadian financial markets and as such has had and
may in the future have positions in the securities of USMX or Dakota and, from
time to time, has executed or may execute transactions on behalf of clients or
on behalf of USMX or Dakota or affiliated entities or related persons for which
it receives compensation. In addition, as an investment dealer, Newcrest
conducts research on securities and may, in the ordinary course of its business,
be expected to provide research and investment advice to its clients on
investment matters, including the Merger, and may in the future, from time to
time, provide investment banking services to Dakota.
No limitations were placed on the scope of Newcrest's investigation
with regard to its fairness opinion. USMX agreed to pay, in the aggregate,
Cdn.$200,000 for the fairness opinion and Newcrest's advisory services. USMX has
also agreed to reimburse Newcrest for reasonable out-of-pocket expenses not to
exceed Cdn.$25,000 and to indemnify Newcrest against certain liabilities
relating to or arising out of services performed by Newcrest in rendering its
fairness opinion. During the last 24 months Newcrest was paid U.S.$34,500 by
USMX for providing financial advisory services to USMX in connection with
evaluation of merger candidates and potential equity offerings by USMX.
<PAGE>
On February 2, 1997 the USMX Board received the verbal opinion of
Newcrest with respect to the proposed Merger. In the opinion of Newcrest, based
upon and subject to certain matters stated therein, as of the date of such
opinion, the proposed transaction is fair, from a financial point of view, to
the USMX Stockholders. Such conclusion was confirmed in a written opinion dated
March 14, 1997. The full text of such opinion, which sets out the assumptions
made, matters considered and limitations on the review undertaken by Newcrest,
is reproduced in full as Appendix D hereto.
In preparing its opinion, Newcrest has, among other things, reviewed
and, where it considered appropriate, relied upon certain financial and
operational information in respect of USMX and Dakota, reports prepared on
behalf of USMX and Dakota, discussions and investigations and certain publicly
available information concerning USMX and Dakota. Newcrest obtained background
information from public sources and from USMX and Dakota.
Newcrest also reviewed and, where it considered appropriate, relied
upon: (a) certain publicly available stock market, financial and other
information concerning each of USMX and Dakota and other mining companies
selected by Newcrest for purposes of comparison; (b) letters of representation
from each of USMX and Dakota; and (c) such other financial, stock market,
corporate and industry information, investigations and analyses as Newcrest
considered necessary or appropriate in the circumstances to complete the
opinion.
As provided in their engagement, and subject to the exercise of
professional judgment in preparing the opinion, Newcrest relied upon and assumed
the completeness, accuracy and fair presentation of the information and the
representations Newcrest received from USMX, Dakota and their advisors, and the
information obtained from public sources. USMX and Dakota each represented to
Newcrest that there has been no material change or change in a material fact
relating to any of the information or representations provided to Newcrest by or
on behalf of their respective corporations that had not been disclosed to
Newcrest, and that no material change has occurred in the facts set out or
referred to in any such information subsequent to the date such information was
supplied which is of a nature as to render the information untrue or misleading
in any material respect. Newcrest did not verify independently the accuracy or
completeness of any of such information, representations or warranties.
Newcrest was not engaged to, and did not prepare, a formal valuation of
the shares of USMX or Dakota or any of their material assets and their opinion
should not be construed as such. Newcrest was not asked to solicit alternative
offers for USMX and did not do so.
The opinion was prepared on the basis of economic and general and
financial conditions prevailing as at the date of the opinion and the condition
and prospects, financial and otherwise, of USMX and Dakota as they were
represented in the information and documents reviewed by Newcrest and as they
were represented to Newcrest by the management of each of USMX and Dakota. In
addition, in its analyses in connection with the preparation of the opinion,
Newcrest made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of USMX or Dakota.
Fairness Considerations. In providing the opinion to the USMX Board,
Newcrest performed a variety of financial and comparative analyses, including
those described below. In Newcrest's view, the preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant
assumptions and methods of financial analysis and the application of these
methods to the particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. Furthermore, in arriving at the
opinion, Newcrest did not attribute any particular weight to any analysis or
factor considered by them, but rather made qualitative judgments based on their
experience in rendering such opinions and on circumstances then prevailing as to
the significance and relevance of each analysis and factor.
Net Asset Value Approach. For purposes of the net asset value
approach, Newcrest made the following assumptions: (i) balance sheet items were
stated at the carrying values as at December 31, 1996, (ii) if the Merger were
not to be completed, USMX would need to complete an equity issue to raise $10
million at $1 per share of USMX Common Stock in 1997, (iii) operating mines were
evaluated on an after-tax discounted cash flow basis, and (iv) USMX's
<PAGE>
exploration properties in the United States, Mexico and Ecuador were reviewed
with USMX management and estimates of value were determined with reference to
several factors such as the size of the properties, the ownership interest of
USMX, the stage of the exploration program and historic exploration
expenditures.
With respect to the discounted cash flow analysis, Newcrest
employed a number of assumptions including the following: (i) discount rates
ranging from 0% to 8%, (ii) gold prices ranging from $350 to $390 per ounce of
gold, and (iii) silver price of $5 per ounce.
As a result of the range of relative company valuations
implied by the net asset value approach, Newcrest is of the opinion that the
Share Exchange Ratio is fair from a financial point of view to the holders of
shares of USMX Common Stock.
Market Trading Analysis. Newcrest reviewed the relative stock
market performance of USMX and Dakota for the periods prior to and after the
announcement of the execution of the agreement in principle on January 6, 1997.
Based on a comparison of the weighted average trading prices of shares of USMX
Common Stock and the Dakota Common Stock with the resulting share-to-share
ratio, Newcrest concluded that the implied prices of the USMX Common Stock were
a modest discount of 6.9% for the 30 days prior to the announcement date and a
slight premium of 2% for the 60-day period prior to the announcement date. With
respect to share trading volume, the USMX Common Stock had an average day
trading volume of approximately 31,767 shares for the 60-day period prior to the
announcement date. This compares to approximately 60,180 shares for the Dakota
Common Shares during the same period.
Comparable Valuation Approach. Newcrest compared the range of
equity valuations of the USMX and Dakota properties, based on adjusted stock
market capitalization multiples (reserves, resources and production) of
comparable publicly traded mining companies. The resulting relative valuations
of USMX and Dakota supported its conclusion that the Share Exchange Ratio
appears fair to holders of the USMX Common Stock. However, given the difficulty
in identifying truly comparable companies which are at the same stage of
production and reserve development, Newcrest placed less emphasis on the
Comparable Valuation Approach.
Other Considerations. Newcrest considered other factors
relevant to a USMX Stockholder before and after giving effect to the Merger
including the following: (i) reduced administrative costs on a consolidated
basis largely through elimination of costs associated with operating USMX as a
publicly-held company, (ii) direct access to cash flows generated through
Dakota's financial and operating activities, representing diversification from
USMX's Illinois Creek Project and resulting in enhanced financing opportunities,
and (iii) the significantly larger market capitalization of the merged company
which should result in enhanced market valuation multiples and better access to
the capital markets.
TERMS OF THE MERGER
The descriptions in this Joint Proxy Statement/Prospectus of the terms
and conditions of the Merger and the Merger Agreement are qualified in their
entirety by reference to the copy of the Merger Agreement attached as Appendix A
hereto (which is incorporated herein by reference in its entirety) and to each
of the other Appendices hereto. SHAREHOLDERS ARE ENCOURAGED TO READ THE MERGER
AGREEMENT IN ITS ENTIRETY.
The Merger Agreement was entered into by and among Dakota, Merger Corp.
and USMX on February 5, 1997, as amended April 21, 1997, following approval by
Dakota's, Merger Corp.'s and USMX's respective Boards of Directors. Pursuant to
the terms of the Merger Agreement, Merger Corp. will be merged with and into
USMX, with USMX being the Surviving Corporation and, as a consequence thereof,
USMX will become a wholly-owned Subsidiary of Dakota.
- 34 -
<PAGE>
Consequences and Effective Time of Merger
If approved and adopted by the requisite USMX and Dakota shareholder
votes, and if all other conditions to the consummation of the Merger are
satisfied or waived, unless the Merger Agreement is terminated as provided
therein, a certificate of Merger will be filed with the Secretary of State of
the State of Delaware and the Merger will become effective upon such filing at
the Effective Time. At the Effective Time, Merger Corp. will be merged with and
into USMX and USMX will be the Surviving Corporation.
Conversion of USMX Common Stock
At the Effective Time, each share of USMX Common Stock outstanding
immediately prior to the Effective Time (other than USMX Common Stock held by
USMX as treasury stock or held by any other member of the USMX Group or the
Dakota Group) will be converted into Dakota Common Shares in the ratio of 1.1
shares of USMX Common Stock to one Dakota Common Share. All shares of USMX
Common Stock owned at the Effective Time by USMX as treasury stock or by any
member of the USMX Group or the Dakota Group will be canceled pursuant to the
terms of the Merger Agreement. No fractional Dakota Common Shares will be issued
in connection with the exchange of outstanding shares of USMX Common Stock at
the Effective Time. Except with respect to derivative securities (options, etc.)
for which no consideration shall be given for fractional shares, if the
conversion of USMX Common Stock would result in any USMX Stockholder being
entitled to a fractional Dakota Common Share, such USMX Stockholder will receive
the next higher number of Dakota Common Shares.
At the Effective Time, each share of Merger Corp. outstanding immediately
prior to the Effective Time will be converted into one share of the Surviving
Corporation.
Conversion of USMX Options
Pursuant to the Merger Agreement, each outstanding USMX Option shall be
converted into a warrant, option or other right to acquire Dakota Common Shares
based on the Share Exchange Ratio, with the exercise price associated therewith,
if any, being adjusted proportionately.
Exchange of Certificates
At the Effective Time, certificates representing shares of USMX Common
Stock converted into Dakota Common Shares in the Merger will be deemed to
represent solely the right to receive the number of Dakota Common Shares
determined as described above. Promptly after the Effective Time, a letter of
transmittal will be furnished by the Exchange Agent to former USMX Stockholders
for use in exchanging their certificates. Each holder of a share of USMX Common
Stock as converted, upon surrender to the Exchange Agent of one or more
certificates for cancellation with such letter of transmittal, will be entitled
to receive certificates representing the number of whole Dakota Common Shares to
be issued in respect of such USMX Common Stock. See "Terms of the
Merger--Conversion of USMX Common Stock."
Until they have surrendered their certificates for exchange, former
USMX Stockholders whose shares of USMX Common Stock have been converted into the
right to receive Dakota Common Shares in the Merger will not be entitled to
receive any dividends which may be declared payable to holders of record of
Dakota Common Shares as of any date on or after the Effective Time. Any such
dividends to which the former USMX Stockholders are entitled following such
surrender will be remitted to the former USMX Stockholders entitled thereto,
without interest, at the time that such USMX certificates are surrendered for
exchange, subject to any applicable abandoned property, escheat or similar laws.
The Exchange Agent for the Merger will be Montreal Trust Company of Canada
at 510 Burrard Street, Vancouver, British Columbia, V6C 3B9. USMX STOCKHOLDERS
SHOULD NOT FORWARD USMX STOCK CERTIFICATES UNTIL THEY HAVE RECEIVED THE LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
Conditions to the Merger
The Merger Agreement provides that the consummation of the Merger is
subject to certain conditions. In addition to the approval of the Merger and
<PAGE>
related matters by the USMX Stockholders and the Dakota Shareholders, the
obligations of USMX, Dakota, and Merger Corp. to consummate the Merger are each
subject to: (i) no action or proceeding, injunction, order or other decree
preventing the consummation of the Merger or to receive damages or obtain other
relief as a result of the Merger having been issued; (ii) compliance with all
requirements of AMEX, the TSE, the BSE and Nasdaq; (iii) the effectiveness of
the Registration Statement of which this Joint Proxy Statement/Prospectus is a
part and obtaining all required approvals of state securities administrators and
making all appropriate filings relating thereto, and no stop order or similar
restraining order having been entered by the SEC or any state securities
administrator; (iv) receipt by Dakota, Merger Corp. and USMX of an opinion from
Coopers & Lybrand L.L.P. to the effect that no gain or loss should be recognized
by Dakota, Merger Corp. or USMX as a result of the Merger or, provided that a
gain recognition agreement is entered into with the IRS, where appropriate, by
the U.S. holders of USMX Common Stock as a result of receipt of Dakota Common
Shares in exchange for their USMX Common Stock pursuant to the Merger; (v) the
written consent of Rothschild required pursuant to the Rothschild Credit
Agreements; (vi) the aggregate proceeds from the offering by Dakota of special
warrants described under "Capitalization and Description of
Securities--Description of Dakota Share Capital and Debentures" shall have been
released from escrow to Dakota or be held in escrow subject only to consummation
of the Merger; and (vii) the Merger Agreement not having been terminated in
accordance with its terms. See "Terms of the Merger - Termination of the Merger
Agreement."
The obligations of Dakota and Merger Corp. to consummate the Merger are
subject to the satisfaction of several additional conditions including: (i) all
of the representations and warranties of USMX being true in all material
respects on the Closing Date; (ii) the performance by USMX in all material
respects of all of its obligations required under the Merger Agreement to be
performed prior to the Effective Time; (iii) no material adverse change having
occurred since December 31, 1996 in the results of operations or financial
condition of the USMX Group (taken as a whole); (iv) Dakota and Merger Corp.
having received an opinion of legal counsel to USMX and such certificates and
other evidence as they may have reasonably requested as to the satisfaction of
the conditions in their favor and as to such other matters as they may
reasonably request; (v) receipt of an up-dated letter of KPMG Peat Marwick
L.L.P. with respect to USMX's financial statements; (vi) USMX and Pegasus Gold
having entered into an agreement in form and substance satisfactory to Dakota
with respect to the disposition of USMX's royalty interest in the Montana
Tunnels properties; and (vii) USMX and Dakota having received all consents
required to be obtained as a condition of completion of the Merger. These
additional conditions may be waived by Dakota and Merger Corp., but it is not
the present intention of management of Dakota and Merger Corp. to waive such
conditions to consummate the Merger. However, management of Dakota and Merger
Corp. reserve the right to waive any condition at any time prior to consummation
of the Merger.
The obligation of USMX to consummate the Merger is subject to the
satisfaction of several additional conditions, including: (i) all of the
representations and warranties of Dakota and Merger Corp. being true in all
material respects on the Closing Date; (ii) performance by Dakota and Merger
Corp. in all material respects of all of their respective obligations required
under the Merger Agreement to be performed prior to the Effective Time including
providing a $5 million line of credit for USMX; (iii) no material adverse change
having occurred since December 31, 1996 in the results of operations or
financial condition of the Dakota Group (taken as a whole); (iv) USMX having
received an opinion of legal counsel to Dakota and such certificates and other
evidence as it may have reasonably requested as to the satisfaction of the
conditions in its favor and as to such other matters as it may reasonably
request; (v) receipt of an up-dated letter of KPMG Peat Marwick L.L.P. with
respect to Dakota's financial statements; and (vi) Dakota and USMX having
received all consents required to be obtained as a condition of completion of
the Merger. These additional conditions may be waived by USMX, but it is not the
present intention of management of USMX to waive such conditions to consummate
the Merger. However management of USMX reserves the right to waive any condition
at any time prior to consummation of the Merger.
Termination of the Merger Agreement
The Merger Agreement may be terminated prior to the Effective Time on
certain occurrences: (i) by either Dakota and Merger Corp. or USMX if the Merger
has not been consummated on or before the Termination Date, provided the party
exercising this right is not in material breach of its obligations under the
<PAGE>
Merger Agreement; or (ii) by the non-breaching party if the other party is in
material breach of its obligations under the Merger Agreement, which cannot
reasonably be expected to be cured prior to the Termination Date or the party in
breach is not taking reasonable efforts to cure such breach, and such breach is
not waived.
In the event the Merger Agreement is terminated (a) by Dakota because
the USMX's Board of Directors has made a recommendation to the USMX Stockholders
against the Merger or in support of a Competing Transaction, or if USMX shall
have entered into a Competing Transaction, or (b) by USMX if USMX's Board of
Directors determines in good faith, after consultation with its outside legal
counsel, that it is required by its fiduciary duties to recommend to the USMX
Stockholders than they vote against the Merger and approve instead a Competing
Transaction that (i) the USMX Board of Directors has determined in good faith,
after consultation with its outside financial advisors, is financially more
favorable to the USMX Stockholders than the Merger (including any adjustment to
the terms and conditions of the Merger proposed by Dakota in response to such
Competing Transaction), (ii) is the subject to a firm written offer from a third
party that is capable of consummating such Competing Transaction and (iii) is
likely to be successful, taking into account any amendments proposed by Dakota
and the conditions and valid and binding character thereof, then USMX may pay to
Dakota a fee of $500,000 (the "Termination Fee") within 30 days after delivery
of the notice of termination of the Merger Agreement in exchange for
cancellation of the option described above, provided that USMX shall not be
permitted to cancel the option if at any time prior to the making of such
payment Dakota shall have exercised such option and USMX shall have issued to
Dakota the USMX Common Stock issuable upon such exercise.
Shareholder Approvals
Dakota Shareholder Approval. The TSE, as a condition to the listing of
the Dakota Common Shares issuable under the Merger, requires the approval of the
issuance of Dakota Common Shares under the Merger Agreement by holders of a
majority of the outstanding Dakota Common Shares voting at the Dakota Meeting in
person or by proxy.
Merger Corp. Stockholder Approval. The DGCL requires the affirmative vote
of a majority of the issued and outstanding shares of common stock of Merger
Corp. for approval of the Merger Agreement. Dakota owns all the issued and
outstanding shares of common stock of Merger Corp., and such shares have been
voted to approve the Merger Agreement.
USMX Stockholder Approval. The DGCL requires the affirmative vote of a
majority of the issued and outstanding shares of USMX Common Stock for approval
of the Merger Agreement.
Representations, Warranties and Covenants under the Merger Agreement
The Merger Agreement contains certain customary representations and
warranties of each of Dakota and Merger Corp. and USMX relating to, among other
things, their respective organization, good standing, qualification, capital
structure, accuracy of securities filings, operations, taxes, restrictions on
business activities, material contracts, insurance, financial condition,
reserves, title to assets, litigation, environmental matters, compliance with
necessary regulatory or governmental authorities and other matters, including
their authority to enter into the Merger Agreement and to consummate the Merger.
Pursuant to the Merger Agreement, each party has covenanted, among other things,
that, until the Effective Time, it will: maintain its business; not take certain
actions outside the ordinary course without the other's consent; not undertake
certain matters respecting changes to its capital structure or dividends; not
allow certain dispositions of its or its subsidiaries' securities; not authorize
capital expenditures or make any material investments or acquisitions, other
than in the ordinary course; not enter into certain employee arrangements; not
change its accounting principles; and use its best efforts to satisfy the
conditions precedent to the Merger. Each party has also agreed to advise the
other of material changes and to allow the other access to its information and
properties. Further, the parties have agreed to apply for and use their best
efforts to obtain all regulatory and other consents and approvals and to hold
the Dakota Meeting and the USMX Meeting and recommend the approval of the Merger
Agreement, the Merger and related matters to their respective shareholders.
Dakota additionally agreed (i) that all rights to indemnification for directors
and officers of USMX will survive the Merger and remain in full force and effect
<PAGE>
for at least six years from the Effective time, (ii) to assume all of USMX's
obligations in respect of such indemnification rights and (iii) to use
commercially reasonable efforts to maintain insurance for USMX's directors and
officers that provides coverage equivalent to Dakota's current directors' and
officers' liability insurance for at least six years from the Effective Time.
See "Interests of Certain Persons in the Transaction - USMX Directors' and
Officers' Indemnification and Insurance." Dakota also agreed to list the Dakota
Common Shares to be issued in connection with the Merger on the TSE and the
AMEX. The listing of such shares on such exchanges on the effective Date is
subject to the satisfaction of the requirements of the exchanges.
The Merger Agreement also provides that until the earlier of the
Effective Time or the termination of the Merger Agreement, USMX will not (and it
will use its best efforts to ensure that no other member of the USMX Group or
their respective directors do not, and shall not permit their officers,
employees, representatives or advisors) directly or indirectly: (i) solicit,
initiate or engage in discussions or negotiations with any person, encourage
submission of any inquiries, proposals or offers by or take any other action
intended or designed to facilitate the efforts of any person, other than Dakota
or any of its Subsidiaries, relating to a possible Competing Transaction; (ii)
provide non-public information with respect to USMX or any member of the USMX
Group or afford access to the properties, books or records of the same to any
person, other than Dakota or any of its Subsidiaries relating to a possible
Competing Transaction; (iii) make or authorize any statement, recommendation or
solicitation in support of any possible Competing Transaction; or (iv) enter
into an agreement providing for a possible Competing Transaction.
Notwithstanding the foregoing, prior to the approval of the Merger at the USMX
Meeting, the USMX Board of Directors and its agents are not prohibited from
engaging in discussions or negotiations with a party concerning an unsolicited
proposal for a Competing Transaction, providing non-public information with
respect to the USMX Group that has been provided to Dakota or any of its
Subsidiaries, or making any statement or recommendation in support of a
Competing Transaction, in each case if USMX's directors determine in good faith,
after consultation with and receiving written advice from its outside legal
counsel, that such action is required by reason of the USMX Board of Directors'
fiduciary duties to USMX Stockholders under applicable law and USMX first
notifies Dakota of such discussions or negotiations with a person respecting a
Competing Transaction and keeps Dakota informed of the status of any such
discussions or negotiations. The Merger Agreement also provides that USMX will
immediately notify Dakota of any unsolicited offer or proposal to enter into
negotiations relating to a Competing Transaction. The Merger Agreement provides
that, at any time prior to the USMX Meeting, Dakota may, in its sole discretion,
increase the consideration payable to USMX Stockholders by amending the Merger
Agreement under certain conditions.
The Merger Agreement provides that, notwithstanding any other
provisions thereof, USMX will not (i) enter into a Competing Transaction until
at least 10 business days following the first notification by USMX to Dakota
that it has entered into discussions with a third party in respect of such
Competing Transaction and five business days following delivery of written
notice by USMX to Dakota of the identity and terms of the Competing Transaction;
or (ii) for a period of 10 business days following termination of the Merger
Agreement by USMX pursuant to the determination of the USMX Board of Directors
respecting the recommendation of a Competing Transaction that the USMX Board of
Directors determines that its fiduciary duties require it to recommend to the
USMX Stockholders and that, among other things, is financially more favorable to
the USMX Stockholders than the Merger (see "Termination of the Merger
Agreement"), grant or agree to grant to any third party, in connection with a
Competing Transaction, an option to purchase treasury securities or assets of
USMX or any of its subsidiaries, pay or agree to pay to any such third-party
termination, expense reimbursement, "topping" or similar fees in the event of
non-consummation of such Competing Transaction, or otherwise commit to any
inducement to any such third party.
The Merger Agreement also provides (a) that immediately following the
Effective Time, the Dakota Board will consist of eight persons, five of whom
will be members of Dakota's current Board of Directors, two of whom will be
designated by USMX and one of whom will be designated by Pegasus Gold.
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<PAGE>
Other Agreements
Agreement to Support the Transaction. Pegasus Gold, as holder of
approximately 4.8 million shares of USMX Common Stock (representing
approximately 29.1% of the outstanding shares of USMX Common Stock as of the
USMX Record Date, has entered into a Support Agreement with Dakota pursuant to
which it has agreed (i) until the earlier of June 1, 1997 or the termination of
the Merger Agreement, to vote its USMX Common Stock in favor of the Merger and
the Merger Agreement, and against any action which would impede, interfere with
or discourage the Merger or result in any breach by USMX under the Merger
Agreement, unless the USMX Board of Directors recommends that their stockholders
vote against the Merger or the opinion of Coopers & Lybrand L.L.P. referred to
under "Conditions of the Merger" does not conclude that no gain or loss should
be recognized by U.S. holders of USMX Shares upon receipt of Dakota Shares in
exchange for their USMX Shares; and (ii) without the prior written consent of
Dakota, to refrain from selling any of its USMX Common Stock until the earlier
of consummation of the Merger or termination of the Merger Agreement. In the
Support Agreement, Dakota and USMX agree to use their best efforts, subject to
applicable law and the fiduciary obligations of the USMX Board of Directors, to
obtain the approval of the USMX Stockholders with respect to the disposition of
USMX's royalty interest in the Montana Tunnels property (see "Business and
Properties of USMX-Montana Tunnels") and it is agreed that Pegasus Gold shall
have the right to designate one director of Dakota following the Merger, subject
to shareholder approval, and shall receive the recommendation of the Dakota
Board of Directors following the Merger that such designated director can
continue to hold that seat as long as Pegasus Gold holds not less than five
percent of outstanding Dakota Common Shares.
Option Agreement. Dakota and USMX have entered into the Option
Agreement pursuant to which USMX granted to Dakota an option to purchase 810,000
shares of USMX Common Stock at a price of $1.75 per share in the event the
Merger Agreement is terminated because the USMX Board of Directors makes a
recommendation to the USMX Stockholders against the Merger or in support of a
Competing Transaction or if USMX has entered into a Competing Transaction. Such
option shall expire six months after such termination. Dakota has the right to
terminate the option at any time.
$5,000,000 Loan Agreement. As part of the Merger transactions Dakota
and USMX agreed that Dakota will provide a $5 million line of credit to USMX to
provide interim working capital to sustain USMX's operations, principally the
construction and development of the Illinois Creek Mine, until the Merger is
consummated. The line of credit bears interest at the rate of one per cent above
a quoted floating prime rate and is due August 31, 1997 or earlier if the Merger
Agreement is terminated before such date because USMX completes or plans to
complete a business combination with another company. The proceeds will be used
to pay certain ongoing operating expenses of USMX, primarily in connection with
start-up activities associated with the Illinois Creek Mine and to partially pay
trade creditors of USMX and its subsidiaries.
The line of credit is evidenced by two promissory notes with similar
terms but different amounts and different security. The $2 million promissory
note ("Note 1") is secured by a second priority position in all of the capital
stock of USMX of Alaska, Inc. owned by USMX. USMX of Alaska, Inc. holds title to
the Illinois Creek Mine. The second promissory note for $3 million ("Note 2") is
secured by a first position on all of the capital stock of MXUS S.A. de C.V.,
USMX's Mexican Subsidiary, and a first position on USMX's interest in the
Thunder Mountain property in Idaho. USMX and Dakota agreed to grant Rothschild a
second priority security position in the security for Note 2.
Funding for the $5 million line of credit was provided from a portion
of the proceeds of the Special Warrant offering described under the heading
"Dakota Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources-Special Warrant Financing and
Issue of Debentures" with the consent of the Agents.
The $5,000,000 Loan Agreement contains representations, warranties,
covenants and negative covenants typical in short-term financing transactions.
USMX will use the proceeds of such loan to partly pay outstanding balances due
to trade creditors according to a plan approved by Dakota and Rothschild.
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<PAGE>
Intercreditor Agreements. In connection with the extension of the $5
million line of credit by Dakota to USMX and consummation of the Merger, the
consent of Rothschild was required. Further, Dakota, as the potential owner of
USMX, desired certain changes to the Rothschild loan facility in order to avoid
immediate defaults under such facility after closing of the Merger. Accordingly,
the parties negotiated an Intercreditor Agreement which provides, among other
things, as follows:
(a) The consent of Rothschild to the Merger and the extension of the
$5 million line of credit from Dakota to USMX on the terms
described above.
(b) Rothschild's agreement to share, pari passu with Dakota, in any
proceeds from foreclosure on the capital stock of USMX of Alaska,
Inc. in the ratio of the amount outstanding under Note 1 to $22
million, but with Rothschild retaining the right to deal with
such security.
(c) Dakota's agreement to fund at least $2 million of its line of
credit for costs and expenses at the Illinois Creek Mine
according to a plan prepared by USMX and approved by Rothschild
and Dakota.
(d) The agreement of Dakota to guarantee USMX's obligations under the
Rothschild Credit Agreements until "commercial completion" of the
Illinois Creek Mine.
(e) The agreement of Rothschild to forebear from exercising its
rights to declare and enforce defaults (except payment or
bankruptcy defaults) of USMX under the Rothschild Credit
Agreements until the earliest of consummation of the Merger,
termination of the $5 million line of credit or June 30, 1997.
(f) For amendment of certain terms and covenants in the Rothschild
Credit Agreements, to be effective upon closing of the Merger,
which include revisions to the definition of "commercial
completion," and amendments to certain financial covenants.
(g) Dakota's and Rothschild's rights to share in the collateral
terminate if the Merger is consummated or the $5 million line of
credit is extinguished.
(h) At the closing of the Merger, a $2.5 million convertible loan to
USMX under the Rothschild Credit Agreements will be extinguished
by payment of $1.5 million by Dakota and adding the balance to
the outstanding amounts under the project financing portion of
the such Agreements.
(i) Rothschild, Dakota and Gerald Metals, Inc. ("Gerald") have also
entered into an Intercreditor agreement in connection with the
foregoing transactions and the extension by Gerald of additional
working capital credit to Dakota. See "Dakota Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Sources and Uses of Cash." This Intercreditor
agreement provides that Rothschild shall enjoy a first priority
position on assets owned by the USMX Group and Gerald will hold a
first priority position on all Dakota assets except the USMX
Group assets, following the Merger. Gerald will receive a
collateral assignment of Dakota's rights in Note 2 to secure its
extension of additional credit under its working capital facility
to Dakota.
Settlement Agreement With Peak Oilfield Service Co. ("Peak"). Peak
supplied construction services to USMX at its Illinois Creek project in Alaska.
A dispute arose between USMX and Peak concerning payment of, and the amount owed
to, Peak for its services. Peak claimed over $7.0 million was owed to it under a
$3.0 million construction contract and USMX disputed such amount. Peak filed a
mechanic's lien on the Illinois Creek Project in November, 1996.
The parties entered into settlement discussions (in which Dakota also
participated) as part of the effort to deal with USMX's outstanding liabilities
prior to closing of the Merger. The parties entered into a letter agreement on
April 22, 1997 to settle this dispute for $5 million on the following principal
terms:
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<PAGE>
(a) Peak will release its mechanic's lien on the Illinois Creek
Project and USMX will pay Peak an aggregate of $5 million in
cash and securities as follows:
(i) $1,772,000 was previously paid by USMX to Peak;
(ii) An additional cash payment of $445,598 will be made within
one day of execution of the definitive letter agreement
(which payment was timley made);
(iii)A further cash payment of $1,782,396, plus interest at 9%
per annum, commencing April 11, 1997, upon consummation of
the Merger but not later than June 15, 1997; and
(iv) The issuance of 1,000,000 shares of USMX Common Stock
immediately prior to consummation of the Merger. Dakota has
agreed to use its best efforts to file a Registration
Statement covering the resale of the Dakota Common Shares to
be received by Peak in connection with the Merger.
(b) USMX agreed that Peak would retain its full lien rights, and the
right to claim the full amount of its claims, if the settlement
is not consummated;
(c) If the Merger is not consummated by June 15, 1997, then USMX
would have the right for a sixty day period thereafter to pay
Peak solely in cash the balance of $2,782,396, plus interest at
15% per annum. If the payment is not made Peak May obtain a
judgment against USMX for $2,782,396 or may rescind, the
settlement agreement in which event Peak could reassert
its original claims, and USMX could reassert its objections to
such claims.
Interests of Certain Persons in the Merger
Options. Under the Merger Agreement, from and after the Effective Time,
each outstanding USMX Option will be converted into a warrant, option or other
right to acquire Dakota Common Shares based on the Share Exchange Ratio, with
the exercise price associated therewith, if any, being adjusted proportionally.
See "USMX, Annual MeetingExecutive Compensation" for a description of the
outstanding USMX Options owned by directors, officers and employees of USMX that
will be converted into a warrant, option or other right to acquire Dakota Common
Shares. USMX Options will be exercisable under the terms of the Dakota option
plan described elsewhere in this Prospectus. See "The Merger--Other
Agreements--Employment and Option Plans."
Ownership of Dakota Common Shares. On consummation of the Merger it is
anticipated that the directors and executive officers of USMX and their
affiliates will beneficially own approximately 9.9% of the then outstanding
Dakota Common Shares, excluding out of the money stock options.
Resale of Dakota Common Shares. The Dakota Common Shares to be issued in
the Merger will have been registered under the Securities Act by a Registration
Statement on Form S-4, of which this Joint Proxy Statement/Prospectus is a part,
thereby allowing those shares to be traded in the United States without
restriction by all former holders of USMX Common Stock who neither (a) are
deemed to be affiliates of USMX at the time of the USMX Meeting nor (b) become
affiliates of Dakota after the Merger. USMX has agreed to use its reasonable
best efforts to cause each person who is an "affiliate" (as such term is defined
in Rule 145 under the Securities Act) of USMX to deliver to Dakota at or prior
to the Effective Time, a written agreement to the effect that such person will
not sell, transfer or otherwise dispose of any Dakota Common Shares such person
will acquire in connection with the Merger unless (a) such sale, transfer or
other disposition is made in conformity with the volume and other limitations of
Rule 145 promulgated by the SEC under the Securities Act, (b) such resale,
transfer or other disposition has been registered under the Securities Act or
(c) in the opinion of counsel reasonably acceptable to Dakota, such sale,
transfer or other disposition is otherwise exempt from registration under the
Securities Act. Peak has been granted certain registration rights. See" The
Merger- Other Agreements - Settlement with Peak Oilfield Service Co."This Joint
Proxy Statement/Prospectus does not cover any resales of Dakota Common Shares
received by persons who are deemed to be affiliates of USMX.
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<PAGE>
For information regarding Canadian resale provisions, See "Resale Restrictions."
Directors. If the Merger Agreement is approved by the Dakota
Shareholders and USMX Stockholders, Dakota's Board of Directors will include two
designees of USMX, and one designee of Pegasus Gold.
USMX Directors' and Officers' Indemnification and Insurance. The Merger
Agreement provides that from and after the Effective Time Dakota will indemnify
and hold harmless all past and present officers and directors of USMX and of its
Subsidiaries to the full extent such persons may be indemnified by Dakota for
acts or omissions occurring at or prior to the Effective Time and will advance
reasonable litigation expenses incurred by such officers and directors in
connection with the defending of any action arising out of such acts or
omissions. The Merger Agreement provides that these rights to indemnification
shall continue for a period of at least six years from the Effective Time.
Dakota has also agreed to use commercially reasonable efforts to provide
directors and officers' liability insurance for six years from the Effective
Time for the persons serving as officers and directors of USMX immediately prior
to the Effective Time.
Change in Control Arrangements. Certain officers of USMX have
change-in-control agreements with USMX that will trigger certain obligations
upon completion of the Merger if such officers are terminated without "cause" or
there is a "material change" in such officer's job status as each is defined
therein. Such obligations include payment of salary and the continuation of
medical benefits for a period of time based on tenure. Dakota intends to honor
such agreements to the extent necessary.
Employment and Option Plans. Dakota and USMX have agreed to use reasonable
efforts to coordinate the conversion or merger of any employment benefit plans
of USMX into comparable Dakota plans, and Dakota has agreed to honor in
accordance with their terms, all employment, severance, stock option and other
compensation agreements and plans existing prior to the Merger Agreement between
USMX and any officer, director or employee which have been disclosed to Dakota
to the extent practicable under existing comparable agreements and plans in
effect for Dakota employees. See "USMX Annual Meeting-Executive Compensation."
Comparison of Rights of Holders of Shares of USMX Common Stock Under Delaware
and Canadian Law
The rights of holders of shares of USMX Common Stock are currently
governed by Delaware law, particularly the DGCL, USMX's Certificate of
Incorporation and USMX's Bylaws. On consummation of the Merger, holders of
shares of USMX Common Stock will become holders of Dakota Common Shares, and
their rights as holders of Dakota Common Shares will be governed by the CBCA,
Dakota's Articles of Continuance and Dakota's Bylaws. While it is not practical
to summarize all of the legal differences between the rights of holders of
<PAGE>
shares of USMX Common Stock and Dakota Common Shares, certain material
differences that could affect the rights of the holders of shares of USMX Common
Stock are set forth below. The following summary does not purport to be complete
and is qualified in its entirety by reference to the DGCL and the CBCA.
Amendments to the Governing Documents. Under the CBCA, an amendment to
a corporation's articles of continuance requires approval by special resolution,
which is a resolution passed by a majority of not less than two-thirds of the
votes cast by shareholders entitled to vote on the resolution. In a case where
the proposed amendment would affect a class or series of shares, the holders of
shares of that class or series are entitled to vote separately as a class or
series. The CBCA provides that unless the articles or bylaws otherwise provide,
the directors may, by resolution, make, amend or repeal any bylaws that regulate
the business or affairs of a corporation. Where the directors make, amend or
repeal a bylaw, they are required under the CBCA to submit the bylaw, or an
amendment or a repeal of a bylaw to the shareholders at the next meeting of
shareholders, and the shareholders may confirm, reject or amend the bylaw,
amendment or repeal by an ordinary resolution, which is a resolution passed by a
majority of the votes cast by shareholders entitled to vote on the resolution.
Generally, under the DGCL, an amendment to a corporation's certificate
of incorporation requires the affirmative vote of the holders of at least a
majority of outstanding stock entitled to vote thereon and the majority of the
outstanding stock of each class entitled to vote thereon. In a case where the
proposed amendment would increase or decrease the aggregate number of authorized
shares of a class, increase or decrease the par value of the shares of a class,
or alter or change the powers, preferences, or special rights of the shares of a
class, the amendment must also receive an affirmative vote of at least a
majority of the outstanding stock of that class whether or not otherwise
entitled to vote. If the certificate of incorporation requires a larger
proportion or number, the certificate of incorporation controls. Bylaws may be
amended by a majority vote of the shareholders of the corporation, unless
otherwise provided in the certificate of incorporation to allow amendments by
the Board of Directors. USMX's Certificate of Incorporation provides for an
affirmative vote of 66 2/3% of the outstanding stock to amend the Certificate of
Incorporation bylaws regarding removal of directors.
Disposition of Assets. Under the CBCA, a sale, lease or exchange of all
or substantially all of the property of a corporation other than in the ordinary
course of business of such corporation requires approval by special resolution.
The sale, lease or exchange shall be effective on the adoption of a special
resolution of the holders of each class or series entitled to vote on the
matter. If the sale, lease or exchange would affect the holders of a particular
class or series of shares in a manner different from the other shareholders of
the corporation, the holders of such class or series of shares are entitled to
vote separately as a class or series, whether or not they are otherwise entitled
to vote on the matter. The directors of the corporation may, if so authorized by
the shareholders approving the sale, lease or exchange, and subject to the
rights of third parties, abandon the transaction without further approval of the
shareholders.
Under the DGCL, a sale, lease, transfer or other disposition of all or
substantially all of the property of a corporation requires the approval of the
holders of a majority of the outstanding stock entitled to vote thereon.
Vote Required for Other Extraordinary Transactions. Under the CBCA,
certain other extraordinary corporate actions, such as certain amalgamations,
continuances and other extraordinary corporate actions such as liquidations,
dissolutions and (if ordered by a court) arrangements, are required to be
approved by special resolution. In certain cases, a special resolution to
approve an extraordinary corporate action is also required to be approved
separately by the holders of a class or series of shares.
Except with respect to certain mergers and consolidations between a
parent and its subsidiaries, the DGCL requires the affirmative vote of a
majority of the outstanding stock entitled to vote thereon to effect a merger or
consolidation.
Directors Qualification. Under the CBCA, a corporation having
outstanding securities which were issued as part of a distribution to the
public, must have not fewer than three directors and a majority of the directors
must be resident Canadians. The CBCA also requires that at least two of the
directors of such a corporation must not be officers or employees of the
corporation or any of its affiliates.
<PAGE>
Under the DGCL, a corporation may have one or more directors. USMX's
Certificate of Incorporation provides that the USMX board shall consist of not
less than three or more than nine directors. Directors hold office until their
successors are elected and qualified or until they resign or are removed.
Removal of Director. Under the CBCA, directors may generally be removed
before the expiration of their term in office, with or without cause, by
ordinary resolution, which is a resolution passed by a majority of the votes
cast by the shareholders who voted in respect of that resolution at a special
meeting. A replacement may be appointed by ordinary resolution at such meeting.
Generally, under the DGCL, directors may be removed with or without
cause, by the affirmative vote of a majority of the outstanding stock entitled
to vote for directors. USMX's Certificate of Incorporation provides for removal
without cause by the affirmative vote of 66 2/3% of the outstanding stock.
Indemnification. Under the CBCA, a corporation may, except in respect
of an action by or on behalf of the corporation to procure a judgment in its
favor, indemnify a director or officer, a former director or officer or a person
who acts or acted at the corporation's request as a director or officer of a
body corporate of which the corporation is or was a shareholder or creditor, and
his or her heirs and legal representatives (an "Indemnifiable Person"), against
all costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by the Indemnifiable Person in respect
of any civil, criminal or administrative action or proceeding to which the
Indemnifiable Person is made a party by reason of being or having been a
director or officer of such corporation or such body corporate, if: (a) the
Indemnifiable Person acted honestly and in good faith with a view to the best
interests of such corporation; and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, the
Indemnifiable Person had reasonable grounds for believing that his or her
conduct was lawful. An Indemnifiable Person is entitled to such indemnity from
the corporation if he or she was substantially successful on the merits in his
or her defense of the action or proceeding and fulfilled the conditions set out
in (a) and (b) above. A corporation may, with the approval of a court, also
indemnify an Indemnifiable Person in respect of an action by or on behalf of the
corporation or body corporate to procure a judgment in its favor, to which such
person is made a party by reason of being or having been a director or an
officer of the corporation or body corporate, if he or she fulfils the
conditions set out in (a) and (b) above.
Under the DGCL, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or was serving as a director, officer,
employee or agent of another entity at the corporation's request, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with the
action, suit or proceeding, if such person: (a) acted in good faith; (b)
reasonably believed that the conduct was in, or not opposed to, the best
interests of the corporation; and (c) with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or on a plea of nolo contendere or its equivalent does not, of
itself, create a presumption that the person did not meet the criteria for
indemnification. A corporation may not indemnify any such person with respect to
any claim, issue or matter as to which such person was adjudged liable to the
corporation unless the court deems such indemnification proper in view of the
circumstances. A corporation may purchase and maintain insurance on behalf of
any director, officer, employee or agent of the corporation or any director,
officer, agent or employee of any other entity serving at the corporation's
request, in such person's official capacity against any liability asserted
against and incurred by such person in or arising from that capacity, whether or
not the corporation has the authority to indemnify the person.
Liability of Directors. Under the CBCA, every director of a corporation
who authorizes the issue of shares of the corporation from treasury for
consideration, other than money is jointly and severally liable to the
corporation to make good any amount by which the consideration received is less
than the fair equivalent of the money that the corporation would have received
if the shares had been issued for money. Directors who vote for or consent to
resolutions authorizing, in a manner or under circumstances contrary to the
provisions of the CBCA, (i) the granting of any financial assistance, (ii) a
purchase, redemption or other acquisition of shares, (iii) a commission, or
discount on the issues of shares or securities (iv) a payment of a dividend, (v)
a payment of an indemnity, or (vi) a payment to any person, are jointly and
<PAGE>
severally liable to restore to the corporation any amounts so distributed or
paid and not otherwise recovered by the corporation.
Under the DGCL, directors of a corporation are jointly and severally
liable for the willful or negligent violation of the provisions regarding
dividends and the purchase or redemption of its stock. However, directors are
fully protected if they rely in good faith on the records of the corporation and
certain other information, reports and opinions as to the value and amount of
its assets, liabilities, net profits, surplus and other funds with respect to
the declaration and payment of dividends and the purchase and redemption of
stock.
Dissenters' Appraisal Rights. The CBCA provides that shareholders of a
CBCA corporation entitled to vote on certain matters are entitled to exercise
dissent rights and to be paid the fair value of their shares in connection
therewith. The CBCA does not distinguish for this purpose between listed and
unlisted shares. Such matters include (a) any amalgamation with another
corporation (other than with certain affiliated corporations); (b) an amendment
to the corporation's articles to add, change or remove any provisions
restricting the issue, transfer or ownership of shares; (c) an amendment to the
corporation's articles to add, change or remove any restriction upon the
business or businesses that the corporation may carry on; (d) a continuance
under the laws of another jurisdiction: (e) a sale, lease or exchange of all or
substantially all the property of the corporation other than in the ordinary
course of business; (f) a court order permitting a shareholder to dissent in
connection with an application to the court for an order approving an
arrangement proposed by the corporation; and (g) certain amendments to the
articles of a corporation which require a separate class or series vote,
provided that a shareholder is not entitled to dissent if an amendment to the
articles is effected by a court order approving a reorganization or by a court
order made in connection with an application for an oppression remedy.
Under the DGCL, a stockholder may be entitled to exercise appraisal
rights, and receive the fair value of such stockholders stock in the event of a
merger or consolidation. However, there are no appraisal rights with respect to
a merger or consolidation in favor of the holders of stock ("Listed Stock") of
any class or series which is either listed on a national securities exchange,
designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by at least 2,000 stockholders, unless the certificate of incorporation provides
otherwise or the holders are required to receive anything other than shares of
the surviving corporation, shares of any Listed Stock, cash in lieu of
fractional shares, or any combination thereof.
Oppression Remedy and Other Actions. The CBCA provides an oppression
remedy that enables the court to make any order, interim or final, to rectify
the matters complained of where it is satisfied upon application by a
complainant (as defined below) that: (i) any act or omission of the corporation
or an affiliate effects a result; (ii) the business or affairs of the
corporation or an affiliate are, have been or are threatened to be carried on or
conducted in a manner; or (iii) the powers of the directors of the corporation
or an affiliate are, have been exercised in a manner, that is oppressive or
unfairly prejudicial to or that unfairly disregards the interest of any security
holder, creditor, director or officer of the corporation. A complainant
includes: (a) a present or former registered holder or beneficial owner of
securities of a corporation or any of its affiliates; (b) a present or former
officer or director of the corporation or any of its affiliates; and (c) any
other person who in the discretion of the court is a proper person to make such
application.
Due to the breadth of the conduct which can be complained of and the
scope of the court's remedial powers, the oppression remedy is very flexible and
is sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the CBCA, it
is not necessary to prove that the directors of a corporation acted in bad faith
in order to seek an oppression remedy. Furthermore, the court may order the
corporation or its subsidiary to pay the interim expenses of a complainant
seeking an oppression remedy, but the complaint may be held accountable for such
interim costs on final disposition of the complaint (as in the case of a
derivative action, which is described below).
The DGCL does not provide a statutory remedy for oppression.
Stockholders may, however, have a number of legal and equitable remedies
available under the Delaware common law for the improper acts and omissions of
its directors and officers.
<PAGE>
Derivative Action. Under the CBCA, a complainant may apply to the court
for leave to bring an action in the name of and on behalf of a corporation or
any subsidiary, or to intervene in an existing action to which any such body
corporate is a party, for the purpose of prosecuting, defending or discontinuing
the action on behalf of the body corporate. Under the CBCA, no action may be
brought and no intervention in an action may be made unless the complainant has
given reasonable notice to the directors of the corporation or its subsidiary of
the complainant's intention to apply to the court if the directors of the
corporation or its subsidiary will not bring, diligently prosecute or defend or
discontinue the action and the court is satisfied that (a) the complainant is
acting in good faith and (b) it appears to be in the interest of the corporation
or its subsidiary that the action be brought, prosecuted, defended or
discontinued.
Under the CBCA, the court in a derivative action may make any order it
thinks fit, including an order requiring a corporation or its subsidiary to pay
the complainant's interim costs, including reasonable legal fees and
disbursements.
In certain instances, derivative actions may be brought in Delaware by
a stockholder on behalf of, and for the benefit of, the corporation. Under the
DGCL, a stockholder must aver in the complaint that the plaintiff was a
stockholder of the corporation at the time of the transaction of which the
plaintiff complains, or that the shares thereafter devolved on the plaintiff by
operation of law.
Access to Corporate Records and Financial Statements. Under the CBCA a
corporation is required to make available to the public certain prescribed books
and records during usual business hours of the corporation. In addition,
directors of a corporation are entitled to examine certain additional records,
documents and instruments of the corporation.
Under the DGCL, on written demand under oath, any stockholder may, for
any proper purpose, inspect during usual business hours the corporation's stock
ledger, a list of stockholders, and its other books and records, and may make
copies and extracts therefrom.
Fiduciary Duties of Directors. Directors of corporations governed by
the CBCA have fiduciary obligations to the corporation. Under the CBCA, the duty
of loyalty requires directors to act honestly and in good faith with a view to
the best interests of the corporation as a whole, and the duty of care requires
that the directors exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances. Directors and
officers who are a party to a material contact or proposed material contact with
the corporation or who are a director or an officer of, or have a material
interest in, any person who is a party to a material contact or proposed
material contact with the corporation have a duty to disclose the nature and
extent of such interest. If such interest exists, the director generally may not
vote on any resolution to approve the contract. No such contract is void or
voidable by reason only of the relationship if such interest is properly
disclosed, the contract is approved by the other directors or by the
shareholders and it was fair and reasonable to the corporation at the time it
was approved.
Directors of corporations incorporated or organized under the DGCL have
fiduciary obligations to the corporation and its stockholders. In fulfilling
these fiduciary obligations, the directors must act in accordance with the
so-called duties of "care," "disclosure" and "loyalty." The duty of care
generally requires that the directors exercise the same standard of care as an
ordinary prudent person would exercise in the same or similar situation, which
includes acting in an informed and deliberative manner and informing themselves,
prior to making any business decision, of all material information reasonably
available to them. The duty of disclosure requires that directors disclose fully
and fairly to the corporation's stockholders all material information within
their control. The duty of loyalty can be summarized as the duty to act in good
faith in a manner which the directors reasonably believe to be in the interests
of the stockholders: and generally requires that directors refrain from
self-dealing. A contract or transaction between a corporation and one or more of
its directors and any other corporation in which a director has a financial
interest is voidable unless (a) the material facts as to the director's
relationship or interest in the contract or the transaction are disclosed or are
known to the board of directors (or stockholders, if they are entitled to vote
thereon) prior to a vote regarding the transaction is taken, and the transaction
was approved by a majority of the "disinterested directors," (i.e. directors
without a financial interest in the transaction) or stockholders, if appropriate
or (b) the contract or transaction was fair to the corporation at the time it
<PAGE>
was authorized, approved or ratified by the directors or stockholders, if
applicable.
Anti-Takeover Provisions and Interested Stockholder Transactions. The
CBCA provides that, in the absence of an exemption, if any person offers to
acquire shares that, if combined with shares already beneficially owned or
controlled, directly or indirectly, by the offeror or an affiliate or associate
of the offeror on the date of the offer, would exceed 10% of any class of issued
shares of the corporation, the offeror must prepare and send a take-over bid
circular to each shareholder of the corporation. Canadian provincial securities
laws augment and clarify this requirement to in effect require a take-over bid
offeror to offer the same consideration to all shareholders unless certain
exemptions are available, which include limited private agreement purchases and
limited market purchases.
The CBCA does not impose any limitations on the rights of non-residents
or foreigners to hold or vote Dakota Common Shares.
The DGCL does not impose any limitations on the rights of non-residents
or foreigners to hold or vote their domestic corporation stock.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE MERGER
The following summary discusses the material federal income tax
consequences of the Merger and of acquiring Dakota Common Shares. This
discussion, which is based on the Internal Revenue Code of 1986, as amended (the
"Code"), and the Regulations, rulings and decisions currently in effect, all of
which are subject to change, does not address all aspects of federal income
taxation that may be relevant to a particular shareholder in light of his or her
personal investment circumstances or to shareholders subject to special
treatment under the federal income tax laws such as life insurance companies,
tax-exempt organizations and certain consequences to foreign taxpayers and does
not discuss any aspects of state, local or foreign tax laws. Furthermore, this
discussion does not consider the potential effects, both adverse and beneficial,
of any recently proposed legislation which, if enacted, could be applied,
possibly on a retroactive basis, at any time. Neither USMX nor Dakota has
requested or will receive an advance ruling from the IRS as to the tax
consequences of the Merger, however, as discussed below in "Tax Free Merger,"
Coopers & Lybrand L.L.P. has provided an opinion to USMX and Dakota with respect
to some, but not all, of the federal income tax consequences of the Merger. IN
VIEW OF THE INDIVIDUAL NATURE OF EACH STOCKHOLDER'S TAX SITUATION, THE
STOCKHOLDERS OF USMX ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE TAX
CONSEQUENCES TO THEM OF THE MERGER AND OF ACQUIRING, OWNING AND DISPOSING OF
DAKOTA COMMON SHARES.
Tax Free Merger
In the opinion of Coopers & Lybrand L.L.P., the Merger will, under
current law, constitute a tax-free reorganization within the meaning of Section
368(a) of the Code and Dakota, USMX and Merger Corp. will each be a party to the
reorganization within the meaning of Section 368(b) of the Code. In rendering
such opinion, Coopers & Lybrand L.L.P. has relied upon certain assumptions,
conditions, and qualifications as set forth in their opinion to Dakota and USMX.
While not entirely free from doubt, as a tax-free reorganization, the
Merger will have the following United States federal income tax consequences for
USMX Stockholders, Dakota and USMX:
<PAGE>
(a) No gain or loss should be recognized by U.S. Stockholders of USMX
on the exchange of USMX stock for Dakota Common Shares if, by
virtue of the Merger, they become holders of less than 5% of the
shares of Dakota, measured by either voting rights or value. No
gain or loss should be recognized by U.S. Stockholders of USMX on
the exchange of USMX Common Stock for Dakota Common Shares if, by
virtue of the Merger, they become holders of 5% or greater of the
shares of Dakota measured by either voting rights or value,
provided such shareholders enter into gain recognition agreements
<PAGE>
with the IRS as required in Section 367 of the Code and the
Regulations pursuant thereto;
(b) The aggregate tax basis of the Dakota Common Shares received in
the Merger by a USMX Stockholder should be the same as the tax
basis of his USMX Common Stock exchanged therefor;
(c) The holding period of Dakota Common Stock in the hands of a USMX
Stockholder should include the holding period of his USMX Common
Stock exchanged therefor, provided such USMX Common Stock is held
as a capital asset at the time of the Merger; and
(d) Neither Dakota nor USMX will recognize gain or loss as a result
of the Merger.
Certain United States Federal Income Tax Consequences of USMX's U.S.
Stockholders Becoming Holders of Dakota Common Shares
The following discussion summarizes the material United States federal
income tax consequences under current law generally applicable to USMX
Stockholders who become U.S. Holders (as defined below) of Dakota Common Shares
upon the consummation of the Merger. The summary is of a general nature only and
is not intended to be, and should not be construed to be, legal or tax advice to
any USMX Stockholder and no representation or opinion to any USMX Stockholder is
made. USMX Stockholders should consult with their own tax advisors for advice
with respect to the tax consequence of an investment in Dakota Common Shares.
U.S. Holders
As used herein, the term "U.S. Holder" generally means a holder of
Dakota Common Shares who is a U.S. Person. This summary does not address the tax
consequences to, and U.S. Holder does not include persons subject to specific
provisions of federal income tax law such as, tax-exempt organizations,
qualified retirement plans, individual retirement accounts and other
tax-deferred accounts, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, nonresident
alien individuals, persons or entities that have a "functional currency" other
than the U.S. dollar, shareholders who hold Dakota Common Shares as a part of a
straddle, hedging or a conversion transaction, and shareholders who acquired
their stock through the exercise of employee stock options or otherwise as
compensation for services. This summary is limited to U.S. Holders who own
Dakota Common Shares as capital assets. This summary does not address the
consequences to a person or entity holding an interest in a shareholder of USMX
or the consequences to a person of the ownership, exercise or disposition of any
options, warrants or other rights to acquire Dakota Common Shares.
Certain U.S. Shareholder Filing Requirements
Sections 367, 368, and 6038B of the Code, and the administrative
pronouncements thereunder, require USMX Stockholders who are U.S. persons to
file certain information with the IRS regarding the Merger. USMX Stockholders
should consider these regulations, and their requirements, prior to filing the
required information with the IRS. If a USMX Stockholder who is a U.S. person,
including a USMX Stockholder who files a gain recognition agreement, fails to
comply with such notice requirements, significant adverse tax consequences,
including penalties, may be imposed on such Stockholder. U.S. Stockholders of
USMX should consult with their tax advisors regarding these requirements.
Distributions on Dakota Common Shares
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to Dakota Common Shares are required to include in gross
income for United States federal income tax purposes the gross amount of such
distributions to the extent that Dakota has current or accumulated earnings and
profits, without reduction for any Canadian income tax, if any, withheld from
such distributions. Such Canadian tax, if any, withheld may be credited, subject
<PAGE>
to certain limitations, against the U.S. Holder's United States federal income
tax liability, or alternatively if the U.S. Holder generally elects, may be
deducted in computing the U.S. Holder's United States federal taxable income by
those who itemize deductions. (See more detailed discussion at "Foreign Tax
Credit" below.) To the extent that distributions exceed current and accumulated
earnings and profits of Dakota, they will be treated first as a return of
capital up to the U.S. Holder's adjusted basis in the Dakota Common Shares and
thereafter as gain from the sale or exchange of the Dakota Common Shares.
Preferential tax rates for net capital gains are applicable to a U.S. Holder
which is an individual, estate or trust. There are currently no preferential tax
rates for long-term capital gains of a U.S. Holder which is a corporation.
Generally, dividends paid on shares of a foreign corporation will not
be eligible for the dividends received deduction provided to corporations
receiving dividends from certain United States corporations. However, an
exception may apply in this case. Specifically, a U.S. Holder of Dakota Common
Shares which is a corporation may, under certain circumstances, be entitled to a
70% deduction of the United States source portion of dividends received from
Dakota (unless Dakota qualifies, as a "foreign personal holding company" or a
"passive foreign investment company," as defined below) if such U.S. Holder owns
shares representing at least 10% of the voting power and value of Dakota. The
availability of this deduction is subject to several complex limitations which
are beyond the scope of this summary.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian
income tax with respect to the ownership of Dakota Common Shares may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayer's income subject to tax. This election is made on a year-by-year basis
and applies to all direct and indirect foreign income taxes paid by (or withheld
from) the U.S. Holder during that year. There are significant and complex
limitations which apply to the credit, among which is the general limitation
that the credit cannot exceed the proportionate share of the U.S. Holder's
United States income tax liability that the U.S. Holder's foreign source income
bears to his or its worldwide taxable income. In the determination of the
application of this limitation, the various items of income and deduction must
be classified into foreign and domestic sources. Complex rules govern this
classification process. There are further limitations on the foreign tax credit
for certain types of income such as "passive income," "high withholding tax
interest," "financial services income," "shipping income," and certain other
classifications of income. The availability of the foreign tax credit and the
application of the limitations on the credit are fact specific, and holders and
prospective holders of the Dakota Common Shares should consult their own tax
advisors regarding their individual circumstances.
Disposition of Dakota Common Shares
Generally, a U.S. Holder will recognize gain or loss upon the sale of
Dakota Common Shares equal to the difference, if any, between (i) the amount of
cash plus the fair market value of any property received, and (ii) the
shareholder's tax basis in Dakota Common Shares. This gain or loss generally
will be capital gain or loss if the Dakota Common Shares are a capital asset in
the hand of the U.S. Holder, and will be a short-term or long-term capital gain
or loss depending upon the holding period of the U.S. Holder. See discussion
below. For U.S. Holders which are individuals, any unused portion of such net
capital loss may be carried over for use in later tax years until such net
capital loss is thereby exhausted. For U.S. Holders that are corporations (other
than corporations subject to Subchapter S of the Code), an unused net capital
loss may be carried back three years from the loss year and carried forward five
years from the loss year to be offset against capital gains until such net
capital loss is thereby exhausted or expires unused.
<PAGE>
Other Considerations
Foreign Personal Holding Company. If at any time during a taxable year
more than 50% of the total combined voting power or the total value of Dakota's
outstanding shares is owned, directly or indirectly, by five or fewer
individuals who are U.S. Persons and 60% or more of Dakota's gross income for
such year was derived from certain passive sources (e.g., from dividends
received from its subsidiaries), Dakota may be treated as a "foreign personal
holding company." In that event, U.S. Holders that hold Dakota Common Shares
would be required to include in gross income for such year their allocable
portions of such passive income to the extent Dakota does not actually
distribute such income.
Foreign Investment Company. If 50% or more of either the combined
voting power or the total value of Dakota's outstanding shares are held,
directly or indirectly, by U.S. Persons and Dakota is found to be engaged
primarily in the business of investing, reinvesting, or trading in securities,
commodities, or any other interest therein, it is possible that Dakota may be
treated as a "foreign investment company" as defined in Section 1246 of the
Code, causing all or part of any gain realized by a U.S. Holder selling or
exchanging Dakota Common Shares to be treated as ordinary income rather than
capital gain.
Passive Foreign Investment Company. As a foreign corporation with U.S.
Holders, Dakota could potentially be treated as a passive foreign investment
company ("PFIC"), as defined in Section 1296 of the Code, depending upon the
percentage of Dakota's income which is passive, or the percentage of Dakota's
assets producing passive income. U.S. Holders owning common shares of a PFIC are
subject to an additional tax and to an interest charge based on the value of
deferral of tax for the period during which the common shares of the PFIC are
owned, in addition to treatment of gain realized on the disposition of common
shares of the PFIC as ordinary income rather than capital gain. However, if the
U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund
("QEF") with respect to such shareholder's interest therein, the above-described
rules generally will not apply. Instead, for each year the entity qualifies as a
PFIC, the electing U.S. Holder would include in his gross income his pro rata
share of the PFIC's ordinary earnings and net capital gain regardless of whether
such income or gain was actually distributed. A U.S. Holder of a QEF can,
however, elect to defer the payment of United States federal income tax on such
income inclusions. Special rules apply to U.S. Holders who own their interests
in a PFIC through intermediate entities or persons.
Controlled Foreign Corporation. If more than 50% of the voting power of
all classes of stock or the total value of the stock of Dakota is owned,
directly, or indirectly, by U.S. persons that are "US Shareholders," (a "US
Shareholder" is any U.S. person that owns at least 10% of the total combined
voting power of all classes of stock of Dakota) Dakota could be treated as a
"controlled foreign corporation" under Subpart F of the Code. This
classification could invoke many complex results including the required
inclusion in income by such United States shareholders of their pro rata shares
of "Subpart F income" (as specifically defined by the Code) of Dakota.
Generally, Subpart F would require current inclusion in income by United States
shareholders to the extent of a controlled foreign corporation's accumulated
earnings invested in "excessive passive" assets (as defined by the Code). In
addition, under Section 1248 of the Code, gain from the sale or exchange of
stock by a holder of Dakota Common Shares who is or was a "United States
Shareholder" at any time during the five year period ending with the sale or
exchange is treated as ordinary dividend income to the extent of earnings and
profits of Dakota attributable to the stock sold or exchanged. Because of the
complexity of Subpart F, and because it is not clear that Subpart F would apply
to the holders of Dakota Common Shares, a more detailed review of these rules is
outside of the scope of this discussion.
Certain Limitations on Net Operating Losses
Section 382 of the Code generally places an annual limitation on a
corporation's ability to utilize its net operating losses ("NOLs") following a
more than 50 percentage point change in the ownership of the corporation's stock
within a three year period (a "Change"). The annual limitation is expressed as a
product of (i) the value of the corporation immediately prior to the Change and
(ii) an interest rate prescribed monthly by the IRS for ownership changes
occurring within that month. In each year following a Change, the corporation
can only utilize an amount of its pre-Change NOLs equal to the annual limitation
to offset its income for such year. Any unused limitation for a particular year
<PAGE>
will carry forward and increase the following year's limitation. In addition,
Section 382 provides special rules for dealing with inherent but unrealized
gains and losses (i.e., built-in gains and losses) in a corporation at the time
of a Change. Temporary regulations apply these limitations on a sub-group basis.
Further, certain separate return limitation rules will restrict the Dakota U.S.
consolidated groups' ability to utilize the USMX NOLs against income generated
by entities other than members of the USMX consolidated group.
Certain Non-US Shareholders
USMX may be a U.S. Real Property Holding Corporation ("USRPHC") for
purposes of the U.S. Foreign Investment in Real Property Tax Act ("FIRPTA").
Generally, a USRPHC is a U.S. corporation the fair market value of whose U.S.
real property assets, measured at specific testing dates within the prior five
year period, has equaled or exceeded 50% of the sum of the fair market value of
the company's U.S. and foreign real property assets plus business assets. If
USMX is a USRPHC, foreign persons exchanging their shares of USMX for shares in
Dakota will be subject to the special FIRPTA rules, which may cause any gain
realized on their USMX stock to be taxable in the U.S., absent an exception. Any
foreign persons owning more than 5% of a publicly traded USRPHC may be required
to satisfy more stringent FIRPTA requirements in order to qualify for an
exception. Foreign persons participating in the exchange are advised to consult
with their tax advisors regarding the potential application of the FIRPTA rules
and associated filing requirements, if any.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase business combination for
accounting and financial reporting purposes under Canadian GAAP. Under this
method of accounting, Dakota will allocate the cost of acquiring USMX to the
assets acquired and liabilities assumed, based upon the fair value of the assets
acquired and liabilities assumed at the date of acquisition. Accounting for the
business combination using the purchase method in accordance with Canadian GAAP
is consistent with the U.S. GAAP accounting method.
RESALE RESTRICTIONS
United States
The Dakota Common Shares received by USMX Stockholders in the Merger
will be freely transferable, except that the Dakota Common Shares received by
persons who are deemed to be "affiliates" (as such term is defined for purposes
of Rule 145 of the Securities Act) of USMX at the time the Merger is submitted
to the vote of USMX Stockholders may be resold by them only in accordance with
Rule 145 promulgated under the Securities Act. Persons who may be deemed to be
affiliates of USMX generally include individuals or entitles that control, are
controlled by, or are under common control with, such party and may include
officers, directors and principal stockholders.
Under Rule 145 as currently in effect, holders of "restricted shares"
may sell, within any three-month period, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of the Dakota Common Shares
or (ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
SEC, provided that certain requirements relating to the manner of sale, notice
and availability of current public information about Dakota are met. A person
who is not deemed to have been an affiliate of the company at any time during
the 90 days immediately preceding the sale and whose restricted shares have been
fully paid for two years may sell such restricted shares under Rule 145(d)(2)
subject only to the volume limitation described above, and such non-affiliate
who has held such shares for three years may sell such restricted shares under
Rule 145(d)(3) without regard to the limitations described above. Rule 145 has
been amended, effective in May 1997, to reduce the foregoing holding periods to
one year and two years, respectively.
Canada
To the extent necessary Dakota will apply for rulings or orders of
certain provincial securities regulatory authorities in Canada to permit the
issuance to former USMX Stockholders of the Dakota Common Shares. Application
has also been made to permit resale of those shares in such provinces without
restriction by a shareholder other than a "control person," provided that no
unusual effort is made to prepare the market for any such resale or to create a
demand for the securities which are the subject of any such resale and no
extraordinary commission or consideration is paid in respect thereof. Applicable
Canadian securities legislation provides a rebuttable presumption that a person
or company is a control person in relation to an issuer where the person or
company alone or in a combination with others holds more than 20% of the
outstanding voting securities of the issuer.
REGULATORY MATTERS
Consummation of the Merger is conditional on the receipt of all
material regulatory authorizations, consents, orders and approvals, subject to
waiver of such conditions, in accordance with the terms of the Merger Agreement.
Dakota and USMX do not believe that any regulatory approvals are required. See
"Terms of the Merger-Conditions to the Merger" and the Merger Agreement attached
as Appendix A, for details.
- 51 -
<PAGE>
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Directors
At the USMX Meeting, USMX Stockholders will elect a Board of Directors.
If the Merger is approved by both the USMX Stockholders and the Dakota
Shareholders, the directors elected to the USMX Board will remain in office only
until the Effective Time, whereupon their term as directors will cease and
Dakota, as the sole holder of voting stock of the Surviving Corporation, will
then elect new directors of the Surviving Corporation. If the Merger is approved
by both the USMX Stockholders and the Dakota Shareholders, then the directors
nominated for election at the Dakota Meeting will be the directors of Dakota
following the Effective Time, and pursuant to the Merger Agreement, Dakota will
nominate two representatives of USMX and one representative of Pegasus Gold to
the Board. See "Terms of the Merger-Interests of Certain Persons in the Merger
Directors and Officers" and "Dakota Annual and Special MeetingMatters to be
Addressed at the Meeting - Number and Election of Directors."
Officers
As of the Effective Time, if the Merger is approved by the USMX
Stockholders and the Dakota Shareholders, the officers of Merger Corp. will
become the officers of USMX as the Surviving Corporation. The current officers
of Merger Corp. are Alan R. Bell, Chief Executive Officer, and Robert R.
Gilmore, Vice President, Treasurer and Secretary. If the Merger is approved, the
current Officers of Dakota will continue as such. See "Terms of the
Merger-Interests of Certain Persons in the Merger - Directors and Officers."
Business and Operations of USMX
After the Merger, the business and operations of USMX will be managed
and operated as a wholly-owned Subsidiary of Dakota. Dakota expects that the
business operations of Dakota and USMX will be consolidated after the Merger.
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OF DAKOTA MINING CORPORATION
(Unaudited)
The following unaudited pro forma consolidated financial information of
Dakota (collectively, the "Pro Forma Information") was prepared to illustrate
the estimated effects of the acquisition by Dakota (through its wholly owned
Subsidiary, Dakota Merger Corporation) of all the outstanding Common Stock of
USMX for balance sheet purposes as of December 31, 1996 and for purposes of the
results of operations for the year ended December 31, 1996.
<PAGE>
Based upon the terms of the Merger Agreement and the resulting
attributes of the Merger, the Pro Forma Information has been prepared in
accordance with Canadian GAAP using the purchase method of accounting which is
consistent with the method expected to be used under U.S. GAAP. The Pro Forma
Information presented is derived from a combination of USMX financial
information, which is prepared in accordance with U.S. GAAP and Dakota financial
information, which is prepared in accordance with Canadian GAAP. There are no
material differences between U.S. GAAP and Canadian GAAP with respect to USMX
financial information used to prepare the Pro Forma Information.
The balance sheet and statement of operations of Dakota and USMX have
been summarized and reclassified so that they may be presented on a consistent
basis for purposes of the Pro Forma Information. The pro forma consolidated
balance sheet as of December 31, 1996, gives effect to the transactions set out
in the merger agreement more fully described in Note 2 to the Pro Forma
Information as though they had occurred on December 31, 1996, whereas the pro
forma combined statement of operations for the year ended December 31, 1996
gives effect to the these transactions as if they had occurred on January 1,
1996.
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
COMPILATION REPORT
To the Directors of
Dakota Mining Corporation
We have reviewed, as to compilation only, the accompanying unaudited pro forma
consolidated balance sheet of Dakota Mining Corporation as of December 31, 1996
and the unaudited pro forma combined statement of operations for the year ended
December 31, 1996 which have been prepared for inclusion in the Joint Proxy
Statement/Prospectus of Dakota Mining Corporation and USMX, Inc. In our opinion,
the unaudited pro forma consolidated balance sheet and unaudited pro forma
combined statement of operations have been properly compiled to give effect to
the proposed merger and the assumptions described in the notes thereto.
KPMG
Chartered Accountants
Toronto, Canada
COMMENT BY INDEPENDENT CHARTERED ACCOUNTANTS FOR UNITED STATES READERS ON
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES REPORTING STANDARDS
The above opinion, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate expression of an opinion with respect to the
compilation of pro forma financial information. United States standards do not
provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the pro
forma financial statements would require an examination which would be
substantially greater in scope than the review we have conducted. Consequently,
under United States standards, we would be unable to express any opinion with
respect to the compilation of the accompanying pro forma financial information.
KPMG
Chartered Accountants
Toronto, Canada
April 22, 1997
<TABLE>
<CAPTION>
DAKOTA MINING CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1996
(Amounts Stated in Thousands of U.S. Dollars)
(Unaudited)
Pro Forma
Dakota USMX Adjustments Consolidated
(Note 3)
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,092 $ 238 $ 15,400 iv $ 20,730
Inventories 2,644 688 918 iii 4,250
Other current assets 1,625 1,335 (687) iii 2,273
------------------------------------------ --------------------
Total current assets 9,361 2,261 15,631 27,253
814 i
Property, plant and equipment, net 15,150 42,907 1,954 iii 60,825
Commodity futures contracts - 1,144 1,662 iii 2,806
Reclamation bonds and other assets 7,058 3,843 509 iv 11,410
------------------------------------------ --------------------
Total assets $ 31,569 $ 50,155 $ 20,570 $ 102,294
========== ========= ========== =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current portion of long-term debt $ 383 $ 21,355 $(15,355) v $ 6,383
Current portion of note payable to related party - 355 (355) ii -
Accounts payable 4,915 6,708 (186) i 11,437
Accrued and other liabilities 3,057 975 1,250 iii 5,282
------------------------------------------ --------------------
Total current liabilities 8,355 29,393 (14,646) 23,102
Long-term debt 3,240 - (1,500) iv 17,095
15,355 v
7.5 % subordinated debentures - - 6,884 iv 6,884
Note payable to related party - 3,923 (3,923) ii -
Other long-term liabilities 6,515 298 - 6,813
------------------------------------------ --------------------
Total liabilities 18,110 33,614 2,170 53,894
------------------------------------------ --------------------
Shareholders' equity:
Warrants 63 - - 63
Common shares 52,810 16 (16) iii 77,226
24,416 iii
Contributed surplus - - 10,525 iv 10,525
Additional paid-in capital - 19,581 1,000 i -
(20,581) iii
Accumulated deficit (39,134) (3,056) 4,278 ii (39,134)
(1,222) iii
Cumulative translation adjustment (280) - - (280)
------------------------------------------ --------------------
Total shareholders' equity 13,459 16,541 18,400 48,400
------------------------------------------ --------------------
Total liabilities and shareholders' equity $ 31,569 $ 50,155 $ 20,570 $ 102,294
========== ========== ========== =========
</TABLE>
- 54 -
<PAGE>
<TABLE>
<CAPTION>
DAKOTA MINING CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
December 31, 1996
(Amounts Stated in Thousands of U.S. Dollars and Shares, Except for Per Share Amounts)
(Unaudited)
Pro Forma
Dakota USMX Adjustments Combined
(Note 3)
<S> <C> <C> <C> <C>
Operating revenues $24,556 $ - $ - $ 24,556
------------------------------------------ --------------------
Operating costs
Mine, mill and administration 26,296 - - 26,296
Depreciation, depletion and amortization 6,496 - - 6,496
Royalties and severance taxes 1,164 - - 1,164
Exploration 499 643 - 1,142
Reclamation 2,255 - - 2,255
Holding and standby costs 1,330 - - 1,330
General corporate costs 1,790 3,621 - 5,411
Property impairment 7,922 1,416 (1,416) viii 7,922
------------------------------------------ --------------------
47,752 5,680 (1,416) 52,016
------------------------------------------ --------------------
Operating loss (23,196) (5,680) 1,416 (27,460)
------------------------------------------ --------------------
Other income (expense):
Unrealized gain on commodity futures contracts - 884 (884) viii -
Investment income 476 275 - 751
Royalty income - 720 (720) ii -
Interest expense (442) (511) 184 ii (2,647)
(654) vi
(1,224) vii
Other 92 955 (936) viii 111
------------------------------------------ --------------------
126 2,323 (4,234) (1,785)
------------------------------------------ --------------------
Loss before income taxes (23,070) (3,357) (2,818) (29,245)
Income tax expense (benefit) - (55) 55 -
------------------------------------------ --------------------
Loss before non-recurring charges or credits
attributable to the contemplated transactions $ (23,070) $ (3,302) $ (2,873) $(29,245)
============================================= =============
Loss per common share before non-recurring
charges or credits attributable to the contemplated
transactions $ (0.73) $ (0.64)
Weighted average number of shares outstanding 31,405 47,027
</TABLE>
- 55 -
<PAGE>
Dakota Mining Corporation
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
1. Basis of Presentation
The unaudited pro forma condensed consolidated balance sheet and combined
statement of operations have been prepared in conformity with accounting
principles generally accepted in Canada ("Canadian GAAP"). As described in
Note 4, these principles differ in certain material respects from those
that would have been followed had the unaudited pro forma condensed
consolidated balance sheet and combined statements of operations been
prepared in conformity with accounting principles generally accepted in the
United States ("US GAAP").
The pro forma condensed consolidated balance sheet has been prepared to
give effect to the pro forma transactions as though they had occurred on
December 31, 1996 and the pro forma combined statement of operations gives
effect to the pro forma transactions as though they had occurred effective
January 1, 1996.
The operating results presented in the pro forma condensed combined
statement of operations are not necessarily indicative of future combined
operating results nor of operating results that would have been reported
had the companies previously been combined.
2. Pro Forma Assumptions
a) The pro forma consolidated balance sheet and pro forma combined statement
of operations have been prepared to give effect to the transactions set out
in the Merger Agreement more fully described elsewhere in this Joint Proxy
Statement. In summary, the following material transactions have been
assumed:
i) On February 5, 1997, Dakota signed a definitive Merger Agreement with
USMX, Inc. (USMX). Under the terms of the agreement, shareholders of
USMX will receive one Dakota Common Share for every 1.1 common shares
of USMX held and USMX will become a wholly owned subsidiary of Dakota.
Dakota expects to issue 15,621,984 Common Shares to complete the
transaction.
ii) On February 6, 1997, Dakota sold, by way of private placement, 25,000
Special Warrants at a price of Cdn.$1,000 per special warrant. Each
Special Warrant entitles the holder, upon exercise thereof and without
payment of any additional consideration, to acquire one 7.5% unsecured
subordinated convertible debenture of Dakota in the principal amount of
Cdn.$1,000 (the Debentures). Each Debenture will be convertible into
Dakota Common Shares at a conversion price of Cdn.$2.00 per common
share up to and including the last business day immediately preceding
February 5, 2004. The Debentures will be convertible into 12,500,000
Dakota Common Shares. The Debentures will not be redeemable prior to
January 29, 2001 but thereafter will be redeemable by Dakota if the
weighted average trading price of Dakota's Common Shares is 125% of the
conversion price for a defined period prior to such redemption. On
maturity or redemption, Dakota will have the option to repay the
principal amount of the Debentures in cash or Dakota Common Shares
valued at a price equal to 95% of the weighted average trading price
for a defined period prior to such maturity or redemption.
iii) On February 21, 1997, the terms of the $22 million USMX credit
facility were amended as part of the Merger between USMX and Dakota.
Among the amended terms is a requirement that Dakota apply $1.5 million
of proceeds from the offering discussed above to repay part of the $2.5
million convertible portion of the USMX credit facility, and the
convertible nature of the remaining $1 million balance terminates. As
at December 31, 1996, USMX was in breach of certain financial covenants
and hence the amount outstanding under the loan facility was classified
as a current liability. Upon completion of the Merger, payment of the
$1.5 million referred to above and various other terms and conditions,
USMX is not expected to be in breach of these covenants. There were no
other material amendments to the terms of the credit facility and the
carrying value of the facility approximates its fair market value.
Refer to "Terms of Merger--Other Agreements--Intercreditor Agreements"
and "Dakota Management's Discussion and Analysis of Financial
- 56 -
<PAGE>
Condition and Results of Operations."
iv)On March 17, 1997, USMX and Pegasus Gold entered into a formal Purchase
and Sale Agreement for the sale of the USMX royalty interest in the
Montana Tunnels Mine to Pegasus Gold for cancellation and forgiveness
of all unpaid principal and interest pursuant to a USMX loan payable to
Pegasus Gold.
v) On April 21, 1997 Dakota entered into a settlement agreement with one
of the construction contractors on the Illinois Creek Property in
Alaska regarding a claim disputed by USMX (see Note 15 to the USMX
consolidated financial statements). The claim will be settled for total
of $5 million, payable $4 million in cash and consideration of $1
million of USMX Common Stock issued prior to the Merger. See "Terms of
the Merger - Other Agreements." The Settlement will be recorded by USMX
Prior to the consumation of the merger.
vi) Under the terms of the Merger Agreement, Dakota has provided a $5
million line of credit subsequent to December 31, 1996, to USMX in
accordance with various terms and conditions. Borrowings pursuant to
this line would be eliminated in the pro forma presentation. At April
18, 1997, approximately $1.8 million was outstanding under this
borrowing arrangement.
b) The Merger described in (a) above has been accounted for using the purchase
method whereby Dakota acquires the net assets of USMX and the value of
consideration given (being the representative market value at the date of
acquisition of the Dakota shares exchanged for the shares of USMX Common
Stock) is allocated to the assets and liabilities of USMX on the basis of
the estimated fair market values thereof.
3. Pro Forma Adjustments
i) Adjustment to reflect the settlement of a USMX contractor claim for a
total consideration of $5 million. The adjustment includes issuance of
1,000,000 shares of USMX Common Stock valued at $1 million.
Settlement consideration $5,000
Amounts paid or accrued by USMX 4,186
-----
Additional cost incurred 814
Reduction in USMX liability recorded 186
-----
Equity portion of settlement $1,000
======
ii) Adjustment to reflect completion of the sale of the USMX net profits
royalty interest in the Montana Tunnels Mine. The transaction consists
of forgiveness of a note payable of $4,278,000 ($355,000 current
liability and $3,923,000 non-current liability). As a result of the
sale, royalty income received in accordance with the net profits
royalty interest ($720,000) and interest paid pursuant to the note
payable ($184,000) have been eliminated from the pro forma condensed
combined statement of operations.
iii)Adjustment to reflect the purchase business combination and the
issuance of 15,621,984 Dakota Common Shares in exchange for 100% of the
issued and outstanding common shares of USMX. The Dakota shares have
been valued at a price of US$1.58. The share value is based upon the
average trading price on the Toronto Stock Exchange for a reasonable
period before and after the date of the announcement of the agreement
in principle to combine the two companies.
- 57 -
<PAGE>
The accounting for the acquisition of USMX is summarized as follows:
Deemed consideration
Ascribed value of Dakota common shares $24,416
Transaction costs 1,250
--------
25,666
========
Net assets of USMX after pro forma adjustments
(i) and (ii) above 21,819
------
Excess of deemed consideration over net book
value of assets $ 3,847
========
Estimated transaction costs include:
Investment firm fees for financial
consultation and fairnessopinions $400
Severance payments for USMX employees
to be terminated as a result of the Merger 375
Professional fees to be incurred in connection
with the Merger 250
Other costs, including printing, mailing, etc. 225
--------
$1,250
==========
The purchase price discrepancy has been attributed to the identifiable assets of
USMX as follows:
Inventories 918
Other current assets (687)
Property, plant and equipment (including mineral properties)1,954
Commodity futures contracts 1,662
--------
$3,847
=======
Inventories have been adjusted to reflect the estimated market value of
contained gold in ore inventories less anticipated processing and
selling costs. The actual market value may differ (see "Risk
Factors-Fluctuation in the Price of Gold").
Other current assets include pre-paid financing costs which have been
eliminated.
Property, plant and equipment is adjusted to recognize the estimated
fair value of USMX's Illinois Creek Property, Thunder Mountain Property
and certain Mexican property interests. There are risks associated with
the recoverability of these assets (see "Specific Risks Related to
USMX").
Commodity futures contracts treated as hedge transactions by USMX have
been marked to their estimated fair market value as of December 31,
1996. The actual market value may differ (see "Risk Factors-Hedging
Activities").
*
iv) Adjustment to cash, common shares and long-term liabilities giving
effect to the receipt of net proceeds of $16.9 million from the
issuance of 25,000 Dakota Special Warrants, assuming conversion of the
Special Warrants to Debentures, convertible into 500 Dakota common
shares as follows:
Gross proceeds $Cdn 25,000
Conversion to U.S. dollars @ 0.73 $ 18,250
Less: Agents commission and other costs 1,350
---------------
Net proceeds $ 16,900
=============
Classified as follows:
7.5% subordinated debentures (liability) $ 6,884
Deferred issue costs (asset) (509)
Contributed Surplus, net of issue costs of $841,000 10,525
--------------
$ 16,900
=============
The issue amount for the convertible debentures has been allocated
between an equity component and a liability component. The liability
component has been calculated, effective the date of the issue, by
discounting the mandatory cash payments of principal and interest under
the terms of the debenture. The discount rate used (9.5%) reflects the
presumed interest rate that would have been obtainable had Dakota
issued a pure debt instrument of a similar term. Recorded interest
expense related to the convertible debentures is determined by applying
the discount rate to the outstanding liability component.
Of the net proceeds obtained from the issuance, $1,500,000 will be used
to prepay a portion of the $22 million USMX credit facility. The
transaction will be accounted for at the date of the exchange of
Special Warrants for Debentures. If the conversion for the Debentures
differs from that assumed, the allocation of proceeds will be adjusted
accordingly.
v) Under the terms agreed with Rothschild, subsequent to the Merger, USMX
will not be in breach of various loan facility covenants. This
adjustment reclassifies a portion of the current liability to long-term
debt (Refer to note 2(iii), "Terms of the Merger-Other
Agreements-Intercreditor Agreements," and "Dakota Management's
Discussion and Analysis of Financial Condition and Results of
Operations.")
vi) Adjustment for additional interest expense on the subordinated
debentures issued at an assumed interest rate of 9.5% ($6,884,000 X
9.5% = $654,000). Refer also to note (iv) above.
vii)Adjustment to reflect the annual interest cost of $1,551,000 for the
USMX credit facility, calculated on a principal loan balance of
$19,855,000 (refer note 2(iii)) Interest is calculated at the rate of
2.25% above the quarterly LIBOR rate of 5.5625% at December 31, 1996
(ie 7.8125%).
viii)Adjustment to remove the operating loss effect of the USMX property
impairment ($1,416,000) and unrealized gain on commodity futures
contracts ($884,000) since the assets to which these charges relate
would have been adjusted to their fair values in the pro forma
consolidated information. Similarly, the profit on sale of Alta common
stock ($936,000) reflected as "other income" has been eliminated.
ix) The pro forma combined statement of operations has not been adjusted
for anticipated reductions in general and administrative expenses
resulting from the Merger
x) There are no pro forma adjustments required for differences in
accounting policies of Dakota and USMX.
4. Pro Forma Common Share and Per Share Information
The pro forma Dakota Common Shares outstanding after giving effect to the
transactions set forth in Note 2 Pro Forma Assumptions are calculated as
follows:
<TABLE>
<S> <C>
USMX Common Stock issued and outstanding as of December 31, 1996 16,184,182
USMX Common Stock to be issued as settlement of contractor claim 1,000,000
----------
17,184,182
Conversion of USMX Common Stock to Dakota Common
Shares at 1.1 to 1, respectively 15,621,984
- 59 -
<PAGE>
Dakota Common Shares issued and outstanding as of December 31, 1996 35,479,742
----------
Pro forma combined Dakota Common Shares issued and outstanding upon
completion of the Merger 51,101,726
==========
The pro forma weighted average number of Dakota Common Shares outstanding for
1996 are calculated as follows: Weighted average number of Dakota Common Shares
outstanding for the year
ended December 31, 1996. 31,405,369
Dakota Common Shares expected to be issued on completion of the Merger 15,621,984
------------
Pro forma combined weighted average number of Dakota Common Shares outstanding 47,027,353
============
</TABLE>
12,500,000 Dakota Common Shares issuable upon conversion of the Debentures is
not included in the pro forma weighted average number of shares outstanding as
the impact would be antidilutive.
5. Deferences between Canadian and United States Accounting Principles
These pro forma condensed consolidated financial statements have been
prepared in accordance with Canadian GAAP which differs from U.S. GAAP
principally with respect to: 1) accounting for the issuance of the 25,000
Dakota Special Warrants; and 2) the elimination of certain non recurring
transactions.
The proceeds of the convertible debentures underlying the Special Warrants
have been allocated between a liability and an equity component in
accordance with new Recommendations of the Canadian Institute of Chartered
Accountants, assuming that the Debentures are convertible into 500 Dakota
Common Shares. Under U.S. GAAP, the Debentures are accounted for as a
liability. The following GAAP adjustments relate solely to this difference.
The pro forma adjustments include the elimination of certain non recurring
items as set forth in Note 3 (viii). The Securities and Exchange commission
Staff requested that these amounts be included in the U.S. Pro forma
presentation.
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Amounts GAAP Amounts
Canadian GAAP Adjustments U.S. GAAP
<S> <C> <C> <C>
Reclamation bonds and other assets $ 11,410 $ 841 $ 12,251
7.5 % subordinated debentures 6,884 11,366 18,250
Contributed surplus 10,525 (10,525) --
Property impairment 7,922 1,416 9,338
Unrealized gain on commodity
futures contracts - 884 884
Interest Expense (2,667) (715) (3,382)
Other 111 936 1,047
Loss before non-recurring charges
or credits attributable to the
contemplated transactions $(29,245) $ (311) $(28,934)
</TABLE>
At the date that the 25,000 Dakota Special Warrants are exchanged for
Debentures, the Debentures will be accounted for based on the conversion
price as compared to the market value of Dakota's Common Shares.
- 60 -
<PAGE>
DAKOTA ANNUAL AND SPECIAL MEETING
Solicitation of Proxies
This Joint Proxy Statement/Prospectus is furnished in connection with
the holding of an annual and special meeting of the shareholders of Dakota to be
held at the time and place and for the purposes set forth in the accompanying
Notice of Annual and Special Meeting of Shareholders ("the Notice") and at any
adjournment(s) thereof. Proxies are solicited hereby by or on behalf of the
management of Dakota ("Management"). While it is expected that solicitation will
be primarily by mail, proxies may be solicited personally or by telephone by the
Management and/or other employees or agents of Dakota. All costs of this
solicitation will be borne by Dakota. The Notice and Joint Proxy
Statement/Prospectus are being mailed to Shareholders on or about May 1,
1997.
Appointment and Revocation of Proxies
The individuals named in the accompanying form of proxy (the "Management
Proxy") are the Chairman of the Board, the President, the Chief Financial
Officer and the Assistant Secretary of Dakota. A SHAREHOLDER WISHING TO APPOINT
SOME OTHER PERSON (WHICH OTHER PERSON NEED NOT BE A SHAREHOLDER) TO REPRESENT
SUCH SHAREHOLDER AT THE DAKOTA MEETING HAS THE RIGHT TO DO SO, EITHER BY
DELETING THE NAME(S) SET FORTH IN THE PROXY, INSERTING SUCH PERSON'S NAME IN THE
BLANK SPACE PROVIDED IN THE PROXY AND RETURNING THE SAME OR BY COMPLETING AND
RETURNING ANOTHER FORM OF PROXY. A proxy will not be valid unless the completed
form of proxy is received by Dakota's transfer agent, Montreal Trust Company of
Canada, 151 Front Street West, 8th Floor, Toronto, Ontario M5J 2N1, not less
than 48 hours (excluding Saturdays, Sundays and holidays) preceding the day of
the Dakota Meeting or, if adjourned, any reconvening thereof.
A Dakota Shareholder who has given a proxy has the right to revoke it
at any time before it is exercised. In addition to revocation in any other
manner permitted by law, a Dakota Shareholder may revoke a proxy by an
instrument in writing, executed by the Dakota Shareholder (or by his attorney,
duly authorized in writing) or, where the Dakota Shareholder is a corporation,
by a duly authorized officer or attorney of the corporation, and delivered
either to Dakota's transfer agent at the address set forth above or to the
registered office of the Company, P.O. Box 10424, Pacific Centre, Suite 1300,
777 Dunsmuir Street, Vancouver, British Columbia V7Y 1K2 (Attention: Dawn
Whittaker) any time up to and including the last business day preceding the day
of the Dakota Meeting or, if adjourned, any reconvening thereof, or with the
Chairman of the Meeting on the day of the Dakota Meeting or, if adjourned, any
reconvening thereof.
