<PAGE> 1
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
COMMISSION FILE NUMBER 33-0773-A
FREMONT GOLD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0110447
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2000 - 777 Hornby Street
Vancouver, British Columbia, Canada V6Z 1S4
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 682-4606
(Former name and former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
There were 6,060,000 shares of the Company's Common Stock, $.001 par value per
share, issued and outstanding at October 31, 1996.
<PAGE> 2
FREMONT GOLD CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
--------------------- --------
<S> <C>
Item 1. Financial Statements
Balance Sheets - September 30, 1996 and December 31, 1995 4
Statements of Operations
Quarters ended September 30, 1996 and 1995
Nine Months Ended September 30, 1996 and 1995 5
Statement of Changes in Financial Position -
Quarters ended September 30, 1996 and 1995
Nine Months Ended September 30, 1996 and 1995 6
Notes to Financial Statements 7-14
Item 2. Management Discussion and Analysis of Results of
Operations and Financial Condition 15-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to Vote of Security-Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
FREMONT GOLD CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
3
<PAGE> 4
FREMONT GOLD CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, 1996 DECEMBER 31,
(unaudited) 1995
---------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 752,233 $ 1,035
Accounts receivable 17,626 --
----------------------------
769,859 1,035
Investment in mineral properties (Note 2) 386,708 --
Property, plant and equipment (net depreciation) 10,724 --
----------------------------
TOTAL ASSETS $ 1,167,291 $ 1,035
============================
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 38,171 $ --
Due to related parties (Note 3) 322,635 --
Notes payable (Note 4) 740,000 5,000
----------------------------
Total Current Liabilities 1,100,806 5,000
Minority interest 2,435 --
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock $.001 par value; 20,000,000
authorized; 6,060,000 and 1,000,000 issued and
outstanding at September 30, 1996 and December 31,
1995 respectively (Note 6) 25,060 20,000
Additional paid-in capital 818,040 471,100
Accumulated deficit (779,050) (495,065)
----------------------------
Total Stockholders' Equity (Deficiency) 64,050 (3,965)
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 1,167,291 $ 1,035
============================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
FREMONT GOLD CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ -- $ -- $ -- $ --
Interest income 2,100 -- 2,151 --
--------------------------------------------------------------------
2,100 -- 2,151 --
GENERAL AND ADMINISTRATIVE EXPENSES
Consulting $ 53,332 $ -- $ 157,760 $ --
Depreciation 308 -- 308 --
Foreign exchange 8,203 -- 8,203 --
Legal & accounting 34,582 350 45,344 4,307
Office 41,762 530 42,104 1,475
Shareholder information 3,331 -- 6,325 367
Transfer agent & filing fees 250 750 3,034 2,459
Travel & public relations 19,941 -- 23,058 --
--------------------------------------------------------------------
161,709 1,630 286,136 8,608
--------------------------------------------------------------------
Net Loss $ (159,609) $ (1,630) $ (283,985) $ (8,608)
====================================================================
Weighted average number of
shares outstanding 2,010,870 1,000,000 1,340,659 1,000,000
====================================================================
Net loss per common share $ (.080) $ (.002) $ (.212) $ (.009)
====================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
FREMONT GOLD CORPORATION
STATEMENT OF CHANGES IN FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $(159,609) $(1,630) $ (283,985) $(8,608)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-cash expenditure -
depreciation 308 -- 308 --
Increase (decrease) in
Accounts receivable 107,461 -- (17,626) --
Accounts payable 31,224 -- 38,171 --
Loans payable 122,635 -- 317,635 5,000
----------------------------------------------------------
Net cash flow from operating
activities 102,019 (1,630) 54,503 (3,608)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares for cash and
subscription deposits 340,000 -- 340,000 --
Issuance of shares for debt -- -- 12,000 --
Share subscription deposits (135,148) -- -- --
Issuance of Notes (Note 4) 740,000 -- 740,000 --
----------------------------------------------------------
Net cash flow from financing
activities 944,852 -- 1,092,000 --
CASH FLOW FROM INVESTMENT ACTIVITIES:
Investment in mineral properties (384,272) -- (384,272) --
Investment in property, plant &
equipment (11,032) -- (11,032) --
----------------------------------------------------------
Net cash flow from investing
activities (395,304) -- (395,304) --
----------------------------------------------------------
Net increase (decrease) in cash 651,567 (1,630) 751,199 (3,608)
Cash and cash equivalents, beginning
of period 100,666 3,919 1,034 5,897
----------------------------------------------------------
Cash and cash equivalents, end of
period $ 752,233 $ 2,289 $ 752,233 $ 2,289
==========================================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
FREMONT GOLD CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
History and Prior Activities
Fremont Gold Corporation (the "Company") was incorporated under the
laws of the State of Florida as Tri-Way Industries, Inc. on June 27, 1986, for
the purpose of seeking, investigating and acquiring business opportunities. The
Company did not engage in any meaningful operations until on or about November
22, 1989, at which time the Company acquired the Rothchild Group, Inc., at which
time it changed its name to The Rothchild Companies, Inc.
Until mid-1993, the Company, through its wholly-owned subsidiary, The
Rothchild Group, Inc., operated as a full service advertising agency engaged in
the advertising, marketing and public relations agency business. On October 20,
1993, however, the Company's subsidiary, The Rothchild Group, Inc., filed
bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code in the
Bankruptcy Court for the Southern District of Florida. Other than the business
operation of the Rothchild Group, Inc., the Company was not engaged in any other
meaningful commercial activities until the acquisition of control by Laminco
Resources, Inc., more fully discussed below.
On July 12, 1994, an investment group ("Investment Group") completed
the purchase of an aggregate of 315,598 shares of the Company's Common Stock
representing approximately 60% of the Company's issued and outstanding Common
Stock as of the date of the acquisition. In addition the Investment Group
provided sufficient funds in the form of loans to insure the Company's viability
and permit the Company to pursue a possible business combination, merger or
similar transaction. These loans were subsequently converted into 419,656 shares
of Common Stock of the Company on December 30, 1994.
On April 8, 1996, the Company completed the transfer of its state of
incorporation from Florida to Delaware. Accordingly, the Company is now a
Delaware corporation.
On April 15, 1996, the board of directors of the Company and holders of
a majority of the outstanding Common Stock of the Company authorized the
Company, by written consent, to take a series of actions related to its
authorized and outstanding Common Stock. These actions included a one-for-twenty
(1-for-20) reverse stock split of the Company's Common Stock, pursuant to which
each twenty (20) shares of the Company's Common Stock outstanding immediately
prior to April 30, 1996 was converted into one (1) share of the Company's Common
Stock. In connection with the reverse split the Company maintained the par value
of its Common Stock at $.001 par value per share, and the total number of shares
of Common Stock authorized to be issued by the Company remained unchanged at
20,000,000 shares. The number of issued and outstanding shares of the Company's
Common Stock after the reverse split was 1,000,000 shares. All references to
shares of Common Stock herein have been adjusted to reflect this reverse split.
In May 1996, the Company's Board of Directors approved a private
placement of 1,000,000 shares of Common Stock at an offering price of $.20
aggregating $200,000 to the Company. This private placement was closed on July
30, 1996.
On June 4, 1996, Laminco Resources, Inc. ("Laiminco") completed the
purchase of an aggregate of 600,000 of the Company's Common Stock representing
approximately 60% of the Company's issued and outstanding Common Stock as of the
date of the acquisition. These shares were purchased from the
7
<PAGE> 8
Investment Group. In connection with the completion of the share acquisition by
Laminco, the Company's board of directors and management was reconstituted and
the Company implement a new business plan discussed hereinafter under "Current
Business Operations".