A Dakota Shareholder may also revoke a proxy by signing a form of proxy
bearing a later date and returning such proxy to Dakota's transfer agent or
registered office up to but not after the time limit specified in the preceding
paragraph.
Voting of Proxies and Discretionary Authority
Unless specifically directed in the form of proxy to withhold the
shares represented by the form of proxy from a poll, Management shall vote the
shares represented by the form of proxy on each poll. Where a choice with
respect to any matter to be acted upon has been specified in the form of proxy,
the shares will be voted in accordance with the specification so made. ON A
POLL, SHARES REPRESENTED BY THE FORM OF PROXY WILL BE VOTED BY MANAGEMENT "FOR"
EACH MATTER IN RESPECT OF WHICH NO CHOICE HAS BEEN SPECIFIED BY THE SHAREHOLDER.
THE ENCLOSED FORM OF PROXY, WHEN PROPERLY COMPLETED, DELIVERED AND
UNREVOKED, CONFERS DISCRETIONARY AUTHORITY UPON THE PERSON(S) APPOINTED PROXY
THEREUNDER TO VOTE ON ANY AMENDMENTS OR VARIATIONS WITH RESPECT TO ANY MATTERS
IDENTIFIED IN THE NOTICE, AND WITH RESPECT TO OTHER MATTERS WHICH MAY
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<PAGE>
PROPERLY COME BEFORE THE DAKOTA MEETING. In the event that amendments or
variations to matters identified in the Notice are properly brought before the
Dakota Meeting or any further or other business is properly brought before the
Dakota Meeting, it is the intention of the proxy holders designated in the
enclosed form of proxy to vote in accordance with their best judgment on such
matters or business. At the time of the printing of this Joint Proxy
Statement/Prospectus, Management knows of no such amendment, variation or other
matter which may be presented to the Dakota Meeting.
A person duly appointed under an instrument of proxy will be entitled
to vote the shares represented thereby, only if the form of proxy is properly
completed and delivered in accordance with the requirements set out above under
the heading "Appointment and Revocation of Proxies" and such proxy has not been
revoked.
Voting Securities
Dakota is authorized to issue 20,000,000 Preference Shares without
nominal or par value ("Preference Shares"), which shares are issuable in series.
There are no Preference Shares outstanding. The Directors of the Company are
authorized to issue the Preference Shares in one or more series and to fix the
number of shares in, and to determine the designation, rights, privileges,
restrictions and conditions attached to each series of Preference Shares which
may be issued. The Preference Shares rank prior to the Dakota Common Shares with
respect to the payment of dividends and with respect to the distribution of the
assets of Dakota in the event of its dissolution, liquidation or winding-up.
Dakota is authorized to issue an unlimited number of Common Shares
without nominal or par value of which 35,479,742 Dakota Common Shares were
issued and outstanding and entitled to vote at the Dakota Meeting. Each Dakota
Common Share entitles the holder thereof to receive dividends as and when
declared by Dakota's Board of Directors and ranks equally with all other Dakota
Common Shares in respect of the payment of dividends and upon the dissolution,
liquidation or winding-up of Dakota. Each Dakota Shareholder is entitled to one
vote for each Dakota Common Share registered in such Shareholder's name. The
Dakota Common Shares have no preemptive or conversion rights. All of the
outstanding Dakota Common Shares are fully paid and nonassessable shares in the
capital of Dakota.
THERE ARE NO OTHER VOTING CLASSES OF SECURITIES OF THE COMPANY ISSUED
AND OUTSTANDING.
The Board of Directors of Dakota has fixed the close of business on
April 17, 1997 as the Record Date for determining those Dakota Shareholders
entitled to receive notice of the Dakota Meeting, but the failure of any Dakota
Shareholder to receive a notice of the Dakota Meeting does not deprive the
Dakota Shareholder of a vote at the Dakota Meeting. If a person has acquired
Dakota Common Shares after the Record Date, that person is entitled to vote
those shares at the Dakota Meeting upon producing properly endorsed share
certificates or otherwise establishing share ownership, and demanding the
inclusion of such person's name on the list of Dakota Shareholders entitled to
vote at the Dakota Meeting not later than 10 days before the Dakota Meeting.
Approval Required
An ordinary resolution is required in respect of the matters identified
in the Notice. An ordinary resolution means a resolution passed by a majority of
the votes cast by shareholders who voted in respect of that resolution.
In accordance with the provisions of the CBCA and Dakota's Articles and
By-Laws, for the election of the directors, and the appointment of KPMG,
Chartered Accountants as auditors of the Company, only proxies and ballots
marked "FOR" are counted to determine the total number of votes cast;
abstentions and broker non-votes are not counted for purposes of such
resolutions. For any other resolution, only proxies and ballots marked "FOR" the
resolution or "AGAINST" the resolution are counted as votes cast in respect of
that resolution, and abstentions and broker non-votes are not counted as votes
cast for the purposes of such resolutions.
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<PAGE>
Matters to be Addressed at the Dakota Meeting
Merger Resolution. Dakota Shareholders at the Dakota Meeting will be
asked to approve and adopt the Merger Agreement and to approve the transactions
contemplated thereby including the issuance of Dakota Common Shares to effect
the Merger. By voting to approve and adopt the Merger, the Dakota Shareholders
will also approve the assumption by Dakota of the USMX Options. The resolution
proposed to be passed is included in Appendix B to this Joint Proxy
Statement/Prospectus and requires the approval of a majority of the Dakota
Common Shares present held by shareholders represented in person or by proxy and
voting at the Dakota Meeting.
FOR THE REASONS AS SET FORTH UNDER "THE MERGER - DAKOTA'S REASONS FOR THE
MERGER AND BOARD OF DIRECTORS' RECOMMENDATION," THE DAKOTA BOARD OF DIRECTORS
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE MERGER.
Approval of Issue of Common Shares with Respect to the Series B Special
Warrants. In accordance with the requirements of the TSE, at the Dakota Meeting
Dakota Shareholders will be asked to approve the issue of up to 4,884,500 Dakota
Common Shares issuable upon conversion of Debentures issuable upon exercise of
8,881 Series B Special Warrants of Dakota. Pursuant to an Agency Agreement dated
as of February 5, 1997, Dakota sold by way of private placement 25,000 Special
Warrants, comprised of 16,119 Series A Special Warrants and 8,881 Series B
Special Warrants, for net proceeds of Cdn.$23.5 million. Such net proceeds, less
U.S. $5 million which has been loaned by Dakota to USMX (see "Terms of the
Merger - Other Agreements - $5,000,000 Loan Agreement") are currently held in
escrow pending completion of the Merger, shareholder approval of the issue of
the Dakota Common Shares ultimately underlying the Series B Special Warrants and
the filing of a prospectus in Canada in respect of the Special Warrants. The
Special Warrants are exercisable for Cdn.$25 million aggregate principal amount
of 7.5% unsecured convertible debentures ("Debentures") of Dakota. Each $1,000
principal amount of Debentures is convertible to 500 Dakota Common Shares. The
net proceeds realized by Dakota from the sale of the Special Warrants will be
used to complete construction and commence start-up of USMX's Illinois Creek
Mine, for developmental drilling, for repayment of $1.5 million of certain of
USMX's bank debt and for working capital.
The maximum number of Dakota Common Shares issuable upon conversion of
all Debentures issued on exercise of all Series B Special Warrants (assuming the
imposition of a penalty as more fully described elsewhere herein) is 4,884,550,
representing approximately 13.8% of the outstanding Dakota Common Shares as at
April 18, 1997 and representing approximately 6.9% of the outstanding Dakota
Common Shares on a fully diluted basis upon completion of the Merger. For
details regarding the issue of Special Warrants, including the Series B Special
Warrants, and the Debentures of Dakota, see "Dakota-Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources." The resolution proposed to be passed is included in Appendix B to
this Joint Proxy Statement/Prospectus and requires the approval of a majority of
the Dakota Common Shares held by shareholders represented in person or by proxy
and voting at the Dakota Meeting. The TSE, however, prohibits the holders of
Dakota Common Shares issued as a result of the conversion of Debentures issued
upon exercise of Series A Special Warrants from voting on this resolution.
Ratification of Amendment to Share Incentive Plan.
Description of Share Incentive Plan. Dakota maintains a Share
Incentive Plan (the "Share Incentive Plan"), the principal purpose of which is
to promote a proprietary interest in Dakota among its directors and employees
("participants"); to retain, attract and motivate the qualified managers which
Dakota requires to carry on its operations; to provide long-term incentive
element and overall compensation; and to promote the long-term profitability of
Dakota. Dakota currently has approximately 30 directors and key employees
eligible to participate in the Share Incentive Plan.
The Share Incentive Plan currently provides that the maximum
aggregate number of Common Shares issuable thereunder is 3,000,000. In addition,
the Share Incentive Plan provides that the aggregate number
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<PAGE>
of Dakota Common Shares so reserved for issuance under Share Incentive Plan to
any one participant shall not exceed 5% of the outstanding Dakota Common Shares.
The price at which Dakota Common Shares may be issued upon the exercise of stock
options granted under the Share Incentive Plan is determined by the Board,
provided that such price may not be less than the closing price per Dakota
Common Share on the date of grant of the stock option. Each participant holding
an option is entitled, upon exercise of such option, to receive Dakota Common
Share. Options are exercisable for a period of five years from the date of the
grant unless the participant's relationship with Dakota is terminated.
Incentives which may be awarded under the Share Incentive Plan
include share options, share appreciation rights or share purchase rights. The
share appreciation right, which would be attached to a share option, once
activated by the Board of Directors, entitles the participant in the Share
Incentive Plan to elect, in lieu of exercising an outstanding share option, to
receive the number of Dakota Common Shares equivalent in value to the difference
between such participant's option exercise price and the net existing market
price of a Dakota Common Share multiplied by the number of Dakota Common Shares
for which the option could be exercised.
The share purchase right provides for the purchase by a
participant in the Share Incentive Plan of Common Shares, payment for which is
to be satisfied by deducting the purchase price in installments from the
participant's salary, and by contributing up to an equal amount by Dakota.
The Share Incentive Plan is administered by the Stock Option
Committee of the Board of Directors. The members of the Stock Option Committee
will not receive any benefits under the Share Incentive Plan during their tenure
on such committee. Share options and share appreciation rights may be granted at
any time to any director or key employee of Dakota or one of its affiliates,
including the executive officers, taking into consideration the present and
potential contribution of a particular director or key employee to the success
of Dakota or any affiliate and any other factors which the Stock Option
Committee may deem proper and relevant. Share purchase rights may be granted at
any time, in the sole discretion of the Stock Option Committee, to any key
employee who has been continuously employed by Dakota or any affiliate for at
least 12 consecutive months, although the Stock Option Committee has the power
to waive this 12 months' service requirement.
The Share Incentive Plan provides that the Board of Directors
of Dakota may, at any time, authorize Dakota to loan money to an optionee on
such terms and conditions as the Board of Directors, in its sole discretion, may
determine in order to assist the optionee to exercise an option held by him or
her.
The U.S. federal income tax consequences of exercising a stock
option will depend upon whether the option is an incentive stock option. If the
option is not an incentive stock option, an optionee generally will not
recognize income upon the grant of the option, but will recognize compensation
income on the exercise of the option equal to the difference between the fair
market value of the stock acquired and the option price. To the extent that the
optionee recognizes compensation income upon the exercise of the option, Dakota
will be entitled to a corresponding deduction, subject to the general rules
relating to reasonableness of compensation and certain withholding requirements.
If the option is an incentive stock option, an optionee will
not be deemed to receive any income at the time the option is granted or
exercised, although the exercise may give rise to alternative tax liability for
the optionee. If an optionee does not dispose of the shares acquired on exercise
of an incentive stock option within the two-year period beginning on the day
after the day of the grant of the option or within the one-year period beginning
on the day after the day of the transfer of the shares to the optionee, the gain
(if any) on a subsequent sale (i.e., the excess of the proceeds received over
the option price) will be long term capital gain and any loss the optionee may
sustain on such sale will be long term capital loss. If the optionee disposes of
the shares within the two-year or one-year period referred to above, the
disposition is a "disqualifying disposition" and the optionee will generally
realize ordinary income taxable as compensation in the year of the disqualifying
disposition to the extent of the excess of the fair market value of the shares
on the date of purchase over the option price, and the balance, if any, will be
long term or short term capital gain depending, generally, on whether the shares
were held more than
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one year after the incentive stock option was exercised. To the extent the
optionee recognizes compensation income with respect to a disqualifying
disposition, Dakota will be entitled to a corresponding deduction, subject to
general rules relating to reasonableness of compensation.
Amendment to Share Incentive Plan. At the Dakota Meeting,
Dakota Shareholders will be asked to consider and, if thought advisable, to
ratify an amendment (the "Plan Amendment") to the Share Incentive Plan
increasing the number of Common Shares issuable pursuant to the exercise of
options granted under the Share Incentive Plan from 3,000,000 to 6,000,000. As
at April 18, 1997, options to purchase an aggregate of 2,088,525 Dakota Common
Shares, representing approximately 6.0% of the outstanding Dakota Common Shares
have been granted and 1,843,525 options remain unexercised under the Share
Incentive Plan. The proposed increase to a maximum number of 6,000,000 Dakota
Common Shares to be reserved for issuance under the Share Incentive Plan would
represent approximately 16.9% of the outstanding Dakota Common Shares as at
April 18, 1997 or 10.7% upon completion of the Merger
The Board of Directors of Dakota have approved the Plan
Amendment subject to obtaining the required shareholder approval and unanimously
recommends that Dakota Shareholders vote in favor of the ratification of the
Plan Amendment. In making its recommendation, the Board of Directors considered
that options are an integral component of Dakota's compensation strategy to
attract and retain qualified and capable personnel and are necessary in order to
act as an incentive to enhance shareholder value.
The Plan Amendment must be ratified by the affirmative vote of
the holders of a majority of the Dakota Common Shares present in person or
represented by proxy at the Dakota Meeting. The TSE, however, has approved the
Plan Amendment subject to Dakota obtaining the approval of "disinterested"
shareholders. For these purposes, "disinterested" shareholders are deemed to
exclude "Insiders" of Dakota and their "Associates" as such terms are defined by
the Securities Act (Ontario). To the best knowledge of Dakota, such Insiders and
their Associates as of April 18, 1997 hold an aggregate of 6,379,196 Dakota
Common Shares. On any ballot that may be called for relating to the ratification
of the Plan Amendment, the shares represented by proxies in favor of
Management's nominees will be voted in favor of the resolution ratifying the
Plan Amendment, the full text of which resolution is set out in Appendix B to
this Joint Proxy Circulation, unless the Shareholder has specified in his/her
proxy that their shares are to be voted against ratification of the Plan
Amendment. A draft of the amended Share Incentive Plan is available for
inspection at the registered offices of the Company, P.O. Box 10424, Pacific
Centre, Suite 1300, 777 Dunsmuir Street, Vancouver, British Columbia, Canada V7Y
1K2 and 410 Seventeenth Street, Suite 2450, Denver, Colorado 80202. The amended
Share Incentive Plan will be tabled at the Dakota Meeting.
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<PAGE>
The following table summarizes the number of Dakota Common Shares issuable upon
exercise of presently outstanding options issued under the Share Incentive Plan
to the indicated persons as of March 14, 1997:
<TABLE>
<CAPTION>
<S> <C>
Alan R. Bell, Director, President and Chief Executive Officer(1)............ 395,000
Robert R. Gilmore, Vice-President, Finance, Chief Financial Officer and
Secretary................................................................... 256,032
All current executive officers as a group................................... 916,032
All current directors as a group............................................ 1,256,032
Each nominee for director:
Stanley Dempsey (2)................................................. 90,000
Edward G. Thompson (2).............................................. 90,000
Landon T. Clay (2).................................................. 90,000
Tor Jensen (2)...................................................... 70,000
D. James Rudack..................................................... ---
Christopher M. T. Thompson (3)...................................... 50,000
Gregory Pusey (3)................................................... ---
Each Other Person owning more than 5% of outstanding options:
Karl Spodding....................................................... 100,000
All employees, excluding executive officers................................. 455,000
<FN>
(1) Mr. Bell is also a nominee for director of Dakota.
(2) Incumbent director and nominee; not an executive officer of Dakota.
(3) Nominees for director only if the Merger is approved.
</FN>
</TABLE>
Number and Election of Directors.
Nominees if Merger Approved. The term of office of the present
directors of Dakota expires at the termination of the Dakota Meeting. The number
of directors of Dakota is fixed at nine, and if the Merger Agreement is approved
by the Dakota Shareholders and USMX Stockholders, the nine nominees named below
will be presented for election at the Dakota Meeting as Management's nominees
for the Board of Directors, and, unless a contrary direction is indicated, the
proxies named in the accompanying form of proxy intend to vote "FOR" the
election of these nominees. Management does not contemplate that any of these
nominees will be unable to serve as a director but, if such an event should
occur for any reason prior to the Dakota Meeting, the proxies named in the form
of proxy reserve the right to vote for another nominee in their discretion
unless the shareholder has specified otherwise in the form of proxy.
The following sets out the names and ages of Management's
nominees for director, the municipality in which each is ordinarily resident,
their principal occupation for the past five years, their position with Dakota,
if any, and the period of time during which each has been a director of the
Dakota. Dakota Common Shares beneficially owned, directly or indirectly,
controlled or directed as at April 18, 1997 by each nominee is set out under
"Dakota Security Ownership of Certain Beneficial Owners."
<PAGE>
Name and Municipality Current
of Residence Position with Dakota Director Since
- ------------ -------------------- --------------
Alan R. Bell(1)(3) President and Chief May 19, 1991
Age: 58 Executive Officer
Littleton, Colorado
Landon T. Clay(1) Director May 11, 1990
Age: 71
Hancock, New Hampshire
Stanley Dempsey(1)(2)(3) Director September 13, 1993
Age: 57
Lakewood, Colorado
Tor Jensen(2) Director June 25, 1996
Age: 61
Scarborough, Ontario
Edward G. Thompson(2) Director September 13, 1993
Age: 60
Toronto, Ontario
D. James Rudack Nominee N/A
Age: 73
Sault Ste. Marie, Ontario
Christopher M. T. Thompson Nominee N/A
Age: 49
Englewood, Colorado
Gregory Pusey Nominee N/A
Age: 44
Vail, Colorado
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Environmental Committee
The principal occupation and other directorships held by each nominee are as
follows:
Alan R. Bell has been a Director and President and Chief Executive Officer of
Dakota since May 1991. From August 1987 to May 1991, Mr. Bell was President and
Chief Executive Officer of Nevada Goldfields Company, a gold mining company.
Mr. Bell also serves as a director of Granges Inc.
Landon T. Clay has been the Chairman and Chief Executive Officer of Eaton Vance
Corp., an investment company, for more than the past five years.
Stanley Dempsey has been Chairman, President and Chief Executive Officer of
Royal Gold Inc. for more than the past five years.
Tor Jensen was elected as a director of the Company in 1996 and has been
the President of Mining Financial Services Inc. since 1988. This private company
provides consulting services to the mining industry as well as the financial
community. Mr. Jensen has served as a director of several publicly traded
companies in the mining
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industry in recent years.
Edward G. Thompson is President of E.G. Thompson Mining Consultants, Inc.
and Consolidated Thompson- Lundmark Gold Mines Ltd. and has been a consultant to
the mining industry for more than five years. From 1987 to 1990, Mr. Thompson
was President and Chief Executive Officer of Mingold Resources Inc. and is also
a director of Adrian Resources Ltd., Consolidated Thompson Lundmark, Freewest
Resources (Canada) Inc., Geomaque Exploration Ltd., Golden Queen Mining Co.
Ltd., International Gold Resources Corp., Minera Rayrock Inc., Newfoundland
Goldbar Resources Inc., Orvana Minerals Corp., Sparton Resources and Windy
Mountain Explorations Ltd.
D. James Rudack is semi-retired and has been a consultant since 1993. Mr.
Rudack previously served as President and Chief Executive Officer of Economic
Development Corporation (1987-1993) and as major projects Program Manager for
Rio Algom Ltd. (1975-1987). Mr. Rudack serves on the Board of Directors of
Michigan Bidco Corporation, J. Pierman Corp. and Metis and Aboriginal
Development Corp.
Christopher M. T. Thompson has been President of Castle Group, Inc. and
Executive Vice President of Fulcrum Management, Inc., its predecessor, for more
than the past five years. Mr. Thompson currently serves as a director of the
following public companies: Silver Standard Resources, Ltd., Pacific Rim Mining
Corp., Lone Star Explorations, N.L., Golden Queen Mining Co., Ltd. and Canyon
Resources Corporation.
Gregory Pusey, became President of USMX in April 1997. He previously served
as USMX's Chief Financial Officer from May 1989 until January 1990 and earlier
as the Secretary and Treasurer of USMX. Since 1983, Mr. Pusey has been engaged
in private investment activities. He has served as President of Livingston
Capital, Ltd. and President of the General Partner of Graystone Capital, Ltd, a
venture capital firm. He is also President and a Director of Cambridge Holdings,
Ltd. and a Director of Nutrition For Life International, Inc. Mr. Pusey was a
founder of USMX.
Nominees if Merger Not Approved. If the Merger Agreement is not approved by
the USMX Stockholders or the Dakota Shareholders, proxies for directors of
Dakota will be solicited with respect to the following five nominees: Alan R.
Bell, Landen T. Clay, Stanley Dempsey, Tor Jensen and Edward G. Thompson.
Appointment and Remuneration of Auditors. Management will recommend to
the Dakota Shareholders, and unless a contrary direction is indicated, intends
to vote the proxies in the attached form of proxy "FOR" the appointment of KPMG,
Chartered Accountants, as Auditors of Dakota and "FOR" the authorization of the
directors to fix the Auditors' remuneration. KPMG, Chartered Accountants, was
first appointed Auditors of Dakota in October 1993. Representatives of KPMG will
be present at the Dakota Meeting with the opportunity to make a statement if
they so desire and to respond to appropriate questions.
Other Matters. Other than the approval of the foregoing, Dakota is not
presently aware of any other business to be brought before the Dakota Meeting.
If any matters come before the Dakota Meeting which are not directly referred to
in this Joint Proxy Statement or the enclosed proxy, including matters
incidental to the conduct of the Dakota Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of
Dakota management.
Corporate Governance
The TSE prescribes guidelines for effective corporate governance. These
guidelines address matters such as the constitution and independence of
corporate boards, the functions to be performed by boards and their committees,
and the effectiveness and education of board members. The Board of Directors and
Management of Dakota believe that the development of such corporate governance
guidelines, together with adherence to the TSE guidelines, are important for the
Dakota Shareholders.
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<PAGE>
Mandate of the Board. The Board of Directors has the duty to manage the
business and affairs of Dakota pursuant to the powers vested in it by and in
accordance with the requirements of, the CBCA and of all other statutory and
legal requirements generally applicable to directors of a business corporation
that is also a reporting issuer. Management is responsible for the day-to-day
operation of the business and affairs of Dakota. In fulfilling its mandate, the
Board is responsible for, among other things, (i) adoption of a strategic
planning process for Dakota which establishes Dakota's long-term goals and
monitors the success of Management in achieving those goals; (ii) identification
of the principal risks arising from or incidental to the business activities of
Dakota, notably related to financial, regulatory, technological and
environmental matters, and ensuring the implementation of the appropriate
systems to manage these risks; (iii) succession planning for Dakota including
appointing, training and the monitoring the performance of all senior management
which includes overseeing executive compensation policies and their
implementation and review of the performance of senior executives in line with
Company policies and objectives; (iv) oversee public communications policy for
Dakota and implementation including disclosure of material information and
shareholder communications; and (v) monitor and assess the scope, implementation
and integrity of Dakota's internal control and management information systems.
In order to carry out is mandate, the Board holds regular meetings on a
quarterly basis and additional meetings as necessary to consider particular
issues or conduct specific reviews between quarterly meetings whenever
appropriate. During 1996, the Board of Directors met nine times. Each of the
incumbent directors who is nominated for election at the Dakota Meeting attended
at least 75% of the total number of meetings held by the Board of Directors
during their respective terms and the total number of meetings held by all of
the managing committees of Dakota upon which each respective director served.
Composition of the Board. The TSE guidelines recommend that a board of
directors be constituted with a majority of individuals who qualify as
"unrelated directors." The TSE defines an unrelated director as a director who
is independent of management and is free from any interest and any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director's ability to act with a view to the best interests
of the corporation, other than interests and relationships arising from
shareholding. The TSE guidelines also recommend that in circumstances where a
corporation has a "significant shareholder" (that is, a shareholder with the
ability to exercise the majority of the votes for the election of the directors
attached to the outstanding shares of the corporation) the board of directors
should include a number of directors who do not have interests in or
relationships with either the corporation or the significant shareholder and
which fairly reflects the investment in the corporation by shareholders other
than the significant shareholder.
The directors have examined the relevant definitions in the TSE
guidelines and have individually considered their respective interests and
relationships in and with Dakota. As a consequence the Board has determined that
of its five directors, four are unrelated directors and one is a related
director. Mr. Bell is an "inside" director (i.e. a director who is an officer
and/or employee of Dakota or any of its affiliates and is, by definition,
"related"). Dakota does not have a significant shareholder (as defined). The
Board considers its size of five directors to be appropriate at the current time
and a nine director Board following the completion of the Merger to be
appropriate in light of the changes to Dakota to result from the Merger. The
following is a summary of the responsibilities and activities of the various
committees of the Board.
Executive Committee. The Executive Committee is permitted to exercise all
the powers of the Board except as may be restricted by the Board itself or by
legislation. The committee generally is responsible for considering major
corporate business plans and issues prior to presentation and approval from the
full Board of Directors of Dakota. The Executive Committee is composed of two
outside directors who are also unrelated and Mr. Bell who is an "inside"
director. This committee did not meet in 1996.
Audit Committee. The Audit Committee reviews the annual and interim
financial statements of Dakota and certain other public disclosure documents
required by regulatory authorities and makes recommendations to the Board with
respect to such statements and documents. The committee also makes
recommendations to the Board regarding the appointment of independent auditors,
reviews the nature and scope of the annual audit as proposed
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<PAGE>
by the auditors and management, and reviews with the management the risks
inherent in Dakota's business and risk management programs relating thereto. The
committee also reviews with the auditors and management the adequacy of the
internal accounting control procedures and systems within Dakota. The Audit
Committee is composed of three outside directors, all of whom are also unrelated
directors. The committee met two times during 1996.
Environmental Committee. Environmental Committee responsibilities include
the review and monitoring of the Company's environmental policies and practices,
including the procedures and scope of internal assessments used by key personnel
to identify, prevent, minimize and respond to significant risks to the
environment, and to communicate with regulatory authorities. The Environmental
Committee is composed of one outside director who is also an unrelated director
and Mr. Bell, who is an inside and related director. The committee met one time
during 1996.
Decisions Requiring Prior Board Approval. In addition to those matters
which must by law or by the Articles of Continuance of Dakota be approved by the
Board, Management is required to seek Board approval for all major transactions
such as debt financings, investments, acquisitions and divestitures. The Board
of Directors has delegated to senior management the authority to enter into
various types of transactions, including certain financing transactions subject
to specified limitations.
Other. Dakota considers its orientation and education program for new
directors to be an important element of ensuring responsible corporate
governance. In addition to extensive discussions with the Board and Chief
Executive Officer with respect to the business and the operations of Dakota, a
new director receives a record of historical public information on Dakota
together with the mandates and prior minutes of applicable committees of the
Board. The Board has not adopted a formal policy for the recruitment of
directors. In addition, Board meetings are regularly held at Dakota's mining
operations in order to assist the directors in better understanding Dakota's
operations.
Through its investor relations department, Dakota receives and responds
to shareholder inquiries. Shareholder inquires and concerns are dealt with
promptly by senior management of Dakota. To date, the Board has not needed to
take an active role in responding to shareholder inquiries and concerns.
In certain circumstances it may be appropriate for an individual director
to engage an outside advisor at the expense of Dakota. The engagement of the
outside advisor would be subject to the approval of the Board.
Executive Officers
The following table sets forth the names and ages of each of the
officers of Dakota and all offices of Dakota now held by each of them.
Name Age Office Held
- ----------------------- --------- ------------------------------
Alan R. Bell 58 President and Chief Executive
Officer
Robert R. Gilmore 45 Vice-President, Finance, Chief
Financial Officer and Secretary
Joseph G. Kircher 39 Vice-President, Operations
<PAGE>
Kayron L. McCoy 54 Assistant Secretary
Alan R. Bell (See information under "Number and Election of Directors").
Robert R. Gilmore has been Vice-President, Finance, Chief Financial Officer and
Secretary since June 1991.
Joseph G. Kircher has been Vice-President, Operations of Dakota since May 1996.
From June 1991 to April 1996, Mr. Kircher was Vice-President, Operations of
Consolidated Nevada Goldfields Corporation, a gold mining company.
Kayron L. McCoy joined the Company in October, 1993. She became Assistant
Secretary in June 1995. Prior thereto, Ms. McCoy was secretary to various
administrative directors and managers of Homestake Mining Company in Colorado
and South Dakota for more than five years.
Voting Commitments, Agreements or Understandings
As of the Dakota Record Date, directors and executive officers of
Dakota and their affiliates had the right to vote approximately 3.19% of the
issued and outstanding Dakota Common Shares entitled to vote at the Dakota
Meeting. There are no agreements, commitments or understandings between Dakota
and its directors, officers and shareholders with respect to voting at the
Dakota Meeting. However, the directors and executive officers of Dakota have
indicated their intention to vote their shares in favor of the proposal to
approve the Merger Agreement.
DAKOTA MANAGEMENT
Executive Compensation
As permitted under Canadian law, the Company reports on executive
compensation in accordance with the requirements of the Exchange Act. The
following table summaries the total compensation of the Chief Executive Officer
and the other most highly compensated executive officers ("Named Officers") of
Dakota earning in excess of $100,000 for the year ended December 31, 1996, as
well as the total compensation paid to each such individual for the Company's
three previous fiscal years:
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
Securities
Underlying
Annual Compensation Options
Name and
Principal Position Year Salary Bonus Other(1) Shares
- ------------------ - ----- -- ------- --- ------ - --------- - ------
<S> <C> <C> <C> <C> <C>
Alan R. Bell................. 1996 $210,000 -- $14,314
President and CEO 1995 $210,000 -- $13,817 225,000
1994 $210,000 -- $13,418 --
Robert R. Gilmore............ 1996 $135,000 -- $12,227 25,000
Vice President 1995 $135,000 -- $12,165 75,000
Finance and CFO 1994 $135,000 -- $11,704 --
<FN>
(1) Other compensation consists principally of Company paid medical/life
insurance of $6,977 in 1996, $6,385 in 1995 and $6,124 in 1994 each for
Messrs. Bell and Gilmore, employer matching contributions under a 401(k)
plan of $4,620 for each year for each named officer, and Company-paid
parking expenses and director fees paid to Mr. Bell.
<PAGE>
</FN>
</TABLE>
Options Granted in Last Fiscal Year. Shown below is information as to
grants of stock options made pursuant to the Share Incentive Plan during
the year ended December 31, 1996 to each Named Officer. Options were
exercisable upon date of grant.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
% of total of Stock Price
Number of Options Appreciation
Securities Granted to for option Term
Underlying Employees in Cdn$/share ------------------------
Options Fiscal Year Exercise Price Expiration 10%
Name Granted Date 5% (Cdn.$) (Cdn.$)
- ------- ---------- ------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alan R. Bell Nil 0% -- -- -- --
Robert Gilmore 25,000 4.2% $2.75 06/26/01 $4,750 $23,750
</TABLE>
Aggregated Option Exercises and Fiscal Year-End Option Values. Shown
below is information as at December 31, 1996 with respect to the exercise of
stock options during the year ended December 31, 1996 by each Named Officer and
unexercised options to purchase Common Shares granted in prior years to Named
Officers under the Share Incentive Plan:
<TABLE>
<CAPTION>
Securities Number of Securities
Acquired Underlying Unexercised Cdn. $ Value of Unexercised
on Options Held at December 31, In-the-Money Options at
Exercise(1) Value 1996 December 31, 1996
Common Realized Exercisable/Unexercisable(1)(2) Exercisable/
Name Shares Cdn($) Common Shares Unexercisable(1)(2)
- ------------------- ------------ ----------- ----------------------------- ---------------------
<S> <C> <C> <C> <C>
Alan R. Bell None Nil 395,000 $105,500
Robert R. Gilmore.... 25,000 $22,815 256,032 $50,000
<FN>
(1) All options held by Named Officers were exercisable at December 31, 1996.
(2) Based on the closing price on the TSE on December 31, 1996, 245,000 options
held by Mr. Bell and 125,000 options held by Mr. Gilmore were in-the-money.
</FN>
</TABLE>
Compensation of Directors. Those directors of Dakota who are not
officers of Dakota receive the following stipends:
(i) an annual fee of Cdn. $5,000 payable in quarterly instalments;
(ii) Cdn. $750 per board meeting attended in person;
(iii) Cdn. $750 per committee meeting attended in person; and
(iv) Cdn. $250 per board or committee meeting attended by conference
telephone.
Directors who are also officers of Dakota or its Subsidiaries receive only the
regular board meeting attendance fee, but do not receive annual fees, fees for
committee meetings or board meetings conducted by telephone. In addition, Dakota
reimburses the directors for reasonable expenses incurred by them in attending
meetings of the Board of Directors or of Committees of the Board.
Grants of stock options made pursuant to the Share Incentive Plan during 1996 to
each director are as follows:
<TABLE>
<CAPTION>
<PAGE>
Underlying Securities
Options Common Cdn$/Share Expiration
Name of Director Granted Shares Exercise Price Date
- --------------------- --------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Landon T. Clay 22,507 22,507 $2.75 06/26/01
David S. Robertson(1) 26,868 26,868 $2.75 06/26/01
Stanley Dempsey 20,000 20,000 $2.75 06/26/01
Edward G. Thompson 20,000 20,000 $2.75 06/26/01
Tor Jensen 50,000 50,000 $2.75 06/26/01
Paul A. Bailly(1) 50,000 50,000 $2.45 08/21/01
<FN>
(1) Mr. Bailly and Mr. Robertson retired from the Board of Directors
effective December 31, 1996.
</FN>
</TABLE>
Employment Contracts. Effective May 19, 1991, the Company entered into
a five-year agreement with Mr. Alan R. Bell, Dakota's President, Chief Executive
Officer and a director of Dakota, which provides, among other things, that in
the case of a change in control of Dakota, Mr. Bell is entitled to receive
severance pay equal to the lesser of one year's salary or the salary for the
unexpired term of his five-year contract, less any deductions required by law.
Unless otherwise terminated, the agreement is automatically extended on a one
year by one year basis.
Effective June 17, 1991, the Company entered into a three-year
agreement with Mr. Gilmore, Vice-President Finance, Chief Financial Officer and
Secretary of Dakota, which provides, among other things, that in the case of a
change in control of Dakota, Mr. Gilmore is entitled to receive severance pay
equal to the lesser of six months salary or the salary for unexpired term of his
three year contract, less any deductions required by law. Unless otherwise
terminated, the agreement is automatically extended on a year by year basis.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions. Messrs. Paul A. Bailly and David S. Robertson, former directors of
Dakota, served as the Compensation Committee and the Stock Option Committee for
Dakota's Board of Directors during the year ended December 31, 1996. No
committee member was an officer or employee of Dakota or any of its
Subsidiaries, other than Mr. Bailly who was the Chairman of the Board of Dakota
until his resignation on December 31, 1996. Messrs. Bailly and Robertson are
directors of MinVen, Inc., a general partner of VenturesTrident II, L.P. See
"Dakota-Certain Relationships and Related Transactions."
Report on Executive Compensation
Compensation of Dakota's executive officers is currently determined by
the Board of Directors. The Board of Directors is responsible for setting and
administering the policies which govern annual compensation. The Board of
Directors reviews with Management the compensation levels of Dakota's managers
and other key employees as well as the performance of Management, management
succession, and related matters. No adjustments to salaries have been made or
bonuses granted for any officer since September 1993.
The key elements of Dakota's executive compensation consist of salary,
bonus, and stock options. The Board of Directors monitors and approves salary
levels and bonuses of officers and the Stock Option Committee of the Board of
Directors monitors and approves employee stock-option awards. In evaluating the
performance and setting the compensation of the Chief Executive Officer and
other senior management, the Board of Directors has taken particular note of
Management's' success in completing numerous complex financing transactions
which have resulted in the improvement in the overall financial condition of
Dakota over the past three years. At June 1993, Dakota reported a deficit in
working capital of approximately $26 million. As of February 28, 1997, after the
private placement of Special Warrants on February 6, 1997 (see "Dakota
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Special Warrant Financing and Issue of Debentures"), Dakota's working
capital had improved to approximately $17 million at February 28, 1997. The
partial turnaround of Dakota's financial circumstances are, in the Board's view,
largely attributable to Management's successful completion of several private
placement financings which have enabled Dakota to repay substantially all of its
long-term indebtedness and in obtaining new operating permits which enabled
Dakota to restart operations at its Stibnite Mine in 1995 and its Anchor Hill
gold deposit at Gilt Edge mine in 1996. Accordingly, past executive compensation
<PAGE>
has not been based upon specific corporate operating results over the past three
years.
Salaries for executive officers are also determined by evaluating the
responsibilities of the position held and the experience of the individual, and
by reference to the competitive marketplace for executive talent, including an
analysis of salaries for similar positions at other gold-mining companies of a
comparable size. The Board believes that Dakota's most direct competitors for
executive talent are not necessarily all of the companies that would be included
in a peer group established to compare shareholder returns. Thus, the
compensation peer group is not the same as the peer group index in the
Shareholder Return Performance graph included in this Joint Proxy
Statement/Prospectus. The Board of Directors will, where appropriate, also
considers other performance measures, such as, safety, environmental awareness,
and improvements in relations with shareholders, employees, the public and
governmental regulators.
Bonuses are based upon merit and the specific circumstances giving rise
to Dakota realizing direct benefits from the employee's efforts. No bonuses were
declared or paid in 1996.
The Board of Directors believes that the Chief Executive Officer and
the other officers of Dakota remain motivated and are dedicated to the growth in
value of Dakota. The Board of Directors also believes that the Chief Executive
Officer is receiving reasonable salary compensation when compared to peer-group
levels and that his performance incentives are dependent upon his share purchase
plan and employee stock options in Dakota. For a description of Mr. Bell's
compensation arrangements, refer to "Executive Compensation."
Board of Directors
Alan R. Bell
Landon T. Clay
Stanley Dempsey
Edward J. Thompson
Tor Jensen
Shareholder Return Performance Graph
The following graph shows the cumulative total shareholder return on Dakota
Common Shares compared to the cumulative total return of three other stock
market indices: (1) Standard and Poor's 500 Index; (2) Standard and Poor's Gold
Index; and (3) a peer group of small market capitalization North American gold
mining companies. The time period graphed is the five year period from December
31, 1991 through December 31, 1996.
Shareholder Returns(1)
[GRAPHIC OMITTED]
(1) Assumes $100 invested on January 1,1992 in Dakota Common Shares,
Standard and Poor's 500 Index, Standard & Poor's Gold Index, and Peer
Group Index (small market capitalization North American Gold Mining
companies).
<TABLE>
<CAPTION>
Company Name/Index Base Period
Dec '91 Dec '92 Dec '93 Dec '94 Dec '95 Dec '96
<S> <C> <C> <C> <C> <C> <C>
Dakota Mining Corp 100 80.13 48.37 35.47 38.70 43.52
S& P Gold & Precious Metals Mining-500 100 93.37 171.05 138.20 155.55 154.39
S&P 500 Index 100 107.62 118.46 120.03 165.13 203.05
Old Peer Group 100 101.76 184.91 189.97 204.55 208.16
New Peer Group 100 99.41 175.20 135.87 120.96 126.71
</TABLE>
<PAGE>
The Standard and Poor's Gold Index includes data from four large North
American gold mining companies: Echo Bay Mines Ltd., Homestake Mining Company,
Nominate Gold Company and Placer Dome Inc.
As of December 31, 1996, Management concluded that the old peer group
was no longer reasonably comparable to Dakota for purposes of analyzing total
shareholder returns, because several of the old peer group companies had either
been acquired, merged into other companies, ceased operations, or had grown
significantly larger than Dakota. Accordingly, Dakota determined that it would
be appropriate to establish a new peer group. The new peer group of gold mining
companies includes data from fourteen (14) companies, all of which are listed on
Nasdaq or AMEX. The fourteen companies are: Alta Gold Co., Pioneer Metals Corp.,
Atlas Gold, Rea Gold Corp., Canyon Resources Corp., USMX Inc., Consolidated
Nevada Goldfields, Vanderbilt Gold Corp., Crown Resources Corp., Viceroy
Resource Corporation, Glamis Gold Ltd., Vista Gold Corp., North Lily Mining Co.
and Wharf Resources Ltd.
The old peer group of gold mining companies includes data from 19
companies, all of which are listed on Nasdaq, AMEX or the New York Stock
Exchange. The companies are: Alta Gold Co., Atlas Corp., Canyon Resources Corp.,
Consolidated Nevada Goldfields, Crown Resources Corp., Glamis Gold Ltd., Vista
Inc., Kinross Gold Corp. (formerly known as Plexus Resources Corp.), North Lily
Mining Co., Piedmont Mining Co. Inc., Pioneer Metals Corp., USMX Inc.,
Vanderbilt Gold Corp., Viceroy Resource Company, and Wharf Resources Ltd.
Directors' and Officers' Liability Insurance
Dakota holds directors' and officers' liability insurance acquired by
it from Chubb Insurance Company on behalf of its directors and officers. The
policy provides coverage to Dakota for payments made on behalf of its directors
and officers under indemnity provisions of its Bylaws, and to the individual
directors and officers for losses arising during the performance of their duties
from which they are not indemnified by Dakota. Effective September 1996, the
policy provided coverage for one year with an aggregate limit of Cdn.$2,000,000
for all policy participants in each policy year, subject to a deductible of
Cdn.$500,000 for each amount payable to Dakota. The approximate amount of
premium paid by Dakota for the period from September 1996 through September 1997
in respect of its directors and officers as a group was approximately
Cdn.$69,000.
DAKOTA SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, certain information with respect to
beneficial ownership of the Common Shares as of April 18, 1997, by (i) each
director or nominee for director of Dakota; (ii) each Named Officer; (iii) all
officers and directors of Dakota as a group; and (iv) each person or entity
known to Dakota to be the beneficial owner of more than 5% of Dakota's
outstanding Common Shares. Information with respect to beneficial ownership by
each officer or director is based upon information furnished by that individual.
Unless otherwise noted, all directors and officers have sole power and sole
investment power with respect to shares beneficially owned by them.
<TABLE>
<CAPTION>
Number of Percentage
Common of Common
Name Address Shares Owned Shares Owned(1)
- ---- ------- ------------ ---------------
Directors
- ---------
<S> <C> <C> <C>
Alan R. Bell 4303 E. Links Parkway 395,001(2) *
Littleton, CO 80122
Stanley Dempsey 10899 W. 30th Avenue 90,001(3) *
Lakewood, CO 80215
Edward G. Thompson 111 Moore Avenue 90,001(4) *
Toronto, Ontario
M4T 1V7
Landon T. Clay 24 Federal Street 6,469,196(5) 18.19%
Boston, MA 02110
Tor Jensen 51 Bledlow Manor Drive 70,000(6) *
Scarborough, Ontario
<PAGE>
D. James Rudack -- --
Christopher M.T. Thompson 475 17th Street, Suite 50,000(7) *
750
Denver, CO 80202
Gregory Pusey 1722 Buffehr Creek Road -- --
Vail, CO 81657
Named Officers
Robert R. Gilmore 735 Leyden Street 256,033(8) *
Denver, CO 80220
All Officers, Directors and
Nominees
As a Group: 14 persons 7,625,232(12) 20.8%
- -----------
Five Percent Shareholders
VenturesTrident II, L.P. 475 Seventeenth St. 3,996,965 11.3%
Suite 750
Denver, CO 80202
MacKenzie Financial 150 Bloor Street West 3,164,786 8.92%
Corporation Suite M111
Toronto, Ontario
M5S 3B5
Sun Valley Gold Company 620 Sun Valley Road 2,145,050 6.00%
PO Box 2211
Ketchum, ID 83340
Silverton International Fund 129 Front Street 4,000,000(9) 10.13%
Suite 301
Toronto, Ontario
M4W 1E6
Fulcrum Management, Inc. 24 Federal Street 1,351,369(10) 5.07%
Boston, MA 02110
C.A. Delaney Capital BCE Place 2,942,400(11) 8.19%
Management Ltd. Canada Trust Tower
161 Bay Street, #3900
Toronto, Ontario
M5J 2S1
<FN>
* Less than 1%
* Less than 1.0%.
(1) As of March 14, 1997, the total number of Dakota Common Shares
outstanding was 35,479,742.
(2) Includes 395,000 Dakota Common Shares issuable pursuant to stock
options.
(3) Includes 90,000 Dakota Common Shares issuable pursuant to a stock
option.
(4) Includes 90,000 Dakota Common Shares issuable pursuant to stock
options.
(5) Mr. Clay is an affiliate of Ventures Trident II, L.P. and Fulcrum
Management, Inc. Includes 11,040 Dakota Common Shares held in two
trusts in which Mr. Clay holds an interest, 90,000 Dakota Common
Shares issuable pursuant to a stock option, 5,908 Dakota Commons
Shares held by his wife, 24,078 Dakota Commons Shares held by LTC
Corp., a private corporation controlled by Mr. Clay, and 5,348,334
Dakota Common Shares held by Ventures Trident II, L.P. and Fulcrum
Management, Inc. Mr. Clay is a
<PAGE>
controlling person of VenturesTrident II, L.P. and Fulcrum Management,
Inc. Under this arrangement, Mr. Clay has shared voting, investment
and dispositive power with respect to the shares owned by
VenturesTrident II, L.P. and Fulcrum Management, Inc. Mr. Clay
disclaims ownership of the portion of such holding in which he has no
actual pecuniary interest.
(6) Consists of 70,000 Dakota Common Shares issuable pursuant to a stock
option.
(7) Consists of 50,000 Dakota Common Shares issuable pursuant a stock
option.
(8) Consists of 256,032 Dakota Common Shares issuable pursuant to a stock
option.
(9) Consists of 4,000,000 Dakota Common Shares issuable upon conversion of
convertible debentures issuable upon exercise of Special Warrants.
(10) Includes 250,000 Dakota Common Shares issuable upon exercise of Common
Share Purchase Warrants.
(11) Includes 460,000 Dakota Common Shares issuable upon exercise of Common
Share Purchase Warrants.
(12) Includes 1,246,032 Dakota Common Shares issuable pursuant to stock
options and 5,348,334 Dakota Common Shares held by VenturesTrident II,
L.P. and Fulcrum Management Inc. which Dakota Common Shares are
beneficially held by Mr. Clay. Refer to footnote (6) above.
</FN>
</TABLE>
DAKOTA SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Dakota's officers and
directors, and persons who own more than 10% of a registered class of Dakota's
equity securities, to file reports of ownership and changes in ownership with
the SEC and AMEX. Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish Dakota with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms received
by it, or written representations from certain reporting persons, Dakota
believes that, during the fiscal year ended December 31, 1996 all filing
requirements applicable to its officers, directors, and greater than 10%
beneficial owners were complied with.
DAKOTA CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Interests Of Management And Others In Material Transactions
During the three year period prior to the date hereof, no director,
senior officer or principal shareholder of Dakota, nor any affiliate or
associate thereof, has had any material interest, direct or indirect, in any
transaction which has or will materially effect Dakota except as disclosed
below.
Certain Transactions Relating To Principal Shareholders
VenturesTrident II, L.P. ("VTII") is a Delaware limited partnership formed
to invest in precious metals projects and companies. VTII is managed by Castle
Group, Inc. Fulcrum Management Partners, L.P. ("Fulcrum") and Fulcrum Management
Partners II, L.P. ("Fulcrum II") are Delaware limited partnerships serving as
the sole general partners. MinVen, Inc., a Massachusetts corporation, together
with Landon T. Clay, a director of Dakota, are the general partners of each of
Fulcrum and Fulcrum II. Mr. Clay is also a director of MinVen, Inc. MinVen, Inc.
and Fulcrum Management Inc. are wholly-owned subsidiaries of Eaton Vance Corp.,
of which Mr. Clay is the Chairman and Chief Executive Officer. Eaton Vance Corp.
and Mr. Clay are also partners of VTII.
Due to the various relationships among Dakota, VTII, Castle Group,
Inc., Fulcrum, Fulcrum II and Fulcrum Management Inc., and due to the status of
Mr. Clay as a director of Dakota, there are or may occur circumstances when
conflicts of interest arise in connection with decisions affecting Dakota. In
such circumstances, Mr. Clay has abstained and will continue to abstain from
voting on relevant transactions.
On October 13, 1994, VTII exercised Arrangement Warrants and purchased
359,767 Dakota Common Shares at $1.75 per share. The Company used these proceeds
to repay VTII $629,592 of interest accrued to date on certain notes that were
converted pursuant to the Arrangement completed on September 15, 1993. See
"Business of Dakota Mining Corporation - Dakota."
Indebtedness of Directors and Senior Officers
No individual who is, or at any time during the most recently completed
financial year of Dakota was, a director, executive officer or senior officer of
Dakota, no proposed nominee for election as a director of Dakota, and
<PAGE>
no associate of any such director, officer or proposed nominee is, or at any
time since the beginning of the most recently completed financial year of Dakota
has been, indebted to Dakota or any of its Subsidiaries or has been the subject
of a guarantee, support agreement, letter of credit or other similar arrangement
or understanding provided by Dakota or any of its Subsidiaries.
DAKOTA SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected financial data in Table I has been derived from the
audited consolidated financial statements of Dakota and should be read in
conjunction therewith, including notes thereto, included elsewhere in this Joint
Proxy. Dakota utilizes the United States dollar as its reporting currency. All
financial data presented below are in thousands of United States dollars except
per share and other data.
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
Income Statement Data
Revenue $ 24,556 $ 17,209 $ 8,442
Exploration costs 499 87 203
Loss from operations (15,274) (8,718) (5,663)
Other income (expense) (7,796) (272) (76)
Net loss (23,070) (8,990) (5,739)
Net loss per share (0.73) (0.35) (0.33)
Dividends per share 0.00 0.00 0.00
Balance Sheet Data(1):
Property, plant and equipment $ 15,150 $ 22,973 $ 23,527
Total assets 31,569 35,905 34,344
Total debt:
Short-term borrowings 624 1,158 1,158
Current portion of long-term debt 383 566 1,824
Long-term 3,240 440 898
Other non-current liabilities 6,515 3,558 1,851
Shareholders' equity 13,459 22,590 25,485
Other Data:
U.S. dollar exchange rate
(Canadian$/US$)(2)
As of December 31, 0.7301 0.7325 0.7129
Yearly average 0.7334 0.7284 0.7321
Low for period 0.7215 0.7025 0.7105
High for period 0.7515 0.7529 0.7632
</TABLE>
Had the consolidated financial statements been presented in accordance
with accounting principles and practices generally accepted in the United
States, additional financial data would be disclosed as follows:
<TABLE>
<CAPTION>
TABLE II
1993(3) 1992
-------------- --------------
<S> <C> <C>
Income Statement Data
Revenue $ 7,156 $ 31,834
Exploration costs 147 326
Operating loss (5,080) (7,850)
Other income (expense) (2,036) (1,357)
Net loss (7,115) (8,991)
Net loss per share (1.04) (2.80)
Dividends per share 0.00 0.00
Balance Sheet Data (1):
Property, plant and equipment $ 23,362 $ 39,990
<PAGE>
Total assets 35,036 48,804
Total debt:
Short-term borrowings 1,549 -
Current portion 3,329 20,494
Long-term 2,416 1,333
Other non-current liabilities 1,648 2,389
Shareholders' equity 19,852 17,143
Other Data:
U.S. dollar exchange rate
(Canadian$/US$)(2)
As of December 31, 0.7553 0.7867
Yearly average 0.7753 0.8276
Low for period 0.7435 0.7760
High for period 0.8050 0.8760
<FN>
(1) Amounts are at the last day of each of the periods indicated.
(2) Exchange rates are expressed as the United States dollar equivalent to
one Canadian dollar.
(3) The Arrangement was accounted for as financial reorganization under
Canadian generally accepted accounting principles ("Canadian GAAP")
which resulted in a "fresh start." Accordingly, results of operations
subsequent to September 15, the effective date of the Arrangement, are
reported separately in Table I in conformity with Canadian GAAP. Under
U.S. GAAP, the Arrangement would have been accounted for as a
quasi-reorganization with results of operations for the
pre-Arrangement period, January 1, 1993 to September 15, 1993,
combined with the post-Arrangement period.
</FN>
</TABLE>
DAKOTA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
USMX Merger. On February 5, 1997, Dakota entered into the Merger
Agreement with USMX. Under the terms of the Merger Agreement, holders of USMX
Common Stock will receive one Dakota Common Share for every 1.1 share of USMX
Common Stock and USMX will become a wholly-owned subsidiary of Dakota. In
connection with the transaction, Dakota will issue approximately 15.6 million
Dakota Common Shares. The Dakota Common Shares had an approximate market value
of $23.2 million or $1.58 per share, based upon an average trading price for
Dakota's Common Shares for a reasonable period before and after the Merger was
announced. Dakota will account for the Merger as a "purchase". Based upon the
opinion of Coopers & Lybrand L.L.P., Dakota anticipates that the Merger will not
be taxable to Dakota and should not be taxable to shareholders of Dakota or
USMX. See "U.S. Federal Income Tax Considerations of the Merger." Completion of
the Merger remains subject to shareholder approval, review by regulatory
authorities, and other customary conditions. Dakota expects to complete the
Merger in May, 1997. See "The Merger."
The principal asset of USMX is its Illinois Creek Project. Reference is
made to "Business and Properties of USMX - The Illinois Creek Project." The
Illinois Creek Project is expected to produce approximately 64,000 ounces of
gold and 419,000 ounces of silver in 1997 at a cash cost of approximately $250
per ounce of gold. The Illinois Creek Project has an estimated six year life and
is expected to be an important source of operating cash flow to Dakota
throughout its productive life.
Special Warrant Financing and Issue of Debentures. To provide financing
for Dakota and USMX in connection with the Merger, on February 5, 1997, Dakota
entered into an agency agreement with certain Canadian investment dealers (the
"Agents") to sell by way of private placement 25,000 Special Warrants (as
defined hereafter) at a price of Cdn.$1,000 per Special Warrant for aggregate
gross proceeds to Dakota of Cdn.$25 million (U.S. $18.25 million). Proceeds from
the Special Warrant offering, after deducting the 6% commission paid to Agents
and other expected costs, approximate $16.9 million. The offering proceeds will
principally be used to complete construction and commence start-up of the
Illinois Creek Project, developmental drilling, repayment of $1.5 million of the
Rothschild Credit Agreements and for general working capital purposes.
The Special Warrants are comprised of 16,119 Series A Special Warrants
and 8,881 Series B Special Warrants.
- 80 -
<PAGE>
The Special Warrants offering was completed on February 6, 1997 with all
proceeds, net of a 6% commission paid to Agents placed in escrow. Each Special
Warrant entitles the holder, upon exercise thereof and without payment of any
additional consideration, to acquire one Debenture in the principal amount of
Cdn$1,000. The Debentures are described under the heading "Capitalization and
Description of Dakota Securities-Description of Dakota Share Capital and
Debentures-Debentures."
Dakota has agreed to use its best efforts to file a prospectus in
British Columbia, Alberta, Ontario and Quebec to qualify for distribution the
Debentures issuable upon exercise of the Special Warrants and the Dakota Common
Shares issuable upon conversion of the Debentures. A prospectus has been filed.
If qualification is not obtained by June 5, 1997 or such later date as the
Agents may determine in their sole discretion, the number of Dakota Common
Shares issuable upon conversion of the Debentures will be such that each
Debenture will be convertible for 550 Dakota Common Shares (the "Penalty").
If the shareholders of Dakota do not approve the issuance of the Series
B Special Warrants prior to May 31, 1997, then all Series B Special Warrants
will automatically be retracted and the holders thereof will receive the
original purchase price paid therefor plus a pro rata portion of the interest
earned on the purchase price while it was held in escrow. If the Merger is not
completed prior to June 5, 1997, the holders of the Series B Special Warrants
may elect to retract the Special B Warrants.
On March 11, 1997, $5.0 million of the Special Warrant offering
proceeds was released to Dakota in connection with the terms of the Merger
Agreement and the $5,000,000 Loan Agreement. Reference is made to the heading
"Terms of the Merger-Other Agreements-$5,000,000 Loan Agreement." Proceeds from
the $5,000,000 Loan Agreement will be used by USMX to reduce outstanding
accounts payable balances and to fund construction and start-up activities at
the Illinois Creek Project until the Merger is completed. All expenditures must
first be approved in advance by Dakota and Rothschild. Further reductions in
outstanding USMX accounts payable balances, together with additional
construction and start-up costs at the Illinois Creek Project in 1997, are
expected to approximate an additional $7 million. These additional costs will be
funded by Dakota from proceeds of the Special Warrant offering.
The remaining proceeds of the Special Warrant offering will be released
upon completion of the Merger, the obtaining of receipts from various securities
commissions in Canada of the final prospectus qualifying the securities issuable
by Dakota in connection with the offering and upon approval of the issue of the
Dakota Common Shares ultimately underlying the Series B Special Warrants by
Dakota shareholders. Should the Merger not be consummated for any reason, Dakota
will be obligated to exchange a pro rata portion of the Special Warrants for
Debentures in an amount equal to the proceeds released from escrow prior to that
time. USMX will be obligated to repay all outstanding obligations under the
$5,000,000 Loan Agreement. The remaining escrowed proceeds will then be used to
retract from the holders of the Special Warrants a pro rata number of Special
Warrants for the original purchase price thereof together with a pro rata amount
of interest earned thereon while such proceeds were held in escrow.
Upon completion of the Merger, Dakota will be obligated to repay USMX's
$22 million balance due under the Rothschild Credit Agreements. USMX has failed
to comply with various provisions of the Rothschild Credit Agreements and has
continued operations to date with the forbearance of Rothschild. However, Dakota
and Rothschild entered into an Intercreditor Agreement on March 12, 1997 which
among other things, contained Rothschild's consent to the Merger Agreement and
set forth certain changes to the Rothschild Credit Agreements, which changes
will become effective upon consummation of the Merger. Refer to "Terms of the
Merger-Other Agreements-Intercreditor Agreements." In Dakota's view, the
prospective changes to the Rothschild Credit Agreements will avoid any existing
or immediate defaults thereunder after closing of the Merger.
The most significant changes to the Rothschild Credit Agreements
include: (i) $1.5 million of the proceeds from the Special Warrant offering will
be used to repay a portion of the Rothschild Credit Agreements, (ii) certain
minimum cash retention requirements will no longer be required; (iii) all
remaining and outstanding loan balances will be deemed to be project debt and no
portion thereof will be convertible into Dakota Common Shares; (iv) scheduled
loan repayment dates will be changed to better match projected Illinois Creek
Project cash flows; (v) minimum working capital cash balances will be retained
in the Illinois Creek Project; (vi) certain terms related to "commercial
completion" and various financial covenants will be amended; and (vii) Dakota
will guarantee the Rothschild Credit Agreements until
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"commercial completion" is realized.
The adjusted project loan balance of $20.5 million will bear interest,
payable quarterly, at 2.25% above LIBOR until "commercial completion" of the
project has occurred. The requirements for commercial completion include the
construction of the Illinois Creek Mine facilities, which facilities and the
equipment thereon must be mechanically complete and electrically operable
("Mechanical Completion"), the achievement of production amounts and grades,
costs and reserves similar to the development plan, and the absence of any
default in the Rothschild Credit Agreement. Following commercial completion,
this note bears interest at 1.879% above LIBOR. Principal payments are to be
made in installments of $3 million each on November 30 and February 28, of each
year, commencing November 30, 1997.
Dakota expects to repay the outstanding amounts under the Rothschild
Credit Agreements and all related interest accrued thereon from the operating
cash flows from the Illinois Creek Project. No assurances can be given that the
Illinois Creek Project will provide sufficient cash flows to meet these
repayment obligations.
Sources and Uses of Cash. On February 28, 1997, Dakota and Gerald
Metals, Inc. ("Gerald") signed a letter agreement to amend and restate Dakota's
line of credit facility with Gerald. Under the amended terms, Dakota's line of
credit will be increased from the present outstanding balance of $3.23 million
to $5.0 million. The loan will be repayable at a rate of $1.0 million per month
commencing in June 1998, will bear interest at LIBOR plus 2.25% and will be
collateralized by Dakota's underlying assets at its Gilt Edge and Stibnite Mines
and a guarantee by Dakota.
Gerald has also agreed to provide a $2.5 million standby credit
facility to Dakota until July 31, 1997. The standby facility is intended to
serve as a bridge financing until completion of the Merger and the release from
escrow of the remaining proceeds from the Special Warrant offering. Dakota will
be obligated to pay a 1/2 of one percent commitment fee on any unused portion of
the standby credit facility. All outstanding balances thereunder bear interest
at LIBOR plus 2.25% and are collateralized by an assignment of Note 2 under the
$5,000,000 Loan Agreement as described under the heading "Terms of the
Merger-Other Agreements -$5,000,000 Loan Agreement."
In April, 1996, Dakota commenced construction of expanded heap leach
facilities at its Gilt Edge Mine. Remaining capital costs are estimated to be
$4.0 million over two years. The heap leach pad expansion is being constructed
in stages. In this manner, ores can be mined and processed, thereby generating
an operating cash flow, prior to the completion of the entire heap leach pad
expansion. The remaining capital costs are expected to be funded by cash flows,
cash on hand and proceeds from the borrowing arrangements with Gerald.
Inventories decreased from approximately $3.82 million at December 31,
1995 to approximately $2.64 million at December 31, 1996. The decrease
principally relates to lower quantities of gold contained on heap leach pads at
the Stibnite Mine as of year end. In 1996, estimated recoverable ounces of gold
on the Stibnite heap leach pads were approximately 1,400 ounces as compared to
approximately 4,400 ounces in 1995.
As of December 31, 1996, the investment in property, plant and
equipment at Gilt Edge Mine approximated $9.4 million of which $1.7 million is
attributed to the sulfide development potential of the property which is not
currently subject to amortization. Based upon a $380 per ounce gold price, an
independent engineering study and past operating experiences, Dakota believes
that mining and processing the Anchor Hill oxide deposit and the substantial
sulfide deposit will generate sufficient operating margins to ensure the
recovery of Dakota's remaining investment in Gilt Edge Mine.
Dakota estimates that the salvage value of the Golden Reward Mine
assets are equal to or exceed all remaining obligations of the partnership.
Accordingly, future holding costs are not expected to be material to Dakota.
Dakota has identified sufficient mineralized oxide materials at its
Stibnite Mine to conduct operations at annual production rates of approximately
24,000 ounces of gold during 1997 and has drill indicated mineralized material
which Dakota believes will allow for several additional years of operations. The
drill indicated areas will require further development drilling at a cost of
approximately $500,000 per year over the next two to three years. Drilling
activities will be financed from the proceeds of the Special Warrants and from
operating cash flows.
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<PAGE>
Dakota's investment in mining assets at Stibnite Mine as of December
31, 1996 is approximately $4.3 million of which approximately $1.9 million has
been attributed to the sulfide ore potential of the property and is not
currently subject to amortization. Future depreciation will approximate $34 per
ounce providing that 65% of the drill-indicated reserves convert to the proven
and probable category. Based upon a $380 per ounce gold price and its past
operating experience, Dakota believes Stibnite Mine's future operating margins
should ensure the recovery of its remaining investment in mining assets.
Once the Merger is completed, the principal focus of Dakota for the
remainder of 1997 will be: (i) to complete the successful start-up of operations
at Illinois Creek Project, including construction of expanded leach pad
facilities at a cost of $4.5 million; (ii) to continue operations at Gilt Edge
and Stibnite Mines, (iii) to complete construction of additional heap leach pads
at Gilt Edge Mine as previously discussed; (iv) to conduct development drilling
activities at Stibnite and Gilt Edge Mines at a cumulative cost of $1.1 million
in order to convert drill indicated mineral resources into proven and probable
mineable reserves; and (v) to continue exploration and evaluation of other
mining properties, including the Thunder Mountain Project owned by USMX located
near Dakota's Stibnite Mine.
Over the next three years, the combined capital expenditures of Dakota
and USMX are expected to approximate $11.0 million in 1997, $5.9 million in
1998, and $3.0 million in 1999, excluding any costs to develop USMX's Thunder
Mountain Project. In 1997, capital expenditures at Gilt Edge Mine are expected
to approximate $5.0 million, $4.6 million for heap leach pad expansion and
$400,000 for exploration. Capital expenditures at Stibnite Mine are expected to
approximate $1.16 million in 1997 consisting of $530,000 for exploration,
$450,000 for mine development and the remainder for equipment replacement.
Capital expenditures at Illinois Creek are estimated to be $3.8 million to
complete construction of heap leach facilities and an additional $1.0 million
will be spent on exploration at Illinois Creek Mine and Thunder Mountain Project
after the Merger is complete.
In 1998, capital expenditures relate primarily to heap leach pad
expansion at Gilt Edge Mine - $2.5 million and at Illinois Creek Mine - $2.2
million. The remaining $1.2 million of capital expenditures will be allocated
for exploration at Gilt Edge, Illinois Creek and Stibnite Mines depending upon
the results of 1997 drilling activities. In 1999, capital expenditures will
pertain primarily to heap leach pad expansion and exploration activities.
For additional information on operating properties, see "Business and
Properties of Dakota" and "Business and Properties of USMX." Management expects
that the cash flows generated from mining activities, together with the proceeds
from the offering of Special Warrants and under the Gerald credit facilities,
discussed previously, will be adequate to fund all required capital expenditures
and operating activities. However, no assurances can be given that Dakota's
operations will provide sufficient cash flow to fund these capital expenditures.
At December 31, 1996, Dakota had a working capital of $1.0 million as
compared to a working capital deficit of $2.2 million at December 31, 1995. The
improvement is due to higher cash balances in 1996 and a lower outstanding
balance under a short-term borrowing arrangement. At December 31, 1995, Dakota
had a working capital deficit of $2.2 million primarily due to an increase in
accounts payable of $3.47 million since December 31, 1994. The increase in
accounts payable arose in connection with the recommencement of operations at
Stibnite Mine as discussed below and increased operating activities at Gilt Edge
Mine related to the processing of certain previously stockpiled sulfide ores.
The working capital deficit was eliminated in February 1996 as a result of the
private placement of equity securities and reductions in accounts payable using
proceeds from sales of gold bullion produced after December 31, 1995.
Cash used in operations was $6.2 million during 1996 compared to cash
provided by operations of $413,219 in 1995. The increase in cash used during
1996 is a result of operating losses of approximately $2.8 million in 1996 at
Stibnite Mine and preproduction costs of approximately $ 3.2 million incurred in
connection with the start-up of Gilt Edge Mine in the spring of 1996.
Cash provided by operations was $413,219 during 1995 compared to cash
used in operations of $3.88 million in 1994. The decrease in cash used in 1995
compared to 1994 is primarily due to the increase in accounts payable and
accrued liabilities in 1995. The increase in cash used in 1994 to $3.88 million,
from $2.96 million in 1993, is due primarily to the payment of holding and
standby costs at the Gilt Edge and Stibnite Mines neither of which conducted
significant operations in 1994 nor provided operating cash flows.
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<PAGE>
Cash used in investing activities during 1996 primarily pertains to
additions to plant, property and equipment including the expansion of the leach
pad and development of Anchor Hill at the Gilt Edge Mine.
Cash used in investing activities during 1995 pertains to additions to
plant, property and equipment, including deferred development activities at Gilt
Edge Mine and Golden Reward Mine and the addition of a water treatment plant at
Gilt Edge Mine. During 1994, cash used also related to additions to plant,
property and equipment, including development activities at Gilt Edge Mine and
Golden Reward Mine.
Cash provided by financing activities during 1996 included
approximately $13.5 million of proceeds, net of offering costs, from the sale of
special warrants and $340,397 of proceeds received upon the exercise of common
share purchase warrants. Dakota also borrowed $3.23 million under a Revolving
Loan Agreement with Gerald Metals, Inc. In total, Dakota repaid almost $1.1
million of borrowings during 1996, including its pro rata share of long-term
debt obligations of Golden Reward L.P.
Cash provided by financing activities during 1995 included
approximately $5.5 million of proceeds, net of offering costs, from the sale of
special warrants and $587,873 of proceeds received upon the exercise of common
share purchase warrants. Dakota also borrowed $1.875 million under a short-term
credit facility with Gerald Metals, Inc., which credit facility was fully repaid
prior to the end of 1995. Proceeds from the borrowing were used for working
capital to restart operations at Stibnite Mine. Dakota also repaid approximately
$1.8 million of its pro rata share of certain long-term debt obligations of
Golden Reward L.P. In total Dakota repaid borrowings of $3.7 million in 1995.
Financing activities in 1994 generated $9.5 million of proceeds, net of offering
costs, from the sale of special warrants and $2.17 million of proceeds received
upon the exercise of Common share purchase warrants. Dakota repaid approximately
$1.87 million of its pro rata share of certain long-term debt obligations of
Golden Reward L.P. and in total repaid borrowings of $6.13 million in 1994.
Dakota has needs for cash to fund permitting, construction and
environmental compliance activities at its Gilt Edge, Stibnite and Golden Reward
projects. See "Business and Properties of Dakota-Gilt Edge Mine, Golden Reward
Mine and Stibnite Mine."
Other. In the course of its normal business, Dakota uses
forward sales and commodity put and call option contracts to manage its exposure
to fluctuations in the price of gold which it produces. Contract positions are
designed to ensure that Dakota will receive a defined minimum price for a
portion of its gold production. Potential gains on gold price increases are also
eliminated under forward sales commitments if such commitments are not bought
back.
Dakota is exposed to credit risk to the extent of an inability of a
counterparty to honor contracts; however, management believes the risk of
incurring losses due to credit risk is remote. Market risk on financial
instruments results from fluctuations in the gold price during the periods in
which the contracts are outstanding. Dakota manages its exposure to market risk
by matching future physical gold delivery with contract maturities. Risk of loss
arises from the possible inability of Dakota to deliver gold.
Dakota's accounting treatment for hedging is outlined in Notes to Item
8 - "Financial Statements and Supplementary Data."
At December 31, 1996, Dakota had entered into various forward sale
contracts with a gold bullion dealer to deliver 7,500 ounces of gold at a
minimum prices of $370 per ounce and a maximum of $385 per ounce during the
period from January 31, 1997 through June 30, 1997. In addition, forward sales
contracts for 16,000 ounces at an average price of $387 were in place at
year-end. As of February 28, 1997, Dakota had forward sale contracts remaining
to deliver approximately 21,000 ounces of gold throughout 1997 at an average
price of $384 per ounce. Fluctuations in future gold prices could significantly
impact Dakota's future revenues as only a portion of Dakota's expected gold
production in 1997 has been hedged by these forward sales contracts.
Dakota intends to adopt the new Recommendations of the
Canadian Institute of Chartered Accountants relating to the presentation and
disclosure of financial instruments. In accordance with these recommendations
the Debentures will be segregated into their debt and equity components. The
financial liability component, representing
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<PAGE>
the present value of future interest payments, will be included in long-term
debt. The remaining component, representing the value ascribed to both the
holders' option to convert the principal balance into Dakota Common Shares and
Dakota's right to pay the principal amount of the instrument in Common Shares,
will be classified in shareholders' equity as the equity component of
convertible instruments. These components will be measured at their respective
fair values at the date the Debentures are exchanged for the Special Warrants.
Environmental Matters and Government Regulation. All of Dakota's
exploration, development and production activities are subject to regulation
under one or more of the various state, local and federal environmental laws and
regulations. These laws address emissions to the air, discharges to water,
management of wastes, management of hazardous substances, protection of
endangered species, protection of natural resources and others. Such laws and
regulations are generally becoming more restrictive. Dakota has made and expects
to continue to make in the future, significant expenditures to comply with such
laws and regulations. Except as otherwise disclosed in this Joint Proxy
Statement/Prospectus, Dakota believes it is in substantial compliance with all
applicable material governmental and environmental regulations.
Existing and possible future environmental legislation, regulations and
actions, could cause additional expense, capital expenditures, restrictions and
delays in the activities of Dakota, the extent of which cannot be predicted.
Regulatory requirements and environmental standards are subject to constant
evaluation and may be significantly increased, which significantly adversely
affect Dakota's business. The cost of compliance with changes in governmental
regulations has the potential to reduce the profitability of operations.
Several recent legislative developments have affected or may in the
future affect the cost of and the ability of mining claimants to use the Mining
Law of 1872, as amended, to acquire and use federal lands for mining operations.
Since October 1994, a moratorium has been imposed on processing new patent
applications for mining claims. Also, since 1993, a rental or maintenance annual
fee of $100 per claim has been imposed by the Federal government on unpatented
mining claims in lieu of the prior requirement for annual assessment work.
During the last several Congressional sessions, bills have been repeatedly
introduced in the U.S. Congress which would supplant or radically alter the
General Mining Law. As of the end of 1996, no such bills had been passed. Such
bills have proposed, among other things, to permanently eliminate or greatly
limit the right to a mineral patent, impose royalties, and impose new federal
reclamation, environmental control and other restoration requirements. If
enacted, such legislation could impair the ability of Company to economically
develop mineral resources on federal lands. The extent of the changes, if any,
which may be made by Congress to the General Mining Law is not presently known
and the potential impact on Dakota as a result of future Congressional action is
not presently determinable.
The South Dakota Department of Environment and Natural Resources
("DENR") has conducted a Preliminary Assessment on behalf of the United States
Environmental Protection Agency ("EPA") of Gilt Edge Mine activities including
the approximately 406 acres permitted under Dakota's South Dakota state mining
permit. At this time, EPA has not made a determination as to whether any further
study needs to be made of the site. Accordingly, Dakota is not able to determine
what impact, if any, further action by the DENR or EPA in connection with the
Preliminary Assessment may have on the site. Dakota does not know when the EPA
may reach a decision on the Preliminary Assessment.
In April 1993, the DENR issued the DENR Order regarding remediation
efforts related to acid rock drainage at Gilt Edge Mine. The DENR Order remains
in effect and Dakota is in full compliance. The DENR Order principally requires
that, unless discharge water meets certain permitted terms and conditions, there
shall be no discharge of acid mine drainage. On January 19, 1996, Dakota
received final approval of an updated and amended reclamation plan from the
State of South Dakota. Under the conditions of the revised reclamation plan,
Dakota plans to reclaim waste depositories and other areas by capping these
areas with impervious materials available from the overburden associated with
the Anchor Hill oxide deposit. Such capping will prevent any continued migration
of acid mine drainage.
Dakota has provided the State of South Dakota with a form of financial
assurance in the amount of $7.9 million in connection with the reclamation and
remediation plan in the form of cash deposits of $2.4 million and a demand note
as proof of financial assurance in the amount of $5.5 million. Dakota has
estimated that its actual capping costs will approximate $3.2 million, which
costs have been fully accrued at December 31, 1996. Funding of this obligation
will
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be made from operating cash flow derived from processing the Anchor Hill oxide
deposit.
Dakota is required to meet certain equity covenants of $20 million as a
condition of its permits with the State of South Dakota. As of December 31, 1996
Dakota did not meet this requirement, however completion of the Special Warrant
offering on February 6, 1997 as discussed previously will ensure that Dakota
meets this requirement on a go-forward basis.
At a future date when Dakota provides notice to the State of South
Dakota that the Gilt Edge Mine will close and that post closure care is to
begin, Dakota will be obligated to convert a portion of its financial assurance
into a post-closure fund in a form acceptable to the State to ensure long term
treatment and maintenance of the site. The amount of the post-closure financial
assurance is not expected to be less than $3.0 million although no final
determination will be made until the mine actually closes.
The State of South Dakota requires mines to provide the State with
financial assurance to cover mitigation costs in the event of an environmental
accident. In order to fulfil its obligation, Dakota has provided the State with
a form of demand note in the amount of $359,000.
Golden Reward L.P. is required by the State of South Dakota to provide
financial security to cover the estimated cost of reclamation. Reclamation bonds
totaling $1,175,759 have been posted as a guarantee that the land which is
disturbed by mining will be reclaimed. Golden Reward L.P. anticipates that total
costs of reclamation will not exceed the amount of these bonds.
In November 1993, Dakota filed an application for a U.S. Federal Clean
Water Act National Pollution Discharge Elimination System permit in respect of
Stibnite Mine. This permit is not necessary for Dakota's current mining
operations at Stibnite Mine. However, Dakota believes that obtaining this permit
would be of benefit as it would allow Stibnite Mine to discharge clean water
from the minesite in accordance with such permit standards in the future. Dakota
cannot anticipate when a draft permit will be issued.
On July 10, 1995, Dakota entered into a voluntary Administrative Order
on Consent with the EPA regarding the tailings area (the "Meadow Creek Plan").
Approximately 50% of the work under the Meadow Creek Plan was completed in 1995.
Through December 31, 1996, $224,733 has been incurred in connection with the
Meadow Creek Plan. Management estimates that it will cost approximately $667,000
in 1997 in order to complete the Meadow Creek Plan. Such costs will be funded
from operating cash flows although there is no assurance that sufficient cash
flow from operations will be generated to complete the Meadow Creek Plan. Dakota
has apprised previous owners and operators of the property of the Meadow Creek
Plan and believes that a portion of such costs may be recoverable from these
parties. However, there is no assurance that Dakota will be successful in
obtaining a recovery of any of the costs of the Meadow Creek Plan.
On September 11, 1996, Dakota received a Notice of Potential Liability
and Conduct of Removal Action from the United States Environmental Protection
Agency ("EPA") pertaining to certain remediation activities at an historic mine
sight, located on certain lands once leased by Dakota. Dakota never conducted
operations at this sight and no longer owns any interest in the leases
pertaining to this property. The EPA estimates a total cost of $940,000 for its
action. However, Dakota cannot presently determine the extent of its liability,
or whether any liability actually exists.
Reclamation bonds totaling $701,322 have been posted by Dakota in
accordance with State of Idaho and USFS requirements to ensure that land which
is disturbed by mining will be reclaimed. Dakota estimates that the total costs
of reclamation of other land which is disturbed by mining will not exceed the
amount of these reclamation bonds.
Reference is made to the respective sections "Operations, Permitting
and Environmental Matters" in the description of the Gilt Edge, Golden Reward
and Stibnite Mines in the "Business Properties of Dakota-Properties" section of
this document for further discussion of the financial impact of environmental
compliance.
Results of Operations
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<PAGE>
Revenues and Direct Operating Costs. Dakota recorded a consolidated net
loss of $23.1 million, or $0.73 per share, in 1996. Of this loss, $16.4 million
reflects non-recurring expenses including the following: (i) a $9.6 million
writedown in asset carrying values and accrual of certain future estimated costs
related to the suspension of operations at Golden Reward Mine, (ii) an increase
in depletion of $2.9 million at Stibnite Mine due to a change in accounting
estimates and the expensing of deferred stripping costs of $700,000 which had
been deferred in prior years, and (iii) $3.2 million of start-up expenses at the
Gilt Edge Mine prior to recommencing operations at the Anchor Hill deposit in
May 1996.
Shown below is Dakota's share of metal sales (in ounces) in each of the
last three years:
<TABLE>
<CAPTION>
Metal Sales
Year Ended December 31(1)
1996 1995 1994
---- ---- ----
Gold Silver Gold Silver Gold Silver
<S> <C> <C> <C> <C> <C> <C>
Cactus Mine (25%) 564 197 1,468 997 2,595 7,624
Gilt Edge Mine(2) 23,537 32,619 8,839 16,156 2,534 7,245
Golden Reward Mine (40%) 10,070 9,078 19,078 5,451 19,618 5,323
Stibnite Mine 28,752 7,309 17,622 4,739 - -
------ ----- ------ ------ ---------- --------
62,923 49,203 47,007 27,343 24,747 20,192
====== ====== ====== ====== ====== ======
<FN>
(1) Precious metals production for each of the joint venture operations
includes Dakota's pro rata share.
(2) Includes gold sales from Gilt Edge Mine of 2,308 ounces and 2,534
ounces while in holding and standby stage during 1995 and 1994,
respectively. The related revenues were recorded as a reduction of
holding and standby costs.
</FN>
</TABLE>
Operating results for the last three years are summarized in the
following table:
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating revenue $ 24,556,406 $ 18,094,834 $ 9,589,821
Loss on gold loan repayment(1) - - (205,558)
Reclassified to holding and standby - (886,226) (942,640)
--- --------- ---------
Net operating revenue $ 24,556,406 $ 17,208,608(2) $ 8,441,623(2)
============ ============= ===========
<FN>
(1) Loss on gold loan relates to the payoff of a gold loan as a result of
the revaluation of the gold loan to $348 per ounce pursuant to the
arrangement completed September 15, 1993.
(2) Excludes sales of gold from Gilt Edge Mine while in holding and
standby stage.
</FN>
</TABLE>
The benefits of Dakota's short-term gold hedging program principally provide a
minimum selling price for ounces of gold which only slightly exceeded the
average spot prices.
<TABLE>
<CAPTION>
Mine, Mill and Administration(1)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gilt Edge Mine $ 10,339,845 $ 6,442,615 $ 3,563,013
Golden Reward Mine 3,003,781 4,363,047 4,681,572
Stibnite Mine 12,666,675 6,450,714 856,884
Cactus Mine 285,832 477,409 751,499
--------------- ------------ -------------
Subtotal 26,296,133 17,733,785 9,852,968
Reclassified to holding and standby - (3,882,148) (4,419,897)
--------------- ------------- -------------
Total mine, mill and administration $ 26,296,133 $ 13,851,637 $ 5,433,071
============= ============ ============
Average cash cost per ounce of gold sold $418 $310(2) $245(2)
<FN>
(1) Cash costs include mining, milling, project administration,
on-property exploration, and all holding and standby costs.
(2) Excludes ounces of gold sold by Gilt Edge Mine while in the holding
and standby stage.
</FN>
</TABLE>
1996 Compared to 1995. Metal sales at both Gilt Edge Mine and Stibnite Mine
were higher in 1996 than 1995 due primarily to an increase in ore tons
processed. During 1996, Gilt Edge Mine processed approximately 1.583 million ore
tons at an average grade of 0.023 ounces of gold per ton and Stibnite Mine
processed 927,000 ore tons at an average grade of 0.031 ounces of gold per ton.
In comparison, during 1995, Gilt Edge Mine processed approximately 572,000 ore
tons at an average grade of 0.043 ounces of gold per ton and Stibnite Mine
processed 544,000 ore tons at an average grade of 0.05 ounces of gold per ton.
The higher tonnages resulted in increased total metal production.
The above increases in production were partially offset by lower metal
sales from Dakota's 40% interest in the Golden Reward Mine. Golden Reward Mine
ceased mining activities at the end of the second quarter of 1996.
Mine, mill and administrative expense increased substantially in 1996
when compared to 1995. The increase in costs relates primarily to the higher
volumes of ore tons mined at Gilt Edge and Stibnite Mines as discussed
previously. Although ore tonnages were higher, lower ore grades in 1996
adversely effected cash costs per ounces of gold sold. In addition, costs at
Gilt Edge Mine in 1996 include approximately $3.2 million of operating costs
related to the Anchor Hill oxide deposit incurred during the period from January
to April. Gold recoveries from this deposit commenced in May 1996. Such expenses
are not recurring in nature as the Anchor Hill deposit will continue operations
on a year around basis, increased the average cash costs per ounce of gold sold
by $51 in 1996. The Golden Reward Mine incurred $1.3 million less costs in 1996
than in 1995, due to the cessation of mining activities in June. Costs at Cactus
Mine were lower in 1996 than in 1995 and relate to wind-up and reclamation
activities.
The increase in depreciation, depletion and amortization in 1996 when
compared to 1995 is due to higher production rates in 1996 and to a change in
accounting estimate which led to a higher per ounce depletion rate for the
Stibnite Mine in 1996. This change in estimate resulted in additional depletion
of $2.9 million during 1996.
Based upon uncertainties arising from the proximity of certain
unpermitted reserves to a ski hill, the operator of Golden Reward Mine reflected
in the financial statements of the partnership in 1995 and 1996, an impairment
of its investment in mineral properties relating to the Golden Reward Mine.
Dakota recorded this impairment of approximately $7.9 million in its 1996
financial statements after Golden Reward L.P. failed to reach an agreement
regarding the acquisition of certain surface rights owned by the ski hill. Of
this amount, approximately $790,500 pertains to the write down of inventory.
During the second quarter of 1996, Dakota recorded an accrual of approximately
$1.7 million for its share of reclamation and other costs due to the cessation
of mining operations.
Royalties vary from mine-to-mine and within the specific area being
mined in accordance with various agreements with landowners. Effective in 1995,
the State of South Dakota adjusted its method for calculating severance taxes,
the result of which was to significantly lower the effective rate. Overall,
royalties and severance taxes generally relate directly to revenues earned.
Therefore higher revenues in 1996 resulted in higher royalty and severance taxes
than in 1995.
- 88 -
<PAGE>
Reclamation costs in 1996 consist of accruals at Gilt Edge Mine,
Stibnite Mine and Golden Reward Mine of $1.2 million, $380,000 and $640,000,
respectively. The costs at Gilt Edge Mine pertain to the mining of ore and waste
tons at Anchor Hill, the costs at Stibnite pertain to revised estimates of
reclamation costs due to additional mining activities in the West End and
Stibnite pits, and the costs at Golden Reward pertain to the cessation of
operations in the second quarter of 1996. According to estimates provided by our
partner in Golden Reward Mine, all future reclamation costs should now be
accrued as of December 31, 1996.
General corporate costs increased $500,000 in 1996 when compared to
1995 due to additions in staff, legal expenses, travel activities, and in the
use of outside professional services incurred in connection with mine
acquisitions. These increases are due, in part, to overall increases in
corporate activity.
Investment income is higher in 1996 due principally to interest earned
on higher cash balances available for investment purposes.
Interest expense is slightly lower in 1996 than in 1995 due to
decreased vendor interest on outstanding payable balances during 1996. This is
slightly offset by interest on the balance of the Revolving Loan Agreement with
Gerald Metals, Inc. beginning in the second quarter of 1996.
Dakota does not anticipate that its U.S. operations will be subject to
alternative minimum tax during 1997.
1995 Compared to 1994 and 1994 Compared to 1993. Gold production and
related operating revenues in 1995 increased from 1994 levels principally due to
the recommencement of operations at Stibnite Mine in August 1995 after the
successful completion of various permit matters and leaching certain stockpiled
ores at Gilt Edge Mine. In 1994 gold production and revenues decreased from 1993
levels due to the decrease in ounces sold from Gilt Edge Mine as a result of the
cessation of mining activities in January 1993. This was partially offset by
higher average gold prices realized and by increased ounces of gold produced at
Golden Reward Mine due to higher mined tonnages.
In 1995, Dakota mined and processed at Stibnite Mine a total of 544,340
tons of ore with an average grade of 0.05 ounces of gold per ton with overall
average recoveries expected to approximate 86%. Approximately 4,000 ounces of
gold remained on leach pads at December 31, 1995 and were recovered during the
Spring 1996 start-up. In 1994, Stibnite Mine was on standby awaiting the
issuance of certain operating permits. Production at Gilt Edge Mine was higher
in 1995 and is attributable to processing of approximately 572,000 tons of
certain stockpiled sulfide ores with an average grade of 0.043 ounces of gold
per ton and an expected recovery of 45%. Leaching of these materials continued
into 1996. Gilt Edge production in 1994 was principally from reprocessing
certain previously leached materials.
Mine, mill and administrative costs increased significantly in 1995
when compared to 1994. Such costs increased by approximately $2.9 million at
Gilt Edge Mine principally as a result of crushing and pad loading costs
associated with the processing of stockpiled sulfide ores as noted above. Costs
at Gilt Edge Mine in 1994 and through August 1995 relate principally to
neutralization, environmental compliance and administration. Costs at Stibnite
Mine increased $5.6 million as a result of the recommencement of operating
activities. Accordingly, costs are not comparable to 1994. Costs at Golden
Reward were relatively unchanged.
The decrease in average cash costs per ounce sold in 1994 resulted
primarily from increased cost efficiencies obtained at Golden Reward Mine which
are substantially due to the termination of a life-of-mine contract with Harley
Hall in October 1993. Due to the cessation of mining activities at Gilt Edge
Mine wherein certain fixed costs were spread over fewer ounces produced, cost
per ounce values for 1994 are not meaningful and have been excluded from Dakota
average.
Costs at Cactus Mine were lower in 1995 than in 1994 and relate to
wind-up and reclamation activities. Such costs will continue to decline in the
future as final reclamation activities continue.
The increase in depreciation, depletion and amortization in 1995 when
compared to 1994 is due to an increase in the depletion rate at Golden Reward
Mine resulting from a reduction in estimated recoverable reserves at December
- 89 -
<PAGE>
31, 1995. Increases in depletion of approximately $398,000 at Gilt Edge Mine and
$726,000 at Stibnite Mine are attributable to units of production amortization
as each mine recommenced gold production in the third quarter of 1995.
Depreciation and depletion also increased in 1994 when compared to 1993
primarily due to the purchase of equipment at Gilt Edge Mine and the utilization
of straight-line depreciation of equipment while production was suspended during
1994. However, Dakota principally amortizes its mining assets using the units of
production method.
Holding and standby costs pertain to Gilt Edge Mine - $1.5 million and
Stibnite Mine - $866,605 and represent additional accrued 1994 operating
expenses incurred by each mine respectively while awaiting new operating
permits. The increase in holding costs at Gilt Edge Mine are a result of slower
than expected neutralization of spent ores on heap leach pads and the resultant
delays in processing certain stockpiled ores.
Royalties vary from mine-to-mine and within the specific area being
mined in accordance with various agreements with landowners. Effective in 1995,
the State of South Dakota adjusted its methods for calculating severance taxes,
the result of which was to significantly lower the effective rate. Overall,
royalties and severance taxes generally relate directly to revenues earned.
Therefore higher revenues in 1995 resulted in higher royalty and severance taxes
than in 1994. In 1994 royalties increased due to higher operating revenues, but
remained consistent in proportion to such revenue.
Reclamation costs in 1995 include approximately $1.7 million and in
1994 include approximately $1.3 million accrued in connection with the
finalization of a planned acceleration of concurrent reclamation activities
related to existing waste facilities at Gilt Edge Mine. Other reclamation costs
pertain principally to Golden Reward Mine and are relatively unchanged.
General corporate costs decreased in 1995 when compared to 1994 due to
reductions in staff, legal expenses, travel activities, and in the use of
outside professional services. These reductions are due, in part, to overall
decreases in corporate activity during 1995. Such corporate costs decreased in
1994 as compared to 1993 primarily due to an accrual of bonuses to certain
officers in 1993, offset in part, by increased shareholder and investor
relations activities.