On June 4, 1996, and June 20, 1996, Laminco advanced the Company an
aggregate amount of $200,000 pursuant to a loan agreement. In consideration of
these loans, the Company granted Laminco warrants to purchase 400,000 shares of
the Company's Common Stock at a purchase price of $1.00 for a period of two (2)
years. In addition, the Company granted Laminco certain rights to participate in
all future financing completed by the Company on the same terms offered third
parties. In August 1996 and October, 1996, payments of $100,000 and $100,000
respectively were made to Laminco.
On June 20, 1996, the Company advanced Flagship Holding Ltd. ("FHL"), a
Barbados corporation which owns 99% of Inversiones Mineras Ayl S.A. ("IMSA"), a
Chilean corporation which owns exploration mineral property interests, $125,000
pursuant to a loan agreement. In consideration of this loan the Company was
issued 125,000 shares of FHL's common stock.
On June 30, 1996, the Company entered into a Letter of Intent to
acquire Flagship Holding, Inc.
On July 25, 1996, the Board of Directors of the Company and holders of
a majority of the outstanding shares of the common stock of the Company,
authorized the Company, by written consent, to take a series of actions. These
actions included: i) The Change Of Corporate Name to Fremont Gold Corporation to
better reflect the proposed business of the Company, ii) The Adoption of Amended
and Restated Certificate of Incorporation, iii) Adoption of Stock Option Plan to
allow the Company to attract and retain the best available personnel for
positions of responsibility within the Company and to provide additional
incentive to employees of the Company in order to promote the success of the
Company's business; and iv) Make Certain Management and Director Changes,
Expansion of the Board of Directors and Formation of Compensation and Audit
Committees.
On July 31, 1996, the Board of Directors of the Company and holders of
a majority of the outstanding shares of the common stock of the Company,
authorized the Company, by written consent, to acquired 100% of FHL stock not
previously owned by the Company. The Company completed this acquisition in
consideration of the exchange of 3,560,000 shares of its Common Stock pursuant
to exemptions from registration, of these 614,000 were issued by FHL under Rule
701 of the Securities Act and subsequently exchanged for the Company's shares,
and accordingly are "Restricted Shares", as the term is defined in Rule 144 and
2,946,000 shares were issued pursuant to Regulation S Rule 903 and transfer of
these securities is prohibited except in accordance with the provision of
Regulation S. Michael J. Hopley, a director, president and chief executive
officer of the Company, and David Shaw, a director of the Company, received
418,000 and 372,000 shares, respectively, of the Company's Common Stock in the
exchange.
On July 30, 1996, the Company completed a private placement of 500,000
shares of its Common Stock to Laminco in consideration of $140,000.
On August 1, 1996, Mr. David Alexander resigned as a director,
treasurer and chief financial officer of the Company. Replacing Mr. Alexander,
Edward M. Topham was appointed vice president, treasurer and chief financial
officer of the Company.
On August 21, 1996, the Company commenced an offering of $1,800,000
principal amount of 10.5% Series A Senior Convertible Notes ("Series A Notes").
On September 30, 1996 the Company had accepted subscriptions totaling $740,000.
In October the Company completed the offering of Series A Notes and accepted
subscriptions aggregating $1,800,000. Each Series A Note is convertible, at the
option of the Holder into Equity Units at any time after the Issue Date prior to
the close on the Maturity Date at the rate of $.50 per Equity Unit. Each Equity
Unit is composed of one share of the Company's Common Stock, par value $.001 per
share, and one Redeemable Common Stock Purchase Warrant ("Warrant").
8
<PAGE> 9
The Warrant is exercisable to purchase one share of Common Stock at the greater
of $1.50 or 75% of the ten day average closing prices, as quoted on the NASDAQ
Bulletin Board, immediately preceding the notice of exercise. The Warrants
issued in connection with the conversion of the Series A Notes as a component of
the Equity Unit will be redeemable by the Company beginning January 1, 1997,
upon 15 days notice to the Warrant holder, at a redemption price of $.10 per
warrant. The Holders of the Series A Notes, Warrants or Common Stock issued to
Holders without an effective Registration Statement under the Securities Act of
1933, as amended, ("Act") shall have the right, at any time, to join with the
Company to register the Common Stock and the Common Stock underlying the Series
A Notes and Warrants in any Registration Statement under the Act filed by the
Company with the Securities and Exchange Commission. The Company anticipates
filing a Registration Statement on Form S-B with the Securities and Exchange
Commission during the fourth quarter of 1996. Such Registration Statement will
include the Common Stock underlying the Series A Notes and Warrants. Each
purchaser of the Series A Notes, as a condition precedent to his, her or its
conversion into Equity Units, must enter into a Voluntary Stock Pooling
Agreement ("Pooling Agreement"). See Note 4 "Notes Payable" for a description of
the Pooling Agreement.
In August 1996, the Company's indirectly owned Chilean operating
subsidiary changed its name from Inversiones Mineras Ayl S. A. to Minera Fremont
Gold Chile S.A.
Current Business Operations
The Company is engaged in the acquisition, exploration and development
of mineral properties, primarily gold and copper properties located in Latin
America.
Subsequent to its July 31, 1996, acquisition of FHL, the Company's
principal mineral property interests consists of three (one gold, one
gold-copper and one copper-gold-silver) exploration properties located along the
historically productive Atacama Fault System in Chile. The Resguardo Property,
the Los Leones Property and the Remolino Property interests are currently held
through existing leases and purchase options. See Note 2 "Mineral Properties"
for a description of the lease and purchase options. The Company's mineral
property interests are held by a Chilean operating company, Minera Fremont Gold
Chile S.A., a Chilean corporation, a 99% subsidiary of its wholly owned
subsidiary Flagship Holding Ltd., a Barbados corporation. Unless otherwise
indicated, the term "Company" means collectively Fremont Gold Corporation,
Flagship Holding Ltd and Minera Fremont Gold Chile S.A.
The Company is continuously assessing new opportunities for the
acquisition of properties with the potential to be significant gold and copper
producers through its extensive knowledge and contacts in Latin America,
garnered from the over 100 years of collective exploration experience of the
Company's principals.
The Resguardo Property covers an area of over 4,000 hectares (10,000
acres) along 6 kilometers of the highly productive Atacama Fault System of
northern Chile. The property is on the same structural trend and about 10
kilometers south of the Mantoverde Mine operated by the Anglo-American company.
The property is accessible by road, approximately 100 km from Copiapo, a town
with a population of about 150,000. A series of surface mine workings and recent
surface sampling by the Company indicate extensive gold mineralization.
The Los Leones Property covers an area of approximately 6,000 hectares
(15,000 acres) along highly productive Atacama Fault System of central Chile.
Cambior Chile S.A. ("Cambior"), the previous owner, has conducted exploration
work on the property since April 1994, and has defined extensive areas of copper
and gold mineralization. The property is accessible by road, approximately 25 km
from Combarbala, a town with a population of about 30,000.
The Remolino Property covers an area of approximately 1,200 hectares
(3,000 acres) along the highly productive Atacama Fault System of central Chile.
Local small miners are currently active on the
9
<PAGE> 10
property exploiting a series of high grade vein structures and Cambior, the
previous owner, has conducted exploration work on the property since mid-1994.
This activity has shown the potential for high grade polymetallic deposits and
low grade, bulk tonnage polymetallic deposits of copper-gold-silver. The
property is accessible by road, approximately 45 minutes from Illapel and 3 1/2
hours from the capital city of Santiago.
In August 1996, the Company commenced an exploration program consisting
of air photo interpretation, geological mapping, geophysical surveys, sampling,
trenching and limited core drill holes, primarily over obvious mineralized
areas, concentrating on identifying the controlling structures and the
interrelationships between the base and precious metals in the systems.
The Company's registered office and headquarters is 777 Hornby Street,
Suite 2000, Vancouver, British Columbia V6Z 1S4, its telephone number is
604-682-4606. While its headquarters are in Vancouver, the Company has
established an office in Santiago, Chile from which its Chilean exploration
activities are directed.
Fair Presentation
The balance sheet as of September 30, 1996, the statement of operations
for the three months and six months ended September 30, 1996 and 1995, and the
statement of changes in financial position for the three months and six months
ended September 30, 1996 and 1995, have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring accruals) necessary to present fairly the financial position and
results of operations at September 30, 1996, and for all periods presented have
been made.
The unaudited financial statements are based on certain estimates and
are presently subject to year-end adjustments. The operations for the three
months and six months ended September 30, 1996 are not necessarily indicative of
the results of operations to be expected for the Company's fiscal year.
The financial statements as of December 31, 1995 have been derived from
audited financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto as of December 31, 1995, and the year then ended.
2. MINERAL PROPERTIES
a) Accumulated costs in respect to the Company's interest in mineral
claims under option consist of the following:
<TABLE>
<CAPTION>
BALANCE EXPENDITURES WRITTEN OFF BALANCE
JUNE 14, DURING DURING SEPTEMBER 30,
PROPERTY 1996 PERIOD PERIOD 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Resguardo Property $ -- $345,652 $ -- $355,652
Remolino Property $ -- 15,000 -- 15,000
Los Leones Property -- 26,056 -- 26,056
-----------------------------------------------------
$ -- $386,708 $ -- $386,708
=====================================================
</TABLE>
10
<PAGE> 11
Remolino Property
On June 17, 1996, the Company entered into a mining option. Under the
terms of the agreement, the Company shall pay a total consideration of $105,000
plus all costs to keep the property in good standing. The $105,000 is payable
$15,000 upon execution of the mining option; $15,000 in 6 months; $25,000 on the
first anniversary of the mining option; and $50,000 on the second anniversary of
the mining option. Additional option payments totaling $135,000 as follows:
$10,000 upon execution of the mining option; $20,000 on September 10, 1996;
$50,000 on December 10, 1996; and $55,000 on March 10, 1997. A net smelter
royalty of 3% must be paid to a maximum of $5 million if the property commences
commercial production.
Los Leones Property
On June 17, 1996, the Company entered into a mining option. Under the
terms of the agreement, the Company shall pay a total consideration of $100,000
plus all costs to keep the property in good standing. The $100,000 is payable
$10,000 upon execution of the mining option; $15,000 in 6 months; $25,000 on the
first anniversary of the mining option; and $50,000 on the second anniversary of
the mining option. A net smelter royalty of 3% must be paid to a maximum of $5
million if the property commences commercial production.
Resguardo Property
On July 17, 1996, the Company entered into a 99 year Lease Agreement on
a Chilean property known as the Resguardo Property. Lease payments are as
follows: $75,000 upon execution of the Lease Agreement; $60,000 payable on each
of the lease's first and second anniversary; and $80,000 payable on the lease's
third anniversary. The Company has the exclusive right to exploit, benefit,
explore, develop and smelt minerals from the 10,000 acre property located on the
Atacama Fault System of northern Chile. The owners retain a net smelter return
production royalty, equal to 5% on gold and 2% on all other mineral production
from the lease. Subsequent to the third anniversary of the lease, the Company
must complete a feasibility study and obtain project financing to begin
production on or before the seventh anniversary of the lease. No payments to the
owners are required during this period. If production financing has not been
obtained during this period, the Company must pay advance royalty payments that
increase annually from $150,000 per year to $250,000 per year, of which the
first payment may be credited to future net smelter return production royalty.
3. DUE TO RELATED PARTIES
On June 4, 1996, and June 20, 1996, Laminco, affiliate of the Company,
advanced the Company an aggregate amount of $200,000 pursuant to a loan
agreement. In consideration of these loans the Company granted Laminco warrants
to purchase 400,000 shares of the Company's Common Stock at a purchase price of
$1.00 for a period of two (2) years. In addition, the Company granted Laminco
certain rights to participate in all future financing completed by the Company
on the same terms offered third parties. These loans are repayable upon demand
with an interest rate of 10%. In August 1996 and October 1996, payments of
$100,000 and $100,000 respectively were made to Laminco.
On June 14, 1996, the Company borrowed $60,847 from Edward M. Topham,
an officer of the Company, pursuant to a Loan Agreement. This loan is repayable
upon demand with interest accruing at 10%.
In connection with the identification and acquisition of the Remolino,
Los Leones and Resguardo properties, expenses totaling $138,650 were incurred by
Mr. Roberto Partarrieu. The Company, in connection with the acquisition of these
properties has agreed to reimburse Mr. Partarrieu. Mr. Partarrieu is an officer
of Minera Fremont Gold Chile, S.A.
11
<PAGE> 12
4. NOTES PAYABLE
On August 21, 1996, the Company commenced an offering of $1,800,000
principal amount of 10.5% Series A Senior Convertible Notes ("Series A Notes")
pursuant to Regulation D of the Securities and Exchange Act of 1933, as amended.
On September 30, 1996 the Company had accepted subscriptions totaling $740,000.
In October 1996, the Company completed the offering of Series A Notes and
accepted subscriptions aggregating $1,800,000. Each Series A Note is
convertible, at the option of the Holder into Equity Units at any time after the
Issue Date prior to the close on the Maturity Date at the rate of US$.50 per
Equity Unit. Each Equity Unit is composed of one share of the Company's Common
Stock, par value $.001 per share, and one Redeemable Common Stock Purchase
Warrant ("Warrant"). The Warrant is exercisable to purchase one share of Common
Stock at the greater of $1.50 or 75% of the ten day average closing prices, as
quoted on the NASDAQ Bulletin Board, immediately preceding the notice of
exercise. The Warrants issued in connection with the conversion of the Series A
Notes as a component of the Equity Unit will be redeemable by the Company
beginning January 1, 1997, upon 15 days notice to the Warrant holder, at a
redemption price of $.10 per warrant. The Holders of the Series A Notes,
Warrants or Common Stock issued to Holders without an effective Registration
Statement under the Securities Act of 1933, as amended, ("Act") shall have the
right, at any time, to join with the Company to register the Common Stock and
the Common Stock underlying the Series A Notes and Warrants in any Registration
Statement under the Act filed by the Company with the Securities and Exchange
Commission. The Company anticipates filing a Registration Statement on Form S-B
with the Securities and Exchange Commission during the fourth quarter of 1996.
Such Registration Statement will include the Common Stock underlying the Series
A Notes and Warrants. Each purchaser of the Series A Notes, as a condition
precedent to his, her or its conversion into Equity Units, must enter into a
Voluntary Stock Pooling Agreement ("Pooling Agreement"). Under the terms of the
Pooling Agreement each recipient of Common Stock pursuant to conversion of the
Series A Notes will severally agree with the Company, the Trustee (as defined in
the Pooling Agreement) and each with the other, that they will deliver or cause
to be delivered to the Trustee certificates representing their respective shares
of Common Stock received in the conversion. The shares of Common Stock issuable
upon exercise of the Warrants will not be subject to the Pooling Agreement.