Investment income is lower in 1995 due principally to lower cash
balances available for investment purposes. Investment income increased in 1994
as compared to 1993 due to interest earned on higher average cash balances. The
increase in cash balances arose from proceeds realized as a result of the
Arrangement described under "Business and Properties of Dakota" below, completed
in September 1993 and the private placement of special warrants in February
1994.
Interest expense is lower in 1995 due to lower outstanding indebtedness
as a result of the repayment of indebtedness to Wharf throughout 1995 and 1994.
This is partially offset by an increase in vendor interest due to larger
outstanding payable balances. Interest expense decreased in 1994 compared to
1993 primarily as a result of the $1.75 million payoff to Citibank, N.A. in
September 1993, offset in part by the interest accrued to Wharf due to advances
made for cash calls at the Golden Reward Mine.
BUSINESS AND PROPERTIES OF DAKOTA
Dakota was formed as a result of an amalgamation of Brohm Resources
Inc. and MFC Mining Finance Corporation under the provisions of The Company Act
(British Columbia) effective August 2, 1988. Under the terms of the
amalgamation, Dakota was renamed MinVen Gold Corporation. On December 16, 1988,
Dakota was continued under the Canada Business Corporations Act (the "CBCA").
On September 13, 1993, the shareholders of Dakota approved a
recapitalization of Dakota's outstanding common shares as part of an arrangement
structured as a plan of arrangement (the "Arrangement") under Section 192 of the
CBCA. As a part of the Arrangement, all of the common shares of Dakota
outstanding as of September 15, 1993 (the "Old Common Shares") were exchanged
for Common Shares and common share purchase warrants ("Arrangement Warrants")
and the name of MinVen Gold Corporation a was changed to Dakota Mining
Corporation.
- 90 -
<PAGE>
Under Canadian GAAP, the Arrangement was accounted for as a financial
reorganization utilizing "fresh start" accounting. Generally, prior period
figures are not included in the financial statements of an enterprise that has
comprehensively revalued its assets and liabilities as a result of a financial
reorganization. This is consistent with the concept that the enterprise is
starting anew using a "fresh start" basis of accounting. Accordingly, results of
operations and cash flow activities prior to September 15, 1993, the effective
date of the Arrangement, have not been included in the consolidated statements
of operations and cash flows as of December 31, 1993, rather these consolidated
financial statements are limited to the post-Arrangement period commencing
September 16, 1993.
Corporate Structure
The following chart sets forth Dakota's corporate structure including
all material Subsidiaries and their respective jurisdictions of incorporation.
CHART OMITTED
Dakota carries out its operations through its direct and indirect wholly-owned
Subsidiaries as noted above.
Business of Dakota
Dakota is engaged in the business of investing in and operating
precious metals mining projects, producing gold and silver and exploring for,
acquiring and developing precious metals properties throughout the world. Dakota
currently has 100% interest in Gilt Edge Mine located near Deadwood, South
Dakota, a 40% interest in Golden Reward Mine located near Lead, South Dakota and
a 100% interest in Stibnite Mine located in Valley County, Idaho.
[A map of the western United States highlighting the states of Idaho, South
Dakota and Colorado and the location of Dakota's operations has been inserted at
this point]
Dakota has a 25% interest in Cactus Mine located near Lancaster,
California. The entire ore deposit at Cactus Mine has been mined and while gold
recovery occurred throughout 1996 in connection with heap leach neutralization
activities, Cactus Mine is not expected to significantly affect future
operations of Dakota.
Dakota currently holds limited interests in certain other mining
claims, mineral claims and Crown granted mineral claims in British Columbia.
Although no work programs with respect to these existing claims are currently
under way Dakota continues to seek the acquisition of additional mineral
interests outside of the United States.
Properties
Reference hereafter, is occasionally made to sulfide or oxide Mineral
Deposits. Sulfide Mineral Deposits are mineralized rock in which much of the
gold is contained in sulfide. Such sulfide Mineral Deposits are generally mined
and processed by means of crushing the material into fine particles and floating
the particles in a solution to separate the gold. This process is capital
intensive and often not an economic means of processing lower grade Mineral
Deposits.
Oxide Mineral Deposits are sulfide deposits that have been oxidized.
Unlike sulfide deposits, gold can be extracted from oxide deposits through the
use of cyanide heap leaching solutions. Because cyanide heap leaching is
generally a less expensive process than crushing and floating sulfide Mineral
Deposits, lower grade Mineral Deposits can be more economically mined. For this
reason, Dakota has incurred costs to investigate methods of treating sulfide
deposits to render them amenable to cyanide leaching processing. See "Properties
- - Gilt Edge Mine - Sulfide Mineral Deposit." Each Mineral Deposit has unique
metallurgical characteristics, and oxide and sulfide Mineralized Material are
commonly intermingled.
Gilt Edge Mine. Gilt Edge Mine is a year round open pit heap leaching
operation. The following table sets forth certain historical production
information for Gilt Edge Mine:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ore crushed (thousands of tons) 1,583 572 - - 773
Average grade gold (ounces/tons) 0.023 0.043 - - 0.056
Average recovery (%) 72.8% 39.6% - - 60.0%
Ounces produced
Gold 26,150 9,748 2,374 9,423 26,836
Silver 38,223 19,436 5,670 18,524 45,201
Per ounce of gold sold
Cash Cost ($) $439 -(1) -(1) $301 $308
Total Cost ($) $500 -(1) -(1) $366 $381
<FN>
(1) During 1994 and through to August 1995, Gilt Edge Mine was on stand-by
pending the issuance of operating permits for new mining areas. All
costs incurred in this period to care for and maintain the mine and
production facilities have been categorized as "stand-by costs". All
proceeds from the sale of gold and silver during this period were used
to offset stand-by costs. Cost per ounce figures are not meaningful.
(2) Gilt Edge recorded operating costs during the first four months of 1996
of approximately $3.2 million, or $122 cash cost per ounce, which costs
were incurred prior to obtaining any gold production from the Anchor
Hill deposit. Cash costs per ounce are expected to decline
significantly in future years as Gilt Edge Mine will produce gold year
around and will not proportionally increase its operating costs
</FN>
</TABLE>
<PAGE>
General. Dakota owns 100% of Gilt Edge Mine. Gilt Edge Mine is located near
Deadwood, South Dakota, approximately 40 miles from Rapid City, South Dakota,
where there is scheduled commercial airline service. Access to the property is
from Highway 385 on a secondary road maintained by the county. Gilt Edge Mine is
located within the Black Hills National Forest on private land that is leased
from various unaffiliated third parties. Unless production is continuing or the
leases are otherwise extended, such leases expire at various times through 2012.
The property consists of 308 patented and 323 unpatented claims covering
approximately 7,725 acres.
Ownership of the mineral rights under certain lease agreements is
transferable to Dakota upon payment of an aggregate of $3.67 million, of which
$1.3 million has been paid to date. Current production royalties of
approximately 2% with annual minimum royalty payments of approximately $228,200
are paid to parties dealing at arm's length with Dakota. All current production
royalty payments are applied to the $3.67 million lease buy-out price noted
above.
Pursuant to an agreement between Dakota and Repadre
International Corporation ("Repadre") dated March 8, 1995, Repadre has a 1-3/4%
royalty interest in certain properties and a 3/4% royalty interest in the other
properties at Gilt Edge Mine in consideration for having made a credit facility
available to Dakota. These royalties are in addition to the 2% production
royalties described above.
All mining, hauling and road maintenance at Gilt Edge Mine is
performed by a mining contractor.
Conventional open-pit mining methods are used with ores
processed through a heap-leach processing facility. The Gilt Edge Mine site
includes one planned open-pit mine known as Anchor Hill and two historic
open-pit mines, a 7,000 ton per day crushing plant, a 14 acre heap leach pad, a
1,000 gallon per minute Merrill-Crowe zinc precipitation processing plant,
solution storage facilities and ancillary facilities including two water
treatment processing plants, laboratory, warehouse, pump house, maintenance
shops, and administrative buildings. The plant and equipment are in good
condition and are adequately maintained.
Anchor Hill Oxide Deposit. As of January 1996, Dakota had
obtained all requisite state and county permits required for the initial
development of the Anchor Hill oxide deposit. Gold production from this deposit
commenced in April 1996. Based on presently established proven and probable
reserves and planned mining rates, the Anchor Hill deposit will produce gold for
approximately three years. Dakota is also conducting site exploration and
development drilling activities in order to enlarge the presently known oxide
Reserves. Several promising targets have been identified and gold
mineralizations have been confirmed. Dakota expects to expend approximately
$500,000 per year over the next three years in connection with this program.
Sulfide Mineral Deposit. Since 1989, Dakota has been
evaluating the possibility of mining the large sulfide Mineral Deposit which has
been fully delineated and lies directly beneath the two open pits which were
mined prior to 1992.
In September 1992, following laboratory tests conducted by
Dakota on mineralization from Gilt Edge Mine showing that the sulfide
Mineralized Material responded to conventional cyanide leaching, a bulk heap
leach test of the material was instituted. A 42,000 ton bulk sample of the
material was crushed to a minus 1/4 inch in size and was subjected to
conventional heap leach procedures. The bulk test was concluded in November 1993
after 383 days of leaching with actual gold recoveries at 49.4%. Extrapolated
gold recoveries after two full years of leaching were calculated to be in excess
of 61%.
Based upon the bulk test results, Dakota commissioned two
studies to evaluate the commercialization of this large gold resource, including
an estimate of future capital costs and utilization of bio-oxidation processes
to treat sulfide Mineralized Material at Gilt Edge.
One study was undertaken to substantiate the economic
viability of utilizing a heap leach facility to process certain sulfide gold
bearing Mineralized Material at Gilt Edge Mine using the results obtained from
the large scale bulk test noted above. However, management of Dakota has not yet
concluded that such a facility will be constructed in the near future. Rather,
Dakota is continuing to evaluate alternatives which, if successful, could
further enhance Gilt Edge Mine by allowing Dakota to process a greater portion
of the known sulfide Mineralized Material. Such alternatives include
investigation of a pre-treatment process, including bio-oxidation of sulfide
Mineralized
- 93 -
<PAGE>
Material prior to cyanidation leaching as described below, and conventional mill
grinding of Mineralized Material.
To date Dakota has spent approximately $717,600 on studying
the feasibility of the bio-oxidation process at Gilt Edge. Results gathered to
date are encouraging and indicate that for each 1% increase in oxidation there
is a corresponding approximately 1% increase in recovery. Due to the promising
results to date in exploring for additional oxide Mineralized Material at Gilt
Edge Mine, Dakota has refocused its efforts to expanding its oxide inventory of
Mineralized Material as noted above. Accordingly, no significant expenditures
are contemplated in the next year to further develop these sulfide resources
Geology. Mineralized Deposits covered by Gilt Edge Mine
properties are associated with an early Tertiary alkalic igneous complex.
Multiple stock, dike and sill intrusions, comprised of alkalic trachyte
porphyries, have been emplaced into Precambrian metamorphic and Cambrian
sedimentary basement rocks along major northeast and northwest trending fracture
zones. Gold mineralization is disseminated within the porphyritic intrusions and
concentrated within fracture and breccia zones cross cutting all rock types. In
addition, gold mineralization as replacement stratiform or manto type bodies,
occurs within favorable (chemically reactive) strata of the flat lying Cambrian
sedimentary rocks.
Exploration. There is exploration potential for other oxide
and sulphide areas of Mineralized Material on the Gilt Edge Mine properties.
Most of the potential oxide tonnages are in small "pockets" (relative to the
much more extensive sulphide Mineralized Material) that could prolong mine life
to the point that development of sulphide Mineralized Material takes place. The
Anchor Hill oxide Deposit, from which production commenced in 1996, remains as
the largest oxide deposit defined to date. In addition, the Southeast Langley
oxide Deposit, which will compliment Anchor Hill production in 1997, will
require additional drilling to fully delineate the reserves in that area.
Finally, 1996 exploration drilling intersected significant mineralized intervals
in two exploration targets not drilled previously. These areas (Ruby Ridge and
West Anchor) are directly adjacent to existing mine and operating facilities and
no resource estimate has been calculated for these areas.
Additional drilling in 1997 will be completed in the Southeast
Langley and the two new areas to fully assess the reserve potential. Field
geochemical work and mapping has identified at least two additional areas which
will be drilled for the first time in 1997.
Reserves. The table below sets forth the permitted in-place
Proven and Probable oxide Reserves at Gilt Edge Mine as of December 1, 1996; as
audited by DMBW:
<TABLE>
<CAPTION>
Grade oz. Contained Waste to Ore
Area Tons /ton Au Ounces Au(1) Ratio
<S> <C> <C> <C> <C>
Anchor Hill
Southeast 7,231,372 0.029 210,465 1.74:1
Langley 403,379 0.029 11,588 1.13:1
-------- ----- ------- --------
Total 7,634,751 0.029 222,053 1.71:1
========= ===== ======= ======
<FN>
(1) Average metallurgical recoveries from heap leaching are expected to approximate 71.5% of contained ounces of gold.
</FN>
</TABLE>
<PAGE>
Operations, Permitting and Environmental Matters. Dakota has
obtained all of the requisite state and county permits that are required for the
development of the Anchor Hill oxide Deposit. However, the ultimate open pit
design contemplates a disturbance of approximately 37 acres of U.S. National
Forest Service lands principally for pit wall layback. Accordingly, Dakota must
finalize an ongoing Environmental Impact Statement (the "Gilt Edge Mine EIS") to
develop the ultimate open pit mine design. The Gilt Edge Mine EIS, which has
been underway since January 1994, is expected to be finalized in May 1997.
Assuming the Gilt Edge Mine EIS is completed on a timely basis, no disruption to
mining operations is expected in 1997. To date, the Dakota has expended $151,409
for the Gilt Edge Mine EIS and expects to spend an additional $58,000 in 1997
for a total expenditure of $209,409 through to its completion.
On February 21, 1997, Gilt Edge Mine received a draft Notice
of Violation ("NOV") from the State of South Dakota regarding an unauthorized
discharge of approximately 5,500 gallons of mine water due to an equipment
failure. Gilt Edge Mine had previously reported the discharge which occurred in
November 1996. The NOV requests a fine of $5,400 and that Dakota increase its
efforts to properly treat and discharge excess mine waters presently stored at
the minesite. Dakota is presently assessing the nature and extent of the
requested additional water treatment procedures requested by the State of South
Dakota and cannot presently determine what incremental costs, if any, that it
may likely incur as a result of the NOV.
Reference is also made to "Dakota Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Environmental of Matters and
Government Regulation."
Severance Tax. Production from Gilt Edge Mine is subject to
severance taxes payable to the State of South Dakota at the rate of $4.00 per
ounce of gold produced together with a defined net profit tax of 10%.
Golden Reward Mine. Golden Reward Mine is a year round open pit heap
leaching operation. The following table sets forth certain historical production
information for Golden Reward Mine:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ore crushed (thousands of tons) 665 1,683 1,829 1,513 2,127
Average grade gold (ounces/tons) 0.037 0.040 0.040 0.033 0.038
Average recovery (%) - 72.7% 71.8% 71.2% 63.7%
Ounces produced
Gold 21,430 47,569 52,556 35,549 51,135
Silver 9,078 13,061 12,795 30,776 67,712
Per ounce of gold sold
Cash Cost ($) $298 $229 $263 $362 $381
Total Cost ($) $462 $401 $370 $471 $494
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Gold 8,572 19,078 21,022 14,220 24,909
Silver 3,631 5,451 5,118 12,310 13,020
</TABLE>
General. Golden Reward Mine is situated within the historic
Ruby Basin Mining District in the northern Black Hills, approximately four miles
southwest of Lead, South Dakota. Access to the mine is from Highway 85 via the
paved Fantail Gulch Road. The property leased by Golden Reward L.P. comprises
approximately 6,450 acres of land consisting of 426 patented and 194 unpatented
claims. All present and immediate future activities are on patented lands leased
from third parties. The leases require annual minimum payments of $400,000
($160,000 for Dakota's account) with royalty rates ranging from 1% to 5%.
Dakota has a 40% interest in Golden Reward Mine. From
inception of the project through February 27, 1992, Dakota's ownership interest
in Golden Reward Mine was 33-1/3%. Dakota's ownership interest in Golden Reward
Mine was adjusted from 33-1/3% to 54% effective February 28, 1992 as a result of
a former joint venture partner's failure to pay certain cash call obligations
that were in default. On October 8, 1992, Dakota acquired that joint venture
partner's remaining interest in the assets of Golden Reward Mine. Immediately
upon attaining a 100% ownership interest in Golden Reward Mine, Dakota sold a
60% ownership interest in Golden Reward Mine to Wharf Resources, Ltd. of
Toronto, Ontario. Thereafter, Wharf and Dakota contributed their respective
ownership interests into a newly formed limited partnership, Golden Reward
Mining Company, L.P. ("Golden Reward L.P."). The limited partnership is governed
by a partnership agreement dated October 8, 1992.
The mine has exhausted all of its presently permitted mineral
Reserves. Present activities pertain only to care and maintenance which costs
are minimal to Dakota. Future mining activities, if any, are dependent upon
Golden Reward L.P. acquiring certain land surface rights and new operating
permits. No assurance can be given that Golden Reward L.P. will be successful in
its endeavors.
Operations. Mining at Golden Reward Mine took place in
satellite pits using conventional open-pit mining methods. Ore and waste was
drilled and blasted and then the ore is trucked to the crusher. The ore was
crushed to a nominal 5/8 inch product, and was transported by conveyor to a rail
mounted stacker which loaded the ore on to the "on/off" leach pad. This consists
of 12 cells each capable of holding 50,000 tons of ore. Gold extraction from the
solution is by means of Merrill-Crowe recovery plant. All facilities are in
excellent condition and well maintained.
Geology. Golden Reward Mine is located in the Black Hills
igneous intrusive belt, an east-west trend of Eocene Age with intrusive activity
being 70 miles in length. These igneous rocks are typically alkalic and are
generally porphyritic in texture with Tertiary porphyry the most volumetrically
significant intrusive rock in the area. All intrusive rock types at Golden
Reward Mine host gold mineralization. The tertiary intrusive rocks consist of
porphyritic dykes, sills and dyke-sill complexes. These dykes typically occur
along high-angle structures or schistocyte planes in the steeply inclined
Precambrian rocks. The sills within the Deadwood Formation, the dominant exposed
sedimentary rock, usually follow bedding planes or shale horizons.
Mineralization occurs in fracture zones radiating from these igneous-sedimentary
contacts.
Historically, gold production at Golden Reward Mine has come
from high-angle structures or "verticals" and associated replacements within the
dolomitic rocks of the Cambrian Deadwood Formation. The majority of the
mineralization at the present operation is oxide and occurs in the nearly flat
lying Cambrian Deadwood Formation.
Ski Area. Golden Reward Mine is located next to the Terry Peak
Ski Area, a regionally popular Winter recreation site. Due to the sensitive
nature of this area to recreational activities, Golden Reward L.P. has
instituted a reclamation planning project for the area, which includes
sequentially mining the various areas and reclaiming the areas which were
previously mined as new mine areas are opened. Golden Reward L.P. owns a 31%
interest in the ski area for which it paid $1.3 million in 1986. A new lodge was
constructed and new snow making equipment installed in 1989 and the project is
now self-sufficient. The operations of the Terry Peak Ski Area are not material
to the operations of Golden Reward L.P. The cost of the investment has been
accounted for as part of the cost of the property and is being amortized over
the life of the Golden Reward Mine.
Reserves and Mineralized Deposits. Shown below are the proven
and probable in-place oxide Reserves and other oxide Mineralized Material of
Golden Reward Mine (100% interest) as of December 31, 1996 as prepared on
January 30, 1997 by Glenn R. Clark, an independent professional engineer (the
"Clark Ore Reserve Report").
<TABLE>
<CAPTION>
Grade oz/ Contained
Tons ton Au Ounces Au
-------------- ------------- ------------
<S> <C> <C> <C>
Proven and Probable Reserves 1.85 million 0.054 94,350
Defined mineral Deposits
Permitted .2 million 0.034
Non-Permitted(1) 4.35 million 0.035
<FN>
(1) Non-permitted mineralization represents extensions to existing
identified reserves or mineralized deposits on contiguous acreage
controlled by Golden Reward L.P.
</FN>
</TABLE>
Certain third party surface rights or facilities encumber the development
of 1.57 million tons of
- 96 -
<PAGE>
permitted Proven and Probable Reserves at an average grade of 0.052 ounces of
gold per ton, or 81,640 ounces of gold, and all non-permitted defined Mineral
Deposits. In order to access such additional reserves and Mineralized Material,
Golden Reward L.P. will be required to relocate its existing crusher facility
and reduce its leach pad capacity by approximately 25% or to acquire or
otherwise compensate third parties to acquire or remove their facilities. All
the present time, Golden Reward Mine is not actively pursuing the removal of
said encumbrances.
The known Reserves and Mineral Deposits at Golden Reward Mine
are on patented or private lands and would not be subject to a U.S. federal
royalty should the U.S. Congress enact a requirement for such a royalty.
Exploration. Potential exists for Golden Reward Mine to
increase its inventory of Mineralized Material. The development effort has
focused on those surface Mineral Deposits which are amenable to open-pit mining,
however, potential also exists for underground Mineral Deposits which have yet
to be evaluated. Golden Reward L.P. has not yet determined that such underground
Mineralized Material, if any, could economically be developed.
Other Matters. Dakota and Wharf have disagreed regarding
certain operational and financial matters for the Golden Reward Mine, including
planned future operations and related funding requirements. The resolution of
these matter is not presently determinable.
Severance Taxes. Golden Reward Mine is subject to a severance
tax of $4.00 per ounce of gold produced and 10% of net profits as levied by the
State of South Dakota.
Stibnite Mine. Stibnite Mine is a seasonal open pit heap leach
operation with potential for future expansion of existing oxide production.
Stibnite Mine recommenced operations in August 1995 after being placed
on stand-by for substantially all of 1993 and for 1994 while awaiting operating
permits. In July 1995, Stibnite Mine received all requisite operating permits to
recommence mining and processing activities and now has all requisite permits to
continue operations throughout 1997. See "Stibnite Mine-Operations, Permitting
and Environmental Matters." The following table sets forth certain historical
production information concerning Stibnite Mine.
<TABLE>
<CAPTION>
1996 1995 1994(1) 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ore crushed (thousands of tons) 927 544 - 91 814
Average grade gold (ounces/tons) 0.031 0.050 - 0.016 0.038
Average recovery (%) 81.0% 71.0%(3) - 89.0% 89.4%
Ounces produced
Gold 29,352 19,094 - 1,863 27,651
Silver 7,309 5,358 - 1,212 11,683
Per ounce of gold sold
Cash Cost ($) $441(4) $366 - N/A(2) $323
Total Cost ($) $558 $407 - N/A(2) $330
<FN>
(1) No operations were conducted in 1994 while the mine was on stand-by awaiting operating permits.
(2) Costs for 1993 are not meaningful due to reduced level of mining activities pending the issue of operating permits.
(3) Approximately 4,000 ounces of gold remained on the heap leach pads at December 31, 1995 and were recovered in 1996 thereby
increasing recoveries to approximately 86%.
(4) Future Cash costs per ounce of gold produced are expected to be substantially lower as the Stibnite Mine no longer plans
to crush ores but rather heap leach ores on a run-of-mine basis. In addition, mineable head grades are expected to
increase thereby yielding higher revenues for similar tones of ore mined. Refer to "Reserves."
</FN>
</TABLE>
General. Dakota's original 50% interest in Stibnite Mine was
acquired in 1986 from Pioneer Metals Corporation. In 1991, Dakota acquired the
remaining 50% interest in Stibnite Mine from Pegasus Gold.
- 97 -
<PAGE>
Stibnite Mine is located in central Idaho's Salmon River
Mountains in Valley County, approximately 15 miles east of the town of Yellow
Pine. Access is by secondary road from State Highway 55. A landing strip
suitable for light aircraft also exists on the property. The property comprises
thirty patented claims, 28 patented millsites and 487 unpatented mining claims
covering 8,028 acres leased from third parties. This land surrounds the Yellow
Pine Mine owned by Hecla Mining Company ("Hecla").
The leases generally require production royalties that range
from 5% up to 6%. Two leases cover the majority of the production or targeted
areas on the property and will expire in the years 2005 through 2010. The leases
require advance minimum royalties of approximately $92,500 per year.
Operations.
Stibnite Mine is a seasonal, heap leach operation with mining
activity generally occurring from May through November. Conventional
drill-blast-load-haul methods are used. The ore is then crushed into pieces less
than one inch in diameter and deposited on leach pads for dilute cyanide
treatment. Gold and silver are recovered from the solution in a carbon
absorption plant with the barren ore being rinsed, neutralized and removed from
the pads. All facilities and equipment are in good condition and are adequately
maintained.
All mining, hauling, crushing and road maintenance is
performed by a mining contractor. Dakota and contractor personnel are housed
on-site in both company and privately owned trailers. Additional permanent
living quarters and mess hall facilities are provided at the site by Dakota.
Geology. The Stibnite Mine district lies in the east-central
margin of the Idaho Batholith. Quartz-monzonite and aplite dikes of this
Cretaceous intrusive complex are the most common rock-type in this area.
Precambrian metasediments of the Belt Series are also present. The sediments are
composed of quartzite, schist, conglomerate, calc silicate hornfels and marble.
The sediments form part of a large roof pendent with the contained sedimentary
formations, generally striking in a northwesterly direction and dipping to the
northeast.
North-to-northeasterly trending faulting is strongly developed
in the area, with three major northeast striking faults identified.
Gold occurs in fractures and quartz veining mainly in
metasediments, closely associated with pyrite, marcasite, pyrrhotite,
chalcopyrite and arsenopyrite which has been oxidized near the surface.
Brecciated quartzite is the most common rock. The gold bearing Oxide Ores
currently mined are generally underlain by deeper gold bearing sulfide zones.
Exploration. During 1996, Dakota entered into an agreement
with Hecla to develop the sulfide potential in the Stibnite district. Dakota and
Hecla each hold 50% of the unitized mineral interest. Under the terms of the
agreement, the parties are actively seeking a third party mining company to
develop the Mineralized Material. Dakota's oxide heap leach operations and
resources are not to be a part of the unitized assets.
Modest exploration programs have been conducted over the past
several years, principally within three target areas. Drilling results to date
have produced encouraging results. These three mineralized areas will be the
subject of a continuing drill program in 1997 when it is anticipated that the
mineralization and extent of the Mineralized Material will be further defined in
order to increase Proven Reserves. In addition, soil and stream geochemical
sampling and modest geophysical work are planned for the coming year. Dakota
expects to expend approximately $531,000 in 1997 for exploration.
The Stibnite Mine district has potential to host significant
additional oxide and sulfide gold Deposits. However, due to severe cash
limitations in the past few years, exploration efforts have been restricted to
oxides and to the needs of short term mine feed. A focused sulfide drilling
program could enhance this resource.
- 98 -
<PAGE>
A particular opportunity exists at Stibnite Mine due to its
strategic land position surrounding the Yellow Pine sulfide Deposit owned by
Hecla. Yellow Pine is undeveloped and reported by Hecla to contain approximately
20 million tons of refractory sulfide material or approximately two to three
million ounces of gold. The potential to define additional sulfide Mineralized
Material exists primarily on Stibnite Mine lands. Furthermore, should the Yellow
Pine deposit be developed at some future date, Stibnite Mine lands may be
essential for pit layback, mill site, waste and tailing disposal.
Reserves and Mineralized Deposits. An independent audit
conducted by DMBW, professional mining consultants, confirmed reserves as of
January 1, 1997 as follows:
Tons Grade Contained Ounces/Au
Proven and Probable Reserves 432,190 0.049 21,504
Dakota's engineering staff has also identified other oxidized
Mineralized Material outside of the current reserves of approximately 5.68
million ore tons at an average grade of .032 opt gold.
In addition to the oxidized Mineralized Material above,
Dakota's engineering staff has also located on the property refractory sulfide
Mineralized Material of approximately 5.0 million tons at a grade of 0.061
ounces of gold per ton located throughout the property.
Of the total known mineralization, only the Mineralized
Material in the West End Pit, and Mineralized Material (sulfide) at the Yellow
Pine, Homestake and Meadow Creek Mines are located on patented or private lands.
All other known mineralization is on unpatented claims, which could be adversely
affected in the event certain proposed changes in mining laws in the United
States are enacted. See "Risk Factors-General Risks Related to the Mining
Industry-Proposed Changes in Mining Laws."
Operations, Permitting and Environmental Matters. Since early
1992, Dakota has been in the process of preparing an Environmental Impact
Statement (the "Stibnite Mine EIS") to expand its mining operations. Dakota does
not expect that the Stibnite Mine EIS will be finalized until fall 1997.
However, operations planned for 1997 are not affected by the EIS.
Reference is made to "Dakota Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental Matters and
Government Regulations."
- 99 -
<PAGE>
CAPITALIZATION AND DESCRIPTION OF DAKOTA SECURITIES
The following table sets forth the unaudited consolidated
capitalization of Dakota as at December 31, 1996 and February 28, 1997 before
and after giving effect to the Merger and offering of Special Warrants. This
capitalization table should be read in conjunction with the Pro Forma
Consolidated Financial Information and respective consolidated financial
statements for each of Dakota and USMX and the related notes thereto, which
consolidated financial statements are included elsewhere in the Joint Proxy. All
amounts are in thousands except share data.
<TABLE>
<CAPTION>
Outstanding Outstanding
28-Feb-97 28-Feb-97
after effect after effect
of Merger and of Merger and
Amount Outstanding Outstanding exercise of conversion of
Description Authorized 31-Dec-96 28-Feb-97 Special Warrants Debentures
(3) (1) (4) (4)
- ------------------------- ------------ ---------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Long-term debt, including
current portion (2) $ 3,623 $ 3,483 $ 24,123 $ 24,123
Note payable to related party $ - $ - $ - $ -
7.5% convertible
subordinated debentures $ - $ - $ 6,884 $ -
Shareholders equity (5)
Special Warrants, net of $ - $ 16,900 $ - $ -
offering costs [25,000] [25,000]
[Special Warrants
outstanding]
Purchase Warrants $ 63 $ 63 $ 63 $ 63
[Purchase Warrants [4,550,000] [4,550,000] [4,550,000] [4,550,000] [4,550,000]
outstanding]
Preference Shares $ - $ - $ - $ -
[Preference Shares [20,000,000] nil nil nil nil
outstanding]
Common Shares $ 52,810 $ 52,810 $ 77,226 $ 94,635
[Common Shares [unlimited] [35,479,742] [35,479,742] [51,101,726] [63,601,726]
outstanding]
Contributed Surplus - - 10,525 -
Accumulated Deficit (6) $ (39,134) $ (39,134) $ (39,134) $ (39,134)
Cumulative Translation $ (280) $ (280) $ (280) $ (280)
Adjustment
------------------ ------------------ ------------------ ------------------
Total long-term debt and
shareholders' equity $ 17,082 $ 33,842 $ 79,407 $ 79,407
================== ================== ================== ==================
<FN>
(1) Amounts in accordance with the pro forma consolidated financial
information which assumes the issuance of 15,621,984 Dakota Common
Shares in exchange for 100% of the issued and outstanding Common Stock
of USMX.
(2) Consists of long-term debt due to Rothschild (see Note 8 of Notes to
USMX consolidated financial statements) and amounts due to Gerald
Metals Inc. (see Note 6 of Notes to Dakota consolidated financial
statements).
(3) Reflects the issuance of 25,000 Special Warrants by Dakota. Refer to
Dakota Management's Discussion and Analysis of Financial Condition and
Results of Operations. Of the total proceeds, $1,500,000 will be used
to repay a portion of the long-term debt due Rothschild.
(4) Assuming that no Series B Special Warrants are retracted and that all
conditions imposed on Dakota under the Agency Agreement are met such
that no penalty in respect to the number of Common Shares issuable
upon conversion of each Debenture issued on the exercise of the
Special Warrants is imposed, all Special Warrants are exercised for
25,000 Debentures and all Debentures are converted into 12,500,000
Common Shares.
(5) Does not include 2,250,150 Common Shares issuable upon the exercise of
options and warrants previously issued by Dakota or 769,773 Common
<PAGE>
Shares issuable by Dakota in accordance with terms of the Merger
Agreement upon the exercise of options previously issued by USMX.
(6) The accumulated deficit as of December 31, 1996 is applied to
calculate the pro forma shareholders' equity as of February 28, 1997.
</FN>
</TABLE>
Description of Dakota Share Capital and Debentures
The authorized share capital of Dakota consists of an unlimited number
of Common Shares without nominal or par value and 20,000,000 Preference Shares
without nominal or par value.
Common Shares. The holders of the Common Shares are entitled to receive
notice of, attend and vote at all meetings of the Dakota Shareholders. The
Common Shares carry one vote per share. The holders of the Common Shares are
entitled to receive dividends if, as and when declared by the Board of Directors
of Dakota. The Common Shares have no pre-emptive or conversion rights.
Preference Shares. The directors of Dakota are authorized to issue
Preference Shares in one or more series and to fix the number of shares in, and
to determine the designation, rights, privileges, restrictions and conditions
attached to, each series of Preference Shares which may be issued. The
Preference Shares rank prior to the Common Shares with respect to payment of
dividends and with respect to the distribution of the assets of Dakota in the
event of its dissolution, liquidation or winding-up. As at the date hereof, no
Preference Shares have been issued by Dakota.
Debentures. Upon Completion of the Merger and subject to the
fulfillment of certain other conditions (see "Dakota Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources") Dakota will have outstanding Cdn. $25 million aggregate
principal amount of unsecured convertible debentures ("Debentures") due February
5, 2004. The Debentures will bear interest at the rate of 7.5% per annum payable
in arrears in equal semi-annual installments on June 30 and December 31 in each
year.
Debentures will be convertible, at the option of the holders thereof,
at any time up to and including the close of business on the last business day
immediately preceding February 5, 2004 into fully paid and nonassessable Dakota
Common Shares at a conversion price of $2.00 per Dakota Common Share, subject to
the adjustment in certain circumstances, including any subdivision or
consolidation of Dakota Common Shares.
Debentures will redeemed at the option of Dakota at any time on or
after February 4, 2001 and up to and including maturity, provided that the
weighted average price per share at which the Dakota Common Shares have traded
on the TSE during the 20 consecutive trading days ending not more than five
trading days before the date on which a notice of redemption is given exceeds
125% of the conversion price mentioned above.
Unless an event of default under the terms of the Debentures has
occurred and is continuing, Dakota may at its option, and subject to applicable
law and regulatory approvals, elect to satisfy the obligation to repay the
principal amount of the Debentures on redemption or maturity by the issue and
delivery of that number of freely tradeable Dakota Common Shares determined by
dividing the principal amount of the Debentures by 95% of the weighted average
price per share at which the Dakota Common Shares have traded on the TSE during
the 20 consecutive trading days ending not more than five trading days before
the date that the Debentures are fixed for redemption or the date of maturity,
as the case may be, provided that, in the event that such weighted average price
on maturity of the Debentures is less than Cdn. $2.00, Dakota, at its option,
may satisfy its obligation to pay the principal amount payable to the holders
thereof by the issue to such holders of that number of Dakota Common Shares
equal to the lesser of (a) the number determined by dividing such principal
amount by 95% of such weighted average price of the Dakota Common Shares on
maturity and (b) the number determined by dividing the principal amount by the
closing market price of the Dakota Common Shares on the TSE on the maturity
date.
The indebtedness evidenced by the Debentures is a direct unsecured
obligation of Dakota and is subordinated and subject in right of payment to the
prior payment of all senior liabilities including, without limitation, trade
debts of Dakota, whether outstanding at the date of issue of the Debentures or
<PAGE>
thereafter created, incurred, assumed or guaranteed.
Trading History
The Common Shares of Dakota are listed for trading on the TSE and AMEX
under the trading symbol "DKT" and on the BSE under the trading symbol "DMC."
The following table sets forth for the period indicated, the high and low sale
prices per Dakota Common Shares as reported by the TSE and AMEX. On January 2,
1997 the day preceding the date of the public announcement of the Merger, the
closing sale price on the TSE of Dakota Common Share was Cdn. $1.96 per share
and AMEX was U.S. $1.63 per share. For current price information, Dakota
Shareholders are encouraged to consult publicly available sources.
<TABLE>
<CAPTION>
TSE AMEX
Volume Volume
High Low (000's) High Low (000's)
---- --- ------- ---- --- -------
(Cdn. $) (U.S.$)
<S> <C> <C> <C> <C> <C> <C>
1995
First quarter............ $2.35 $1.50 1,037,941 $1.88 $1.06 387,500
Second quarter........... 2.40 1.70 417,183 2.00 1.25 266,700
Third quarter............ 2.40 1.80 452,302 1.88 1.25 359,400
Fourth quarter........... 2.25 1.40 213,527 1.75 1.06 1,204,600
1996 3.65 1.40
First quarter............ 3.65 1.85 4,081,816 2.84 1.50 3,855,100
Second quarter........... 3.65 2.65 4,261,941 2.50 2.00 641,600
Third quarter............ 3.30 2.25 3,062,423 2.25 1.63 2,028,900
Fourth quarter........... 2.96 2.00 1,293,870 2.25 1.50 2,509,600
1997
January.................. 2.50 1.82 2,284,971 1.88 1.38 1,118,900
February................. 2.00 1.85 1,902,431 1.50 1.38 663,900
March.................... 1.93 1.75 418,780 1.44 1.31 402,700
As of April 18, 1997..... 1.79 1.40 1,044,694 1.31 1.06 456,600
</TABLE>
Dividend Policy
Dakota has no fixed dividend policy. Dividend distribution will be
considered by the Board of Directors from time to time having regard to Dakota's
operating results, capital requirements and general financial condition and
requirements. No dividends have been paid by Dakota to date. For the foreseeable
future, it is anticipated that Dakota will use earnings to finance its growth
and that dividends will not be paid to shareholders.
THE USMX ANNUAL MEETING
Time, Date and Place of USMX Meeting
The USMX Meeting will be held at 9:00 a.m., local time, on May 27, 1997,
in Denver, Colorado.
Record Date
The USMX Board of Directors has fixed the close of business on April 16,
1997 as the USMX Record Date for the determination of the holders of shares of
USMX Common Stock entitled to receive notice of and to vote at the USMX Meeting
and at any adjournments or postponements thereof.
Business to be Conducted at USMX Meeting
At the USMX Meeting, the USMX Stockholders will vote on proposals to
approve the Merger Agreement and the Montana Tunnels Royalty Agreement and to
elect directors. See "The Merger."
The USMX Board of Directors has unanimously approved the Merger Agreement
and Montana Tunnels Royalty Agreement and recommends that the USMX Stockholders
vote FOR approval and adoption of the Merger Agreement and Montana Tunnels
Royalty Agreement and the transactions contemplated thereby.
Vote Required
As of the USMX Record Date there were 16,184,182 shares of USMX Common
Stock outstanding. Each share of USMX Common Stock outstanding on the USMX
Record Date is entitled to one vote upon each matter properly submitted at the
USMX Meeting. The affirmative vote of a majority of the shares represented at
the USMX Meeting is required to elect each director. The affirmative vote of a
majority of the outstanding shares of USMX Common Stock is required to approve
the matters to be considered and voted on at the USMX Meeting in connection with
the Merger Agreement and Montana Tunnels Royalty Agreement. The terms of the
Merger Agreement do not require the affirmative vote of a majority of the issued
and outstanding shares of USMX Common Stock held by persons unaffiliated with
USMX for the approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
The presence in person or by proxy at the USMX Meeting of one-third of the
outstanding shares of USMX Common Stock is necessary to constitute a quorum for
the transaction of business. Abstentions will be counted as present for the
purposes of determining whether a quorum is present. All abstentions and broker
non-votes with respect to the proposal to approve and adopt the Merger Agreement
and Montana Tunnels Royalty Agreement and the transactions contemplated thereby
will have the same effect as negative votes.
Voting Commitments, Agreements or Understandings
As of the USMX Record Date directors and executive officers of USMX and
their affiliates owned beneficially approximately 34.4% of the shares of USMX
Common Stock entitled to vote at the USMX Meeting. Except as set forth in the
following sentence, there are no agreements commitments or understandings
between USMX and its directors, officers and shareholders with respect to voting
at the USMX Meeting. However, the directors and executive officers of USMX have
indicated their intention to vote their shares of USMX Common Stock in favor of
the proposal to approve the Merger Agreement and Montana Tunnels Royalty
Agreement and Pegasus Gold, the owner of approximately 29.2% of the outstanding
shares of USMX Common Stock, is a party to the Montana Tunnels Royalty Agreement
and has entered into an agreement with Dakota and USMX pursuant to which Pegasus
Gold has agreed to vote in favor of the proposal to approve the Merger. See
"Terms of the Merger-Other Agreements."
- 103 -
<PAGE>
Voting and Revocation of Proxies
Shares of USMX Common Stock represented by a proxy properly signed and
received at or prior to the USMX Meeting, unless subsequently revoked, will be
voted in accordance with the instruction thereon. If a proxy is signed and
returned without indicating any voting instructions, shares of USMX Common Stock
represented by the proxy will be voted FOR the proposal to adopt and approve the
Merger Agreement. Any proxy given pursuant to this solicitation may be revoked
by the person giving it at any time before the proxy is voted by filing a duly
executed revocation or of a duly executed proxy bearing a later date with the
Secretary of USMX prior to or at the USMX Meeting, or by voting in person at the
USMX Meeting. All written notices of revocation and other communications with
respect to revocation of USMX proxies should be addressed as follows: Secretary,
USMX, Inc., 141 Union Boulevard, Suite 100, Lakewood, Colorado 80228. Attendance
at the USMX Meeting will not in and of itself constitute revocation of a proxy.
The USMX Board of Directors is not currently aware of any business to be
acted upon at the USMX Meeting other than as described herein. If, however,
other matters are properly brought before the USMX Meeting, or any adjournments
or postponements thereof, the persons appointed as proxies will have discretion
to vote or act thereon according to their best judgment.
Solicitation of Proxies
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from holders of the USMX Common Shares by the management
of USMX for use at the USMX Meeting to be held at the time and place and for the
purposes set forth in the accompanying Notice of Meeting and at any adjournments
thereof. Each copy of this Joint Proxy Statement/Prospectus mailed to holders of
USMX Common Stock is accompanied by a form of proxy for use at the USMX Meeting.
The solicitation will be by mail and possibly supplemented by telephone or other
personal contact to be made without special compensation by regular officers and
employees of USMX. No solicitation will be made by specifically engaged
employees or soliciting agents. The cost of solicitation will be borne by USMX.
USMX does not reimburse members, nominees or agents for the costs incurred in
obtaining from their principals authorization to execute forms of proxy.
Election of Directors of USMX
The Board of Directors of USMX is divided into three Groups, with the
terms of office of each Group ending in successive years. The terms of directors
of Group III (Donald P. Bellum and Gregory Pusey) expire with the USMX Meeting.
Proxies will be voted at the USMX Meeting, unless authority is withheld, FOR the
election of the Group III directors. Each of these persons is currently a
director of USMX. There is no nominating committee of the USMX Board. The
affirmative vote of a majority of the shares represented at the USMX Meeting is
required to elect each director. If the Merger is consummated, Dakota may remove
any of the current USMX directors and elect new directors of USMX.
The directors and executive officers of USMX, their respective positions
and ages, and the year in which each director was first elected are set forth in
the following table. Additional information concerning each of these individuals
follows the table:
<TABLE>
<CAPTION>
Director
Name Age Position with USMX Since
<S> <C> <C> <C>
Gregory Pusey (1)(3) 44 President and Director 1979
George J. Allen(3) 68 Director 1990
Phillips S. Baker 37 Director 1995
Terry P. McNulty(2) 58 Director 1990
Werner G. Nennecker (1)(3) 43 Director 1992
Robert Scullion(2) 58 Director 1987
John R. Haigh 59 Vice-President-Investor Relations and Public Affairs
Dennis L. Lance 52 Vice President - Exploration
Thomas M. Smagala 45 Secretary and Treasurer
<FN>
(1) Members of the Executive Committee.
(2) Members of the Audit Committee.
(3) Members of the Compensation Committee.
</FN>
</TABLE>
George J. Allen has served as President of Allen Engineering since 1983.
From 1951 to 1983, he served in various positions with Kennecott Corporation,
including Vice President and Director of Tolling.
Phillips S. Baker joined Pegasus Gold in January 1994 as Vice President,
Finance and Chief Financial Officer. Prior to joining Pegasus, Mr. Baker worked
seven years for Battle Mountain Gold Company, most recently as Treasurer. He
also worked as an accountant for Arthur Andersen LLP. Mr. Baker is an attorney,
Certified Public Accountant and Certified Cash Manager.
Terry P. McNulty has served as President of T.P. McNulty & Associates, a
consulting firm, since 1988. From 1983 to 1988, he was President of Hazen
Research, Inc.
Werner G. Nennecker joined Pegasus Gold Inc. in September 1992 as Senior
Vice President and Chief Operating Officer. In November 1992, Mr. Nennecker
assumed the position of President and Chief Executive Officer of Pegasus. Prior
to joining Pegasus, Mr. Nennecker worked 15 years in the mining industry with
Ranchers Exploration and Santa Fe Pacific Gold Corporation. Most recently, he
held the positions of Executive Vice-President of Santa Fe Pacific Minerals
Corporation and President of Santa Fe Pacific Gold Corporation. He has extensive
experience in all aspects of the mining business. Mr. Nennecker is also a
director of Pegasus Gold Inc., Zapopan NL, the Gold Institute, and the National
Mining Hall of Fame.
Gregory Pusey became President of USMX in April 1997. He previously served
as USMX's Chief Financial Officer from May 1989 until January 1990 and earlier
as the Secretary and Treasurer of USMX. Since 1983, Mr. Pusey has been engaged
in private investment activities. He has served as President of Livingston
Capital, Ltd. and President of the General Partner of Graystone Capital, Ltd, a
venture capital firm. He is also President and a Director of Cambridge Holdings,
Ltd. and a Director of Nutrition For Life International, Inc. Mr. Pusey was a
founder of USMX.
Robert Scullion has been a partner in Scullion, Strasheim & Company, a firm
of Certified Public Accountants, since 1975. He is a Certified Public Accountant
licensed in the United States as well as a Scottish Chartered Accountant.
John R. Haigh has served as Vice President - Investor Relations and Public
Affairs of USMX since June 1996. Mr. Haigh has 36 years experience in the mining
industry and from July 1991 until June 1996 was manager of Investor Relations of
USMX. Mr. Haigh is a degreed geologist and prior to June 1991 was the Chief
Executive Officer and Director of a public gold and diamond mining company that
he created in 1973.
Dennis L. Lance has served as Vice President -- Exploration of USMX since
May 1989. He also served as Secretary of USMX from January 1990 to December
1990. He has served as a geologist with USMX since June 1986. Prior thereto, he
was an independent consulting geologist.
Thomas M. Smagala joined USMX in April, 1989 as Business Development
Manager. He was elected Treasurer of USMX in July, 1993 and Secretary of USMX in
April, 1997. Prior thereto, he was an independent consulting geological
engineer.
The USMX Board held eleven meetings in person or by consent during the year
ended December 31, 1996. All
- 105 -
<PAGE>
incumbent directors attended at least 75% of the meetings of the Board
during 1996.
The USMX Board had three standing committees in 1996: The Executive
Committee, Audit Committee and Compensation Committee. The Executive Committee
is permitted to exercise all the powers of the USMX Board except as may be
restricted by the USMX Board or by the DGCL. The Executive Committee held three
meetings in person or by consent in 1996.
The Audit Committee reviews the scope and results of audits by USMX's
independent auditors, internal accounting controls, non-audit services performed
by the independent accountants and the cost of accounting services. The Audit
Committee held two meetings in 1996.
The Compensation Committee reviews matters related to compensation
programs, including stock option grants, with particular emphasis on executive
compensation. The Compensation Committee held three meetings in 1996.
Executive Compensation
Following is information regarding compensation paid during each of the
last three completed fiscal years to the executive officers of USMX whose salary
and bonus exceeded $100,000 during 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Long Term
Compensation All Other
Name and Principal Position Awards Compensation
Year Salary ($) Bonus ($) (Options #) ($)
<S> <C> <C> <C> <C> <C>
Donald P. Bellum, President $1,512 (1)
and CEO(3) 1996 $134,400 - 150,000 $2,200 (2)
1995 - - - $8,850 (2)
1994 - - - $6,506 (2)
James A. Knox
President and CEO(4) 1996 $148,289 - 25,000 $4,663 (1)
1995 $156,050 $10,000 50,000 $4,620 (1)
1994 $151,500 $20,000 30,000 $4,022 (1)
Dennis L. Lance,
V.P. -- Exploration 1996 $109,200 - 35,000 $2,867 (1)
1995 $107,100 - 25,000 $3,213 (1)
1994 $ 93,816 $8,000 15,000 $2,814 (1)
Donald E. Nilson(3)
V.P. -- Finance 1996 $107,200 - 35,000 $2,874 (1)
1995 $105,100 - 25,000 $3,153 (1)
1994 $ 95,530 $8,000 15,000 $2,790 (1)
Paul B. Valenti,(3)
V.P. -- Operations 1996 $114,198 - 40,000 $3,426 (1)
1995 $108,150 - 25,000 $3,244 (1)
1994 $ 98,650 $8,000 15,000 $2,959 (1)
<FN>
(1) The amounts shown represent USMX's matching contribution for the stated
individuals to its 401(K) plan.
(2) Director's fees.
(3) Mr. Bellum became Chairman of the Board of Directors and Chief
Executive Officer of USMX on May 1, 1996. On July 1, 1996, Mr. Bellum also
assumed the duties of President of USMX. Messrs. Bellum, Nilson and Valenti left
the employ of USMX effective March 31, 1997
(4) Mr. Knox served as Chairman of the Board of Directors and Chief
Executive Officer of USMX until May 1, 1996, and as President until July
</FN>
</TABLE>
The following table sets forth information with respect to stock
options granted during 1996 to each USMX executive named in the Summary
Compensation Table. The assumed annual rates of stock price appreciation of 5%
and 10% are set by a rule of the SEC, and are not intended as a forecast of
possible future appreciation and stock prices. The potential value of options
granted depends on an increase in the market price of USMX's common stock. If
the stock price does not increase, the options will be worthless. If the stock
price does increase, this increase would benefit both option holders and
stockholders commensurately.
<TABLE>
<CAPTION>
Option Grants in 1996.
Potential Realizable Value
% of Total at Assumed Annual Rates of
Options Stock Price Appreciation
Granted for Option Term
Options to Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- -------------- ------------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Donald P. Bellum 150,000 18.5 % $2.55 4/18/2006 $240,552 $609,606
James A. Knox 25,000 3.1 % $2.63 6/18/2006 $41,350 $104,789
Dennis L. Lance 35,000 4.3 % $2.63 6/18/2006 $57,890 $146,704
Donald E. Nilson 35,000 4.3 % $2.63 6/18/2006 $57,890 $146,704
Paul B. Valenti 40,000 4.9 % $2.63 6/18/2006 $66,160 $167,662
All Stockholders (1) $23,833,000 $60,396,000
Executive officers' 1.95% 1.95%
gain as a % of all
Stockholders' gain
<FN>
(1) The amounts shown for All Stockholders represent the potential
realizable value assuming appreciation at the rates indicated based on
the exercise price per share and the expiration date applicable to
grants made in 1996 and the number of outstanding shares on the date of
grant.
</FN>
</TABLE>
<PAGE>
The following table sets forth, in the aggregate, the number of shares
underlying options exercised during 1996 by each executive named in the Summary
Compensation Table, and states the value at year-end of exercisable and
unexercisable options remaining outstanding.
Aggregated Option Exercises and Fiscal Year-End Option Values
Value of Unexercised In-
Number of Unexercised the-Money Options at
Options at FY-End (#) FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
Name
Donald P. Bellum 75,000 / -
100,000 -
James A. Knox 190,000 / -
50,000 -
Dennis L. Lance 68,334 / -
51,666 -
Donald E. Nilson 38,334 / -
51,666 -
Paul B. Valenti 58,334 / -
56,666 -
Compensation of Directors. All directors who are not employed either by
USMX or by Pegasus Gold are paid a fee of $350 for each meeting of the Board
attended. In addition, each director who is not a full-time employee of USMX
receives a fee of $500 per month. These directors also receive additional
compensation plus reasonable expenses for any additional services performed.
Robert Scullion is paid an additional $4,000 per year as chairman of the Audit
Committee. During 1996, certain directors were paid a total of $6,973 for
consulting fees and out of pocket expenses pertaining to various USMX projects.
Employment and Change-in-Control Arrangements. USMX has no employment
agreements with any of its officers or directors. USMX entered into change in
control agreements with Donald P. Bellum, John R. Haigh, Dennis L. Lance, Donald
E. Nilson, Thomas M. Smagala and Paul B. Valenti. Each agreement (other than the
agreement with Mr. Bellum) provided that if the officer's employment was
terminated without "cause" after a change in control, he would be entitled to
receive the balance, if any, due as salary for the month in which termination
occurred, plus salary for that number of months which is the greater of: (i)
six, or (ii) the number of complete years of employment by the officer with
USMX. The officers are also entitled to a continuation of medical insurance
coverage with the premium paid by USMX for six months after termination. Mr.
Bellum's agreement provides that he will receive the equivalent of twelve
month's salary. Cause is defined in the agreements as wilful misconduct,
fraudulent conduct, felonious behavior or acting in a manner which is materially
injurious to USMX, monetarily or otherwise. The proposed merger with Dakota
would be deemed a change in control under these agreements.
Effective March 31, 1997, Donald P. Bellum, Donald E. Nilson and Paul
B. Valenti left the employ of USMX. USMX entered into written settlement
agreements with Messrs. Bellum and Valenti pursuant to which USMX agreed to pay
their respective salary equivalents in installments over a six-month period,
commencing in April 1997. USMX also agreed to continue to pay the premiums for
their medical insurance coverage during this period. USMX has entered into a
written settlement agreement with Thomas M. Smagala pursuant to which
- 108 -
<PAGE>
Mr. Smagala will continue to work for USMX until consummation of the Merger, and
will thereafter receive an amount equivalent to his current salary payable in
installments over a seven-month period. USMX will also pay his premium for
medical insurance coverage for six months. It is anticipated that Messrs. Haigh
and Lance will become employees of Dakota subsequent to the Merger.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions. George J. Allen, Donald P. Bellum and Gregory Pusey
served as members of the Compensation Committee during 1996. Mr. Pusey is a
former officer of USMX. In April 1996, Mr. Bellum resigned as a member of the
Compensation Committee and Werner G. Nennecker was elected to serve as a member
of the Compensation Committee. Effective May 1, 1996, Mr. Bellum became Chairman
of the Board of Directors and Chief Executive Officer of USMX.
Board Compensation Committee's Report on Executive Compensation. The
compensation policies of the Compensation Committee applicable to USMX's
executive officers are based on the continuing need to attract and retain a
management team capable of guiding the growth of USMX over the long term.
Compensation of executive officers paid during 1996 is based on the
qualifications and experience of the individuals officers, competitive market
conditions for executive talent, and the contributions of the individuals to the
long term growth and stability of USMX and to maximizing the long term value of
stockholders' investment in USMX. Factors considered by the Compensation
Committee to be important in the long term growth and stability of USMX and to
maximizing the long term value of the stockholders' investment including
increasing the quantity and quality of USMX's portfolio of exploration
properties, development of these properties into producing mines where
justified, acquisition and improvement of producing properties, increasing the
amount and timeliness of internal and external financial reporting and building
and maintaining a complement of well trained and highly motivated employees. The
Compensation Committee also compared salaries and bonuses with those paid by
other gold mining companies.
USMX's Compensation Committee did not make its determinations based
specifically upon objective measures of corporate performance in 1996 such as
revenue or net income, nor did that Committee set any targets of performance
using such objective measures. The Committee believes that, for a growing
exploration and mining company, primary emphasis should be placed on the
exploration and development of mining properties with superior potential that
will ultimately result in the achievement of improved financial results, through
mineral production or property sale. The Committee considered the performance of
USMX's CEO and other executive officers during 1996 as well as other factors
discussed above in making its compensation decisions.
George J. Allen
Donald P. Bellum
Werner G. Nennecker
Gregory Pusey
Shareholder Return Performance Graph.
[GRAPH TO BE PLACED HERE]
<TABLE>
<CAPTION>
Base Year
1991 Dec 1992 Dec 1993 Dec 1994 Dec 1995 Dec 1996
<S> <C> <C> <C> <C> <C> <C>
USMX $100 $195.42 $305.34 $190.84 $150.29 $121.66
Nasdaq $100 $116.38 $133.59 $130.59 $184.67 $227.16
S & P Gold and Precious
Metals Mining Index $100 $93.37 $171.05 $138.20 $155.55 $154.39
</TABLE>
The above graph assumes an initial investment of $100 as of the close
of trading December 31, 1991. Each of the data points gives the dollar value of
the investment from December 31, 1991, forward assuming dividends, where paid,
are reinvested monthly plus any price change in the investment.
<PAGE>
USMX SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information regarding USMX Common Stock owned by each director, by each
executive officer named in the Summary Compensation Table, by all executive
officers and directors as a group, and by each person known by USMX to be the
beneficial owner of more than 5% of USMX Common Stock as of April 16, 1997 is
set forth in the following table:
<TABLE>
<CAPTION>
Shares of $0.001 Par Value
Common Stock
Name Beneficially Owned Percent of Class
<S> <C> <C>
George J. Allen 37,000(1) *
Phillips S. Baker 4,846,000(2)(3) 29.2%
Donald P. Bellum -0- *
James A. Knox 127,232 *
Dennis L. Lance 157,068(4) *
Terry P. McNulty 38,000(1) *
Werner G. Nennecker 4,856,000(3)(5) 29.3%
Donald E. Nilson 22,250 *
Gregory Pusey 297,274(2) 1.8%
Robert Scullion 26,750(6) *
Paul B. Valenti 56,449 *
All directors and executive officers as a group
(13 persons) 5,779,690(3)(7) 34.4%
Pegasus Gold, Inc.
601 West First Avenue
Suite 1500
Spokane, WA 99204 4,826,000 29.1%
North Pacific Mining Corporation
2525 C Street
Anchorage, AK 99503 1,540,663(8) 9.5%
Van Eck Associates
Corporation
122 East 42nd Street
New York, New York 10168 1,040,000(9) 6.3%
<FN>
(1) Includes 25,000 shares underlying currently exercisable options granted
pursuant to USMX's Non-Discretionary Stock Option Plan For Non-Employee
Directors.
(2) Includes 20,000 shares underlying currently exercisable options granted
pursuant to USMX's Non-Discretionary Stock Option Plan For Non-Employee
Directors.
(3) Messrs. Nennecker and Baker are officers and Mr. Nennecker is a
director of Pegasus Gold. As such, they can be considered to be
beneficial owners of the 4,826,000 shares held of record by Pegasus
Gold. Accordingly, the figures opposite their names reflect the
4,826,000 shares owned by Pegasus Gold.
(4) Includes 68,334 shares underlying currently exercisable options granted
pursuant to USMX's 1987 Stock Option Plan.
(5) Includes 30,000 shares underlying currently exercisable options
granted pursuant to USMX's Non-Discretionary Stock Option Plan For
Non-Employee Directors.
(6) Consists of 26,750 shares underlying currently exercisable options
granted pursuant to USMX's Non-Discretionary Stock Option Plan For
Non-Employee Directors.
(7) Includes currently exercisable options to purchase 215,084 shares.
(8) USMX has entered into a settlement agreement with Peak Oilfield Services
Company ("Peak"), construction contractor which provided services to USMX
on the Illinois Creek Project, pursuant to which USMX has agreed to issue
1,000,000 shares of USMX Common Stock immediately prior to consummation of
the Merger in partial payment of Peak's claim. Peak is in a control group
with North Pacific Mining Corporation
<PAGE>
("NPMC") and may be deemed an affiliate of NPMC. If the settlement is
completed, NPMC and Peak would own an aggregate of 2,540,663 shares, or
approximately 14.8% of the then outstanding USMX Common Stock.
(9) Van Eck Associates Corporation has advised USMX that it is a registered
investment adviser, and that such shares are held for funds or trusts
managed by it, including 715,000 shares (4.3%) held for Gold/Resources
Fund and 275,000 shares (1.7%) held for International Investors
Incorporated and 50,000 shares (0.3%) for a private investor.
Gold/Resources Fund and International Investors Incorporated are open
end, diversified investment management companies which concentrate
investments in gold mining shares. The shares of both of such companies
are publicly held and Van Eck Associates Corporation has advised USMX
that to its knowledge no natural person owns beneficially more than 5%
of the outstanding shares of either such company. John C. Van Eck,
whose business address is the same as that of Van Eck Associates
Corporation, has voting control of Van Eck Associates Corporation.
* Represents less than 1%.
</FN>
</TABLE>
USMX SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires USMX officers and directors,
and persons who own more than 10% of a registered class of USMX's equity
securities, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish USMX with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, USMX believes that,
during the fiscal year ended December 31, 1996 all filing requirements
applicable to its officers, directors, and greater than 10% beneficial owners
were complied with.
USMX CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
USMX presently owns a net profits interest in the Montana Tunnels
Property which has been operated by Pegasus Gold Inc. since 1987. Pegasus Gold
is USMX's largest stockholder. USMX is entitled to the greater of a five percent
net profits royalty interest or minimum advance royalties of $60,000 per month
until certain construction, land acquisition and associated Financing and other
costs have been recovered by Pegasus Gold ("Payback"), and a 50 percent net
profits royalty interest thereafter. See "Business and Properties of USMX."
Payback has not been achieved.
In order to obtain additional funding for its operations and to
partially fund the cost overruns experienced at the Illinois Creek Project, USMX
borrowed $2.5 million from Pegasus Gold in May 1996. The obligation is secured
by USMX's royalty interest in the Montana Tunnels Property. In June 1996 USMX
and Pegasus Gold agreed to the sale of USMX's interest in the Montana Tunnels
Property to Pegasus Gold for $4.5 million. The transaction is subject to the
approval of the USMX Stockholders. Pending completion of the transaction,
Pegasus Gold provided USMX an additional $2 million which was deemed an
amendment to the terms of the outstanding $2.5 million loan. Upon the closing of
the transaction, USMX will transfer to Pegasus Gold its interest in the Montana
Tunnels Property, and will be relieved of its obligation to repay these loans.
See "Approval of Montana Tunnels Royalty Agreement."
As of December 31, 1996, USMX had provided collateral in the form of
Certificates of Deposit totaling approximately $283,000 to secure repayment of
bank loans to four employees or former employees of USMX including one officer
(John R. Haigh - $78,856, and two former officers Paul B. Valenti - $114,398 and
Donald E. Nilson - $52,776). The employees have pledged a total of 134,349
shares of USMX Common Stock to USMX to secure repayment of these obligations.
In March 1995, USMX acquired all of the outstanding capital stock of
Mega Minerals S.A., an Ecuadorian company. USMX assumed obligations of
approximately $120,000, and agreed to pay the seller a 10% net proceeds royalty
on any production from the concessions after recovery of all capital
expenditures. Gregory Pusey, a director and principal shareholder of the seller,
is also a director of USMX. The assets of Mega Minerals S.A. consist of eight
exploration concessions and the rights to acquire four additional exploration
concessions, all located in the Nambija-Zamora gold belt of southern Ecuador.
USMX has entered into a settlement agreement with Peak, a construction
contractor which provided services to USMX on the Illinois Creek Project,
pursuant to which USMX has agreed to issue 1,000,000 shares
<PAGE>
of USMX Common Stock immediately prior to consummation of the Merger in partial
payment of Peak's claim. Peak is in a control group with North Pacific Mining
Corporation ("NPMC") and may be deemed on affiliate of NPMC. If the settlement
is completed, NPMC and Peak would own an aggregate of 2,540,663 shares, or
approximately 14.8% of the then outstanding USMX Common Stock.
APPROVAL OF MONTANA TUNNELS ROYALTY AGREEMENT
The Montana Tunnels property is located in the Colorado Mining
District, Jefferson County, Montana, 22 miles south of Helena. Montana Tunnels
consists of approximately 9,300 acres of patented ground plus about 1,000 acres
of other mineral rights. This property was developed and is operated by Pegasus
Gold pursuant to an agreement with USMX. Mine and mill construction commenced in
March 1986, milling operations began in March 1987, and full operating status
was achieved by Pegasus Gold in October 1987.
The Montana Tunnels Mine involves open pit mining operations and
conventional milling technology. The Montana Tunnels ore is processed through a
circuit which incorporates crushing, grinding, and selective flotation to
produce lead and zinc concentrates, and a gravity circuit for recovery of free
gold. The majority of gold and silver value is associated with the base metal
concentrates. As of December 31, 1996, Pegasus Gold estimated that the Montana
Tunnels Mine has proven and probable ore reserves of approximately 17,095,000
tons.
Pending completion of the sales transaction described below, USMX owns
a net profits interest in the Montana Tunnels Mine. USMX is entitled to the
greater of a five percent net profits royalty interest or minimum advance
royalties of $60,000 per month until certain construction, land acquisition and
associated financing and other costs have been recovered by Pegasus Gold
("Payback"), and a 50 percent net profits royalty interest thereafter. Payback
is defined in the agreement with Pegasus Gold to occur when 90 percent of net
profits equals the sum of $250,000, plus the project costs incurred subsequent
to January 1, 1986, plus interest costs imputed on these costs until September
30, 1987, the date of full operation status. Net profits, as defined, include
deduction from revenues of such costs as direct operating and administration
expenses, allowable new capital expenditures, property payments, management
fees, interest on debt and equity financing, repayment of gold loans, repayment
of certain debt obligations, and taxes other than income taxes. Based on
information provided by Pegasus Gold, USMX estimates that, as of December 31,
1995, the remaining net profit recoverable costs were $26,539,000. Accordingly,
Payback has not been achieved, and it is unclear whether Payback will ever be
achieved. Since inception of the contract USMX has only received the minimum
advance royalties.
In order to obtain additional funding for its operations and to
partially fund the cost overruns experienced at the Illinois Creek Project, USMX
borrowed $2.5 million from Pegasus Gold in May 1996. The obligation is secured
by USMX's royalty interest in the Montana Tunnels Property. In June 1996 USMX
and Pegasus Gold agreed to the sale of USMX's interest in the Montana Tunnels
Property to Pegasus Gold for $4.5 million, subject to the approval of USMX's
Stockholders. Pending completion of the transaction, Pegasus Gold provided USMX
an additional $2 million which was deemed an amendment to the terms of the
outstanding $2,500,000 loan (the "Loan"). The $60,000 per month minimum advance
royalty has been applied for payment of the principal and accrued interest on
the Loan.
In March 1997, Pegasus Gold and USMX entered into a Formal Purchase and
Sale Agreement (the "Montana Tunnels Royalty Agreement"). A closing is to be
held within five days after USMX Stockholder approval. At closing of the
transaction, Pegasus Gold will cancel and forgive all unpaid principal and
interest on the Loan, and the security interests granted by USMX to Pegasus Gold
and the net profits royalty interest will be deemed to be terminated. At the
closing, USMX will deliver all of its right, title and interest in and to the
royalty interest and Pegasus Gold will deliver an acknowledgment of repayment of
the Loan. The Montana Tunnels Royalty Agreement is attached as Appendix F to
this Joint Proxy Statement/Prospectus.
In determining to sell the net profits royalty interest, the USMX Board
of Directors evaluated the history of payment of the minimum advance royalties,
terms of current and future smelter contracts, estimated variables in metal
prices, site visits conducted by employees of USMX and USMX's outside consultant
and interviews with key staff
- 112 -
<PAGE>
members of the Montana Tunnels Mine and employees of Pegasus Gold. Based on the
scheduled production termination at the Montana Tunnels Mine in the year 2000,
it was determined that the net present value of the minimum advance royalties
was $2.7 million. The USMX Board concluded that the purchase price was
reasonable in view of its determination that it was unlikely that USMX would
receive royalty payments substantially greater than the purchase price.
THE USMX BOARD UNANIMOUSLY RECOMMENDS THAT USMX STOCKHOLDERS VOTE TO
APPROVE AND ADOPT THE MONTANA TUNNELS ROYALTY AGREEMENT.
USMX SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information for the
periods described below has been derived from the USMX consolidated financial
statements which are prepared in accordance with U.S. GAAP. The following
summary financial information should be read in conjunction with the USMX
consolidated financial statements and related notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Summary Consolidated Financial Information
(dollars in thousands, except per share amounts and operating data)
Years Ended December 31,
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue (gold sales plus net other
income)............................... $2,323 $3,922 $14,866 $24,252(1) $18,043
Gross profit (loss)................... -- (605) 1,641 880 1,658
Prospecting costs..................... 643 684 739 667 651
Abandonment and impairment of
mineral properties.................... 1,416 4,431 261 938 21
Income (loss from continuing
operations............................ (3,302) (6,906) 204 2,602 37
Net income (loss)..................... (3,302) (6,906) 204 2,602 37
Net income (loss per share............ $(0.22) $(0.47) $0.01 $0.17 $0.00(2)
Operating Data:
Ounces of gold sold................... -- 7,000 35,575 50,429 47,356
Average realized price per ounce -- $383 $383 $360 $360
Average market price per ounce $388 $384 $384 $360 $344
Ounces of gold produced:
Alligator Ridge are(3).............. -- -- -- 23,454 41,120
Green Springs -- -- -- -- 2,353
Goldstrike(4)....................... -- 6,266 34,486 31,934 4,496
-------------- --------- -------- -------- -------
Total............................ -- 6,266 34,486 55,388 47,969
-------------- --------- ======== ====== ======
Cash costs per ounce:
Alligator Ridge area (3)............ -- -- -- $268 $285
Green Springs -- -- -- -- 198
Goldstrike(4)....................... -- $233 $229 305 270
-------------- --------- -------- ---------- --------
Combined......................... -- $233 $229 $289 $280
-------------- --------- ======== ========= =======
<PAGE>
Total cost per ounce:
Alligator Ridge area (3)............ -- -- $328 $328 $336
Green Springs -- -- -- -- 162
Goldstrike(4)....................... $233 $233 326 326 282
---------- ---------- --------- --------- --------
Combined......................... $233 $233 $327 $327 $331
========== ========== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Working capital....................... ($27,132) $5,094 $14,105 $19,362 $12,903
Current assets........................ $2,261 $5,834 $14,923 $21,573 $16,427
Total assets.......................... $50,155 $17,469 $24,190 $28,808 $28,741
Current liabilities................... $29,393 $740 $818 $2,211 $3,524
Long term liabilities................. $ 4,221 $885 $361 $1,074 $3,290
Stockholders' equity.................. $16,541 $15,844 $23,011 $25,523 $21,927
<FN>
(1) Includes gain from the sale of USMX's Alligator Ridge assets totaling
$5,000.
(2) Less than $0.01
(3) Sold August 27, 1993
(4) The Goldstrike Mine was acquired effective November 1,1992.
</FN>
</TABLE>
<PAGE>
USMX MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Going Concern Uncertainty
USMX has suffered recurring losses and cash flow deficits from
operations and currently has no mines in operation. At December 31, 1996, USMX
has an accumulated deficit of approximately $3,056,000, a working capital
deficiency of approximately $27,132,000 and is not in compliance with certain
covenants of its long term debt agreements. In addition, significant additional
funds will be required to bring USMX's Illinois Creek Mine into production.
USMX's auditors have included an explanatory paragraph in their opinion that
states that these matters raise substantial doubt about USMX's ability to
continue as a going concern and that the financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
USMX has entered into a Merger Agreement with Dakota. The Merger is
subject to approval by the TSE, stockholder and creditor approval, review by
other regulatory authorities, and other customary conditions. In connection with
the Merger, Dakota has agreed to loan up to $5 million to USMX to be used to pay
for work completed and ongoing work at the Illinois Creek Mine prior to the
Merger. In connection with the Merger, USMX's principal lender agreed with
Dakota not to accelerate the due date of any loans to USMX or to exercise any
rights it may have to collateral security (except for payment or bankruptcy
defaults) until the earlier of the consummation of the Merger, the termination
of the Merger Agreement in accordance with its terms, or June 30, 1997.
Should USMX be unable to complete the Merger with Dakota, the ability
of USMX to continue as a going concern is dependent on the continued forbearance
of Rothschild and the commencement and continuation of successful operations at
the mine. Future success of the mine is dependent on USMX's ability to produce
gold from the mine in quantities and at costs consistent with those projected by
USMX.
Liquidity and Capital Resources
Working capital at December 31, 1996, was negative $27.1 million. Cash
and cash equivalents amounted to $238,000. Cash and cash equivalents decreased
during 1996 by $5 million primarily as a result of investment in property, plant
and equipment of approximately $25.7 million, including deferred exploration
costs of $0.5 million and development costs of $25.2 million ($23.9 million at
Illinois Creek, Alaska and $1.2 million at Thunder Mountain, Idaho), investment
in reclamation surety and restricted cash accounts of $2.5 million and cash used
in operations of $3.9 million. These costs were partially offset by $1.3 million
in proceeds from the sale of USMX's holdings in Alta Gold Co. common stock.
In addition, USMX obtained $4.5 million in loans from Pegasus Gold
secured by USMX's interest in the Montana Tunnels property and a $22.0 million
financing facility from Rothschild for the construction of the Illinois Creek
Mine and related facilities, including working capital. At December 31, 1996,
USMX had drawn approximately $21.4 million against the facility. See "Business
and Properties of USMX" for a detailed discussion of this financing.
USMX completed its feasibility study of the Illinois Creek Project in
February 1996. After approval of the project by USMX's Board of Directors,
clearing and grubbing activities began in March 1996. Upon receipt of a
commitment for the $22 million financing facility from Rothschild, and required
permits and regulatory approvals in May, construction of the mine and related
facilities was begun.
The original Illinois Creek development budget was $22.6 million,
including $4.7 million in estimated working capital. In the process of obtaining
bids from construction contractors, USMX determined that the forecast needed to
be increased by approximately $2.8 million to $25.4 million. As a result of
weather induced delays and other problems arising from the complexities of
developing a mine using only air transport USMX had incurred costs at December
31, 1996, of approximately $30.7 million related to the development of the
property, including approximately $2.8 million of working capital. At December
31, 1996, USMX had unpaid obligations to suppliers and contractors of
approximately
0109507.04 4/22/97
- 116 -
<PAGE>
$5.7 million for work completed in 1996. As noted below, subsequent to December
31, 1996, USMX obtained a $5 million line of credit from Dakota, which funds
were made available to Dakota as a partial release of funds from a Dakota
private placement. Dakota expects to utilize a substantial portion of the
additional proceeds from that private placement for repayment of the balance of
USMX's unpaid obligations, and for construction and working capital requirements
at Illinois Creek. Of the $5.7 million unpaid at December 31, 1996, USMX has
subsequently paid from the $5 million Dakota line approximately $1.8 million.
USMX estimates that an additional $7 million, including $3.2 million of
working capital will be required to bring the mine to production. In the event
the Merger is consummated and the additional proceeds from the Dakota financing
are received, gold production is scheduled for the summer of 1997. See "Risk
Factors - Specific Risks Related to USMX - Certain Illinois Creek Project
Risks."
In the event the Merger is not consummated, USMX would need to obtain other
financing or attempt to merge or engage in another form of business combination
with an entity with available cash resources, or sell assets. Prior to entering
into the agreement in principle to merge with Dakota, USMX had contemplated a
public offering of securities to raise additional capital. USMX determined not
to proceed with such plans because of the attractiveness of the Merger with
Dakota. See "The Merger - Background to the Merger and USMX's Reasons for the
Merger and Board of Directors' Recommendation." Nonetheless, considerable
preparation for such offering had been accomplished, including regulatory
filings and preliminary marketing arrangements. Moreover, Illinois Creek is
presently closer to production and the ability to achieve cash flow from
operations is nearer to realization. USMX has also reduced its general and
administrative expenditures in an effort to lower its ongoing cash requirements.
As a result, USMX believes that it has reasonable prospects for continued
forbearance from Rothschild and other creditors pending receipt of funds from
operations at Illinois Creek and proceeds of a securities offering or as a
result of another business combination. USMX also believes that the prospects
for sale of its principal asset, the Illinois Creek Mine, are enhanced as the
plans for production are advanced. Therefore, USMX believes that it has a viable
plan for continuation of operations. As noted elsewhere herein, USMX's plan is
subject to substantial risk and success of its plan is not assured.
One of the construction contractors on the Illinois Creek Property in
Alaska working under an approximately $3 million contract with USMX has
submitted invoices and claims totaling approximately $7 million for work
completed in 1996. At December 31, 1996, USMX had paid the contractor $1,772,000
and has recorded an additional liability to the contractor, based on USMX's
estimate of its obligation under the contract of $2,414,000. In April 1997 USMX
and the construction contractor agreed to settle the claim for $5 million. See
"Terms of the Merger Other Agreements." On November 8, 1996, the construction
contractor also filed a lien on the Illinois Creek Property for certain unpaid
invoices and claims submitted through that date.
In addition to construction and working capital requirements at
Illinois Creek, USMX is required by the terms of the credit agreements with
Rothschild to maintain minimum balances in a Proceeds Account for use only in
connection with the Project and to maintain certain financial ratios related to
the Project and to USMX. Per the terms of the Rothschild Credit Agreements, USMX
agreed to deposit $1.5 million in the Proceeds Account by September 30, 1996.
USMX was unable to comply with this requirement and Rothschild agreed to waive
this and certain financial ratio requirements until December 31, 1996,
conditional upon USMX's agreements to, among other things, (A) file a prospectus
with the appropriate Canadian securities regulatory authorities by November 1,
1996, and complete an offering by December 31, 1996, (B) adjust the price at
which Rothschild may elect to convert the $2.5 million loan into USMX Common
Stock to the price at which the shares are sold in an offering, or if no sale,
at the average trading price for the last ten trading days of 1996 and (C) to
pay the Lender a fee of US$100,000 which fee is payable upon the first to occur
of (i) a date upon which such payment can be made without materially reducing
the working capital reasonably required by USMX for continued operations or (ii)
April 15, 1997. At December 31, 1996, USMX had not completed the offering and
was unable to comply with the requirement that it deposit $1.5 million in the
Proceeds Account. As a result of the covenant violations, at December 31, 1996,
the loans from Rothschild have been classified as a current liability. USMX has
determined not to proceed with the offering.
On January 3, 1997, USMX entered into an agreement in principle to merge
with Dakota. On February 5,
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1997, USMX signed the Merger Agreement with Dakota whereby USMX Stockholders
will receive one Dakota Common Share for every 1.1 shares of USMX Common Stock
and USMX will become a wholly-owned subsidiary of Dakota.
In February 1997, Dakota offered by way of private placement 25,000
Special Warrants at a price of Cdn. $1,000 per Special Warrant resulting in
gross proceeds of Cdn. $25 million. Each Special Warrant entitles the holder to
receive one 7.5% unsecured subordinated convertible debenture in the amount of
Cdn. $1,000. Of the proceeds, U.S. $5 million have been released and the
remaining proceeds have been deposited in escrow pending completion of the
Merger and approval by the Dakota Shareholders of the issuance of the Common
Shares underlying the Debentures. This offering was a condition of USMX's
obligation to proceed with the Merger. A substantial portion of the proceeds
will be used to pay suppliers and contractors for work completed at the Illinois
Creek Mine and to complete construction and provide working capital at the
Illinois Creek Mine.
As part of the Merger Agreement, Dakota and USMX agreed that Dakota
would provide a $5 million line of credit to USMX to provide interim working
capital to sustain USMX operations until the Merger is consummated. Reference is
made to the heading "Terms of the Merger-Other Agreements-$5,000,000 Loan
Agreement." The proceeds are to be used to pay certain ongoing operating
expenses primarily in connection with start-up activities associated with the
Illinois Creek Mine and to partially pay trade creditors.
The line of credit is evidenced by two promissory notes with similar
terms but different amounts and different security. The $2 million promissory
note ("Note 1") is secured by a second priority position in all of the capital
stock of USMX of Alaska, Inc. owned by USMX. USMX of Alaska, Inc. holds title to
the Illinois Creek Mine. The second promissory note for $3 million ("Note 2") is
secured by a first position on all of the capital stock of MXUS S.A. de C.V.,
USMX's Mexican Subsidiary, and a first position on USMX's interest in the
Thunder Mountain property in Idaho. USMX and Dakota agreed to grant Rothschild a
second priority security position in the security for Note 2. Funding for the
line of credit was provided from a portion of the proceeds of a Special Warrant
offering by Dakota described above.
USMX has filed a Notice of Intent to Operate with the Idaho Department
of Lands describing USMX's proposed gold and silver mining activities in the
Thunder Mountain Project. Management estimates that the project would require
substantial capital to place it into production, including working capital. If
the project is sufficiently attractive to warrant continued development and the
necessary permits are obtained, construction could begin in 1998. Production
could begin in 1998 or 1999 depending on the construction schedule. Management
believes that USMX will need to obtain additional capital to put Thunder
Mountain into production.
USMX's mining operations are subject to various laws and regulations
concerning prospecting, developing, production, exports, taxes, labor standards,
occupational health, waste disposal, toxic substances, environmental protection,
mine safety and other matters. USMX seeks to make good faith efforts to comply
with all applicable laws and regulations. Except as otherwise disclosed
elsewhere in this Prospectus, USMX believes that it is in substantial compliance
with all applicable material governmental regulations. Instances of
non-compliance or new laws or regulations governing operations and activities of
mining companies, however, could have a material adverse impact on the business
of USMX.
Mining is subject to potential risks and liabilities associated with
pollution of the environment and the disposal of waste products occurring as a
result of mineral exploration and production. Environmental liability may result
from mining activities conducted by others prior to USMX's ownership of a
property. Insurance for environmental risks (including potential liability for
pollution or other hazards as a result of the disposal of waste products
occurring from exploration and production) is not generally available at a
reasonable price to companies within the industry. To the extent USMX is subject
to environmental liabilities, the payment of such liabilities would reduce funds
otherwise available to the companies and could have a material adverse effect on
the companies.
In the context of environmental compliance and permitting, including the
approval of reclamation plans, USMX
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<PAGE>
must comply with standards, laws and regulations which may entail greater or
lesser costs and delays depending on the nature of the activity to be permitted,
constructed and operated and how stringently the regulations are implemented by
the applicable regulatory authority. It is possible that the costs and delays
associated with compliance with such laws, regulations and permits could become
such that a company would not proceed with the development of a project or the
operation or further development of a mine. Except as otherwise disclosed
elsewhere in this Prospectus, USMX believes that it is in substantial compliance
with all applicable material environmental regulations. However, laws,
regulations and regulatory policies involving the protection and remediation of
the environment are constantly changing at all levels of government and are
generally becoming more restrictive and the costs imposed on the development and
operation of mineral properties are increasing as a result of such changes. USMX
has made, and expects to make in the future, significant expenditures to comply
with such laws and regulations.
USMX's balance sheet at December 31, 1996 reflects a total of $0.8
million in accrued reclamation liabilities associated with its acquisition and
operation of the Goldstrike Mine. Reclamation activities in 1996 have focused
primarily on recontouring, topsoiling and planting heap number one and
completion of rinsing of heap number two. Commencement of recontouring and
topsoiling of heap number two as well as the dismantling of the process plant
and reclamation of the plant site will begin once USMX has obtained acceptance
by the State of Utah of USMX's final closure. The goal is to achieve closure by
the end of 1997. This reclamation is expected to be financed with internally
available cash balances, cash generated from the sale of gold produced as a by
product of heap rinsing and approximately $1.7 million cash previously provided
to the State of Utah as reclamation surety.
The Illinois Creek Project is permitted as a "zero discharge facility".
As such, operation will require strict control of the water balance to ensure
that no discharge occurs. Upon closure, reclamation activities will be closely
monitored and effluent from the decommissioned facility will be required to meet
strict water quality standards.
Results of Operations
USMX realized a net loss for the year ended December 31, 1996, of
$3,302,000 compared with a $6,906,000 loss for 1995 and net income of $204,000
for 1994. The loss for 1996 includes mineral property abandonments and
impairments of $1,416,000 compared to $4,431,000 for 1995 and $261,000 for 1994.
General and administrative costs increased to $3,621,000 in 1996 from $2,548,000
in 1995 and $2,185,000 in 1994, as the result of added office space and related
expenses arising from increased staffing requirements to develop the Illinois
Creek and Thunder Mountain properties. The 1996 results include a gain of
approximately $936,000 from the sale of common stock held for investment
purposes and an unrealized gain of $884,000 resulting from the roll forward of
four gold forward sales contracts and the sale of various silver call options.
The 1994 results include a $497,000 income tax credit resulting from the
difference between the estimated 1993 federal income tax provision and the
actual liability reflected on the 1993 income tax returns.
Fluctuations in USMX's results of operations from year to year arise
primarily from four factors: (1) changes in the volume of gold sold and the
selling price of gold, (2) changes in the cost of gold sold, (3) the cost of
mineral properties abandoned during any given period, and (4) asset
dispositions.
Change in the Volume of Gold Sold and Selling Price of Gold
The following table analyzes the variance in gold sales revenue for the
years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
Revenue Variance Analysis
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Ounces of gold sold................................. -- 6,900 35,575
Average price realized per ounce.................... $ - $ 388 $ 383
Change in revenue attributable to:
<PAGE>
Less ounces sold.................................... $ (2,678,000) $ (10,972,000) $ (5,342,000)
Higher (lower) price................................ -- 35,000 820,000
Decrease in gold sales revenue compared to the
preceding year.................................... $ (2,678,000) $ (10,937,000) $ (4,522,000)
</TABLE>
Change in Costs Applicable to Sales
Cost of Gold Sold. No gold was sold in 1996 compared to the cost of
gold sold of $2,890,000 or approximately $419 per ounce in 1995, and $11,203,000
or approximately $315 per ounce in 1994. The fluctuation in the cost of gold
sold is a result of the change in the cost of production throughout the life of
each mine as illustrated in the table below.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Cash production costs incurred............................. -- $ 233 $ 229
Depreciation, depletion, amortization and reclamation
accruals................................................... 48
Production cost per ounce produced......................... $ - $ 233 $ 277
---- ----- -----
Gold sales revenue $ - $ 388 $ 383
==== ===== =====
Production cost per ounce sold............................. -- $ 212 $269
Change in inventories and deferred......................... -- 207 46
---- ---
Cost of gold sold.......................................... -- 419 315
Mining taxes............................................... -- 2 3
Production royalties....................................... $ - 55 19
---- --- ---
Costs applicable to sales.................................. $ - 476 337
---- ---- ----
Gross profit (loss)........................................ $ - $ (88) $ 46
==== ===== ====
</TABLE>
Cash production costs per ounce of gold produced at USMX's Goldstrike
Mine increased to $233 for 1995 from $229 for 1994 despite the fact that no
mining, crushing or pad loading costs were incurred after October 1994 because a
significant portion of processing costs are fixed and, therefore, do not
decrease as production decreases. As the result of a reduction of the estimated
remaining recoverable ounces of gold at the Goldstrike Mine, change in
inventories and deferred production costs increased to $207 per ounce sold for
1995 from $46 in 1994.
Mining Taxes and Royalties. During 1995, USMX incurred $14,000 in
mining taxes compared to $106,000 in 1994. The decrease in mining taxes in 1995
and 1994 is attributable to the decrease in ounces sold compared to the previous
year as a result of declining production at the Goldstrike Mine. Also, USMX
incurred $379,000 in royalty expense for 1995 compared to $665,000 in 1994. The
increase in production royalties per ounce of gold sold is attributable to the
monthly minimum royalty paid at Goldstrike through January of 1996.
Cost of Mineral Properties Abandoned and Provisions for Impairments of
Investments in Mineral Properties
USMX periodically reviews the carrying values of its properties. In
1996, management determined that properties with an aggregate historical cost of
$674,000 no longer held sufficient promise to justify the cost of maintenance.
The properties abandoned in 1996 were Goldstrike ($345,000), Elk Creek
($93,000), Baggs Creek ($69,000), Putu Chile ($61,000), two other properties in
the United States ($17,000) and six small properties in Mexico ($89,000).
Property abandonments were $758,000 and $261,000 in 1995 and 1994, respectively.
The properties abandoned in 1995 were Tule Canyon ($65,000), Divide ($63,000)
and three other properties in the United States ($202,000) and La Cienega
($111,000), Jalisco Copper ($164,000) and four other properties in Mexico
($153,000). The properties abandoned in 1994 were the Ancho Canyon, New Mexico
($221,000) and the South Pass, Wyoming placer properties ($40,000), both of
which were acquired during that year.
During 1996 USMX wrote down the carrying value of the Nambija property
in Ecuador and the Amargosa and La Reserva properties in Mexico by $335,000,
$326,000 and $81,000 respectively. The carrying value of each of the properties
<PAGE>
was reduced to zero. Although the three properties appear to have geological
potential, to date, no significant economic mineralization has been encountered.
The La Reserva property is currently being explored in joint venture with
another mining company. The Nambija and Amargosa properties are being held for
possible future joint venture exploration. In the fourth quarter of 1995, the
carrying value of the Amargosa polymetallic prospect in Chihuahua, Mexico was
reduced by $1.0 million.
In 1995, the Commonwealth of Puerto Rico adopted legislation which
amended the mining law to prohibit future mining of metallic deposits by open
pit methods. Although USMX is considering various strategies and responses, the
effect of the mining law, as currently amended, is to render USMX's plan for
development of the Cala Abajo deposit uneconomic. As a result, in 1995 USMX
reduced the carrying value of this property to zero and recorded an impairment
loss of $1.1 million.
Gold production at USMX's Goldstrike Mine in Utah declined sharply in
August and September of 1995. This decline in gold recovery triggered a
reevaluation of the estimated remaining recoverable gold ounces in the heaps. As
a result, the carrying value of deferred mining and processing costs was reduced
to the fair market value of the remaining gold bullion and dore at the refinery
and USMX recorded an impairment loss of $1.6 million.
Asset Dispositions and Gain on Sale of Common Stock
In April 1994, USMX sold its interest in the Kinsley Mountain Project
in Elko County, Nevada to Alta Gold Co. ("Alta"). In addition to the $20,000
previously received, USMX received $380,000 in cash and Alta restricted common
stock with a then market value of $200,000. In April 1995, USMX received a final
cash payment of $400,000 and additional Alta restricted common stock with a then
market value of $200,000. USMX received, and retained at December 31, 1995, a
total of 352,711 shares of Alta restricted common stock. The cash proceeds and
discounted value of the stock received were recorded as a reduction to the
carrying value of the property on USMX's books. In 1995, USMX recorded a loss on
this transaction of $1,000. During 1996 USMX sold all of the outstanding shares
of Alta common stock for $1,281,000 and recorded a gain on the sale of $936,000.
Other Costs and Expenses
General and administrative costs increased to $3,621,000 in 1996 from
$2,548,000 in 1995, as the result of added office space and related expenses
arising from increased staffing requirements to develop the Illinois Creek and
Thunder Mountain properties. General and administrative expenses were higher in
1995 than 1994 principally due to legal and other professional fees paid
relative to the Cala Abajo project and to salaries and related expenses of
additional corporate staff. Legal and professional consultants were engaged to
evaluate the impact of a change in Puerto Rican mining law and USMX's
alternatives concerning the Cala Abajo Project.
Prospecting costs in 1996 were comparable to Prospecting costs in 1995.