Pursuant to the Pooling Agreement the Trustee shall hold all certificates
subject to release , on a pro-rata basis, as set forth below:
PRO-RATA SHARES OF COMMON STOCK RELEASE DATE
------------------------------- ------------
25% of Common Stock purchased April 1, 1997
25% of Common Stock purchased July 1, 1997
25% of Common Stock purchased October 1, 1997
the balance of Common Stock purchased January 1, 1998
5. INCOME TAXES
At December 31, 1995, the Company has net operating tax loss
carryforwards, amounting to approximately $405,771. The losses expire at various
intervals through the year 2010. No deferred tax benefit has been recorded due
to the uncertainty of the Company realizing these benefits through profitable
operation in the future.
6. COMMON STOCK
On April 15, 1996, the board of directors of the Company and holders of
a majority of the outstanding Common Stock of the Company authorized the
Company, by written consent, to take a series of actions related to its
authorized and outstanding Common Stock. These actions included a one-for-twenty
(1-for-20) reverse stock split of the Company's Common Stock, pursuant to which
each twenty (20) shares of the Company's Common Stock outstanding immediately
prior to April 30, 1996 was
12
<PAGE> 13
converted into one (1) share of the Company's Common Stock. In connection with
the reverse split the Company maintained the par value of its Common Stock at
$.001 par value per share, and the total number of shares of Common Stock
authorized to be issued by the Company remained unchanged at 20,000,000 shares.
The number of issued and outstanding shares of the Company's Common Stock after
the reverse split was 1,000,000 shares. All references to shares of Common Stock
herein have been adjusted to reflect this reverse split.
In May 1996, the Company's Board of Directors approved a private
placement of 1,000,000 shares of Common Stock at an offering price of $.20
aggregating $200,000 to the Company. This private placement was closed on July
30, 1996.
On July 31, 1996, the Board of Directors of the Company and holders of
a majority of the outstanding shares of the common stock of the Company,
authorized the Company, by written consent, to acquired 100% of FHL stock not
previously owned by the Company. The Company completed this acquisition in
consideration of the exchange of 3,560,000 shares of its Common Stock. Michael
J. Hopley, a director, president and chief executive officer of the Company, and
David Shaw, a director of the Company, received 418,000 and 372,000 shares,
respectively, of the Company's Common Stock in the exchange.
On July 30, 1996, the Company completed a private placement of 500,000
shares of its Common Stock to Laminco in consideration of $140,000.
<TABLE>
<CAPTION>
Additional Paid in
Number of Shares Par Value of Shares Capital
------------------------------------------------------------
<S> <C> <C> <C>
As at December 31, 1995 1,000,000 $20,000 $ 471,100
June 6, 1996 forgiveness of debt 12,000
-----------------------------------------------------
As at June 30, 1996 1,000,000 20,000 483,100
July 30, 1996 private placement 500,000 500 139,500
July 30, 1996 private placement 1,000,000 1,000 199,000
July 31, 1996 acquisition of Flagship
Holding Ltd. 3,560,000 3,560 (3,559)
-----------------------------------------------------
As at September 30, 1996 6,060,000 $25,060 $ 818,041
=====================================================
</TABLE>
7. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles as applied in the
United States.
a) Income and loss per share -- Income and loss per share is computed
by dividing the net income or loss by the weighted average number
of common shares outstanding during the applicable period.
b) Principles of Consolidation -- The consolidated statements include
the accounts of the Company and its 100% owned subsidiary,
Flagship Holding Ltd. for the period presented.
c) Mineral Properties -- The Company capitalizes the cost of
acquiring mineral claims and exploration costs which are directly
related to specific mineral claims until such time as the extent
of mineralization has been determined and the mineral claims are
either developed, abandoned or allowed to lapse.
13
<PAGE> 14
d) Foreign Currency Translation -- Transactions recorded in Chilean
pesos and Barbados pounds are translated as follows:
i) Monetary assets and liabilities at the rate prevailing at
the balance sheet date.
ii) Non-monetary assets and liabilities at historic rates.
iii) Income and expenses at the average rate in effect during
the year.
Exchange gains or losses are recorded in the consolidated
statement of loss and deficit.
14
<PAGE> 15
FREMONT GOLD CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The analysis of Fremont Gold Corporation (the "Company") financial
condition, liquidity and capital resources, and results of operations should be
viewed in conjunction with the accompanying financial statements, including the
notes thereto.
FINANCIAL CONDITION
At September 30, 1996, the Company had current assets and total assets
of $769,859, as compared to current assets and total assets of $1,035 at
December 31, 1995. The increase at September 30, 1996, reflects cash balances of
$752,233 and an account receivable of $17,859. At September 30, 1996, the
Company had current liabilities and total liabilities of $1,100,806, as compared
to current liabilities and total liabilities of $5,000 at December 31, 1995. The
increase at September 30, 1996 is comprised of i) $740,000 in subscriptions
received in connection with a placement of $1,800,000 principal amount of Series
A Notes, and $322,635 due to related parties. At September 30, 1996 the Company
has a net worth of $64,050, as compared to a net worth ($3,965) at December 31,
1995. The increase in net worth was a result of a private placements of the
Company's Common Stock in consideration of $340,000.
RESULTS OF OPERATIONS
The Company had a loss during the third quarter ended September 30,
1996, of $159,609 or $.08 per share, as compared to a loss of $1,630 or $.002
per share, during the third quarter ended September 30, 1995. For the nine
months ended September 30, 1996 the Company's loss was $283,985 or $.21 per
share, as compare to a loss of $8,608 or $.009 per share during the nine months
ended September 30, 1995.
The increase in losses for the three months and nine months ended
September 30, 1996, of $157,979 and $275,377 respectively, was primarily due to
a $100,000 consulting fee paid in connection with a change in control of the
company and $53,332 consulting fees paid for geological and administrative
services. The balance of the losses are attributed to $45,344 professional fees
charged in connection with the change in control and acquisition of Flagship
Holding Ltd and general and administrative costs of implementing the Company's
new business plan.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Company's working
capital deficiency increased from $3,965 to $330,947. The increase is primarily
attributed to $740,000 principal amount of Series A Notes and $322,635 due to
related parties.
The Company anticipates the expenditure of $500,000 in connection with
phase-I exploration costs at its Resguardo, Los Leones and Remolino properties.
In addition the Company anticipates making human resource commitments in
technical and administrative personnel. Additional working capital will be
needed to meet the Company's general and administrative needs as it implements
its business plan.
The Company anticipates filing a Registration Statement on Form S-B
with the Securities and Exchange Commission during the fourth quarter of 1996.
Upon approval of the Company's Registration Statement, it is anticipated the all
of the Series A Notes will be converted in to shares of its Common Stock and
Common Stock Purchase Warrants. The Company further anticipates exercising its
right to
15
<PAGE> 16
extend the due date of the Series A Notes until March 1, 1997. If all of the
Warrants underlying the Equity Units received by the Series A Note holders upon
conversion are exercised, the Company will receive minimum net proceeds of
$5,400,000.
16
<PAGE> 17
FREMONT GOLD CORPORATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceeding
No legal proceedings are currently pending or to, the
knowledge of management, threatened against the Company.
Item 2 - Changes In Securities
Not applicable
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission Of Matters To A Vote Of Security-Holders
During the current reporting period, the holders of a majority
of the outstanding shares of the Company, by written consent,
took the actions described in Item 6-b below.