Prospecting costs in 1995 were lower than 1994 as a result of the concentrated
effort by USMX's exploration staff to complete development drilling at the
Illinois Creek, Alaska property.
Interest income decreased to $275,000 in 1996 compared to $525,000 in
1995, as the result of decreasing cash balances during 1996. Interest income for
1995 was comparable to 1994.
Interest expense increased to $511,000 in 1996 compared to $14,000 in
1995, as the result of long term debt incurred during 1996 related to
development of the Illinois Creek property and a $4.5 million loan received from
Pegasus Gold, a stockholder of USMX. Interest expense for 1995 was comparable to
1994.
Income tax expense primarily represents current and deferred federal
income taxes. The entire income tax benefits for 1996 and 1995 are related
primarily to net operating losses carried back to prior years. The 1994 benefit
results primarily from the difference between the estimated 1993 federal income
tax provision and the actual liability reflected on the 1993 income tax returns.
See Note 10 to the Consolidated Financial Statements for a reconciliation of the
<PAGE>
provision for income taxes for 1996, 1995 and 1994 to the statutory federal
income tax rate.
Trends Which May Affect Future Results of Operations. As previously
stated, fluctuations in USMX's results of operations arise primarily from four
factors: (1) changes in the volume and cost of gold sold, (2) changes in the
selling price of gold, (3) the cost of mineral properties abandoned during any
given period and (4) asset dispositions. The following is management's view of
trends in these factors.
Changes in the Volume and Cost of Gold Sold. USMX's ability to achieve
forecasted gold production will be dependent upon many factors, some of which,
such as the price of gold and climate conditions, are beyond the control of
USMX.
Estimates of mineralization, metallurgical recovery, and cash operating
costs are to a large extent based on the interpretation of geologic data
obtained from drill holes and other sampling techniques and feasibility reviews
which derive estimates of cash operating costs based on anticipated tonnage and
grades of ore to be mined and processed, the configuration of the ore body,
expected recovery rates of metals from the ore, comparable facility and
equipment costs, anticipated climate conditions and other factors. Accordingly,
actual volumes of gold produced and actual cash operating costs may differ from
the volumes and costs initially estimated.
USMX's operations will be subject to all of the operating hazards and
risks normally incident to operation of mineral properties, such as unusual or
unexpected geological formations, environmental hazards, industrial accidents,
labor disputes, equipment incapability or failures, and inclement weather
conditions. Such occurrences could result in damage to, or destruction of,
mineral properties or production facilities, personal injury or death,
environmental damage, delays in mining, monetary losses and possible legal
liability. Moreover, USMX's mining operations will be subject to extensive
federal, state and local laws and regulations governing production, taxes, labor
standards, occupational health, waste disposal, protection and remediation of
the environment, reclamation, mine safety, toxic substances and other matters.
Compliance with such laws and regulations has increased the cost of
planning, designing, drilling, developing, constructing, operating and closing
other mines and facilities previously operated by USMX. In addition, USMX has
expended significant resources, both financial and managerial, to comply with
environmental protection regulations and permitting requirements and anticipates
that it will continue to do so in the future. Although USMX believes that it has
made adequate provision to comply with such regulations, there can be no
assurance that additional significant costs and liabilities will not be incurred
to comply with current and future environmental protection regulations.
Moreover, it is possible that future developments, such as increasingly strict
environmental protection laws, regulations and enforcement policies, and claims
for damages to property and persons resulting from USMX's operations, could
result in substantial costs and liabilities in the future.
Changes in the Selling Price of Gold. Another significant uncertainty
facing USMX which could potentially impact its financial position, profitability
and liquidity in the short term is the price of gold. The gold price is a
function of a number of factors including investors' expectations with respect
to inflation, the strength of world currencies, decisions by central banks
regarding their gold reserves, and supply and demand factors, none of which is
under the control of USMX's management. During 1996 gold reached a six year high
of $415 per ounce early in the year and a three year low of $369 per ounce late
in the year. The average market price of gold was $388 an ounce during 1996
compared to $384 per ounce during 1995 and 1994.
In the course of its normal business, USMX uses financial instruments
to manage its exposure to fluctuations in the price of gold which it produces.
Contract positions are designed to ensure USMX will receive a defined minimum
price for a portion of its gold production. Potential gains in gold price
increases are also eliminated under forward sales commitments if such
commitments are not bought back.
USMX is exposed to credit risk to the extent of an inability of a
counterparty to honor contracts, however, management believes the risk of
incurring losses due to credit risk is remote.
Market risk on financial instruments results from fluctuations in the
gold price during the periods in which the
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<PAGE>
contracts are outstanding. USMX manages its exposure to market risk by
attempting to match future physical gold delivery with contract maturities. The
risk of loss arises from the possible inability of USMX to deliver gold.
USMX's accounting treatment of financial instruments and hedging is
outlined in Notes 2 and 14 to the consolidated financial statements.
As of December 31, 1996, USMX had entered into forward sales contracts
for 140,900 ounces of gold deliverable at various dates through December 31,
1999 at an average selling price of $409 per ounce. Delivery under these spot
deferred contracts can be deferred at USMX's option up to forty months depending
on the individual contract. The aggregate unrealized excess of the net market
value of USMX's forward sales contracts over the spot gold price of $368 per
ounce as of December 31, 1996, is approximately $5,875,000.
USMX has also written silver call options expiring at various dates
over the next forty months, which if exercised, would become spot deferred
contracts with delivery deferred as previously described. At December 31, 1996,
USMX had sold 825,300 ounces of silver call option contracts all at a strike
price of $5.50 per ounce expiring on dates ranging from September 28, 1997
through December 29, 1999. Call options premiums received amounted to
approximately $424,000.
Cost of Mineral Properties Abandoned. The cost of mineral properties
abandoned in any period is a function of the results of USMX's exploration
efforts and economic considerations. USMX makes every effort to maximize the
results of its exploration efforts. However, exploration for economically
recoverable metals involves significant risk. Accordingly, while it is probable
there will be abandonment losses in the future, it is not possible to predict
either the timing or amount.
BUSINESS AND PROPERTIES OF USMX
Introduction
USMX was founded in 1979, and has engaged in exploration for precious
metal properties. In 1988 when USMX developed the Green Springs Mine in east
central Nevada. During the period 1988 through 1995, USMX produced approximately
273,000 ounces of gold from Green Springs and three additional mines and
successfully closed and reclaimed the Green Springs Mine. USMX was the recipient
of awards for its performance in the areas of environmental protection,
reclamation and safety. Mining was completed in October 1995 at USMX's remaining
production unit, the Goldstrike Mine, in southwestern Utah. USMX expects to
complete reclamation of the Goldstrike Mine in 1997.
USMX views exploration as an important means of growth, and
historically explored several projects annually. During 1996, USMX continued its
exploration efforts outside of the United States, principally in Mexico.
USMX's principal focus in 1996 was the development of its Illinois
Creek Project (the "Project") in west central Alaska. In February 1996 USMX
completed its feasibility study of the Project and received a commitment for
project financing. In May 1996 key permits necessary for mining, heap leaching
and dam construction were received and USMX commenced construction of the mine
and related facilities. The Air Quality Permit was received in June. Effective
July 11, 1996, USMX acquired leasehold and other property interests in the
Project from North Pacific Mining Corporation ("NPMC"), a subsidiary of Cook
Inlet Region ("CIRI"), in exchange for 1,540,663 shares of USMX Common Stock. As
a result of this transaction, NPMC owns approximately 9.5% of USMX's issued and
outstanding Common Stock. In addition, NPMC received a 5% net returns royalty on
production from the Illinois Creek Upland Mining Lease. Also effective July 11,
1996, USMX entered into the Rothschild Credit Agreements for a $22,000,000
facility to finance the development and construction costs of the Project.
During 1996 USMX substantially completed construction of a 90-person
man camp, a 6.5 mile road to connect the camp with the deposit area and the site
of the process facility, a double synthetic, modified valley fill heap leach
pad,
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<PAGE>
a rotary kiln to produce calcined line and a carbon gold recovery plant. In
addition, approximately 115,000 tons of overliner material and run-of-mine ore
has been placed on the leach pad. Minor construction and a leak test of the
leach pad will have to be completed before start-up in 1997. Leaching is
scheduled to commence during mid-May upon completion of the leakage testing of
the liner system and loading ore on the first leach cell. If the leak test is
successful and normal weather prevails, the first gold production is anticipated
by early Summer of 1997.
History of Operations
USMX's first producing mine, the Green Springs Mine, commenced
production in June 1988. USMX completed mining crushing and stacking operations
at Green Springs in June 1990. Reclamation of pits, haul roads and waste dumps
commenced in 1990 and continued through 1993. Rinsing of the heaps was initiated
during 1992 to meet final closure requirements. During 1993, rinsing of the
heaps and reclamation of the plantsite were completed. During the life of the
Green Springs Mine, USMX received environmental and safety awards for this
operation while producing a total of 69,331 ounces of gold. USMX received the
1992 State of Nevada Governor's Award for Excellence in Mine Reclamation in
connection with several of USMX's Nevada mines which included the Green Springs
Mine. The Governor's award, made jointly by the State of Nevada, U.S. Bureau of
Land Management and U.S. Forest Service was awarded to USMX in recognition of
outstanding achievement in innovative design, superior mine planning and
commitment to reclamation from project commencement to closure.
USMX commenced open pit mining at the Casino Mine in Nevada in June
1990 and completed mining in May 1991. In July 1991, USMX commenced mining at
the Winrock Mine. Mining and crushing were completed at the Winrock Mine in June
1992. The Casino and Winrock Mines shared a common heap leaching facility. USMX
produced a total of 48,953 ounces of gold from the Casino/Winrock project prior
to its sale on August 27, 1993.
In May 1990, USMX completed the purchase of the Alligator Ridge Mine in
Nevada, which included partially leached gold ore on heaps, gold recovery
facilities, a mining fleet, a mill, and approximately 26,000 acres of mineral
interests in the Alligator Ridge trend. During its tenure at the Alligator Ridge
Mine, USMX produced 50,188 ounces of gold. Construction of the crushing and gold
recovery facilities at a satellite facility, designated the Yankee Mine, was
completed during the first quarter of 1992. USMX produced 26,220 ounces of gold
at the Yankee Mine between the time of initial gold production in June 1992 and
its sale on August 27, 1993. USMX's Casino/Winrock, Alligator Ridge and Yankee
Mines, together with surrounding exploration prospects, were sold in two
separate transactions in 1993 for a total of $20 million cash, plus the
assumption by the buyer of related obligations, including reclamation
liabilities.
Effective November 1, 1992, USMX acquired from Tenneco Corporation
"Tenneco," the stock of Tenneco Minerals Company-Utah "TMC-Utah," owner and
operator of the Goldstrike Mine located approximately 35 miles northwest of St.
George, Utah. Soon after the acquisition, the name of this wholly owned
subsidiary was changed to USMX of Utah, Inc. Gold production from the Goldstrike
Mine since November 1, 1992, has been 77,182 ounces, including 6,266 ounces of
gold produced in 1995. During 1995, USMX was recognized for its reclamation
efforts at the Goldstrike Mine when it received the 1995 Earth Day Award from
the State of Utah Department of Natural Resources and Division of Oil, Gas and
Mining.
Access to the Goldstrike Mine is by State Highway 212 to a point
approximately 21 miles northwest of St. George, then by well-maintained gravel
road over a distance of approximately 14 miles. Mining operations at the
Goldstrike Mine were completed in October 1994. Leaching was completed in
December 1995. Disturbed areas at the Goldstrike Mine were largely reclaimed
during 1995 except for the heaps and the plant site. Reclamation of the two
remaining heaps was begun during 1995 with rinsing of the second heap commenced
in January 1996, and expected to continue through 1997. A pilot test utilizing a
bio-reactor for the passive treatment of heap effluent was initiated in mid-1996
and is expected to be completed in early 1997. Once rinsing of the second heap
is complete and a closure plan has been approved by the regulatory agencies, the
heap will be recontoured, covered with topsoil and seeded with various native
plant species. In addition, the process plant will be dismantled and the plant
site reclaimed.
USMX's investment in the Goldstrike Mine as of December 31, 1996, was
$364,000 in undepreciated property,
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plant and equipment and approximately $1,700,000 in cash provided to the State
of Utah as reclamation surety. The primary lease covering the mine permit area
has been terminated; however, a post termination agreement, dated July 16, 1996,
provides for USMX's continued occupancy during ongoing reclamation activities.
The Illinois Creek Project
History. The Illinois Creek Project is moderate grade, near surface
gold-silver deposit. It consists of two State of Alaska Mining Leases, totaling
62,480 acres. The Illinois Creek Project is part of a large polymetallic
district covering 400 square miles in the southern Kaiyuh Mountains. The area
was first explored by Anaconda Minerals as part of a joint venture with Cook
Inlet Region Inc. ("CIRI") in 1980. Subsequent to Anaconda Minerals' activities,
the area was explored by Goldmor Group, Ltd., NPMC, and Echo Bay in association
with North Pacific Mining Corporation, CIRI's mineral development subsidiary
("NPMC"). USMX commenced its exploration activities in August 1994. USMX has
drilled 61 core holes and 89 reverse circulation holes, totaling approximately
32,000 feet. This drilling succeeded in increasing the minable reserve to about
442,000 contained equivalent ounces of gold and provided geotechnical
information necessary for pit design and engineering.
USMX made payments to NPMC totaling $100,000 in 1994 to evaluate the
Illinois Creek property and subsequently entered into an agreement with NPMC
effective December 16, 1994, which was amended on February 6, 1996 (the "NPMC
Agreement"). Pursuant to the NPMC Agreement, USMX agreed to make a $1,000,000
non-refundable payment to NPMC in cash or shares of USMX Common Stock. USMX
elected to make the payment in Common Stock, and based upon the average market
price of the Common Stock on Nasdaq as provided in the NPMC Agreement, USMX was
required to issue to NPMC 449,754 Shares of Common Stock. USMX also agreed that,
upon obtaining the necessary permits and if no material adverse economic change
had occurred, USMX would make a production decision and issue to NPMC an
additional $3,000,000 in cash or Common Stock. USMX received the key permits
related to the Project in May 1996, and determined that no material adverse
economic change had occurred with respect to the Project economics. USMX made a
production decision and agreed to issue to NPMC an additional 1,090,909 shares
of Common Stock. The calculation of the number of shares was based on the
average market price of the Common Stock on Nasdaq as provided in the NPMC
Agreement.
Effective July 11, 1996, USMX issued the aggregate of 1,540,663 Common
Stock to NPMC. As a result of this transaction, NPMC owns approximately 9.5% of
USMX's issued and outstanding Common Stock. USMX also granted a security
interest to NPMC in the property, which is subject to a subordination
arrangement with Rothschild on the Project (see below). USMX had also agreed
with NPMC to file a Registration Statement relating to the resale of these
shares, which Registration Statement has been filed and declared effective by
the Securities and Exchange Commission. USMX has agreed to use its best efforts
to keep the Registration Statement effective until NPMC has sold these shares or
until June 1999, whichever occurs sooner.
In addition to the Common Stock, NPMC had the right to enter into a
mining venture agreement with USMX pursuant to which USMX would transfer to NPMC
an undivided 25% interest in the Illinois Creek Mining Leases, or to receive a
5% net returns royalty. NPMC chose to receive a 5% net returns royalty on
production from the Illinois Creek Upland Mining Lease. No decision has been
made regarding the property covered by the Roundtop Upland Mining Lease, as USMX
has not completed significant exploration work there.
If USMX delineates the existence of additional ore reserves on the
lease known as the Illinois Creek Upland Mining Lease, which increases the total
proven ore reserves to at least 1,000,000 ounces of equivalent gold ore reserves
beyond the mineralization stated in USMX's February 1996 feasibility report,
then NPMC will have the right to elect to participate in subsequent mining
operations with respect to those additional reserves for a 25% working interest
by reimbursing USMX 120% of NPMC's 25% share of exploration, development and
capital costs incurred by USMX subsequent to February 1996 which are directly
related to delineation and/or production of the additional reserves.
Pursuant to the NPMC Agreement, USMX has until December 16, 1997 to
achieve "Commercial Production" which is defined as the delivery to a bona fide
purchaser of minerals produced for a minimum period of 45 consecutive
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days at not less than 70% of the pro forma production capacity as set forth in
the Project feasibility report. This period may be extended at the option of
USMX for two additional one-year periods upon payment by USMX of a $300,000
advance royalty, adjusted for inflation, for each one-year extension. The NPMC
Agreement terminates on December 16, 1999 if USMX has not achieved commercial
production by that date.
Location, Access, Terrain and Climate. The Illinois Creek Project site
is located in the southern Kaiyuh Mountains in the western interior of Alaska.
The project is located approximately 57 miles southwest of Galena and 23 miles
east of the Yukon River. It is equidistant from Fairbanks and Anchorage which
lie approximately 320 miles to the east and southeast of the Project
respectively.
Access to the site is by air. Equipment and supplies are transported to
the site by land, sea and air. The most economical way to transport freight to
the site is from Seattle, Washington to Anchorage, Alaska by barge. From
Anchorage, it travels by truck or rail to Nenana. From Nenana, it is moved down
river on barge to Galena. From Galena, it is transported by air to the site. The
mine site is connected to the personnel camp and airstrip by a 6.5 mile road.
The climate is sub-arctic and characterized by large, seasonal extremes
in temperature and daylight. Average Winter temperatures are -7(degree) F to
20(degree)F; mean Summer temperatures range from 35(degree)F to 67(degree)F.
Regional extremes are -63(degree)F to 93(degree)F. Precipitation averages 15 to
18 inches annually, including 81 inches of snow. Snow depth at the site ranges
from 24 to 36 inches during a typical Winter. Historically, August is the
heaviest rainfall month with an average of 5.3 inches.
Freeze-up of the Yukon River normally occurs in late October to early
November and breakup normally occurs in early to mid May. Accordingly, the
shipping schedule on the Yukon River will typically be limited to a period
between approximately May 25 and September 25.
Proven and Probable Mineable Reserves. The following table sets forth
the proven and probable mineable gold ore reserves located on the Illinois Creek
Project as of September 24, 1996. These reserves are based on a cutoff grade of
0.025 ounce of gold equivalent per ton of ore.
Proven and probable mineable ore reserves are estimates of quantities
and grades of ore which can be economically recovered based on assumptions of a
$400 per ounce future gold price. These reserves have been prepared by USMX and
have been reviewed by Roscoe Postle Associates ("RPA") which is an independent
mining consulting firm. In the opinion of RPA, the reserves at Illinois Creek
are estimated in accordance with standard engineering methods and the reserve
estimation methods and procedures used are in keeping with standard industry
practice. However, the ore reserves presented in this Joint Proxy
Statement/Prospectus are estimates only and may require revisions based on
actual production experience. In particular, RPA has noted some issues which may
lower the average grade and RPA believes that most of the reserves should be
classified as probable. Fluctuations in the market price of gold, as well as
increased production costs or reduced recovery rates, may render reserves
containing relatively lower grades of mineralization uneconomical to recover and
may ultimately result in a restatement of reserves. See "Risk Factors."
<TABLE>
<CAPTION>
Contained
Gold Gold
Contained Equivalent Equivalent
Ore Tons Gold Grade Gold Ounces Silver Grade Grade Ounces
<S> <C> <C> <C> <C> <C>
6,219,470(1) .064 oz/ton 398,046 (1.422 oz/ton) 0.069 oz/ton(2) 429,143
<FN>
(1) In addition there are approximately 575,000 tons of material with
grades between 0.015 oz/ton and the cut-off grade of 0.025 oz/ton
which must be stripped and may be placed on the heap if economics
warrant it.
(2) Gold Equivalent grade is calculated using a gross recovery for silver
of 25% and a gold to silver price ratio of 80.
(3) Metallurgical recovery from the run-of-mine ore is projected to be
approximately 80% of contained gold and 25% of contained silver.
Seasonal leaching of gold is currently planned; however, year round
leaching will be conducted if operations prove this to be effective.
</FN>
</TABLE>
Geology. The deposit occurs as a large gossan zone striking
east-northeast and dipping 40(degree) to 70(degree) to the southeast, hosted
within a thick sequence of quartzites which are carbonate rich. The gossan has
been intersected by drilling over a strike length of 12,000 feet and to a depth
of greater than 1,500 feet. Oxidation of the mineralization is complete to a
depth of at least 1,100 feet below the present surface. Economic gold-silver
mineralization is present in portions of the gossan, and is associated with
elevated levels of copper and/or lead, hydrothermal or remobilized silica,
earthy hematite, and poorly defined structural features. Supergene enrichment of
both gold and silver in near surface locations is also apparent.
Plan of Operations. USMX has constructed a 90-person camp north of an
airstrip which is 6.5 miles by road from the mine site. Water for ore processing
comes from a source located near the mid-point of the main access road from the
airfield to the mine site and electrical power is generated using diesel powered
generator sets. Waste heat from the generators will be used to heat the process
building. In addition to the process building, a modular assay laboratory, a
truck maintenance shop and a modular administration building have been
constructed. Communications are by satellite phone systems.
The deposit has been developed as a conventional open-pit mine. USMX
currently plans to conduct mining during May through October. Depending on
weather conditions, USMX may attempt to extend this season. Trucks and front-end
loaders will be used to mine, haul and stack the ore in a valley fill lined
impoundment. Heap leaching followed by carbon
adsorption/desorption/electrowinning will be used to extract the gold. The
process system is designed to recover the annual scheduled amount of gold
production in eight months. Lime is used to condition the ore and is produced
on-site utilizing a local source of limestone. The burnt lime is calcined in a
diesel-fired rotary kiln, which has been erected at the site. This locally
produced lime is less expensive than purchasing and transporting calcined lime
to the site.
The mine operating schedule will be ten hours per shift, two shifts per
day, six days per week. Present plans provide for three crews which will rotate
on a four-week on, two-week off schedule. USMX expects to employ 54 people at
Illinois Creek, which excludes personnel to be employed by the mine contractor.
Total pre-production capital costs, including approximately $7.6
million in working capital, are currently estimated at about $43.9 million,
exclusive of property acquisition costs of $4 million paid to NPMC as outlined
above. As of December 31, 1996, USMX's investment in Illinois Creek was
approximately $33.7 million including $4.0 million of property acquisition
costs.
Project Financing. Effective July 11, 1996, USMX entered into the
Rothschild Credit Agreements for a $22,000,000 facility to finance the
development and construction costs of the Project. USMX transferred its interest
in the Project to its wholly-owned subsidiary, USMX of Alaska, Inc. ("AK") which
is the borrower of $19.5 million of the $22 million facility. Under certain
circumstances, the loan to AK may be in the form of a gold loan, in which event
the maximum credit amount would be the number of ounces of gold equal to
$19,500,000 divided by the price of gold in London. However, USMX has agreed
with NPMC that it will not convert the loan to a gold loan until such time as
the Project has achieved Commercial Production as defined in the NPMC Agreement.
Advances are made by Rothschild solely to an account dedicated to the
Project operations and only if certain conditions related principally to Project
operations are satisfactory to Rothschild. In addition, AK is required to
maintain a minimum balance in the Proceeds Account equal to the sum of (i) the
greater of $1,500,000 or a formula amount based on the present value of future
net cash flow from the Project, (ii) the lesser of $250,000 or interest payable
to Rothschild for the following three months, and (iv) any other payments due to
Rothschild for the following three months. As more fully discussed below in
connection with the October 1996 letter agreement with Rothschild, USMX and
Rothschild have agreed on disbursement procedures for the balance of the credit
facility.
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AK is not permitted to make withdrawals from the Proceeds Account for
its general corporate purposes or to pay dividends until "Completion" has
occurred. The requirements for completion include the construction of the
Project facilities, which facilities and the equipment thereon must be
mechanically complete and electrically operable ("Mechanical Completion"), the
achievement of production amounts and grades, costs and reserves similar to the
development plan, and the absence of any default in the credit agreement. The
note evidencing the $19.5 million obligation bears interest, payable quarterly,
at 2.25% above LIBOR until Completion and 1.879% thereafter for the remainder of
the approximate four-year term of the loan. Principal payments will be made in
seven amortized installments on September 30 and December 31, of each year.
Subject to satisfaction of the requirements for maintenance of the
Proceeds Account, advances will be made by Rothschild to AK until the first to
occur of September 30, 1997, or Mechanical Completion. AK paid an establishment
fee of $292,500 to Rothschild. AK will also be required to pay a commitment fee
of one-half of one percent of the difference between the principal amount
outstanding and the maximum credit amount.
The balance of the facility is represented by a $2.5 million note made
by USMX which originally provided for conversion into Common Shares at the
conversion price of $3.40 per share at the option of Rothschild at any time
during the approximate four-year term of the note. USMX may also require
conversion if the note is in default and the daily closing price of the USMX
Common Stock on Nasdaq exceeds $4.75 for 30 consecutive trading days. As a
result of the October 1996 amendment, the conversion price has been reduced to
$1.74. USMX has also agreed to register the USMX Common Stock for resale under
certain circumstances. The $2.5 million loan bears interest at 2% above LIBOR,
payable no less frequently than semi-annually.
In accordance with the requirements of the related credit agreements,
USMX deposited the entire proceeds of the $2.5 million loan into the Proceeds
Account and such proceeds are not available for general corporate purposes.
Payments may be made to USMX from the Proceeds Account in an amount sufficient
for USMX to make interest payments. AK will not be permitted to repay the $2.5
million to USMX or other advances by USMX in the approximate amount of $3.4
million unless certain conditions are satisfied, principally related to
repayment of the notes to Rothschild and satisfactory operation of the Project.
USMX has pledged to Rothschild its shares in AK as well as its notes from AK for
advances made by USMX. Rothschild and Dakota have agreed to terminate the $2.5
million note for payment of $1.5 million and transfer of the balance due to the
$19.5 million note. See "Terms of the Merger-Other Agreements- $5,000,000 Loan
Agreement."
USMX is also a guarantor of the $19.5 million loan to AK until it has
demonstrated that the Project is operating in a manner satisfactory to
Rothschild. In addition, USMX will be a continuing guarantor of AK's covenant to
comply with environmental laws.
AK must deliver to Rothschild, among other things, financial
information, reserve, hedging and operating reports, and must use all
commercially reasonable efforts to maintain, develop and operate the Project in
accordance with the present development plan and prudent mining industry
practices. AK must comply with applicable laws and maintain its property rights
in the Project, including payment of royalties which may become due to NPMC. In
addition, except for limited circumstances, without Rothschild's consent, AK may
not incur any additional indebtedness, permit any liens on the Project, assume
or guarantee indebtedness of others, invest in others, merge or change its
capital structure, sell the assets of the Project, or permit Project reserves or
future net cash flows to decline materially from the present development plan.
AK must also achieve Mechanical Completion by July 31, 1997, and Completion by
November 30, 1997.
USMX has also agreed with Rothschild that, so long as the $2.5 million
note made by USMX is unpaid, or any other obligation of USMX remains
unsatisfied, including USMX's guarantee of the loan to AK, USMX will, among
other things, comply with all applicable laws, provide Rothschild with financial
reports and continue to engage principally in the mining business. In addition,
except for limited circumstances, without Rothschild's consent, USMX may not
incur indebtedness (other than indebtedness after Completion to develop mining
properties where the sole recourse of the lender is the mining property being
developed), permit any liens on the Project, assume or guarantee
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indebtedness of others, invest in others, merge (unless after Completion and
USMX is the survivor of the merger) or change its capital structure, pay any
dividends or sell the assets of the Project.
USMX has also agreed with Rothschild that it shall not permit its (a)
current ratio to be less than 2.0 to 1.0; (b) consolidated tangible
shareholders' equity to be less than $17,500,000; and (c) total consolidated
liabilities to exceed 175% of its consolidated tangible shareholders' equity,
and that it would deposit $1,500,000 in the Proceeds Account by September 30,
1996, which it was unable to do. In October 1996 Rothschild agreed with USMX to
waive these conditions and to not take any actions until December 31, 1996,
conditioned upon USMX's agreements to, among other things, file a prospectus for
a public offering by November 1, 1996 with appropriate securities regulatory
authorities and complete the offering by December 31, 1996, adjust the price at
which Rothschild may elect to convert the $2.5 million loan into USMX's Common
Stock to the offering price in the public offering (or in a private placement)
are sold or if no sale, at the average trading price of the Common Stock for the
last ten trading days of 1996 and to pay to Rothschild a fee of $100,000 which
fee is payable upon the first to occur of (i) a date upon which such payment can
be made without materially reducing the working capital reasonably required by
USMX for continued operations or (i) April 15, 1997. In addition, USMX agreed
that of the $7.5 million then on deposit in the Proceeds Account, approximately
$2.4 million would be distributed to pay accounts payable, approximately $4.5
million would be transferred back to Rothschild and available to be advanced in
accordance with the credit agreements and approximately $0.6 million would
remain in the Proceeds Account and available for disbursement in accordance with
the credit agreements. USMX determined to proceed with the Merger instead of a
public offering. USMX has entered into a loan agreement with Dakota and
Rothschild and Dakota have entered into an agreement which provides for, among
other things, forbearance by Rothschild under certain circumstances of the
exercise of Rothschild's rights under the Rothschild Credit Agreements with
USMX. See "Terms of the Merger-Other Agreements-$5,000,000 Loan Agreement."
USMX has also agreed that it will establish an additional proceeds
account with its presently available cash and disburse these funds in accordance
with a budget agreed to by Rothschild. USMX will also establish arrangements for
the monitoring by Rothschild of completion of the Project and payment of
associated costs.
The Thunder Mountain Project
Introduction. USMX proposes to conduct gold and silver mining
activities at the Dewey Mine in the Thunder Mountain Mining District in eastern
Valley County, Idaho, approximately 100 miles northeast of Boise, Idaho. The
proposed Dewey mining operations are part of the Thunder Mountain Project and
consist of the development of a gold and silver ore deposit located on patented
mining claims administered by the Idaho Department of Lands. In January 1996,
USMX submitted a Notice of Intent to Operate ("NOI") with the Idaho Department
of Lands, which is currently being reviewed. Preparation of a feasibility study
is expected to be ongoing throughout 1997 to refine the project design and
economics.
History. Gold was discovered in the Thunder Mountain area in 1894 at
the site of what is now known as the Dewey Mine. During the period from the
initial discovery until 1942, various operators reportedly produced
approximately 31,000 ounces of gold and 16,000 ounces of silver from both
underground lode and surface placer workings. Renewed interest in the district
began in earnest during the early 1970's due to rising gold prices. After
exploration by several major mining companies, a portion of the property, the
Sunnyside Mine area, was placed into production by Coeur d'Alene Mines
Corporation (Coeur d'Alene,) as an open pit, heap leach operation in 1986.
Between 1986 and 1990, Coeur d'Alene reportedly produced 120,000 ounces of gold
and 240,000 ounces of silver from the combined Sunnyside, Goldbug and Lightning
Peak pits. After reclaiming the property, Coeur d'Alene terminated its leases
with Thunder Mountain Gold, Inc. in December 1990. At the adjacent Dewey Mine,
the Dewey Mining Company constructed a 450 ton per day mill and the property was
operated as an open pit mine (Golden Reef Joint Venture) during 1981. In the mid
1980's, the Dewey Mine became the subject of litigation which was resolved in
favor of the Dewey Mining Company late in 1991.
Effective July 9, 1993, USMX entered into an Exploration and Option to
Purchase Agreement ("Thunder Mountain Agreement") with Dewey Mining Company,
Thunder Mountain Gold, Inc. and two individuals (the foregoing
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companies and individuals described below collectively as "Owners"). The Owners
control approximately 5,500 acres in the Thunder Mountain Mining District
consisting of both patented and unpatented mining claims. Pursuant to the terms
of the Thunder Mountain Agreement, USMX was granted the sole and exclusive right
to explore for and develop minerals on the property in exchange for advance
royalty payments totaling $100,000. In addition, USMX committed to spend, and
did spend, a minimum of $500,000 evaluating the property prior to April 1, 1995.
The Thunder Mountain Agreement requires that, before USMX can put the
property into commercial production, it must prepare and deliver to the owners a
feasibility study regarding the project. USMX has extended the term of the
agreement through June 15, 1997. The Thunder Mountain Agreement further
provides USMX with the option for a final extension until April 30, 1998, in
exchange for an additional advance royalty payment of $250,000. The advance
royalty payments made may be recovered by USMX for seven years after payment
should the Owners elect to receive royalties under options (a) or (c) below. The
Thunder Mountain Agreement terminates if USMX fails to deliver a feasibility
study to the Owners by the end of the last year's extension under the Agreement
or if USMX exercises its right to terminate the Thunder Mountain Agreement at
any time.
Within 90 days after USMX provides the Owners with a feasibility study,
the Owners may elect to (a) participate in subsequent efforts to the extent of a
30% working interest, plus receive a 1.5% royalty, or (b) receive a 30% net
profits interest, or (c) receive a 5% net returns royalty from production. If
the Owners elect to receive a 5% net return royalty, USMX will be obligated to
make advance royalty payments of: (1) $200,000 within thirty days after
commencement of Commercial Production (as defined in the Thunder Mountain
Agreement), and (2) $250,000 each year thereafter. If the Owners fail to notify
USMX of their election prior to the end of the 90 day election period they will
be deemed to have made an election to receive a 5% net returns royalty.
The Thunder Mountain Agreement provides that once the Owners have made
their election, USMX shall have one year within which to achieve Commercial
Production. If USMX fails to achieve Commercial Production within one year, USMX
must either reconvey the property to the Owners or extend by one year the time
period within which Commercial Production must commence by paying an advance
royalty of $200,000 to the Owners. If Commercial Production has not begun by the
end of the extension period, USMX may obtain a final extension of one year
within which to achieve Commercial Production by paying the Owners the
additional advance royalty of $250,000.
In addition to the advance royalty payments and the work commitments
outlined above, USMX is obligated to pay all fees necessary to maintain the
unpatented mining claims through August 31 of the calendar year in which the
extension year expires.
The area of USMX's primary activity lies approximately 4,000 feet west
of the Sunnyside deposit previously mined by Coeur d'Alene. The results of
USMX's drilling in 1993 were favorable, including a number of intersections that
exceed 100 feet in thickness and average in excess of 0.10 ounces of gold per
ton. USMX was also successful in extending the deposit along strike into an area
that was not previously drilled. During 1994, USMX drilled a total of 104
exploration and development holes on the property, helping to define the margins
and high grade core of the Dewey deposit. As of December 31, 1996, USMX has
expended a total of $3.7 million on the property.
Location, Access, Terrain and Climate. The Dewey Mine lies within the
Thunder Mountain District in eastern Valley County, Idaho. Access to the
District is obtained via U.S. Highway 95 to Cascade, Idaho, then east 42 miles
to Landmark, Idaho on Forest Highway 22, then north and east approximately 57
miles on U.S. Forest Service roads to the property. The Thunder Mountain Mining
District is currently accessible by vehicle about seven months out of the year
from late May to late November.
Local elevations range from approximately 7,300 to 9,000 feet. The
District forms an enclave of patented and federal lands within the Frank Church
Wilderness Area administered by the Krassel District of the Payette National
Forest.
Due to the location of the property, and based on the experience of
operations previously conducted at the
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Dewey Mine and at nearby existing operations, future mining operations of USMX
would be seasonal, except that processing can be conducted year around.
Plan of Operations. The Dewey Mine contains a bulk tonnage,
heap-leachable Mineral Deposit located on patented lode mining claims in the
central portion of the Thunder Mountain Mining District. USMX is currently
conducting a feasibility study to determine the optimum design to exploit this
Mineral Deposit. It is presently anticipated that conventional open pit/heap
leach techniques will be used with the fluid management system to be designed as
a zero discharge system. Due to the remote location of the Mineral Deposit USMX
would be required to generate its own electrical power.
USMX plans to use a contract miner to develop and operate the open pit
mine. The preliminary production schedule is for a six to eight month per year
mining system, two shifts per day, seven days per week. The number of mine
operating days is estimated at 210 to 240, depending on weather. Processing
would occur at least 250 days per year, and perhaps would run throughout the
year. USMX would expect to use approximately 75 to 100 people at the Dewey Mine,
including mining contractor personnel.
Geology. The Thunder Mountain Mining District is localized in the
central portion of a caldera complex underlain by Challis volcanics as well as
graben-fill, pyroclastic-derived sediments. The Dewey Mine ore deposit is hosted
by pyroclastic sediments, while the Sunnyside, Goldbug and Lightning Peak
deposits previously mined by Coeur d'Alene were hosted by the volcanics. Known
concentrations of economic gold mineralization are controlled by a combination
of structure and stratigraphy.
Permitting. During 1995 and 1996, geotechnical and baseline
environmental work was conducted and USMX re-evaluated the project using the
heap leach process for the recovery of gold. On January 31, 1996, USMX submitted
a Notice of Intent to Operate ("NOI") with the Idaho Department of Lands ("IDL")
and U.S. Forest Service-Payette National Forest ("PNF").
Permits, plans and approvals from federal, state and local agencies are
to be obtained utilizing the Idaho Joint Review Program, details of which are
published in a February 1996 State of Idaho publication titled "Joint Review
Program." This program was initiated on January 31, 1996 with the publication of
the NOI which was forwarded to the IDL. A joint review of the NOI by the IDL and
the PNF determined that a Federal Environmental Impact Statement and Record of
Decision would be required for the Project prior to initiation of development. A
third-party consultant, Science Applications International Corporation, was
selected by the agencies to develop the EIS.
Subsequently, meetings were organized by the IDL and the PNF in which
permit requirements, baseline data requirements and design standards were
discussed on air, climate, soils and subsoils, geology, engineering for the
waste rock facility, roads and heap leach facility. Baseline data requirements
were completed in the Summer of 1996 and a draft environmental impact statement
is in preparation. Since permitting has only recently commenced, it is difficult
to predict when necessary permits might be received.
Feasibility Study. Substantially all the field work for the feasibility
study has been completed and it is USMX's intention to complete an internal
feasibility study during 1997. To the extent that production at USMX's Illinois
Creek Project is delayed and/or USMX's estimates of capital resources to be
devoted to the Illinois Creek Project are not adequate, work on the feasibility
study and permitting at Thunder Mountain may not proceed as presently
anticipated.
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<PAGE>
Montana Tunnels
The Montana Tunnels property is located in the Colorado Mining
District, Jefferson County, Montana, 22 miles of Helena. Montana Tunnels
consists of approximately 9,300 acres of patented ground plus about 1,000 acres
of other mineral rights. The Montana Tunnels Mine is operated by Pegasus Gold,
the principal stockholder of USMX. USMX owns a net profits royalty interest in
the Montana Tunnels. USMX borrowed $2.5 million from Pegasus Gold in May 1996.
In June 1996, USMX and Pegasus Gold agreed to the sale of USMX's interest in the
Montana Tunnels to Pegasus Gold for $4.5 million. Pending completion of the
transaction, Pegasus Gold provided USMX an additional $2 million which was
deemed an amendment to the terms of the outstanding $2.5 million loan. In March
1997, USMX and Pegasus Gold entered into a Purchase and Sale Agreement
concerning the purchase and sale of the royalty interest (the "Montana Tunnels
Royalty Agreement"). Closing of the sale is subject to stockholder approval at
the USMX Meeting. See "Approval of Montana Tunnels Royalty Agreement."
Exploration
Due to continued threat of adverse amendment to or replacement of the
U.S. mining laws as well as to other existing regulations, USMX continued to
direct its exploration activity to the evaluation of private lands in the United
States, and opportunities in Latin America. Exploration for minerals,
particularly for gold, is highly speculative in nature, involves many risks and
frequently is non-productive. There can be no assurance that USMX's mineral
exploration efforts will be successful. Once mineralization is discovered, it
usually takes a number of years from the initial phases of exploration until
production is possible, during which time the economic feasibility of production
may change. Substantial expenditures are required to establish ore reserves
through drilling, to determine metallurgical processes to extract the metal from
the ore and, in the case of new properties, to construct mining and processing
facilities. As a result of these uncertainties, no assurance can be given that
USMX's exploration programs will result in the expansion or replacement of
existing reserves.
Ophir. This property is located in western Alaska, approximately 250
miles northwest of Anchorage. In July 1996 USMX was granted the right to explore
approximately 13,000 acres in the Ophir Mining District pursuant to an Exclusive
Mineral Exploration Permit with the State of Alaska Mental Health Trust Unit, a
division of the Alaska Department of Natural Resources. Access to the property
is by charter air service from Anchorage to public or private airstrips, then
over state maintained roads to the property. Alternative transport is by barge
up the Kuskokwim River to Sterling Landing, the eastern terminus of the current
road system.
Placer gold production from the District has been significant and is
estimated at greater than 600,000 troy ounces, including over 200,000 troy
ounces from streams proximal to the property. Production is continuing from five
drainages in the District.
In the District, Cretaceous graywackes and mudstones have been intruded
by late Cretaceous to early Tertiary gold-mineralized granite porphyry sills,
dikes, and small stocks. These intrusive rocks and/or their alteration zones are
the source of gold in the placer deposits. The exploration objective will be to
define ore in bedrock with sufficient size potential and gold grade to justify
development.
During August 1996, USMX conducted preliminary geological mapping,
geochemical sampling and geophysics, with additional exploration activities
planned for 1997. USMX's investment in this property was approximately $99,800
at December 31, 1996.
Cala Abajo, Puerto Rico. During 1992, 1993 and 1994, USMX acquired an
equity interest currently totaling approximately 80% of the outstanding common
stock of Southern Gold Resources (USA), Inc. ("Southern Gold"), a Colorado
corporation. On October 5, 1992, Southern Gold was granted an exclusive
exploration permit by the Puerto Rican government covering 2,170 acres that
include the Cala Abajo copper/gold deposit in western-central Puerto Rico. The
prospecting permit may be extended year to year for a maximum 10 year period and
gives Southern Gold the exclusive right to conduct exploration and environmental
studies and to negotiate a mining lease covering the permit
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<PAGE>
area. In September 1996 the permit was extended by the Puerto Rican government
through September 1997. Through 1995, USMX incurred approximately $1.0 million
in drilling, metallurgical test work, engineering and base line environmental
studies.
In 1995, the Commonwealth of Puerto Rico amended its mining law to
prohibit open pit mining of metal deposits on the island. The effect of the
mining law, as currently amended, was to render Southern Gold's plan for
development of the Cala Abajo deposit uneconomic. Accordingly, USMX's investment
was written off in 1995. Southern Gold has notified the Puerto Rican government
of its belief that the government's action was unjustified and harmful to
Southern Gold. Southern Gold is considering whether any other action is
warranted.
Other United States Mineral Properties. USMX has additional mineral
properties, located in Utah, Montana, Wyoming, Alaska and Nevada in the United
States. These additional properties are currently being explored solely by USMX.
<TABLE>
<CAPTION>
Investment as of
Property State Status December 31, 1995
- -------- ----- ------ -----------------
<S> <C> <C> <C>
Goldstrike Area Utah Drilling proposed $358,000
Baggs Creek/Hidden Hand Montana Has small resource 69,000
Roundtop Alaska Part of Illinois Creek 45,000
Jack Springs Nevada Has small resource -0-
</TABLE>
Mexico
USMX is currently investigating several opportunities located primarily
in the northern Mexican states of Sonora, Chihuahua and Coahuila. The more
significant projects USMX is currently evaluating are described below.
Amargosa. This property is located approximately 95 kilometers
southeast of Juarez in the state of Chihuahua. The property is accessible from
Juarez on Highway 2, southeast for 90 kilometers to El Porvenir, then via poorly
maintained dirt roads to the project. USMX controls by denouncement
approximately 15,100 acres. USMX must meet certain minimum work requirements
arising from Mexican mining law to maintain its rights to the properties. In
addition, if the properties are placed into production, USMX will be obligated
to pay a net smelter return royalty of 2.75% on production from most of the
properties.
A significant amount of exploration was conducted on the Amargosa
polymetallic massive sulfide targets in 1994. Results of this drilling at
Amargosa were geologically interesting; however, continuity of mineralization
between holes was not demonstrated.
A strong magnetic anomaly has been partially defined at the edge of a
ground geophysical survey, caused by a pyrrohite body. Massive sulfide
mineralization is associated with and adjacent to the anomaly. Although this
property continues to hold a great deal of geologic interest, no economic
mineralization has yet been identified. Accordingly, management recorded an
impairment loss of $1.0 million in 1995 and USMX's carrying value in this
property was reduced to zero in 1996.
Boludo Goldfields. Early in 1994, USMX acquired by lease and purchase
option approximately 5,400 acres in the Boludo Goldfields placer district
located approximately 121 kilometers southwest of Nogales in northwest Sonora.
Access to the property is via paved highway and well maintained dirt road.
During 1994, 328 backhoe pits were dug at Boludo by USMX to test for placer
gold. In addition, several drill holes were put down in the hard rock targets.
This drilling failed to identify significant mineralization. In 1995, USMX
entered into an agreement with Resource Trend Pty Ltd, an Australian mining
company, which firm has informed USMX that it intends to commence production in
1997. USMX retains a royalty interest on future production from the property.
USMX's investment in this project was approximately $487,000 as of December 31,
1996.
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<PAGE>
Noche Buena. The Noche Buena Project was acquired by USMX in 1992. USMX
controls by denouncement of concessions, approximately 18,800 acres, subject to
Mexican mineral property taxes and work obligations.
The property is located in northwestern Sonora approximately 45
kilometers northwest of the city of Caborca in the state of Sonora. Access from
Caborca is via Highway 2 north for 60 kilometers then west via dirt roads for
approximately 10 kilometers.
USMX conducted exploration on the concessions in 1993 and 1994
outlining an area of Mineralized Material which is open in all directions. The
project was joint ventured to Minera Kennecott, the Mexican entity of RTZ-CRA,
on July 15, 1995, under terms whereby Kennecott can earn majority interest in
the project by paying USMX $850,000 spending $2,500,000 over a period of five
years and delivering to USMX a feasibility study. Upon delivery of a feasibility
study USMX has the option to participate in the joint venture at 35% or elect a
4 to 4.5% net smelter royalty depending on gold price.
Kennecott has expanded on the drilling conducted by USMX as well as
completed geochemical and geophysical surveys over the property. Based on the
encouraging results of this work, it is expected that Kennecott will conduct
additional drilling on this property in 1997. As of December 31, 1996, USMX's
investment in Noche Buena was approximately $257,000.
Samalayuca. Samalayuca is located approximately 40 kilometers south of
Juarez in the state of Chihuahua, and is accessed via Highway 45 to the town of
Samalayuca then via dirt roads west a few kilometers to the property. USMX
controls by lease agreement and denouncement approximately 19,000 acres. The
lease, executed on August 12, 1992, provides for a twenty year term. If the
exploration work is successful, the owners will be paid a 3% net smelter return
royalty on base metals and a 4% net smelter return royalty on precious metals
produced and sold from the property. USMX or its joint venture partner must make
annual advance royalties of $25,000 and must meet certain minimum work
requirements.
The property is a sediment hosted, stratabound copper/silver property
with primary chalcocite mineralization. In the past (pre 1975), local miners
shipped copper bearing quartzite to the El Paso smelter as flux. These miners
were paid for the copper content of this material which ranged from one to three
percent. Previous mining ceased when copper prices fell in the mid 1970's.
USMX has conducted short hole air track drilling as well as limited
rotary and core drilling since acquisition of the property. Results of this work
have been inconclusive due to structural complexity and associated oxidation and
the depletion of copper values in the near surface environment.
During 1995, the property was joint ventured with a subsidiary of
Phelps Dodge Corporation. Phelps Dodge has conducted geophysical surveys over
the property and has recently completed a first phase drilling program; however,
the joint venture was terminated in March 1997. Following review of the Phelps
Dodge data USMX will either conduct further exploration, seek a new joint
venture partner or terminate its agreements pertaining to the property. As of
December 31, 1996, USMX had invested a total of $508,000 in the property.
Sierra Mojada. This property is located approximately 200 kilometers
north of Torreon in the state of Coahuila. Access is via improved dirt road
north from Torreon or by railroad from Monclova. USMX controls by denouncement
approximately 15,900 acres in the district.
Production from the district in the past has been significant,
consisting of copper, zinc, lead and silver. The district was discovered in 1878
with most of the past production occurring between 1890 and 1945.
On July 26, 1996 USMX entered into a joint venture agreement with
Metalline Mining Company to further explore and develop the property. USMX may
elect to participate for a 35% working interest or receive a net smelter royalty
after earn-in by Metalline. USMX's investment in this project was approximately
$34,000 as of December 31, 1996.
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<PAGE>
Other Mexican Mineral Properties. USMX has additional mineral properties in
Mexico as follows.
Investment as of
Property State Status December 31, 1996
- -------- ----- ------ -----------------
Altar, Los Apaches Sonora Joint Venture $240,000
El Ocuca, Las Rastras Sonora Joint Venture $146,000
San Miguel Sonora Available for Lease $ 36,000
Ecuador
In 1995, USMX acquired all of the outstanding capital stock of Mega
Minerals S.A., an Ecuadorian company. The assets of the Ecuadorian company at
the time of acquisition consisted of title to eight exploration concessions
comprising approximately 80,600 acres and the right to acquire title to four
additional exploration concessions located in the Nambija-Zamora gold belt of
southern Ecuador. Initial exploration on these concessions has yielded
encouraging results, and the land position has been reduced in size to cover the
most promising target areas. Geological mapping and geochemical sampling of
stream sediments anomalous in base and precious metals have identified a two
kilometer by three kilometer zone of skarn type alteration with associated base
metals and gold mineralization. An exploration program is being planned to
further evaluate the discovery, and USMX is also seeking interest by other
mining companies to participate in a joint venture. USMX's investment in Ecuador
as of December 31, 1996 totaled $335,000.
DESCRIPTION OF USMX CAPITAL STOCK
USMX's authorized capital consists of 45,000,000 shares of USMX Common
Stock, par value $.001 per share, and 20,000,000 shares of preferred stock,
$.001 par value (the "Preferred Stock"). As of December 31, 1996, there were
16,184,182 shares of USMX Common Stock outstanding and no shares of Preferred
Stock outstanding. In April 1997 USMX entered into an agreement to issue
1,000,000 shares of USMX Common Stock in connection with the settlement of a
claim for construction services. See "Terms of Merger--Other Agreements."
Dividends may be declared and paid from the Common Stock out of legally
available surplus. Such dividends may be paid in cash, property or shares of
Common Stock. The Board of Directors of USMX may set aside reserves out of funds
available for dividends for any purpose the Board of Directors of USMX
determines in USMX's best interest. At present, USMX is restricted pursuant to
loan covenants in the payment of dividends. USMX has no present plans to pay
dividends in the foreseeable future.
Each share of Common Stock is entitled to share equally in dividends
from sources legally available therefore when, as, and if declared by the Board
of Directors of USMX and, upon liquidation or dissolution of USMX, whether
voluntary or involuntary, to share equally in the assets of USMX available for
distribution to the holders of the Common Stock. Each holder of Common Stock is
entitled to one vote per share for all purposes. The holders of Common Stock
have no preemptive rights and there is no cumulative voting, redemption right or
right of conversion with respect to the Common Stock.
No shares of Preferred Stock have been issued. However, the Board of
Directors of USMX has the right to fix the rights, privileges and preferences,
including preference upon liquidation, of any class of Preferred Stock to be
issued in the future out of authorized but unissued shares of Preferred Stock.
The Board of Directors of USMX may issue these shares after adopting and filing
a certificate of designations with the Secretary of State of the State of
Delaware.
Certain Potential Anti-Takeover Effects
USMX currently has certain provisions in its Certificate of Incorporation
and Bylaws which may be viewed
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<PAGE>
as having "anti-takeover" affects. These provisions may make it more difficult
and time-consuming to change majority control of USMX and of the Board of
Directors of USMX and could reduce the vulnerability of USMX to an unsolicited
offer to "take over" USMX. These measures could have an adverse impact on the
market value of the Common Stock. Stockholders of USMX do not have cumulative
voting rights in the election of directors. USMX currently has authorized but
unissued shares of both Common Stock and Preferred Stock that could be issued in
such a way as to have anti-takeover effects. The Board of Directors of USMX
could create an issue of shares of Preferred Stock with such voting or
conversion rights which would make divestment of USMX more difficult or costly.
In addition, the Certificate of Incorporation and/or Bylaws may be
deemed to have anti-takeover effects in that they provide for: (i) the Board of
Directors to be divided into three classes of directors, each with a term of
three years, (ii) 66 2/3% stockholder vote to remove directors other than for
cause, and (iii) a 66 2/3% stockholder vote to amend certain provisions of the
Certificate of Incorporation and Bylaws.
Trading History
USMX Common Stock is listed for trading on the TSE under the symbol
"USM" and is quoted through Nasdaq under the symbol "USMX." The following table
sets forth, for the periods indicated, the high and low sale prices per share of
USMX Common Stock as reported by Nasdaq. On January 2, 1997, the day preceding
the date of the public announcement of the Merger, the closing sale price on
Nasdaq was U.S. $1.75 per share. No information has been furnished with respect
to the sales prices on the TSE as trading of USMX Common Stock on that exchange
has been limited and sporadic in nature. For current price information,
stockholders are encouraged to consult publicly available sources.
<TABLE>
<CAPTION>
Nasdaq
Volume
High Low (000's)
(U.S.$)
TOTAL BLOCK
<S> <C> <C> <C> <C>
1995
First quarter............ $2.75 $2.06 1,080,515 80,000
Second quarter........... 2.94 2.13 1,648,662 328,200
Third quarter............ 2.63 1.97 1,881,695 411,450
Fourth quarter........... 2.06 1.75 1,347,137 174,500
1996
First quarter............ 3.25 1.94 2,576,586 514,000
Second quarter........... 3.13 2.44 837,129 47,000
Third quarter............ 2.75 2.06 1,057,138 224,000
Fourth quarter........... 2.44 1.44 1,672,758 164,200
1997
January.................. 1.62 1.47 591,586 34,900
February................. 1.50 1.32 927,351 56,020
March.................... 1.41 1.00 229,660 30,000
April (as of April 18,
1997).................. 1.32 0.94 113,400 10,000
</TABLE>
Dividend Policy
USMX has not paid any cash dividends since its inception. USMX anticipates
that earnings would be retained for the development of its business and that no
cash dividends on its Common Stock will be paid in the foreseeable future. In
addition, USMX is restricted from the payment of dividends pursuant to its
lending arrangements with Rothschild on the Illinois Creek Project. See
"Business and Properties of USMX."
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<PAGE>
LEGAL MATTERS
Parcel, Mauro, Hultin & Spaanstra, P.C., Denver, Colorado, is acting as
U.S. counsel, and McCarthy Tetrault, Vancouver, B.C., Canada, is acting as
Canadian counsel for Dakota in connection with certain legal matters in
connection with the Merger.
Bearman Talesnick & Clowdus Professional Corporation, Denver, Colorado, is
acting as counsel for USMX in connection with certain legal matters in
connection with the Merger. Attorneys employed by Bearman Talesnick & Clowdus
Professional Corporation beneficially own approximately 27,000 shares of USMX
Common Stock.
EXPERTS
The consolidated financial statements of Dakota Mining Corporation as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996 have been included herein and in the Registration
Statement in reliance upon the report of KPMG, chartered accountants, appearing
elsewhere herein and in reliance upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of USMX, INC. and subsidiaries as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996 have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
USMX's Illinois Creek Project reserves have been reviewed by Roscoe Postle
Associates Inc. and information regarding their Report has been included herein
and in the Registration Statement in reliance upon their Report and upon the
authority of such firm as experts in mining, geology and reserves determination.
SHAREHOLDER PROPOSALS
Proposals by Shareholders of Dakota to be presented at the next Annual
Meeting of Dakota Shareholders must be received by Dakota a reasonable amount of
time prior to such meeting to be included in Dakota's Proxy Statement and proxy
for that meeting. The proponent must be a record or beneficial owner entitled to
vote on his or her proposal at the next Annual Meeting and must continue to own
such security entitling him or her to vote through that date on which the
Meeting is held. The proponent must own 1% or more of the outstanding shares, or
$1,000 in market value, of Dakota's Common Shares and must have owned such
shares for one year in order to present a shareholder proposal to Dakota.
Proposals by USMX Stockholders to be presented at the next Annual Meeting
of USMX Stockholders must be received by USMX a reasonable amount of time prior
to such meeting to be included in USMX's Proxy Statement and proxy for that
meeting. The proponent must be a record or beneficial owner entitled to vote on
his or her proposal at the next Annual Meeting and must continue to own such
security entitling him or her to vote through that date on which the Meeting is
held. The proponent must own 1% or more of the outstanding shares, or $1,000 in
market value, of USMX's Common Stock and must have owned such shares for one
year in order to present a shareholder proposal to USMX.
ANNUAL REPORT ON FORM 10-K
Copies of the Annual Report Form 10-K concerning the operations of Dakota
during the fiscal year ended December 31, 1996, including audited financial
statements for the year then ended, may be obtained upon written request of the
Secretary of the Company at 410 17th Street, Suite 2450, Denver, Colorado 80202.
Copies of the Annual Report Form 10-K concerning the operations of USMX
during the fiscal year ended December 31, 1996, including audited financial
statements for the year then ended, may be obtained upon written request of the
Secretary of the Company at 141 Union Boulevard, Suite 100, Lakewood, Colorado
80228.
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<PAGE>
GENERAL GLOSSARY
"AMEX" means the American Stock Exchange.
"BSE" means the Berlin Stock Exchange.
"Canaccord" means Canaccord Capital Corporation.
"Canadian GAAP" means generally accepted accounting principles in Canada.
"Canadian Securities Acts" mean the securities acts and regulations of each of
the provinces of Canada in which there are Dakota Shareholders.
"Canadian Tax Act" means the Income Tax Act (Canada).
"Closing" means the closing of the Merger on the Effective Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Competing Transaction"means any acquisition of, or business combination with,
USMX or any of its Subsidiaries or any material portion of its or their shares
of capital stock or assets by any Person other than Dakota or any of its
Subsidiaries, or any firm proposal to make such an acquisition or combination.
"Dakota" means Dakota Mining Corporation, a corporation continued under the laws
of Canada, and where the context so requires means Dakota and its Subsidiaries.
"Dakota Common Shares" means the common shares, no par value, in the capital of
Dakota.
"Dakota Group" means Dakota and its Subsidiaries.
"Dakota Meeting" means the annual and special meeting of the Dakota Shareholders
to be held on May 22, 1997 at 4:00 p.m., local time, in Toronto, Ontario.
"Dakota Record Date" means April 14, 1997.
"Dakota Shareholders" means the holders of record of Dakota Common Shares as of
the Dakota Record Date.
"Debentures" means the Cdn.$.25 million aggregate principal amount of 7.5%
unsecured convertible debentures of Dakota described under the heading "Dakota
Mining Corporation - Description of Dakota Share Capital and Debentures
Debentures."
"DGCL" means the General Corporation Law of the State of Delaware.
"Effective Date" means the effective date of the Merger.
"Effective Time" means the effective time of the Merger on the Effective Date.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Agent" means Montreal Trust Company of Canada.
<PAGE>
"IRS" means the United States Internal Revenue Service.
"Joint Proxy Statement/Prospectus" means this Prospectus, Management Information
Circular and Proxy Statement of Dakota, and Management Information Circular and
Proxy Statement of USMX.
"Laws" means all statutes, codes, ordinances, decrees, rules, regulations,
municipal by-laws, judicial or arbitral or administrative or ministerial or
departmental or regulatory judgments, orders, decisions, rulings or awards, or
any provisions of the foregoing, including general principles of common and
civil law and equity, binding on or affecting the Person referred to in the
context in which such word is used; and "Law" means any one of them.
"Merger" means the merger of USMX and Merger Corp. whereby USMX becomes the
Surviving Corporation as contemplated in the Merger Agreement.
"Merger Agreement" means the agreement dated February 5, 1997, as amended April
21, 1997 between Dakota, Merger Corp. and USMX relating to the Merger annexed to
the Joint Proxy Statement/Prospectus as Appendix A.
"Merger Corp." means Dakota Merger Corporation, a Delaware corporation and a
wholly-owned subsidiary of Dakota.
"Merger Consideration" means the number of Dakota Common Shares issued to USMX
Stockholders pursuant to the Merger.
"Mineral Deposit, Deposit, or Mineralized Material" means a mineralized
underground body which has been intersected by sufficient closely spaced drill
holes and or underground sampling to support sufficient tonnage and average
grade of metal(s) to warrant further exploration-development work. This deposit
does not qualify as a commercially minable ore body (Reserves), as prescribed
under Commission standards, until a final and comprehensive economic, technical,
and legal feasibility study based upon the test results is concluded.
"Montana Tunnels Royalty Agreement" means the agreement dated March 17, 1997
among USMX, USMX of Montana, Inc., and Pegasus Gold.
"Nasdaq" means the Nasdaq National Market System.
"Newcrest" means Newcrest Capital, Inc.
"Option Agreement" means the agreement dated for reference the 4th day of
February, 1997 between Dakota and USMX providing for the option described under
"Terms of The Merger - Other Agreements - Option Agreement."
"Pegasus Gold" means Pegasus Gold Corporation a Nevada company, which is a
principal stockholder of USMX.
"Person" means any individual, corporation, limited liability company,
partnership, association, trust or any other entity or organization, including a
domestic or foreign government or political subdivision or any agency or
instrumentality thereof.
"Rothschild" means N.M. Rothschild & Sons, Limited.
"Rothschild Credit Agreements" mean those certain Credit Agreements dated July
11, 1996 between USMX, USMX of Alaska, Inc. and Rothschild, and all instruments
and documents delivered in connection therewith, and all modifications,
extensions and renewals thereof.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Securities Act Affiliates" means affiliates of a Person for purposes of Rule
145 under the Securities Act.
"Series B Special Warrants" means the Series B Special Warrants described under
the heading "Financing."
<PAGE>
"Share Exchange Ratio" means the ratio of 1.1 shares of USMX Common Stock for
each one Dakota Common Share.
"Subsidiary" means, with respect to any Person, a corporation the voting
securities of which sufficient to elect at least a majority of its Board of
Directors are owned directly or indirectly by such Person and includes a
subsidiary of such corporation that is that Person's subsidiary.
"Surviving Corporation" means USMX in its capacity as that corporation whose
separate corporate existence will not cease upon the merger of Merger Corp. with
and into USMX pursuant to the terms and conditions of the Merger Agreement.
"Termination Fee" means the fee which may be paid by USMX as described under
"Terms of The Merger Termination of the Merger Agreement."
"TSE" means The Toronto Stock Exchange.
"U.S. GAAP" means the generally accepted accounting principles in the United
States.
"U.S. Person" means any (a) citizen or resident of the United States; (b) United
States corporation or partnership; or (c) estate or trust subject to United
States federal income tax on its worldwide income.
"USMX" means USMX, Inc., a corporation formed under the laws of Delaware, and
where the context so requires means USMX and its Subsidiaries.
"USMX Common Stock" means the shares of the common stock, par value $.001 per
share of USMX.
"USMX Group" means USMX and its Subsidiaries.
"USMX Meeting" means the annual and special meeting of the stockholders of USMX
to be held on May 27, 1997 in Denver, Colorado at 9:00 a.m. local time.
"USMX Options" means all warrants, options or other rights to acquire USMX
Common Stock.
"USMX Record Date" means April 16, 1997.
"USMX Securities" means the USMX Common Shares and USMX Options, collectively.
"USMX Stockholders" means the holders of record of USMX Common Stock as of the
USMX Record Date.
"USRPI" mean a United States real property interest as defined in Section
897(c)(1) of the Code.
<PAGE>
GLOSSARY OF CERTAIN MINING TERMS
The following is a glossary of some of the terms used in the mining industry and
referenced herein:
"Adsorption" A process in which soluble complexes of gold and silver physically
adhere without chemical reaction to activated carbon particles.
"Contained Gold" The total measurable gold or gold equivalent in grams or ounces
estimated to be contained within a mineral deposit. A calculation or estimate of
contained gold makes no allowance for mining dilution or recovery losses.
"Cutoff grade" The grade of mineralization, established by reference to economic
factors, above which material is included in mineral deposit reserve/resource
calculations and below which the material is considered waste. May be either an
external cutoff grade which refers to the grade of mineralization used to
control the external or design limits of an open pit based upon the expected
economic parameters of the operation, or an internal cutoff grade which refers
to the minimum grade required for blocks of mineralization present within the
confines of an open pit to be included in mineral deposit estimates.
"Desorption" A process in which gold and silver physically adhered to carbon
particles in the adsorption process are stripped from the carbon particles using
a weak acid solution.
"Gold Deposit" A mineral deposit mineralized with gold but without reference to
its potential economics.
"Gold Equivalent" A method of presenting combined gold and silver concentrations
or weights for comparison purposes. Commonly involves expressing silver as its
proportionate value in gold based on the relative values of the two metals. When
gold equivalent is used to express metal sold, the calculation is based on
actual prices received. When grades are expressed in gold equivalent, the
relative recoveries of the two metals are also taken into account.
"Grade" The amount of valuable mineral in each ton of mineralized material,
expressed as troy ounces (or grams) per ton or tonne of gold or as a percentage
of copper and other base metals.
"Heap Leaching" A method of gold and silver extraction in which mineralized
material is heaped on an impermeable pad and sodium cyanide solution is applied
to the material. The gold and silver are dissolved out of the material as the
solution percolates down through the heap, the pregnant solution is collected
from below the heap and the gold and silver are precipitated from the pregnant
solution in vessels or columns containing activated carbon or zinc powder.
"Heap Leach Pad or Leach Pad" A large, impermeable foundation or pad used as a
base for ore during heap leaching. The pad prevents the leach solution from
escaping out of the circuit.
"Lode Mining Claim" A mining claim located on a vein or lode of quartz or other
rock in place, bearing gold, silver, cinnabar, tin, lead, copper, or other
valuable deposits.
"Net Smelter Return Royalty" A royalty payment made by a producer of metals,
usually to a previous property owner or Governmental authority, based on the
value of gross metal production from the property, less deduction of certain
limited costs including smelting, refining, transportation and insurance costs.
"Net Profits Interest Royalty" A royalty payment made by the producer of metals,
usually to a property owner or Governmental authority, based on the value of
gross metal production from the property, less deduction of certain costs
including smelting, refining, transportation and insurance costs (often referred
to as realization costs) plus direct operating costs associated with the mining
and treatment of ore and the mining of associated waste.
"Open Pit Mining" The process of mining ore body from the surface in
progressively deeper steps. Sufficient waste rock adjacent to the ore body is
removed to maintain mining access and to maintain the stability of the resulting
pit.
"Ore" A natural aggregate of one or more minerals which, at a specified time and
place, may be mined and sold at a profit, or from which some part may be
profitably separated.
"Ounce (Oz)" Troy ounce.
"Oxidized Ore (Also Referred to as "Oxide Ore")" Mineralized rock which can be
profitably mined and in which some of the original minerals have been oxidized
by natural processes. Oxidation tends to make the ore more porous and permits a
more complete permeation of cyanide solutions so that minute particles of gold
in the interior of the rock will be more readily dissolved.
"Oz/ton (Opt)" Troy ounces per short ton.
"Patented Mining Claim" A mining claim on the public land of the United States,
under the mining laws, for which a patent has been issued conveying the title of
the United States to the patentees.
"Porphyritic" A rock texture in which one mineral has a larger grain size than
the accompanying minerals.
"Probable Reserves" Reserves for which quantity and grade and/or quality are
computed from information similar to that used for proven 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.
"Proven/probable Reserves" A term used if the difference in degree of assurance
between the proven and probable categories cannot be reliably defined.
"Proven Reserves" 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 geological
character is so well defined that size, shape, depth and mineral content of
reserves are well established.
"Reserve" That part of a mineral deposit which can be economically and legally
extracted or produced at the time of the reserve determination. Reserves are
customarily stated in terms of "ore" when dealing with metalliferous minerals.
"Reverse Circulation Holes" Exploration drill holes in which the fine and coarse
rock chips created during drilling are rapidly flushed to the surface so that a
representative sample can be obtained.
"Stock" A body of intrusive rock that covers less than 40 square miles, has
steep dips and is generally discordant with surrounding rock.
"Strike Length" The longest horizontal dimensions of a body or zone of
mineralization.
"Stripping Ratio" The ratio of waste material to ore that is experienced in
mining an ore body.
"Unpatented Mining Claim" A mining claim located on the public lands of the
United States,for which a patent has not been issued. An unpatented mining
<PAGE>
claim is a possessory interest only, subject to the paramount title of the
United States. The validity of an unpatented mining claim depends upon the
existence of a valuable mineral deposit within the boundaries of the claim and
compliance with mining codes.
GEOLOGICAL STANDARDS
When used in this Joint Proxy Statement/Prospectus, the mineralized material in
the proven and probable categories were used to calculate the mining or mineable
reserves by application of minimum mining widths, dilution, recovery factors,
operating costs and metal prices. With respect to open pit mining, optimized
pits were generated, followed by detailed pit design and engineering in
establishment of mining/mineable reserves. The term "mining or mineable
reserves" used in this Joint Proxy Statement/Prospectus correspond to proven and
probable reserves.
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
dated February 5, 1997
among
DAKOTA MINING CORPORATION,
DAKOTA MERGER CORPORATION,
and
USMX, INC.
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated February 5, 1997 (this "Agreement") among the
following parties (sometimes referred to herein individually as a "Party" and
collectively as the "Parties"):
(a) Dakota Mining Corporation, a corporation continued
under the Canada Business Corporation Act ("Dakota");
(b) Dakota Merger Corporation, a Delaware corporation and
wholly-owned subsidiary of Dakota ("Merger Corp"); and
(c) USMX, INC., a Delaware corporation ("USMX").
Capitalized terms used in this Agreement shall have the meanings ascribed to
such terms on Schedule A, unless otherwise defined herein.
RECITALS
WHEREAS, the common stock, par value US$.001 per share, of USMX ("USMX Shares")
is publicly traded in the United States and Canada and is quoted on the Nasdaq
National Market System and The Toronto Stock Exchange;
WHEREAS, the common shares, no par value, of Dakota ("Dakota Shares") are
publicly traded in Europe, Canada, and the United States and are quoted on the
Berlin Stock Exchange, The Toronto Stock Exchange, and the American Stock
Exchange;
WHEREAS, the respective Boards of Directors of Dakota, Merger Corp, and USMX
have approved and declared fair and advisable to, and in the best interests of,
their respective stockholders the Merger, upon the terms and subject to the
conditions set forth herein, whereby all of the issued and outstanding USMX
Shares will be converted into Dakota Shares;
WHEREAS, for federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the Tax
Code; and
WHEREAS, Dakota, Merger Corp, and USMX desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual benefits to be derived and the
representations and warranties, conditions and promises herein contained, and
intending to be legally bound hereby, the Parties agree as follows:
ARTICLE I
GENERAL
I.1 Merger. In accordance with the terms and provisions of this Agreement, the
GCL, and other applicable Law, Merger Corp shall be merged with and into USMX
(the "Merger"), and USMX shall be, and is hereinafter sometimes referred to as,
the "Surviving Corporation." Merger Corp and USMX shall be, and are hereinafter
sometimes referred to as, the "Constituent Corporations."
I.2 Charter and By-laws; Directors and Officers. From and after
the Effective Time:
(a) the Certificate of Incorporation and the By-laws of Merger Corp shall
continue in full force and effect as the Certificate of Incorporation and the
By-laws of the Surviving Corporation; and
(b) the directors and officers of Merger Corp shall be the
directors and officers of the Surviving Corporation.
I.3 No Separate Identity. Except as hereinafter specifically set forth, the
identity, existence, corporate organization, purposes, powers, objects,
franchises, privileges, rights and immunities of Merger Corp shall be merged
with and into USMX, and USMX, as the Surviving Corporation, shall be fully
vested therewith. The separate existence and the corporate organization of
Merger Corp, except insofar as they may continue by statute, shall cease as of
the Effective Time.
I.4 Effectiveness. The Merger shall not become effective until, and shall become
effective at, the point in time at which Certificate of Merger (the "Certificate
of Merger") in accordance with the terms of this Agreement and in substantially
the form attached as Exhibit 1.4, and in accordance with Section 251 of the GCL,
shall have been executed by the Constituent Corporations and filed with the
Secretary of State of the State of Delaware. The time when the Merger shall
become effective as aforesaid is herein called the "Effective Time." The Parties
shall cause the Certificate of Merger to be executed and filed as aforesaid on
the Closing Date upon the satisfaction or waiver of the conditions contained in
Articles VIII, IX, and X.
I.5 Conversion of Shares. As of the Effective Time, all outstanding USMX Shares
shall be converted automatically into the right to receive Dakota Shares in the
ratio of 1.10 USMX Shares to one Dakota Share; and each share of the common
stock of Merger Corp shall be converted automatically into the right to receive
one share of common stock of the Surviving Corporation.
I.6 Treasury Shares, Etc. Each USMX Share which, immediately prior to the
Effective Time, is held by (a) USMX as treasury stock, (b) any other member of
the USMX Group, or (c) any member of the Dakota Group, shall be canceled and no
consideration shall be delivered with respect thereto.
I.7 Warrants, Options, Etc. Each warrant, option, or other right to acquire USMX
Shares as of the Effective Time shall be converted into a warrant, option, or
other right to acquire Dakota Shares based on the conversion ratio set forth in
Section 1.5, with the exercise price associated therewith, if any, being
adjusted proportionately.
I.8 No Fractional Shares. Fractional Dakota Shares shall not be issued in
exchange for USMX Shares. Except for operation of this Section, if the
conversion of shares pursuant to Section 1.5 would result in any stockholder of
USMX being entitled to receive a fractional interest in a Dakota Share, such
stockholder shall receive a single whole Dakota Share in lieu of such fractional
interest.
I.9 Stock Transfer Books. The stock transfer books of USMX shall be closed as of
the Effective Time, and no transfer of USMX Shares shall be made or consummated
thereafter except by the Surviving Corporation.
I.10 Exchange of Certificates.
(a) Dakota and USMX shall authorize Montreal Trust Company of Canada (or
such other Person as shall be reasonably acceptable to Dakota and USMX) to act
as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable after
the Effective Time, Dakota shall deposit with the Exchange Agent for the benefit
of the holders of certificates which immediately prior to the Effective Time
represented USMX Shares (the "Certificates") certificates representing Dakota
Shares (together with any dividends or distributions with respect thereto
payable as provided in Section 1.10(c), the "Exchange Fund") issuable pursuant
to Section 1.5 in exchange for outstanding USMX Shares.
(b) As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record of a Certificate whose shares were converted
pursuant to Section 1.5 into Dakota Shares a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon actual and proper delivery of the
Certificates to the Exchange Agent, shall contain instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing Dakota Shares, and shall be in such form and contain such other
provisions as Dakota and USMX may reasonably specify). Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
Dakota Shares which such holder has the right to receive pursuant to this
Article, and the Certificate so surrendered shall forthwith be canceled. Until
surrendered as contemplated by this Section, each Certificate shall, at and
after the Effective Time, be deemed to represent only the right to receive, upon
surrender of such Certificate, the certificate representing the appropriate
number of Dakota Shares and certain dividends and other distributions as
contemplated by Section 1.10(c).
(c) No dividends or other distributions that are declared on or after the
Effective Time on Dakota Shares or are payable to the holders of record thereof
on or after the Effective Time will be paid to persons entitled by reason of the
Merger to receive certificates representing Dakota Shares until such persons
surrender their Certificates, as provided in Section 1.10(b). Subject to the
effect of applicable Law, there shall be paid to such record holders of the
certificates representing such Dakota Shares (1) at the time of such surrender
or as promptly as practicable thereafter, the amount of any dividends or other
distributions theretofore paid with respect to whole Dakota Shares and having a
record date on or after the Effective Time and a payment date prior to such
surrender and (2) at the appropriate payment date or as promptly as practicable
thereafter, the amount of dividends or other distributions payable with respect
to whole Dakota Shares and having a record date on or after the Effective Time
but prior to surrender and a payment date subsequent to surrender. In no event
shall the person entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions. If any
cash or certificate representing Dakota Shares is to be paid to or issued in a
name other than that in which the Certificate surrendered in exchange therefor
is registered, it shall be a condition of such exchange that the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and that the person requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates for
such Dakota Shares in a name other than that of the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
(d) Any portion of the Exchange Fund which remains undistributed to the
former stockholders of USMX for one year after the Effective Time shall be
delivered to Dakota, upon demand of Dakota, and any former stockholders of USMX
who have not theretofore complied with this Section shall thereafter look only
to Dakota for payment of their claim for Dakota Shares and any dividends or
distributions with respect to Dakota Shares. Neither Dakota nor USMX shall be
liable to any holder of USMX Shares for Dakota Shares (or dividends or
distributions with respect thereto) delivered to a public official pursuant to
any applicable abandoned property, escheat, or similar Law.
I.11 Directors of Dakota. Immediately following the Effective Time, Dakota shall
increase the number of directors comprising its Board of Directors to nine;
Dakota shall allow USMX to designate three directors and Pegasus Gold Inc. to
designate one director to fill the vacancies created by increasing the board
size, subject to Dakota's approval, with Donald P. Bellum as one of the three
USMX designated directors and the Chairman of the Board.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF USMX
USMX makes the following representations and warranties to Dakota and Merger
Corp. However, certain matters disclosed on any Exhibit hereto may not be
required to be disclosed therein, but may be stated therein for information
purposes only, and no such disclosure shall constitute an indication or
admission of the materiality thereof or create a standard of disclosure, and no
representation or warranty shall be deemed to have been made by USMX by reason
of the inclusion of such matters. Further, no representation or warranty shall
be deemed to have been made by USMX by virtue of any disclosures made on, or
contained in, any Exhibit hereto except to the extent expressly made in this
Article II.
II.1 Organization and Good Standing.
(a) Each of the USMX Group Members is a corporation duly organized, validly
existing, and in good standing under the Laws of the jurisdiction of its
incorporation and is qualified to transact business and is in good standing as a
foreign corporation in the jurisdictions (which are listed in Exhibit 2.1) where
it is required to qualify in order to conduct its business as presently
conducted, and where the failure to be so qualified would have a Material
Adverse Effect. Except as listed in Exhibit 2.1, there are no subsidiaries of
USMX, none of USMX's subsidiaries has any subsidiaries, and since December 31,
1991, neither USMX nor any of its subsidiaries has had any subsidiaries.
(b) Each USMX Group Member has the corporate power and authority to own,
lease, or operate its properties and to carry on its business as now conducted.
(c) USMX has heretofore delivered or made available to Dakota and Merger
Corp complete and correct copies of USMX's and its subsidiaries' respective
Certificate or Articles of Incorporation (or like charter document) and By-laws,
as each has been amended and is in effect on the date hereof.
II.2 Consents, Authorizations, and Binding Effect.
(a) USMX may execute, deliver, and perform this Agreement without the
necessity of any USMX Group Member obtaining any consent, approval,
authorization, or waiver, or giving any notice or otherwise, except for such
consents, approvals, authorizations, waivers, and notices:
(1) disclosed in Exhibit 2.2;
(2) which, with respect to consents, approvals, authorizations, and
waivers, have been obtained, are unconditional, and are in full force and
effect, and which, with respect to notices, have been given; or
(3) approval of the USMX stockholders in accordance with the GCL to be
obtained pursuant to Section 5.10.
(b) USMX has the full corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
Transactions.
(c) This Agreement and the Transactions have been duly authorized by the
board of directors of USMX. This Agreement has been duly executed and delivered
by USMX and constitutes the legal, valid, and binding obligation of USMX,
enforceable against USMX in accordance with its terms, except
(1) as may be limited by bankruptcy, reorganization, insolvency, and
similar Laws of general application relating to or affecting the enforcement of
creditors' rights or the relief of debtors; and
(2) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(d) The execution, delivery, and performance of this
Agreement by USMX will not
(1) constitute a violation of the respective Certificates or Articles
of Incorporation (or like charter documents) or By-laws, each as amended, of any
USMX Group Member;
(2) with respect to the USMX Group, subject to obtaining any consent,
approval, authorization, or waiver described in Exhibit 2.2, conflict with,
result in the breach of or constitute a default under any Contract which would
have a Material Adverse Effect;
(3) constitute a material violation of any Law
applicable or relating to any USMX Group Member or the businesses
of the USMX Group; or
(4) with respect to the USMX Group, subject to obtaining any consent,
approval, authorization, or waiver described in Exhibit 2.2, result in the
creation of any Lien upon any of the assets of any USMX Group Member.
II.3 Minute and Stock Transfer Books. The minute books of each USMX Group Member
fairly reflect the corporate actions of the respective boards of directors and
the stockholders of each such USMX Group Member. The stock transfer books of
each USMX Group Member are correct, complete, and current, and all documentary
and stock transfer tax stamps required in connection with the issuance and
transfer of shares of the capital stock of each USMX Group Member, if any, have
been duly paid, affixed, and canceled.
II.4 Financial Statements and Financial Condition.
(a) The USMX Group has maintained its accounting books and records in all
material respects in compliance with the Foreign Corrupt Practices Act, as
amended.
(b) Except as described in Exhibit 2.4(b), the accounting books and records
of the USMX Group during the periods covered by the 1995 USMX Financial
Statements and the Interim USMX Financial Statements fairly reflect in all
material respects the items of income and expense and the assets and liabilities
of the USMX Group, including the nature thereof and the transactions giving rise
thereto (to the extent normally reflected in the accounting books and records of
the USMX Group Members) and provided a fair basis for the preparation of the
1995 USMX Financial Statements and the Interim USMX Financial Statements.
(c) Attached as Exhibit 2.4(c) are the Interim USMX
Financial Statements.
(d) The 1995 USMX Financial Statements have been prepared
in accordance with U.S. GAAP.
(e) The 1995 USMX Financial Statements and the Interim USMX Financial
Statements are correct and complete in all material respects and present fairly
in accordance with U.S. GAAP (except that the Interim USMX Financial Statements
may not contain notes and may be subject to year-end adjustments) the financial
position of the USMX Group as of the dates of such financial statements and the
results of operations and cash flows of the USMX Group for the periods covered
by such financial statements.
(f) The USMX Group has no liabilities (absolute, contingent, or otherwise)
required under U.S. GAAP to be set forth on a consolidated balance sheet (or in
the notes thereto) of the USMX Group, other than:
(1) those set forth, reserved against, or described on or in the 1995
USMX Balance Sheet (or in the notes thereto) or the Interim USMX Financial
Statements;
(2) those incurred by the USMX Group in the ordinary course of
business since the date of the Interim USMX Balance Sheet;
(3) obligations to be performed after the date hereof based on the
operations of any USMX Group Member after the date hereof under any Contract of
such USMX Group Member; and
(4) those described or disclosed on, or which may arise out of or with
respect to the matters or Contracts described or disclosed on, the Exhibits to
this Agreement, or those which may arise out of or with respect to matters or
Contracts that would be required to be disclosed on such Exhibits but for the
limitations on such disclosure contained in the representations and warranties
relating to such Exhibits.
II.5 Title and Condition of Assets.
(a) Exhibit 2.5(a) lists all of the real property owned by the USMX Group
in fee simple and all unpatented mining claims, real property leases, and
concessions in which any USMX Group Member has a right or interest.
(b) To the knowledge of USMX, except as described in
Exhibit 2.5(b),
(1) the USMX Group has good and sufficient title to all real property
owned by it in fee simple, and is in exclusive possession thereof, free and
clear of Liens other than Permitted Liens and statutory Liens not yet
delinquent;
(2) the USMX Group has good and sufficient title to all material
tangible personal property owned by it free and clear of Liens other than
Permitted Liens and statutory Liens not yet delinquent;
(3) with respect to the unpatented mining claims in
which any USMX Group Member has a right or interest,
(A) such claims were properly laid out and staked and properly
recorded and filed with appropriate Governmental agencies and, subject to the
paramount title of the United States, are free and clear of Liens other than
Permitted Liens and statutory Liens not yet delinquent;
(B) all required assessment work has been performed and all
affidavits of assessment work and other filings required to maintain such claims
in good standing have been properly and timely recorded and filed with
appropriate Governmental agencies;
(C) all claim maintenance and claim rental fees and all taxes
assessed against such claims have been timely paid; and
(D) there are no conflicting claims;
provided that USMX makes no representation that there has been a discovery of
minerals on each of the unpatented mining claims; and
(4) with respect to concessions in which the USMX Group has an
interest, all acts and payments necessary to obtain and maintain such
concessions in good standing have been timely made or performed.
(c) To the knowledge of USMX, all mineral production rights or other
royalties of any sort whatsoever which are payable with respect to any real
property in which any USMX Group Member has a right or interest are described in
Exhibit 2.5(c).
(d) To the knowledge of USMX, no improvement or structure on any real
property owned or leased by any USMX Group Member encroaches to any material
extent on any adjacent property or conflicts with the rights of any owner
thereof.
(e) The material improvements, fixtures, and appurtenances on or to the
property and the material tangible assets, owned or leased and used by any USMX
Group Member, are in substantially good operating condition, order, and repair,
subject to ordinary wear and tear, except as described in Exhibit 2.5(e). Since
December 31, 1996, none of the assets of any USMX Group Member has been affected
by any fire, accident, act of God, or any other casualty that has had a Material
Adverse Effect. All of the material assets used by any USMX Group Member in its
businesses are owned or leased by such USMX Group Member.
(f) The businesses of the USMX Group as conducted by the USMX Group Members
in any jurisdiction are not conducted under any material restriction imposed in
any such jurisdiction upon the USMX Group Members (but not imposed upon other
persons conducting similar businesses or operating similar assets for similar
purposes in the same jurisdictions where the businesses and assets of the USMX
Group are located) by any zoning, anti-pollution, health, or other Law.
II.6 Insurance.
(a) Exhibit 2.6 contains a list of all material policies of insurance
maintained by the USMX Group, including insurance providing benefits for
employees, in effect on the date hereof and generally describing the coverage
thereby.
(b) Except for amounts deductible under the policies of insurance
described, or as otherwise disclosed, in Exhibit 2.6, no USMX Group Member is or
has been at any time since December 31, 1994, subject to any Liability as a
self-insurer of the businesses and assets of the USMX Group, in respect of
insurance of the type customarily carried by businesses of the type engaged in
by the USMX Group in the jurisdictions where the USMX Group maintains offices,
which could have a Material Adverse Effect.
(c) There are no material coverage disputes with underwriters pending or,
to the knowledge of USMX, threatened, and all premiums due and payable have been
timely paid and all such material policies are in full force and effect in
accordance with their respective terms (however, no representation or warranty
is made as to the solvency or financial condition of any underwriter or issuer
of such policy).
II.7 Litigation and Compliance.
(a) Except as to the matters described in Exhibit 2.7(a), and except for
actions, suits, claims, and proceedings where the damages asserted by the
plaintiff in such actions, suits, claims, or proceedings (together with the
damages claimed in the matters described in Exhibit 2.7(a)) would not have a
Material Adverse Effect or where insurance proceeds will be actually available
for such actions, suits, claims, and proceedings:
(1) as of the date of this Agreement, there are no actions, suits,
claims, or proceedings, whether in equity or at law, or Governmental
investigations pending or, to the knowledge of USMX, threatened against any USMX
Group Member or with respect to any asset or property owned, leased, or used by
any USMX Group Member; and
(2) there are no actions, suits, claims, or proceedings, whether in
equity or at law, or Governmental investigations pending or, to the knowledge of
USMX, threatened which question or challenge the validity of this Agreement or
any action taken or to be taken pursuant to this Agreement.
(b) Each USMX Group Member is in compliance with, and is not in default or
violation under, any Law applicable to the businesses or operations of the USMX
Group, including without limitation all safety and health Laws (but excluding
any Environmental Law), except for noncompliances, defaults, and violations
which would not, in the aggregate, have a Material Adverse Effect, and no USMX
Group Member has received any notice of the same.
(c) Except as described in Exhibit 2.7(c), no USMX Group Member, no
material assets of any USMX Group Member, nor the Transactions are subject to
any judgment, order, or decree entered in any lawsuit or proceeding which has
had, or which is reasonably likely to have, a Material Adverse Effect or which
would prevent USMX from performing its obligations under this Agreement. Each
USMX Group Member subject to any such judgment, order, or decree is in
compliance in all material respects with, and is not in default or violation in
any material respect under, any such judgment, order, or decree.
(d) Except as described in Exhibit 2.7(d), and except as may be required
under any Environmental Law, each USMX Group Member has duly filed all reports
and returns required to be filed by it with any Government and obtained all
Governmental permits and licenses and other Governmental consents which are
required in connection with the businesses and operations of the USMX Group, the
failure of which would have a Material Adverse Effect. All of such material
permits, licenses, and consents are in full force and effect, and to the
knowledge of USMX, no proceedings for the suspension or cancellation of any of
them are pending or threatened.
(e) Neither USMX nor, to the knowledge of USMX, any other USMX Group
Member, either on its own behalf or on behalf of any of its respective officers,
agents, consultants, or employees, has
(1) made or agreed to make any contributions, payments, or gifts of
their funds or property to any Governmental official, employee, or agent where
the payment of such contribution, payment, or gift was illegal under any
applicable Law;
(2) established or maintained any unrecorded fund or asset for any
such purpose, or made any intentional false or artificial entry on any of its
books or records in connection with any such activity; or
(3) made or agreed to make any contribution, or reimbursed any
political gift or contribution made by any other person, to candidates for
public office, whether federal, state, local, or foreign, where such
contribution was a violation of applicable Law by any USMX Group Member.
II.8 Taxes.
(a) The USMX Group has paid in all material respects on or before the due
date thereof, or accrued in all material respects on the 1995 USMX Financial
Statements, all federal, state, local, and foreign Taxes for all periods ending
on or prior to December 31, 1996. The USMX Group has made provision (subject to
year-end audit adjustments) in all material respects on its accounting books and
on the Interim USMX Balance Sheet for all federal, state, local, and foreign
Taxes accruing since the date of the 1995 USMX Financial Statements. As of the
Effective Time, the USMX Group will have duly and timely filed all Tax reports
and returns required to be filed by any USMX Group Member on or before such date
(subject to extensions which have been granted to such USMX Group Member or
extensions to which such USMX Group Member is entitled under then applicable
Laws); and all such Tax reports and returns were, or will be, complete and
correct in all material respects.
(b) Since December 31, 1991, the taxable income of the USMX Group has been
included in the consolidated federal income tax returns of USMX to the extent
required to be included under the Tax Code; and all such federal income tax
returns as they relate to the USMX Group were complete and correct in all
material respects.
(c) Except as described in Exhibit 2.8, no USMX Group Member has received
notice of any material Tax deficiency, claim, or dispute outstanding, proposed,
or assessed against any USMX Group Member (which has not been satisfied or for
which provision has not been made on the books and records of the USMX Group),
nor has any USMX Group Member executed any waiver of any statute of limitations
on the assessment or collection of any material Taxes or executed or filed with
the Internal Revenue Service or any other Taxing authority (including foreign
Taxing authorities) or executed any agreement now in effect extending the period
for assessment or collection of any material Taxes.
(d) There are no Tax Liens (other than Permitted Liens) upon, pending
against or, to the knowledge of USMX, threatened against any asset of any USMX
Group Member, which Tax Lien would have a Material Adverse Effect.
(e) No USMX Group Member is a party to any pending or, to the knowledge of
USMX, threatened action or proceeding, assessment or collection of Taxes by any
Taxing authority, foreign or domestic, relating to the business and operation of
any USMX Group Member.
(f) The USMX Group Members are not parties to any Tax
sharing agreement.
(g) No election under 341(f) of the Tax Code has been or shall hereafter be
made to treat any USMX Group Member as a "consenting corporation" as defined in
341(f).
(h) Since December 31, 1991, no USMX Group Member has ever been a
"Subchapter S" or an "S" corporation within the meaning of the Tax Code.
(i) No representation or warranty is made by USMX with respect to whether
any deferred tax benefit accrued on the books of the USMX Group or reflected in
the 1995 USMX Financial Statements or Interim USMX Financial Statements will
ultimately be usable by any USMX Group Member.
II.9 Intangible Assets. Neither USMX nor any USMX Group Member owns or has any
proprietary interest in any domestic or foreign patents, patent applications,
trademarks, trademark registrations, applications for trademark registrations,
trade names, or copyrights.
II.10 Employees. USMX has delivered to Dakota and Merger Corp a list of all
employees of each USMX Group Member and each such employee's date of hire and
annual rate of compensation as of the date hereof.
II.11 Pension and Other Employee Plans and Agreements.
(a) Exhibit 2.11 sets forth all Employee Plans maintained by each USMX
Group Member, and USMX has furnished or made available to Dakota and Merger Corp
true and complete copies of all such Employee Plans as amended and in effect on
the date hereof.
(b) To the knowledge of USMX,
(1) the execution and delivery of this Agreement by USMX and the
consummation of the Transactions do not constitute and will not result in any
"prohibited transaction" within the meaning of ERISA or 4975 of the Tax Code;
(2) each Employee Plan of the USMX Group and any related trust
agreements, annuity contracts, insurance contracts, or other funding instruments
are currently, and have been in the past, in compliance in all material respects
with the requirements of applicable Laws as to the form, operation, and
administration of such plans;
(3) all reports, notices, and applications relating thereto required
by any Governmental agency have been in all material respects timely filed;
(4) all contributions required to be made on or before the date hereof
to each such Employee Plan under the terms of such plan, ERISA, the Tax Code or
other applicable law have been in all material respects timely made;
(5) no USMX Group Member has incurred, or will incur as a result of
the Transactions, any Liability (except for premiums) to the Pension Benefit
Guaranty Corporation; and
(6) none of the Employee Plans of the USMX Group is a
"Multi-employer Plan" (as such term is defined in 3(37) of
ERISA); and
(c) There are no actions, suits, claims or proceedings, whether in equity
or at law, or Governmental investigations pending or, to the knowledge of USMX,
threatened against or with respect to any Employee Plan of the USMX Group or any
assets of any such Employee Plan.
II.12 Labor Relations.
(a) Except as described in Exhibit 2.12, no employees of any USMX Group
Member are covered by any collective bargaining agreement.
(b) Except as described in Exhibit 2.12:
(1) each USMX Group Member has complied with all applicable Laws
(including without limitation ERISA and Laws governing foreign employee benefit
and pension plans) relating to the employment of labor, including without
limitation those relating to wages, hours, unfair labor practices,
discrimination, payment of social security, and similar Taxes, where the failure
to be in compliance would have a Material Adverse Effect;
(2) no USMX Group Member is engaged in any unfair labor practice which
would have a Material Adverse Effect;
(3) there are no complaints against any USMX Group Member pending as
of the date hereof before the National Labor Relations Board or any similar
foreign, state, or local labor agency by or on behalf of any employee of any
USMX Group Member which would have a Material Adverse Effect; and
(4) there are no representation questions, arbitration proceedings,
labor strikes, slow-downs or stoppages, material grievances, or other labor
troubles pending or, to the knowledge of USMX, threatened as of the date hereof
with respect to the employees of any USMX Group Member which would have a
Material Adverse Effect.
II.13 Contracts, Etc.
(a) Except as set forth in Exhibit 2.13, all Contracts to which any USMX
Group Member is a party or by which any USMX Group Member is bound are valid and
in full force and effect and constitute the legal, valid, and binding
obligations of such USMX Group Member and, to the knowledge of USMX, the other
parties thereto; and there are no existing defaults by any USMX Group Member or,
to the knowledge of USMX, by any other party thereunder; and no event, act, or
omission has occurred which (with or without notice, lapse of time, or the
happening or occurrence of any other event) would result in a default thereunder
which has had, or which is reasonably likely to have, a Material Adverse Effect.
To the knowledge of USMX, no other party to any such Contract has asserted the
right to renegotiate the material terms or conditions of any such Contract.
(b) Except as set forth in Exhibit 2.13, to the knowledge of USMX, all
Contracts of the USMX Group are listed in the USMX SEC Reports except the
following:
(1) employment agreements terminable at will and Contracts for
miscellaneous services terminable at will, in each case without the necessity of
payment of any material penalty, bonus, severance payment, or additional
compensation (other than liabilities accruing to the effective date of such
termination);
(2) Contracts with customers, distributors, and
suppliers; and
(3) other Contracts involving aggregate liabilities under all such
Contracts providing for future payments by any USMX Group Member of not more
than US$50,000 individually and of not more than US$250,000 in the aggregate.
(c) USMX has heretofore delivered or made available to Dakota and Merger
Corp true, correct, and complete copies of all Contracts required to be listed
pursuant to Section 2.13.
II.14 Absence of Certain Changes, Etc. Except as described
in Exhibit 2.14, and except for any actions required to be
performed by USMX or otherwise permitted pursuant to this
Agreement, since December 31, 1996
(a) there has been no Material Adverse Change in the results of operations
or financial condition of the USMX Group (taken as a whole) from that reflected
in the Interim USMX Financial Statements;
(b) no USMX Group Member has:
(1) sold, transferred, distributed, or otherwise
disposed of any of its assets, or agreed to do any of the
foregoing, except in the ordinary course of business;
(2) made or agreed to make any capital expenditure or commitment for
additions to property, plant, or equipment, except for expenditures and
commitments in accordance with budgets heretofore approved by the USMX Group or
otherwise not in excess of US$50,000 in the aggregate;
(3) experienced any damage, destruction, or loss to or
of any of its assets, whether or not covered by insurance,
exceeding US$50,000 in the aggregate;
(4) made or agreed to make any increase in the compensation payable to
any employee, except for increases made in the ordinary course of business and
consistent with presently existing policies or agreements;
(5) conducted its operations otherwise than in due
course;
(6) entered into any transaction or Contract, or amended or terminated
any transaction or Contract, except transactions or Contracts entered into in
the ordinary course of business in arm's-length transactions;
(7) effected any material change in the practices followed by the USMX
Group in calculating bad debts, contingencies, or other reserves from that
reflected in the Interim USMX Financial Statements; or
(8) agreed or committed to do any of the foregoing.
II.15 Subsidiaries.
(a) Exhibit 2.15(a) sets forth with respect to each
subsidiary of USMX
(1) the date and jurisdiction of its incorporation;
(2) the number and class of shares of its equity
securities;
(3) its equity securities owned, directly or
indirectly, by USMX;
(4) the number of its equity securities owned,
directly or indirectly, by any person other than USMX;
(5) a description of any limitations on USMX's ability
to vote, pledge or alienate such equity securities; and
(6) a description of any agreements containing any right of first
negotiation or refusal, options, or warrants with respect to the equity
securities of such subsidiary owned by any person other than USMX.
(b) Except as set forth in Exhibit 2.15(b), all of the outstanding shares
of capital stock of each USMX Group Member (other than USMX) owned of record and
beneficially by USMX are so owned free and clear of all Liens. Except with
respect to the subsidiaries listed in Exhibit 2.15(a), USMX does not own,
directly or indirectly, any equity securities or interests of or in any entity
or enterprise organized under the Laws of the United States, any state thereof,
the District of Columbia, Canada, any province thereof, or any other domestic or
foreign jurisdiction.
(c) All outstanding shares of the capital stock of or other equity
interests in each USMX Group Member (other than USMX) have been duly authorized
and are validly issued, fully paid, and nonassessable, and no Liability attaches
to the ownership thereof (except Liabilities imposed by Law).
(d) Except as described in Exhibit 2.15(d), there are no
authorized, outstanding, or existing
(1) proxies, voting trusts, or other agreements or understandings with
respect to the voting of any capital stock of any USMX Group Member (other than
USMX);
(2) securities convertible into or exchangeable for
any capital stock of any USMX Group Member (other than USMX);
(3) options, warrants, or other rights to purchase or subscribe for
any capital stock of, or securities convertible into or exchangeable for any
capital stock of, any USMX Group Member (other than USMX);
(4) agreements of any kind relating to the issuance of any capital
stock of any USMX Group Member (other than USMX), any such convertible or
exchangeable securities or any such options, warrants, or rights;
(5) agreements of any kind which may obligate any USMX Group Member
(other than USMX) to issue or purchase any of its securities; or
(6) agreements containing any right of first negotiation or refusal
with respect to the equity securities of any USMX Group Member (other than
USMX).
(e) Exhibit 2.15(e) lists the name of each subsidiary of USMX since January
1, 1990 not listed on Exhibit 2.15(a). The USMX Group has no Liabilities with
respect to the ownership or disposition of any such subsidiaries.
II.16 Capitalization and Title to Shares.
(a) The authorized capital stock of USMX consists of 45,000,000 USMX
Shares, of which 16,184,182 shares were outstanding as of December 31, 1996, and
20,000,000 shares of preferred stock, par value $.001 per share, of which no
shares are outstanding as of the date hereof.
(b) The USMX Shares constitute all of the outstanding shares of all classes
of the capital stock of USMX.
(c) The USMX Shares have been duly authorized and are validly issued, fully
paid, and nonassessable, and no Liability attaches to the ownership thereof.
(d) Except as described in Exhibit 2.16, there are no
authorized, outstanding, or existing:
(1) voting trusts or other agreements or understandings with respect
to the voting of any USMX Shares, or to the knowledge of USMX, proxies;
(2) securities convertible into or exchangeable for
any USMX Shares;
(3) options, warrants, or other rights to purchase or subscribe for
any USMX Shares or securities convertible into or exchangeable for any USMX
Shares;
(4) agreements of any kind relating to the issuance of any USMX
Shares, any such convertible or exchangeable securities, or any such options,
warrants, or rights; or
(5) agreements of any kind which may obligate USMX to
issue or purchase any of its securities.
II.17 Environmental Matters. Except as to the matters
described in the environmental reports and other documents
described in Exhibit 2.17, if any:
(a) there exists no Environmental Condition which is reasonably likely to
result in any Liability to, or would have a Material Adverse Effect on, the USMX
Group; and
(b) each of the USMX Group Members has duly filed all material reports,
returns, and filings required to be filed by it with any Government, and has
obtained all material Governmental permits and licenses and other Governmental
consents which are required in connection with the businesses of the USMX Group
relating to an Environmental Condition and Environmental Laws.
II.18 Brokers. Except for fees and expenses payable to Newcrest Capital Corp. in
an amount mutually agreeable to the Parties, the USMX Group, their Affiliates,
and their respective Advisers have not retained any broker or finder in
connection with the Transactions, nor have any of the foregoing incurred any
Liability to any broker or finder by reason of the Transactions.
II.19 Officers and Directors. Exhibit 2.19 is a list of the names and addresses
of all officers and directors of each USMX Group Member.
II.20 Fairness of Transaction. USMX believes that the transaction contemplated
by this Agreement is fair to, and in the best interests of, USMX and its
stockholders.
II.21 Valid Issuance of New Stock. Upon consummation of the Transactions, the
shares of common stock of the Surviving Corporation issued hereunder will be
duly and validly authorized and, when issued and delivered in accordance with
the terms and provisions of this Agreement and the Certificate of Merger as
provided for in Article I, will be fully paid and nonassessable. At the Closing,
USMX will have the power to issue the new shares of Common Stock of the
Surviving Corporation free and clear of all liens, encumbrances, security
agreements, equities, options, claims, charges, and restrictions, except for
generally applicable restrictions imposed under applicable securities laws.
II.22 No Misstatements or Omissions. The representations, warranties, and
statements made by USMX in this Agreement, the Exhibits, and the documents and
information furnished by USMX to Dakota or Merger Corp in connection with the
Transactions, when considered both in the aggregate and individually, and both
in light of the circumstances under which those representations, warranties, and
statements were made and in light of the circumstances as of the date of this
Agreement, did not and do not contain any untrue statement of a material fact,
and did not fail to state any material facts that are necessary in order to make
the statements contained in this Agreement, the Exhibits, and the documents and
information furnished to Dakota or Merger Corp pursuant to the terms and
conditions of this Agreement, not misleading. There are no facts known to USMX
which, either individually or in the aggregate, could have a Material Adverse
Effect which have not been disclosed in this Agreement, the Exhibits, or
otherwise in writing to Dakota and Merger Corp.
II.23 USMX SEC Reports.
(a) USMX has delivered to Dakota the following: (1) its Annual Report on
Form 10-K for the year ended December 31, 1995, (2) all of its Quarterly Reports
on Form 10-Q for 1996, (3) all of its Current Reports on Form 8-K filed with the
SEC since October 1, 1996, and (4) its Registration Statement on Form S-2, as
filed with the SEC in November, 1996 (in each case, with all amendments thereto
and documents incorporated by referenced therein, excluding preliminary
materials, the "USMX SEC Reports").
(b) Except as set forth in Exhibit 2.23, as of its respective filing date,
each USMX SEC Reports complied in all material respects with the requirements of
the laws, rules, and regulations applicable to such USMX SEC Report, including,
without limitation, the Securities Act and the Exchange Act.
(c) Except as set forth in Exhibit 2.23, as of its respective filing date,
no USMX SEC Report contained any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
(d) Except as set forth in Exhibit 2.23, each USMX SEC Report, as amended
or supplemented, if applicable, as of the date of such USMX SEC Report or
amendment became effective, did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
II.24 Information in Disclosure Documents. None of the information with respect
to any USMX Group Member to be included or incorporated by reference in the
Joint Proxy/ Registration Statement will (a) at the respective times such
documents are filed with the SEC and (b)(1) in the case of the Joint Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Joint Proxy Statement and any amendments or supplements thereto
and at the times of the USMX Stockholders' Meeting and the Dakota Shareholders'
Meeting or (2) in the case of the Registration Statement or any amendments
thereof or supplements thereto, at the time it becomes effective and at the
Effective Time, 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, or necessary to correct any statement in any earlier filing with
the SEC of the Joint Proxy/Registration Statement or any amendment thereof or
supplement thereto or any earlier communication to stockholders of USMX or
shareholders of Dakota with respect to the Transactions; provided, however, that
this provision shall not apply to statements or omissions in the Joint
Proxy/Registration Statement based upon information furnished by Dakota or
Merger Corp for use therein. The Joint Proxy Statement will comply as to form in
all material respects with the applicable provisions of the Exchange Act and the
Securities Act relating to the USMX Stockholders' Meeting and the issuance of
the Dakota Shares.
II.25 No Knowledge of Breach of Representations and Warranties of Merger Corp.
USMX has no knowledge of any breach by Dakota or Merger Corp of any of the
representations and warranties contained in Article III.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DAKOTA AND MERGER CORP
Dakota and Merger Corp make the following representations and warranties to
USMX. However, certain matters disclosed on any Exhibit hereto may not be
required to be disclosed therein, but may be stated therein for information
purposes only, and no such disclosure shall constitute an indication or
admission of the materiality thereof or create a standard of disclosure, and no
representation or warranty shall be deemed to have been made by Dakota or Merger
Corp by reason of the inclusion of such matters. Further, no representation or
warranty shall be deemed to have been made by Dakota or Merger Corp by virtue of
any disclosures made on, or contained in, any Exhibit hereto except to the
extent expressly made in this Article III.
III.1 Organization and Good Standing.
(a) Each Dakota Group Member is a corporation duly organized, validly
existing, and in good standing under the Laws of the jurisdiction of its
incorporation and is qualified to transact business and is in good standing as a
foreign corporation in the jurisdictions (which are listed in Exhibit 3.1) where
it is required to qualify in order to conduct its business as presently
conducted, and where the failure to be so qualified would have a Material
Adverse Effect. Except as listed in Exhibit 3.1, there are no subsidiaries of
Dakota, none of Dakota's subsidiaries has any subsidiaries, and since December
31, 1991, neither Dakota nor any of its subsidiaries has had any subsidiaries.
(b) Each Dakota Group Member has the corporate power and authority to own,
lease, or operate its properties and to carry on its business as now conducted.
(c) Dakota has heretofore delivered or made available to USMX complete and
correct copies of Dakota's and its subsidiaries' respective Certificates or
Articles of Incorporation (or like charter document) and By-laws, as each has
been amended and is in effect on the date hereof.
III.2 Consents, Authorizations, and Binding Effect.
(a) Dakota and Merger Corp may execute, deliver, and perform this Agreement
without the necessity of any Dakota Group Member obtaining any consent,
approval, authorization, or waiver, or giving any notice or otherwise, except
for such consents, approvals, authorizations, waivers, and notices:
(1) disclosed in Exhibit 3.2;
(2) which, with respect to consents, approvals, authorizations, and
waivers, have been obtained and are unconditional, and are in full force and
effect, and which, with respect to notices, have been given; or
(3) approval of the Dakota shareholders in accordance with applicable
Law to be obtained pursuant to Section 6.9.
(b) Each of Dakota and Merger Corp has the full corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder, and to consummate the Transactions.
(c) This Agreement and Transactions have been duly authorized by the
respective boards of directors of Dakota and Merger Corp, as applicable. This
Agreement has been duly executed and delivered by Dakota and Merger Corp and
constitutes the legal, valid, and binding obligation of Dakota and Merger Corp,
enforceable against each in accordance with its terms, except
(1) as may be limited by bankruptcy, reorganization, insolvency and
similar Laws of general application relating to or affecting the enforcement of
creditors' rights or the relief of debtors; and
(2) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(d) The execution, delivery, and performance of this
Agreement by Dakota and Merger Corp will not
(1) constitute a violation of the respective Certificates or Articles
of Incorporation (or like charter documents) or By-laws, each as amended, of any
Dakota Group Member;
(2) subject to obtaining any consent, approval, authorization, or
waiver described in Exhibit 3.2, conflict with, result in the breach of, or
constitute a default under any Contract which would have a Material Adverse
Effect;
(3) constitute a material violation of any Law
applicable or relating to any Dakota Group Member or the
businesses of the Dakota Group; or
(4) subject to obtaining any consent, approval, authorization, or
waiver described in Exhibit 3.2, result in the creation of any Lien upon any of
the assets of any Dakota Group Member.
III.3 Minute and Stock Transfer Books. The minute books of each Dakota Group
Member fairly reflect the corporate actions of the respective boards of
directors and the shareholders of each such Dakota Group Member. The stock
transfer books of each Dakota Group Member are correct, complete, and current,
and all documentary and stock transfer tax stamps required in connection with
the issuance and transfer of shares of the capital stock of each Dakota Group
Member, if any, have been duly paid, affixed, and canceled.
III.4 Financial Statements and Financial Condition.
(a) The Dakota Group has maintained its accounting books and records in all
material respects in compliance with the Foreign Corrupt Practices Act, as
amended.
(b) Except as described in Exhibit 3.4(b), the accounting books and records
of the Dakota Group during the periods covered by the 1995 Dakota Financial
Statements and the Interim Dakota Financial Statements fairly reflect in all
material respects the items of income and expense and the assets and liabilities
of the Dakota Group, including the nature thereof and the transactions giving
rise thereto (to the extent normally reflected in the accounting books and
records of the Dakota Group) and provided a fair basis for the preparation of
the 1995 Dakota Financial Statements and the Interim Dakota Financial
Statements.
(c) Attached as Exhibit 3.4(c) are the Interim Dakota
Financial Statements.
(d) The 1995 Dakota Financial Statements have been prepared in accordance
with Canadian GAAP.
(e) The 1995 Dakota Financial Statements and the Interim Dakota Financial
Statements are correct and complete in all material respects and present fairly
in accordance with Canadian GAAP (except that the Interim Dakota Financial
Statements may not contain notes and may be subject to year-end adjustments) the
financial position of the Dakota Group as of the dates of such financial
statements and the results of operations and cash flows of the Dakota Group for
the periods covered by such financial statements.
(f) The Dakota Group has no liabilities (absolute, contingent, or
otherwise) required under Canadian GAAP to be set forth on a consolidated
balance sheet (or in the notes thereto) of the Dakota Group, other than:
(1) those set forth, reserved against, or described on or in the
Interim Dakota Balance Sheet (or in the notes thereto) or the Interim Dakota
Financial Statements;
(2) those incurred by the Dakota Group in the ordinary course of
business since the date of the Interim Dakota Balance Sheet;
(3) obligations to be performed after the date hereof based on the
operations of any Dakota Group Member after the date hereof under any Contract
of such Dakota Group Member; and
(4) those described or disclosed on, or which may arise out of or with
respect to the matters or Contracts described or disclosed on, the Exhibits to
this Agreement, or those which may arise out of or with respect to matters or
Contracts that would be required to be disclosed on such Exhibits but for the
limitations on such disclosure contained in the representations and warranties
relating to such Exhibits.
III.5 Title and Condition of Assets.
(a) Exhibit 3.5(a) lists all of the real property owned by the Dakota Group
in fee simple and all unpatented mining claims, real property leases, and
concessions in which any Dakota Group Member has a right or interest; provided
that Exhibit 3.5 (a) does not list any real property interests in which the
Dakota Group has any right or interest pursuant to The Golden Reward Mining Co.,
L.P. or The Cactus Gold Mines Company Joint Venture, and Dakota and Merger Corp
make no representation or warranty with respect thereto.
(b) To the knowledge of Dakota and Merger Corp, except as
described in Exhibit 3.5(b),
(1) the Dakota Group has good and sufficient title to all real
property owned by it in fee simple, and is in exclusive possession thereof, free
and clear of Liens other than Permitted Liens and statutory Liens not yet
delinquent;
(2) the Dakota Group has good and sufficient title to all material
tangible personal property owned by it free and clear of Liens other than
Permitted Liens and statutory Liens not yet delinquent;
(3) with respect to the unpatented mining claims in
which any Dakota Group Member has a right or interest,
(A) such claims were properly laid out and staked and properly
recorded and filed with appropriate Governmental agencies and, subject to
paramount title of the United States, are free and clear of Liens other than
Permitted Liens and statutory Liens not yet delinquent;
(B) all required assessment work has been performed and all
affidavits of assessment work and other filings required to maintain such claims
in good standing have been properly and timely recorded and filed with
appropriate Governmental agencies;
(C) all claim maintenance and claim rental fees and all taxes
assessed against such claims have been timely paid; and
(D) there are no conflicting claims;
provided that Dakota and Merger Corp make no representation that there has been
a discovery of minerals on each of the unpatented mining claims; and
(4) with respect to concessions held by the Dakota Group, if any, all
acts and payments necessary to obtain and maintain such concessions in good
standing have been timely made or performed.
(c) To the knowledge of Dakota and Merge Corp, all mineral production
rights or other royalties of any sort whatsoever which are payable with respect
to any real property in which any Dakota Group Member has a right or interest
are described in Exhibit 3.5(c).
(d) To the knowledge of Dakota and Merger Corp, no improvement or structure
on any real property owned or leased by any Dakota Group Member encroaches to
any material extent on any adjacent property or conflicts with the rights of any
owner thereof.
(e) The material improvements, fixtures, and appurtenances on or to the
property and the material tangible assets, owned or leased and used by any
Dakota Group Member, are in substantially good operating condition, order, and
repair, subject to ordinary wear and tear, except as described in Exhibit
3.5(e). Since December 31, 1996, none of the assets of any Dakota Group Member
has been affected by any fire, accident, act of God, or any other casualty that
has had a Material Adverse Effect. All of the material assets used by any Dakota
Group Member in its businesses are owned or leased by such Dakota Group Member.
(f) The businesses of the Dakota Group as conducted by the Dakota Group
Members in any jurisdiction are not conducted under any material restriction
imposed in any such jurisdiction upon the Dakota Group Members (but not imposed
upon other persons conducting similar businesses or operating similar assets for
similar purposes in the same jurisdictions where the businesses and assets of
the Dakota Group are located) by any zoning, anti-pollution, health, or other
Law.
III.6 Insurance.
(a) Exhibit 3.6 contains a list of all material policies of insurance
maintained by the Dakota Group, including insurance providing benefits for
employees, in effect on the date hereof and generally describing the coverage
thereby.
(b) Except for amounts deductible under the policies of insurance
described, or as otherwise disclosed, in Exhibit 3.6, no Dakota Group Member is
or has been at any time since December 31, 1994, subject to any Liability as a
self-insurer of the businesses and assets of the Dakota Group, in respect of
insurance of the type customarily carried by businesses of the type engaged in
by the Dakota Group in the jurisdictions where the Dakota Group maintains
offices, which could have a Material Adverse Effect.
(c) There are no material coverage disputes with underwriters pending or,
to the knowledge of Dakota threatened, and all premiums due and payable have
been timely paid and all such material policies are in full force and effect in
accordance with their respective terms (however, no representation or warranty
is made as to the solvency or financial condition of any underwriter or issuer
of such policy).
III.7 Litigation and Compliance.
(a) Except as described in Exhibit 3.7(a), and except for actions, suits,
claims, and proceedings where the damages asserted by the plaintiff in such
actions, suits, claims, or proceedings would not have a Material Adverse Effect
or where insurance proceeds will be actually available (subject to applicable
deductibles) for such actions, suits, claims, and proceedings:
(1) as of the date of this Agreement, there are no actions, suits,
claims or proceedings, whether in equity or at law, or Governmental
investigations pending or, to the knowledge of Dakota or Merger Corp, threatened
against any Dakota Group Member or with respect to any asset or property owned,
leased, or used by any Dakota Group Member; and
(2) there are no actions, suits, claims, or proceedings, whether in
equity or at law, or Governmental investigations pending or, to the knowledge of
Dakota or Merger Corp, threatened which question or challenge the validity of
this Agreement or any action taken or to be taken pursuant to this Agreement.
(b) Each Dakota Group Member is in compliance with, and is not in default
or violation under, any Law applicable to the businesses or operations of the
Dakota Group, including without limitation all safety and health Laws (but
excluding any Environmental Law), except for noncompliances, defaults, and
violations which would not, in the aggregate, have a Material Adverse Effect,
and no Dakota Group Member has received any notice of the same.
(c) Except as described in Exhibit 3.7(c), no Dakota Group Member, no
material assets of any Dakota Group Member, nor the Transactions are subject to
any judgment, order, or decree entered in any lawsuit or proceeding which has
had, or which is reasonably likely to have, a Material Adverse Effect or which
would prevent Dakota or Merger Corp from performing its obligations under this
Agreement. Each Dakota Group Member subject to any such judgment, order, or
decree is in compliance in all material respects with, and is not in default or
violation in any material respect under, any such judgment, order, or decree.
(d) Except as described in Exhibit 3.7(d), and except as may be required
under any Environmental Law, each Dakota Group Member has duly filed all reports
and returns required to be filed by it with Governmental authorities and
obtained all Governmental permits and licenses and other Governmental consents
which are required in connection with the businesses and operations of the
Dakota Group, the failure of which would have a Material Adverse Effect. All of
such material permits, licenses, and consents are in full force and effect, and
to the knowledge of Dakota or Merger Corp no proceedings for the suspension or
cancellation of any of them are pending or threatened.
(e) Neither Dakota nor Merger Corp nor, to the knowledge of Dakota or
Merger Corp, any other Dakota Group Member, either on its own behalf, or on
behalf of any of its respective officers, agents, consultants, or employees, has
(1) made or agreed to make any contributions, payments, or gifts of
their funds or property to any Governmental official, employee, or agent where
the payment of such contribution, payment, or gift was illegal under any
applicable Law;
(2) established or maintained any unrecorded fund or asset for any
such purpose, or made any intentional false or artificial entry on any of its
books or records in connection with any such activity; or
(3) made or agreed to make any contribution, or reimbursed any
political gift or contribution made by any other person, to candidates for
public office, whether federal, state, local, or foreign, where such
contribution was a violation of applicable Law by any Dakota Group Member.
III.8 Taxes. The Dakota Group has paid in all material respects on or before the
due date thereof, or accrued in all material respects on the 1995 Dakota
Financial Statements, all federal, state, local, and foreign Taxes for all
periods ending on or prior to December 31, 1996. The Dakota Group has made
provision (subject to year-end audit adjustments) in all material respects on
its accounting books and on the Interim Dakota Balance Sheet for all federal,
state, local, and foreign Taxes accruing since the date of the 1995 Dakota
Financial Statements. As of the Effective Time, the Dakota Group will have duly
and timely filed all Tax reports and returns required to be filed by any Dakota
Group Member on or before such date (subject to extensions which have been
granted to such Dakota Group Member or extensions to which such Dakota Group
Member is entitled under then applicable Laws); and all such Tax reports and
returns were, or will be, complete and correct in all material respects.
III.9 Intangible Assets. Neither Dakota nor any Dakota Group Member owns or has
any proprietary interest in any domestic or foreign patents, patent
applications, trademarks, trademark registrations, applications for trademark
registrations, trade names, or copyrights.
III.10 Pension and Other Employee Plans and Agreements.
(a) Exhibit 3.10 sets forth all Employee Plans maintained by each Dakota
Group Member, and Dakota has furnished or made available to USMX true and
complete copies of all such Employee Plans as amended and in effect on the date
hereof.
(b) To the knowledge of Dakota and Merger Corp,
(1) the execution and delivery of this Agreement by Dakota and the
consummation of the Transactions do not constitute and will not result in any
"prohibited transaction" within the meaning of ERISA or 4975 of the Tax Code;
(2) each Employee Plan of the Dakota Group and any related trust
agreements, annuity contracts, insurance contracts, or other funding instruments
are currently, and have been in the past, in compliance in all material respects
with the requirements of applicable Laws as to the form, operation, and
administration of such plans;
(3) all reports, notices, and applications relating thereto required
by any Governmental agency have been in all material respects timely filed;
(4) all contributions required to be made on or before the date hereof
to each such Employee Plan under the terms of such plan, ERISA, the Tax Code or
other applicable law have been in all material respects timely made;
(5) no Dakota Group Member has incurred, or will incur as a result of
the Transactions, any Liability (except for premiums) to the Pension Benefit
Guaranty Corporation; and
(6) none of the Employee Plans of the Dakota Group is
a "Multi-employer Plan" (as such term is defined in 3(37) of
ERISA); and
(c) There are no actions, suits, claims or proceedings, whether in equity
or at law, or Governmental investigations pending or, to the knowledge of Dakota
or Merger Corp, threatened against or with respect to any Employee Plan of the
Dakota Group or any assets of any such Employee Plan.
III.11 Labor Relations.
(a) No employees of any Dakota Group Member are covered by
any collective bargaining agreement.
(b) Each Dakota Group Member has complied with all applicable Laws
(including without limitation ERISA and Laws governing foreign employee benefit
and pension plans) relating to the employment of labor, including without
limitation those relating to wages, hours, unfair labor practices,
discrimination, payment of social security, and similar Taxes, where the failure
to be in compliance would have a Material Adverse Effect.
(c) No Dakota Group Member is engaged in any unfair labor practice which
would have a Material Adverse Effect.
(d) There are no complaints against any Dakota Group Member pending as of
the date hereof before the National Labor Relations Board or any similar
foreign, state, or local labor agency by or on behalf of any employee of any
Dakota Group Member which would have a Material Adverse Effect.
(e) There are no representation questions, arbitration proceedings, labor
strikes, slow-downs or stoppages, material grievances, or other labor troubles
pending or, to the knowledge of Dakota or Merge Corp, threatened as of the date
hereof with respect to the employees of any Dakota Group Member which would have
a Material Adverse Effect.
III.12 Contracts, Etc.
(a) Except as set forth in Exhibit 3.12, all Contracts to which any Dakota
Group Member is a party or by which any Dakota Group Member is bound are valid
and in full force and effect and constitute the legal, valid, and binding
obligations of such Dakota Group Member and, to the knowledge of Dakota and
Merger Corp, the other parties thereto; and there are no existing defaults by
any Dakota Group Member or, to the knowledge of Dakota, by any other party
thereunder; and no event, act, or omission has occurred which (with or without
notice, lapse of time, or the happening or occurrence of any other event) would
result in a default thereunder which has had, or which is reasonably likely to
have, a Material Adverse Effect. To the knowledge of Dakota and Merger Corp, no
other party to any such Contract has asserted the right to renegotiate the
material terms or conditions of any such Contract.
(b) Except as listed in Exhibit 3.12, to the knowledge of Dakota and
Merger, all Contracts of the Dakota Group are listed in the Dakota SEC Reports
except the following:
(1) employment agreements terminable at will and Contracts for
miscellaneous services terminable at will, in each case without the necessity of
payment of any material penalty, bonus, severance payment, or additional
compensation (other than liabilities accruing to the effective date of such
termination);
(2) Contracts with customers, distributors, and
suppliers; and
(3) other Contracts involving aggregate liabilities under all such
Contracts providing for future payments by any Dakota Group Member of not more
than US$50,000 individually and of not more than US$250,000 in the aggregate.
(c) Dakota has heretofore delivered or made available to USMX true,
correct, and complete copies of all Contracts required to be listed pursuant to
Section 3.12(b).
III.13 Absence of Certain Changes, Etc. Except as described in Exhibit 3.13, and
except for any actions required to be performed by Dakota or Merger Corp or
otherwise permitted pursuant to this Agreement, since December 31, 1996
(a) there has been no Material Adverse Change in the results of operations
or financial condition of the Dakota Group (taken as a whole) from that
reflected in the Interim Dakota Financial Statements;
(b) no Dakota Group Member has:
(1) sold, transferred, distributed, or otherwise
disposed of any of its assets, or agreed to do any of the
foregoing, except in the ordinary course of business;
(2) made or agreed to make any capital expenditure or commitment for
additions to property, plant, or equipment, except for expenditures and
commitments in accordance with budgets heretofore approved by the Dakota Group
or otherwise not in excess of US$50,000 in the aggregate;
(3) experienced any damage, destruction or loss to or
of any of its assets, whether or not covered by insurance,
exceeding US$50,000 in the aggregate;
(4) made or agreed to make any increase in the compensation payable to
any employee, except for increases made in the ordinary course of business and
consistent with presently existing policies or agreements;
(5) conducted its operations otherwise than in due
course;
(6) entered into any transaction or Contract, or amended or terminated
any transaction or Contract, except transactions or Contracts entered into in
the ordinary course of business in arm's-length transactions;
(7) effected any material change in the practices followed by the
Dakota Group in calculating bad debts, contingencies, or other reserves from
that reflected in the Interim Dakota Financial Statements; or
(8) agreed or committed to do any of the foregoing.
III.14 Subsidiaries.
(a) Exhibit 3.14(a) sets forth with respect to each
subsidiary of Dakota,
(1) the date and jurisdiction of its incorporation;
(2) the number and class of shares of its equity
securities;
(3) its equity securities owned, directly or
indirectly, by Dakota;
(4) the number of its equity securities owned,
directly or indirectly, by any person other than Dakota;
(5) a description of any limitations on Dakota's
ability to vote, pledge, or alienate such equity securities; and
(6) a description of any agreements containing any right of first
negotiation or refusal, options, or warrants with respect to the equity
securities of such subsidiary owned by any person other than Dakota.
(b) Except as set forth in Exhibit 3.14(b), all such outstanding shares of
capital stock of each Dakota Group Member (other than Dakota) owned of record
and beneficially by Dakota are so owned free and clear of all Liens. Except with
respect to the subsidiaries listed in Exhibit 3.14(a), Dakota does not own,
directly or indirectly, any equity securities or interests of or in any entity
or enterprise organized under the Laws of the United States, any state thereof,
Canada, any province thereof, the District of Columbia or any other domestic or
foreign jurisdiction.
(c) All outstanding shares of the capital stock of or other equity
interests in each such subsidiary have been duly authorized and are validly
issued, fully paid, and nonassessable, and no Liability attaches to the
ownership thereof (except Liabilities imposed by Law).
(d) Except as described in Exhibit 3.14(d), there are no
authorized, outstanding, or existing:
(1) proxies, voting trusts, or other agreements or\understandings with
respect to the voting of any capital stock of any Dakota Group Member (other
than Dakota);
(2) securities convertible into or exchangeable for
any capital stock of any Dakota Group Member (other than Dakota);
(3) options, warrants, or other rights to purchase or subscribe for
any capital stock of any Dakota Group Member (other than Dakota) or securities
convertible into or exchangeable for any capital stock of any Dakota Group
Member (other than Dakota);
(4) agreements of any kind relating to the issuance of any capital
stock of any Dakota Group Member (other than Dakota), any such convertible or
exchangeable securities or any such options, warrants, or rights;
(5) agreements of any kind which may obligate any Dakota Group Member
(other than Dakota) to issue or purchase any of its securities; or
(6) agreements containing any right of first negotiation or refusal
with respect to the equity securities of any Dakota Group Member (other than
Dakota).
(e) Dakota has had no subsidiaries since January 1, 1990
not listed in Exhibit 3.14(a).
III.15 Capitalization and Title to Shares.
(a) The authorized capital stock of Dakota consists of an unlimited number
of Dakota Shares, of which 35,479,742 shares were outstanding as of December 31,
1996, and 20,000 preference shares, no nominal or par value, of which no shares
are outstanding as of the date hereof.
(b) The Dakota Shares constitute all of the outstanding shares of all
classes of the capital stock of Dakota.
(c) The Dakota Shares have been duly authorized and are validly issued,
fully paid, and nonassessable, and no Liability attaches to the ownership
thereof.
(d) Except as described in Exhibit 3.15, there are no
authorized, outstanding, or existing:
(1) voting trusts or other agreements or understandings with respect
to the voting of any Dakota Shares, or, to the knowledge of Dakota and Merger
Corp, proxies;
(2) securities convertible into or exchangeable for
any Dakota Shares;
(3) options, warrants, or other rights to purchase or subscribe for
any Dakota Shares or securities convertible into or exchangeable for any Dakota
Shares;
(4) agreements of any kind relating to the issuance of any Dakota
Shares, any such convertible or exchangeable securities or any such options,
warrants, or rights; or
(5) agreements of any kind which may obligate Dakota
to issue or purchase any of its securities.
III.16 Environmental Matters. Except as to the matters
described in the environmental reports and other documents
described in Exhibit 3.16, if any:
(a) there exists no Environmental Condition which is reasonably likely to
result in any Liability to, or would have a Material Adverse Effect on, the
Dakota Group; and
(b) each Dakota Group Member has duly filed all material reports, returns,
and filings required to be filed by it with any Government, and has obtained all
material Governmental permits and licenses and other Governmental consents which
are required in connection with the businesses of the Dakota Group relating to
an Environmental Condition and Environmental Laws.
III.17 Fairness of Transaction. Dakota and Merger Corp believe that the
transaction contemplated by this Agreement is fair to, and in the best interests
of Dakota, Merger Corp, and Dakota's shareholders.
III.18 Valid Issuance of New Stock. Upon consummation of the Transactions, the
Dakota Shares issued hereunder will be duly and validly authorized and, when
issued and delivered in accordance with the terms and provisions of this
Agreement and the Certificate of Merger as provided for in Article I, will be
fully paid and nonassessable. At the Closing, Dakota will have the power to
issue the new Dakota Shares free and clear of all liens, encumbrances, security
agreements, equities, options, claims, charges, and restrictions, except for
generally applicable restrictions imposed under applicable securities laws.
III.19 No Misstatements or Omissions. The representations, warranties and
statements made by Dakota and Merger Corp in this Agreement, the Exhibits, and
the documents and information furnished by Dakota and Merger Corp to USMX in
connection with the Transactions, when considered both in the aggregate and
individually, and both in light of the circumstances under which those
representations, warranties, and statements were made and in light of the
circumstances as of the date of this Agreement, did not and do not contain any
untrue statement of a material fact, and did not fail to state any material
facts that are necessary in order to make the statements contained in this
Agreement, the Exhibits, and the documents and information furnished to USMX
pursuant to the terms and conditions of this Agreement, not misleading. There
are no facts known to Dakota or Merger Corp which, either individually or in the
aggregate, could have a Material Adverse Effect which have not been disclosed in
this Agreement, the Exhibits, or otherwise in writing to USMX.
III.20 Dakota SEC Reports.
(a) Dakota has delivered to USMX the following: (1) its Annual Report on
Form 10-K for the year ended December 31, 1995, (2) all of its Quarterly Reports
on Form 10-Q for 1996, and (3) all of its Current Reports on Form 8-K filed with
the SEC since October 1, 1996 (in each case, with all amendments thereto and
documents incorporated by referenced therein, excluding preliminary materials,
the "Dakota SEC Reports").
(b) Except as set forth in Exhibit 3.20, as of its respective filing date,
each Dakota SEC Report complied in all material respects with the requirements
of the laws, rules, and regulations applicable to such Dakota SEC Report,
including, without limitation, the Securities Act and the Exchange Act.
(c) Except as set forth in Exhibit 3.20, as of its respective filing date,
no Dakota SEC Report contained any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(d) Except as set forth in Exhibit 3.20, each Dakota SEC Report, as amended
or supplemented, if applicable, as of the date of the Dakota SEC Report or
amendment became effective, did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
III.21 Information in Disclosure Documents. None of the information with respect
to any Dakota Group Member to be included or incorporated by reference in the
Joint Proxy/ Registration Statement will (a) at the respective times such
documents are filed with the SEC and (b)(1) in the case of the Joint Proxy
Statement or any amendments thereof or supplements thereto and at the time of
the mailing of the Joint Proxy Statement and any amendments or supplements
thereto, at the times of the Dakota Shareholders' Meeting and the USMX
Stockholders' Meeting or (2) in the case of the Registration Statement or any
amendments thereof or supplements thereto, at the time it becomes effective and
at the Effective Time, 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, or necessary to correct any statement in any earlier
filing with the SEC of the Joint Proxy/Registration Statement or any amendment
thereof or supplement thereto or any earlier communication to stockholders of
USMX or shareholders of Dakota with respect to the Transactions; provided,
however, that this provision shall not apply to statements or omissions in the
Joint Proxy/Registration Statement based upon information furnished by USMX for
use therein. The Joint Proxy Statement will comply as to form in all material
respects with the applicable provisions of the Exchange Act and the Securities
Act relating to the Dakota Shareholders' Meeting and the issuance of the Dakota
Shares.
III.22 No Knowledge of Breach of Representations and Warranties of USMX. Neither
Dakota nor Merger Corp has no knowledge of any breach by USMX of any of the
representations and warranties contained in Article II.
ARTICLE IV
NO OTHER REPRESENTATIONS AND WARRANTIES
IV.1 No Other Representations and Warranties. None of USMX, Dakota, or Merger
Corp shall be deemed to have made to any Party, or any of their respective
Affiliates, any representation or warranty other than as expressly made in
Article II or Article III, respectively (as such representations and warranties
are supplemented by the Exhibits relating thereto).
IV.2 Projections, Etc. Without limiting the generality of the foregoing, but
subject to the express representations and warranties made by USMX in Article II
and by Dakota and Merger Corp in Article III, none of USMX, Dakota, or Merger
Corp makes any representation and warranty to any Party, or any of their
respective Affiliates, with respect to the following:
(a) any projections, estimates, or budgets heretofore delivered to or made
available to any Party, or any of their respective Affiliates or Advisers, of
future revenues, expenses, or expenditures, results of operations (or any
component thereof) or financial condition (or any component thereof) or business
and operations; or
(b) any other information or documents made available to any Party, or any
of their respective Affiliates or Advisers, with respect to business and
operations, except to the extent that such information or documents are set
forth, disclosed, or described on, or attached to, any Exhibit hereto; however,
certain matters disclosed on any Exhibit hereto may not be required to be
disclosed therein, but may be stated therein for information purposes only, and
no such disclosure shall constitute an indication or admission of the
materiality thereof or create a standard of disclosure, and no representation or
warranty is shall be deemed to have been made by reason of the inclusion of such
matters.
ARTICLE V
USMX COVENANTS
From and after the date hereof and until the Closing Date (except as hereinafter
otherwise provided), unless Dakota and Merger Corp shall otherwise agree in
writing:
V.1 Access. USMX shall permit, and shall cause each USMX Group Member to permit:
(a) Dakota, Merger Corp, and their Advisers to have reasonable access to
all properties, books, accounts, records, Contracts, files, correspondence, tax
records, and documents of or relating to the USMX Group, and to discuss such
matters with the executive officers of the USMX Group; USMX shall make available
to Dakota, Merger Corp, and their Advisers a copy of each report filed with the
SEC and all other information concerning its business and properties as Dakota
may reasonably request;
(b) Dakota and Merger Corp, at their sole cost and expense, to conduct, or
cause its agents to conduct, such reasonable reviews, inspections, surveys,
tests, and investigations of the assets of the USMX Group as Dakota or Merger
Corp deems necessary or advisable;
(c) Dakota, Merger Corp, and their Advisers to consult with the accountants
for the USMX Group, and said accountants are hereby authorized to disclose all
information in their possession to Dakota, Merger Corp, and their Advisers with
respect to the USMX Group and the businesses thereof; and
(d) Dakota, Merger Corp, and their Advisers to discuss the proposed Merger
with the employees of the USMX Group; provided that representatives of USMX may
be present during any such discussions (except that Dakota and Merger Corp shall
be free to have discussions with those persons permitted pursuant to Section
5.1(c) without representatives of USMX being present) and provided that such
discussions are coordinated with representatives of USMX as to the content of
such proposed discussions to assure that such discussions do not interfere
unreasonably with the business and operations of any USMX Group Member or harm
the relationship which any USMX Group Member has with its employees;
provided, however, any investigation pursuant to this Section shall be conducted
in such manner as not to interfere unreasonably with the businesses and
operations of the USMX Group.
V.2 Ordinary Course. Except as set forth in Exhibit 5.2, and except for any
actions required to be performed by USMX or otherwise permitted pursuant to this
Agreement, USMX shall (and shall cause each USMX Group Member to) conduct its
business only in the ordinary and usual course in all material respects and use
all reasonable efforts to preserve its business organizations intact and its
existing relations with customers, suppliers, employees, and business
associates, and USMX shall not (and shall cause each USMX Group Member not to)
do any of the following:
(a) sell or pledge or agree to sell or pledge any capital
stock owned by it in any of its Subsidiaries;
(b) amend its Certificate of Incorporation (or like charter
documents) or By-laws;
(c) subdivide, split, combine, consolidate, or reclassify
any of its outstanding shares of capital stock;
(d) declare, set aside or pay any dividend or make any other distribution
payable in cash, shares, stock, securities or property with respect to any of
its shares of capital stock;
(e) repurchase, redeem, or otherwise acquire, directly or indirectly, any
of its capital stock or any securities convertible into or exchangeable or
exercisable into any of its capital stock;
(f) enter into any material transaction not in the ordinary
course of its business consistent with past practice;
(g) issue, sell, pledge, dispose of, or encumber, or authorize or propose
the issuance, sale, pledge, disposition, or encumbrance of, any of its capital
stock, or any securities convertible into or exchangeable or exercisable for, or
options, puts, warrants, calls, commitments or rights of any kind to acquire,
any of its shares of capital stock other than debentures or notes convertible
into USMX Shares as contemplated in clause (h) below or USMX Shares issuable
pursuant to securities convertible into USMX Shares outstanding on the date
hereof;
(h) transfer, lease, license, sell, mortgage, pledge, encumber, or dispose
of any property or assets or incur, guarantee, assume, or modify any
indebtedness or other liability other than in the ordinary and usual course of
business consistent with past practice, other than convertible debentures or
notes issued by USMX or other indebtedness incurred by USMX in an aggregate
principal amount of up to US$3 Million on terms and conditions acceptable to
Dakota, acting reasonably;
(i) authorize capital expenditures other than in the
ordinary and usual course of business consistent with past
practice;
(j) make any material acquisition of, or investment in, assets, shares,
capital stock or other securities of any other person or entity other than its
wholly-owned Subsidiaries or in the ordinary and usual course of business
consistent with past practice;
(k) except as may be required to satisfy contractual obligations existing
as of the date hereof and the requirements of applicable Law, establish, adopt,
enter into, make, amend in any material respect, or make any material elections
under any collective bargaining agreement or Employee Plan;
(l) implement any change in its accounting principles,
practices, or methods, other than as may be required by generally
accepted accounting principles; and
(m) authorize or enter into any agreement to take any of
the actions referred to in this Section.
V.3 Representations and Warranties. USMX shall, and shall cause each USMX Group
Member to, refrain from doing, or causing to be done, anything which would cause
the representations and warranties set forth in Article II from being true,
complete, and accurate in all material respects on the Closing Date as if made
on such date (except to the extent that such representations and warranties are,
by their terms, made expressly as of the date of this Agreement).
V.4 Insurance. USMX shall use best efforts to continue to insure the USMX Group
and all property, real and personal, owned or leased by any USMX Group Member
substantially in accordance with the manner set forth in Exhibit 2.6, and to
use, operate, maintain, and repair all property in accordance with prior
practice.
V.5 No Breach. USMX shall, and shall cause the USMX Group Members to, refrain
from doing any act or omitting to do any act, or permitting any act or omission
to act, which will cause a material breach of any Contract or this Agreement.
V.6 Financial Statements. USMX shall furnish to Dakota within 30 days after the
end of each fiscal month ending after the date hereof an unaudited consolidated
and consolidating balance sheet and income statement of the USMX Group for each
such period.
V.7 Litigation. USMX shall promptly notify Dakota in writing of any action,
written investigation, claim, action, suit, or proceeding which is commenced
against, by or relating to any USMX Group Member or this Agreement before any
court or Governmental department, commission, board, bureau, agency, or
instrumentality.
V.8 Closing Conditions. USMX shall use best efforts to cause all of the
conditions to the obligations of Dakota and Merger Corp under this Agreement to
be satisfied on or prior to the Closing Date (to the extent the satisfaction of
such conditions is within the control of the USMX Group).
V.9 Contracts. USMX shall use best efforts to cause the USMX Group to consult
with Dakota prior to entering into any Contract not in the ordinary course of
business.
V.10 USMX Stockholders' Approval. The board of directors of USMX shall call a
stockholders' meeting ("USMX Stockholders' Meeting") to be held at the earliest
practicable date following delivery of the Joint Proxy Statement to the USMX
stockholders for the purpose of voting on the adoption of this Agreement and the
Transactions as required by the GCL and, to the extent applicable, the Nasdaq
National Market System. USMX shall use its best efforts to obtain its
stockholders' approval of the foregoing, including without limitation
specifically recommending that its stockholders vote to approve the foregoing;
provided, however, that in the event of a third-party offer (which USMX shall
not encourage or solicit), and in all other instances, USMX shall be free, with
respect to its recommendation, to exercise its fiduciary duties to its
stockholders.
V.11 Rule 145 Affiliates. Prior to the Effective Time, USMX shall cause to be
delivered to Dakota a list identifying all persons who might, at the time of the
meeting of the USMX Stockholders' Meeting, be deemed to be Securities Act
Affiliates of USMX. USMX shall use its reasonable efforts to cause each person
who is identified as a possible Securities Act Affiliate to enter into prior to
the Effective Time an agreement in the form attached hereto as Exhibit 5.11
pursuant to which each such Person acknowledges its responsibilities as such a
Securities Act Affiliate.
V.12 No Shop.
(a) From and after the date hereof until the Closing Date, USMX shall not,
and shall use its best efforts to ensure that no other USMX Group Member or
their respective directors do not, and shall not permit the respective officers,
employees, representatives, and other Advisors of the USMX Group to, directly or
indirectly, (1) solicit, initiate, or engage in discussions or negotiations with
any person, encourage submission of any inquiries, proposals, or offers by, or
take any other action intended or designed to facilitate the efforts of any
person, other than Dakota, relating to the possible acquisition of, or business
combination with, USMX or any of its Subsidiaries (whether by way of merger,
consolidation, take-over bid, tender offer, purchase of shares, purchase of
assets, or otherwise) or any material portion of its or their shares of capital
stock or assets (with any such efforts by any such person, including a firm
proposal to make such an acquisition or combination, herein referred to as a
"Competing Transaction"), (2) provide non-public information with respect to
USMX or any USMX Group Member, or afford any access to the properties, books, or
records of the same, to any Person, other than Dakota, relating to a possible
Competing Transaction by any person other than Dakota, (3) make or authorize any
statement, recommendation, or solicitation in support of any possible Competing
Transaction by any Person other than by Dakota, or (4) enter into an agreement
with any person, other than Dakota, providing for a possible Competing
Transaction. The USMX Group and their respective directors, officers, employees,
representatives, and other Advisors shall immediately cease any and all
activities, discussions, or negotiations with any parties conducted heretofore
with respect to any of the foregoing.
(b) Notwithstanding paragraph (a) above, prior to the approval of the
Merger by the holders of USMX Shares, nothing contained in this Section shall
prevent the Board of Directors of USMX (or its agents pursuant to its
instructions) from (1) engaging in discussions or negotiations with (but not
soliciting or initiating such discussions or negotiations or encouraging
inquiries from) a party concerning an unsolicited proposal for a Competing
Transaction, (2) providing non-public information with respect to the USMX Group
that has previously been provided to Dakota, or (3) making any statement or
recommendation in support of any Competing Transaction, in each case if the USMX
Board of Directors first determines in good faith, after consultation with and
receiving written advice from its outside legal counsel (which advice need not
constitute an opinion), that such action is required by reason of the fiduciary
duties of the directors of USMX to the USMX stockholders under applicable Law;
provided that in each such event USMX first notifies Dakota of such
determination and provides Dakota with the fact that it is furnishing
information to, or entering into discussions or negotiations with, a person or
entity, and USMX keeps Dakota informed of the status of any such discussions or
negotiations. If USMX or any USMX Group Member receives any unsolicited offer or
proposal to enter negotiations relating to a Competing Transaction, USMX shall
immediately notify Dakota thereof. USMX shall be responsible for any breach of
this Section by any USMX Group Member or any of their respective directors,
officers, employees, representatives, or other Advisors or Affiliates.
(c) Dakota may, in its sole discretion, prior to the holding of USMX
Stockholders' Meeting, amend the terms of this Agreement to increase the
consideration payable to holders of USMX Shares pursuant thereto, by delivering
such amended terms to USMX before the holding of such meeting, provided that
such amendment shall not materially delay the consummation of the Merger.
(d) Notwithstanding any other provisions hereof, USMX shall not (1) enter
into a Competing Transaction until at least (A) ten Business Days following the
first notification by USMX to Dakota that it has entered into discussions with a
third party in respect of such Competing Transaction and (B) five Business Days
following delivery of written notice by USMX to Dakota of the identity of the
parties to and the terms and conditions of such Competing Transaction or (2) for
a period of ten Business Days following termination of this Agreement pursuant
to Section 11.2 hereof, grant or agree to grant to any third party, in
connection with a Competing Transaction, an option to purchase treasury
securities or assets of USMX or any USMX Group Member, pay or agree to pay to
any such third party, termination, expense reimbursement, "topping" or similar
fees in the event of non- consummation of such Competing Transaction or
otherwise commit to any inducement to any such third party.
V.13 Cooperation. USMX shall, and shall use its best efforts to cause the USMX
Group to, cooperate with Dakota in all reasonable respects in connection with
the transaction described in Section 10.10 (including preparation and filing of
preliminary and final prospectuses in Canada in connection therewith).
ARTICLE VI
DAKOTA'S AND MERGER CORP'S COVENANTS
From and after the date hereof and until the Closing Date (except as hereinafter
otherwise provided), unless USMX shall otherwise agree in writing:
VI.1 Access. Dakota and Merger Corp shall permit, and shall cause each Dakota
Group Member to permit:
(a) USMX and its Advisers to have reasonable access to all properties,
books, accounts, records, Contracts, files, correspondence, tax records, and
documents of or relating to the Dakota Group and to discuss such matters with
the executive officers of the Dakota Group; Dakota shall make available to USMX
and its Advisers a copy of each report filed with the SEC and all other
information concerning its business and properties as USMX may reasonably
request;
(b) USMX, at its sole cost and expense, to conduct, or cause its agents to
conduct, such reasonable reviews, inspections, surveys, tests, and
investigations of the assets of the Dakota Group as USMX deems necessary or
advisable;
(c) USMX and its Advisers to consult with the accountants for the Dakota
Group, and said accountants are hereby authorized to disclose all information in
their possession to USMX and its Advisers with respect to the Dakota Group and
the businesses thereof; and
(d) USMX and its Advisers to discuss the proposed Merger with the employees
of the Dakota Group; provided that representatives of Dakota and Merger Corp may
be present during any such discussions (except that USMX shall be free to have
discussions with those persons permitted pursuant to Section 6.1(c) without
representatives of Dakota or Merger Corp being present), and provided that such
discussions are coordinated with representatives of Dakota or Merger Corp as to
the content of such proposed discussions to assure that such discussions do not
interfere unreasonably with the business and operations of any Dakota Group
Member or harm the relationship which any Dakota Group Member has with its
employees;
provided, however, any investigation pursuant to this Section shall be conducted
in such manner as not to interfere unreasonably with the businesses and
operations of the Dakota Group.
VI.2 Ordinary Course. Except as set forth in Exhibit 6.2, and except for any
actions required to be performed by Dakota or Merger Corp or otherwise permitted
pursuant to this Agreement, Dakota shall (and shall cause each Dakota Group
Member to) conduct its business only in the ordinary and usual course in all
material respects and use all reasonable efforts to preserve its business
organizations intact and its existing relations with customers, suppliers,
employees, and business associates, and Dakota shall not (and shall cause each
Dakota Group Member not to) do any of the following:
(a) sell or pledge or agree to sell or pledge any capital
stock owned by it in any of its Subsidiaries;
(b) amend its Certificate of Incorporation (or like charter
documents) or By-laws;
(c) subdivide, split, combine, consolidate, or reclassify
any of its outstanding shares of capital stock;
(d) declare, set aside or pay any dividend or make any other distribution
payable in cash, shares, stock, securities or property with respect to any of
its shares of capital stock;
(e) repurchase, redeem, or otherwise acquire, directly or indirectly, any
of its capital stock or any securities\convertible into or
exchangeable or exercisable into any of its capital stock;
(f) enter into any material transaction not in the ordinary
course of its business consistent with past practice;
(g) issue, sell, pledge, dispose of, or encumber, or authorize or propose
the issuance, sale, pledge, disposition, or encumbrance of, any of its capital
stock, or any securities convertible into or exchangeable or exercisable for, or
options, puts, warrants, calls, commitments or rights of any kind to acquire,
any of its shares of capital stock other than Dakota Shares or securities
directly or indirectly convertible into or exchangeable or exercisable for
Dakota Shares in connection with the offering referenced in Section 9.7;
(h) transfer, lease, license, sell, mortgage, pledge, encumber, or dispose
of any property or assets or incur, guarantee, assume, or modify any
indebtedness or other liability other than in the ordinary and usual course of
business consistent with past practice, other than convertible debentures or
notes issued by Dakota in connection with the offering referenced in Section
9.7;
(i) authorize capital expenditures other than in the
ordinary and usual course of business consistent with past
practice;
(j) make any material acquisition of, or investment in, assets, shares,
capital stock or other securities of any other person or entity other than its
wholly-owned Subsidiaries or in the ordinary and usual course of business
consistent with past practice;
(k) except as may be required to satisfy contractual obligations existing
as of the date hereof and the requirements of applicable Law, establish, adopt,
enter into, make, amend in any material respect, or make any material elections
under any collective bargaining agreement or Employee Plan;
(l) implement any change in its accounting principles,
practices, or methods, other than as may be required by generally
accepted accounting principles; and
(m) authorize or enter into any agreement to take any of
the actions referred to in this Section.
VI.3 Representations and Warranties. Dakota shall, and shall cause each Dakota
Group Member to, refrain from doing, or causing to be done, anything which would
cause the representations and warranties set forth in Article III from being
true, complete, and accurate in all material respects on the Closing Date as if
made on such date (except to the extent that such representations and warranties
are, by their terms, made expressly as of the date of this Agreement).
VI.4 No Breach. Dakota shall, and shall cause the Dakota Group Members to,
refrain from doing any act or omitting to do any act, or permitting any act or
omission to act, which will cause a material breach of any Contract or this
Agreement.
VI.5 Financial Statements. Dakota shall furnish to USMX within 30 days after the
end of each fiscal month ending after the date hereof an unaudited consolidated
and consolidating balance sheet and income statement of the Dakota Group for
each such period.
VI.6 Litigation. Dakota shall promptly notify USMX in writing of any action,
written investigation, claim, action, suit, or proceeding which is commenced
against, by or relating to any Dakota Group Member or this Agreement before any
court or Governmental department, commission, board, bureau, agency, or
instrumentality.
VI.7 Closing Conditions. Dakota and Merger Corp shall use best efforts to cause
all of the conditions to the obligations of USMX under this Agreement to be
satisfied on or prior to the Closing Date (to the extent the satisfaction of
such conditions is within the control of the Dakota Group).
VI.8 Contracts. Dakota shall use best efforts to cause the Dakota Group to
consult with USMX prior to entering into any Contract not in the ordinary course
of business.
VI.9 Dakota Shareholders' Approval. The board of directors of Dakota shall call
a shareholders' meeting ("Dakota Shareholders' Meeting") to be held at the
earliest practicable date following delivery of the Joint Proxy Statement to the
Dakota shareholders for the purpose of voting on the adoption of this Agreement
and the Transactions as required by The Toronto Stock Exchange. Dakota shall use
its best efforts to obtain its shareholders' approval of the foregoing,
including without limitation specifically recommending that its shareholders
vote to approve the foregoing; provided, however, that in the event of a
third-party offer (which Dakota shall not encourage or solicit), Dakota shall be
free, with respect to its recommendation, to exercise its fiduciary duties to
its shareholders.
VI.10 Stock Listing. Dakota shall cause the Dakota Shares to be issued in
connection with the Merger to be listed on The Toronto Stock Exchange and the
American Stock Exchange.
VI.11 Line of Credit. Dakota shall provide a line of credit to USMX on the terms
and subject to the conditions set forth in Exhibit 6.11 on or prior to February
21, 1997, provided, however, Dakota shall not be required to provide such line
of credit unless (a) the definitive agreements between USMX and Pegasus Gold
Corp., in form and substance acceptable to Dakota, with respect to the
disposition described in Section 8.8 have been executed and delivered and (b)
with respect to the offering described in Section 9.7, Canaccord Capital
Corporation has consented to the release of US$5 million from escrow to Dakota.
If Dakota has not provided such line of credit to USMX on or prior to February
21, 1997, USMX may terminate this Agreement upon written notice to Dakota;
provided, however, USMX may not terminate this Agreement pursuant to the
foregoing if Dakota, USMX, and NM Rothschild & Sons Limited are in agreement
(which may include oral agreement to the reasonable satisfaction of USMX) on all
material terms and conditions of such line of credit at February 21, 1997, and
each such party thereafter is using and continues to use reasonable efforts to
document such agreement in an extremely expeditious manner with no material
change to the material terms and conditions of such line of credit; and provided
further that USMX may not terminate this Agreement pursuant to the foregoing
once the line of credit has been consummated.
VI.12 Employee Benefit Plans. Each of the Parties agrees to use its reasonable
efforts to coordinate the conversion or merger of any employee benefit plans of
USMX into Dakota plans, to the extent that such plans may exist, to provide any
and all employees of the USMX Group who become employees of the Dakota Group
with the same employee benefits uniformly offered to employees of such Dakota
Group Member. Dakota shall use its best efforts to ensure that any and all
employees of the USMX Group who become employees of the Dakota Group are not
subject to any pre-existing condition requirement under Dakota's medical
insurance plan.
VI.13 Indemnification; Directors' and Officers' Insurance.
(a) In the event of any threatened or actual claim, action, suit,
proceeding, or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding, or
investigation in which any person who is now, or has been at any time prior to
the date of this Agreement, a director or officer of any USMX Group Member (for
purposes of this Section the "Indemnified Parties") is, or is threatened to be,
made a party based in whole or in part on, or arising in whole or in part out
of, or pertaining to (1) the fact that he is or was a director or officer of any
USMX Group Member or any of their respective predecessors or is or was serving
at the request of any such party as a director, officer, employee, fiduciary, or
agent of another corporation, partnership, trust or other enterprise, or (2)
this Agreement or any of the transactions contemplated hereby, whether in any
case asserted or arising before or after the Effective Time, the appropriate
Dakota Group Member will after the Effective Time cooperate and use its best
efforts to defend against and respond thereto. It is understood and agreed that
after the Effective Time, the appropriate Dakota Group Member shall indemnify
and hold harmless (as and to the full extent permitted by applicable Law and to
the full extent USMX would have been required to indemnify such Indemnified
Party had such claim, action, suit, proceeding, or investigation been finally
determined prior to the Effective Time) each such Indemnified Party against any
Liability or Penalty in connection with any such threatened or actual claim,
action, suit, proceeding, or investigation, and shall advance reasonable
litigation expenses incurred by Indemnified Parties, and in the event of any
such threatened or actual claim, action, suit, proceeding, or investigation
(whether asserted or arising before or after the Effective Time), the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with Dakota; provided, however, (A) the indemnifying entity shall
have the right to assume the defense thereof and upon such assumption the
appropriate Dakota Group Member shall not be liable to any Indemnified Party for
any legal expenses of other counsel or any other expenses subsequently incurred
by any Indemnified Party in connection with the defense thereof, except that if
the indemnifying entity elects not to assume such defense or counsel for the
Indemnified Parties reasonably advises that there are issues which raise
conflicts of interest between the indemnifying entity and the Indemnified
Parties, the Indemnified Parties may retain counsel reasonably satisfactory to
them after consultation with Dakota, and the indemnifying entity shall pay the
reasonable fees and expenses of such counsel for the Indemnified Parties, (B)
the indemnifying entity shall be obligated pursuant to this paragraph to pay for
only one firm of counsel for all Indemnified Parties, (C) the indemnifying
entity shall not be liable for any settlement effected without its prior written
consent, and (D) the indemnifying entity shall have no obligation hereunder to
any Indemnified Party when and if a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and
nonappealable, that indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable Law. Any Indemnified Party
wishing to claim Indemnification under this Section, upon learning of any such
claim, action, suit, proceeding or investigation, shall notify Dakota thereof,
provided that the failure to so notify shall not affect the obligations of the
indemnifying entity under this Section except to the extent such failure to
notify materially prejudices such indemnifying entity. The obligations under
this Section shall continue in full force and effect for a period of six years
from the Effective Time; provided, however, that all rights to indemnification
in respect of any claim asserted or made within such period shall continue until
the final disposition of such claim.
(b) Dakota shall use commercially reasonable efforts to cause the persons
serving as officers and directors of USMX immediately prior to the Effective
Time to be covered for a period of six years from the Effective Time by the
directors' and officers' liability insurance policy currently maintained by the
Dakota Group with respect to acts or omissions occurring prior to the Effective
Time which were committed by such officers and directors in their capacity as
such; provided that in no event shall Dakota or any Dakota Group Member be
required to obtain any new or additional directors' and officers' liability
insurance policies to accomplish the foregoing.
(c) In the event Dakota or any of its successors or assigns (1)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (2) transfers or conveys all or substantially all of its properties and
assets to any Person, then, and in each such case, to the extent necessary to
effectuate the purposes of this Section, Dakota shall use commercially
reasonable efforts to make proper provision so that the successors and assigns
of Dakota assume the obligations set forth in this Section.
(d) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
VI.14 Assumption of Existing Agreements Relating to
Employment.
(a) Following the Effective Time, the Surviving Corporation shall honor in
accordance with their terms all employment, severance, stock option, and other
compensation agreements and arrangements existing prior to the execution of this
Agreement, which are between any USMX Group Member and any director, officer, or
employee thereof and which have been disclosed to Dakota, and to assume all
duties, liabilities, and obligations under such agreements as in effect at the
date of this Agreement.
(b) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, the directors, officers, or employees who are
parties to the agreements and arrangements referred to in such section.
VI.15 USMX Stock Options. At or prior to the Effective Time, Dakota shall take
all corporate action necessary to authorize and reserve for issuance a
sufficient number of Dakota Shares for delivery upon exercise of options to
purchase USMX Shares assumed by it in accordance with Section 1.7. As soon as
practicable after the Effective Time, Dakota shall file a registration statement
on Form S-8 (or any successor or other appropriate forms), or another
appropriate form with respect to the Dakota Shares subject to such options and
shall use its best efforts to maintain the effectiveness of such registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding.
ARTICLE VII
OTHER COVENANTS OF THE PARTIES
VII.1 Consents and Notices. Promptly after the date hereof and, if necessary,
for a reasonable time after the Closing Date:
(a) The Parties shall use their best efforts, and the Parties shall
cooperate with each other, to obtain all consents, waivers, approvals, and
authorizations which may be necessary to effect the Transactions, including
without limitation obtaining those consents, waivers, approvals, and
authorizations described in Exhibits 2.2 and 3.2; provided, however, the
foregoing shall not impose upon any of the Parties any obligation to effect any
payment or to incur any further or additional Liability to any third party in
order to obtain any such consent, waiver, approval, or authorization.
(b) The Parties and their Affiliates shall give all notices to third
parties and make all Governmental filings required to be given or made by the
Parties and their Affiliates in contempla tion of, and as a result of, the
Transactions, including without limitation those notices described in Exhibits
2.2 and 3.2.
VII.2 Joint Proxy/Registration Statement.
(a) The Parties shall jointly prepare and file with the SEC as soon as
reasonably practicable after the date hereof (1) a Registration Statement on
Form S-4 to be filed under the Securities Act by Dakota in connection with the
Merger for purposes of registering Dakota Shares to be issued in the Merger (the
"Registration Statement") and (2) a joint proxy statement and management
information circular to be filed under the Exchange Act by Dakota and USMX to be
distributed by Dakota and USMX, respectively, in connection with the Dakota
Shareholders' Meeting and USMX Stockholders' Meeting (the "Joint Proxy
Statement" and, together with the Registration Statement, the "Joint
Proxy/Registration Statement"). USMX shall cooperate with Dakota and both USMX
and Dakota shall use all reasonable efforts to cause the Registration Statement
to be declared effective under the Securities Act as promptly as practicable
after such filing. Dakota and USMX shall use all reasonable efforts to take any
action required to cause Dakota Shares issuable pursuant to the Merger to be
registered or to obtain an exemption from registration under applicable
provincial, state, or foreign "blue sky" or securities laws. Dakota and Merger
Corp will furnish to USMX and USMX shall furnish to Dakota and Merger Corp all
information concerning itself as each Party or its Advisors may reasonably
request and which is required or customary for inclusion in the Joint
Proxy/Registration Statement.
(b) Dakota and Merger Corp covenant to USMX that the Joint Proxy/
Registration Statement (1) will comply as to form in all material respects with
the applicable provisions of the Exchange Act and the Securities Act relating to
the Dakota Shareholders' Meeting and the issuance of the Dakota Shares and (2)
will not (A) at the respective times such documents are filed with the SEC, (B)
in the case of the Joint Proxy Statement and any amendments thereof or
supplements thereto, at the time of the Dakota Shareholders' Meeting and USMX
Stockholders' Meeting, and (C) in the case of the Registration Statement and any
amendment thereof or any supplement thereto, at all times after it becomes
effective under the Securities Act and at the Effective Time, 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 were made, not misleading, or necessary to
correct any statement in any earlier filing with the SEC of such Joint
Proxy/Registration Statement or any amendment thereof or any supplement thereto
or any earlier communication to shareholders of Dakota or stockholders of USMX
with respect to the Transactions; provided, however, that no representation,
covenant, or agreement is made by Dakota or Merger Corp with respect to
information supplied by USMX for inclusion in the Joint Proxy/ Registration
Statement.
(c) Dakota covenants to USMX, and USMX covenants to Dakota and Merger Corp,
that all filings required by Law to be made by Dakota or USMX, as applicable, in
the various jurisdictions in Canada shall be made in connection with the Joint
Proxy/Registration Statement.
(d) USMX covenants to Dakota and Merger Corp that the Joint Proxy Statement
and Registration Statement (1) will comply as to form in all material respects
with the applicable provisions of the Exchange Act and the Securities Act
relating to the USMX Stockholders' Meeting and the issuance of the Dakota Shares
and (2) will not (A) at the respective times such documents are filed with the
SEC, (B) in the case of the Joint Proxy Statement or any amendments thereof or
supplements thereto, at the time of the Dakota Shareholders' Meeting and USMX
Stockholders' Meeting, and (C) in the case of the Registration Statement and any
amendment thereof or any supplement thereto, at all times after it becomes
effective under the Securities Act and at the Effective Time, 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 were made, not misleading, or necessary to
correct any statement in any earlier filing with the SEC of such Joint
Proxy/Registration Statement or any amendment thereof or any supplement thereto
or any earlier communication to shareholders of Dakota or stockholders of USMX
with respect to the Transactions; provided, however, that no representation,
covenant, or agreement is made by USMX with respect to information supplied by
any Person other than USMX or its Affiliate and Advisors for inclusion in the
Joint Proxy Statement and Registration Statement.
(e) USMX shall cause to be delivered to Dakota a letter of KPMG Peat
Marwick LLP or other nationally recognized certified public accounting firm,
dated the date of the Joint Proxy/Registration Statement, and addressed to
Dakota and Merger Corp, in form and substance satisfactory to Dakota (with such
changes to which Dakota shall consent, it being understood that such consent
shall not be unreasonably withheld) relating to the independence of such
certified public accountants with respect to the USMX Group, compliance with the
form requirements of the financial statements of USMX, and as to the procedures
of the financial statements of the USMX Group.
(f) Dakota shall cause to be delivered to USMX a letter of KPMG or other
nationally recognized certified public accounting firm, dated the date of the
Joint Proxy/Registration Statement, and addressed to USMX, in form and substance
satisfactory to USMX (with such changes to which USMX shall consent, it being
understood that such consent shall not be unreasonably withheld) relating to the
independence of such certified public accountants with respect to the Dakota
Group, compliance with the form requirements of the financial statements of the
Dakota Group, and as to the procedures of the financial statements of the Dakota
Group.
(g) It shall be a condition to the mailing of the Joint Proxy Statement to
the shareholders of Dakota and the stockholders of USMX that Dakota and USMX
shall independently have received opinions of Canaccord Capital Corporation and
Newcrest Capital Corp., respectively, dated the mailing date of the Joint Proxy
Statement, to the effect that, as of the date thereof, the conversion ratio set
forth in Section 1.5 is fair from a financial point of view to the shareholders
of Dakota and the stockholders of USMX, respectively.
VII.3 Support Agreements. The Parties shall use their best
efforts to procure from Pegasus Gold Inc. a Support Agreement
substantially in the form of Exhibit 7.3.
VII.4 Confidentiality. Prior to the Effective Time and for one year from any
termination of this Agreement, each of the parties hereto will hold, and will
use commercially reasonable efforts to cause its respective officers, directors,
employees, and Advisors to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of Law, all
confidential documents and information concerning the other Party furnished to
such Party by such other Party in connection with the Transactions, except to
the extent that such information can be shown to have been (a) previously known
on a nonconfidential basis by such Party, (b) in the public domain through no
fault of such Party, or (c) later acquired by such Party from sources other than
such other Party so long as, to the knowledge of such Party, such sources are
not subject to a contractual or fiduciary duty of confidentiality with respect
to such information; provided that such Party may disclose such information to
its officers, directors, employees, and Advisors in connection with the
Transactions so long as such persons are informed by such Party of the
confidential nature of such information and are directed by such Party to treat
such information confidentially. The obligations of the parties hereto to hold
any such information in confidence shall be satisfied if it exercises the same
care with respect to such information a it would take to preserve the
confidentiality of its own similar information. If this Agreement is terminated,
each of the parties hereto will, and will use its best efforts to cause its
officers, directors, employees, and Advisors to, destroy or deliver to the other
Party all documents and other materials, and all copies thereof, obtained by
such Party from such other Party in connection with the Transactions that are
subject to such confidence.
VII.5 Press Releases. Before issuing any press release or otherwise making any
public statements with respect to the Transactions, Dakota and Merger Corp, on
the one hand, and USMX, on the other hand, shall consult with each other and
shall undertake reasonable efforts to agree upon the terms of such press
release, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
Law or by obligations pursuant to any listing agreement with any stock exchange
or national securities exchange.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF DAKOTA AND MERGER CORP
The obligations of Dakota and Merger Corp to consummate the Transactions are
subject to the satisfaction of the following conditions on or prior to the
Closing Date, each of which may be waived by Dakota and Merger Corp:
VIII.1 Representations and Warranties. The representations and warranties of
USMX set forth in Article II shall be true and correct in all material respects
as of the date hereof and on the Closing Date as if made on the Closing Date,
except to the extent that such representations and warranties are, by their
terms, made expressly as of the date of this Agreement.
VIII.2 Compliance with Covenants. USMX shall have performed and complied in all
material respects with all covenants and agreements required by this Agreement
to be performed or complied with by USMX prior to or on the Closing Date.
Without limiting the generality of the foregoing, it shall be a further
condition to the obligations of Dakota and Merger Corp that the USMX Group shall
have taken, and shall not have failed to have taken, such actions in all
material respects as USMX shall have covenanted in Articles V and VII to use
best efforts to cause the USMX Group to take or to refrain from taking.
VIII.3 Opinion of Counsel. Dakota and Merger Corp shall have received the
opinion of Bearman Talesnick & Clowdus dated the Closing Date in form and
substance reasonably acceptable to the Parties.
VIII.4 No Material Adverse Change. There shall not have occurred any Material
Adverse Change since December 31, 1996 in the results of operations or financial
condition of the USMX Group (taken as a whole) from that reflected in the
Interim USMX Financial Statements.
VIII.5 Other Matters. USMX shall have furnished, or caused to be furnished, to
Dakota and Merger Corp, in form and substance reasonably satisfactory to Dakota
and Merger Corp, such certificates and other evidence as Dakota and Merger Corp
may have reasonably requested as to the satisfaction of the conditions contained
in this Article and as to such other matters as Dakota and Merger Corp may
reasonably request.
VIII.6 Consents. The consents, waivers, approvals, and authorizations expressly
designated in Exhibits 2.2 and 3.2 as required to be obtained as a condition to
closing shall have been obtained.
VIII.7 Accountant's Bring-Down Letter. Dakota and Merger Corporation shall have
received a letter from the certified public accountants referred to in Section
7.2(e), dated the Closing Date, confirming and updating the information
contained in their letter delivered pursuant to Section 7.2(e) to a date not
more than five Business Days prior to the Closing Date.
VIII.8 Montana Tunnel. USMX and Pegasus Gold Inc. shall have
entered into an agreement in form and substance satisfactory to
Dakota with respect to the disposition of USMX's royalty interest
in the Montana Tunnels properties.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF USMX
The obligations of USMX to consummate the Transactions are subject to the
satisfaction of the following conditions on or prior to the Closing Date, each
of which may be waived by USMX:
IX.1 Representations and Warranties. The representations and warranties of
Dakota and Merger Corp set forth in Article III shall be true and correct in all
material respects as of the date hereof and on the Closing Date as if made on
the Closing Date, except to the extent that such representations and warranties
are, by their terms, made expressly as of the date of this Agreement.
IX.2 Compliance with Covenants. Dakota and Merger Corp shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by Dakota or Merger Corp prior
to or on the Closing Date. Without limiting the generality of the foregoing, it
shall be a further condition to the obligations of USMX that the Dakota Group
shall have taken, and shall not have failed to have taken, such actions in all
material respects as Dakota or Merger Corp shall have covenanted in Articles VI
and VII to use best efforts to cause the Dakota Group to take or to refrain from
taking.
IX.3 Opinions of Counsel. USMX shall have received the opinions of Parcel,
Mauro, Hultin & Spaanstra, P.C. and McCarthy Tetrault dated the Closing Date in
form and substance reasonably acceptable to the Parties.
IX.4 No Material Adverse Change. There shall not have occurred any Material
Adverse Change since December 31, 1996 in the results of operations or financial
condition of the Dakota Group (taken as a whole) from that reflected in the
Interim Dakota Financial Statements.
IX.5 Other Matters. Dakota and Merger Corp shall have furnished, or caused to be
furnished, to USMX, in form and substance reasonably satisfactory to USMX, such
certificates and other evidence as USMX may have reasonably requested as to the
satisfaction of the conditions contained in this Article and as to such other
matters as USMX may reasonably request.
IX.6 Consents. The consents, waivers, approvals, and authorizations expressly
designated in Exhibits 2.2 and 3.2 as required to be obtained as a condition to
closing shall have been obtained.
IX.7 Accountant's Bring-Down Letter. USMX shall have received a letter from the
certified public accountants referred to in Section 7.2(f), dated the Closing
Date, confirming and updating the information contained in their letter
delivered pursuant to Section 7.2(f) to a date not more than five Business Days
prior to the Closing Date.
ARTICLE X
CONDITIONS TO OBLIGATIONS OF THE PARTIES
The obligations of the Parties to consummate the Transactions are subject to the
satisfaction of the following conditions on or prior to the Closing Date, each
of which may be waived upon the mutual consent of all of the Parties:
X.1 No Adverse Proceedings. On the Closing Date, no action or proceeding shall
be pending involving any Government or other Person or before any court or
administrative body to restrain, enjoin, or otherwise prevent the consummation
of this Agreement or the Transactions or to recover any damages or obtain any
other relief as a result of the Transactions.
X.2 No Termination. This Agreement shall not have been
terminated pursuant to Section 11.2.
X.3 No Injunctions. No temporary restraining order, preliminary injunction, or
permanent injunction or other order preventing the consummation of the
Transactions shall have been issued by any federal, state, or provincial court
(whether domestic of foreign) and remain in effect. The Parties agree to use its
best efforts to have any such injunction or order lifted.
X.4 Support Agreement. Pegasus Gold Inc. shall have entered
into the Support Agreement described in Section 7.3 in form and
substance satisfactory to Dakota and USMX.
X.5 Stock Exchange Approvals. To the extent necessary, this Agreement and the
Transactions shall comply with the requirements of the American Stock Exchange,
The Toronto Stock Exchange, the Berlin Stock Exchange, and the Nasdaq National
Market System.
X.6 Shareholder Approval. This Agreement and the Transactions shall have been
adopted and/or approved by (a) the stockholders of USMX in accordance with the
GCL and USMX's Certificate of Incorporation and By-Laws and (b) the shareholders
of Dakota in accordance with The Toronto Stock Exchange and the Articles of
Incorporation and Bylaws of Dakota.
X.7 SEC Filings. Prior to the first date upon which the Joint Proxy Statement is
mailed to the USMX stockholders and Dakota shareholders, the SEC shall have
declared the Registration Statement effective, and any required approvals of
state securities administrators shall have been obtained and appropriate filings
made. On the Closing Date, no stop order or similar restraining order that has
been entered by the SEC or any state securities administrator shall still be in
effect.
X.8 Tax Letter. Dakota, Merger Corp, and USMX shall have received an opinion
from Coopers & Lybrand L.L.P. dated the Closing Date, based on the appropriate
representations of Dakota, Merger Corp, and USMX, to the effect that no gain or
loss should be recognized by Dakota, Merger Corp, or USMX as a result of the
Merger or, provided that a gain recognition agreement is entered into with the
Internal Revenue Service where appropriate, by the U.S. holders of USMX Shares
as a result their receipt of Dakota Shares in exchange for their USMX Shares as
contemplated herein, and otherwise in form and substance reasonably acceptable
to the Parties.
X.9 Rothschild Loan. The written consent of N M Rothschild & Sons Limited shall
have been obtained in a form acceptable to the Parties.
X.10 Canadian Offering. The aggregate proceeds from the offering by Dakota
described in the letter agreement dated December 23, 1996 between Dakota and
Canaccord Capital Corporation of not less than Cdn.$25 Million shall have been
released from escrow to Dakota or shall be held in escrow subject only to
consummation of the Merger.
X.11 Up-Dating of Exhibits; Election Not to Close.
(a) At least three Business Days prior to the Closing Date, USMX may
deliver to Dakota and Merger Corp, and Dakota and Merger Corp may deliver to
USMX, new or additional Exhibits modifying, qualifying, or supplementing the
representations and warranties contained in Articles II and III, respectively.
Except as provided in the next sentence, such new or additional Exhibits shall
be deemed to have modified the representations and warranties made by USMX and
Dakota or Merger Corp, as applicable, on the date of this Agreement (and as of
the Closing Date) and to have superseded any similarly numbered or named Exhibit
hereto delivered on the date hereof. The foregoing shall not affect the
conditions to the obligations or the covenants of USMX, Dakota, or Merger Corp
contained in Articles V through X, as applicable, as such conditions relate to
such representations and warranties prior to giving effect to the delivery of
such new or additional Exhibits (except, in the case of any representation and
warranty qualified by a reference to "Material Adverse Effect," to the extent
that the additional information furnished pursuant to the new or additional
Exhibits would not in the aggregate have or result in a Material Adverse
Effect), such that if such condition is not satisfied as a result of the
disclosures in such new or additional Exhibits, USMX or Dakota and Merger Corp,
as applicable, may terminate this Agreement in accordance with Section 11.2.
(b) In the event that any of the conditions to the obligations of Dakota
and Merger Corp set forth in Article VIII or this Article, or USMX set forth in
Article IX or this Article, shall not have been satisfied, USMX or Dakota and
Merger Corp, as the case may be, shall advise the other, prior to the Closing
Date, that such conditions are not satisfied, and shall advise the other, prior
to the Closing Date, of the basis on which such Person believes such condition
has not been satisfied.
(c) Without limiting the generality of the foregoing, Dakota and Merger
Corp and USMX shall not be entitled to assert any claim against USMX or Dakota
and Merger Corp, respectively, based on any breach of the representations and
warranties contained in Articles II and III, respectively, based upon the
disclosures made in such new or additional Exhibits pursuant to Section 10.11(a)
or if the non-breaching Party or its Affiliates shall, prior to the Closing,
have had knowledge of such breach.
ARTICLE XI
CLOSING AND TERMINATION
XI.1 Closing. The Closing shall take place at the offices of Parcel, Mauro,
Hultin & Spaanstra, P.C., Suite 3600, 1801 California Street, Denver, Colorado
80202, at 9:00 o'clock a.m. (Denver, Colorado time) (or at such other place and
time as the Parties may otherwise agree), on the Closing Date.
XI.2 Termination of this Agreement.
(a) In the event that the Closing shall not have occurred on or before the
Termination Date, then Dakota and Merger Corp or USMX shall have the right
(provided in each case that such person or persons is not in material breach of
its obligations under this Agreement), exercisable at any time after such date
by notice in writing, to terminate this Agreement and its obligations hereunder.
(b) In the event that, prior to the Termination Date, any Party (the
"Breaching Party") is in material breach of its or their obligations under this
Agreement (and such breach cannot reasonably be expected to be cured by the
Breaching Party prior to the Termination Date, or the Breaching Party is not
taking reasonable efforts to cure such breach, and, in either event, such breach
is not waived), then, so long as any other Party (the "Non-Breaching Party")
entitled to the benefit of such obligations is not in default of its or their
obligations under this Agreement, the Non-Breaching Party shall have the right
to terminate this Agreement (unless such breach is or has been cured prior to
the giving of such notice of termination).
(c) No termination of this Agreement, whether pursuant to this Section or
otherwise, shall terminate or impair any claim by Dakota and Merger Corp against
USMX, or by USMX against Dakota and Merger Corp, based upon any breach by the
other of its obligations under this Agreement if such breach serves as the
principal reason for the failure of the conditions contained in Article VIII,
IX, or X to have been satisfied; subject to Sections 10.11(c) and 11.3.
XI.3 Liquidated Damages. If this Agreement is terminated
consistent with Section 11.2 for the following reasons:
(a) by Dakota, if the Board of Directors of USMX shall have made any
recommendation to the USMX stockholders against the Merger or in support of a
Competing Transaction, or if USMX shall have entered into a Competing
Transaction; or
(b) by USMX, if the Board of Directors of USMX determines in good faith,
after consultation with and receiving written advice from its outside legal
counsel (which advice need not be an opinion), that it is required, by reason of
the fiduciary duties of the directors of USMX to the USMX stockholders under
applicable Law, to recommend to the USMX stockholders that they vote against the
Merger and approve instead a Competing Transaction that the USMX Board of
Directors, has determined in good faith, after consultation with its outside
financial advisors, is financially more favorable to the USMX stockholders than
the Merger (including any adjustment to the terms and conditions of the Merger
proposed by Dakota in response to such Competing Transaction, if any), is the
subject of a firm written offer from a third party that is capable of
consummating such Competing Transaction and is likely to be successful, taking
into account any adjustments proposed by Dakota and the conditions and valid and
binding character of such offer,
then USMX may pay to Dakota (by wire transfer of immediately available funds) a
fee (the "Termination Fee") of US$500,000 within thirty days after the delivery
of the notice of termination in exchange for cancellation of the option, dated
February 5, 1997, granted to Dakota to purchase 810,000 USMX Shares; provided
that USMX shall not be permitted to make such payment if at any time prior to
the making of such payment, Dakota shall have exercised such option and USMX
shall have issued to Dakota the USMX Shares issuable upon such exercise.
The obligations of USMX to pay the Termination Fee are in lieu of any damages or
any other payment which USMX might otherwise be obligated to pay to Dakota as a
result of any termination for which payment is due hereunder. USMX agrees that,
in view of the nature of the issues likely to arise in the event of such a
termination, it would be impracticable or extremely difficult to fix the actual
damages resulting from such termination and proving actual damages, causation
and foreseeability in the case of such termination would be costly, inconvenient
and difficult. In requiring USMX to pay the Termination Fee as set forth herein,
it is in the intent of the parties to provide, as of the date hereof, for a
liquidated amount of damages to be paid by USMX to Dakota. Such liquidated
amount shall be deemed full and adequate damages for such termination and is not
intended by either party to be a penalty.
ARTICLE XII
INDEMNIFICATION
XII.1 Indemnification by USMX.
(a) USMX shall indemnify the Dakota Group against, and hold the Dakota
Group harmless from, at all times after the date hereof, any and all
Indemnifiable Claims incurred, suffered, sustained, or required to be paid by
the Dakota Group resulting from, arising out of, based upon, or in respect of
the following:
(1) any breach of any of the representations or warranties made by
USMX in Article II; provided that to the extent exceptions or qualifications to
such representations and warranties are disclosed to Dakota and Merger Corp in
or on the Exhibits hereto prior to the Closing Date (including as disclosed
pursuant to Section 10.11(a)), such representations and warranties shall not be
deemed to have been breached for purposes of these indemnification provisions;
and
(2) any breach of the covenants made by USMX in or pursuant to this
Agreement, including Articles V and VII.
(b) The Dakota Group shall not be entitled to assert any claim for
indemnification in respect of a breach of any representation and warranty under
Section 12.1(a)(1):
(1) until such time as all Indemnifiable Claims of the Dakota Group
under Section 12.1(a)(1) exceed US$100,000 (the "Basket") in the aggregate, at
which time all Indemnifiable Claims of the Dakota Group under Sections
12.1(a)(1) may be asserted;
(2) if the matter which is the basis of such claim for indemnification
under Section 12.1(a)(1) is subject to a reserve established on the books of the
USMX Group as of the Closing Date, except to the extent that any Indemnifiable
Claims based on such matters exceed such reserves;
(3) in any case, in an aggregate amount in excess of
US$3,500,000.
Except as otherwise set forth herein, claims for indemnification in respect of
breaches of covenants by USMX may be made at any time and from time to time
after the date hereof and shall not be subject to the limitations contained in
the preceding sentence.
XII.2 Indemnification by Dakota and Merger Corp.