Item 5 - Other Information
Not applicable
Item 6 - Exhibits And Reports On Form 8-K
a) Exhibit table:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER
-------------- ---------------------- -----------
<S> <C> <C>
10.1 Form of 10.5% Series A *
Convertible Note
</TABLE>
* Filed Herewith
b) Reports on Form 8-K
CURRENT REPORT ON FORM 8-K DATED JULY 29, 1996 (announcing i) The
Change Of Corporate Name to Fremont Gold Corporation, ii) Adoption
of Amended and Restated Certificate of Incorporation, iii)
Adoption of Stock Option Plan, iv) Management and Director
Changes, Expansion of the Board of Directors and Formation of
Compensation and Audit Committees, and v) the Company's
acquisition of 100% of FHL stock.)
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Commission Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FREMONT GOLD CORPORATION
DATE: NOVEMBER 14, 1996
By:/S/ Michael J. Hopley
--------------------------------
Michael J. Hopley, President
18
<PAGE> 1
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY,
THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
FREMONT GOLD CORPORATION
10.5% SERIES A CONVERTIBLE NOTE
NO. _____
ISSUE DATE: $__________
FOR VALUE RECEIVED, Fremont Gold Corporation, a Delaware corporation
(the "Company"), promises to pay to ___________________________________________,
whose address is _______________________________, ____________________, or
registered assigns (the "Holder"), the sum of __________________________________
_________ Dollars ($____________) in lawful money of the United States of
America on or before the Maturity Date as defined herein, with all Interest
thereon as defined and specified herein.
1. INTEREST. This Note shall bear, and the Company shall pay, interest
("Interest") at the rate of ten and one-half percent (10.5%) per annum from the
Issue Date through the Maturity Date. Interest on this Note shall be payable on
the Maturity Date.
2. PRE-PAYMENTS AND MATURITY DATE. This Note shall be due and payable
in full, including all accrued Interest thereon, on December 31, 1996 ("Original
Maturity Date"). At its option, the Company may extend the term of the Note to
March 1, 1997 ("Extended Maturity Date"), at which point all principal and
accrued Interest will be due and payable. The Original Maturity Date or the
Extended Maturity Date, if the original Maturity Date is extended, shall be
referred to in this Note as the "Maturity Date." The Company may prepay this
Note at any time after issuance without penalty.
3. EQUAL RANK. This Note represents one of a series of up to $1,800,000
principal amount of 10.5% Series A Senior Convertible Notes ("Notes") issued by
the Company. All Notes rank equally and ratably without priority over one
another.
4. CONVERSION OF NOTE.
4.1 Conversion Price. This Note is convertible, at the option
of the Holder, into Units at any time after the Issue Date prior to the close of
business on the business day prior to the Maturity Date at the rate of $0.50 per
Unit (the "Conversion Price"), subject to adjustment as hereinafter provided.
Each Unit is composed of one share of the Company's Common Stock, par value
$.001 per share ("Common Stock"), and one Redeemable Common Stock Purchase
Warrant ("Warrant"). The Warrant is exercisable to purchase one share of Common
Stock at the price and term specified in the Warrant. The Common Stock
comprising the Units shall be deemed to have a value of $0.499 per share and the
Warrant a value of $.001 per Warrant. No fractional Units or shares will be
issued. In lieu
19
<PAGE> 2
thereof, the Company will pay cash for fractional share amounts equal to the
fair market value of the Common Stock as quoted as the closing bid price of the
Common Stock on the date of conversion.
4.2 Adjustment Based Upon Stock Dividends, Combination of
Shares or Recapitalization. The Conversion Price shall be adjusted in the event
that the Company shall at any time (i) pay a stock dividend on the Common Stock
(ii) subdivide its outstanding Common Stock into a greater number of shares,
(iii) combine its outstanding Common Stock into a smaller number of shares, (iv)
issue by reclassification of its Common Stock any other special capital stock of
the Company, (v) issue to holders of Common Stock, rights or warrants to
subscribe for or purchase Common Stock at less than the current market price (as
defined) of the Common Stock, or (vi) distribute to all holders of Common Stock
evidences of indebtedness or assets (excluding cash dividends) or rights or
warrants to subscribe for Common Stock (other than those mentioned above). No
adjustment of the Conversion Price will be required until cumulative adjustments
amount to One Dollar ($1.00) per Note or more. Upon the occurrence of an event
requiring adjustment of the Conversion Price, and thereafter, the Holder, upon
surrender of this Note for conversion, shall be entitled to receive the number
of shares of Common Stock or other capital stock of the Company which the Holder
would have owned or have been entitled to receive after the happening of any of
the events described above had this Note been converted immediately prior to the
happening of such event.
4.3 Adjustment Based Upon Merger or Consolidation. In case of
any consolidation or merger to which the Company is a party (other than a merger
in which the Company is the surviving entity and which does not result in any
reclassification of or change in the outstanding Common Stock of the Company),
or in case of any sale or conveyance to another person, firm, or corporation of
the property of the Company as an entirety or substantially as an entirety, the
Holder shall have the right to convert this Note into the kind and amount of
securities and property (including cash) receivable upon such consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
into which such Note might have been converted immediately prior thereto.
4.4 Exercise of Conversion Privilege. The Conversion Privilege
provided for herein shall be exercisable by the Holder by written notice to the
Company or its successor and the surrender of this Note in exchange for the
number of shares (or other securities and property, including cash, in the event
of an adjustment of the Conversion Price) into which this Note is convertible
based upon the Conversion Price. Conversion rights will expire at the close of
business on the business day prior to the Maturity Date or redemption date of
this Note.
4.5 Corporate Status of Common Stock to be Issued. All Common
Stock (or other securities in the event of an adjustment of the Conversion
Price) which may be issued upon the conversion of this Note shall, upon
issuance, be fully paid and nonassessable.
4.6 Issuance of Certificate. Upon the conversion of this Note,
the Company shall in due course issue to the Holder a certificate or
certificates representing the number of shares of the Common Stock (or other
securities in the event of an adjustment of the Conversion Price) to which the
conversion relates.
5. STATUS OF HOLDER OF NOTE. This Note shall not entitle the Holder to
any voting rights or other rights as a shareholder of the Company or to any
rights whatsoever except the rights herein expressed, and no dividends shall be
payable or accrue in respect of this Note or the securities issuable upon the
conversion hereof unless and until this Note shall be converted. Upon the
conversion of this Note, the Holder shall, to the extent permitted by law, be
deemed to be the holder of record of the shares of Common Stock and Warrants
issuable upon such conversion, notwithstanding that the stock transfer books of
the Company shall then be closed or that the certificates representing such
shares of Common Stock and Warrants shall not then be actually delivered.
20
<PAGE> 3
6. RESERVE OF SHARES OF COMMON STOCK. The Company shall reserve out of
its authorized shares of Common Stock (and other securities in the event of an
adjustment of the Conversion Price) a number of shares sufficient to enable it
to comply with its obligation to issue shares of Common Stock (and other
securities in the event of an adjustment of the Conversion Price) upon the
conversion of this Note.