(a) Dakota and Merger Corp shall indemnify the USMX Group against, and hold
the USMX Group harmless from, at all times after the date hereof, any and all
Indemnifiable Claims incurred, suffered, sustained, or required to be paid by
the USMX Group resulting from, arising out of, based upon, or in respect of the
following:
(1) any breach of any of the representations or warranties made by
Dakota or Merger Corp in Article III; provided that to the extent exceptions or
qualifications to such representations and warranties are disclosed to USMX in
or on the Exhibits hereto prior to the Closing Date (including as disclosed
pursuant to Section 10.11(a)), such representations and warranties shall not be
deemed to have been breached for purposes of these indemnification provisions;
(2) any breach of the covenants made by Dakota or Merger Corp in or
pursuant to this Agreement, including Articles VI and VII.
(b) The USMX Group shall not be entitled to assert any claim for
indemnification in respect of a breach of any representation and warranty under
Section 12.2(a)(1):
(1) until such time as all Indemnifiable Claims of the Dakota Group
under Section 12.2(a)(1) exceed the Basket in the aggregate, at which time all
Indemnifiable Claims of the USMX Group under Sections 12.2(a)(1) may be
asserted;
(2) if the matter which is the basis of such claim for indemnification
under Section 12.2(a)(1) is subject to a reserve established on the books of the
Dakota Group as of the Closing Date, except to the extent that any Indemnifiable
Claims based on such matters exceed such reserves;
(3) in any case, in an aggregate amount in excess of
US$3,500,000.
Except as otherwise set forth herein, claims for indemnification in respect of
breaches of covenants by Dakota or Merger Corp may be made at any time and from
time to time after the date hereof and shall not be subject to the limitations
contained in the preceding sentence.
XII.3 Assertion of Claims; Etc.
(a) If a party entitled to be indemnified pursuant to this Agreement (an
"Indemnitee") receives notice of the assertion by a third party of any claim or
of the commencement by any such person of any action or proceeding (a
"Third-Party Claim") with respect to which another Party (an "Indemnifying
Party") is obligated to provide indemnification, the Indemnitee shall give the
Indemnifying Party prompt notice thereof after becoming aware of such
Third-Party Claim in reasonable detail and shall indicate the amount (estimated
if necessary) of the Indemnifiable Claim that has been or may be sustained by
the Indemnitee. The receipt of such notice shall be a condition precedent to any
Liability of the Indemnifying Party for any Third-Party Claim under the
provisions for indemnification contained in this Agreement; provided, however,
that the rights of the Indemnitee to be indemnified or compensated hereunder in
respect of any Third- Party Claim shall only be affected by its failure to give
prompt notice to the Indemnifying Party of such Third-Party Claim if and to the
extent that such failure prejudices that Indemnifying Party in the defense of
such Third-Party Claim.
(b) If the Indemnifying Party elects to compromise or defend such
Third-Party Claim, it shall within thirty days notify the Indemnitee of its
intent to do so, it shall consult with the Indemnitee and keep the Indemnitee
fully informed as to matters concerning such Third-Party Claim during the course
of such compromise or defense and the Indemnitee shall cooperate, at the expense
(out-of-pocket expenses only) of the Indemnifying Party, in the compromise of,
or defense against, such Third-Party Claim.
(c) If the Indemnifying Party elects not to compromise or defend against
the Third-Party Claim, or fails to notify the Indemnitee of its election as
herein provided or fails to diligently defend any such Third-Party Claim, the
Indemnitee may pay (without prejudice of any of its rights as against the
Indemnifying Party), compromise or defend such Third-Party Claim. The
Indemnifying Party shall give the Indemnitee thirty days notice of its intent to
cease defending the Indemnitee with respect to such Third-Party Claim and the
Indemnitee shall be fully indemnified hereunder for any additional damages
suffered by the Indemnitee if the cessation of such defense prejudices the
Indemnitee in the continuing defense or compromise of such Third- Party Claim;
provided, that upon assuming such responsibility the Indemnitee shall use its
best efforts to diligently defend or attempt to compromise such Third-Party
Claim.
(d) Notwithstanding the foregoing, neither the Indemnifying Party nor the
Indemnitee may settle or compromise any claim over the objection of the other,
provided, however, that consent to settlement or compromise shall not be
unreasonably withheld.
(e) The Indemnitee and the Indemnifying Party may each participate, at its
own expense, in the defense of such Third- Party Claim.
(f) Any Indemnifiable Claim which does not result from a Third-Party Claim
shall be asserted by written notice given by the party claiming indemnity to the
party from which indemnity is claimed.
(g) To the extent an Indemnifiable Claim may be covered by insurance
carriers under applicable insurance policies covering such Indemnifiable Claim,
the Indemnitee shall use its best efforts to seek recovery in good faith for
such Indemnifiable Claim from such insurers. Notwithstanding the foregoing, the
Indemnitee shall not be obligated to exhaust its remedies against such insurance
carriers in the event such carriers fail to accept responsibility for such
Indemnifiable Claim and the Indemnitee shall be able to fully assert its rights
of indemnification against the Indemnifying Party hereunder; provided, that in
such event the Indemnitee shall assign its right of recovery with respect to
such Indemnifiable Claim against such insurance carrier to the Indemnifying
Party. Any Indemnifiable Claim hereunder shall be reduced by the amounts
actually recovered by the Indemnitee from its insurance carriers and any amounts
recovered by the Indemnitee subsequent to the payment by the Indemnitor with
respect to the same claim shall be remitted to the Indemnitor; provided that
such remittance shall not exceed the amount of such indemnification payment by
the Indemnitor.
XII.4 Survival of Representations, Warranties and Covenants.
(a) No claim for indemnification under the representations and warranties
contained in Article II and Article III shall be made following April 30, 1998.
(b) The expiration of any representation and warranty shall not affect any
claim timely and validly made prior to the date of such expiration.
(c) Except as otherwise expressly set forth herein, all covenants and
agreements of USMX, Dakota, and Merger Corp contained in this Agreement shall
survive the Closing hereunder, without limitation. However, any claim by USMX,
Dakota, or Merger Corp against the other based on a breach of any covenant of
the other required to be performed on or prior to the Closing Date ("Pre-Closing
Covenants") shall not survive the Closing and shall be deemed to have been
waived by the Party for whose benefit such covenant exists; unless the Party who
has made such Pre-Closing Covenant has taken actions to intentionally conceal
the existence of such breach from the Party for whose benefit such Pre-Closing
Covenant exists, but provided that the Party for whose benefit such Pre-Closing
Covenant exists has suffered a damage or loss that would otherwise constitute an
Indemnifiable Claim.
XII.5 Insurance. The benefits of any property, casualty, and other business
insurance which is available to cover any damage or loss that might be the basis
for any Indemnifiable Claim shall be made available to cover any such damage or
loss. The Parties shall prosecute any claim for insurance and apply the proceeds
thereof as aforesaid. No covenant or agreement by any Party to indemnify any
other Party shall release, or be deemed to release, any insurer or indemnitor of
any damage or loss which might be the basis for any Indemnifiable Claim.
XII.6 Other Claims. Dakota and Merger Corp shall not be entitled to assert
against USMX, and USMX shall not be entitled to assert against Dakota and Merger
Corp, any claim for damages, indemnification, or otherwise relating to the
Transactions (including without limitation any Liability arising from or in
connection with this Agreement) except pursuant to this Agreement and subject to
the provisions and limitations of this Article.
ARTICLE XIII
MISCELLANEOUS
XIII.1 Further Actions. From time to time, as and when
requested by any Party, the other Parties shall execute and
deliver, or cause to be executed and delivered, such documents
and instruments and shall take, or cause to be taken, such\further or other
actions as may reasonably request in order to:
(a) carry out the intent and purposes of this Agreement;
(b) effect the Merger (or to evidence the foregoing); and
(c) consummate and give effect to the other transactions, covenants, and
agreements contemplated by this Agreement.
XIII.2 Indemnification Regarding Brokers. The Parties shall indemnify the other
Parties against, and hold the other parties harmless from, at all times after
the date hereof, any and all Liabilities and expenses (including without
limitation legal and professional fees) resulting from, related to or arising
out of any final judgment obtained by any person claiming brokerage commissions
or finder's fees, or rights to similar compensation, on account of services
purportedly rendered on behalf of any Party in connection with this Agreement or
the Transactions.
XIII.3 Expenses. Except as otherwise specifically provided herein, USMX, Dakota
and Merger Corp shall each bear their own legal fees and other costs and
expenses with respect to the negotiation, execution, and the delivery of this
Agreement and the consummation of the Transactions.
XIII.4 Entire Agreement. This Agreement, which includes the Exhibits hereto and
the other documents, agreements, and instruments executed and delivered pursuant
to or in connection with this Agreement, contains the entire Agreement among the
Parties with respect to the Transactions and, except as expressly provided
herein, supersedes all prior arrangements or understandings with respect
thereto, including, without limitation, the letter agreement dated January 3,
1997 between Dakota and USMX (except for such agreements supplementing or
amending this Agreement which specifically make reference to this Section).
XIII.5 Descriptive Headings. The descriptive headings of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision of this Agreement.
XIII.6 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by telecopier, nationally recognized over-night courier, or registered
or certified mail, postage prepaid, addressed as follows:
(a) If to any USMX Group Member:
USMX INC.
141 Union Boulevard, Suite 100
Lakewood, Colorado 80228
Attention: Donald P. Bellum, President
Telecopy: (303) 980-1363
with a copy to:
Bearman Talesnick & Clowdus Professional Corporation
1200 17th Street, Suite 2600
Denver, Colorado 80202-5826
Attention: Robert M. Bearman, Esq.
Telecopy: (303) 572-6511
(b) If to any Dakota Group Member:
Dakota Mining Corporation
410 Seventeenth Street, Suite 2450
Denver, Colorado 80202
Attention: Robert R. Gilmore, Vice President-Finance
and CFO
Telecopy: (303) 573-1012
with a copy to:
Parcel, Mauro, Hultin & Spaanstra, P.C.
Suite 3600, 1801 California Street
Denver, Colorado 80202
Attention: Richard F. Mauro, Esq.
Telecopy: (303) 295-3040
and
McCarthy Tetrault
P.O. Box 10424, Pacific Centre
Suite 1300, 777 Dunsmuir Street
Vancouver, B.C.
CANADA V7Y 1K2
Attention: Richard J. Balfour, Esq.
Telecopy: (604) 643-7900
Any such notices or communications shall be deemed to have been received: (1) if
delivered personally or sent by telecopier (with transmission confirmed) or
nationally recognized overnight courier, on the date of such delivery; or (2) if
sent by registered or certified mail, on the third Business Day following the
date on which such mailing was postmarked. Any Party may by notice change the
address to which notices or other communications to it are to be delivered or
mailed.
XIII.7 Governing Law.
(a) This Agreement shall be governed by and construed in accordance with
the Laws of the State of Delaware (other than the choice of law principles
thereof), except that any representations and warranties with respect to real
and tangible property shall be governed by and construed in accordance with the
Laws of the jurisdiction where such property is situated if other than in the
State of Delaware.
(b) Any action, suit, or other proceeding initiated by USMX, Dakota, or
Merger Corp against the other under or in connection with this Agreement may be
brought in any federal or state court in the State of Colorado, as the Party
bringing such action, suit, or proceeding shall elect, having jurisdiction over
the subject matter thereof. USMX, Dakota, and Merger Corp hereby submit
themselves to the jurisdiction of any such court for the purpose of any such
action and agree that service of process on them in any such action, suit, or
proceeding may be effected by the means by which notices are to be given to it
under this Agreement.
XIII.8 Assignability. This Agreement shall not be assignable otherwise than by
operation of law by any Party without the prior written consent of the other
Parties, and any purported assignment by any Parties without the prior written
consent of the other Party shall be void.
XIII.9 Remedies. The Parties acknowledge that the remedy at law for any breach
of the obligations undertaken by the Parties is and shall be insufficient and
inadequate and that the Parties shall be entitled to equitable relief, in
addition to remedies at law. In the event of any action to enforce the
provisions of this Agreement, each of the Parties waive the defense that there
is an adequate remedy at law. The Parties acknowledge that the USMX Shares and
Dakota Shares are unique. Without limiting any remedies any Party may otherwise
have, in the event any other Party refuses to perform its obligations under this
Agreement, the Parties shall have, in addition to any other remedy at law or in
equity, the right to specific performance.
XIII.10 Waivers and Amendments. Any waiver of any term or condition of this
Agreement, or any amendment or supplementation of this Agreement, shall be
effective only if in writing. A waiver of any breach or failure to enforce any
of the terms or conditions of this Agreement shall not in any way affect, limit,
or waive a Party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Agreement.
XIII.11 Third-Party Rights. Notwithstanding any other provision of this
Agreement, this Agreement shall not create benefits on behalf of any stockholder
or employee of the USMX Group or the Dakota Group, any third party or any other
Person (including without limitation any broker or finder, notwithstanding the
provisions of Section 13.2 ); and this Agreement shall be effective only as
between the Parties, their successors and permitted assigns.
XIII.12 Illegalities. In the event that any provision contained in this
Agreement shall be determined to be invalid, illegal, or unenforceable in any
respect for any reason, the validity, legality, and enforceability of any such
provision in every other respect and the remaining provisions of this Agreement
shall not, at the election of the Party for whose benefit the provision exists,
be in any way impaired.
* * *
The remainder of this page is blank. IN WITNESS WHEREOF, the
undersigned have executed and delivered this Agreement as of the day and year
first above written.
USMX, INC. DAKOTA MINING CORPORATION
By: By:
Name: Donald P. Bellum Name: Alan R. Bell
Title: President Title: President and
CEO
DAKOTA MERGER CORPORATION
By:
Name: Alan R. Bell
Title: President
Schedule A
Certain Definitions
"1995 Dakota Financial Statements" shall mean the audited consolidated balance
sheet of the Dakota Group as of December 31, 1995, with the related audited
consolidated statements of income and retained deficits and of cash flows for
the fiscal year ended as of such date (together with the related notes and
schedules thereto), which financial statements contain a letter from KPMG Peat
Marwick Thorne reporting thereon.
"1995 USMX Financial Statements" shall mean the audited consolidated balance
sheet of USMX and its subsidiaries as of December 31, 1995, with the related
audited consolidated statements of income and retained deficits and of cash
flows for the fiscal year ended as of such date (together with the related notes
and schedules thereto), which financial statements contain a letter from KPMG
Peat Marwick LLP reporting thereon.
"Advisers" when used with respect to any Person shall mean such Person's
directors, officers, employees, representatives, agents, counsel, accountants,
advisers, engineers, and consultants.
"Affiliate" shall mean as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person and, if such Person is an individual, any member of the immediate family
(including parents, spouse, children and grandchildren) of such individual and
any trust whose principal beneficiary is such individual or one or more members
of such immediate family and any Person who is controlled by any such member or
trust. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the direction of
the management or policies (whether through the ownership of securities or
partnership or other ownership interests, by Contract or otherwise).
"Agreement" shall mean this Agreement and Plan of Merger, as it may be amended
or supplemented at any time and from time to time after the date hereof.
"Basket" shall have the meaning ascribed in Section 12.1(b)(1).
"Breaching Party" shall have the meaning ascribed in Section
11.2(b).
"Business Day" shall mean any day on which commercial banks are not authorized
or required to close in Denver, Colorado.
"Canadian GAAP" shall mean generally accepted accounting principles in Canada
consistently applied.
"Certificate" shall have the meaning ascribed in Section 1.10(a).
"Certificate of Merger" shall have the meaning ascribed in
Section 1.4.
"Closing" shall mean the consummation of the Transactions. "Closing Date" shall
mean a date as soon as practicable after approval and/or adoption of this
Agreement and the Transactions by the shareholders of Dakota and the
stockholders of USMX and satisfaction or waiver of the conditions set forth in
Articles VIII, IX, and X.
"Competing Transaction" shall have the meaning ascribed in
Section 5.12.
"Constituent Corporations" shall have the meaning ascribed in
Section 1.1.
"Contract" shall mean any contract, lease, agreement, instrument, license,
commitment, order, or quotation.
"Dakota Group" shall mean and include Dakota, Merger Corp, and their respective
subsidiaries, taken as a whole.
"Dakota Group Member" shall mean and include Dakota, Merger Corp, or any of
their respective subsidiaries.
"Dakota SEC Reports" shall have the meaning ascribed in Section
3.15.
"Dakota Shareholders' Meeting" shall have the meaning ascribed in
Section 6.9.
"Dakota Shares" shall have meaning ascribed in the Recitals.
"Effective Time" shall have the meaning ascribed in Section 1.4.
"Employee Plans" shall mean any employee benefit plan (as defined in 3(3) of
ERISA), other deferred compensation plan, bonus plan, material fringe benefit
plan (as defined in 6039D of the Tax Code) and other material employee benefit
plan maintained (other than those required by Law to be maintained) for the
benefit of employees.
"Environmental Condition" shall mean and include:
(a) the generation, discharge, emission, or release into the environment
(including without limitation ambient air, surface water, groundwater or land),
spill, receiving, handling, use, storage, containment, treatment,
transportation, shipment, or disposition prior to the Closing of any Hazardous
Substance by any Person (or their predecessors) as to which Remedial Action is
currently or in the future required under any Environmental Law or as to which
any Liability is currently or in the future imposed on any Person based on the
actions or omissions prior to the Closing of any Person (or their predecessors)
with respect to any Hazardous Substance or reporting with respect thereto; and
(b) the presence as of the Closing Date on any real property owned by any
member of the USMX Group or Dakota Group, as applicable, of any underground
storage tank which contains or contained Hazardous Substances.
"Environmental Laws" shall mean Laws regulating or pertaining to the generation,
discharge, emission or release into the environment (including without
limitation ambient air, surface water, groundwater or land), spill, receiving,
handling, use, storage, containment, treatment, transportation, shipment,
disposition or remediation or clean-up of any Hazardous Substance, as such Laws
are amended and in effect as of the date hereof, including without limitation
the following Laws of the United States: the Clean Air Act; the Clean Water Act;
the Comprehensive Environmental Response, Compensation and Liability Act of
1980; the Resource Conservation and Recovery Act of 1976; and the Toxic
Substances Control Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall have the meaning ascribed in Section
1.10(a).
"Exchange Fund" shall have the meaning ascribed in Section
1.10(a).
"GCL" shall mean the General Corporation Law of the State of
Delaware.
"Government" shall mean:
(a) the government of the United States, Canada, or any
other foreign country;
(b) the government of any state, province, county, municipality, city,
town, or district of the United States, Canada, or any other foreign country;
and any multi-county district; and
(c) any ministry, agency, department, authority, commission,
administration, corporation, bank, court, magistrate, tribunal, arbitrator,
instrumentality, or political subdivision of, or within the geographical
jurisdiction of, any government described in the foregoing clauses (a) and (b).
"Governmental" shall mean pertaining to any Government.
"Hazardous Substance" shall include petroleum products, hazardous substances,
hazardous waste, or hazardous materials, or pollutants or contaminants, as such
terms are defined in the Comprehensive Environmental Response, Compensation and
Liability Act of 1980; the Resource Conservation and Recovery Act of 1976; or
any other Environmental Law (including any foreign Environmental Law); all as
amended and in effect as of the date hereof.
"Income Tax" shall mean any Tax based on or measured by income (including
without limitation based on net income, gross income, income as specifically
defined, earnings, profits or selected items of income, earnings or profits);
and any interest, Penalties and additions to tax with respect to any such tax
(or any estimate or payment thereof).
"Indemnifiable Claims" shall mean and include any and all loss or damage or
Liability, and all expenses (including without limitation reasonable legal fees
incurred in the investigation, defense, compromise and settlement of any
Indemnifiable Claim for which such Person is entitled to indemnification under
Article XII), of any Person entitled to indemnification under Article XII.
"Indemnifiable Claim" shall not include any injury to business reputation, lost
business opportunities, lost profits (other than actual lost profits), punitive,
special or consequential damages or interference with business operations (other
than actual damages resulting from interference with business operations). The
amount of any Indemnifiable Claim shall be determined or computed net of:
(a) any proceeds of insurance or third-party indemnity (whether maintained
by USMX or Merger Corp) actually received or collected in respect of any such
Indemnifiable Claims; and
(b) any Indemnification Tax Benefit received by the Person entitled to
indemnification with respect to any tax year in which the claim for
indemnification is satisfied or in any prior tax year.
"Indemnification Tax Benefit" shall mean an amount equal to the amount of any
Tax savings actually recognized and actually realized by reason of a net
reduction in taxes paid by an indemnitee attributable to the payment by the
indemnitor of such Indemnifiable Claim (after taking into account the Tax
effect, if any, of receipt of payment of any Indemnifiable Claim). In computing
the amount of any Indemnification Tax Benefit, the indemnitee shall be deemed to
have used all other items of loss, deduction or credit before using any loss
attributable to any Indemnifiable Claim.
"Indemnified Party" shall have the meaning ascribed in Section
6.13.
"Indemnifying Party" shall have the meaning ascribed in Section
12.3(a).
"Indemnitee" shall have the meaning ascribed in Section 12.3(a).
"Interim Dakota Balance Sheet" shall mean the unaudited consolidated balance
sheet included in the Interim Dakota Financial Statements.
"Interim Dakota Financial Statements" shall mean the unaudited financial
statements dated as of December 31, 1996, or such other more recent unaudited
financial statements delivered (from time to time) to USMX.
"Interim USMX Balance Sheet" shall mean the unaudited consolidated balance sheet
included in the Interim USMX Financial Statements.
"Interim USMX Financial Statements" shall mean the unaudited financial
statements dated as of December 31, 1996, or such other more recent unaudited
financial statements delivered (from time to time) to Dakota.
"Joint Proxy Statement" shall have the meaning ascribed in
Section 7.2.
"Joint Proxy/Registration Statement"shall have the meaning
ascribed in Section 7.2.
"Law" shall mean any of the following of, or issued by, any Government, in
effect on or prior to the date hereof, including any amendment, modification, or
supplementation of any of the following from time to time subsequent to the
original enactment, adoption, issuance, announcement, promulgation, or granting
thereof and prior to the date hereof: any statute, law, act, ordinance, code,
rule, or regulation or any writ, injunction, award, decree, judgment, or order
of any Government.
"Liability" of any Person shall mean and include:
(a) any right against such Person to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured or unsecured;
(b) any right against such Person to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such
right to any equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured or unsecured; and
(c) any obligation of such Person for the performance of any covenant or
agreement (whether for the payment of money or otherwise).
"Liens" shall mean liens, encumbrances, licenses, claims, security interests,
mortgages, pledges, charges, escrows, options, or rights of first refusal or
offer.
"Material Adverse Change" or "Material Adverse Effect" shall mean a material
adverse change in, or material adverse effect on, the business, properties,
assets, liabilities, results of operations or financial condition of the USMX
Group or Dakota Group (as applicable), in any case after application of the
proceeds of any insurance or indemnity under any contract or agreement between
the applicable Group, USMX or Dakota and any third party. The foregoing shall
not include any change or effect attributable to changes in the economy (of the
United States, Canada, or any other country) generally, changes in the
industries in which the applicable Group engages, changes in metal prices, or
seasonality of the businesses of the Group. No "Material Adverse Change" or
"Material Adverse Effect" shall be deemed to have occurred by virtue or as a
result of any voluntary termination or termination for cause of the employment
of any officer of the applicable Group or the termination of any consulting
relationship between any Person and the applicable Group.
"Merger" shall have the meaning ascribed in Section 1.1.
"Non-Breaching Party" shall have the meaning ascribed in Section
11.2(b).
"Parties" and "Party" shall have the meanings ascribed in the
Preamble.
"Penalty" shall mean any civil or criminal penalty (including any interest
thereon), fine, levy, lien, assessment, charge, monetary sanction, or payment,
or any payment in the nature thereof, of any kind required to be made to any
Government under any Law.
"Permitted Liens" shall mean Liens arising out of the ordinary course of
business which do not, individually or in the aggregate, materially detract from
the use, value or enjoyment (in the ordinary course of business as presently
conducted) of the assets which are the subject of such Liens.
"Person" shall mean any corporation, partnership, limited lability company or
partnership, joint venture, trust, unincorporated association or organization,
business, enterprise, or other entity; any individual; and any Government.
"Pre-Closing Covenant" shall have the meaning ascribed in Section
12.4(c).
"Registration Statement" shall have the meaning ascribed in
Section 7.2.
"Remedial Action" shall mean any investigation, feasibility study, monitoring,
testing, sampling, removal (including without limitation removal of underground
storage tanks), restoration, clean-up, remediation, corrective action, closure,
site restoration, remedial response or remedial work with respect to any
Environmental Condition.
"SEC" shall mean the Securities and Exchange Commission of the
United States.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securities Act Affiliate" shall mean any affiliate of a Person for purposes of
Rule 145 of the Securities Act.
"Surviving Corporation" shall have the meaning ascribed in
Section 1.1.
"Tax" shall mean any tax, levy, charge, assessment, penalty, interest or fine
imposed by or due any Government, including without limitation any of the
following:
(a) any tax based on or measured by income (including without limitation
based on net income, gross income, income as specifically defined, earnings,
profits or selected items of income, earnings or profits);
(b) any franchise, sales, use and value added tax or any license or
withholding tax; any payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, alternative or add-on minimum tax; and any customs
duties or other taxes;
(c) any "trust fund" tax under Subtitle C, Chapter 24A of
the Tax Code;
(d) any tax on property (real or personal, tangible or
intangible, based on transfer or gains);
(e) any estimate or payment of any of tax described in the
foregoing clauses (a) through (d); and
(f) any interest, Penalties and additions to tax with respect to any tax
(or any estimate or payment thereof) described in the foregoing clauses (a)
through (e).
"Tax Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"Termination Date" shall mean April 30, 1997, provided that, if the Joint Proxy/
Registration Statement has not been declared effective by the SEC by a date
which allows sufficient time (under applicable Law) to properly hold the USMX
Stockholders' Meeting and the Dakota Shareholders' Meeting, or if other required
regulatory approvals or clearances have not been received, on or prior to April
30, 1997, the Termination Date shall be extended to a date which allows for the
foregoing, which date, in no event, shall be later than May 31, 1997.
"Termination Fee" shall have the meaning ascribed in Section
11.3.
"Third-Party Claim" shall have the meaning ascribed in Section
12.3(a).
"Transactions" shall mean the Merger, and any other actions or transactions
contemplated under this Agreement.
"U.S. GAAP" shall mean generally accepted accounting principles
in the United States consistently applied.
"USMX Group" shall mean and include USMX and its subsidiaries,
taken as a whole.
"USMX Group Member" shall mean and include USMX or any
subsidiary.
"USMX SEC Reports" shall have the meaning ascribed in Section
2.26.
"USMX Stockholders' Meeting" shall have the meaning ascribed in
Section 5.10.
"USMX Shares" shall have the meaning ascribed in the Recitals.
TABLE OF CONTENTS
RECITALS 1
AGREEMENT 1
ARTICLE I--GENERAL 2
1.1 Merger. 2
1.2 Charter and By-laws; Directors and Officers. 2
1.3 No Separate Identity. 2
1.4 Effectiveness. 2
1.5 Conversion of Shares. 2
1.6 Treasury Shares, Etc. 2
1.7 Warrants, Options, Etc. 3
1.8 No Fractional Shares. 3
1.9 Stock Transfer Books. 3
1.10 Exchange of Certificates 4
1.11 Directors of Dakota. 4
ARTICLE II--REPRESENTATIONS AND WARRANTIES OF USMX 4
2.1 Organization and Good Standing. 5
2.2 Consents, Authorizations, and Binding Effect. 5
2.3 Minute and Stock Transfer Books. 6
2.4 Financial Statements and Financial Condition. 6
2.5 Title and Condition of Assets. 7
2.6 Insurance. 9
2.7 Litigation and Compliance. 9
2.8 Taxes. 10
2.9 Intangible Assets. 11
2.10 Employees. 11
2.11 Pension and Other Employee Plans and Agreements. 11
2.12 Labor Relations. 12
2.13 Contracts, Etc. 13
2.14 Absence of Certain Changes, Etc. 13
2.15 Subsidiaries. 14
2.16 Capitalization and Title to Shares. 16
2.17 Environmental Matters. 16
2.18 Brokers. 16
2.19 Officers and Directors. 17
2.20 Fairness of Transaction. 17
2.21 Valid Issuance of New Stock. 17
2.22 No Misstatements or Omissions. 17
2.23 USMX SEC Reports. 17
2.24 Information in Disclosure Documents. 18
2.25 No Knowledge of Breach of Representations and
Warranties of
Merger Corp. 18
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF DAKOTA AND MERGER
CORP 18
3.1 Organization and Good Standing. 19
3.2 Consents, Authorizations, and Binding Effect. 19
3.3 Minute and Stock Transfer Books. 20
3.4 Financial Statements and Financial Condition. 20
3.5 Title and Condition of Assets. 21
3.6 Insurance. 23
3.7 Litigation and Compliance. 23
3.8 Taxes. 24
3.9 Intangible Assets. 25
3.10 Pension and Other Employee Plans and Agreements. 25
3.11 Labor Relations. 25
3.12 Contracts, Etc. 26
3.13 Absence of Certain Changes, Etc. 27
3.14 Subsidiaries. 27
3.15 Capitalization and Title to Shares. 29
3.16 Environmental Matters. 29
3.17 Fairness of Transaction. 30
3.18 Valid Issuance of New Stock. 30
3.19 No Misstatements or Omissions. 30
3.20 Dakota SEC Reports. 30
3.21 Information in Disclosure Documents. 31
3.22 No Knowledge of Breach of Representations and
Warranties of USMX. 31
ARTICLE IV--NO OTHER REPRESENTATIONS AND WARRANTIES 31
4.1 No Other Representations and Warranties. 31
4.2 Projections, Etc. 31
ARTICLE V--USMX COVENANTS 32
5.1 Access. 32
5.2 Ordinary Course. 32
5.3 Representations and Warranties. 34
5.4 Insurance. 34
5.5 No Breach. 34
5.6 Financial Statements. 34
5.7 Litigation. 34
5.8 Closing Conditions. 34
5.9 Contracts. 34
5.10 USMX Stockholders' Approval. 34
5.11 Rule 145 Affiliates. 35
5.12 No Shop. 35
5.13 Cooperation. 36
ARTICLE VI--DAKOTA'S AND MERGER CORP'S COVENANTS 36
6.1 Access. 36
6.2 Ordinary Course. 37
6.3 Representations and Warranties. 38
6.4 No Breach. 39
6.5 Financial Statements. 39
6.6 Litigation. 39
6.7 Closing Conditions. 39
6.8 Contracts. 39
6.9 Dakota Shareholders' Approval. 39
6.10 Stock Listing. 39
6.11 Line of Credit. 39
6.12 Employee Benefit Plans 40
6.13 Indemnification; Directors' and Officers' Insurance 40
6.14 Assumption of Existing Agreements Relating to
Employment 41
6.15 USMX Stock Options 42
ARTICLE VII--OTHER COVENANTS OF THE PARTIES 42
7.1 Consents and Notices. 42
7.2 Joint Proxy/Registration Statement. 42
7.3 Support Agreements. 44
7.4 Confidentiality. 44
7.5 Press Releases. 45
ARTICLE VIII--CONDITIONS TO OBLIGATIONS OF DAKOTA AND MERGER CORP
45
8.1 Representations and Warranties. 45
8.2 Compliance with Covenants. 45
8.3 Opinion of Counsel. 45
8.4 No Material Adverse Change. 45
8.5 Other Matters. 45
8.6 Consents. 45
8.7 Accountant's Bring-Down Letter. 46
8.8 Montana Tunnel. 46
ARTICLE IX--CONDITIONS TO OBLIGATIONS OF USMX 46
9.1 Representations and Warranties. 46
9.2 Compliance with Covenants. 46
9.3 Opinions of Counsel. 46
9.4 No Material Adverse Change. 46
9.5 Other Matters. 46
9.6 Consents. 47
9.7 Accountant's Bring-Down Letter. 47
ARTICLE X--CONDITIONS TO OBLIGATIONS OF THE PARTIES 47
10.1 No Adverse Proceedings. 47
10.2 No Termination. 47
10.3 No Injunctions. 47
10.4 Support Agreement. 47
10.5 Stock Exchange Approvals. 47
10.6 Shareholder Approval. 47
10.7 SEC Filings. 47
10.8 Tax Letter. 48
10.9 Rothschild Loan. 48
10.10 Canadian Offering. 48
10.11 Up-Dating of Exhibits; Election Not to Close. 48
ARTICLE XI--CLOSING AND TERMINATION 49
11.1 Closing. 49
11.2 Termination of this Agreement. 49
11.3 Liquidated Damages. 49
ARTICLE XII--INDEMNIFICATION 50
12.1 Indemnification by USMX. 50
12.2 Indemnification by Dakota and Merger Corp. 51
12.3 Assertion of Claims; Etc. 52
12.4 Survival of Representations, Warranties and Covenants.53
12.5 Insurance. 54
12.6 Other Claims. 54
ARTICLE XIII--MISCELLANEOUS 54
13.1 Further Actions. 54
13.2 Indemnification Regarding Brokers. 54
13.3 Expenses. 54
13.4 Entire Agreement. 54
13.5 Descriptive Headings. 55
13.6 Notices. 55
13.7 Governing Law. 56
13.8 Assignability. 56
13.9 Remedies. 56
13.10 Waivers and Amendments. 57
13.11 Third-Party Rights. 57
13.12 Illegalities. 57
SCHEDULE OF EXHIBITS
EXHIBIT NO. DESCRIPTION
1.4 Form of Certificate of Merger
USMX Disclosure Exhibits
2.1 Foreign Qualification and Subsidiaries
2.2 Consents, Etc.
2.4(b) Accounting Books and Records
2.4(c) Interim USMX Financial Statements
2.5(a) Real Property Interests
2.5(b) Property Liens and Defects
2.5(c) Royalties
2.5(e) Operating Condition Defects
2.6 Insurance
2.7(a) Litigation
2.7(c) Judgments, Etc.
2.7(d) Permits, Etc.
2.8 Taxes
2.11 Employee Plans
2.12 Labor Matters
2.13 Contracts
2.14 Certain Changes
2.15(a) Subsidiaries
2.15(b) Liens on Subsidiary Capital Stock
2.15(d) Subsidiary Proxies, Options, Etc.
2.15(e) Disposed Subsidiaries
2.16 Capital Stock of USMX
2.17 Environmental Matters
2.19 Officers and Directors
2.23 USMX SEC Reports
Dakota Disclosure Exhibits
3.1 Foreign Qualification and Subsidiaries
3.2 Consents, Etc.
3.4(b) Accounting Books and Records
3.4(c) Interim Dakota Financial Statements
3.5(a) Real Property Interests
3.5(b) Property Liens and Defects
3.5(c) Royalties
3.5(e) Operating Condition Defects
3.6 Insurance
3.8(a) Litigation
3.7(c) Judgments, Etc.
3.7(d) Permits, Etc.
3.10 Employee Plans
3.12 Contracts
3.13 Certain Changes
3.14(a) Subsidiaries
3.14(b) Liens on Subsidiary Capital Stock
3.14(d) Subsidiary Proxies, Options, Etc.
3.15 Capital Stock of Dakota
3.16 Environmental Matters
3.20 Dakota SEC Reports
5.2 USMX Exceptions to Ordinary Course
5.11 Form of Securities Act Affiliate Agreement
6.2 Dakota Exceptions to Ordinary Course
6.11 Terms of Line of Credit
7.3 Form of Support Agreement
<PAGE>
APPENDIX A1
AMENDMENT NO.1
TO AGREEMENT AND PLAN OF MERGER
Dated April 21, 1997
THIS AMENDMENT NO.1 TO AGREEMENT AND PLAN OF MERGER is made as of the 21st day
of April, 1997 by and among Dakota Mining Corporation ("Dakota"), Dakota Merger
Corporation ("Merger Corp") and USMX, Inc. ("USMX").
RECITALS:
A. Dakota, Merger Corp and USMX have entered into that certain Agreement
and Plan of Merger dated February 5, 1997 ("Merger Agreement'). Certain
defined terms used herein shall have the same meaning as is set forth in the
Merger Agreement; and
B. The parties desire to amend the Merger Agreement in certain
particulars to reflect the revised understandings they have reached.
NOW, THEREFORE, in consideration of the mutual benefits to be derived and the
representations and warranties, conditions and promises herein contained, and
intending to be legally bound hereby, the parties agree as follows:
1.Amendment The following provisions of the Merger Agreement are amended:
a. Section 1.8 is amended to provide that with respect to derivative
securities (options etc.) no consideration shall be given for fractional shares
to be issued upon exercise thereof.
b. Section 1.11 is amended to provide that immediately following the
Effective Time, Dakota shall increase the number of directors comprising its
Board of Directors to eight, including two directors designated by USMX and one
director designated by Pegasus to fill the vacancies created by increasing the
Board size. Donald P. Bellum will not be designated by USMX as a member of the
Board of Directors and will not serve as Chairman of the Board.
<PAGE>
c. Any other provision in the Merger Agreement necessary to be changed as a
result of the amendments in paragraphs (a) and (b) above, shall be deemed to be
made as if set forth herein.
2. Effectiveness of Amendment Except as set forth herein, the Merger
Agreement is ratified and confirmed as previously written. his Amendment shall
be effective as of the date first written above.
Executed this 21st day of April, 1997.
DAKOTA MINING CORPORATION
By:______________________
DAKOTA MERGER CORPORATION
By:______________________
USMX, INC.
By:______________________
<PAGE>
APPENDIX B
RESOLUTIONS
DAKOTA RESOLUTIONS
1. Resolutions to Approve and Adopt the Merger Agreement
WHEREAS, the Board of Directors of Dakota has authorized and approved,
and has recommended that the Shareholders of Dakota approve and adopt,
the Agreement and Plan of Merger dated February 5, 1997 (the "Merger
Agreement") among Dakota, Dakota Merger Corporation, and USMX, Inc.;
and
WHEREAS, it is desirable to approve and adopt the Merger Agreement.
NOW, THEREFORE, BE IT RESOLVED that the Merger Agreement is hereby
approved and adopted in all respects; and
FURTHER RESOLVED that the transactions contemplated under the Merger
Agreement, including, without limitation, the issuance of additional
Common Shares of Dakota to effect the Merger, are hereby approved in
all respects.
2. Resolution to Ratify an Amendment to the Share Incentive Plan
WHEREAS, the Board of Directors of Dakota has approved an amendment to
Dakota's Share Incentive Plan to increase the number of Common Shares
reserved for issuance thereunder from 3,000,000 to 6,000,000 (the "Plan
Amendment"); and
WHEREAS, it is desirable to ratify, confirm, approve and adopt the
Plan Amendment.
NOW, THEREFORE, BE IT RESOLVED that the Plan Amendment is hereby
ratified, confirmed, approved and adopted in all respects.
3. Resolution to Issue 4,884,550 Common Shares
WHEREAS, Dakota has issued 8,881 Series B Special Warrants exercisable
for 7.5% unsecured convertible debentures of Dakota (the "Debentures"),
which Debentures are convertible into up to 4,884,550 Common Shares of
Dakota;
WHEREAS, the Board of Directors of Dakota has authorized the issuance
of the Series B Special Warrants, the Debentures issuable thereunder,
and the Common Shares issuable thereunder; and
WHEREAS, it is desirable to approve the issuance the Common Shares upon
conversion of the Debentures issuable upon exercise of the Series B
Special Warrants.
NOW, THEREFORE, BE IT RESOLVED that the issuance of up to 4,884,550
Common Shares of Dakota upon conversion of the Debentures issuable upon
exercise of the Series B Special Warrants is hereby approved in all
respects.
USMX RESOLUTIONS
1. Resolutions to Approve and Adopt the Merger Agreement
WHEREAS, the Board of Directors of USMX has authorized and approved,
and has recommended that the Stockholders of USMX approve and adopt,
the Agreement and Plan of Merger dated February 5, 1997 (the "Merger
Agreement") among Dakota Mining Corporation, Dakota Merger Corporation,
and USMX; and
WHEREAS, it is desirable to approve and adopt the Merger Agreement.
NOW, THEREFORE, BE IT RESOLVED that the Merger Agreement is hereby
approved and adopted in all respects; and
FURTHER RESOLVED that the transactions contemplated under the Merger
Agreement are hereby approved in all respects.
2. Resolution to Approve the Montana Tunnels Agreement
WHEREAS, USMX has entered into a Purchase and Sale Agreement dated
March 17, 1997 with Pegasus Gold, Inc. with respect to the Montana
Tunnels (the "Montana Tunnels Agreement");
WHEREAS, the Board of Directors of USMX has approved the Montana
Tunnels Agreement; and
WHEREAS, it is desirable to ratify, confirm, and approve the Montana
Tunnels Agreement.
NOW, THEREFORE, BE IT RESOLVED that the Montana Tunnels Agreement is
hereby ratified, confirmed, and approved in all respects.
<PAGE>
APPENDIX C
The Board of Directors
March 14, 1997
Page 8
CANACCORD CAPITAL CORPORATION
P.O. Box 6, Suite 1210
320 By Street
Toronto, Ontario
Canada M5H 4A6
March 14, 1997
PRIVATE AND CONFIDENTIAL
The Board of Directors of
Dakota Mining Corporation (the "Special Committee")
Dear Sirs:
Re: Proposed Merger of Dakota Mining Corporation and USMX, Inc.
INTRODUCTION
Canaccord Capital Corporation ("Canaccord") understands that Dakota Mining
Corporation ("Dakota") entered into an agreement providing for the merger (the
"Merger") of a wholly-owned subsidiary of Dakota with USMX, Inc. (`USMX") on
February 6, 1997 (the "Announcement Date"). The proposed Merger will result in
shareholders of USMX receiving one Dakota common share for every 1.1 common
share of USMX (the "Share Exchange Ratio"). It is understood that USMX will
become a wholly owned subsidiary of Dakota.
The terms and conditions of the Merger as well as a detailed review of the
financial position and operations of each of Dakota and USMX are more fully
described in the management information circular and proxy statement (the "Proxy
Circular") for the annual and special meeting of shareholders which will be
provided to common shareholders of USMX and Dakota.
ENGAGEMENT OF CANACCORD
Canaccord has acted as a financial advisor to Dakota since January 1996 and has
assisted Dakota in identifying merger candidates with the intention of creating
shareholder value. Canaccord has conducted detailed due diligence and is
familiar with the assets of Dakota. As such, the Special Committee first
contacted Canaccord to provide a fairness opinion in January, 1997, as to
whether the terms of the Merger are fair, from a financial point of view, to the
Dakota Shareholders (the "Fairness Opinion"). Canaccord was formally engaged on
February 10, 1997.
Under the terms of our engagement, Canaccord will receive a fee of US $200,000
for the preparation of the Fairness Opinion as well as on-going financial
advice. Additionally, Dakota has agreed to reimburse Canaccord for its
reasonable out-of-pocket expenses, including the fees and disbursements of its
counsel, related to this engagement and to indemnify Canaccord in certain
circumstances. The fees payable to Canaccord are not contingent in whole or in
part upon the approval or completion of the Merger nor dependent upon the
conclusion reached by Canaccord in the Fairness Opinion. Canaccord has not been
engaged to prepare a formal valuation of either Dakota or USMX or any of their
material assets nor have we been requested to determine the likely trading range
of the combined company that will exist after giving effect to the Merger, and
this opinion should not be construed as such.
CREDENTIALS OF CANACCORD
Canaccord is not an insider, associate or affiliate (as such terms are defined
in the Securities Act (Ontario) of Dakota or USMX. Canaccord has previously
acted for Dakota in a financing in 1996 and in February, 1997, and generally as
a financial advisor, but not in any other capacity. Further, Canaccord may be
retained in the future to act in connection with the solicitation of
shareholders in connection with the approval of the Merger.
We believe Dakota selected us to act as its financial advisor in connection with
the proposed Merger as a result of our knowledge of Dakota and USMX, our
knowledge of the Canadian securities markets generally, and our experience in
complex financial transactions in Canada. As part of our investment banking
business, we are regularly engaged in the provision of fairness opinions and in
the valuation of businesses and securities in connection with mergers and
acquisitions and private placements.
The Fairness Opinion expressed herein is the opinion of Canaccord and the form
and content hereof have been approved for release by a committee of its officers
and directors, each of whom is experienced in the preparation of fairness
opinions and merger, acquisition, divestiture and valuation matters.
SCOPE OF REVIEW
In preparing this Fairness Opinion, Canaccord reviewed and, where considered
appropriate, relied upon the following:
Dakota Mining Corporation
1. Audited financial statements for the year ended December 31, 1995 and draft
financial statements for the year ended December 31, 1996;
2. Annual Reports dated December 31, 1994 and 1995;
3. Unaudited interim financial statements for the period ended September 30,
1996;
4. Draft Proxy Circular to be mailed to Dakota Shareholders dated March 14,
1997;
5. Operating forecast prepared by management for the fiscal years ending
December 31, 1997 through to 2000;
6. Pre-feasibility report on the sulfide portion of the Gilt Edge Mine by
Roberts & Schaefer Company, 1994;
7. Site visits by Canaccord;
8. Draft Loan and Intercreditor Agreement with a senior lender as disclosed in
the Proxy Circular; and
9. Review of Dakota gold hedging program.
USMX Inc.
1. Audited financial statements for the year ended December 31, 1995 and draft
financial statements for the year ended December 31, 1996;
2. Annual Reports dated December 31, 1994 and 1995;
3. Unaudited interim financial statements for the period ended September 30,
1996;
4. Draft Information Circular to be mailed to USMX Shareholders dated March
14, 1997;
5. Operating forecast prepared by management for the fiscal years ending
December 31, 1997 through to 2000;
6. Review of USMX's gold hedging program; and
7. Review of USMX's preliminary prospectus dated November 1, 1996.
General Information
1. Merger Agreement between Dakota and USMX dated February 5, 1997;
2. Joint press releases of USMX and Dakota announcing the proposal for the
Merger;
3. Discussions with senior management of Dakota and USMX with respect to
information referred to above and their assessment of the historical,
current and prospective operations, assets, investments and financial
position of their respective companies;
4. Current and historical stock market trading information relating to Dakota
and USMX;
5. Information concerning basic and fully diluted shares outstanding at
various specific dates for Dakota and USMX;
6. Other industry, corporate, economic, and market data, as well as such other
investigations and financial analysis as Canaccord considered necessary or
appropriate in the circumstances; and
7. Proprietary Canaccord gold mining company databases.
ASSUMPTIONS AND LIMITATIONS
Pursuant to our engagement, and with the approval of the Board, Canaccord has
relied upon and has assumed the completeness, accuracy and fair presentation of
all the financial and other information, data, advice, opinions and
representations obtained by it from public sources, contained in the Proxy
Circular, or provided to it by Dakota, USMX or their respective subsidiaries,
affiliates and advisors, or otherwise pursuant to our engagement. Canaccord has
assumed that the business plans, financial estimates and projections provided to
it by the management of Dakota and USMX represent their best estimates of the
most probable results for their respective companies for the periods presented
therein and that such estimates and projections are justifiable. Further,
Canaccord has assumed that all of the conditions for the Merger (as described in
the Proxy Circular) will be met. Should any of the conditions of the Merger not
be met, Canaccord has the right to amend or withdraw its opinion. Subject to the
exercise of professional judgment and except as expressly described herein,
Canaccord has not attempted to verify independently the accuracy or completeness
of any of such information, data, advice, opinions, representations, business
plans, forecasts and projections.
Dakota and USMX have each represented to Canaccord, in certificates dated as at
the date hereof, amongst other things, that the information, data and other
material provided to Canaccord was at the date provided, complete, true and
correct in all material respects and did not contain any untrue statement of
material fact or omit to state any material fact necessary to make the
statements therein not misleading in light of the circumstances in which such
statements were made. Each of Dakota and USMX has represented to Canaccord that
since the date that any information, data or other material were provided to
Canaccord, except as disclosed in writing to us, to the best of their knowledge,
information and belief after reasonable inquiry there has been no material
change, financial or otherwise, in the business, operations or prospects of
either Dakota or USMX respectively, or any of their subsidiaries not disclosed
to Canaccord which would reasonably be expected to have a material affect on the
Fairness Opinion. Further, it was represented to Canaccord, with respect to any
portions of the information that constitute forecasts, projections or estimates,
such forecasts, projections or estimates were prepared using the assumptions
identified therein, which in the reasonable belief of Dakota and USMX are
reasonable in the circumstances, and are not misleading in any material respect.
The Fairness Opinion is rendered on the basis of securities markets, economic
and general business and financial conditions prevailing as of the date hereof
and the condition and prospects, financial and otherwise, of Dakota and USMX as
they were reflected in the information and documents reviewed by Canaccord and
as they were represented to us in our discussions with their respective
management.
In our analysis and in connection with the preparation of the Fairness Opinion,
Canaccord reviewed financial projections provided by Dakota and USMX, or their
advisors, which reflect numerous assumptions regarding the impact of general
economic and industry conditions and political and other conditions on the
future financial results of each of these companies. While Canaccord believes
the assumptions used are appropriate in the circumstances, many are beyond the
control of any party involved with the Merger. The Fairness Opinion is not
intended to be and does not constitute a recommendation to any shareholder of
Dakota as to whether or not such shareholder should vote in favor of the Merger,
but rather represents Canaccord's assessment of the fairness, from a financial
point of view, of the Merger to the Dakota Shareholders.
FAIRNESS METHODOLOGY
In rendering our Fairness Opinion to the Board of Directors, Canaccord reviewed,
considered and performed a variety of financial and comparative analyses. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant assumptions and methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not necessarily susceptible to partial analysis or summary
description. No specific weightings were assigned to any of the various
methodologies employed. Instead, qualitative judgments were made based on our
experience in rendering opinions and on circumstances then prevailing as to the
significance and relevance of each analysis and factor. Any attempt to select
portions of our analysis or of the factors considered, without considering all
factors and analyses employed would create an incomplete and misleading view of
the process underlying the Fairness Opinion.
In arriving at our opinion as to fairness, from a financial point of view, of
the Merger to the Dakota Shareholders, Canaccord compared the Share Exchange
Ratios with our assessment of the relative values of Dakota and USMX.
The scope of our analyses encompassed the following:
a) A comparison of the Merger Share Exchange Ratio and the historical stock
market trading prices for Dakota and USMX;
b) An analysis of the net asset values for each of Dakota and USMX on an
aggregate and per share basis, and in reference to the proposed Share
Exchange Ratio;
c) A comparison of Dakota and USMX relative to their respective publicly
traded peer groups in terms of market capitalization to various measures as
deemed appropriate; and
d) A comparison of the implied acquisition value for Dakota relative to
selected recent market transactions Canaccord deemed comparable.
We have also completed such other analysis and investigations that were
considered by Canaccord to be appropriate in the circumstances for the purposes
of arriving at an opinion as to whether the Merger is fair, from a financial
point of view, to the Dakota Shareholders. For the purposes of our analysis,
Canaccord did not prepare, nor were we requested to prepare, a formal valuation
of either Dakota of USMX, or a determination of the likely trading range of USMX
shares following the Merger.
Market Trading Analysis
Canaccord reviewed the relative trading of Dakota and USMX for certain periods
prior to the Announcement Date. As shown in the chart below, the historic
exchange ratio for the 12 month period prior to the announcement date January 6,
1997 ("Announcement Date") was less than 1:1.1 (Dakota shares: USMX shares)
representing a slight discount of USMX common shares, as compared to USMX's
common share market value at such time, to Dakota Shareholders.
[Share Exchange Ratio Chart Inserted Here]
To determine if the market was a fair indication of value, we performed detailed
liquidity analyses of both Dakota and USMX. We analyzed the volume traded as a
percentage of total shares outstanding, volume traded as a percentage of public
float, approximate daily trading volume (# of shares), approximate daily value
of trading, approximate daily block trading volume and approximate block trading
as a percentage of total trading, for the 30 day, 100 day, and 12 months prior
to the Announcement Date.
From this analysis we concluded that the proposed Share Exchange Ratio
represented a modest historic premium for Dakota Shareholders and that the
recent historic exchange ratios do not differ materially from the recent
historical stock market trading prices of each of Dakota and USMX.
We further concluded that as a valuation technique the market trading approach
for Dakota and USMX could be given considerable consideration in determining
value given their high liquidity. For the historical periods in consideration,
Dakota traded between approximately $100,000 and $250,000 per day and over 65%
of the total shares outstanding in 1996. In addition there exists a history of
sizable block trading activity. It was clear that the Dakota Shareholders had
ample liquidity and we had no reason to believe that the market was not a fair
reflection of value. USMX traded between approximately $75,000 and $100,000 per
day and over 45% of the total shares outstanding in 1996. Despite the lack of
block trading activity compared to Dakota, USMX Shareholders had ample liquidity
and we had no reason to believe that the market was not a fair reflection of
value.
To arrive at an appropriate market value for Dakota and USMX, Canaccord
calculated an average share price from the closing market price on the
Announcement Date, the 30 day weighted average market value prior to the
Announcement Date, and the 100 day weighted average market value prior to the
Announcement Date.
Net Asset Value Analysis
The Net Asset Value approach allows for the separate valuation of each of the
individual assets and liabilities using the most appropriate valuation
methodology for the individual asset.
Sufficient information existed to utilize a discounted cash flow approach
("DCF") in conjunction with current balance sheets, and review of exploration
properties to determine the net asset value for both Dakota and USMX. For the
purposes of the net asset value approach, Canaccord made the following
assumptions:
a) The balance sheets for Dakota and USMX were dated December 31, 1996;
b) The price of unhedged gold would remain constant at US $370/oz.;
c) The price of silver would remain constant at US $5/oz.;
d) Net present values for the operating mines were calculated based on
after-tax discounted cashflows;
e) Further exploration programs and assumptions to increase the gold reserves
were not factored into the DCF model;
f) The applied discount rates ranged from 0% to 5%. In addition, no premium to
the NAV was assigned;
g) USMX would require additional equity financing amounting to US $10 million
at US $1.00 per common share should the Merger not be completed.
Canaccord reviewed and analyzed the financial condition of both Dakota and USMX
and their ability to finance operations.
Selected Comparable Companies Analysis
Dakota and USMX were analyzed in comparison to similar publicly traded
companies, based on several criteria including property locations, relative
reserve development of those properties, and the timing and magnitude of future
gold production for each of the companies. Canaccord reviewed the market
capitalization per ounce of gold equivalent production and per ounce of gold
reserve for each of the selected comparable companies. The results of the
analysis indicate that Dakota and USMX are trading in reasonable ranges relative
to the selected comparable companies.
Selected Comparable Transactions Analysis
Canaccord analyzed recent comparable publicly disclosed transactions of both
gold companies and individual properties. This approach was not a material
determinant of value due to, among other things, the difficulty in identifying
companies that had properties in similar geographic locations and that were in
equivalent stages of production and reserve development, and the different forms
of consideration paid.
Other Considerations
In reaching our conclusions in this Fairness Opinion, Canaccord reviewed and
considered other qualitative factors that would be relevant to the Dakota
Shareholders including, but not limited to market presence, market liquidity,
geographic diversity, financing leverage, financial strength and management
depth. These considerations included the following:
A) Increased Market Liquidity
On a pro forma basis, after taking into consideration the Merger, Dakota
Shareholders will benefit from increased market presence and liquidity inherent
in the merged company. Specifically, the combined company will benefit from the
following attributes: (i) have a market capitalization exceeding $150 million;
(ii) be a multiple listed company; and (iii) have an increased shareholder base.
B) Increased Access to Capital
The merged company will have greater access to capital in North America given
its larger size and market liquidity. In addition, there are opportunities to
increase financial leverage as the larger merged company will be better able to
secure debt, especially when certain projects are brought into operation.
C) Increased Production and Reserve Profile
The merged company will have approximate annual production in excess of 200,000
ounces of gold in 1988 and 1.7 million ounces of proven and probable reserves.
This should result in the merged company receiving a higher market
capitalization per ounce of production and reserves.
D) Complementary Management Teams
Dakota and USMX have complementary management teams possessing operating
expertise, both open pit and underground. Dakota will provide additional
experience and expertise in operating cold weather heap leach operations.
E) Enhanced Exploration Potential
Dakota and USMX in particular have exciting exploration potential which should
contribute to increased reserves upon undertaking a comprehensive exploration
program.
F) Gold Hedging Program
Dakota and USMX in particular have employed an excellent gold hedging program of
approximately 10,300 ounces and 145,000 ounces of gold hedged at an average
price of US $389 and US 410 respectively.
G) Cost Rationalization
The merged company will be able to reduce general, administrative and overhead
costs resulting from overlapping responsibilities and redundant costs.
CONCLUSION
Based upon and subject to the foregoing, Canaccord is of the view that the
Merger is fair, from a financial point of view, to Dakota Shareholders, as of
the date hereof.
We have assumed, without independent verification, that all of the opinions,
advice and statements contained in the Proxy Circular is correct including,
without limitation, the opinions and statements contained therein relating to
taxation matters. To the extent that such opinions, advice or statements are
subject to any assumptions, qualifications or limitations, this opinion is
deemed subject to the same assumptions, qualifications and limitations.
We have also noted the risks associated with investment in USMX and Dakota,
including those factors set out in the Proxy Circular. This opinion could be
materially affected by the occurrence of any such matters in respect of USMX to
the extent that it would not have materially affected Dakota.
This opinion has been provided for the use and information of the Board of
Directors and Shareholders of Dakota and may not be used by any other person
without the express prior written consent of Canaccord. We hereby consent to the
appending of this opinion, in its entirety, to the Proxy Circular. Canaccord is
providing this opinion as of the date hereof and disclaims any undertaking or
obligation to advise any person of any change in any fact or matter affecting
this opinion which may come or be brought to Canaccord's attention after the
date hereof. Without limiting the foregoing, in the event that there is any
material change in any fact or matter affecting this opinion after the date
hereof, Canaccord reserves the right to change, modify or withdraw this opinion.
Yours truly,
/s/ CANACCORD
CANACCORD CAPITAL CORPORATION
<PAGE>
APPENDIX D
March 14, 1997
The Board of Directors of
USMX, Inc.
141 Union Boulevard, Suite 100
Lakewood, CO
U.S.A. 80228
Dear Sir(s):
Newcrest Capital Inc. ("Newcrest", "we", "us", or "our") understand that USMX,
Inc. ("USMX") has entered into a merger agreement (the "Merger") with Dakota
Mining Corporation ("Dakota"). Under the terms of the Merger, shareholders of
USMX will receive one Dakota common share for every 1.1 common shares of USMX
held (the "Share Exchange Ratio") and USMX will become a wholly owned subsidiary
of Dakota.
The terms and conditions of the Merger as well as a detailed review of the
financial position and operations of each of USMX and Dakota are more fully
described in a notice of annual and special meeting of shareholders and
management information circular and proxy statement which will be provided to
common shareholders of USMX and Dakota.
Engagement of Newcrest Capital Inc.
USMX has retained Newcrest to provide advisory services as well as our opinion
(the "Fairness Opinion") to the Board of Directors of USMX (the "Board of
Directors") as to the fairness, from a financial point of view, of the Merger to
the shareholders of USMX (the "Holders of Shares"). We have not been engaged to
prepare and have not prepared a formal valuation of USMX or any of its material
assets and our Fairness Opinion should not be construed as such. Under the terms
of the engagement, Newcrest will receive a fee for the preparation of the
Fairness Opinion and USMX has agreed to reimburse Newcrest for its reasonable
out-of pocket expenses. USMX has also agreed to indemnify Newcrest in respect of
certain liabilities which may be incurred by Newcrest in connection with the
provision of its services. No part of Newcrest's fee is contingent upon the
conclusion reached by Newcrest in the Fairness Opinion.
Qualifications of Newcrest
Newcrest is an independent, fully-integrated investment dealer headquartered in
Toronto, Ontario with additional offices in Montreal, Calgary and Vancouver. The
firm specializes in equity investments in publicly traded Canadian companies.
Newcrest was known as Sanwa McCarthy Securities Ltd. until September of 1995 and
was renamed in October of 1995 after a significant corporate reorganization.
Newcrest provides investment services to institutional clients; employs its own
trading group; does specialized and comprehensive research on a variety of
different industries and is an active underwriter and financial advisor to
Canadian companies.
In particular, Newcrest has participated in a significant number of transactions
involving financings, fairness opinions and valuations of mining companies.
Scope of Review
In preparing the Valuation and Fairness Opinion, Newcrest has, among other
things, reviewed and relied upon, or carried out, the following:
(i) audited financial statements of USMX and Dakota for the year ended
December 31, 1995 and draft financial statements of USMX and Dakota for
the year ended December 31, 1996;
(ii) unaudited interim financial statements for the periods ended
September 30, 1996 for USMX and Dakota;
(iii) management prepared operating and financial forecasts for fiscal years
ending December 31, 1997, 1998, 1999 and 2000 for USMX and Dakota;
(iv) draft information circular describing the Merger to be mailed to USMX
and Dakota shareholders;
(v) certain publicly available information related to the business,
operations, financial performance and industry conditions of USMX;
(vi) press releases issued by USMX and Dakota from January 1, 1996 to the
date hereof;
(vii) gold market performance and industry data;
(viii) discussions with senior management of USMX in respect of the operations,
business plans and undeveloped mining interests of USMX and gold industry
conditions;
(ix) stock market information relating to USMX and Dakota;
(x) a certificate addressed to Newcrest from USMX representing, among other
things, that the information provided to us in respect to the Fairness
Opinion is full, true and complete disclosure and that no material
information has been withheld which might reasonably affect the Fairness
Opinion; and,
(xi) such other market, financial and resource industry information that
Newcrest considered necessary or appropriate in the circumstances in
order to provide the Fairness Opinion.
We conducted such analysis, investigations, research and testing of
assumptions as were considered by us to be appropriate in the circumstances. We
were granted access to the management of both USMX and Dakota and were not, to
our knowledge, denied access to any information which we requested which might
be material to the Fairness Opinion.
Assumptions
In accordance with the terms of our engagement agreement, we have relied on and
assumed the completeness and accuracy of publicly available information
concerning USMX and Dakota and the financial and other information which
Newcrest has received from each company. Although we have not conducted any
independent verification of the information, we have no reason to believe that
such information is not accurate or complete. The Fairness Opinion is
conditional upon such completeness, accuracy and fair presentation of all
material provided to us.
USMX and Dakota have represented to Newcrest, in certificates dated as at the
date hereof, amongst other things, that the information, data, advice, opinions
and representations provided to Newcrest are complete, true and correct in all
material respects and do not contain any untrue material fact or omit to state
any material fact and that since the date the relevant information was provided,
there has been no material changes in USMX or Dakota or any of their
subsidiaries and no material change has occurred in the information or any part
thereof which would reasonably be expected to have a material effect on the
Fairness Opinion. USMX and Dakota have also represented in the above
certificates that with respect to any portions of the information that
constitute forecasts, projections or estimates, such forecasts, projections or
estimates were prepared using assumptions which in the belief of USMX and Dakota
are reasonable in the circumstances, and are not misleading in any material
respect in light of the assumptions used.
The analysis utilized in developing the range of a fair merger ratio between
USMX and Dakota is based upon techniques and relevant assumptions that Newcrest
deemed appropriate in the circumstances. In our analysis and in connection with
the preparation of the Fairness Opinion, we have made certain assumptions with
respect to economic and industry conditions and other matters, many of which are
beyond the control of any party involved with the Merger.
The methodology employed by Newcrest included a review of long range financial
and operational projections provided by USMX and Dakota which reflect numerous
assumptions regarding the impact of general economic and industry conditions on
the future financial results of USMX and Dakota. While Newcrest believes the
assumptions used are appropriate in the circumstances, some or all of the
assumptions may prove to be incorrect.
The analysis incorporated in the Fairness Opinion must be considered as a whole.
Any attempt to select portions of our analysis without considering all factors
and analysis could lead to an undue emphasis on any particular factor or
analysis and possibly lead to incorrect and misleading conclusions. The Fairness
Opinion is not intended to be and does not constitute a recommendation to any
shareholder of USMX as to whether or not such shareholder should tender their
shares.
Fairness Methodology
Newcrest reviewed and considered different methodologies and approaches to
assess the fairness from a financial point of view of the Merger to Holders of
Shares. Of particular significance is a comparison of the Share Exchange Ratio
with our assessment of the relative values of USMX and Dakota using consistent
assumptions and techniques for both companies. We have not attributed any
particular weight to any analysis or factor considered by us, but rather have
made qualitative judgements based on our experience in rendering such opinions
and on circumstances then prevailing as to the significance and relevance of
each analysis and factor.
In assessing the fairness of the Merger, from a financial point of view, to the
Holders of Shares, we have compared the Share Exchange Ratio to:
i) the relative valuations of USMX and Dakota derived from employing
a net asset value approach ("NAV Aproach");
ii) the historical market trading prices of the common shares (and the
implied exchange ratios) of USMX and Dakota; and
iii) the relative valuations of USMX and Dakota based on production and
resource trading multiples of comparable mining companies.
NAV Approach
The NAV Approach incorporates discounted cash flow analysis which takes into
account the amount, timing and relative certainty of the future cash flows
expected to be generated by all the properties currently held by USMX and
Dakota. The free cash flow projections were discounted to present value by
applying an appropriate weighted average cost of capital. As part of our
analysis, Newcrest conducted various sensitivity analyses whereby the
sensitivity of the discounted value of the free cash flows were considered
relative to changes in certain variables including the projected price of gold,
amount of ore mined and discount rates.
For purposes of the NAV approach, Newcrest made the following assumptions:
i) balance sheet items were stated at the carrying values as at
December 31, 1996;
ii) if the Merger were not to be completed, USMX would complete an equity
issue to raise US$10 million (at US$1.00 per common share) in 1997;
iii) operating mines were evaluated on an after-tax discounted cash flow
basis;
iv) USMX's exploration interests outside of Illinois Creek and Thunder
Mountain were reviewed with USMX management and estimates of value were
determined with reference to several factors such as the size of the
properties, ownership interest of USMX, stage of exploration program and
historic exploration expenditures;
v) discount rates ranging from 0% to 8%;
vi) spot gold prices ranging from US$350 per ounce to $390 per ounce; and
vii) silver price of US$5.00 per ounce.
As a result of the range of relative company valuations implied by the NAV
Approach, Newcrest is of the opinion that the Share Exchange Ratio is fair from
a financial point of view to the Holders of Shares.
Market Trading Analysis
On January 6, 1997 (the "Announcement Date"), the Merger was publicly announced.
Set forth below is a summary of the weighted average trading price of USMX and
Dakota common shares during the periods referenced together with the resulting
implied share exchange ratio:
USMX Weighted Dakota Weighted Implied Share
Time Horizon Average Price Average Price Exchange Ratio
Mar 7/96 $1.34 $1.38 1.023
1 day prior to Jan 6/97 $1.84 $1.50 0.813
30 days prior to Jan 6/97 $1.71 $1.76 1.024
60 days prior to Jan 6/97 $1.76 $1.98 1.122
Notes:
(1) Implied share exchange ratio refers to the ratio of the Dakota closing share
price (AMEX) to the USMX closing share price (Nasdaq).
(2) All trading prices quoted in US$.
(3) Dakota total volume based on volume on AMEX and TSE.
(4) Dakota US$ share prices based on daily closing prices on the AMEX.
(5) Average Prices have been rounded to two decimal places
For the period of 60 trading days prior to the Announcement Date, the minimum
implied share exchange ratio was 0.814 and the maximum was 1.458.
In terms of share trading volume, USMX common shares had an average daily
trading volume of approximately 31,767 shares for the 60 day period prior to the
Announcement Date. For the same period, Dakota shares had daily average trading
volumes of 37,570 shares (American Stock Exchange) and 22,618 (Toronto Stock
Exchange). Based on the daily close of the two stocks for the same period, 46%
of the volume of USMX common shares traded were done so when the implied share
exchange ratio was at or above the Share Exchange Ratio.
[GRAPHIC OMITTED]
The Share Exchange Ratio is fair from a financial point of view to the Holders
of Shares based on the above analysis of the range of relative trading prices
for the common shares for USMX and Dakota in the above periods prior to the
announcement of the Merger.
Comparable Valuation Approach
As a check on the conclusions reached based upon the NAV Approach, Newcrest
compared the range of equity valuations of the USMX and Dakota properties, based
on current adjusted stock market capitalization multiples (reserves, resources
and production) of comparable publicly traded mining companies. The resulting
relative valuations of USMX and Dakota supported the conclusion that the Share
Exchange Ratio is fair to Holders of Shares. However, given the difficulty in
identifying truly comparable companies which are at the same stage of production
and reserve development, Newcrest placed less significance on the Comparable
Valuation Approach.
Other Considerations
Newcrest considered other factors relevant to Holders of Shares before and after
giving effect to the proposed Merger including the following:
i) reduced administrative costs on a consolidated basis largely through
elimination of costs associated with operating USMX as a publicly-held
company;
ii) direct access to cash flows generated through Dakota's financial and
operating activities, representing diversification from the Illinois
Creek project and resulting in enhanced financing opportunities; and
iii) the merged company will have a significantly larger market capitalization
and near term annual projected production of approximately 200,000 ounces
gold; the merged company should be viewed by markets as a mid-cap gold
producer instead of a junior producer, resulting in enhanced market
valuation multiples and better access to the capital markets.
FAIRNESS OPINION
Based on and subject to the foregoing, Newcrest is of the opinion that, as of
the date hereof, the Share Exchange Ratio is fair, from a financial point of
view, to the Holders of Shares.
This Fairness Opinion may be relied upon by the Board of Directors of USMX and
the shareholders of USMX for the purpose of their consideration of the Merger,
but may not be used or relied upon by any other person for any other purpose
without our express prior written consent.
Yours very truly,
NEWCREST CAPITAL INC.
<PAGE>
<PAGE>
APPENDIX E
March 14, 1997
USMX
141 Union Blvd.
Lakewood, Colorado 80028
Dakota Mining Corporation
410 Seventeenth Street, Suite 2450
Denver, Colorado 80202
Re: Dakota / USMX Merger Transaction
Gentlemen:
Pursuant to your request, we are providing our opinion of certain United States
federal income tax consequences to United States shareholders of the proposed
Merger Transaction as described below. Our opinion is based on the Agreement and
Plan of Merger dated February 5, 1997, ("Merger Agreement") and the description
of facts and assumptions contained herein. If any of the facts or assumptions
presented herein or included as part of the Merger Agreement are incorrect in
whole or in part, such inaccuracies may have a material effect upon our opinion
expressed in this letter.
The opinion discussed in this letter covers only those items of federal income
tax specifically discussed in this letter. No attempt has been made to analyze
the tax implications of this transaction to foreign shareholders nor to reach a
conclusion under applicable state or local law.
The parties to the Merger Agreement are:
Dakota Mining Corporation, is a federal corporation organized under the Canada
Business Corporations Act ("Dakota"). Dakota is publicly traded in Europe,
Canada and the United States and is not an investment company. Dakota or its
wholly owned foreign affiliates commenced an active mining business in 1989
outside the United States, has been continuously engaged in the mining business
thereafter, and continues to hold and has sought to acquire additional mineral
interest claims outside the United States to date. In addition, Dakota, through
other affiliates, has been engaged in the mining business throughout this
period.
USMX Merger Corporation, is a Delaware corporation and a direct,
wholly-owned subsidiary of Dakota ("Merger Corp"), formed for
purposes of the Merger transaction. Merger Corp. is not an
investment company. Merger Corp holds no liabilities nor any
assets subject to liabilities; and
USMX Inc., is a Delaware corporation ("USMX") and is not an investment company.
The common stock of USMX is publicly traded in the United States and Canada. No
other classes of stock are outstanding.
For reasons germane to the business continuance, Dakota and Merger Corp desire
to acquire USMX by way of a merger of Merger Corp with and into USMX, with USMX
as the surviving corporation ("Merger Transaction"). Such merger will constitute
a valid merger under Delaware state law.
Subsequent to the Merger Transaction, Dakota will contribute the stock of USMX,
including its affiliates, to an existing wholly-owned U.S. subsidiary of Dakota.
Our opinion is based on a number of assumptions. In rendering our opinion, we
have assumed the following:
1) In the Merger Transaction, the USMX shareholders will surrender and Dakota
will acquire, an amount of stock representing at least 80 percent (as measured
immediately prior to the Merger Transaction) of the total combined voting power
of all classes of stock entitled to vote and at least 80 percent (as measured
immediately prior to the Merger Transaction) of the total number of shares of
each class of non-voting stock of USMX in exchange solely for Dakota voting
stock.
2) After the Merger Transaction, USMX will hold substantially all (at least 90
percent of net worth) of its own properties and substantially all (at least 90
percent of net worth) of the properties of Merger Corp. USMX will not sell or
otherwise dispose of any of its assets, except in the ordinary course of its
trade or business.
3) USMX has not made any distributions other than regular, normal dividends
within the past six months, nor will any distributions be made as part of the
Merger Transaction nor has any stock been redeemed within the past six months.
4) The shareholders of USMX have no present plan, intention or arrangement to
sell, transfer, or otherwise dispose of their shares of Dakota stock to be
received in the Merger Transaction that would cause their ownership of Dakota
stock, in the aggregate, to fall below 50% of the stock received in the Merger
Transaction. Dakota has no plan or intention to reacquire any stock issued in
the Merger Transaction, nor liquidate, merge or dispose of USMX after the Merger
Transaction.
5) There is no intercorporate indebtedness between Dakota (or
Merger Corp.) and USMX that was issued, acquired or will be
settled at a discount and there are no plans to capitalize or
cancel the line of credit being granted to USMX.
Our opinion is based on the existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the applicable Treasury regulations thereunder,
and the judicial and administrative interpretations thereof. Any legislative,
regulatory, administrative, or judicial decisions subsequent to the date of this
opinion or changes in the facts of the Merger Transaction may have an impact on
the validity of our conclusions.
Subject to the assumptions, conditions and qualifications described herein, and
based on existing federal income tax law, it is our opinion that for United
States federal income tax purposes:
1) The Merger Transaction will constitute a reorganization
within the meaning of Section 368(a) of the Code, and Dakota,
USMX and Merger Corp. will each be a party to the reorganization
within the meaning of 368(b) of the Code;
2) Dakota will not recognize any gain or loss as a result of the
Merger Transaction;
3) USMX will not recognize any gain or loss as a result of the
Merger Transaction;
4) No gain or loss should be recognized by U.S. shareholders of USMX who, by
virtue of the Merger Transaction, become holders of less than 5% of the stock of
Dakota, measured by either voting rights or value. No gain or loss should be
recognized by U.S. shareholders of USMX who, by virtue of the Merger
Transaction, become holders of 5% or greater of the stock of Dakota measured by
either voting rights or value, provided such shareholders enter into gain
recognition agreements with the Internal Revenue Service as required in Section
367 of the Internal Revenue Code and the Regulations pursuant thereto. No
opinion is being rendered on any transfer or exchange of any options or warrants
for stock in USMX for options or warrants for stock in Dakota;
5) The aggregate tax basis of the shares of Dakota stock
received in the Merger Transaction by a stockholder of USMX
should be the same as the tax basis of his USMX stock exchanged
therefor;
6) The holding period of Dakota stock in the hands of a USMX stockholder should
include the holding period of his USMX stock exchanged therefor, provided such
USMX stock is held as a capital asset at the time of the Merger Transaction;
7) The reorganization will not be disqualified in the event of a
contribution by Dakota of the stock of USMX to an existing,
wholly-owned US subsidiary of Dakota.
This opinion letter represents our current judgment on the specific issues.
There is no assurance that the Internal Revenue Service will agree with the
opinions expressed herein. The Internal Revenue Service may take a position
contrary to our opinion, and if the matter is litigated, a court could reach a
contrary decision.
The opinions expressed herein are solely for your benefit and the benefit of the
USMX and Dakota shareholders at the effective date of the Merger Transaction,
and they may not be relied upon in any matter or for any purpose by any other
person, and may not be circulated, quoted or otherwise referred to for any other
purpose without our consent.
Very truly yours,
<PAGE>
APPENDIX F
PURCHASE AND SALE AGREEMENT
By and Among
PEGASUS GOLD CORPORATION ("Buyer")
and
USMX, INC. and USMX OF MONTANA, INC. ("Sellers")
Dated
March 17, 1997
3/15/97
- ii -
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PRELIMINARY STATEMENTS.......................................................................................... 1
ARTICLE I Purchase and Sale of Mining Agreements....................................................... 2
Section 1. Agreement to Purchase and Sell..................................................... 2
ARTICLE II Purchase Price, Manner of Payment and Closing................................................ 3
Section 2.1 Purchase Price.................................................................... 3
Section 2.2 Time and Place of Closing......................................................... 3
Section 2.3 Manner of Payment of the
Purchase Price............................................................ 3
ARTICLE III Sellers' Representations, Warranties and
Covenants........................................................................... 4
Section 3.1 Organization...................................................................... 4
Section 3.2 Authority......................................................................... 4
Section 3.3 Consents.......................................................................... 4
Section 3.4 Enforceability.................................................................... 5
Section 3.5 Litigation........................................................................ 5
Section 3.6 Mining Agreements................................................................. 5
Section 3.7 Indemnification of Buyer...........................................................6
ARTICLE IV Buyer's Representations, Warranties and
Acknowledgments
7
Section 4.1 Organization...................................................................... 7
Section 4.2 Authority......................................................................... 7
Section 4.3 Enforceability.................................................................... 7
Section 4.4 No Assignment of Loan............................................................. 8
Section 4.5 Consents.......................................................................... 8
Section 4.6 Litigation........................................................................ 8
ARTICLE V Conditions to Closing......................................................................... 8
Section 5.1 Conditions Precedent to
Buyer's Obligations....................................................... 8
(a) Representations and Warranties................................................... 8
(b) Documents and Proceedings Satisfactory........................................... 9
(c) Instruments of Transfer.......................................................... 9
(d) Compliance with Terms and Conditions 9
(e) Officer's Certificate........................................................... 10
Section 5.2 Conditions Precedent to
Sellers' Obligations......................................................10
(a) Representations and Warranties.................................................. 10
(b) Documents and Proceedings Satisfactory.......................................... 10
(c) Compliance with Terms and Conditions
11
(d) Officer's Certificate........................................................... 11
(e) USMX Shareholder Approval....................................................... 11
ARTICLE VI Closing..................................................................................... 11
Section 6.1 Form of Documents................................................... 11
Section 6.2 Buyer's Deliveries.................................................. 12
Section 6.3 Sellers' Deliveries................................................. 12
ARTICLE VII Termination................................................................................ 13
ARTICLE VIII Miscellaneous............................................................................. 13
Section 8.1 Amendments, Etc................................................................. 13
Section 8.2 Addresses and Notices........................................................... 14
Section 8.3 Governing Law................................................................... 14
Section 8.4 Submission to Jurisdiction...................................................... 14
Section 8.5 Expenses........................................................................ 15
Section 8.6 Counterparts.................................................................... 15
Section 8.7 Assignability................................................................... 15
Section 8.8 Further Assurances.............................................................. 16
Section 8.9 No Waiver Regarding Responsibility for Pre-Existing Environmental
Conditions...............................................................16
</TABLE>
EXHIBITS
EXHIBIT A - ASSIGNMENT AGREEMENT
EXHIBIT B - CONSENT AND AGREEMENT
<PAGE>
3/15/97
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3/15/97
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is entered into
this 17th day of March, 1997, by and among PEGASUS GOLD CORPORATION, a
Nevada corporation ("Buyer"), USMX, INC. (successor by merger to U.S.
Minerals Exploration Company, a Colorado corporation), a Delaware
corporation ("USMX"), and USMX of MONTANA, INC., a Montana corporation
("USMX/Montana", and together with USMX being referred to herein
collectively as "Sellers"). Capitalized terms used herein and not otherwise
defined shall have the respective meanings provided in the Loan Agreement
(as hereinafter defined).
: PRELIMINARY STATEMENTS
1. Buyer has entered into a letter agreement, dated May 8, 1996, as
amended by a letter agreement dated June 12, 1996, a letter agreement dated June
20, 1996 and a revised amortization schedule as appended to letter dated June
21, 1996 from Buyer's Vice President and General Counsel (said agreement, as so
amended, hereinafter called the "Loan Agreement"), with USMX, pursuant to which
Buyer agreed to loan $4,500,000 (the "Loan") to USMX and certain of its
subsidiaries and affiliates on the terms and conditions set forth therein.
2. In connection with the Loan Agreement, Sellers and Buyer entered
into an Assignment and Security Agreement, dated as of June 28, 1996 (the
"Security Agreement"), whereby Sellers granted to Buyer a security interest in
all of their right, title and interest in, to and under the following: (a) the
Agreement, dated as of January 1, 1986, by and between USMX and Montana Tunnels
Mining, Inc. (formerly known as Centennial Minerals Inc.), a Nevada corporation
("MTMI"), which is a wholly-owned subsidiary of Buyer; (b) the Special Warranty
Deed and Assignment with Reserved Royalties, dated June 6, 1987, by Sellers to
MTMI, recorded June 23, 1987 in the office of the Jefferson County, Montana
Recorder as Entry No. 140649, in Book 120 Deeds, Pages 751, et seq. (as such
Agreements and Deed have been amended to date, hereinafter collectively called
the "Mining Agreements"); and (c) all proceeds of the Mining Agreements.
3. On the terms and subject to the conditions contained in this
Agreement, Buyer desires to purchase, and Sellers desire to sell, all of
Sellers' right, title and interest in, to and under the Mining Agreements for a
purchase price equal to the outstanding principal amount of the Loan (plus
interest accrued thereon through the Closing Date (as hereinafter defined)).
NOW, THEREFORE, in consideration of the premises contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE IARTICLE I
Purchase and Sale of Mining Agreements
Section 1. Agreement to Purchase and SellAgreement to Purchase and
Sell. On the terms and subject to the conditions contained in this Agreement,
Buyer agrees to purchase from Sellers, and Sellers agree to sell to Buyer, all
of Sellers' right, title and interest in, to and under the Mining Agreements
(the "Purchased Assets").
II
ARTICLE II
Purchase Price, Manner of Payment and Closing
Section II.1 Purchase Price.......Section II.1 Purchase Price. The
purchase price of the Purchased Assets shall be equal to the aggregate
outstanding principal balance of the Loan, plus accrued and unpaid interest
thereon (collectively, the "Purchase Price"), as of the Closing Date, as defined
in Section 2.2 below.
Section II.2 Time and Place of ClosingII.2 Time and Place of Closing.
The transactions contemplated by this Agreement shall be consummated (the
"Closing") at 10:00 a.m., Pacific time, at the offices of Buyer, 601 West First
Avenue, Suite 1500, Spokane, Washington 99204, as soon as practicable, but, in
any event, not later than five (5) days after USMX has received the approval of
its shareholders with respect to this Agreement, or at such other time or place
as shall be mutually agreed upon by Buyer and Sellers. The date on which the
Closing occurs in accordance with the preceding sentence is referred to in this
Agreement as the "Closing Date".
Section II.3 Manner of Payment of the Purchase PriceII.3 Manner of
Payment of the Purchase Price. At the Closing, Buyer shall cancel and forgive
all indebtedness (including but not limited to all unpaid principal and interest
under the Loan) owing to Buyer by USMX, its subsidiaries and its affiliates
under the Loan Agreement in full satisfaction of the Purchase Price. As of the
Closing Date, the Loan Agreement and the Security Agreement shall be deemed to
be terminated and neither party shall have any rights or obligations thereunder.
ARTICLE IIIARTICLE III
Sellers' Representations, Warranties and Covenants
Sellers represent, warrant and covenant to Buyer as follows:
Section III.1 Organization........Section III.1 Organization. Each
Seller is a corporation duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation.
Section III.2 AuthorityIII.2 Authority. Subject to USMX's receipt of
shareholder approval with respect to this Agreement, the execution, delivery and
performance by Sellers of this Agreement, and all documents and instruments to
be executed by Sellers pursuant to this Agreement (collectively, "Sellers'
Ancillary Documents"), have been duly authorized by all necessary corporate
action, and do not and will not contravene (a) either Seller's charter, by-laws
or other organizational documents, (b) any applicable law, statute, rule or
regulation, (c) any contractual restriction including, without limitation, any
indenture, mortgage, lease, agreement, judgment, order or decree binding on or
affecting the Sellers or their properties, and do not and will not result in or
require the creation of any lien, security interest or other charge or
encumbrance upon or with respect to any of their properties.
Section III.3 ConsentsIII.3 Consents. Other than USMX shareholder
approval and the consent of MTMI, no authorization or approval or other action
by, and no notice to or filing with, any governmental authority, regulatory
body, court, financial institution or any other person is required for the due
execution, delivery and performance by Sellers of this Agreement and the
Sellers' Ancillary Documents.
Section III.4 EnforceabilityIII.4 Enforceability. This Agreement and
Sellers' Ancillary Documents have been duly executed and delivered by the duly
authorized representative of each Seller and, subject to the consents described
in Section 3.3 above, constitute the legal, valid and binding obligation of such
Seller enforceable against such Seller in accordance with their terms.
Section III.5 LitigationIII.5 Litigation. There is no pending or, to
Sellers' actual knowledge, threatened action or proceeding affecting Sellers or
any of their respective subsidiaries before any court, governmental, regulatory
or administrative agency or arbitrator which purports to affect the legality,
validity or enforceability of the Agreement, the Sellers' Ancillary Documents or
the transactions contemplated hereby or thereby.
Section III.6 Mining AgreementsIII.6 Mining Agreements. (a) The Mining
Agreements, true and complete copies of which have been furnished to Buyer, have
been duly authorized, executed and delivered by Sellers, have not been amended
or otherwise modified (except by the Amendment of Agreement and Deed, dated as
of July 15, 1991, among MTMI and Sellers, and as otherwise permitted by Section
7 of the Security Agreement), are in full force and effect and are binding upon
and enforceable against Sellers and the other parties thereto in accordance with
their respective terms. Sellers have received no notices of default under any of
the Mining Agreements, and, to Sellers' actual knowledge, there exists no
default under the Mining Agreements by Sellers or any other party thereto.
(b) Sellers collectively are the legal and beneficial owners of the
Purchased Assets free and clear of any lien, security interest, option or other
charge or encumbrance created by Sellers or arising by, through or under
Sellers, except for the security interests granted to Buyer pursuant to the Loan
Agreement, and except for claims or potential claims of the Montana Department
of Environmental Quality under its CECRA Program. No effective financing
statement or other document similar in effect covering all or any part of the
Purchased Assets is on file in any recording office, except those in favor of
Buyer pursuant to the Loan Agreement.
Section III.7 Indemnification of BuyerIII.7 Indemnification of Buyer.
Sellers hereby jointly and severally agree to indemnify Buyer, its successors
and assigns from and against all third parties claiming any right, title or
interest in or to the Purchased Assets by, through or under either or both of
the Sellers, except for the security interests granted to Buyer pursuant to the
Loan Agreement, and except for claims or potential claims of the Montana
Department of Environmental quality under its CECRA Program.
ARTICLE IVARTICLE IV
Buyer's Representations, Warranties and Acknowledgments
Buyer represents and warrants to Sellers as follows:
Section IV.1 Organization Section IV.1 Organization. Buyer is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation.
Section IV.2 AuthorityIV.2 Authority. The execution, delivery and
performance by Buyer of this Agreement, and all documents and instruments to be
executed by Buyer or MTMI pursuant to this Agreement ("Buyer's Ancillary
Documents"), have been duly authorized by all necessary corporate action, and do
not and will not contravene (a) Buyer's or MTMI's charter, by-laws or other
organizational documents, (b) any applicable law, statute, rule or regulation,
(c) any contractual restriction including, without limitation, any indenture,
mortgage, lease, agreement, judgment, order or decree binding on or affecting
Buyer or its properties, and do not result in or require the creation of any
lien, security interest or other charge or encumbrance upon or with respect to
any of its properties.
Section IV.3 EnforceabilityIV.3 Enforceability. This Agreement and
Buyer's Ancillary Documents have been duly executed and delivered by the duly
authorized representative of Buyer and constitutes the legal, valid and binding
obligation of Buyer enforceable against Buyer in accordance with its terms.
Section IV.4 No Assignment of LoanIV.4 No Assignment of Loan. Buyer has
not transferred or assigned any of its right, title or interest in the Loan
Agreement, the Loan or the Security Agreement to any party.
Section IV.5 ConsentsIV.5 Consents. No authorization or approval or
other action by, and no notice to or filing with, any governmental authority,
regulatory body, court, financial institution or any other person is required
for the due execution, delivery and performance by Buyer of this Agreement and
Buyer's Ancillary Documents.
Section IV.6 LitigationIV.6 Litigation. There is no pending or, to
Buyer's actual knowledge, threatened action or proceeding affecting Buyer or
MTMI or any of their respective subsidiaries before any court, governmental,
regulatory or administrative agency or arbitrator which purports to affect the
legality, enforceability or validity of this Agreement, Buyer's Ancillary
Documents, or the transactions contemplated hereby or thereby.
ARTICLE VARTICLE V
Conditions to Closing
Section V.1 Conditions Precedent to Buyer's Obligations Section V.1
Conditions Precedent to Buyer's Obligations. The obligation of Buyer to purchase
the Purchased Assets under this Agreement is subject to the satisfaction (or
waiver by Buyer), at or before the Closing, of each of the following conditions:
(a) Representations and Warranties. All representations and
warranties of Sellers set forth in Article III of this Agreement
shall be true and correct as of the Closing Date as though such
representations and warranties were made as of the Closing Date.
b) Documents and Proceedings Satisfactory. All actions to be taken by
Sellers, and all instruments, opinions and documents required by this
Agreement to be delivered by Sellers, shall be reasonably satisfactory
to Buyer, and Sellers shall have delivered to Buyer on the Closing Date
such documents and other evidence as Buyer may reasonably request in
order to establish the due execution and delivery of this Agreement and
the taking of the requested actions and other proceedings in connection
herewith.
c) Instruments of Transfer. Sellers shall have: (i) executed the
Assignment Agreement in the form of Exhibit A (the "Assignment
Agreement"); and (ii) Sellers shall have delivered to Buyer such other
instruments of sale and transfer ("Other Assignments"), in each case as
may be necessary or desirable to vest in Buyer all of Sellers' right,
title and interest in, to and under the Mining Agreements, free and
clear of any and all liens, security interest, options, claims or
encumbrances, arising by, through or under Sellers, other than security
interests granted by Sellers to Buyer under the Loan Agreement, which
security interests shall be released by Buyer as provided in Sections
6.2(b) and 6.2(c) below.
d) Compliance with Terms and Conditions. All of the terms, covenants,
agreements and conditions to this Agreement to be complied with,
performed and satisfied by Sellers on or before the Closing Date shall
have been complied with, performed and satisfied in all material
respects.
e) Officer's Certificate. Each Seller shall have delivered to Buyer a
certificate, dated the Closing Date, signed by the President or a Vice
President of such Seller, certifying to the matters specified in Sections
5.1(a) and 5.1(b). Section V.2 Conditions Precedent to Sellers' Obligations
Section V.2 Conditions Precedent to Sellers' Obligations. The obligation of
Sellers to sell the Purchased Assets under this Agreement are subject to
the satisfaction (or waiver by Sellers), at or before the Closing, of each
of the following conditions:
(a) Representations and Warranties. All representations and warranties of
Buyer set forth in Article IV of this Agreement shall be true and
correct as of the Closing Date as though such representations and
warranties were made as of the Closing Date.
b) Documents and Proceedings Satisfactory. Buyer shall have caused MTMI
to execute the Consent Agreement in the form attached hereto as
Exhibit B (the "MTMI Consent"). Buyer also shall have executed the
Assignment Agreement, and all actions to be taken by Buyer, and all
other instruments, opinions and documents required by this Agreement
to be delivered by Buyer and MTMI, shall be reasonably satisfactory to
Sellers, and Buyer shall have delivered to Sellers on the Closing Date
such documents and other evidence as Sellers may reasonably request in
order to establish the due execution and delivery of this Agreement
and the taking of the requested actions and other proceedings in
connection therewith.
c) Compliance with Terms and Conditions. All of the terms, covenants,
agreements and conditions to this Agreement to be complied with,
performed and satisfied by Buyer on or before the Closing Date shall
have been complied with, performed and satisfied in all material
respects.
d) Officer's Certificate. Buyer shall have delivered to Sellers a
certificate, dated the Closing Date, signed by the President or a Vice
President of Buyer, certifying to the matters specified in Sections
5.2(a) and 5.2(b).
e) USMX Shareholder Approval. USMX shall have received the approval of
its shareholders with respect to this Agreement.