7. REGISTRATION RIGHTS.
7.1 The Holders of the Notes and Warrants or Common Stock
issued to such Holders without an effective Registration Statement under the Act
("Restricted Shares") shall have the right, at any time, to join with the
Company to register the Common Stock underlying the Notes and Warrants
("Underlying Common Stock") or Restricted Shares in any Registration Statement
under the Securities Act 1993, as amended ("Act"), filed by the Company with the
Securities and Exchange Commission ("Commission"), which includes a public
offering of equity securities for cash, either for the account of the Company or
for the account of any other person. This right to join with the Company in a
Registration Statement under the Act is not applicable to a Registration
Statement filed by the Company with the Commission on Form S-4, S-8, or any
other inappropriate form. If, at any time, the Company proposes to file a
Registration Statement as described above with the Commission, it shall, at
least thirty (30) days prior to such filing, give written notice of such
proposed filing to the Holder and its designees at their addresses appearing on
the records of the Company and shall offer to include in any such filing any
proposed disposition of the Restricted Shares or Underlying Common Stock. Within
fifteen (15) days of receipt of the Company's notice of filing, the owners of
the Restricted Shares and Underlying Common Stock may request registration of
the Restricted Shares and Underlying Common Stock pursuant to a written request
setting forth the intended method of distribution and such other data or
information as the Company or its counsel shall reasonably require and such
Restricted Shares and Underlying Common Stock shall be included in the
Registration Statement under the Act to the maximum extent permissible. The
Company shall supply said owner(s) with copies of such Registration Statement,
and of the prospectus included therein, in such quantities as may be reasonably
necessary for the purpose of the proposed disposition.
7.2 The Company shall use its best efforts to have such
Registration Statement declared effective by the Commission as soon as
practicable after filing. The Company agrees to use its reasonable best efforts
to keep the Registration Statement continuously effective, and to take any and
all other actions reasonably necessary in order to permit the public resale of
the Common Stock covered by the Registration Statement, until the Maturity Date
of the Notes or termination date of the Warrant, whichever is later, or such
shorter period which will terminate when all of the Common Stock issuable upon
conversion of the Notes or exercise of the Warrants is issued pursuant to the
Registration Statement. The Company further agrees, if necessary, to supplement
or amend the Registration Statement, if required by the rules, regulations or
instructions applicable to the registration form used by the Company for such
Registration Statement or by the Act or by any other rules or regulations for
registration, including any registration statements filed pursuant to state
securities laws, and the Company agrees to furnish to the Holders of Notes or
Warrants copies of any such supplement or amendment promptly after its being
used or filed with the Commission. The Company shall pay all registration
expenses in connection with the registration pursuant to this paragraph. Such
reasonably expenses shall include all registration of filing fees, all fees and
expenses of compliance with securities or blue sky laws, including reasonable
fees and disbursements of one firm of counsel for the Holders and any placement
agents in connection with blue sky qualifications of the securities being
registered, printing expenses and reasonable fees and disbursements of counsel
for the Company and its independent certified public accountants, the fees and
expenses associated with any required filing with the National Association of
Dealers, Inc. ("NASD"). The Company is not required to pay any fees or expenses
of Holders, placement agents or Holder's or placement agent's counsel, other
than the blue sky counsel referred to above, or accountant or any other
advisors, including any transfer taxes, underwriting, brokerage or other
discounts and commissions and
21
<PAGE> 4
finder's or similar fees payable with respect to the Common Stock registered in
the Registration Statement.
7.3 Each Holder shall pay all costs and expenses incurred by
such Holder, including all transfer taxes, underwriting, brokerage and other
discounts and commissions and finder's and similar fees payable with respect to
the Restricted Shares and Underlying Common Stock registered pursuant to this
Paragraph 7, "Registration Rights." To the extent any registration expenses are
incurred, assumed or paid by any Holder or any placement or sales agent therefor
or underwriter thereof with the Company's prior consent, the Company shall
reimburse such person for the full amount of the registration expenses so
incurred, assumed or paid within a reasonable time after receipt of a written
request for the same. Any registration expenses submitted by any Holder,
placement agent, sales agent or underwriter on behalf of any such person for
payment by the Company shall be itemized in detail and contain clear and
accurate receipts of all expenditures made by such parties.
7.4 The Company and the Holder shall indemnify and hold
harmless each other and their respective Affiliates from and against any loss,
liability, claim, damage and expense (including reasonable attorneys' fees) to
the extent resulting from any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement pursuant to which the
Restricted Shares and Underlying Common Stock were registered under the Act, or
any amendment thereto, including all documents incorporated by reference, or
from the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statement not misleading; provided
that the obligations of any Holder to indemnify the Company and its Affiliates
shall be limited to the proceeds received by such Holder from the sale of the
Restricted Shares and Underlying Common Stock pursuant to the Registration
Statement and shall only apply with respect to the information furnished in
writing by such Holder or on such Holder's behalf expressly for use in the
Registration Statement or any prospectus relating to the Restricted Shares and
Restricted Shares and Underlying Common Stock or any amendment or supplement
thereto. The indemnification required by this subparagraph 7.4 shall be in a
form typical for transactions of such nature.
8. SENIOR SUBORDINATED INDEBTEDNESS.
8.1 This Note constitutes Senior Indebtedness of the Company
and is unsecured.
8.2 The Indebtedness evidenced by this Note and all of the
Notes will be subordinated to the prior payment when due of the principal of,
and premium, if any, and accrued and unpaid interest on, all existing Senior
Indebtedness. The Notes will be senior to, in right of payment of principal of,
premium, if any, and accrued and unpaid interest on, any other and future
Subordinated Indebtedness of the Company.
8.3 Upon any distribution of assets of the Company in any
dissolution, winding up, liquidation or reorganization of the Company, all
holders of Senior Indebtedness of the Company must be paid in full before any
payment or distribution is made with respect to the Notes.
8.4 Upon the maturity of any Senior Indebtedness of the
Company by lapse of time, acceleration or otherwise, unless and until all
principal thereof, premium, if any, and interest thereon and other amounts due
thereon shall first be paid in full, no payment shall be made by or on behalf of
the Company with respect to the principal of, premium, if any, or interest on
the Notes. Upon the happening of any default in the payment of any principal of
or interest on or other amounts due on any Senior Indebtedness of the Company (a
"Payment Default") unless and until such default shall have been cured or waived
or have ceased to exist, no payment shall be made by or on behalf of the Company
with respect to the principal of or Interest on the Notes. Upon the happening of
any default or event of default (other than a Payment Default), including any
event which with the giving of notice or the lapse of time or both would become
an event of default and including any default or Event of Default which would
result upon any payment with respect to the Notes, with respect to any Senior
Indebtedness of the Company, as such
22
<PAGE> 5
default or event of default is defined therein or in the instrument or agreement
or other document under which it is outstanding, then upon written notice
thereof given to the Company by a holder or holders of any Senior Indebtedness
of the Company or their representative ("Payment Notice"), no payment shall be
made by or on behalf of the Company with respect to the principal of, premium,
if any, or Interest on the Notes, during the period (the "Payment Blockage
Period") commencing on the date of such receipt of such Payment Notice and
ending on the earlier of the date, if any, on which such default is cured or
waived or ceases to exist or the Senior Indebtedness to which such default
relates is discharged.
9. DEFAULT. The Company shall perform its obligations and covenants
hereunder and in each and every other agreement between the Company and Holder
pertaining to the Indebtedness evidenced hereby. The following provisions shall
apply upon failure of the Company so to perform.
9.1 Event of Default. Any of the following events shall
constitute an "Event of Default" hereunder:
(a) Failure by the Company to pay principal of any of
the Notes when due and payable on the Maturity Date;
(b) Failure of the Company to pay Interest when due
hereunder, which failure continues for a period of thirty (30)
days after the due date of the amount involved; or
(c) Failure of the Company to perform any of the
covenants, conditions, provisions or agreements contained
herein, or in any other agreement between the Company and
Holder pertaining to the Indebtedness evidenced hereby, which
failure continues for a period of sixty (60) days after notice
of default has been given to the Company by the Holders of not
less than twenty-five percent (25%) of the principal amount of
the Notes then outstanding; provided, however, that if the
nature of the Company's obligation is such that more than
sixty (60) days are required for performance, then an Event of
Default shall not occur if the Company commences performance
within such sixty (60) day period and thereafter diligently
prosecutes the same to completion; or
(d) The entry of an order for relief under Federal
Bankruptcy Code as to the Company or entry of any order
appointing a receiver or trustee for the Company or approving
a petition in reorganization or other similar relief under
bankruptcy or similar laws in the United States of America or
any other competent jurisdiction, and if such order, if
involuntary, is not satisfied or withdrawn within sixty (60)
days after entry thereof; or the filing of a petition by the
Company seeking any of the foregoing, or consenting thereto;
or the filing of a petition to take advantage of any debtor's
act; or making a general assignment for the benefit of
creditors; or admitting in writing inability to pay debts as
they mature.
9.2 Acceleration. Upon any Event of Default (in addition to
any other rights or remedies provided for under this Note), at the option of the
Holders of not less than twenty-five percent (25%) of the principal amount of
the Notes then outstanding, all sums evidenced hereby, including all principal,
Interest, fees and all other amounts due hereunder, shall become immediately due
and payable. If an Event of Default in the payment of principal or Interest
should occur and be continuing with respect to the Note, any one or more holders
of the Notes then outstanding may declare the principal of the Notes to be
immediately due and payable. In the Event of a Default due to a breach of any
other covenant or term, Holders representing twenty-five percent (25%) of the
principal amount of the Notes may take action to accelerate the Notes.
23
<PAGE> 6
9.3 Notice by Company. Upon the happening of any Event of
Default specified in this paragraph that is not cured within the respective
periods prescribed above, the Company will give prompt written notice thereof to
the Holder of this Note.
9.4 No Waiver. Failure of the Holder to exercise any option
hereunder shall not constitute a waiver of the right to exercise the same in the
event of any subsequent Event of Default, or in the event of continuance of any
existing Event of Default after demand or performance thereof.
9.5 Default Interest. Default Interest will accrue on an
unpaid principal or Interest due hereunder at the rate of sixteen percent (16%)
per annum upon the occurrence of any Event of Default until the Event of Default
is cured.
9.6 Pursuit of any Remedy. No Holder of a Note may pursue any
remedy under the Notes unless (i) the Company shall have received written notice
of a continuing Event of Default from the Holder and (ii) the Company shall have
received a request from Holders of at least twenty-five percent (25%) of
principal amount of the Notes to pursue such remedy. The Holders of fifty-one
percent (51%) of principal amount of the Notes then outstanding have the right
to direct the time, method and place of conducting any proceeding for exercising
any remedy available to the Noteholders under the Notes.
10. ASSIGNMENT, TRANSFER OR LOSS OF THE NOTE.
10.1 No Holder of this Note may assign, transfer, hypothecate
or sell all or any part of this Note or in any way alienate or encumber the Note
without the express written consent of the Company, the granting or denial of
which shall be within the absolute discretion of the Company. Any attempt to
effect such transfer without the consent of the Company shall be null and void.
The Company has not registered this Note under the Act or the applicable
securities laws of any state in reliance on exemptions from registration. Such
exemptions depend upon the investment intent of the Holder at the time he
acquires his Note. Each Holder has acquired his Note for his own account for
investment purposes only and not with a view toward distribution or resale of
such Note within the meaning of the Act and the applicable securities laws of
any state. The Company shall be under no duty to register the Note or to comply
with an exemption in connection with the sale, transfer or other disposition
under the applicable laws and regulations of the Act or the applicable
securities laws of any state. The Company may require the Holder to provide, at
his expense, an opinion of counsel satisfactory to the Company to the effect
that any proposed transfer or other assignment of the Note will not result in a
violation of the applicable federal or state securities laws or any other
applicable federal or state laws or regulations.
10.2 All expenses, including reasonable legal fees incurred by
the Company in connection with any permitted transfer, assignment or pledge of
this Note will be paid by the Holder requesting such transfer, assignment or
pledge.
10.3 Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of any Note and, in the
case of any such loss, theft or destruction of any Note, upon delivery of an
indemnity bond in such reasonable amount as the Company may determine (or, in
the case of any Note held by the original Noteholder, of an indemnity agreement
reasonably satisfactory to the Company), or, in the case of any such mutilation,
upon the surrender of such Note to the Company at is principal office for
cancellation, the Company at its expense will execute and deliver, in lieu
thereof, a new Note of like tenor, dated the date to which interest hereunder
shall have been paid on such lost, stolen, destroyed or mutilated Note.
10.4 Subject to Subparagraph 10.1 above, the Holder may, at
his option, either in person or by duly authorized attorney, surrender this Note
for registration of transfer at the principal office of the Company and, upon
payment of any expenses associated with the transfer, receive in exchange
therefor a Note or Notes, dated as of the date to which interest has been paid
on the Note so surrendered, each in the principal amount of $1,000 or any
multiple thereof, for the same aggregate unpaid principal
24
<PAGE> 7
amount as the Note so surrendered and registered as payable to such person or
persons as may be designated by the Holder. Every Note surrendered for
registration of transfer shall be duly endorsed or shall be accompanied by a
written instrument of transfer duly executed by the Holder or his attorney duly
authorized in writing. Every Note, so made and delivered by the Company in
exchange for any Note surrendered, shall in all other respects be in the same
form and have the same terms as the Note surrendered. No transfer of any Note
shall be valid unless made in such manner at the principal office of the
Company.
10.5 The Company may treat the person in whose name this Note
is registered as the owner and Holder of this Note for the purpose of receiving
payment of all principal of and all Interest on this Note, and for all other
purposes whatsoever, whether or not such Note shall be overdue and, except for
transfers effected in accordance with this subparagraph, the Company shall not
be affected by notice to the contrary.
11. MODIFICATIONS AND AMENDMENTS. After notice given by the Company to
the Holders of all Notes at the time outstanding, the Company may from time to
time and at any time enter into an agreement or agreements supplemental to the
provisions of this Note for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the Notes or of modifying
in any manner the rights of the Holders of the Notes; provided, however, that no
such supplemental agreement shall; provided that no such modification or
amendment may, without the consent of the holder of each Note then outstanding
affected thereby, (i) reduce the percentage of principal amount of Notes whose
Holders may consent to an amendment, supplement or waiver; (ii) reduce the rate
or change the time for payment of interest, including Default Interest, on any
Note; (iii) reduce the principal amount of any Note or change the Maturity Date
of the Notes; (iv) make any Note payable in money other than that stated in the
Note; (v) impair the right to institute suit for the enforcement of any payment
of principal of, or premium, if any, or interest on, any Note; (vi) make any
change in the percentage of principal amount of Notes necessary to waive
compliance with certain provisions of the Note; or (vii) waive a continuing
default or Event of Default in the payment of principal of, premium, if any, or
Interest on the Notes. The modifications and amendments of the Notes may be made
by the Company without the consent of any Holders of Notes in certain limited
circumstances, including (a) to cure any ambiguity, omission, defect or
inconsistency, (b) to provide for the assumption of the obligations of the
Company under the Notes upon the merger, consolidation or sale or other
disposition of all or substantially all of the assets of the Company, or (c) to
make any change that does not adversely affect the rights of any holder of
Notes. The Holders of a majority in aggregate principal amount of the Notes then
outstanding may waive any past default under the Notes, except a default in the
payment of principal, premium, if any, or Interest. Promptly after execution by
the Company and Holders of the Notes of a supplemental agreement pursuant to the
provisions of this paragraph, the Company shall deliver a copy of such
supplemental agreement to all Holders of the Notes at the time outstanding.