ARTICLE VIARTICLE VI
Closing
Section VI.1 Form of Documents....Section VI.1 Form of Documents. At the
Closing, the parties shall deliver the documents and shall perform the acts that
are set forth in this Article VI. All documents that Sellers deliver shall be in
form and substance reasonably satisfactory to Buyer and its counsel, and all
documents that Buyer and MTMI deliver to Sellers shall be in form and substance
reasonably satisfactory to Sellers and their counsel.
Section VI.2 Buyer's DeliveriesVI.2 Buyer's Deliveries. Subject to the
fulfillment or waiver of the conditions set forth in Article V, Buyer shall
deliver to Sellers all of the following:
(a) all promissory notes (if any) and other like instruments under the
Loan Agreement, marked as paid in full by Buyer, or as otherwise
requested by Sellers;
(b) duly executed releases, in recordable form, of all security
instruments executed by Sellers, or either of them, pursuant to the
Loan Agreement or Security Agreement;
(c) the duly executed MTMI Consent;
(d) the Assignment Agreement duly executed by Buyer; and
(e) such other documents from Buyer or MTMI as may reasonably be required
in order to effectuate the transactions contemplated hereby.
Section VI.3 Sellers' Deliveries..Section VI.3 Sellers' Deliveries. Subject
to the fulfillment or waiver of the conditions set forth in Article V, Sellers
shall execute and deliver to Buyer all of the following:
(a) certified copies of the charter and by-laws of each Seller;
(b) certificates of good standing of each Seller with respect to its
jurisdiction of incorporation;
(c) an incumbency and specimen signature certificates for each Seller with
respect to the officers of such Seller executing this Agreement on
behalf of such Seller;
(d) a certified copy of resolutions of each Seller's board of directors
and shareholders authorizing the execution, delivery and performance
of this Agreement and the Sellers' Ancillary Documents;
(e) the Assignment Agreement, conveying all of the right, title and
interest in, to and under the Mining Agreements; and
(f) such other documents from Sellers as may reasonably be required in
order to effectuate the transactions contemplated hereby.
ARTICLE VIIARTICLE VII
Termination
This Agreement and the transactions contemplated hereby may be
terminated at any time prior to the Closing by prompt notice given in accordance
with Section 8.2:
(a) by the mutual written consent of Buyer and Sellers; or
(b) by any party if the Closing shall not have occurred on or before June
30, 1997, or such other date as shall be mutually agreed upon by
Sellers and Buyer.
VIII ARTICLE VIII
Miscellaneous
Section VIII.1 Amendments, Etc....Section VIII.1 Amendments, Etc. No
amendment or waiver of any provision of this Agreement, and no consent to any
departure by any party herefrom, shall in any event be effective unless the same
shall be in writing and signed by the other parties hereto, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
Section VIII.2 Addresses and NoticesVIII.2 Addresses and Notices. All
notices and other communications provided for hereunder shall be in writing
(including telecopier, telegraphic, telex or cable communication) and mailed
(postage prepaid), telecopied, telegraphed, cabled or delivered to it, if to
either Seller, at its address at 141 Union Boulevard, Suite 100, Lakewood,
Colorado 80228, Attention: President, and if to Buyer, at its address at 601
West First Avenue, Suite 1500, Spokane, Washington 99204, Attention: General
Counsel, or as to any party, at such other address as shall be designated by
such party in a written notice to the other parties. All such notices and other
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective five days after deposit in the mails, telecopied, delivered by
telegraph company, confirmed by telex answerback or delivered to the cable
company, respectively.
Section VIII.3 Governing LawVIII.3 Governing Law. This Agreement and
each of Sellers' Ancillary Documents and Buyer's Ancillary Documents shall be
governed by and construed in accordance with the laws of the State of Washington
(without regard to any conflict of laws principles).
Section VIII.4 Submission to JurisdictionVIII.4 Submission to
Jurisdiction. Buyer and Sellers irrevocably submit to the jurisdiction of any
Washington State court or Federal court sitting in the State of Washington in
any action arising out of this Agreement or any document or instrument executed
in connection herewith, agree that all claims in such action may be decided in
such court, waives, to the fullest extent permitted by law, the defense of an
inconvenient forum and consents to the service of process by mail. A final
judgment in any such action shall be conclusive and may be enforced in other
jurisdictions. Nothing contained herein shall affect the right of Buyer or
Sellers to serve legal process in any manner permitted by law or affect Buyer's
or Sellers' right to bring any action in any other court.
Section VIII.5 ExpensesVIII.5 Expenses. Each party hereto shall bear
the fees and expenses incurred by such party in connection with, relating to or
arising out of the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby.
Section VIII.6 CounterpartsVIII.6 Counterparts. This Agreement may be
executed in multiple counterparts, each of which shall be deemed to be an
original, and all such counterparts shall constitute one and the same
instrument.
Section VIII.7 AssignabilityVIII.7 Assignability. This Agreement shall
not be assignable by any party without the prior written consent of the other
parties hereto, except that prior to the Closing Buyer may assign its rights and
delegate its duties under this Agreement to a subsidiary or affiliate of Buyer,
but such assignment and delegation shall not release Buyer from its obligations
hereunder.
Section VIII.8 Further AssurancesVIII.8 Further Assurances. The parties
shall, and shall cause their respective subsidiaries to, execute such further
documents, and perform such further acts, as may be necessary to transfer and
convey the Purchased Assets to Buyer, on the terms herein contained, and to
otherwise comply with the terms of this Agreement and consummate the
transactions contemplated hereby.
Section VIII.9 No Waiver Regarding Responsibility for Pre-Existing
Environmental Conditions. Sellers and Buyer hereby acknowledge that there may be
unresolved issues as to whether Sellers should bear any responsibility with
respect to environmental conditions, if any, that existed prior to January 1,
1986 on the properties subject to Mining Agreements. Sellers and Buyer hereby
agree that neither execution of this Agreement and documents hereunder nor the
Closing hereunder shall constitute or be construed as a waiver by Sellers,
Buyer, MTMI or their respective affiliates, of any right or defense with respect
to such responsibility.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
SELLERS:
USMX, INC.
By:________________________________
Title:_____________________________
USMX OF MONTANA, INC.
By:________________________________
Title:_____________________________
BUYER:
PEGASUS GOLD CORPORATION
By:_______________________________
Title:____________________________
<PAGE>
3/15/97
A-2
EXHIBIT A
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT (this "Assignment") is entered into this ___
day of _____________, 1997, by and among PEGASUS GOLD CORPORATION, a Nevada
corporation ("Buyer"), USMX, INC. (successor by merger to U.S. Minerals
Exploration Company, a Colorado corporation), a Delaware corporation ("USMX"),
and USMX OF MONTANA, INC., a Montana corporation ("USMX/Montana", and together
with USMX being referred to herein collectively as "Sellers"), subject to the
terms and provisions of the Purchase and Sale Agreement, dated March 17, 1997
(the "Purchase Agreement"), by and among Buyer and Sellers. Capitalized terms
used herein and not otherwise defined shall have the respective meanings
provided in the Purchase Agreement.
Subject to the terms of the Purchase Agreement, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Sellers do hereby sell, transfer, and assign to Buyer all of such Sellers'
right, title and interest in, to and under the Mining Agreements. To have and to
hold the same unto Buyer and its successors and assigns from and after the date
hereof.
Sellers hereby jointly and severally agree to indemnify Buyer, its
successors and assigns from and against all third parties claiming any right,
title or interest in or to the Purchased Assets by, through or under either or
both of the Sellers, except for the security interests granted to Buyer pursuant
to the Loan Agreement, and except for claims or potential claims of the Montana
Department of Environmental quality under its CECRA Program.
IN WITNESS WHEREOF, Sellers and Buyer have caused their duly authorized
representatives to execute and deliver this Assignment as of the date first
above written.
USMX, INC.
By:_________________________________
Title:_____________________________
USMX OF MONTANA, INC.
By:________________________________
Title:_____________________________
PEGASUS GOLD CORPORATION
By:_________________________________
Title:_____________________________
STATE OF }
} ss.
COUNTY OF }
<PAGE>
3/15/97
A-3
Before me personally appeared _____________________________ on this
______ day of ________________, 1997, and first being duly sworn, executed the
above __________________________, as ___________________of USMX, INC. and
acknowledged to me that [s]he executed the same in that capacity.
Witness my hand and official seal.
My commission expires: _____________________
(seal)
----------------------------
NOTARY PUBLIC
STATE OF }
} ss.
COUNTY OF }
Before me personally appeared _____________________________ on this
______ day of ________________, 1997, and first being duly sworn, executed the
above __________________________, as ___________________of USMX OF MONTANA, INC.
and acknowledged to me that [s]he executed the same in that capacity.
<PAGE>
3/15/97
A-3
Witness my hand and official seal.
My commission expires: _____________________
(seal)
----------------------------
NOTARY PUBLIC
STATE OF }
} ss.
COUNTY OF }
Before me personally appeared _____________________________ on this
______ day of ________________, 1997, and first being duly sworn, executed the
above __________________________, as ___________________of PEGASUS GOLD
CORPORATION and acknowledged to me that [s]he executed the same in that
capacity.
Witness my hand and official seal.
My commission expires: _____________________
(seal)
----------------------------
<PAGE>
3/15/97
A-3
NOTARY PUBLIC
<PAGE>
3/15/97
B-3
EXHIBIT B
CONSENT AND AGREEMENT
The undersigned hereby acknowledges notice of, and consents to the
terms and provisions of, the Purchase and Sale Agreement, dated mARCH 17, 1997
(the "Purchase Agreement"), by and among PEGASUS GOLD CORPORATION, a Nevada
corporation ("Buyer"), USMX, INC. (successor by merger to U.S. Minerals
Exploration Company, a Colorado corporation), a Delaware corporation ("USMX"),
and USMX OF MONTANA, INC., a Montana corporation ("USMX/Montana", and together
with USMX being referred to herein collectively as "Sellers"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
provided in the Purchase Agreement.
In accordance with the foregoing, the undersigned hereby agrees with
Buyer and Sellers that:
(a) The undersigned will make all payments to be made by it under or in
connection with the Mining Agreements directly to Buyer at its office at
601 West First Avenue, Suite 1500, Spokane, Washington 99204 or otherwise
in accordance with the instructions of Buyer.
(b) All payments referred to in paragraph (a) above shall be made by the
undersigned irrespective of, and without deduction for, any counterclaim,
defense, recoupment or set-off and shall be final, and the undersigned will
not seek to recover from Buyer for any reason any such payment once made.
(c) After the Closing Date, Buyer shall be entitled to exercise, exclusively,
any and all rights and remedies under the Mining Agreements in accordance
with the terms of the respective agreements, Sellers shall have no further
right, title or interest in, to or under the Mining Agreements, and the
undersigned shall comply in all respects with such exercise.
This Consent and Agreement shall be binding upon the undersigned and
its successors and assigns, and shall inure to the benefit of Buyer, Sellers and
their respective successors, transferees and assigns. This Consent and Agreement
shall be governed by the laws of the State of Washington (without regard to
conflict of laws principles).
IN WITNESS WHEREOF, the undersigned has duly executed this Consent and
Agreement as of the date first above written.
MONTANA TUNNELS MINING, INC.
By:________________________________
Title:_____________________________
STATE OF }
} ss.
COUNTY OF }
Before me personally appeared _____________________________ on this
______ day of ________________, 1997, and first being duly sworn, executed the
above __________________________, as ___________________of MONTANA TUNNELS
MINING, INC. and acknowledged to me that [s]he executed the same in that
capacity.
Witness my hand and official seal.
My commission expires: _____________________
(seal)
----------------------------
NOTARY PUBLIC
<PAGE>
3/15/97
B-3
<PAGE>
APPENDIX G
SHARE INCENTIVE PLAN
PART 1. - INTRODUCTION
1.01 Purpose
The purpose of the Plans is to secure for Dakota Mining
Corporation (formerly known as MinVen Gold Corporation) (the "Corporation") and
its shareholders the benefits of incentive inherent in share ownership by the
directors and key employees of the Corporation and its Affiliates who, in the
judgment of the Board, will be largely responsible for its future growth and
success. It is generally recognized that share plans of the nature provided for
herein aid in retaining and encouraging employees and directors of exceptional
ability because of the opportunity offered them to acquire a proprietary
interest in the Corporation.
1.02 Definitions
(a) "Arrangement" means the arrangement under the provisions of section
192 of the Canada Business Corporations Act to give effect to the
Capital Reorganization.
(b) "Arrangement Effective Date" means September 15, 1993.
(c) "Affiliate" has the meaning ascribed thereto in the Canada Business
Corporations Act, as amended from time to time.
(d) "Board" means the board of directors of the Corporation.
(e) "Capital Reorganization" means the corporate capital reorganization
and restructuring undertaken by the Corporation as and pursuant to the
Arrangement, pursuant to which the following events, among others,
were accomplished:
(i) the creation of the Common Shares by amending the Articles as
part of the Arrangement;
(ii) all of the common shares issued and outstanding on the
Arrangement Effective Date ("Old Common Shares") were exchanged
by the holders thereof into Units on the basis of one (1) Unit
for every 12.43452 Old Common Shares then issued and outstanding;
(iii)the terms of all issued and outstanding stock options, warrants
and other convertible or exchangeable securities, if any, were
adjusted accordingly to reflect the consolidation of Old Common
Shares into Units as provided in the preceding paragraph;
(iv) the Articles o Continuance of the Corporation were amended to
cancel the Old Common Shares; and
(v) the name of the Company was changed to "Dakota Mining
Corporation".
(f) "Common Shares" means the common shares of the Corporation.
(g) "Corporation" means Dakota Mining Corporation (formerly known as
MinVen Gold Corporation), a corporation duly amalgamated under the
laws of the Province of British Columbia effective August 2, 1988.
(h) "Eligible Employees" shall means key employees of the Corporation or
any Affiliate thereof including officers, whether or not directors,
and including both full-time and part-time employees, whether or not
they have a written employment contract with the Corporation and shall
constitute the class of employees eligible for participation in each
of the Plans.
(i) "Eligible Directors" shall mean the directors of the Corporation or
any affiliate thereof and shall constitute the class of directors
eligible for participation in the Share Option Plan.
(j) "Fair Market Value" on a particular day means the weighted average
sale price for board lots of the Shares on The Toronto Stock Exchange
(or if the Shares are not listed on The Toronto Stock Exchange, on
such stock exchange on which the Shares are listed as may be selected
for such purpose by the Board or if the Shares are not so listed then
on the over-the-counter market) over the five consecutive trading days
immediately preceding the date on which such value is to be determined
or, if no trades are made during such five-day period, then over the
15 consecutive trading days immediately preceding the date on which
such value is to be determined or, if no trades are made during such
15-day period, then "Fair Market Value" means, the fair value of a
Share as determined by the Corporation's auditors. The weighted
average price per Share shall be determined by dividing the aggregate
sale price of all such Shares sold on the aforementioned exchange
during the aforementioned five-day and 15-day trading periods by the
total number of such Shares so sold in such trading periods,
respectively;
<PAGE>
144554\0424833.WP
- 13 -
(k) "Option" shall mean an option granted under the terms of the Share
Option Plan.
(l) "Option Period" shall mean an Eligible Employee or Eligible Director
to whom an Option has been granted under the terms of the Share Option
Plan.
(m) "Optionee" shall mean an Eligible Employee or Eligible Director to
whom an Option has been granted under the terms of the Share Option
Plan.
(n) "Participant" means, in respect of any Plan, an Eligible Employee or
Eligible Director who is eligible and elects to participate in such
Plan.
(o) "Plan" means, collective the Share Option Plan and the Share Purchase
Plan and the term "Plan" means any such plan.
(p) "Share Option Plan" means the plan established and operated pursuant
to Part 2 hereof.
(q) "Share Purchase Plan" means the plan established and operated pursuant
to Part 3 hereof.
(r) "Shares" shall mean (i) with respect to Options granted prior to the
Arrangement Effective Date, Units (ii) with respect to Options granted
on or after the Arrangement Effective Date, Common Shares, and (iii)
with respect to the Share Purchase Plan, Common Shares.
(s) "Unit" shall mean one Common Share and one-half (1/2) of a Warrant.
(t) "Warrant" shall mean a Common Share Purchase Warrant issued pursuant
to the Warrant Indenture providing for the issue of Common Share
Purchase Warrants, dated as of the Arrangement Effective Date, between
the Corporation and Montreal Trust Company of Canada, Trustee.
PART 2. - SHARE OPTION PLAN
2.01 Participation
Options shall be granted only to Eligible Employees and
Eligible Directors.
2.02 Determination of Option Recipients
The Board shall make all necessary or desirable determinations
regarding the granting of Options to Eligible Employees and Eligible Directors
and may take into consideration the present and potential contributions of a
particular Eligible Employee or Eligible Director to the success of the
Corporation and any other factors which it may deem proper and relevant.
2.03 Price
The exercise price per Share under any Option will be
determined by the Board, provided that such price may not be less than the
closing price per Share for the Shares on The Toronto Stock Exchange on the date
of grant of such Option or, if the date of grant of such Option is not a trading
day, the trading day immediately preceding the date of grant of such Option (or,
if no trade of Shares occurred on The Toronto Stock Exchange on such date, the
simple average of the closing bid and ask prices per Share for the Shares on The
Toronto Stock Exchange on such date.
2.04 Grant of Options
The Board may at any time authorize the granting of Options to
such Eligible Employees and such Eligible Directors as it may select for the
number of Shares that it shall designate, subject to the provisions of the Share
Option Plan. The date of each grant of Options shall be the date the grant is
authorized by the Board.
Each Option granted to an Eligible Employee or to an Eligible
Director shall be evidenced by a stock option agreement with terms and
conditions consistent with the Plan and as approved by the Board (which terms
and conditions need not be the same in each case and may be changed from time to
time).
A director of the Corporation to whom an option may be granted
shall not participate in the decision of the Board to grant such Option.
2.05 Term of Options
The Option Period shall be five years from the date such
Option is granted, but may be reduced with respect to any such Option as
provided in Section 2.08 hereof covering termination of employment or death of
the Optionee.
In the event that the Board elects to grant Options which are
subject to vesting, such Options may only be exercised (in each case to the
nearest full share) during the Option Period as follows:
(a) at any time during the first year of the Option Period the
Optionee may purchase up to 33 1/3% of the total number of shares
set forth in his Option;
(b) at any time after the end of the first year of the Option Period
the Optionee may purchase an additional 33 1/3% of the total
number of Shares set forth in his Option plus any Shares not are
not purchased in accordance with Subsection 2.05(a); and
(c) at any time after the end of the second year of the Option
Period, the Optionee may purchase an additional 33 1/3% of the
total number of Shares set forth in his Option, plus any Shares
not purchased in accordance with Subsections 2.05(a) and 2.05(b).
Except as set forth in Section 2.08, no Option may be
exercised unless the Optionee is at the time of such exercise:
(a) in the case of a Eligible Employee, in the employ of the
Corporation or any Affiliate and shall have been continuously
so employed since the grant of his Option, but absent on
leave, having the approval of the Corporation or such
Affiliate, shall not be considered an interruption of
employment for any purpose of the Share Option Plan; or
(b) in the case of an Eligible Director, a director of the
Corporation or any Affiliate and shall have been such a
director continuously since the grant of his Option.
The exercise of any Option will be contingent upon receipt by
the Corporation of cash payment of the full purchase price of the Shares being
purchased. No Optionee or his legal representative, legatees or distributees
will be, or will be deemed to be, a holder of any Shares subject to an Option,
unless and until certificates for such Shares are issued to him or them under
the terms of the Share Option Plan.
2.06 Share Appreciate Right
An Optionee may, if determined by the Board, have the right
(the "Right"), when entitled to exercise an Option, to terminate such Option in
whole, or in part (the "Terminated Option") by notice in writing to the
Corporation and, in lieu of exercising such Option, receive that number of
Shares, disregarding fractions which, when multiplied by the Fair Market Value,
have a total value (the "Total Value") equal to the product of the number of
Option Shares times the difference between the Fair Market Value on the day
immediately prior to the exercise of the Right and the option price per Share of
the Option Shares.
2.07 Lapsed Options
If Options are terminated pursuant to Section 2.08 hereof or
expire without being exercised in whole or in part, new Options may be granted
covering the Shares not purchased under such lapsed Options.
2.08 Effect of Termination of Employment or Death
--------------------------------------------
(a) If an Optionee shall die while employed by or while a director of
the Corporation or its Affiliate, any Option held by him at the
date of death shall become exercisable in whole or in part if the
Option was issued one year or more prior to the date of death,
but only by the person or persons to whom the Optionee's rights
under the Option shall pass by the Optionee's will or the laws of
descent and distribution. All such Options shall be exercisable
only to the extent that the Optionee was entitled to exercise the
Option at the date of his death and only for six months after the
date of death or prior to the expiration of the Option Period in
respect thereof, whichever is sooner.
(b) If an Optionee ceases to be employed by or a director of the
Corporation or its Affiliate for cause, no Option held by such
Optionee may be exercised following the date on which such
Optionee ceases to be so employed or ceases to be a director, as
the case may be. If an Optionee ceases to be employed by or a
director of the Corporation or its Affiliate for any reason other
than cause then any Option held by such Optionee at the effective
date thereof shall become exercisable in whole or in part for a
period of thirty (30) days thereafter.
2.09 Effect of Take-over Bid
If a bona fide offer (the "Offer") for Shares is made to the
Optionee or to shareholders generally or to a class of shareholders which
includes the Optionee, which Offer, if accepted in whole or in part, would
result in the offeror exercising control over the Corporation within the meaning
of subsection (3) of the Securities Act (Ontario) (as amended from time to
time), then the Corporation shall, immediately upon receipt of notice of the
Offer, notify each Optionee currently holding an Option of the Offer, with full
particulars thereof; whereupon, notwithstanding Section 2.05 hereof, such Option
may be exercised in whole or in part by the Optionee so as to permit the
Optionee to tender the Shares received upon such exercise (the "Optioned
Shares") pursuant to the Offer. If:
(a) the Offer is not completed within the time specified therein; or
(b) the Optionee does not tender the Optioned Shares pursuant to the
Offer; or
(c) all of the Optioned Shares tendered by the Optionee pursuant to
the Offer are not taken up and paid for by the offeror in respect
thereof;
then the Optioned Shares or, in the case of clause (c) above, the Optioned
Shares that are not taken up and paid for shall be returned by the Optionee to
the Corporation and reinstated as authorized but unissued Shares and the terms
of the Option as set forth in Section 2.05 shall again apply to the Option. If
any Optioned Shares are returned to the Corporation under this Section, the
Corporation shall refund the exercise price to the Optionee for such Optioned
Shares. In no event shall the Optionee be entitled to sell the Optioned Shares
otherwise than pursuant to the Offer.
2.10 Effect of Amalgamation, Consolidation or Merger
-----------------------------------------------
If the Corporation amalgamates, consolidates with or merges
with or into another corporation any Shares receivable on the exercise of an
Option shall be converted into the securities, property or cash which the
Participant would have received upon such amalgamation, consolidation or merger
if the Participant had exercised his Option immediately prior to the record date
applicable to such amalgamation, consolidation or merger and the option price
shall be adjusted appropriately by the Board and such adjustment shall be
binding for all purposes of the Share Option Plan.
2.11 Adjustment in Shares Subject to the Plan
----------------------------------------
If there is any change in the Shares through or by means of a
declaration of stock dividends of Shares, of consolidations, subdivisions or
reclassifications of Shares, or otherwise, the number of Shares available under
the Share Option Plan, the Shares subject to any Option, and the purchase price
thereof shall be adjusted appropriately by the Board and such adjustment shall
be effective and binding for all purposes of the Share Option Plan.
2.12 Loans to Employees
Subject to the Act, the Board may at any time authorize the
Corporation to loan money to an Eligible Employee, on such terms and conditions
as the Board in its sole discretion may determine to assist such Eligible
Employee to exercise an Option held by him or her.
PART 3. - SHARE PURCHASE PLAN
3.01 Participants
Participants in the Share Purchase Plan will be Eligible
Employees who have been continuously employed by the Corporation or any of its
Affiliates for at least twelve consecutive months. The Board shall have the
right in its absolute discretion to waive such twelve-month period or refuse any
Eligible Employee or group of Eligible Employees the right of participation or
continued participation in the Share Purchase Plan.
3.02 Election to Participate in the Share Purchase Plan and Participant's
Contribution
Any Participant may elect to contribute money (the
"Participant's Contribution") to the Share Purchase Plan in any calendar year if
the Participant, prior to December 1 of the immediately preceding calendar year,
delivers to the Corporation a written direction in form and substance
satisfactory to the Corporation:
(a) authorizing the Corporation to deduct from the Participant's
salary in equal instalments the Participant's Contribution; and
(b) directing the Corporation to register a municipal address
specified by the Corporation as the Participant's address on the
shareholders' register for any Shares issued to the Participant
in accordance with the Share Purchase Plan.
If by December 1 of the immediately preceding calendar year
the Eligible Employee has not been continuously employed by the Corporation or
any of its Affiliates for at least twelve consecutive months, then, in the month
the Eligible Employee becomes so employed, he may elect to make a Participant's
Contribution with respect to the balance of the calendar year commencing on the
first day of the following month.
The Participant's Contribution shall not exceed 10% of the
Participant's basic annual salary from the Corporation and its Affiliate at the
time of delivery of the direction before deductions, exclusive of any overtime
pay, bonuses or allowances of any kind whatsoever (the "Basic Annual Salary").
In the case of any Eligible Employee who become employed for twelve consecutive
months during the year and delivers a direction at that time, the Participant's
Contribution shall not exceed 10% of his Basic Annual Salary from the
Corporation and it Affiliates at the time of delivery of the direction prorated
over the remainder of the calendar year before deductions exclusive of any
overtime pay, bonuses or allowances of any kind whatsoever.
No adjustment shall be made to the Participant's contribution
until the next succeeding calendar year at which time, in order for the
Participant's Contribution to continue, a new written direction shall have been
delivered to the Corporation for such calendar year. The Participant's
Contribution shall be held by the Corporation in trust for the purpose of the
Share Purchase Plan.
3.03 Corporation's Contribution
Immediately prior to the date any shares are issued to a
Participant in accordance with Section 3.05, the Corporation will credit the
Participant with and thereafter hold in trust for the Participant an amount (the
"Corporation's Contribution") equal to the Participant's Contribution then held
in trust by the Corporation.
3.04 Aggregate Contribution
The Participant's Contribution plus the Corporation's
Contribution shall be the "Aggregate Contribution". The Corporation shall not be
required to segregate the Aggregate Contribution from its own corporate fun or
to pay interest thereon.
3.05 Issue of Shares
On March 31, June 30, September 30 and December 31 in each
calendar year, the Corporation will issue to each Participant fully paid and
non-assessable Shares equal in value to the Aggregate Contribution held in trust
on such date by the Corporation converted into Shares at the Issue Price on such
dates. If such conversion would otherwise result in the issue to a Participant
of a fraction of a Share, the Corporation will issue only such full Shares as
are issuable. "Issue Price" means the higher of (i) the weighted average price
of the Share on The Toronto Stock Exchange (or, if the Shares are not listed on
such Exchange, on any other exchange on which the Shares are listed) for the
three months prior to the date of issue and (ii) the lowest price from time to
time permitted by The Toronto Stock Exchange or such exchange or exchanges on
which the Shares may be traded at such time. The weighted average price shall be
determined by dividing the aggregate sale price of all Shares sold on the said
exchange during the said three-month period by the total number of Shares sold
to such exchange during such period.
The Corporation shall hold any unused balance of the Aggregate
Contribution in trust for a Participant until used in accordance with the Share
Purchase Plan.
3.06 Safekeeping and Delivery of Shares
All Shares issued to a Participant in accordance with the
Share Purchase Plan will be held in safekeeping by a trust company qualified to
carry on business in the Province of British Columbia (the "Trustee") and will
be delivered, subject as provided in the Plan, to such Participant upon the
expiry of a period of twelve months (or such other period as may be imposed by
law or by any regulatory authority or stock exchange on which the Shares are
listed) following the date of issue of such Shares (the "Holding Period"). If
the Trustee receives on behalf of a Participant in respect of any Shares so
held:
(a) cash dividends;
(b) options or rights to purchase additional securities of the
Corporation or any other corporation;
(c) any notice of meeting, proxy statement and proxy for any meeting
of holders of Shares of the Corporation; or
(d) other additional Shares or other securities (by way of dividend
or otherwise);
then the Trustee shall forward to such Participant at his last known address
according to the records of the Corporation any of the items listed in
Subsections 3.06(a), (b) and (c) and shall hold in safekeeping any additional
securities referred to in Subsection 3.06(d) and shall deliver such securities
to a Participant with delivery of the Shares in respect of which such additional
securities were issued.
Any Shares issued to a Participant but held in safekeeping by
the Trustee will be distributed to a Participant or his estate prior to the
expiry of the Holding Period only upon:
(a) the date of the commencement of the Participant's retirement in
accordance with the Corporation's normal retirement policy;
(b) the date of the commencement of the total disability of the
Participant determined in accordance with the Corporation's
normal retirement policy; or
(c) the date of death of the Participant.
All fees and disbursements of the Trustee shall be paid by the
Corporation.
3.07 Effect of Termination of Employment or Death
--------------------------------------------
If a Participant shall cease to be employed by the Corporation
or any of its Affiliates for any reason or shall receive notice from the
Corporation of the termination of his employment, the Participant shall be
deemed to be no longer a Participant in the Share Purchase Plan and
(a) any portion of the Participant's Contribution then held in trust
for the Participant shall be paid to the Participant or his
estate or successor, as the case may be;
(b) any portion of the Corporation's Contribution then held in trust
for the Participant shall be paid to the Corporation; and
(c) any Shares then held in safekeeping for a Participant shall be
delivered to the Participant pursuant to Section 3.06 hereof.
3.08 Effect of Amalgamation, Consolidation or Merger
-----------------------------------------------
If the Corporation amalgamates, consolidates with or merges
with or into another corporation, each Participant for whom Shares are held in
safekeeping will receive, on the date on which any Shares would otherwise have
been delivered to the Participant in accordance with Section 3.06, the
securities, property or cash to which the Participant was entitled to receive on
such amalgamation, consolidation or merger.
PART 4. - GENERAL
4.01 Number of Shares
The aggregate number of Shares that may be reserved for
issuance, from time to time, under the Plans shall not exceed 3,000,000 Shares.
In addition, the aggregate number of shares so reserved for issuance under the
Plans to any one person shall not exceed 5% of the issued and outstanding
Shares.
4.02 Transferability
All benefits, rights and options accruing to any Participant
in accordance with the terms and conditions of any Plan shall not be
transferable unless specifically provided herein. During the lifetime of a
Participant, all benefits, rights and options may only be exercised by the
Participant.
4.03 Employment
Nothing contained in any Plan shall confer upon any
Participant any right with respect to employment or continuance of employment
with the Corporation or any Affiliate, or interfere in any way with the right of
the Corporation or any Affiliate to terminate the Participant's employment at
any time. Participation in any Plan by a Participant is voluntary.
4.04 Record Keeping
The Corporation shall maintain a register in which shall be
recorded:
(a) the name and address of each Participant;
(b) the Plan or Plans in which the Participant participates;
(c) any Participant's Contributions;
(d) the number of Shares held in safekeeping for a Participant; and
(e) the number of Options granted to a Participant and the number of
Options outstanding.
4.05 Necessary Approvals
The Plans shall be effective only upon the approval of the
shareholders of the Corporation given by the affirmative vote of a majority of
the Shares represented at a meeting of holders of Shares and voted thereon or by
a written resolution signed by all shareholders.
The obligation of the Corporation to sell and deliver Shares
in accordance with any Plan is subject to the approval of any governmental
authority having jurisdiction or any stock exchanges on which the Shares are
listed for trading which may be required in connection with the authorization,
issuance or sale of such Shares by the Corporation. If any Shares cannot be
issued to any Participant for any reason including, without limitation, the
failure to obtain such approval, then the obligation of the Corporation to issue
such Shares shall terminate and any Participant's Contribution or option price
paid to the Corporation shall be returned to the Participant.
4.06 Administration of the Plans
The Board is authorized to interpret each Plan from time to
time and to adopt, amend and rescind rules and regulations for carrying out such
Plan. The interpretation and construction of any provision of any Plan by the
Board shall be final and conclusive. Administration of each Plan shall be the
responsibility of the appropriate officers of the Corporation and all costs in
respect thereof shall be paid by the Corporation.
4.07 Income Taxes
As a condition of and prior to participation in the Plan, a
Participant shall authorize the Corporation in written form to withhold from any
remuneration otherwise payable to such Participant any amounts required by any
taxing authority to be withheld for taxes of any kind as a consequence of such
participation in the Plans.
4.08 Amendments to Plans
The Board reserves the right to amend, modify or terminate any
Plan at any time if and when it is advisable in the absolute discretion of the
Board. However, any amendment of such Plan which would:
(a) materially increase the benefits under such Plan; or
(b) materially increase the number of Shares which would be issued
under such Plan (except any increase resulting automatically from
an increase in the number of issued and outstanding Shares); or
(c) materially modify the requirements as to eligibility for
participation in such Plan;
shall be effective only upon the approval of the shareholders of the
Corporation. Any amendment to any provision of such Plan shall be subject to
approval, if required, by any regulatory body having jurisdiction over the
securities of the Corporation.
4.09 No Representation or Warranty
The Corporation makes no representation or warranty as to the
future market value of any Shares issued in accordance with the provisions of
any Plan.
4.10 Interpretation
The Plan will be governed by and construed in accordance with
the laws of the Province of British Columbia and the laws of Canada applicable
therein.
4.11 Compliance with Applicable Law, etc.
If any provision of any Plan of any agreement entered into
pursuant to any Plan contravenes any law or any order, policy, bylaw or
regulation of any regulatory body or stock exchange having authority over the
Corporation or the Plans then such provision shall be deemed to be amended to
the extent required to bring such provision into compliance therewith.
Vancouver, British Columbia
Approved by the directors and
shareholders on September 13, 1993,
Effective as of September 15, 1993
Amended effective May 23, 1996, and
approved by the directors on April 10, 1996 and
by the shareholders on May 23, 1996
<TABLE>
<CAPTION>
DAKOTA MINING CORPORATION
CONSOLIDATED BALANCE SHEETS
(expressed in United States dollars)
December 31, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash $5,092,150 $2,260,025
Inventories 2,643,701 3,821,176
Deferred stripping costs 886,086 667,956
Other current assets 739,064 340,965
----------- ----------
9,361,001 7,090,122
Property, plant and equipment, net 15,150,399 22,972,514
Other assets
Reclamation bonds 5,111,844 3,577,475
Advance minimum royalties 1,871,965 2,007,260
Other 74,141 258,050
------------- ------------
$31,569,350 $35,905,421
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Account payable $4,915,525 $5,152,517
Accrued liabilities 2,003,625 1,864,790
Reclamation costs 428,983 576,500
Short-term borrowings 623,623 1,157,991
Current portion of long-term debt 383,265 565,546
----------- -----------
8,355,021 9,317,344
Long-term liabilities
Long-term debt 3,240,053 439,520
Other long-term liabilities 952,000 -
Reclamation costs 5,562,881 3,558,304
----------- -----------
Total liabilities 18,109,955 13,315,168
---------- ----------
Shareholders' equity
Warrants 63,134 87,500
Preference shares, without par value; 20,000,000
shares authorized, none issued or outstanding
Common shares, without par value; unlimited shares
authorized; 35,479,742 issued and outstanding in
1996; 26,534,742 in 1995 52,809,980 38,906,595
Accumulated deficit (39,133,909) (16,064,270)
Cumulative translation adjustment (279,810) (339,572)
------------- -------------
Total shareholders' equity 13,459,395 22,590,253
---------- ----------
$31,569,350 $35,905,421
========== ==========
</TABLE>
Approved on behalf of the Board
/s/Alan R. Bell /s/ Stanley Dempsey
Alan R. Bell Stanley Dempsey
Director Director
(See accompanying notes to consolidated financial statements)
<PAGE>
DAKOTA MINING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in United States dollars)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1995 1994
--------- ----------- -----------
<S> <C> <C> <C>
Operating revenues $24,556,406 $17,208,608 $8,441,593
Operating costs
Mine, mill and administration 26,296,133 13,851,637 5,433,071
Depreciation, depletion, and
amortization 6,496,371 4,729,391 2,162,255
Royalties and severance taxes 1,163,510 743,713 340,824
Exploration 498,908 87,134 203,437
Reclamation 2,255,429 2,196,383 1,978,609
Holding and standby costs 1,330,026 3,025,127 2,324,437
General corporate costs 1,789,939 1,293,058 1,662,077
Property impairment 7,922,116 - -
----------- ----------- ----------
47,752,432 25,926,443 14,104,710
---------- ---------- ----------
Operating loss (23,196,026) (8,717,835) (5,663,117)
------------ ------------ ------------
Other income (expense):
Investment income 475,508 301,193 326,374
Interest expense (441,844) (496,239) (698,389)
Other 92,723 (76,837) 296,206
-------------- ------------- -----------
126,387 (271,883) (75,809)
------------- ------------ -------------
Net loss $(23,069,639) $(8,989,718) $(5,738,926)
============ =========== ===========
Net loss per common share $(0.73) $(0.35) $(0.33)
====== ====== ======
Weighted average number of
shares outstanding 31,405,369 25,396,310 17,406,350
========== ========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
DAKOTA MINING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(expressed in United States Dollars)
<TABLE>
<CAPTION>
Cumulative
Common Shares Accumulated Translation
Shares Amount Warrants Deficit Account
------------ ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 13,973,068 17,317,430 3,911,844 (1,335,626) (42,148)
Issue special warrants subsequently
exchanged for common shares, net
of offering costs of $734,042 6,000,000 9,498,969 - - -
Exercise of warrants for cash 1,387,040 2,931,226 (760,097) - -
Net loss and translation loss - - - (5,738,926) (297,424)
------------ ----------- ----------- ----------- ---------
Balance, December 31, 1994 21,360,108 29,747,625 3,151,747 (7,074,552) (339,572)
Issue special warrants subsequently
exchanged for common shares, net
of offering costs of $493,150 4,838,710 5,506,850 - - -
Exercise of warrants for cash 335,924 772,631 (184,758) - -
Expiration of common share
purchase warrants - 2,879,489 (2,879,489) - -
Net loss - - - (8,989,718) -
----------------- ---------------------------------- ----------------------------
Balance, December 31, 1995 26,534,742 38,906,595 87,500 (16,064,270) (339,572)
Issue special warrants subsequently
exchanged for common shares, net
of offering costs of $974,478 8,700,000 13,475,488 63,134 - -
Exercise of options for cash 245,000 340,397 - - -
Expiration of Pegasus warrants - 87,500 (87,500) - -
Net loss and transaction loss - - - (23,069,639) 59,762
------------------ - -------------- ------------- ------------ ----------
Balance, December 31, 1996 35,479,742 $52,809,980 $ 63,134 $(39,133,909) $279,810
========== ========== =========== ============ ===========
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
DAKOTA MINING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in United States dollars)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash provided by (used in):
Operating activities
Net loss $(23,069,639) $(8,989,718) $(5,738,926)
Add (deduct) non-cash items
Depreciation, depletion and amortization 6,496,371 4,656,910 2,448,382
Property impairment 7,131,639 - -
Reclamation, holding and standby costs accrued (net) 2,809,060 1,969,390 (165,800)
---------- ---------- -----------
(6,632,569) (2,363,418) (3,456,344)
Net change in non-cash working
capital items related to operations 459,148 2,776,637 (423,149)
----------- --------- -----------
(6,173,421) 413,219 (3,879,493)
------------ ---------- -----------
Investing activities
Additions to property, plant and equipment (5,847,542) (4,357,622) (2,585,907)
Proceeds from asset dispositions 4,757 - 118,380
Additions to reclamation bonds and other assets (1,240,592) (1,271,151) (259,298)
------------ ----------- ---------
(7,083,377) 5,628,773 2,726,825
------------ --------- ---------
Financing activities
Proceeds form exercise of
common share purchase warrants 340,397 587,873 2,171,129
Proceeds from the sale of special warrants 14,513,100 6,000,000 10,233,011
Special warrant offering costs paid (974,478) (493,150) (734,042)
New borrowings 3,242,824 1,992,474 368,155
Repayment of indebtedness (1,092,682) (3,709,059) (6,127,636)
----------- ----------- -----------
16,029,161 4,378,138 5,910,617
Effect of exchange rate changes 59,762 - (290,033)
----------- ----------- ------------
Net change in cash 2,832,125 (837,416) (985,734)
Cash, beginning of period 2,260,025 3,097,441 4,083,175
--------- --------- ---------
Cash, end of period $5,092,150 $2,260,025 $3,897,441
========= ========= =========
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
DAKOTA MINING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Dakota Mining Corporation and its subsidiaries (the "Company") are
engaged in the business of investing in and operating precious metals
mining projects, producing gold and silver and exploring for, acquiring
and developing precious metals properties.
The consolidated financial statements of the Company are reported in
United States dollars in accordance with generally accepted accounting
principles in Canada. As described in Note 11, these principles may
differ in certain respects from those that the Company would have
followed had its consolidated financial statements been prepared in
accordance with generally accepted accounting principles and practices
in the United States. The significant accounting policies used in these
consolidated financial statements are summarized as follows:
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company, its subsidiaries and a proportionate share of the accounts of
partnerships and unincorporated joint ventures in which the Company has
an interest. At December 31, 1996, the Company's principal
subsidiaries, partnerships and joint ventures and its percentage equity
interest in each are as follows:
MinVen Gold (U.S.A.) Corporation 100.0%
Brohm Mining Corp. ("Gilt Edge Mine" or "Brohm") 100.0%
Stibnite Mine Joint Venture ("Stibnite Mine") 100.0%
The Golden Reward Mining Co., L.P. ("Golden Reward Mine") 40.0%
The Cactus Gold Mines Company Joint Venture ("Cactus Mine") 25.0%
Use of Estimates
Management of the Company makes various estimates and assumptions in
determining the reported amount of assets, liabilities, revenues and
expenses, and in the disclosure of commitments and contingencies. These
estimates will change with the passage of time and the occurrence of
future events, and actual results may differ materially from the
estimates.
Foreign Currency Translation
The Company presents its financial statement information in United
States dollars as its principal assets and operations are located in
the United States.
The Company uses the current rate method of foreign currency
translation whereby the assets and liabilities of its self-sustaining
Canadian operations are translated into their United States dollar
equivalent at rates of exchange prevailing at each balance sheet date.
Revenues and expenses of Canadian operations are translated at average
exchange rates prevailing during the periods in which such items are
recognized in earnings. Transaction amounts denominated in foreign
currencies are translated into their United States dollar equivalents
at exchange rates prevailing at the transaction dates.
<PAGE>
1. Accounting Policies (continued)
Foreign Currency Translation (continued)
Gains and losses arising from translation of the financial statements
of Canadian operations are included in the unrealized cumulative
translation adjustment account in shareholders' equity. Gains and
losses added to this account are recognized in the statement of
operations when the related net foreign investment is reduced.
Cash Equivalents
The Company considers all temporary cash investments having maturities
of three months or less at the date of purchase to be cash equivalents.
Inventories
Bullion and ore inventory are valued at the lower of the average unit
production cost or net realizable value. Materials and supplies are
valued at the lower of average cost or replacement cost.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Exploration costs,
pre-production costs, depreciation on equipment and other carrying
charges, principally financing costs, related to the development of
mineral properties with indicated economically recoverable reserves are
deferred until the start of commercial production. Major expenditures
related to the development of identified mineral reserves on producing
properties are capitalized. Mining costs associated with waste rock
removal are deferred and recognized in operations based on the average
stripping ratio for each ore body. The average striping ratio is
calculated as the total tons of material estimated to be mined compared
to the tons of ore estimated to contain economically recoverable
minerals.. Mine exploration costs and development costs to maintain
production of operating mines are charged to operations as incurred.
The Company periodically reviews the carrying value of its properties
by comparing the net book value with the estimated undiscounted future
cash flow from the property. If the net book value exceeds the
undiscounted future cash flow, the Company records an impairment.
Changes in the significant estimates and assumptions underlying future
cash flow estimates may have a material effect on future carrying
values and operating results.
Depreciation, Depletion and Amortization
Depreciation of plant and equipment is provided on the straight-line
method with useful lives ranging from three to ten years over the
lesser of the estimated useful life of the asset or the estimated life
of the ore reserves on the units-of-production method. Depletion and
amortization of deferred exploration and development costs are provided
on the units-of-production method based upon estimated proven and
probable ore reserves.
<PAGE>
Capitalization of Financing Costs
Financing costs, including interest, are capitalized on expenditures
related to significant development or expansion activities on mineral
properties. When production commences on these mineral properties, such
costs are charged against operations as incurred. There was no
capitalized interest in 1996, 1995 or 1994.
Reclamation Costs
The Company records a liability for the estimated cost to reclaim mined
land by accruing charges, ratably over the life of the related mine, to
reclamation costs. The estimate is based on the work which is to be
performed as set forth in the reclamation plan approved by the agencies
responsible for granting the related mining permits. The accrued
reclamation liability is reduced as reclamation expenditures are made.
Expenditures that are expected to be made within one year are
classified as a current liability. If operations are suspended for a
significant period, an immediate accrual of estimated reclamation costs
to be incurred during the suspension period is recorded.
Revenue Recognition
Revenues are recognized when deliveries of gold and silver are made.
Gains or losses on forward metal sales contracts, options and other
similar arrangements which hedge revenues from future production are
not recognized until the hedged production is delivered or the option
contract is exercised or expires.
Hedging
In the normal course of business, the Company uses forward sales
commitments and commodity put and call option contracts to manage its
exposure to fluctuations in the price of gold which it produces.
Contract positions are designed to insure the Company will receive a
defined minimum price for a portion of its gold production. Potential
gains on gold price increases are also eliminated under forward sales
commitments if such commitments are no bought back. Gains or losses on
forward sales, options and commodity loans that effectively establish
prices for future metal production are not recognized in income until
reflected in sales revenues when the related product is delivered for
sale.
Income Taxes
Income taxes are provided based on accounting income or loss. Deferred
taxes arise principally from claiming depreciation, depletion,
amortization, exploration and development costs for tax purposes at
amounts differing from those charged to operations for accounting
purposes. As the timing differences reverse, taxes previously deferred
are charged to income based on the effective rate.
Loss Per Share
Net loss per share has been calculated using the weighted average
number of common shares outstanding during each period. The exercise of
outstanding options and warrants to purchase common shares of the
Company would be anti-dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
1996 financial statement presentation.
2. Merger and Convertible Debenture Offering Subsequent to Year-End:
On February 5, 1997, a definitive Merger Agreement with USMX, Inc.
(USMX) was signed. Under the terms of the Merger Agreement,
shareholders of USMX will receive one Dakota common share for every 1.1
common shares of USMX held and USMX will become a wholly owned
subsidiary of Dakota. In connection with the transaction, the Company
will issue approximately 14.7 million common shares in order to
complete the acquisition. The Company will account for the merger as a
purchase. Completion of the merger remains subject to shareholder and
creditor approval, review by regulatory authorities, and other
customary conditions. Management expects to complete the merger by
early May, 1997.
In order to provide financing for the proposed merger with USMX, on
February 5, 1997, the Company entered into an agency agreement with
certain Canadian investment dealers (collectively, the "Agents") to
sell by way of private placement 25,000 Special Warrants at a price of
Cdn$1,000 per Special Warrant for aggregate gross proceeds to the
Company of Cdn$25 million (US $18.25 million). The Special Warrants
offering was completed on February 6, 1997 with all proceeds, net of a
6% commission paid to the Agents, placed into an escrow account.
Each Special Warrant entitles the holder, upon exercise thereof and
without payment of any additional consideration, to acquire one 7.5%
unsecured subordinated convertible debenture (the "Debentures") of the
Company in the principal amount of Cdn$1,000. Each Debenture will be
convertible into common shares of the Company at a conversion price of
Cdn$2.00 (US $1.56) per common share up to and including the last
business day immediately preceding February 5, 2004. The debentures
will not be redeemable prior to January 29, 2001 but thereafter will be
redeemable by the Company if the weighted average trading price of the
Company's common shares is 125% of the conversion price for a defined
period prior to such redemption. On maturity or redemption, the Company
will have the option to repay the principal amount of the Debentures in
cash or common shares of the Company at a price equal to 95% of the
weighted average trading price for a defined period prior to such
maturity or redemption.
The Company has agreed to use its best efforts to file a prospectus in
British Columbia, Alberta, Ontario and Quebec to qualify for
distribution the Debentures issuable upon exercise of the Special
Warrants and the common shares issuable upon conversion of the
Debentures.
If the Merger is not completed prior to May 31, 1997 or such later date
as the Agents may determine in its sole discretion, the number of
Dakota Common Shares issuable upon conversion of the Debentures will be
such that each Debenture will be convertible for 550 Dakota Common
Shares (the "Penalty").
Proceeds from the Special Warrant offering, after deducting the 6%
commission paid to Agents and other expected costs, approximate US$16.9
million. The offering proceeds will principally be used to complete
construction and commence start-up of the Illinois Creek Mine owned by
USMX, Inc., developmental drilling and for general working capital
purposes. Under the terms of the merger agreement, the Company has
agreed to provide USMX with a $5 million loan from the proceeds of the
Special Warrant offering. The loan is bridge financing needed by USMX
to reduce its outstanding accounts payable and to commence start-up of
its Illinois Creek Mine. The loan will be collateralized by various
USMX assets.
<PAGE>
3. Inventories and Deferred Stripping Costs
At December 31 in each of the years indicated, inventories were
comprised of the following:
1996 1995
---- ----
Bullion $ 854,444 $1,290,231
Ore 1,524,072 2,244,420
Materials and supplies 265,185 286,525
----------- -----------
$2,643,701 $3,821,176
========= =========
In 1993, the mining activity at Stibnite Mine consisted primarily of
the removal of waste overburden. Accordingly, the costs of waste
removal of approximately $1.8 million were deferred. Of this amount,
$1.12 million was charged to operations in 1995 with the remainder
charged to operations in 1996 as related gold resources were mined. In
1996, the mining activity at Gilt Edge Mine included the removal of
waste overburden. Accordingly, the costs of waste removal of $886,086
were deferred.
4. Property, Plant and Equipment
At December 31, in each of the years indicated, property, plant and
equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
At cost
Mining properties $20,451,876 $14,470,978
Plant and equipment 12,352,287 12,312,247
Deferred costs 3,446,432 3,700,540
----------- -----------
36,250,595 30,483,765
---------- ----------
Accumulated depreciation,
depletion and amortization
Mining properties 15,254,392 3,435,856
Plant and equipment 4,809,662 3,532,968
Deferred costs 1,036,142 542,427
------------ -----------
21,100,196 7,511,251
---------- ----------
$15,150,399 $22,972,514
========== ==========
</TABLE>
5. Short-term Borrowings
In April, 1996, the terms of a short-term borrowing arrangement with D.
H. Blattner & Sons ("Blattner") were redetermined. The Company has
signed a Secured Loan Note which provides for monthly payments
including accrued interest of $75,000 commencing May 1, 1996 and
continuing until September 1, 1997. The loan bears interest at 8.5% per
annum, is collateralized by the assets of Stibnite Mine and is
guaranteed by the Company. This facility was subordinated by Blattner
to Gerald Metals under the Revolving Loan Agreement previously
described. On May 21, 1996 Gerald Metals purchased the Secured Loan
Note from Blattner in a transaction not involving the Company. The
remaining unpaid balance as of December 31, 1996 is $624,000. This is
not part of the Revolving Loan Agreement discussed in Note 6(c).
Management believes the fair value of short-term borrowings
approximates the carrying value.
6. Long-term Debt
Long-term debt at December 31 is comprised of the following:
1996 1995
---- ----
Note payable to Harley Hall $ 358,400 $ 716,800
Equipment notes payable 34,918 288,266
Line of Credit Facility 3,230,000 -
----------- -----------
3,623,318 1,005,066
Less current portion 383,265 565,546
--------- ----------
$ 3,240,053 $ 439,520
========== ===========
(a) Note Payable to Harley Hall
At December 31, 1996, the remaining balance due to Harley
Hall, doing business as Hall Construction, ("Hall") is
repayable by the Golden Reward Mine in 12 equal monthly
principal payments (amounting to $896,000 annually, the
Company's 40% share is $358,400) plus accrued interest. The
amount owed to Hall bears interest at the following rates: (i)
from December 30, 1995 to December 29, 1996, at United States
prime plus 1.5%; and (ii) thereafter, at United States prime
plus 1%. The amount owed to Hall is secured by a mechanics'
lien on the Golden Reward Mine. The Company's 40% share of the
note is reflected in the table above.
(b) Equipment Notes Payable
The equipment notes payable are for equipment purchased from a
supplier who agreed to a repayment term over three years on a
graduated payment basis. Interest ranging from 6% to 16.5% per
annum is payable monthly. The notes are secured by the
equipment which is located at the Gilt Edge Mine.
Management believes the fair value of long-term debt approximates the
carrying value.
(c) Line of Credit Facility
On February 28, 1997, the Company entered into a letter
agreement with Gerald Metals Inc. to amend and restate the
terms of a Revolving Loan Agreement dated April 19, 1996.
Under the amended terms, the revolving loan will be converted
to a term loan of up to $5.0 million, will be repayable at the
rate of $1.0 million per month commencing in June 1998, will
bear interest at LIBOR plus 2.25% and will be collateralized
by Dakota's underlying assets at its Gilt Edge and Stibnite
mines. Accordingy, the amounts outstanding at December 31,
1996 under the Revolving Loan Agreement have been classified
as long-term .
Gerald has also agreed to provide the Company with a $2.5
million stand-by credit facility to serve as bridge financing
until completion of the merger with USMX and release of
remaining proceeds from the offering of special warrants.
Refer to Note 2 for a description of these matters. The
stand-by facility will be collateralized by a portion of the
$5 million advance to be made to USMX, will bear interest at
LIBOR plus 2.25% and the Company will be obligated to pay a
commitment fee of 1/2 of one percent on the unused portion.
The stand-by facility will be repayable on or before July 31,
1997.
(d) Interest Paid
Interest paid on long-term debt and short-term borrowings
was $441,844 in 1996, $560,639 in 1995, and $1,213,119 in
1994.
7. Share Capital
(a) Stock Options to Directors and Employees
The Company has established a stock option plan for directors, officers
and employees covering 3,000,000 common shares. At December 31, 1996,
options and warrants to purchase 1,708,525 common shares were
outstanding with terms of up to five years from the date of grant at an
exercise price equal to the market price prevailing at the time of the
grants, as detailed in the following table:
<TABLE>
<CAPTION>
Number of Cdn $ Exercise
Common Option Price Price
Shares Per Share Warrants(1) Per Share
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1993 597,925 $3.50-$16.79 16,463 $1.50
Granted in 1994 40,000 $2.90 -
Surrendered or expired, 1994 (24,423) $3.50-$4.23 (2,211) $1.50
---------- ----------
Outstanding, December 31, 1994 613,502 $2.90-$16.79 14,252 1.75(1)
Granted in 1995 793,132 $1.60-$2.00 $1.75
Surrendered or expired, 1995 111,680 $2.00-$16.79 (14,252) -
------- --------
Outstanding, December 31, 1995 1,294,954 $1.60 - $4.23 - -
Granted in 1996 784,375 $2.45-$3.16 - -
Surrendered or expired, 1996 (370,804) $1.60-$4.23 - -
---------
Outstanding, December 31, 1996 1,708,525 $1.80-$3.50 - -
========= =========
<FN>
(1) Effective September 16, 1994, the exercise price increased to $1.75
pursuant to the terms of the warrants.
(b) Other Stock Purchase Rights
</FN>
</TABLE>
Information concerning other stock purchase rights granted by the
Company are as follows:
<TABLE>
<CAPTION>
Common Exercise Date of
Shares Price Grant Expiration
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Citibank, N.A. 166,625 Cdn$4.68 7/31/92 7/31/97
Gerald Metals, Inc. 100,000 $1.57 9/21/94 9/21/99
Gerald Metals, Inc. 100,000 $ 3/20/97 3/20/02
Common Share Purchase Warrants 4,550,000 Cdn$2.65 2/14/96 12/14/97
</TABLE>
<PAGE>
8. Income Taxes
(a) As a result of accumulated losses for which the Company
receives no current tax benefit, there is no income tax
benefit or expense for 1996, 1995 or 1994.
(b) The Company does not have an effective tax rate as a result of
losses without any resulting tax benefit. Therefore, the
United States statutory income tax rate of 34% is fully
eliminated by such losses.
(c) At December 31, 1996, the Company's United States operations
had net operating loss carry-forwards for tax purposes of
approximately $56 million. A majority of the loss
carry-forwards are restricted under United States tax laws
regarding the availability and future utilization of net
operating loss carry-forwards resulting from ownership
changes. These losses expire in various amounts through the
year 2010. The differences between losses for financial
reporting and tax purposes arise primarily as a result of
timing differences.
9. Commitments and Contingencies
(a) The Company is committed to total minimum payments under
various lease and royalty agreements to 2012, including its
pro rata share from its joint ventures. These commitments for
each of the next five years are as follows:
Years $ Amounts
1997 $503,659
1998 $794,850
1999 $433,563
2000 $336,649
2001 $318,750
Thereafter, annually $318,750
(b) The Company has an employee savings plan wherein it matches
employee contributions to the plan, up to 3% of each
employee's compensation. During 1996, 1995 and 1994, the
Company, contributed $50,334, $64,576, and $60,151,
respectively to the plan, including its pro rata share from
joint ventures.
(c) Environmental Matters
In April 1993, the South Dakota Department of Environmental
and National Resources ("DENR") issued an order ("Order")
regarding remediation efforts related to acid rock drainage at
the Gilt Edge Mine. The Order remains in effect. The Order
principally required that, unless discharge water meets
certain permitted terms and conditions, there shall be no
discharge of acid mine drainage and that the Company's
wholly-owned subsidiary, Brohm, submit a comprehensive
mitigation plan to address specific short term as well as long
term plans for the site. On January 19, 1996, Brohm received
final approval of an updated and amended plan from the State
of South Dakota. Brohm estimates that further reclamation and
mitigation costs in connection with the Order will approximate
$3.2 million which amount has been fully accrued. Brohm has
provided the State of South Dakota with a form of financial
assurance in the amount of $7.9 million to ensure that the
reclamation and remediation activities set forth in the
comprehensive plan will be performed. At December 31, 1996,
Brohm had provided the State of South Dakota with cash
deposits of $2.4 million and has provided the State of South
Dakota with a demand note as proof of financial assurance in
the amount of $5.5 million. All interest earned from the cash
deposits is added to the principal of such deposits. The
demand note is callable only under certain conditions which
principally relate to events whereby Brohm would fail to
fulfill its obligations under the comprehensive plan. The
demand note is subject to periodic adjustments as reclamation
activities are carried out and/or changes to the plan are
made. The Company anticipates that at its planned rate of
expenditure required reclamation will be completed by the end
of 1997 that the demand note will be cancelled.
Further, at a future date when Brohm provides notice to the
State of South Dakota that the mine will close and that post
closure care is to begin, Brohm will be obligated to establish
a post closure fund or other financial assurance acceptable to
the State to ensure long-term treatment and maintenance of the
site. The amount of the post closure financial assurance is
not expected to be less than $3.0 million although no final
determination will be made until the mine actually closes.
The Company is required to meet certain equity covenants of
$20 million as a condition of its permits with the State of
South Dakota. As of December 31, 1996 the Company did not meet
this requirement, however the Convertible Debenture Offering
as discussed in Note 2 will ensure that the Company meets this
requirement on a go-forward basis.
(d) Hedging Activities - Gerald Metals, Inc.
The Company from time-to-time enters into gold price
protection agreements. As of December 31, 1996 the Company had
entered into various option contracts with Gerald Metals to
deliver 7,500 ounces of gold at a minimum price of $370.00 per
ounce and a maximum of $385.00 per ounce during the period
from January 31, 1997 through June 30, 1997. In addition,
forward sales contracts for 16,000 ounces at an average price
of $387.00 were in place at year-end.
The fair value of the Company's hedging instruments based on
the notional gain using market prices as of December 31, 1996
was approximately $309,000 for the forward sales options and
option contracts.
(e) Reclamation Costs
The ultimate amount of the reclamation obligations to be
incurred is uncertain, however the Company estimates these
costs to be $6.9 million at Gilt Edge Mine, $721,000 at
Stibnite Mine and $900,000 for the Company's 40% share at
Golden Reward. Of the total $8.4 million in estimated costs,
$6.0 million has been accrued for as of December 31, 1996. The
remaining costs will be accrued as mining continues at Gilt
Edge Mine and Stibnite Mine. However, no assurances can be
given that the above estimates accurately reflect the actual
costs of all reclamation activities that may be required.
10. Generally Accepted Accounting Principles (GAAP) in Canada and the United
States
The Company follows Canadian accounting principles which are different
in some respects from accounting principles applicable in the United
States. There are no significant differences in 1996, 1995 or 1994
between Canadian accounting principles and U.S. GAAP pertaining to the
Company.
(a) There are no material differences in the application of United
States accounting principles on accumulated deficit, share
capital and cumulative translation adjustment.
(b) Under U.S. GAAP, the Company would calculate deferred income
taxes using an asset and liability method. Deferred income
taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income
tax purposes. The components of the Company's deferred taxes
in the balance sheet under U.S. GAAP as of December 31 would
therefore be as follows ($000's):
<TABLE>
<CAPTION>
1996 1995
---- ----
Canada U.S. Canada U.S.
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Taxable temporary differences
Noncurrent
Mining costs capitalized for financial
reporting purposes $ - $ (300)$ - $(2,500)
Accounting differences attributed to joint ventures - (2,200) - (2,700)
Other - (2,900) - (3,000)
-------- ------- -------- -------
- (5,400) - (8,200)
--------- ------- -------- -------
Deductible temporary differences
Current
Tax basis of inventories in excess of book basis - 200 - (100)
------- -------- --------- --------
Noncurrent
Tax basis of fixed assets in excess of book basis - 12,900 - 12,600
Reclamation costs not deductible for tax purposes - 1,900 - 1,300
Other - 200 - 200
-------- -------- -------
- 15,000 - 14,100
-------- ------ -------- -------
- 9,800 - 5,800
Net operating loss carryovers 1,800 23,200 1,500 19,200
------ ------ ------- -------
Net total deferred tax assets 1,800 33,000 1,500 25,000
Valuation allowance (1,800) (33,000) (1,500) (25,000)
------- -------- ------- --------
$ - $ - $ - $ -
========= ========== ========= ==========
</TABLE>
(c) At December 31, 1996 the Company has one stock-based
compensation plan, which is described below. The Company
applies the intrinsic value method in accounting for its plan.
Accordingly, no compensation cost has been recognized for its
fixed stock option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based
on the fair value at the grant dates for awards under those
plans consistent with the method of Financial Accounting
Standards Board Statement 123 - Accounting for Stock-Based
Compensation, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss As reported $(23,069,639) $(8,989,718)
Proforma (23,626,933) (9,390,332)
Primary loss per common share As reported $(0.73) $(0.35)
Proforma $(0.75) $(0.37)
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black- Scholes option-pricing model with the
following weighted average assumptions used for grants in
1996, and 1995, respectively: dividend yield of 0% for both
years; expected volatility of 33%, and 58%, risk-free interest
rates between 5.28% and 6.61% and expected lives of two to
three years.
A summary of the status of the Company's stock option plan as
of December 31, 1996 and 1995, and changes during the years on
those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
Fixed options
Outstanding at beginning
of year 1,294,954 $2.54 613,502 $3.57
Granted 784,375 $2.76 793,132 $1.93
Exercised 245,000 $1.90 - -
Outstanding and exercisable,
at end of year 1,708,525 $2.71 1,294,594 $2.54
Weighted average fair
value of options granted
during the year $2.76 $1.93
</TABLE>
The range of exercise prices is from $1.80 to $3.50 with a weighted remaining
contractual life of two years.
(d) The following table sets forth the components of the net change in non-cash
working capital items related to operations as reflected in the
consolidated statement of cash flows under U.S. GAAP.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Add (deduct) non-cash working capital items:
Inventories $1,177,475 $(2,529,304) $ 2,562
Deferred stripping costs (218,130) 1,159,260 (163,897)
Other current assets (402,040) (56,729) (115,312)
Accounts payable (236,992) 3,473,531 390,591
Accrued liabilities 138,835 729,879 767,357)
--------- ---------- ----------
$ 459,148 $2,776,637 $ (423,149)
========= ========= =========
</TABLE>
(e) During the fourth quarter of 1996, the Company changed an accounting
estimate which increased the Stibnite Mine depletion expense and net loss
approximately $2.8 million, or $(0.09) per share for the year ended
December 31, 1996.
<PAGE>
11. Ownership Interest in Golden Reward Mine
The Company owns a 40% interest in Golden Reward Mine, with the
remaining 60% interest being owned by two subsidiaries of Wharf
Resources Ltd. ("Wharf"). The Company's proportionate share of the
partnership's condensed statements of net assets as of December 31,
1996 and 1995 and condensed statements of operations and cash flows for
each of the years in the three year period ended December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Condensed Statements of Net Assets
Current assets $ 569,273 $1,313,421
Property, plant and equipment, net 1,264,336 10,047,931
Other assets 575,849 464,193
---------- ------------
Total assets 2,409,458 11,825,445
--------- ----------
Accounts payable and other
current liabilities 486,829 428,777
Current portion of long-term debt 358,400 364,400
Long-term debt - 358,400
Other long-term liabilities 1,843,911 370,701
---------- ------------
Total liabilities 2,689,140 1,522,278
---------- -----------
$ (279,682) $10,303,167
=========== ==========
Condensed Statements of Operations:
Revenues 3,957,670 7,309,158 7,418,342
------------ ----------- -----------
Mine cash production costs 3,003,781 4,363,047 4,796,759
Royalties 96,269 193,720 167,117
Holding and standby costs 1,330,026 - -
Exploration 66,535 - -
Reclamation 639,496 208,298 117,472
Depreciation and depletion 1,645,603 3,277,390 2,155,086
Property impairment 7,922,116 - -
--------- --------------- ---------------
Total operating costs 14,703,826 8,042,455 7,236,434
---------- --------- ---------
Operating income (loss) (10,746,156) (733,297) 181,908
Other income (expense) 86,001 (225,334) (450,137)
------------ ------------ ----------
$(10,660,155) $ (958,631) $ 268,229)
============ =========== ==========
Condensed Statements of Cash Flows
Cash provided by operating activities $ 280,050 $ 2,668,071 $ 1,551,483
Cash used in investing activities (94,663) (1,058,452) (483,799)
Cash used in financing activities (364,400) (1,707,985) (1,346,654)
----------- ----------- -----------
Net decrease in cash (179,013) (98,366) (278,970)
Cash, beginning of period 459,430 557,796 836,766
--------- --------- ---------
Cash, end of period $ 280,417 $ 459,430 $ 557,796
========= ========= =========
</TABLE>
Based upon uncertainties arising from the proximity of certain
unpermitted reserves to a ski hill, the operator of Golden Reward L.P.
reflected in the financial statements of the partnership an impairment
of its investment in mineral properties relating to the Golden Reward
Mine. The Company recorded an impairment of approximately $7.9 million
in the carrying value of its 40% investment in Golden Reward Mine in
its 1996 Financial Statements after Golden Reward L.P. failed to reach
an agreement regarding the acquisition of certain surface rights owned
by the ski hill. Of this amount, $790,477 pertains to the write-down of
inventory. During the second quarter of 1996, the Company recorded an
accrual of $1.7 million, representing its share of reclamation and
other costs accrued due to the cessation of mining operations. At
December 31, 1996, the Company's share of such costs accrued due to the
cessation of mining operations for the Golden Reward Mine were
approximately $890,000, of which $118,000 is included in accrued
liabilities and $772,000 is included in other long-term liabilities in
the Company's December 31, 1996, consolidated balance sheet.
The owners have disagreed regarding certain operational and financial
matters for the Golden Reward Mine, including planned future operations
and related funding requirements. The resolution of these matters is
not presently determinable.
For the years ended December 31, 1996, 1995 and 1994, Wharf Resources
Management Inc., the operator of Golden Reward Mine and 60% owner of
Golden Reward L.P., was reimbursed $425,000, $530,000, and $420,000,
respectively, by Golden Reward Mine for technical and administrative
services.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Financial Data
(unaudited)
March 31 June 30 September 30 December 31 Full Year
-------- ------- ------------ ----------- ---------
1996
<S> <C> <C> <C> <C> <C>
Revenues $3,196,715 $3,604,052 $9,064,863 $8,690,776 $24,556,406
Operating loss (917,139) (3,379,194) (9,485,310) (9,414,383) (23,196,026)
Other expense (28,294) 171,981 39,514 (56,814) 126,387
Net loss (945,433) (3,207,213) (9,446,227) (9,470,766) (23,069,639)
Net loss per share $(0.04) $(0.11) $(0.27) $(0.27) $(0.73)
1995
Revenues $1,967,445 $1,480,343 $3,188,095 $10,572,725 $17,208,608
Operating loss (1,170,173) (1,723,899) (1,100,957) (4,722,806) (8,717,835)
Other expense (54,035) (1,997) (46,065) (169,786) (271,883)
Net loss (1,224,208) (1,725,896) (1,147,022) (4,892,5920 (8,989,718)
Net loss per share $(0.06) $(0.07) $(0.04) $(0.18) $(0.35)
</TABLE>
<PAGE>
USMX, INC. FINANCIAL STATEMENTS
Independent Auditors' Report
The Board of Directors and Stockholders
USMX, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of financial position
of USMX, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of USMX, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred cost overruns associated with the
construction of the Illinois Creek Mine, has cash flow deficits from operations
and currently has no mines in operation. At December 31, 1996, the Company has
an accumulated deficit of $3,056,000, a working capital deficiency of
approximately $27,132,000 and is not in compliance with certain covenants of its
long term debt agreements. In addition, significant additional funds will be
required to bring the Company's Illinois Creek Mine into production. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 12, 1996
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 238 $ 5,226
Restricted cash 108 -
Ore Inventories 200 -
Supplies Inventories 488 -
Federal income taxes receivable 424 381
Prepaid Financing Costs 687 -
Other 116 227
- --------------------------------------------------------------------------------------------------------------
Total current assets 2,261 5,834
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Undeveloped mineral properties 1,826 2,913
Mineral properties under development 12,043 6,345
Construction in progress 27,905 -
Developed mineral properties 920 920
Mine buildings and equipment 3,042 2,451
Vehicles, furniture and equipment 703 662
- --------------------------------------------------------------------------------------------------------------
46,439 13,291
Less accumulated depreciation,
depletion and amortization (3,532) (3,475)
- --------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 42,907 9,816
- --------------------------------------------------------------------------------------------------------------
Commodity futures contracts, at market 1,144 -
Reclamation surety and other assets 3,843 1,819
- --------------------------------------------------------------------------------------------------------------
Total assets $ 50,155 $17,469
- --------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Financial Position
(Concluded)
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long term debt $ 21,355 $ -
Current portion of note payable to related party 355 -
Accounts payable 6,708 312
Accrued salaries 84 73
Accrued reclamation 843 304
Other accrued liabilities 48 51
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 29,393 740
- -------------------------------------------------------------------------------------------------------------
Note payable to related party, less current portion 3,923 -
Deferred commodity option premiums, at market 298 -
Estimated reclamation liability - 885
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000
shares authorized, none issued - -
Common stock, $.001 par value, 45,000,000
shares authorized, 16,184,000 shares issued
and outstanding as of December 31, 1996,
14,644,000 shares issued and outstanding
as of December 31, 1995 16 15
Additional paid-in capital 19,581 15,583
Retained earnings (Accumulated deficit) (3,056) 246
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,541 15,844
Commitments and contingencies (Note 14)
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 50,155 $ 17,469
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Sales of gold $ - $ 2,678 $ 13,615
Costs applicable to sales:
Cost of gold sold - 2,890 11,203
Mining taxes - 14 106
Production royalties - 379 665
- -------------------------------------------------------------------------- ------------------------------------------
- 3,283 11,974
- -------------------------------------------------------------------------- ------------------------------------------
Gross profit (loss) - (605) 1,641
General and administrative expenses 3,621 2,548 2,185
Prospecting costs 643 684 739
Asset abandonments, write downs and impairments 1,416 4,431 261
- -------------------------------------------------------------------------- ------------------------------------------
Loss from operations (5,680) (8,268) (1,544)
Other income (expense):
Unrealized gains on commodity futures and option contracts 884 - -
Gain on common stock held for investment 936 - -
Royalty income (received from related party) 720 720 720
Interest income 275 525 518
Interest expense (including $184,000 to related parties in 1996) (511) (14) (22)
Other, net 19 13 35
- -------------------------------------------------------------------------- ------------------------------------------
2,323 1,244 1,251
- -------------------------------------------------------------------------- ------------------------------------------
Loss before income taxes (3,357) (7,024) (293)
Income tax benefit (55) (118) (497)
- -------------------------------------------------------------------------- ------------------------------------------
Net income (loss) $(3,302) $ (6,906) $204
- -------------------------------------------------------------------------- ------------------------------------------
Net income (loss) per common share $ (0.22) $ (0.47) $ 0.01
- -------------------------------------------------------------------------- ------------------------------------------
Weighted average common and common equivalent shares outstanding 15,285 14,755 14,860
- -------------------------------------------------------------------------- ------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
--------------------------------
Number of Paid-in Treasury (Accumulated
Shares Amount Capital Stock Deficit)
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 15,589 $ 16 $ 18,559 $ - $ 6,948
Shares issued as compensation 2 - 7 - -
Exercise of stock options 198 - 314 - -
Previously issued shares submitted in
partial payment for options - - 14 (14) -
exercised
Repurchase of common stock - - - (3,215) -
Treasury stock retired (1,003) (1) (3,213) 3,213 -
Income tax benefit arising from
the disqualifying disposition of
incentive stock options - - 179 - -
Net income - - - - 204
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 14,786 15 15,860 (16) 7,152
Shares issued as compensation 3 - 11 - -
Exercise of stock options 3 - 6 - -
Repurchase of common stock - - - (278) -
Treasury stock retired (148) - (294) 294 -
Net loss - - - - (6,906)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 14,644 15 15,583 - 246
Shares issued for acquisition of 1,540 1 3,998 - -
assets
Net loss - - - - (3,302)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 16,184 $ 16 $ 19,581 $ - $ (3,056)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Cash from sales of precious metals $ - $ 2,678 $ 13,615
Cash paid to suppliers and employees (4,285) (4,831) (12,279)
Mining taxes paid - (14) (106)
Royalties paid in cash - (379) (665)
Royalties received 720 720 720
Interest received 275 525 518
Interest expense (511) (14) (22)
Other income, net 19 13 35
Income taxes paid, net of refunds received 12 11 1,311
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,770) (1,291) 3,127
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (25,679) (5,674) (4,221)
Proceeds from sales of property and equipment 24 449 380
Increase in restricted cash accounts, net (108) - -
Increase in reclamation surety and other assets (2,369) - (171)
Proceeds from sale of common stock held for investment 1,281 - -
Other, net - - 80
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,851) (5,225) (3,932)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 6 314
Repurchase of common stock - (278) (3,215)
Proceeds of notes payable 25,855 - -
Repayment of notes payable (222) - -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 25,633 (272) (2,901)
- ------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,988) (6,788) (3,706)
Cash and cash equivalents at beginning of year 5,226 12,014 15,720
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 238 $ 5,226 $ 12,014
- ------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(Concluded)
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash (Amounts in thousands)
Provided by Operating Activities
<S> <C> <C> <C>
Net income (loss) $ (3,302) $ (6,906) $ 204
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization charged to costs and expenses 109 134 1,484
Asset abandonments, write downs and impairments 1,416 2,928 261
Gain on sale of common stock held for investment (936) - -
Unrealized gain on commodity futures and option contracts (884) - -
Other, net - (15) 14
Changes in operating assets and liabilities:
(Increase) decrease in ore inventories (200) 2,344 1,647
(Increase) decrease in supplies inventories (488) 34 27
Depreciation, depletion and amortization
included in ending inventories - - 619
(Increase) decrease in federal income taxes receivable (43) (107) 744
(Increase) in other current assets (576) - -
Increase (decrease) in accounts payable 1,434 116 (1,044)
Increase (decrease) in accrued salaries 11 41 (153)
Increase (decrease) in other accrued liabilities 295 (45) (35)
Increase (decrease) in accrued and estimated reclamation liabilities (346) 335 (874)
Other changes in assets and liabilities, net (260) (150) 233
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (3,770) $(1,291) $3,127
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Noncash
Investing and Financing Activities
The Company issued 1,540,663 shares of the Company's common stock to North
Pacific Mining Corporation to acquire leasehold and other property interests in
the Illinois Creek Project in Alaska.
Assets acquired $ 4,000 $ - $ -
Market value of common stock issued 4,000 - -
- ------------------------------------------------------------------------------------------------------------------------
Cash paid $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------
The Company received $400,000 and $380,000 cash, plus 184,438 and 168,273
shares of Alta Gold Co. common stock, in 1995 and 1994 respectively, as
payment for the purchase of the Company's interest in the Kinsley Mountain
Property.
Payment received $ - $ 560 $ 540
Discounted market value of common stock received - 160 160
- ------------------------------------------------------------------------------------------------------------------------
Cash received (included in proceeds from sale of property and equipment) $ - $ 400 $ 380
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. - The Company
USMX, INC. (the "Company") is a Delaware corporation which engages in the
exploration for, and development and operation of precious metal properties. The
Company also evaluates base metal and non-metallic situations. The Company
conducts its operations directly and through various operating subsidiaries. All
references herein to the Company include all subsidiaries of USMX, INC.
Note 2. - Summary of Significant Accounting Policies
Basis of presentation
The financial statements have been prepared assuming the company will
continue as a going concern. Certain factors, discussed below, raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The Company has incurred cost overruns associated with the construction of
the Illinois Creek Mine, has cash flow deficits from operations and currently
has no mines in operation. At December 31, 1996, the Company has an accumulated
deficit of $3,056,000, a working capital deficiency of approximately $26,359,000
and is not in compliance with certain covenants of its long term debt agreements
(see note 8.). In addition, significant additional funds will be required to
bring the Company's Illinois Creek Mine into production.
The Company has entered into a definitive merger agreement with Dakota
Mining Corporation ("Dakota") (see note 15). The merger is subject to the
approval of the Toronto Stock Exchange, stockholder and creditor approval,
review by other regulatory authorities, and other customary conditions. In
connection with the merger, Dakota has agreed to loan the Company US $5.0
million to be used to pay for work completed and ongoing work at the Illinois
Creek Mine prior to the merger. Concurrent with the merger agreement, Dakota
entered into an intercreditor agreement with the Company's principal lender, N M
Rothschild & Sons Limited ("Rothschild"), whereby Rothschild agreed not to
accelerate the due date of any loans to USMX or to exercise any rights it may
have to collateral security until the earlier of the consummation of the merger,
the termination of the merger agreement in accordance with its terms, or June
30,1997.
Should the Company be unable to complete the merger with Dakota, the
ability of the Company to continue as a going concern is dependent on the
continued forbearance of Rothschild, obtaining sufficient additional financing
to complete the Illinois Creek Mine, and the commencement of profitable
operations at the mine. Future profitability of the mine is dependent on the
Company's ability to produce gold from the mine in quantities and at costs
consistent with those projected by the Company.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
Management makes various estimates and assumptions in determining the
reported amounts of assets, liabilities revenues and expenses, and in the
disclosure of commitments and contingencies. These estimates and assumptions
will change with the passage of time and the occurrence of future events, and
actual results will differ from the estimates.
<PAGE>
Note 2. - Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers cash in banks and all highly liquid investments,
purchased with a maturity of three months or less, to be cash equivalents.
Ore Inventory
Production costs incurred are charged to Ore inventories as incurred.
Cost of gold sold is based on the currently estimated life of mine average cost.
The amount carried in the Company's balance sheet Ore inventories is the lower
of the difference between production costs incurred to date and the amount
charged to Cost of gold sold to date or the net realizable value of the
inventoriable ore.
Mineral Properties
The Company's policy is to charge to operations, costs associated with
identifying prospective mineral properties and to capitalize the costs of
acquiring, exploring and developing unproven mineral properties. For properties
subsequently placed into production, the applicable capitalized costs are
amortized using the units-of-production method, based on the ratio of tons of
ore mined or processed during the year to the estimated total proven and
probable ore reserves of the project.
Management periodically reviews the carrying value of its investments
in exploration properties with internal and external mining related
professionals. A decision to abandon, reduce or expand a specific project is
based upon many factors including general and specific assessments of mineral
reserves, anticipated future mineral prices, the anticipated future costs of
exploring, developing, and operating a producing mine, the expiration term and
ongoing expenses of maintaining leased mineral properties and the general
likelihood that the Company will continue exploration. The Company does not set
a pre-determined holding period for properties with unproven reserves, however,
properties which have not demonstrated suitable metal concentrations at the
conclusion of each phase of an exploration program are re-evaluated to determine
if future exploration is warranted and their and their carrying values are
appropriate.
If an area of interest is abandoned or it is determined that its
carrying value cannot be supported by future production or sale, the related
costs are charged against operations in the year of abandonment or determination
of value. The amounts recorded as mineral leases and properties and deferred
exploration expenditures represent costs to date and do not and do not
necessarily reflect present or future values. . Proceeds from rentals and option
fees relating to undeveloped mineral properties in which the Company has an
economic interest are credited against capitalized property costs and no gain is
recognized until all costs have been fully recovered.
Construction in Progress
Pre-production, development and asset construction costs related to new
mines and major programs at existing mines are capitalized to Construction in
progress during the construction phase. Upon completion of construction, the
costs are transferred to the appropriate asset accounts.
Interest Capitalized
Interest costs incurred during the construction of qualifying assets
are capitalized as part of the asset cost.
Depreciation and Amortization
Mine buildings and equipment are depreciated using the
units-of-production method based on the ratio of tons of ore mined or ounces of
gold produced during the period to the estimated total proven and probable
reserves of the related property. Vehicles, furniture and office equipment are
depreciated using the straight-line and the declining balance methods over
estimated useful lives of two to five years. The cost of normal repairs and
maintenance is charged to operations as incurred. Significant expenditures which
increase the life of an asset are capitalized and depreciated over the estimated
remaining useful life of the asset. Upon retirement or disposition of property
and equipment, related gains or losses are recorded in operations.
Impairment of Assets
In 1996 the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
("SFAS 121"). Under SFAS 121, the Company periodically reviews the carrying
value of its assets by comparing the net book value of each asset to the
estimated undiscounted future cash flows from the asset. If the net book value
exceeds the undiscounted future cash flow, an impairment is recorded. Changes in
estimates and assumptions that underlie management's estimate of future cash
flow from the Company's assets can materially impact future carrying values and
operating results. The adoption of SFAS 121 had no effect on the Company's
financial statements.
<PAGE>
Note 2. - Summary of Significant Accounting Policies (continued)
Reclamation Costs
The Company records a liability for the estimated cost to reclaim mined
land by recording charges to production costs for each ton of ore mined. The
amount charged is based on management's estimate of reclamation costs to be
incurred. The estimate is based on the work which is to be performed as set
forth in the reclamation plan approved by the agencies responsible for granting
the related mining permits. The accrued reclamation liability is reduced as
reclamation expenditures are made. Certain reclamation work is performed
concurrently with mining. However, the majority of reclamation expenditures is
made after mining operations cease.
Revenue Recognition
The Company recognizes revenue as precious metals are delivered to the
purchaser.
Commodity Futures Contracts
In order to protect against the impact of falling gold prices, the
Company enters into hedging transactions, the goal of which is to provide a
minimum price for future production, and allow the Company to take advantage of
short term increases in the gold price. Hedging transactions include spot
deferred and forward sales contracts and option contracts. Contracted prices on
spot deferred and forward sales and options are recognized in gold sales as gold
produced is delivered to meet the commitment. The results of hedging activities
are included in revenue when gold is delivered against the contract or, if
delivery under the contract is deferred, the contract is marked to market and
the Company recognizes an unrealized gain or loss in operations. Spot deferred
and forward contracts that are not identified as hedges of specific anticipated
future production are recorded at market, with unrealized gains or losses
recorded in operations.
The Company also has written silver call option contracts. Premiums
received are deferred and recognized in income as the options expire or are
exercised. The open contracts are marked to market and the deferred premiums
adjusted accordingly, with changes in the market value of the contracts
reflected in unrealized gains or losses on commodity future and option contracts
in the consolidated statement of operations.
By-product Revenues
Revenues from sales of by-products (principally silver) are treated as
a reduction of the cost of sales.
Stock Options
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly no compensation costs
are recognized for stock options granted at fair market value.
Income Taxes
The Company follows Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred income taxes
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
<PAGE>
Note 2. - Summary of Significant Accounting Policies (concluded)
Net Income (Loss) per Common Share
Net income (loss) per common share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year, unless they are anti-dilutive.
Reclassifications
Certain amounts in the accompanying consolidated financial statements
for the years ended December 31, 1994 and 1995, have been reclassified to
conform to the classifications used in 1996.
Note 3. - Ore Inventories
Ore inventories in the accompanying consolidated statements of
financial position represent mining, pad loading and processing costs associated
with gold in various stages of production. Approximately $200,000 of costs were
capitalized as of December 31, 1996 associated with ore stockpiled and ore
placed on the leech pad at the Illinois Creek Mine.
During 1995 the Company recorded an impairment of Ore inventories of
$1,620,000 relating to the Goldstrike Mine (see note 7.).
Note 4. - Undeveloped Mineral Properties
Capitalized costs at December 31, 1996 and 1995 associated with undeveloped
mineral properties were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
<S> <C> <C>
United States $ 166,000 $ 584,000
Mexico 1,660,000 2,081,000
Chile - 18,000
Ecuador - 230,000
==================== ---------------------
Total $ 1,826,000 $ 2,913,000
==================== ---------------------
</TABLE>
Note 5. - Mineral Properties Under Development
At December 31, 1996 and 1995, the Company had two mineral properties in various
stages of feasibility and development as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
<S> <C> <C>
Illinois Creek, Alaska $ 8,368,000 $ 4,038,000
Thunder Mountain, Idaho 3,675,000 2,307,000
==================== ---------------------
Total $ 12,043,000 $ 6,345,000
==================== ---------------------
</TABLE>
<PAGE>
Note 5. - Mineral Properties Under Development (Continued)
Illinois Creek, Alaska
The Illinois Creek Project is a moderate grade, near surface
gold-silver deposit. It consists of two State of Alaska Mining Leases, covering
62,480 acres. The project is located in the western interior of Alaska
approximately 57 miles southwest of Galena and 320 miles northwest of Anchorage.
The exploration and feasibility phases were completed in 1995. Site development
and construction commenced in May 1996, with anticipated completion scheduled
for June 1997.
Pursuant to an agreement (the "Agreement") with North Pacific Mining
Corporation ("NPMC"), the owner of the underlying leases, the Company made
initial payments to NPMC of $100,000 in 1994 to evaluate the Illinois Creek
property. The Company was required to make an additional payment to NPMC of $4
million in cash or common stock of the Company in exchange for title to the
underlying leases. The Company chose to make the payment in stock and effective
July 11, 1996, 1,540,663 shares of the Company's common stock were issued to
NPMC. The number of shares of common stock issued to NPMC was equal to $4
million divided by the 30-day average of the price of the Company's stock on the
Nasdaq Stock Market. In addition to these payments, NPMC will receive a 5% net
returns royalty.
Pursuant to the Agreement, the Company has until December 16, 1997, to
achieve Commercial Production (as defined) from the property. This period may be
extended at the option of the Company for two additional one year periods upon
payment by the Company of additional advance royalties of approximately $300,000
for each one year extension. The Agreement terminates on December 16, 1999, if
the Company has not achieved Commercial Production from the property by that
date.
The obligations of the Company to NPMC are secured by a subordinated
security interest in all of the Illinois Creek Project assets. The security
interest terminates at Commercial Production.
Thunder Mountain, Idaho
The Company proposes to conduct gold and silver mining activities at
the Dewey Mine in the Thunder Mountain Mining District in eastern Valley County,
Idaho, approximately 100 miles northeast of Boise, Idaho. The proposed Dewey
mining operations are part of the Thunder Mountain Project and consist of the
development of a gold and silver ore deposit located on patented mining claims
administered by the Idaho Department of Lands.
Effective July 9, 1993, the Company entered into an Exploration and
Option to Purchase Agreement ("Agreement") with Dewey Mining Company, Thunder
Mountain Gold, Inc. and two individuals (the foregoing companies and individuals
described below are collectively referred to as the "Owners"). The Owners
control approximately 5,500 acres in the Thunder Mountain Mining District
consisting of both patented and unpatented mining claims. Pursuant to the terms
of the Agreement, the Company was granted the sole and exclusive right to
explore for and develop minerals on the property in exchange for advance royalty
payments totaling $100,000. In addition, the Company committed to spend, and did
spend, a minimum of $500,000 evaluating the property prior to April 1, 1995.
The Agreement requires that, before the Company can put the property
into commercial production, it must prepare and deliver to the Owners a
feasibility study regarding the project. In 1995 and 1996, the Company extended
the term of the agreement through April 30, 1997, by making additional advance
royalty payments in the aggregate amount of $350,000. The Agreement further
provides the Company with the option for a final extension until April 30, 1998,
in exchange for an additional advance royalty payment of $250,000. The advance
royalty payments made may be recovered by the Company for seven years after
payment should the Owners elect to receive royalties under options (a) or (c)
described below. The Agreement terminates if the Company fails to deliver a
feasibility study to the Owners by the end of the last year's extension under
the Agreement or if the Company exercises its right to terminate the Agreement
at any time.
<PAGE>
Note 5. - Mineral Properties Under Development (Concluded)
Within 90 days after the Company provides the Owners with a feasibility
study, the Owners may elect to (a) participate in subsequent efforts to the
extent of a 30% working interest, plus receive a 1.5% royalty, or (b) receive a
30% net profits interest, or (c) receive a 5% net returns royalty from
production. If the Owners elect to receive a 5% net returns royalty, the Company
will be obligated to make advance royalty payments of $200,000 within thirty
days after commencement of Commercial Production (as defined in the Agreement),
and $250,000 each year thereafter.