12. NOTICES. All notices provided for herein shall be validly given if
in writing and delivered personally or sent by certified mail, postage prepaid,
to the office of the Company or such other address as the Company may from time
to time designate in writing sent by certified mail, postage prepaid, to the
Holder at his address set forth below or such other address as the Holder may
from time to time designate in writing to the Company by certified mail, postage
prepaid.
13. USURY. All Interest, fees, charges, goods, things in action or any
other sums or things of value, or other contractual obligations (collectively,
the "Additional Sums") paid by the Company hereunder, whether pursuant to this
Note or otherwise, with respect to the Indebtedness evidenced hereby, or any
other document or instrument in any way pertaining to the Indebtedness, which,
under the laws of the State of Arizona may be deemed to be Interest with respect
to such loan or Indebtedness, shall, for the purpose of any laws of the State of
Arizona, which may limit the maximum amount of Interest to be charged with
respect to such loan or Indebtedness, be payable by the Company as, and shall be
deemed to be, Interest and for such purposes only, the agreed upon and
contracted rate of Interest shall be deemed to
25
<PAGE> 8
be increased by the Additional Sums. Notwithstanding any provision of this Note
to the contrary, the total liability for payments in the nature of Interest
under this Note shall not exceed the limits imposed by applicable law. The
Company shall not assert a claim, and shall actively resist any attempts to
compel it to assert a claim, respecting a benefit under any present or future
usury laws against any Holder of this Note.
14. BINDING EFFECT. This Note shall be binding upon the parties hereto
and their respective heirs, executors, administrators, representatives,
successors and permitted assigns.
15. COLLECTION FEES. Except as otherwise provided herein, the Company
shall pay all costs of collection, including reasonable attorneys' fees and all
costs of suit and preparation for such suit (and whether at trial or appellate
level), in the event the unpaid principal amount of this Note, or any payment of
Interest is not paid when due, or in the event Holder is made party to any
litigation because of the existence of the Indebtedness evidenced by this Note,
or if at any time Holder should incur any attorneys' fees in any proceeding
under the Federal Bankruptcy Code (or other similar laws for the protection of
debtors generally) in order to collect any Indebtedness hereunder or to
preserve, protect or realize upon any security for, or guarantee or surety of,
such Indebtedness whether suit be brought or not, and whether through courts of
original jurisdiction, as well as in courts of appellate jurisdiction, or
through a bankruptcy court or other legal proceedings.
16. CONSTRUCTION. This Note shall be governed as to its validity,
interpretation, construction, effect and in all other respects by and in
accordance with the laws and interpretations thereof of the State of Arizona.
Unless the context otherwise requires, the use of terms in singular and
masculine form shall include in all instances singular and plural number and
masculine, feminine and neuter gender.
17. SEVERABILITY. In the event any one or more of the provisions
contained in this Note or any future amendment hereto shall for any reason be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this Note
or such other agreement, and in lieu of each such invalid, illegal or
unenforceable provision there shall be added automatically as a part of this
Note a provision as similar in terms to such invalid, illegal or unenforceable
provision as may be possible and be valid, legal and enforceable.
18. DEFINITIONS.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors of such
Person duly authorized to act on behalf of the Board of Directors of such
Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, equity participations or other equivalents (however designated) of
corporate stock or partnership interests and any and all warrants, options and
rights with respect thereto (whether or not currently exercisable), including
each class of common stock and preferred stock of such Person.
"GAAP" means generally accepted accounting principles as in effect in
the United States of America as of the Issue Date.
26
<PAGE> 9
"Holder" means a Person in whose name a Note is registered on the
Company's books.
"Indebtedness" means, without duplication, with respect to any Person,
(a) all obligations of such Person (i) in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such person or
only to a portion thereof), (ii) evidenced by bonds, notes, debentures or
similar instruments, (iii) representing the balance deferred and unpaid of the
purchase price of any property or services (other than accounts payable or other
obligations arising in the ordinary course of business), (iv) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (v) for
the payment of money relating to a capitalized lease obligation under GAAP, or
(vi) evidenced by a letter of credit or a reimbursement obligation of such
Person with respect to any letter of credit; (b) all net obligations of such
Person under interest rate swap obligations and foreign currency hedges; (c) all
liabilities of others of the kind described in the preceding clauses (a) or (b)
that such Person has guaranteed or that are otherwise its legal liability; (d)
Indebtedness (as otherwise defined in this definition) of another Person secured
by lien on any asset of such Person, whether or not such Indebtedness is assumed
by such Person, the amount of such obligations being deemed to be the lesser of
(1) the full amount of such obligations so secured, and (2) the fair market
value of such asset, as determined in good faith by the Board of Directors of
such Person, which determination shall be evidenced by a board resolution; and
(e) any and all deferrals, renewals, extensions, refinancings and refundings
(whether direct or indirect) of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a), (b),
(c), (d) or this clause (e), whether or not between or among the same parties.
"Issue Date" means the date on which the Notes are originally issued.
"Maturity Date" means December 31, 1996, or if the Company extends the
term of the Note, March 1, 1997.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated), which is
preferred as to the payment of dividends, or upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of Capital Stock of
any other class of such corporation.
"Senior Indebtedness" means any Indebtedness of the Company, whether
outstanding on the date hereof or hereafter incurred, unless such Indebtedness
is pari passu with or contractually subordinate or junior in right of payment to
the Notes, except Indebtedness to any Affiliate of the Company which shall be
junior and subordinate to the Notes.
"Subordinated Indebtedness of the Company" means any Indebtedness of
the Company, whether outstanding on the Issue Date or hereafter incurred, which
is contractually subordinate or junior in right of payment to the Notes.
A "subsidiary" of any Person means (i) a corporation a majority of
whose Voting Stock is at the time, directly or indirectly, owned by such Person,
by one or more subsidiaries of such Person or by such Person and one or more
subsidiaries of such Person, (ii) a partnership in which such Person or a
subsidiary of such Person is, at the date of determination, a general or limited
partner of such partnership, but only if such Person or its subsidiary is
entitled to receive more than fifty percent (50%) of the assets of such
partnership upon its dissolution, or (iii) any other Person (other than a
corporation or partnership) in which such Person, directly or indirectly, at the
date of determination thereof, has (x) at least a majority ownership interest or
(y) the power to elect or direct the election of a majority of directors or
other governing body of such Person.
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 752,233
<SECURITIES> 0
<RECEIVABLES> 17,626
<ALLOWANCES> 0
<INVENTORY> 386,708
<CURRENT-ASSETS> 769,859
<PP&E> 10,724
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,167,291
<CURRENT-LIABILITIES> 1,100,806
<BONDS> 0
0
0
<COMMON> 25,060
<OTHER-SE> 41,425
<TOTAL-LIABILITY-AND-EQUITY> 1,167,291
<SALES> 0
<TOTAL-REVENUES> 2,100
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 161,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (159,609)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (159,609)
<EPS-PRIMARY> (.080)
<EPS-DILUTED> (.080)
</TABLE>