The Agreement provides that, once the Owners have made their election,
the Company shall have one year within which to achieve Commercial Production.
If the Company fails to achieve Commercial Production within one year, the
Company must either re-convey the property to the Owners or extend by one year
the time period within which Commercial Production must commence by paying an
advance royalty of $200,000 to the Owners. If Commercial Production has not
commenced by the end of the extension period, the Company may obtain one final
extension of one year within which to achieve Commercial Production by paying
the Owners an additional advance royalty of $250,000. In addition to the advance
royalty payments and the work commitments outlined above, the Company is
obligated to pay all fees necessary to maintain the unpatented mining claims
through August 31 of the calendar year in which the extension year expires.
Note 6. - Developed Mineral Properties
The Company's investment in developed mining properties at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
<S> <C> <C>
Goldstrike Mine $ 364,000 $ 364,000
Montana Tunnels 556,000 556,000
-------------------- ---------------------
Total Cost 920,000 920,000
Less: Accumulated depletion and
amortization 914,000 892,000
==================== ---------------------
$ 6,000 $ 28,000
==================== ---------------------
</TABLE>
Goldstrike Mine
Effective November 1, 1992, the Company acquired from Tenneco
Corporation, the stock of Tenneco Minerals Company-Utah, owner and operator of
the Goldstrike Mine located approximately 35 miles northwest of St. George,
Utah. Soon after the acquisition, the name of this wholly owned subsidiary was
changed to USMX of Utah, Inc. Gold production from the Goldstrike Mine since
November 1, 1992, has been 77,182 ounces, including 6,266 ounces of gold
produced in 1995.
Mining operations at the Goldstrike Mine were completed in October
1994. Leaching was completed in December 1995. All disturbed areas at the
Goldstrike Mine were reclaimed during 1995 except for the heaps and the plant
site. Reclamation of these areas will continue into 1997.
Montana Tunnels
The Company owns a net profits royalty interest in this property and,
accordingly, the carrying value has been classified as a producing mineral
property in the Company's consolidated statements of financial position (see
note 12.). In June 1996, the Company and Pegasus Gold Inc. ("Pegasus"), an
affiliate, agreed to the sale of the Company's net profits royalty interest in
the Montana Tunnels property to Pegasus for $4,500,000. The sale is pending
definitive documentation and approval of the Company's stockholders (see note
8.).
<PAGE>
Note 7. - Asset abandonments and Write-downs
Mineral Property Abandonments
Mineral properties that management determined no longer hold sufficient
promise to justify the cost required to maintain them and which had historical
costs of $674,000, $772,000 and $261,000 were written off in 1996, 1995 and 1994
respectively. The write-offs during 1996 include several exploration targets
near the Goldstrike Mine in Utah with historical costs totaling $345,000 and
various other properties throughout the western United States with total
historical costs of $179,000. Six small properties in Mexico with historical
costs of $89,000 and one property in Chile with historical costs of $61,000 were
also written off in 1996.
Mineral Property Write-downs
During 1996 the Company wrote down the carrying value of the Nambija
property in Ecuador and the Amargosa and La Reserva properties in Mexico by
$335,000, $326,000 and $81,000 respectively. The carrying value of each of the
properties was reduced to zero. To date, no significant economic mineralization
has been encountered on the properties. The La Reserva property is currently
being explored in joint venture with another mining company. The Nambija and
Amargosa properties are being held for possible future joint venture
exploration. During 1995 the Company wrote down the Armagosa property by
$1,000,000.
In June 1995, the Commonwealth of Pueto Rico adopted legislation which
amended the island's mining law to prohibit future mining of metallic deposits
by open pit methods. Although the Company considered various strategies, the
effect of the mining law, as currently amended, is to render the Company's plan
for development of the Cala Abajo deposit uneconomic. As a result the Company
reduce the carrying value of the property to zero and recorded an impairment
loss of $1,039,000 during 1995.
Gold production at the Company's Goldstike Mine in Utah declined sharply in
August and September, 1995. This decline in gold recovery triggered a
reevaluation of the estimated remaining recoverable gold ounces in the heaps. It
was determined that it was no longer economically feasible to add cyanide to the
system and the rinsing of the heaps commenced in October 1995. As a result, the
carrying value of Deferred mining and processing costs was reduced to the fair
market value of the remaining gold bullion and dor, at the refinery and the
Company recorded an impairment loss of $1,620,000.
Note 8. - Long Term Debt and Note Payable to Related Party
Long Term Debt
On July 11, 1996 the Company closed a $22 million financing facility
with Rothschild. The facility consists of a $19.5 million project loan and a
$2.5 million convertible loan. Proceeds of the loans have been used to partially
fund the development of the Company's Illinois Creek Mine in Alaska. At December
31, 1996, the Company has drawn approximately $21,355,000 against the facility.
The $19.5 million project loan bears interest, payable quarterly, at
2.25% above LIBOR until certain tests related to project operations have been
completed to the satisfaction of the lender and 1.875% above LIBOR thereafter.
Principal payments are due in seven installments on September 30 and December 31
of each year, commencing September 30, 1997. The loan is payable by the
Company's operating subsidiary that owns the Illinois Creek property and is
secured by a first priority interest in the Illinois Creek Mine assets. The
Company has agreed to guarantee the $19.5 million project loan until it has been
demonstrated that the Illinois Creek Project is operating in a manner
satisfactory to Rothschild and that no defaults are outstanding. In addition,
the Company is a continuing guarantor of the covenant to comply with
environmental laws.
The Company's obligations under its guarantee and the $2.5 million
convertible loan are secured by subordinated security interests in the Illinois
Creek Mine assets and the outstanding shares of the operating subsidiary formed
to own and develop the mine.
Amounts drawn pursuant to the financing facility are deposited in the
Illinois Creek project proceeds account and may be used only for the benefit of
the project. Such amounts are reflected in the accompanying condensed
consolidated statements of financial position as Restricted cash. At December
31, 1996, approximately $108,000 remained in the account.
The $2.5 million convertible loan bears interest at 2% above LIBOR,
payable semi-annually. The note may be converted into Common Stock at a
conversion price of $1.74 per share at the option of the lender at any time
during the term of the note. The Company may also require conversion of the note
if the note is not in default and the daily closing price of the Common Stock
exceeds $4.75 for 30 consecutive trading days. The convertible loan is due
September 30, 2000.
<PAGE>
Note 8. - Long Term Debt and Note Payable to Related Party (Concluded)
Assuming the $2.5 million convertible loan is not converted, aggregate
maturites of the notes payable under the Rothschild's financing facility are as
follows:
Year ended
December 31,
---------------- --------------------
1997 $ 6,000,000
1998 6,000,000
1999 6,000,000
2000 3,355,000
====================
$ 21,355,000
====================
The loan agreements include financial, operating and other covenants,
including covenants regarding the maintenance of certain operating and financial
ratios, limitations on or prohibitions of dividends, indebtedness, liens,
investments, mergers, changes in capital structure and certain other items. At
December 31, 1996 the Company was not in compliance with certain of the loan
covenants.
Under the terms of the $22.0 million Rothschild financing facility, the
Company agreed to deposit $1.5 million in an escrow account by September 30,
1996. The Company was unable to comply with this requirement and Rothschild
agreed to waive this and certain financial ratio covenant requirements until
December 31, 1996, conditional upon the Company's agreements to, among other
things, (A) file a prospectus with the appropriate Canadian securities
regulatory authorities by November 1, 1996, and complete an offering by December
31, 1996, (B) adjust the price at which Rothschild may elect to convert the $2.5
million loan into the Company common shares to the price at which the shares
offered are sold, or if no sale, at the average trading price for the last ten
trading days of 1996 and (C) to pay Rothschild a fee of $100,000 which fee is
payable upon the first to occur of (i) a date upon which such payment can be
made without materially reducing the working capital reasonably required by the
Company for continued operations or (ii) April 15, 1997. At December 31, 1996,
the Company had not completed the offering and was unable to comply with the
requirement to deposit $1.5 million in an escrow account.
As a result of the covenant violations, Rothschild has the ability to
declare an event of default and require that the balance be paid currently.
Accordingly, the loans have been classified as a current liability. As discussed
in notes 2 and 16, subsequent to December 31, 1996, Rothschild has entered into
an intercreditor agreement, whereby Rothschild agreed not to accelerate the due
date of any loans to USMX or to exercise any rights it may have to collateral
security until the earlier of the consummation of the merger with Dakota, the
termination of the merger agreement in accordance with its terms, or June 30,
1997.
Note Payable to Related Party
During the second quarter of 1996 the Company arranged for a $4.5 million,
8.75% fixed rate loan from Pegasus, a shareholder of the Company. The loan is
repayable over a 50 month period beginning June 1, 1996. The loan is
collateralized by the Company's net profits royalty interest in the Montana
Tunnels property. In lieu of loan payments by the Company, Pegasus has agreed to
offset the $60,000 per month Montana Tunnels minimum advance royalty payments
that are otherwise payable to the Company against the payments due under the
loan. (see note 12.)
During the second quarter of 1996 the Company also agreed with Pegasus
to sell its net profits royalty interest in the Montana Tunnels property to
Pegasus for $4,500,000. Pegasus is the owner and operator of the Montana Tunnels
Mine. The net profits royalty interest entitles the Company to the greater of a
5% net profits royalty interest or minimum advance royalties of $60,000 per
month until certain construction, land acquisition, associated financing and
other costs have been recovered by Pegasus ("Payback"), and a 50% net profits
royalty interest thereafter. Payback is dependent upon several factors,
including future metal prices, production rates, and the life of the Montana
Tunnels Mine. It is unclear whether Payback will ever be achieved. Since
inception of the contract, the Company has only received the monthly minimum
advance royalties.
Loan proceeds received by the Company from Pegasus will be credited
against the sales price at closing and the loan will be extinguished. Closing of
the transaction is subject to completion of definitive documentation and
approval of the Company's stockholders.
<PAGE>
Note 9. - Gain on Sale of Common Stock
In April 1994, the Company sold its interest in the Kinsley Mountain
Project in Elko County Nevada to Alta Gold Co. ("Alta"). In April 1995, the
Company received a final cash payment of $400,000 and Alta restricted common
stock with a market value of $200,000 based on the average closing price of the
stock over the 30 trading days prior to issuance. The payment was in addition to
cash of $400,000 and Alta restricted common stock with a market value of
$200,000 previously received. The cash proceeds and discounted value of the
stock received were recorded as a reduction of the carrying value of the
property. During 1995, the carrying value of the property was reduced to zero
and a $1,000 loss was recorded. During 1996 all of the Alta common stock was
sold for $1,281,000, resulting in a gain of $936,000.
Note 10. - Stock Options
The Company has two stock option plans, the ("1987 Plan") and the
Non-discretionary Plan for Non-Employee Directors ("Directors' Plan"), which
cover a total of 1,700,000 shares of common stock available for grant to
employees and directors of the Company.
Under the 1987 Plan, the Company may grant incentive stock options as
well as non-incentive stock options. Incentive stock options granted under the
1987 Plan are exercisable at prices equal to the market value of the common
stock at the date of grant. The option prices of non-incentive stock options
granted under the 1987 Plan may be less than the market value of the common
shares as of the grant date. Options expire at such time as the Option Committee
of the Board of Directors determines, but no later than ten years from the grant
date.
The Directors' Plan was established in 1992 to afford non-employee
directors an opportunity for investment in the Company and the incentive
advantages inherent in stock ownership of the Company. Options granted under the
Directors' Plan are exercisable at prices equal to the market value of the
common stock at the date of grant and are exercisable in full on the date of
grant.
Shares acquired pursuant to the Directors' Plan may not be sold,
transferred or otherwise disposed of for a period of at least six months
following the date of grant. Under the terms of the Directors' Plan, the
directors who elected to participate were each issued options to purchase 10,000
shares of the Company's common stock upon adoption of the plan. Thereafter, each
non-employee director who elects to participate is automatically granted an
option to purchase 10,000 shares of the Company's common stock upon joining the
Board. In addition, on October 1 of each year each participant is automatically
granted an option to purchase an additional 5,000 shares. Options granted under
the Directors' Plan expire ten years from the date of grant except that an
option will expire, if not exercised, ninety days after the optionee ceases to
be a director of the Company.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its option plans. Accordingly, no compensation cost has been
recognized for options granted at fair market value under the plans. Had
compensation cost for the Company's stock option plans been determined
consistent with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net (loss)
As reported $ (3,302,000) $ (6,906,000)
Pro forma $ (3,493,000) $ (6,954,000)
Net (loss) per common share
As reported $ (0.22) $ (0.47)
Pro forma $ (0.23) $ (0.47)
<PAGE>
Note 11. - Stock Options (Concluded)
Changes in stock options for the years ended December 31, 1994, 1995
and 1996, are as follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
--------------- --------------
<S> <C> <C>
Outstanding at December 31, 1993 757,550 $1.13-5.50
Exercised (198,300) 1.13-3.06
Expired or canceled (39,000) 3.06-5.50
Granted 275,000 2.69-4.13
---------------
Outstanding at December 31, 1994 795,250 1.16-5.50
Exercised (3,000) 2.06
Expired or canceled (791,750) 1.16-5.50
Granted 1,137,250 1.16-5.50
---------------
Outstanding at December 31, 1995 1,137,750 1.16-5.50
Exercised - -
Expired or canceled 581,000 1.88-5.50
Granted 811,000 2.44-2.94
---------------
Outstanding at December 31, 1996 1,367,750 $1.13-5.50
===============
</TABLE>
During 1995, the terms of options to acquire 724,750 shares were
extended to ten years from the original date of grant. For accounting purposes
the extension was treated as the cancellation of the existing options and the
granting of new options.
At December 31, 1996, 1995 and 1994, the number of options exerciseable
was 707,096, 826,250 and 573,250 respectively, the weighted average exercise
price of those options was $3.14, $3.18 and $3.50 respectively, and the weighted
average remaining contractual life was 8.2, 7.8 and 2.2 years respectively. The
remaining 660,664 options at December 31, 1996, are exerciseable at various
dates through August 1999.
The weighted average fair value of options granted during the years
ending December 31, 1996 and 1995 were $1.38 and $0.97 respectively, assuming a
risk free rate of 6%, an expected volatility of 50%, and a weighted average
expected life of 9 years.
<PAGE>
Note 11. - Employees' Benefit Plans and Incentive Bonus Arrangements
Effective July 1, 1987, the Company adopted an Employee Savings and
Investment Plan under section 401(k) of the Internal Revenue Code, which covers
all full-time employees. The plan is a defined contribution plan and allows
employee contributions of up to ten percent of pre-tax compensation, limited to
the maximum deferral allowed by the Internal Revenue Service.
The Company may contribute at least ten percent and not more than one
hundred percent of the amount contributed by the employees, up to a maximum of
six percent of pre-tax compensation. For 1996, 1995 and 1994, the Board of
Directors has set the Company's contribution at fifty percent of the first six
percent of employee contributions. For 1996, 1995 and 1994, the Company's
contributions were approximately $53,000, $57,000, and $59,000, respectively.
Participants vest in the Company's contributions based upon years of service,
and are fully vested after four years of service.
The Company has an Exploration Discovery Bonus Plan under which bonuses
are paid in cash or in shares of the Company's common stock to certain employees
for discoveries of ore deposits that the Company's Board of Directors determines
can be operated at a profit. The bonus is based on the net present value of the
deposit and is calculated using a sliding scale ranging from 2% for deposits
with a net present value of up to $10 million, to 0.85% of the first $100
million of net present value plus 0.25% of that portion of the net present value
of the deposit that exceeds $100 million. Under the terms of the plan, 70% of
each discovery bonus is divided equally among the Company's explorationists and
the remainder is to be shared among those individuals designated by the
Company's President as playing an especially important role in the discovery. No
bonuses were paid in 1996, 1995 or 1994 under the plan.
Note 12. - Transactions With Affiliates
As of December 31, 1996, Pegasus owned 4,826,000 shares (29.9%) of the
Company's outstanding common stock. In January 1986, the Company entered into a
revised agreement with Centennial Minerals Ltd., a subsidiary of Pegasus for the
development of the Montana Tunnels property. Pursuant to the agreement, Pegasus
developed the property, acquired a 100 percent working interest in the project,
and commenced mine and mill operations in March 1987. The operations at Montana
Tunnels achieved defined operating status on October 1, 1987. Under the
agreement, the Company will receive the greater of a minimum advance royalty of
$60,000 per month or a five percent net profits interest until Pegasus recovers
payout of capital and other defined costs.
During the second quarter of 1996 the Company agreed with Pegasus to
sell its net profits royalty interest in the Montana Tunnels Mine to Pegasus for
$4,500,000. Closing of the transaction is subject to completion of definitive
documentation and approval of the Company's stockholders. Loan proceeds in the
amount of $4,500,000 previously received by the Company from Pegasus will be
credited against the sales price at closing and the loan will be extinguished
(see Note 7.).
For each of the years ended December 31, 1996, 1995, and 1994, the Company
received $720,000 in royalty income from the Montana Tunnels property.
In March 1995, the Company acquired all of the outstanding capital
stock of Mega Minerals S.A., an Ecuadorian company. The Company assumed
obligations of approximately $120,000, and agreed to pay the seller a 10% net
proceeds royalty on any production from the concessions after recovery of all
capital expenditures. A director and principal shareholder of the seller is also
a director of the Company. The assets of Mega Minerals S.A. consist of eight
exploration concessions and the rights to acquire four additional exploration
concessions, all located in the Nambija-Zamora gold belt of southern Ecuador.
<PAGE>
Note 13. - Income Taxes
Total income tax benefit for the years ended December 31, 1996, 1995
and 1994, was $55,000, $118,000 and $497,000 respectively. The entire income tax
benefit of $55,000 for the year ended December 31, 1996, is the result of an
adjustment to federal income taxes receivable related to net operating losses
carried back to prior years. Income tax expense (benefit) consists of the
following:
<TABLE>
<CAPTION>
Current Deferred Total
------------------ -------------- -----------------
<S> <C> <C> <C>
Federal tax provision $(55,000) $- $(55,000)
State tax provision - - -
================== ============== =================
Year ended December 31, 1996 $(55,000) $- $(55,000)
================== ============== =================
Federal tax provision $(118,000) $- $(118,000)
State tax provision - - -
================== ============== =================
Year ended December 31, 1995 $(118,000) $- $(118,000)
================== ============== =================
Federal tax provision $(416,000) $- $(416,000)
State tax provision (81,000) - (81,000)
================== ============== =================
Year ended December 31, 1994 $(497,000) $- $(497,000)
================== ============== =================
</TABLE>
The Company's effective tax rate for the years ended December 31, 1996, 1995 and
1994, differs from the federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance (40.9%) (22.4%) -
Revision of prior year's estimated tax 3.8% 1.7% 211.9%
Cost of sales for tax purposes less than financial
statements - 3.0% (184.5%)
Exploration and development deducted for tax
purposes not for financial statements - (13.7%) 77.4%
Royalty payments deducted for tax purposes not for
financial statements - - 22.3%
Mineral property disposal, tax gain greater than
financial statement gain - (2.9%) (44.4%)
Statutory depletion over cost basis - - 16.2%
Use of alternative minimum tax rate - (0.1%) 29.4%
State provision and other 4.4% 2.1% 7.6%
============== ============= =============
Effective tax rate 1.3% 1.7% 169.9%
============== ============= =============
</TABLE>
<PAGE>
Note 13. - Income Taxes (Concluded)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995
------------------ ------------------
<S> <C> <C>
Reclamation liabilities, accrued for financial
reporting purposes $ 310,000 $ 439,000
Ore inventories, due to additional
costs deferred for tax purposes. 91,000 90,000
Alternative minimum tax credit carryforwards 157,000 157,000
Net operating loss carryforwards 3,826,000 3,343,000
Other - 8,000
------------------ ------------------
Total gross deferred tax assets 4,384,000 4,037,000
Less valuation allowance (3,838,000) (3,612,000)
------------------ ------------------
Total deferred tax assets 546,000 425,000
------------------ ------------------
Deferred tax liabilities:
Mineral properties, principally due to the
capitalization of exploration and development costs
for financial reporting purposes (397,000) (296,000)
Unrealized gain on commodity futures contracts
recognized for tax purposes (62,000) -
Plant and equipment, principally due to accelerated tax
depreciation. (87,000) (129,000)
------------------ ------------------
Total gross deferred tax liabilities (546,000) (425,000)
================== ==================
Net deferred income taxes $ $
- -
================== ==================
</TABLE>
The change in the valuation allowance for the years ending December 31, 1996 and
1995 was $226,000 and $3,247,000, respectively.
As of December 31, 1996, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $9,799,000 which
are available to offset future federal taxable income, if any, through 2011. As
the result of an audit by the Internal Revenue Service ("IRS") during 1996, an
additional $3,151,000 of net operating loss carryforwards were disallowed by the
IRS. The Company is currently protesting the IRS findings. In addition, the
Company has net operating loss carryforwards for alternative minimum tax
purposes of approximately $8,640,000 which are available to offset future
alternative minimum taxable income, if any, through 2011.
<PAGE>
Note 14. - Commitments and Contingencies
Reclamation Surety
Pursuant to the mining reclamation and bonding regulations of the State
of Utah, Department of Natural Resources and the Bureau of Land Management, in
1993 the Company provided reclamation surety for the Goldstrike Mine in the
amount of $2,251,000. In October 1995, the Company was advised that, as a result
of the reclamation work accomplished by the Company at the Goldstrike Mine, the
required surety had been reduced by approximately $514,000 to $1,737,000. The
required surety is in the form of a certificate of deposit in the amount of
$800,000 and letters of credit in the amount of $937,000. The certificate of
deposit and restricted cash account supporting the letter of credit are
reflected in Reclamation surety and other assets in the accompanying
Consolidated Statements of Financial Position.
Pursuant to the mining reclamation and bonding regulations of the State
of Alaska, Department of Natural Resources, the Company provided reclamation
surety for the Illinois Creek Mine in the amount of $1,575,000 in 1996. The
required surety is in the form of certificates of deposit totaling $1,575,000
and is reflected in Reclamation surety and other assets in the accompanying
Consolidated Statements of Financial Position.
Hedging
As part of its gold hedging program the Company has entered into
agreements with a major financial institution to deliver gold. Realization under
these agreements is dependent upon the ability of the counterparties to perform
in accordance with the terms of the agreement. As of December 31, 1996, the
Company had entered into forward sales contracts for 140,900 ounces of gold for
delivery at various dates through December 31, 1999 at an average selling price
of $409 per ounce. Delivery under these spot deferred contracts can be deferred
at the Company's option up to forty months depending on the individual contract.
The aggregate unrealized excess of the net market value of the Company's forward
sales contracts over the spot gold price of $368 per ounce as of December 31,
1996, is approximately $5,875,000. The aggregate unrealized gain on the
Company's forward sales contracts accounted for as hedges of future production
were approximately $5,033,000 at December 31, 1996.
The Company has also written silver call options, which if exercised,
would become spot deferred contracts with delivery deferred as previously
described. At December 31, 1996 the Company had sold 825,300 ounces of silver
call option contracts all at a strike price of $5.50 per ounce expiring on dates
ranging from September 28, 1997 through December 29, 1999. Call options premiums
received amounted to approximately $424,000.
Forward sales contracts and silver call options that are not hedges are
recorded on the Consolidated Statements of Financial Position at market value
and any unrealized gains or losses are recognized on the Consolidated Statements
of Operations.
Operating Leases
The Company leases office space, office equipment and vehicles under
operating leases which expire through 2001.
Effective as of June 15, 1992, the Company entered into a new lease for
its corporate offices in Lakewood, Colorado. The lease was amended effective
June 1, 1996, to provide for additional office space and to extend the initial
term of the lease to May 31, 2001. The lease contains an option to renew for an
additional five year period at the market rate in effect at the time of renewal.
The lease provides for base rent of $12,917 per month with annual increases each
year beginning June 14, 1997. In addition, the Company is obligated to reimburse
the landlord for the Company's proportionate share of increases in real estate
taxes and operating expenses.
Effective as of July 1, 1996, the Company entered into a new lease for
its Alaska district offices in Anchorage, Alaska. The term of the lease is three
years, commencing July 1, 1996, and ending June 30, 1999. The lease provides for
aggregate rent of $121,284 payable in equal monthly installments of $3,369.
<PAGE>
Note 14. - Commitments and Contingencies (Concluded)
The following table sets forth the future minimum lease payment
obligations as of December 31, 1996:
Minimum
Year Lease Payments
--------------- ---------------------
1997 $298,000
1998 $249,000
1999 $191,000
2000 $173,000
2001 $76,000
--------------- ---------------------
Rent expense was $154,000, $113,000 and $139,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Contractor Claim
One of the construction contractors on the Illinois Creek Property in
Alaska working under an approximately $3 million contract with the Company has
submitted invoices and claims totaling approximately $7 million for work
completed in 1996. At December 31, 1996, the Company had paid the contractor
$1,772,000 and has recorded an additional liability to the contractor, based on
the Company's estimate of its obligation under the contract of $2,414,000. The
unpaid invoices and claims are currently being reviewed, and it is likely that a
significant portion of the invoices and claims will be disputed by the Company.
The contractor has threatened legal proceedings if the dispute is not informally
resolved. The Company and its representatives are currently reviewing the
relevant facts and until that review is complete the Company cannot estimate the
magnitude of any potential liability, possible counterclaims by the Company or
the outcome of arbitration or litigation if the dispute cannot be resolved by
negotiation. On November 8, 1996, the construction contractor also filed a lien
on the Illinois Creek Property for certain unpaid invoices and claims submitted
through that date.
Note 15 - Subsequent Events
Definitive merger agreement
On February 5, 1997, the Company signed a definitive merger agreement with
Dakota Mining Corporation ("Dakota") whereby the shareholders of the Company
will receive one share of Dakota common stock for every 1.1 shares of the
Company's common stock and the Company will become a wholly owned subsidiary of
Dakota (the "Merger"). The Merger is subject to the approval of the Toronto
Stock Exchange, stockholder and creditor approval, review by other regulatory
authorities, and other customary conditions.
As part of the merger agreement, Dakota and the Company agreed that Dakota
would provide a $5 million line of credit to the Company to provide interim
working capital to sustain the Company's operations until the Merger is
consummated. The line of credit bears interest at the rate of one per cent above
a quoted prime rate and is due August 31, 1997 or earlier if the merger
agreement is terminated before such date. The proceeds are to be used to pay
certain ongoing operating expenses of the Company, primarily in connection with
start-up activities associated with the Illinois Creek Mine and to partially pay
trade creditors of the Company and its subsidiaries.
The line of credit is evidenced by two promissory notes with similar terms
but different amounts and different security. The $2 million promissory note
("the first note") is secured by a second priority position all of the capital
stock of USMX of Alaska Inc. USMX of Alaska, Inc. is the Company's subsidiary
which holds title to the Illinois Creek Mine. A second promissory note for $ 3
million ("the second note") is secured by a first position on all of the capital
stock of the Company's Mexican subsidiary and a first position on the Company's
interest in the Thunder Mountain property in Idaho. Rothschild was granted a
second priority security position in the second note security. Funding for the
line of credit is being provided from the proceeds of a Special Warrant offering
by Dakota described below.
In February 1997, Dakota offered by way of private placement 25,000 Special
Warrants at a price of Cdn. $1,000 per Special Warrant resulting in gross
proceeds of Cdn. $25 million. Each Special Warrant entitles the holder to
receive one 7.5% unsecured subordinated convertible debenture in the amount of
Cdn. $1,000. Of the proceeds, US $5.0 million have been released immediately and
the remaining proceeds have been deposited in escrow pending completion of the
merger and approval by the Dakota shareholders of the issuance of the common
shares underlying the debentures. Completion of this offering was a condition of
the Company's obligation to proceed with the merger.
N. M. Rothschild & Sons Limited financing facility.
Rothschild's consent was required for the extension of the $5 million line of
credit and is required for the consummation of the Merger. Further, Dakota, as
the potential owner of the Company, desired certain changes to the agreements
underlying the Rothschild financing facility (the "Rothschild Credit
Agreements") in order to avoid immediate defaults under such facility after
closing of the Merger. Accordingly, the Rothschild and Dakota negotiated an
Intercreditor Agreement which provided, among other things:
i) The consent of Rothschild to the Merger and the extension of the $5 million
line of credit from Dakota to the Company on the terms described above.
ii) Rothschild's agreement to share, pari passu with Dakota, in any proceeds
from foreclosure on the capital stock of USMX of Alaska, Inc. in the ratio
of the amount outstanding under the first note to $22 million, but with
Rothschild retaining the right to deal with such security.
iii) Dakota's agreement to fund at least $2 million of its line of credit for
costs and expenses at the Illinois Creek Mine according to a plan prepared
by the Company and approved by Rothschild and Dakota.
iv) The agreement of Dakota to guarantee the Company's obligations under the
Rothschild Credit Agreements until "commercial completion" of the Illinois
Creek Mine.
v) The agreement of Rothschild to forebear from exercising its rights to
declare and enforce defaults (except payment or bankruptcy defaults) of the
Company under the Rothschild Credit Agreements until the earliest of the
consummation of the Merger, termination of the $5 million line of credit or
June 30, 1997.
vi) For the amendment of certain terms and covenants in the Rothschild Credit
Agreements, to be effective upon closing of the Merger, which include
revisions to the definition of "commercial completion," and amendments to
certain financial covenants.
vii) Dakota's and Rothschild's rights to share in the collateral terminate if
the Merger is consummated or the $5 million line of credit is extinguished.
viii)At the closing of the Merger, a $2.5 million convertible loan to the
Company under the Rothschild Credit Agreements will be extinguished by
payment of $1.5 million by Dakota and adding the balance to the outstanding
amounts under the project financing portion of the such agreements.
Note 16.- Generally Accepted Accounting Principles in the United States and
Canada
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States which differ in certain
respects from those principles that the Company would have followed had its
financial statements been prepared in accordance with accounting principles
generally accepted in Canada. Differences which materially affect these
consolidated financial statements are:
Convertible Debt Securities
The Company has recorded convertible debt due September 2000 using the
accounting principles generally accepted in the United States, whereby the
$2,500,000 due is presented as long term debt at December 31, 1996. Had the
Company prepared its financial statements using the accounting principles
generally accepted in Canada, as of December 31, 1996 the Company would have
recorded approximately $2,023,000 of additional paid in capital relating to the
conversion rights of the convertible debt, with the remaining $477,000 presented
as long term debt.
Cash Flow Presentation
The Company has presented its financial statements using the accounting
principles generally accepted in the United States, which requires that the cash
flow statement exclude all non cash activities. Had the Company presented its
financial statements using the accounting principles generally accepted in
Canada the Company additions to property, plant and equipment would have been
increased by $4,000,000 and proceeds from issuance of common stock would have
been increased by $4,000,000, for the year ended December 31, 1996, representing
the estimated fair value of the common stock issued to NPMC to acquire leasehold
and other property interests in the Illinois Creek Project.
<PAGE>
PROXY SOLICITED BY MANAGEMENT OF THE CORPORATION
The undersigned shareholder of Dakota Mining Corporation ("Company") hereby
appoints Alan R. Bell, President and Chief Executive Officer, or, failing him,
Robert R. Gilmore, Vice President, Finance, Chief Financial Officer and
Secretary, or, failing him Joseph G. Kircher, Vice President, Operations, or,
failing him, Kayron L. McCoy, Assistant Secretary or, in place of the foregoing,
, as nominee of the undersigned to attend, vote and act for and in the name of
the undersigned at the Annual and Special Meeting of the Shareholders of the
Corporation (the"Meeting") to be held at the Royal York Hotel, 100 Front Street
West , Toronto, Ontario on Thursday, May 29, 1997, at the hour of 8:00 o'clock
in the morning (local time), and at every adjournment(s) thereof, and the
undersigned hereby revokes any former proxy given to attend and vote at the
meeting.
THE NOMINEE IS HEREBY INSTRUCTED TO VOTE AS FOLLOWS WITH RESPECT TO THE
FOLLOWING MATTERS:
<TABLE>
<S> <C> <C> <C> <C>
1. FOR [ ] WITHHOLD [ ] To approve and adopt the Merger Agreement and the
transactions contemplated thereby, including the issue of
additional common shares by Dakota as set out in Appendix B to
the Joint Proxy Statement/Prospectus.
2. FOR [ ] AGAINST [ ] ABSTAIN [ ] To ratify an amendment to the Share Incentive
Plan of the Company as set out in Appendix B to the Joint Proxy
Statement/Prospectus.
3. FOR [ ] AGAINST [ ] To approve the issuance of up to 4,884,550
common shares of Dakota issuable upon conversion of Debentures
issuable upon exercise of Series B. Special Warrants as set out
in Appendix B to the Joint Proxy Statement/Prospectus.
4. FOR [ ] WITHHOLD [ ] To elect Alan R. Bell as a Director.*
5. FOR [ ] WITHHOLD [ ] To elect Landon T. Clay as a Director.*
6. FOR [ ] WITHHOLD [ ] To elect Stanley Dempsey as a Director.*
7. FOR [ ] WITHHOLD [ ] To elect Edward G. Thompson as a Director.*
8 FOR [ ] WITHHOLD [ ] To elect Tor Jensen as a Director.*
9. FOR [ ] WITHHOLD [ ] To elect D. James Rudack as a Director
10. FOR [ ] WITHHOLD [ ] To elect Christopher M.T. Thompson as a Director
11. FOR [ ] WITHHOLD [ ] To elect Gregory Pusey as a Director
12. FOR [ ] WITHHOLD [ ] To appoint KPMG Peat Marwick Thorne as the Auditors
13. FOW [ ] WITHHOLD [ ] ABSTAIN [ ] To authorize the Directors to fix the Auditors remuneration.
<FN>
*If the resolution set out in paragraph No. 1 is not approved, only those nominees referred to in paragraphs 4 through 8 will
stand for election.
</FN>
</TABLE>
VOTE FOR OR AGAINST OR WITHHOLD OR ABSTAIN IN RESPECT OF THE MATTERS LISTED IN
ACCORDANCE WITH THE CHOICE, IF ANY, INDICATED IN THE SPACE PROVIDED. IF NO
CHOICE IS INDICATED, THE PROXY WILL BE VOTED FOR SUCH MATTER. IF ANY AMENDMENTS
OR VARIATIONS ARE TO BE VOTED ON, OR ANY FURTHER MATTERS COME BEFORE THE
MEETING, THIS PROXY WILL BE VOTED ACCORDING TO THE BEST JUDGMENT OF THE PERSON
VOTING THE PROXY AT THE MEETING. THIS FORM SHOULD BE READ IN CONJUNCTION WITH
THE ACCOMPANYING NOTICE OF THE MEETING AND MANAGEMENT PROXY CIRCULAR.
DATED this day of , 1997
Signature of Shareholder
(Please print name of Shareholder)
NOTES:
1. YOU HAVE THE RIGHT TO APPOINT A PERSON TO REPRESENT YOU AT THE MEETING
OTHER THAN THE PERSONS DESIGNATED IN THE FORM OF PROXY. IF YOU WISH TO
EXERCISE THIS RIGHT, INSERT THE NAME OF YOUR NOMINEE IN THE BLANK SPACE
PROVIDED FOR THAT PURPOSE IN THE FORM OF PROXY AND STRIKE OUT THE THREE
PRINTED NAMES.
2. Please date and sign (exactly as the shares represented by this proxy
are registered) and return promptly. Where the instrument is signed by
a corporation, its corporate seal must be affixed or executed must be
made by an officer or attorney thereof duly authorized. If no date is
stated by the shareholder, the proxy is deemed to bear the date upon
which it was mailed by Management to the shareholder.
3. To be valid, this proxy form, duly signed and dated, must arrive at the
office of the Company's transfer agent, the Montreal Trust Company of
Canada, 151 Front Street, Toronto, Ontario M5J 2N1 not less than
forty-eight (48) hours (excluding Saturdays, Sundays and holidays)
before the day of the Meeting or any adjournment(s) thereof.
4. All shares represented at the Meeting by properly executed proxies will
be voted or withheld from voting on any ballot that may be called for,
and where a choice with respect to any matter to be acted upon has been
specified in this proxy form, the shares represented by this proxy will
be voted in accordance with such specifications.
USMX, INC.
ANNUAL MEETING OF STOCKHOLDERS
PROXY SOLICITED BY BOARD OF DIRECTORS OF THE CORPORATION
The undersigned shareholder of USMX, Inc. ("Company") hereby appoints Gregory
Pusey, President and Chief Executive Officer, or, failing him, Dennis L. Lance,
Vice President or, in place of the foregoing, , as nominee of the undersigned to
attend, vote and act for and in the name of the undersigned at the Annual and
Special Meeting of the Shareholders of the Corporation (the"Meeting") to be held
at the Westin Tabor Center,1672 Lawrence Street, Denver, Colorado, Tuesday, May
20, 1997, at the hour of 9:00 o'clock in the morning (local time), and at every
adjournment(s) thereof, and the undersigned hereby revokes any former proxy
given to attend and vote at the meeting.
THE NOMINEE IS HEREBY INSTRUCTED TO VOTE AS FOLLOWS WITH RESPECT TO THE
FOLLOWING MATTERS:
<TABLE>
<S> <C> <C> <C> <C>
1. FOR [ ] AGAINST [ ] ABSTAIN [ ] To approve and adopt the Merger Agreement and the transactions
contemplated thereby, as set out in Appendix B to the Joint Proxy
Statement/Prospectus.
2. FOR [ ] AGAINST [ ] ABSTAIN [ ] To approve and adopt the Montana Tunnels Royalty
Agreement and the transactions contemplated thereby, as set out
in Appendix F to the Joint Proxy Statement/Prospectus.
3. FOR [ ] WITHHOLD [ ] To elect Gregory Pusey as a Director.
4. FOW [ ] WITHHOLD [ ] ABSTAIN [ ] To authorize the Directors to fix the Auditors remuneration.
</TABLE>
VOTE FOR OR AGAINST OR WITHHOLD OR ABSTAIN IN RESPECT OF THE MATTERS LISTED IN
ACCORDANCE WITH THE CHOICE, IF ANY, INDICATED IN THE SPACE PROVIDED. IF NO
CHOICE IS INDICATED, THE PROXY WILL BE VOTED FOR SUCH MATTER. IF ANY AMENDMENTS
OR VARIATIONS ARE TO BE VOTED ON, OR ANY FURTHER MATTERS COME BEFORE THE
MEETING, THIS PROXY WILL BE VOTED ACCORDING TO THE BEST JUDGMENT OF THE PERSON
VOTING THE PROXY AT THE MEETING. THIS FORM SHOULD BE READ IN CONJUNCTION WITH
THE ACCOMPANYING NOTICE OF THE MEETING AND JOINT PROXY STATEMENT/PROSPECTUS.
DATED this day of , 1997
---------------------------- ----------------------------
Signature of Stockholder Signature of Stockholder
------------------------------ ------------------------------
(Print name of Stockholder) (Print name of Stockholder)
NOTES:
1. YOU HAVE THE RIGHT TO APPOINT A PERSON TO REPRESENT YOU AT THE MEETING
OTHER THAN THE PERSONS DESIGNATED IN THE FORM OF PROXY. IF YOU WISH TO
EXERCISE THIS RIGHT, INSERT THE NAME OF YOUR NOMINEE IN THE BLANK SPACE
PROVIDED FOR THAT PURPOSE IN THE FORM OF PROXY AND STRIKE OUT THE THREE
PRINTED NAMES.
2. Please date and sign (exactly as the shares represented by this proxy
are registered) and return promptly. Where the instrument is signed by
a corporation, its corporate seal must be affixed or executed must be
made by an officer or attorney thereof duly authorized. If no date is
stated by the shareholder, the proxy is deemed to bear the date upon
which it was mailed by Management to the shareholder.
<PAGE>
<PAGE>
II-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Canada Business Corporations Act (under which the Registrant is continued)
provides that a corporation may indemnify a director or officer of the
corporation, a former director or officer of the corporation or a person who
acts or has acted at the corporation's request as a director or officer of a
body corporate of which the corporation is or was a shareholder or creditor, and
his heirs and legal representatives, against all costs, charges or 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 such corporation or body corporate, if (a) he acted
honestly and in good faith with a view to the best interests of the corporation;
and (b) in the case of a criminal or administrative action or proceeding that is
enforced by monetary penalty, he had reasonable grounds for believing that his
conduct was lawful. Such indemnification is not available in the case of a
derivative action brought by or on behalf of the corporation unless court
approval is obtained.
The Canada Business Corporations Act further provides that the persons
referred to in the preceding paragraph are entitled to indemnification as a
right in respect to all costs, charges and expenses reasonably incurred in
connection with the defense of any civil, criminal or administrative action or
proceeding to which they are made a party by reason of being or having been a
director or officer of the corporation if any such person seeking indemnity (a)
was substantially successful on the merits in his defense of the action or
proceeding, and (b) fulfills the conditions set out in clauses (a) and (b) of
the preceding paragraph.
The Canada Business Corporation Act also permits a corporation to purchase and
maintain insurance for the benefit of any person referred to in the first
paragraph under this item against any liability incurred by him (a) in his
capacity as a director or officer of the corporation, except where the liability
relates to his failure to act honestly and in good faith with a view to the best
interests of the corporation, or (b) in his capacity as a director or officer of
another body corporate where he acts or acted in that capacity at the
corporation's request, except where the liability relates to his failure to act
honestly and in good faith with a view to the best interests of the body
corporation.
The Bylaws of the Registrant provide that, subject to the Canada Business
Corporations Act, the Registrant shall indemnify a director or officer, a former
director or officer, or a person who acts or acted at the Registrant's request
as a director or officer of a body corporate of which the Registrant is or was a
shareholder 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 the Registrant or such body
corporate, if (a) he acted honestly and in good faith with a view to the best
interests of the Registrant; and (b) 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. The Bylaws of the Registrant
provide that the Registrant shall also indemnify such person in such other
circumstances as the Canada Business Corporations Act or law permits or
requires.
The Registrant, effective January 9, 1989, obtained a director's and officer's
liability policy for all of the directors and officers of the Registrant and its
subsidiaries with coverage currently in an amount of $1,000,000 and such policy
has been continuously in force since that date. The policy provides coverage to
the Registrant for payments made on behalf of its directors and officers under
the indemnity provisions of its Bylaws, and to the individual directors and
officers for losses arising during the performance of their duties for which
they are not indemnified by the Registrant.
Item 21. Exhibits and Financial Statement Schedules
Exhibits referenced herein and which are not specifically included herein are
included herein by reference to the document filed with the Securities and
Exchange Commission (the "Commission") which is set forth in the parenthetical
contained in the description of such exhibit.
2.1 Arrangement Agreement between the Registrant, VenturesTrident, L.P.,
VenturesTrident II, L.P., Holders of the Senior Exchangeable Promissory
Notes and Montreal Trust Company of Canada dated June 9, 1993 and
<PAGE>
Interim Order (see Schedules 2 and 3 to the Registrant's Notice of
Annual and Special Meeting of Shareholders and Management Proxy
Circular dated August 17, 1993)
2.2 Final Order from the Supreme Court of British Columbia dated September
14, 1993 (see Exhibit 4-e to the Registrant's Current Report on Form 8-K
dated September 15, 1993)
2.3 Arrangement Agreement dated July 31, 1992 by and among the
Registrant, United Coin Mines Limited, Moruya Gold Mines of North
America, Inc., Moruya Gold Mines of South Dakota, Inc. and Dakota Gold
Mining Inc. (see Exhibit 1 to the Registrant's Current Report on Form 8-
K dated October 8, 1992)
2.4* Agreement and Plan of Merger dated February 5, 1997 among the Registrant,
Dakota Merger Corporation and USMX, Inc. (see Appendix A to the Joint
Proxy Statement/Prospectus forming a part of this Registration Statement)
2.5** Amendment No. 1 to Agreement and Plan of Merger dated April 21, 1997
among the Registrant, USMX and Dakota Merger Corporation (see Appendix
A-1 to the Joint Proxy Statement/Prospectus forming a part of this
Registration Statement)
3.1 Pro-Forma Articles of Continuance of the Registrant (see Exhibit 3.1
to the Registrant's Registration Statement on Form S-1, File No. 33-
73958)
3.2 Bylaws of the Registrant, as amended (see Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1, File No. 33-73958)
4.1 Specimen certificate for Common Stock, no par value (see Exhibit 1 to the
Registrant's Registration Statement on Form 8-A, as amended, filed with
the SEC on September 16, 1993)
4.2 Purchase Warrant Indenture dated February 14, 1996 between the Registrant
and Montreal Trust Company of Canada (see Exhibit 4.4 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995)
4.3* Trust Indenture dated February 4, 1997 between the Registrant and
Montreal Trust Company of Canada
4.4* Special Warrant Indenture dated February 4, 1997 between the
Registrant and Montreal Trust Company of Canada
5.1** Opinion of McCarthy Tetrault as to the legality of the Securities
8.1* Opinion of Coopers & Lybrand L.L.P. (see Appendix E to the Joint
Proxy Statement/Prospectus forming a part of this Registration
Statement)
10.1 Cactus Joint Venture Agreement dated November 1, 1993 among Middle
Buttes Partners Ltd., CoCa Mines Inc. and Compass Mining, Inc. (see
Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1989)
10.2 Limited Partnership Agreement of the Golden Reward Mining Company
Limited Partnership dated October 8, 1992 between Wharf Gold Mines
Inc., Dakota Gold Mining Inc. and Wharf Reward Mines Inc. (see Exhibit
10.20 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992)
10.3 Amending Agreement dated February 12, 1993 to the Asset Purchase
Agreement and Limited Partnership Agreement of the Golden Reward Mining
Company Limited Partnership between Wharf Gold Mines Inc., Dakota Gold
<PAGE>
Mining Inc. and Wharf Reward Mines Inc. (see Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992)
10.4 Employment Contract dated May 19, 1992 between the Registrant and Alan R.
Bell (see Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992)
10.5 Employment Contract dated June 17, 1991 between the Registrant and Robert
R. Gilmore (see Exhibit 10.25 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992)
10.6 Share Incentive Plan (see Exhibit 28.1 to the Registrant's Registration
Statement on Form S-8 as filed with the Commission on September 16, 1993)
10.7 Option for Services Agreement dated July 21, 1992 between the
Registrant and Citibank N.A. (see Exhibit 10.20 to the Registrant's
Registration Statement on Form S-1, File No. 33-73958)
10.8 Agreement for the Sale of Equipment and Personal Property and the
Resolution of Contract Matters dated September 31, 1993 among Golden
Reward Mining Company, L.P., Wharf Resources Management Inc., Wharf Gold
Mines, Inc., Dakota Gold Mining, Inc., Wharf Reward Mines, Inc. and
Harley Hall, individually and d/b/a Hall Construction Company (see
Exhibit 10.24 to the Registrant's Registration Statement on Form S-1,
File No. 33-73958)
10.9 Net Smelter Return Royalty Agreement dated March 8, 1995 between the
Registrant, Brohm Mining Corp. and Repadre International Corporation (see
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994)
10.10Demand Note as Proof of Financial Assurance dated March 16, 1995 between
the Registrant, MinVen Gold (U.S.A.) Corporation and the State of South
Dakota (see Exhibit 10.20 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994)
10.11 Revolving Loan Agreement dated April 12, 1996 between Registrant and
Gerald Metals Inc. (see Exhibit 10.18 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996)
10.12 Stock Option Agreement between Registrant and Gerald Metals dated
<PAGE>
September 21, 1995 (see Exhibit 10.15 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996)
10.13* Agency Agreement dated February 4, 1997 among the Registrant,
Canaccord Capital Corporation, Scotia McLeod, Inc. and Newcrest Capital
Inc.
10.14* Letter Agreement dated February 26, 1997 between Registrant and
Gerald Metals, Inc. regarding a $7.5 million working capital,
refinancing and hedging facility
10.15**Support Agreement dated February 4, 1997 among the Registrant, USMX,
Inc. and Pegasus Gold, Inc.
10.16 Option Agreement dated February 4, 1997 from USMX, Inc. to the
Registrant (see Exhibit 10(a) to Current Report on Form 8-K of USMX,
Inc. dated February 4, 1997)
10.17* Loan Agreement dated March 11, 1997 among the Registrant, USMX, Inc.,
and USMX of Alaska, Inc.
10.18* Mortgage dated March 11, 1997 from USMX, Inc to the Registrant
10.19* Intercreditor Agreement dated March 11, 1997 between the Registrant
and N M Rothschild & Sons Limited
10.20**Letter Agreement dated April 21, 1997 between among the Registrant,
USMX and Peak Oilfield Service Co.
10.21**Employee Release and Settlement Agreement dated April 9, 1997 by and
between USMX and Donald P. Bellum.
10.22**Employee Release and Settlement Agreement dated April 8, 1997 by and
between USMX and Paul B. Valenti.
11.1* Statement re Computation of Per Share Earnings
13.1 1995 Annual Report to Shareholders (see Exhibit 13, to the Registrant's
Annual Report on From 10-K for the year ended December 31, 1995)
21.1* Subsidiaries of the Registrant
23.1** Consent of KPMG, Chartered Accountants, with respect to the Financial
Statements of the Registrant
23.2** Consent of KPMG, Chartered Accountants, with respect to Pro Forma
Consolidated Financial Information of the Registrant
23.3** Consent of KPMG, Chartered Accountants, with respect to the Financial
Statements of USMX, Inc.
<PAGE>
23.4* Consent of Coopers & Lybrand L.L.P.
23.5** Consent of McCarthy Tetrault (contained in Exhibit 5.1).
23.6** Consent of Glenn R. Clark & Associates Limited
23.7** Consent of DMBW, Inc.
23.8** Consent of Roscoe Postle Associates, Inc.
- -------------------
* Filed with initial filing
** Filed herewith
Item 22. Undertakings
Registration on Form S-4
The undersigned registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
The undersigned registrant hereby undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, an that, for purposes 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.
Request for Acceleration of Effective Date
The undersigned registrant hereby undertakes that, insofar as indemnification
for liabilities arising under the Securities Act of 1933 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.
Rule 415 Offering
The undersigned registrant hereby undertakes 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
<PAGE>
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 and 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 present 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 int he registration statement.
The undersigned registrant hereby undertakes 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.
The undersigned registrant hereby undertakes 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.
The undersigned registrant hereby undertakes, if the registrant is a foreign
private issuer, to file a post-effective amendment to the registration statement
to include any financial statements required by Rule 3-19 of this chapter at the
start of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the Act
need not be furnished, provided, that the registrant includes in the prospectus,
by means of a post-effective amendment, financial statements required pursuant
to this paragraph (a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of those
financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of Colorado
on April 21, 1997.
DAKOTA MINING CORPORATION
By: /s/ Alan R. Bell
Alan R. Bell
Principal Executive Officer
By: /s/ Robert R. Gilmore
Robert R. Gilmore
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Date: April 28, 1997 By: /s/ Alan R. Bell
Alan R. Bell, Director
Date: April 28, 1997 By: /s/ Stanley Dempsey
Stanley Dempsey, Director
Date: April 28, 1997 By: /s/ Landon T. Clay
Landon T. Clay, Director
Date: April 28, 1997 By: /s/ Edward G. Thompson
Edward G. Thompson, Director
Date: April 28, 1997 By: /s/ Tor Jensen
Tor Jensen, Director
EXHIBIT 5.1
April 22, 1997
Dakota Mining Corporation
Suite 2450
410 Seventeenth Street
Denver, Colorado
U.S.A.
80202
Dear Sirs and Mesdames:
We have acted as Canadian counsel to Dakota Mining Corporation
(the "Corporation") in connection with the issue of common shares of the Company
(the "Shares") pursuant to an Agreement and Plan of Merger dated February 5,
1997 (the "Merger Agreement") providing for the merger (the "Merger") of Dakota
Merger Corporation (a subsidiary of the Company) and USMX, Inc. all as described
in the proxy statement and prospectus (the "Prospectus") of the Company dated
April 22, 1997 forming part of a registration statement also dated April 22,
1997 (the "Registration Statement") to be filed by the Company with the
Securities and Exchange Commission in the United States.
We have examined such statutes, public records, corporate
records and documents and certificates of public officials and officers of the
Corporation and other entities and have considered such matters of law as we
have considered appropriate or necessary as a basis for the opinions expressed
herein. In such examinations we have assumed (i) the genuineness of the
signatures of and the authority of all persons signing documents examined by us,
(ii) the authenticity of all documents examined by us which were submitted to us
as originals, (iii) the conformity to authentic original documents of all
documents examined by us which were submitted to us as certified, conformed,
facsimile or photostatic copies of original documents, and (iv) the identity and
capacity of all individuals acting or purporting to act as public officials.
We have made no investigation of the laws of any jurisdiction
other than, and our opinions are limited to, the laws of British Columbia and
the laws of Canada applicable therein.
Based upon and relying upon the foregoing, we are of the
opinion that:
<PAGE>
1. the Corporation is a valid and subsisting corporation under the laws of
Canada; and
2. the Shares have been duly and validly allotted for issuance upon completion
of the Merger and when issued in accordance with the Merger Agreement will
be validly issued and outstanding as fully paid and non-assessable shares
in the capital of the Corporation.
We hereby consent to the use of our name under the heading
"Legal Matters" in the Prospectus and to the filing of a copy of this opinion as
an exhibit to the Registration Statement.
Yours truly,
McCARTHY TETRAULT
EXHIBIT 10.15
SUPPORT AGREEMENT
SUPPORT AGREEMENT dated as of February 4, 1997 (this "Support
Agreement") among the following parties (collectively, the "Parties" and
individually, a "Party"):
(a) Dakota Mining Corporation, a federal corporation organized under the Canada
Business Corporation Act ("Dakota");
(b) USMX INC., a Delaware corporation ("USMX"); and
(c) Pegasus Gold Inc., a British Columbia corporation ("Shareholder").
RECITALS
WHEREAS, Shareholder is the legal or beneficial owner of 4,826,000
shares (or approximately 29.8%) of the voting common stock, par value $.001 per
share, of USMX ("USMX Shares");
WHEREAS, Dakota and USMX have entered into a letter of intent dated
January 3, 1997 ("Letter of Intent") for the purposes of entering into, or have
entered into, a merger agreement (the "Merger Agreement"), whereby, pursuant to
a reverse-triangular merger (the "Merger"), Dakota Merger Corp, a Delaware
corporation and wholly-owned subsidiary of Dakota ("Merger Corp"), will merger
with and into USMX, with USMX as the surviving corporation;
WHEREAS, as a result of the Merger, all of the outstanding USMX Shares
will be automatically converted into common shares, no par value, of Dakota
("Dakota Shares"), which are listed and/or quoted on the American, Berlin, and
Toronto Stock Exchanges, in the ratio of 1.1 USMX Shares to one Dakota Share;
all of the outstanding capital stock of Merger Corp will be automatically
converted into USMX Shares in the ratio of one share of Merger Corp to one USMX
Share;
WHEREAS, pursuant to the General Corporation Law of the State of
Delaware, the Merger Agreement and the Merger will require the approval of a
majority of the USMX Shares at a duly called shareholders' meeting, which will
be held at the time and in the manner set forth in the Merger Agreement (the
"Shareholders' Meeting");
WHEREAS, Shareholder deems it in its best interest of shareholder and
USMX that the Merger Agreement and the Merger be approved by the holders of USMX
Shares; and
WHEREAS, Shareholder understands that USMX and Dakota are relying on
the Shareholder's covenants and agreements contained herein in executing the
Merger Agreement, and that USMX and Dakota will incur substantial expenses in
proceeding toward consummation of the Merger.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual benefits to be derived
and the representations and warranties, conditions and premises herein
contained, and intending to be legally bound hereby, Dakota, USMX, and
Shareholder agree as follows:
1. Affirmative Vote. Shareholder, in its capacity as a holder of USMX Shares or
as a representative with the authority to vote USMX Shares, shall vote (or
appoint proxies who will vote), and shall use its best efforts to cause all of
its affiliates with authority to vote USMX Shares to vote, all of the USMX
Shares that it owns or they own, or over which it controls or they control
voting power, as of the record date for the Shareholders' Meeting (a) in favor
of the approval, consent, and ratification of the Merger Agreement and the
Merger and (b) against any action which would impede, interfere, or discourage
the Merger or result in any breach of representation, warranty, covenant, or
agreement of USMX under the Merger Agreement; provided, however, Shareholder
shall have no obligation with respect to voting USMX Shares if (a) the Board of
Directors of USMX recommends that their respective shareholders vote against
that Merger or (b) the opinion of Coopers & Lybrand L.L.P. delivered pursuant to
Section 10.8 of the Merger Agreement, based on the appropriate representations
of Dakota, Merger Corp, and USMX, and provided that U.S. holders of USMX Shares
enter into gain recognition agreements with the Internal Revenue Service where
appropriate, does not conclude that no gain or loss should be recognized by the
U.S. holders of USMX Shares upon their receipt of Dakota Shares in exchange for
their USMX Shares; and provided further that this agreement to vote shall
immediately terminate on the earliest to occur of termination of the Letter of
Intent (other than by execution of the Merger Agreement), or termination of the
Merger Agreement, or June 1, 1997.
2. Standstill. Without the prior written consent of Dakota, which may be
withheld in Dakota's sole discretion, Shareholder shall not, and shall use its
best efforts to cause its affiliates not to, offer to sell, sell, contract to
sell, or otherwise dispose of any USMX Shares or any securities convertible into
USMX Shares from the date hereof until the earliest of (a) consummation of the
Merger, (b) termination of the Letter of Intent in accordance with its terms,
unless the Letter of Intent is terminated by execution by Dakota and USMX of the
Merger Agreement, or (c) termination of the Merger Agreement in accordance with
its terms. For purposes of the foregoing, the Merger or Merger Agreement shall
in form and substance embody the terms of the Letter of Intent dated January 3,
1997.
3. Representations and Warranties of Shareholder. Shareholder is a corporation
duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation. Shareholder may execute, deliver, and perform
this Support Agreement without the necessity of obtaining any consent, approval,
authorization, or waiver, or giving any notice or otherwise. Shareholder has the
full corporate power and authority to execute and deliver this Support Agreement
and to perform its obligations hereunder. This Support Agreement has been duly
authorized by the Shareholder. This Support Agreement has been duly executed and
delivered by Shareholder and constitutes the legal, valid, and binding
obligation of Shareholder, enforceable against Shareholder in accordance with
its terms, except that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought. The
execution, delivery, and performance of this Support Agreement by Shareholder
will not constitute a violation of the Certificates or Articles of Incorporation
(or like charter documents) or By-laws, each as amended, of Shareholder, or
constitute a material violation of any law applicable or relating to the
Shareholder.
4. Injunctive Relief. The Parties acknowledge that the remedy at law for any
breach of the obligations undertaken by Shareholder may be insufficient and
inadequate, and that Dakota and USMX sole remedy for Shareholder's breach of
this Agreement shall be equitable relief, in addition to remedies at law. In the
event of any action to enforce the provisions of this Support Agreement,
Shareholder waives the defense that there is an adequate remedy at law.
Shareholder acknowledges that the USMX Shares are unique. In the event
Shareholder refuses to perform its obligations under this Support Agreement,
Dakota and USMX shall have, in addition to any other remedy at law or in equity,
the right to specific performance. In no event shall Shareholder be liable for
monetary damages hereunder.
5. Consideration.
(a) Board Seat. Shareholder, in consideration for this Agreement, and
reflecting its ownership position in USMX, shall be appointed to fill a seat on
the Board of Directors of the surviving corporation, subject to shareholder
approval, and shall receive the recommendation of the Board of the surviving
corporation to its shareholders to continue to hold that Board seat as long as
the Shareholder holds not less than five percent of the common stock of the
surviving corporation.
(b) Montana Tunnels. Dakota and USMX shall use their best efforts,
subject to applicable law and the fiduciary obligations of USMX's Board of
Directors, to obtain the approval of the shareholders of USMX with respect to
the disposition of USMX's royalty interest in the Montana Tunnels properties.
6. Miscellaneous.
(a) Entire Agreement. This Support Agreement contains the entire agreement
among the Parties with respect to the subject matter hereof and, except as
expressly provided herein, supersedes all prior arrangements or
understandings with respect thereto (except for such agreements
supplementing or amending this Support Agreement which specifically make
reference to this Section).
(b) Descriptive Headings.Descriptive Headings.Descriptive Headings. The
descriptive headings of this Support Agreement are for convenience only and
shall not control or affect the meaning or construction of any provision of
this Support Agreement.
(c) Governing Law.Governing Law.Governing Law. This Support Agreement shall be
governed by and construed in accordance with the laws of the State of
Washington (other than the choice of law principles thereof).
(d) Waivers and Amendments.Waivers and Amendments.Waivers and Amendments. Any
waiver of any term of this Support Agreement, or any amendment or
supplementation of this Support Agreement, shall be effective only if in
writing. A waiver of any breach or failure to enforce any of the terms or
conditions of this Support Agreement shall not in any way affect, limit, or
waive a Party's rights hereunder at any time to enforce strict compliance
thereafter with every term or condition of this Support Agreement.
(e) Third-Party Rights.Third-Party Rights.Third-Party Rights. Notwithstanding
any other provision of this Support Agreement to the contrary, this Support
Agreement shall not create benefits on behalf of any third party or any
other person; and this Support Agreement shall be effective only as between
the Parties, their successors and permitted assigns.
(f) Illegalities.Illegalities.Illegalities. In the event that any provision
contained in this Support Agreement shall be determined to be invalid,
illegal, or unenforceable in any respect for any reason, the validity,
legality, and enforceability of any such provision in every other respect
and the remaining provisions of this Support Agreement shall not, at the
election of the Party for whose benefit the provision exists, be in any way
impaired.
IN WITNESS WHEREOF, the undersigned have executed this Support Agreement as of
the day and year first above written.
USMX, INC. DAKOTA MINING CORPORATION
By: . . . . . . . . . . . . . . . By: . . . . . . . . . . . . . . .
Name: Name: Alan R. Bell
Title: Title: President and CEO
PEGASUS GOLD INC.
By: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Name:
Title:
EXHIBIT 10.20
USMX, INC.
141 Union Blvd., Suite 100
Lakewood, CO 80228
April 22, 1997
VIA FACSIMILE (907) 263-7070
Mr. Michael O'Connor, President
Peak Oilfield Service Company
2525 C Street, Ste. 201
Anchorage, Alaska 99503
Dear Mike:
The purpose of this letter is to confirm the various discussions among you
and other representatives of Peak Oilfield Service Company ("Peak"), USMX, Inc.
and its subsidiary, USMX of Alaska, Inc. (collectively, "USMX"), and Dakota
Mining Corporation ("Dakota"), which have culminated in our agreement resolving
the dispute regarding services rendered by Peak to USMX on the Illinois Creek
Project in Alaska pursuant to that certain Extraction and Installation Contract,
C-90-0302 (the "Contract") between Peak and USMX. The objective of our
discussions has been the consummation of a definitive settlement agreement
which, among other things, would provide for the following material terms:
1. USMX and Dakota agree to pay Peak an aggregate of $5 million in cash
and securities in full settlement of Peak's claims pursuant to the Contract;
provided, however, that any obligation of Dakota shall accrue only upon the
consummation of the Merger (as defined below). The $5 million will be paid as
follows:
(a) $1,772,000 has been paid by USMX to Peak, receipt of which is
acknowledged by Peak;
(b) An additional cash payment of $445,598 will be made by USMX no
later than one business day after execution of this agreement;
(c) An additional cash payment of $1,782,396 will be made by USMX
with funds provided by Dakota, plus interest at 9% per annum which shall accrue
from April 11, 1997, immediately upon completion of the merger between USMX and
Dakota (the "Merger"), but which Merger shall be completed not later than June
15, 1997; and
(d) The issuance of 1,000,000 shares of USMX's common stock, par
value $.001 ("USMX Stock") to Peak, such shares to be duly authorized, fully
paid and non-assessable. The USMX Stock will be issued to Peak immediately prior
to the execution of the closing documents in connection with the Merger which is
expected to occur on or about May 29, 1997, subsequent to the meetings of
shareholders of USMX and Dakota which have been called to approve the Merger.
The USMX Stock will be restricted upon issuance, but a sufficient number of
shares of Dakota common stock will be registered in the Registration Statement
covering the Merger for issuance to Peak in exchange for the USMX Stock. It is
our understanding Peak would be able to immediately resell the shares of Dakota
common stock it would receive in the Merger on The Toronto Stock Exchange.
Dakota shall provide an opinion of nationally recognized counsel acceptable to
Peak that such shares may be resold without restriction under United States and
Canadian law by Peak on The Toronto Stock Exchange. In addition, Peak would be
able to resell such shares on the American Stock Exchange in the U.S., subject
only to certain limitations prescribed by SEC rules. Dakota shall provide an
opinion of nationally recognized counsel acceptable to Peak that such shares may
be resold in the U.S. by Peak subject to the limitations of Rule 145 of the
Securities Act of 1933, as amended. In addition, to the extent that Peak
determines it necessary to have totally unrestricted trading privileges on the
American Stock Exchange, Dakota will, upon request by Peak, use its best efforts
to file and have declared effective a Registration Statement covering the resale
in the U.S. of the Dakota common stock owned by Peak and deliver an opinion of
nationally recognized counsel acceptable to Peak as to the registration of such
shares. Dakota's out-of-pocket expenses of registration will be reimbursed by
Peak; provided, that, such reimbursement shall be limited to a maximum of
$25,000.
<PAGE>
The settlement agreement shall provide for standard representations and
warranties to be made by USMX and Dakota to Peak in connection with the
registration of such shares and by USMX and Dakota to Peak and by Peak to USMX
and Dakota in connection with the entry into such settlement agreement and for
indemnification of Peak in connection with the registration of such shares. The
obligation of Dakota to file a Registration Statement and provide unrestricted
trading privileges shall remain in effect until Dakota provides an opinion of
nationally recognized counsel acceptable to Peak that such shares may be traded
without restriction in the absence of any Registration Statement.
2. It will be provided in the settlement agreement that Peak will protect,
preserve and maintain its liens until full payment is made as set forth above.
USMX and Dakota recognize that this may require Peak to file a lawsuit against
USMX prior to May 7, 1997. The parties will seek to stay such lawsuit to provide
reasonable opportunity to finalize the settlement agreement. Such action will be
without waiver of rights by any party to assert any claims or defenses in the
lawsuit. Upon full payment, the liens would be released. In addition, the
settlement agreement will provide for mutual releases of all claims between Peak
and USMX and Dakota related to the Contract.
3. If the Merger is not consummated by June 15, 1997, USMX would be
provided the right for a 60-day period thereafter to pay Peak solely in cash the
amount of $2,782,396, plus interest at the rate of 15% per annum from June 15,
1997. If such payment were not timely made, then Peak may choose to either (a)
file a confession of judgment against USMX the form of which will be attached as
an exhibit to the settlement agreement with respect to the unpaid balance of
$2,782,396, plus interest or (b) rescind the settlement agreement and reassert
its original claims in which case USMX could reassert its objections to such
claims; provided, however, that Peak shall be entitled to retain the $445,598
paid pursuant to this letter agreement and the $1,772,000 previously paid to
Peak which amounts would be credited to unpaid amounts under the Contract.
4. This letter is intended to form a binding agreement between the parties
who shall in good faith seek to negotiate a definitive settlement agreement by
May 4, 1997.
Upon the execution by you and return to us of this letter, we shall
instruct our respective counsel to cooperate in the preparation of a definitive
settlement agreement containing provisions substantially in accord with the
foregoing, together with such further appropriate terms and conditions as our
counsel may mutually determine. The settlement agreement shall be subject to the
approval of all parties.
If the foregoing correctly sets forth our agreement in principle, please
so signify by signing and returning this letter to USMX and Dakota. It is
understood that the respective specific rights and obligations of all parties
remain to be defined in the definitive settlement agreement into which this
letter and all prior discussions shall merge.
Thank you very much for your consideration and cooperation.
Very truly yours,
USMX, INC. and USMX of Alaska, Inc.
By:
Authorized Officer
AGREED AND ACCEPTED:
DAKOTA MINING CORPORATION
By:
Authorized Officer
AGREED AND ACCEPTED:
PEAK OILFIELD SERVICE COMPANY
By:
Authorized Officer
usmx\ltrs\oconnor3.ltr\04/22/97
1
EXHIBIT 10.21
EMPLOYEE RELEASE AND SETTLEMENT AGREEMENT
The parties to this Agreement are USMX, Inc., a Delaware corporation
("USMX"), and Donald P. Bellum ("Bellum"). This document describes the
agreements of USMX and Bellum concerning Bellum's resignation from his positions
with USMX and its subsidiaries (the "USMX Companies"). This Agreement and the
payments and other arrangements described below, give valuable consideration to
both USMX and Bellum.
1. Termination of Relationships: USMX and Bellum have agreed upon
Bellum's resignation from his positions as President and Chief Executive
Officer, Chairman of the Board of Directors and Director of USMX and each of the
USMX Companies, as an employee of USMX and the USMX Companies and in any other
capacity with USMX and the USMX Companies, such resignations to be effective
March 31, 1997.
2. Payments and Other Arrangements:
(a) USMX agrees to pay to Bellum $100,900 payable in equal
installments of $8,408.33 each, with the first installment due on April 15,
1997, and thereafter installment payments shall be made in accordance with
USMX's regular payroll practices, with the final installment due on September
30, 1997. Provided, that, in the event that the proposed merger of USMX with
Dakota Mining Corporation ("Dakota") is completed prior to September 30, 1997,
then the balance of payments due shall be paid to Bellum in one single payment
upon effectiveness of the merger. All payments shall include deductions for
standard withholding and authorized deductions. Bellum agrees that he shall be
exclusively responsible for payment of all taxes received by him pursuant to
this Agreement.
(b) Bellum agrees that all options held by him to acquire shares of stock
of USMX are terminated, effective March 31, 1997.
(c) Bellum agrees that USMX will make no further contribution in respect
of him to any benefit plans maintained by or for the USMX Companies.
3. Release by Bellum: Bellum releases and waives all claims for loss, damage
or injury arising from or in any way relating to the following ("Claims"):
(a) the employment of Bellum with USMX, including his positions with the
Board of Directors of USMX and the USMX Companies, and his resignation
from employment and his positions with the USMX Companies;
(b) discrimination on the basis of age, sex, race, religion, national
origin or another basis, including claims under the Age Discrimination
in Employment Act;
(c) other violations of federal, state or local statutes, ordinances,
regulations, rules, decisions or laws;
(d) failure of USMX to act in good faith and deal fairly;
(e) injuries, illness or disabilities of Bellum;
(f) exposure of Bellum to toxic or hazardous materials;
(g) stress, anxiety or mental anguish;
(h) sexual harassment;
(i) statements regarding Bellum;
(j) an express or implied employment contract, change in control contract
or other agreement except for a breach of this Agreement;
(k) compensation or reimbursement of Bellum;
(l) unfair employment practices; and
(m) any act or omission by or on behalf of any of the USMX Companies.
4. Claims Included: The Claims released and waived by Bellum include claims:
(a) arising before the date of this Agreement;
(b) arising on or after the date of this Agreement that relate to Bellum's
employment by USMX;
(c) that are presently known, suspected, unknown or unsuspected;
(d) for reinstatement or future employment;
(e) for actual, consequential, punitive or special damages;
(f) for attorney's fees, costs, experts' fees and other expenses of
investigating, litigating or settling Claims; and
(g) against any of the USMX Companies and their respective affiliates,
employees, officers, directors, agents, attorneys and contractors.
5. Claims Excluded: Bellum does not release or waive Bellum's right to
recover under health, life or disability policies insuring Bellum, and
does not release or waive Claims for worker's compensation benefits.
Bellum has requested that, until further notice by him, he wishes to
continue as a participant in USMX's medical insurance program under
the provisions generally known as COBRA. USMX agrees to pay the
premiums for such continuation through and including September 30,
1997.
6. Agreement Not To Sue of Bellum: Bellum waives any right to file suit
for any Claim. Bellum will not sue any of the USMX Companies for any
Claim. Bellum will not initiate or proceed with any other action or
proceeding against any of the USMX Companies that relates to something
that could give rise to a Claim. Bellum does not waive Claims for
breach of this Agreement.
7. Agreement Not to Sue of USMX: USMX waives any right to file suit for
any Claim. USMX will not sue Bellum for any Claim. USMX will not
initiate or proceed with any other action or proceeding against Bellum
that relates that something that could give rise to a Claim. USMX does
not waive Claims for breach of this Agreement.
8. Termination of Relationships: Bellum and USMX acknowledge that any
employment or contractual relationship between them has terminated and
that they have no further employment or contractual relationship
except as may arise out of this Agreement and that Bellum waives any
right or claim to reinstatement as an employee of USMX and will not
seek employment in the future with any of the USMX Companies.
9. No USMX or Bellum Admission: Neither USMX or Bellum admit any
wrongdoing or liability. USMX and Bellum have executed this Agreement
solely to avoid any misunderstandings that could lead to potential
litigation. The payments and other arrangements described above
compromise and settle any Claims of USMX and Bellum.
10. News Release By USMX: Promptly after Bellum's execution of this
Agreement, USMX shall issue a news release announcing the resignation
of Bellum. The news release shall state that Mr. Bellum resigned to
return to his consulting practice as a result of the proposed merger
of USMX with Dakota. The news release will note that Dakota has filed
a registration statement with the Securities and Exchange Commission
in connection with the merger, which has not yet become effective.
11. Revocability: Either Bellum or USMX may revoke this Agreement in its
entirety during the seven days following execution of the Agreement by
USMX and Bellum. Any revocation of the Agreement must be in writing
during the revocation period. This Agreement will become enforceable
seven days following execution by USMX and Bellum, unless it is
revoked during the seven-day period.
12. Confidences: Bellum will maintain the confidentiality of all of the
USMX Companies' trade secrets, proprietary information, insider
information, security procedures and other confidences that came into
Bellum's possession or knowledge during employment by USMX. USMX will
not use such information concerning the USMX Companies' business
prospects or practices to profit Bellum or others.
13. Property: Bellum represents that Bellum possesses no property of the
USMX Companies with the exception of a Buick automobile. Bellum will
return the Buick automobile to the USMX premises by no later than
April 30, 1997. However, Bellum will have the right to acquire the
Buick automobile at a price of $14,500 by notifying USMX of his intent
to purchase the Buick by April 30, 1997. Title will be transferred to
Bellum on or before May 15, 1997, and Bellum shall concurrently
deliver a promissory note to USMX in the amount of $14,500. The
promissory note shall be unsecured, without interest, and shall be due
and payable on or before the earlier to occur of August 29, 1997 or
the effectiveness of the merger. If not paid when due, payments due to
Bellum pursuant to Section 2(a) shall be offset by USMX in
satisfaction of the amounts owed pursuant to the promissory note.
14. References: The USMX Companies will respond to inquiries from third
parties about Bellum's employment with USMX by identifying Bellum's
date of hire, date of resignation and position held at the time of
resignation. USMX will provide no further information to prospective
employers of Bellum.
15. Entire Agreement; Amendments: This is the entire agreement concerning
the termination of Bellum's employment with USMX. Neither USMX or
Bellum is entitled to rely upon any other written or oral offer or
agreement between USMX and Bellum. This Agreement can be modified only
by a document signed by both parties. Bellum acknowledges that the
only promises made to cause Bellum to sign this Agreement are those
stated in this Agreement.
16. Successors: This Agreement benefits and binds the parties' successors.
17. Governing Law and Severability of Power: This Agreement will be
interpreted in accordance with the laws of the State of Colorado. If
any portion of this Agreement is unenforceable, the remaining portions
of the Agreement will remain enforceable.
18. Fees and Costs: If litigation is commenced concerning Bellum's
employment or this Agreement, the prevailing party shall be entitled
to an award of reasonable attorneys' fees and expenses, court costs,
experts' fees and expenses, and all other expenses of litigation.
19. Counterparts: This Agreement may be executed in counterparts, and each
counterpart, when executed, shall have the efficacy of a signed
original. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
20. Bellum Acknowledgements. Bellum understands that this Agreement is a
final and binding waiver of any claims by Bellum against USMX and by
USMX against Bellum. Bellum acknowledges that he was given 21 days to
consider this Agreement and chose to sign the Agreement prior to the
expiration of the 21-day period. Bellum acknowledges that Bellum has
been told by USMX to consult with an attorney prior to signing this
Agreement. Bellum represents that this Agreement has been fully
explained by Bellum's attorneys, or that Bellum has waived
consultation with an attorney.
USMX, INC.
/s/ Donald P. Bellum By: /s/ Gregory Pusey
DONALD P. BELLUM
Date: April 9, 1997 Date: April 9, 1997
EXHIBIT 10.22
EMPLOYEE RELEASE AND SETTLEMENT AGREEMENT
The parties to this Agreement are USMX, Inc., a Delaware corporation
("USMX"), and Paul B. Valenti ("Valenti"). This document describes the
agreements of USMX and Valenti concerning Valenti's resignation from his
positions with USMX and its subsidiaries (the "USMX Companies"). This Agreement
and the payments and other arrangements described below, give valuable
consideration to both USMX and Valenti.
1. Termination of Relationships: USMX and Valenti have agreed upon
Valenti's resignation from his positions as an officer of USMX and as an officer
or director of any of the USMX Companies, as an employee of USMX and the USMX
Companies and in any other capacity with USMX and the USMX Companies, such
resignations to be effective March 31, 1997.
2. Payments and Other Arrangements:
(a) USMX agrees to pay to Valenti $61,000 payable in an initial
installment of $20,333.36 on April 15, 1997, and thereafter
payable in eight equal installments of $5,083.33 each, commencing
April 30, 1997 in accordance with USMX's regular payroll
practices, with the final installment due on August 15, 1997.
USMX also agrees to pay to Valenti fourteen days vacation in the
amount of $6,568.80 on or before April 15, 1997. All payments
shall include deductions for standard withholding and authorized
deductions. Valenti agrees that he shall be exclusively
responsible for payment of all taxes received by him pursuant to
this Agreement.
(b) Valenti agrees that all options held by him to acquire shares of
stock of USMX will terminate on April 30, 1997.
(c) Valenti agrees that USMX will make no further contribution in
respect of him to any benefit plans maintained by or for the USMX
Companies.
3. Release by Valenti: Valenti releases and waives all claims for
loss, damage or injury arising from or in any way relating to the
following ("Claims"):
(a) the employment of Valenti with USMX, including his positions as
an officer of USMX and as an officer and member of the Board of
Directors of certain of the USMX Companies, and his resignation
from employment and his positions with the USMX Companies;
(b) discrimination on the basis of age, sex, race, religion, national
origin or another basis, including claims under the Age
Discrimination in Employment Act;
(c) other violations of federal, state or local statutes, ordinances,
regulations, rules, decisions or laws;
(d) failure to act in good faith and deal fairly;
(e) injuries, illness or disabilities of Valenti;
(f) exposure of Valenti to toxic or hazardous materials;
(g) stress, anxiety or mental anguish;
(h) sexual harassment;
(i) defamation based on statements of Valenti or others;
(j) breach of an express or implied employment contract, change in
control contract or other agreement;
(k) compensation or reimbursement of Valenti;
(l) unfair employment practices; and
(m) any act or omission by or on behalf of any of the USMX Companies.
4. Claims Included: The Claims released and waived by Valenti
include claims:
(a) arising before the date of this Agreement;
(b) arising on or after the date of this Agreement that relate to
Valenti's employment by USMX;
(c) that are presently known, suspected, unknown or unsuspected;
(d) for reinstatement or future employment;
(e) for actual, consequential, punitive or special damages;
(f) for attorney's fees, costs, experts' fees and other expenses of
investigating, litigating or settling Claims; and
(g) against any of the USMX Companies and their respective
affiliates, employees, officers, directors, agents, attorneys and
contractors.
5. Claims Excluded: Valenti does not release or waive Valenti's
right to recover under health, life or disability policies
insuring Valenti, and does not release or waive Claims for breach
of this Agreement or for worker's compensation benefits. In
addition, the provisions of this Agreement shall not affect the
right, if any, of Valenti to indemnification under USMX's Bylaws,
nor shall it enlarge any such right. Valenti has requested that,
until further notice by him to USMX, he wishes to continue as a
participant in USMX's medical insurance program under the
provisions generally known as COBRA. USMX agrees to pay the
premiums for such continuation through and including September
30, 1997.
6. Agreement Not To Sue of Valenti: Valenti waives any right to file
suit for any Claim. Valenti will not sue any of the USMX
Companies for any Claim. Valenti will not initiate or proceed
with any other action or proceeding against any of the USMX
Companies that relates to something that could give rise to a
Claim.
7. Termination of Relationships: Valenti and USMX acknowledge that
any employment or contractual relationship between them has
terminated and that they have no further employment or
contractual relationship except as may arise out of this
Agreement and that Valenti waives any right or claim to
reinstatement as an employee of USMX and will not seek employment
in the future with any of the USMX Companies.
8. No USMX Admission: USMX does not admit any wrongdoing or
liability. USMX has executed this Agreement solely to avoid the
expense of potential litigation. The payments and other
arrangements described above compromise and settle any Claims of
Valenti.
9. Revocability: Either Valenti or USMX may revoke this Agreement in
its entirety during the seven days following execution of the
Agreement by Valenti. Any revocation of the Agreement must be in
writing and hand-delivered during the revocation period. This
Agreement will become enforceable seven days following execution
by Valenti, unless it is revoked during the seven-day period.
10. Confidences: Valenti will maintain the confidentiality of all of
the USMX Companies' trade secrets, proprietary information,
insider information, security procedures and other confidences
that came into Valenti's possession or knowledge during
employment by USMX. Valenti will not use such information
concerning the USMX Companies' business prospects or practices to
profit Valenti or others.
11. Property: Valenti represents that Valenti possesses no property
of the USMX Companies with the exception of an Acura automobile.
On or before April 15, 1997, Valenti shall pay $1 to USMX and
USMX shall transfer title to the Acura automobile to Valenti.
Valenti will promptly return any other property pertaining to his
work with USMX, including keys and credit cards, without request
or demand by USMX.
12. Loan to Valenti from Norwest Bank. Effective January 27, 1997,
Valenti has borrowed $115,294.10 from Norwest Bank Colorado N.A.
("Norwest"), which indebtedness (the "Loan") is secured by an
uncertificated deposit in the name of USMX in the amount of
$123,130.97 issued by Norwest (the "Security"). This Loan
constituted a renewal of a loan in the original principal amount
of $107,063.78 made by Norwest to Valenti on or about December
22, 1995. Pursuant to a Letter Agreement dated December 22, 1995
between USMX and Valenti, it was agreed that the Loan would be
for a term of one year. Valenti acknowledges the extension of the
Loan for an additional one year and the provision by USMX of an
uncertificated deposit for another one year period. USMX agrees
that it will provide the Security as collateral for the repayment
of the Loan to and including September 30, 1998. The Letter
Agreement and the Stock Pledge and Security Agreement, also dated
December 22, 1995, also concern Valenti's pledge of his 56,449
shares of the common stock of USMX (the "Stock") to secure
repayment of any amounts paid by USMX in connection with its
pledge of the Security. It is understood that the certificate
evidencing the Stock is currently in the possession of USMX.
Valenti has also agreed in the Letter Agreement to hold harmless
USMX for any and all amounts arising in connection with the Loan.
Valenti acknowledges and agrees that the Letter Agreement and
Stock Pledge and Security Agreement are in full force and effect
and shall apply to the current Loan and any extensions, renewals
or replacements thereof. Valenti waives any right to any action
or defense against USMX and shall hold harmless USMX in
connection with exercise by USMX of any of USMX's rights against
the Stock, including USMX's right to retain any part or all of
the Stock in satisfaction of Valenti's obligations pursuant to
the Letter Agreement and Stock Pledge and Security Agreement.
Valenti reserves the right to assert defenses to any claim by
USMX for costs incurred by USMX in connection with the Loan, if
any, which exceed the value realized by USMX from the Stock
pursuant to the Loan Agreement and Stock Pledge and Security
Agreement. Valenti acknowledges that USMX has entered into an
agreement to merge with Dakota Mining Corporation pursuant to
which USMX stockholders will receive common stock of Dakota in
exchange for common stock of USMX. Valenti agrees to cooperate by
providing further assurances or documentation in connection with
the exchange of Dakota common stock for USMX common stock and
understands and agrees that, subsequent to the merger, the Stock
which shall be pledged to USMX will be stock of Dakota in the
name of Valenti instead of stock of USMX in the name of Valenti.
13. References: The USMX Companies may respond to inquiries from
third parties about Valenti's employment with USMX by identifying
Valenti's date of hire, date of resignation and position held at
the time of termination of employment. USMX will have no
obligation to provide further information to prospective
employers of Valenti.
14. Entire Agreement; Amendments: This is the entire agreement
concerning the termination of Valenti's employment with USMX.
Valenti is not entitled to rely upon any other written or oral
offer or agreement with USMX. This Agreement can be modified only
by a document signed by both parties. Valenti acknowledges that
the only promises made to cause Valenti to sign this Agreement
are those stated in this Agreement.
15. Successors: This Agreement benefits and binds the parties'
successors.
16. Governing Law and Severability of Power: This Agreement will be
interpreted in accordance with the laws of the State of Colorado.
If any portion of this Agreement is unenforceable, the remaining
portions of the Agreement will remain enforceable.
17. Fees and Costs: If litigation is commenced concerning Valenti's
employment or this Agreement, the prevailing party shall be
entitled to an award of reasonable attorneys' fees and expenses,
court costs, experts' fees and expenses, and all other expenses
of litigation.
18. Counterparts: This Agreement may be executed in counterparts, and
each counterpart, when executed, shall have the efficacy of a
signed original. Photographic copies of such signed counterparts
may be used in lieu of the originals for any purpose.
19. Valenti Acknowledgements. Valenti understands that this Agreement
is a final and binding waiver of any claims against USMX. Valenti
acknowledges that he was given 21 days to consider this Agreement
and chose to sign the Agreement prior to the expiration of the
21-day period. Valenti acknowledges that Valenti has been told by
USMX to consult with an attorney prior to signing this Agreement.
Valenti represents that this Agreement has been fully explained
by Valenti's attorneys, or that Valenti has waived consultation
with an attorney.
USMX, INC.
/s/ Paul B. Valenti By: /s/ Gregory Pusey
PAUL B. VALENTI
Date: April 8, 1997 Date: April 8, 1997
Exhibit 23.1
Consent of Independent Auditors
To the Shareholders
Dakota Mining Corporation:
We consent to the use of our report dated February 4, 1997, except as to Note 2,
which is as of February 6, 1997, and Note 6(c), which is as of February 28, 1997
relating to the consolidated balance sheets of Dakota Mining Corporation as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996 included herein and the reference to
our firm under the heading "Experts" in the Joint Proxy Statement / Prospectus.
KPMG
Chartered Accountants
Toronto, Canada
April 28,1997
Exhibit 23.2
Consent of Independent Auditors
To the Stockholders and Board of Directors USMX, INC.:
We consent to the use of our report dated March 11, 1997 relating to the
consolidated statements of financial position of USMX, Inc. and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996 included herein and to the reference
to our firm under the heading "Experts" in the Joint Proxy Statement /
Prospectus.
Our report contains an explanatory paragraph that states that the Company has
incurred cost overruns associated with the construction of the Illinois Creek
Mine, has cash flow deficits from operations and currently has no mines in
operation. At December 31, 1996, the Company has an accumulated deficit of
$3,056,000, a working capital deficiency of approximately $27,132,000 and is not
in compliance with certain covenants of its long term debt agreements. In
addition, significant additional funds will be required to bring the Company's
Illinois Creek Mine into production. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
Denver, Colorado
April 28, 1997
Exhibit 23.3
Dakota Mining Corporation
Denver, Colorado
Ladies and Gentlemen:
Re: Registration Statement on Form S-4
With respect to the subject registration, we acknowledge our awareness of the
use therein of our compilation report relating to the unaudited pro forma
consolidated balance sheet as of December 31, 1996 and the unaudited pro forma
combined statement of operations for the year ended December 31, 1996 of Dakota
Mining Corporation and our comments for United States readers on differences
between Canadian and United States reporting standards, both dated April 21,
1997.
We are not subject to the liability provisions of Section 11 of the Securities
Act of 1933 for the compilation report and comments because they are not
considered a "report" or a "part" of a registration statement prepared or
certified by an accountant within the meaning of sections 7 and 11 of the Act.
Very truly yours,
KPMG
Chartered Accountants
Toronto, Canada
April 28, 1997
<PAGE>
EXHIBIT 23.6
GLENN R. CLARK & ASSOCIATES LIMITED
4098 CONCESSION ROAD 5, R.R. #1
ORONO, ONTARIO, CANADA L0B 1M0
Phone 905-983-5127
March 17, 1997
Dakota Mining Corporation
410 Seventeenth Street, Suite 2450
Denver, Colorado
U.S.A. 80202
Gentlemen:
We hereby consent to the reference to our report dated January 30, 1997,
entitled "GOLDEN REWARD MINING COMPANY L.P. at Lead, South Dakota" contained in
the Registration Statement on Form S-4, of Dakota Mining Corporation (the
"Company"), which Form S-4 is incorporated by reference into (i) the
Registration Statement, as amended, of the Company, on Form S-3 (File No.
33-73958), and (ii) the Registration Statement of the Company, on Form S-8 (File
33-68872).
Yours truly,
/c/s/ Glenn R. Clark
Glenn R. Clark & Associates Limited
EXHIBIT 23.7
DMBW, Inc. 13949 W. Colfax Ave., Suite 110
DERRY, MICHENER, BOOTH & WAHL Golden, Colorado 80401
MINING AND GEOLOGICAL CONSULTANTS Telephone: (303) 233-8786
Telecopier: (303) 232-2586
March 17, 1997
Dakota Mining Corporation
410 Seventeenth Street, Suite 2450
Denver, CO 80202
Gentlemen:
We hereby consent to the reference to our report, dated January 17, 1997 and
entitled Audit of Ore Reserves at the Gilt Edge Deposit, Lawrence County, South
Dakota and the Stibnite Deposit, Valley County, Idaho, contained in the
Registration Statement on Form S-4, of Dakota Mining Corporation (the
"Company"), which Form S-4 is incorporated by reference into (i) the
Registration Statement, as amended, of the Company, on Form S-3 (File No.
33-73958), and (ii) the Registration Statement of the Company, on Form S-8 (File
33-68872).
Yours truly,
/c/s/ I.S. Parrish
I.S. Parrish, President
CPG #4612, FGAC #F1662
EXHIBIT 23.8
ROSCOE POSTLE ASSOCIATES INC. Suite 1210
55 University Avenue
Toronto, Ontario
M5J 2H7
Tel: (416) 947-0907
Fax: (416) 947-0395
March 17, 1997
Dakota Mining Corporation
410 Seventeenth Street, Suite 2450
Denver, CO
U.S.A. 80202
Gentlemen:
We hereby consent to the reference to our report dated October 24, 1996
entitled "Report on the Illinois Creek Project for USMX, Inc." contained in the
Registration Statement on Form S-4, of Dakota Mining Corporation (the "Company")
which Form S-4 is incorporated by reference into (i) the Registration Statement,
as amended, of the Company, on Form S-3 (File No. 33-73958), and (ii) the
Registration Statement of the Company, on Form S-8 (File 33-68872).
Sincerely,
ROSCOE POSTLE ASSOCIATES INC.
/c/s/ William E. Roscoe
William E. Roscoe, Ph.D., P.Eng.
President
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