-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nq5Y8PlKPKbmwVbFsgZKzSprUwBjGO0qh+6Lq/MDtTBdTOlvtgqfgUuIXn/SHtpK g9RC6UkBM/0ZX/l+4H36Yg== 0001014909-02-000204.txt : 20021205 0001014909-02-000204.hdr.sgml : 20021205 20021205173723 ACCESSION NUMBER: 0001014909-02-000204 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 20021205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S GOLD CORP CENTRAL INDEX KEY: 0000314203 STANDARD INDUSTRIAL CLASSIFICATION: MINERAL ROYALTY TRADERS [6795] IRS NUMBER: 840796160 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-96653 FILM NUMBER: 02850163 BUSINESS ADDRESS: STREET 1: 2201 KIPLING ST STREET 2: STE 100 CITY: LAKEWOOD STATE: CO ZIP: 80215-1545 BUSINESS PHONE: 3032381438 MAIL ADDRESS: STREET 1: 2201 KIPLING STREET STE 100 CITY: LAKEWOOD STATE: CO ZIP: 80215 FORMER COMPANY: FORMER CONFORMED NAME: SILVER STATE MINING CORP DATE OF NAME CHANGE: 19880629 FORMER COMPANY: FORMER CONFORMED NAME: U S SILVER STATE MINING CORP DATE OF NAME CHANGE: 19880706 SB-2/A 1 am2_sb2usgold.txt AMEND. NO. 2 TO FORM SB-2 As filed with the Securities and Exchange Commission on December 5, 2002 Registration No. 333-96653 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- Amendment No. 2 to Form SB-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 U.S. GOLD CORPORATION (Name of small business issuer in its charter) Colorado 1041 84-0796160 - ---------------- ----------------- ------------------- (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification organization) Code) 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545 (303) 238-1438 (Address and telephone number of principal executive offices) 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545 (Address of principal place of business or intended place of business) William W. Reid, President, U.S. Gold Corporation 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545 303-238-1438 (Name, address and telephone number of agent for service) With a copy to: Richard Mauro, Esq. Moye, Giles, O'Keefe, Vermeire & Gorrell LLP 1225 Seventeenth Street, 29th Floor Denver, Colorado 80202-5529 (303) 292-2900 Approximate date of commencement proposed sale to public: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE Title of each Proposed Proposed class of Amount maximum maximum Amount of securities to to be offering price aggregate registration be registered registered per unit offering price fee - ------------- ---------- -------------- -------------- ------------ Common Shares 2,785,715 $0.423 $1,178,357 $106.00 - -------------------------------------------------------------------------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. The Selling Shareholders may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion, dated December 5, 2002 Prospectus U.S. Gold Corporation 2,785,715 Shares Common Stock By this prospectus, the Selling Shareholders named in this prospectus may from time to time offer shares of our Common Stock. U.S. Gold Corporation will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Shareholders. This prospectus also relates to shares to be issued upon exercise of certain Common Stock warrants for which U.S. Gold Corporation would receive gross proceeds of $227,143 if all the subject warrants are exercised (see "DESCRIPTION OF CAPITAL STOCK" elsewhere in this prospectus). Our Common Stock trades on the OTC Bulletin Board under the symbol :"USGL." On December 4, 2002, the reported last sale price of our Common Stock was $0.36 per share. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4 OF THIS PROSPECTUS AND THOSE RISK FACTORS CONTAINED IN THE APPLICABLE PROSPECTUS SUPPLEMENT, IF ANY, FOR INFORMATION YOU SHOULD CONSIDER BEFORE BUYING THE SECURITIES. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is December 5, 2002. TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY......................................................... 3 RISK FACTORS............................................................... 4 DETERMINATION OF OFFERING PRICE............................................ 9 SELLING SECURITY HOLDERS................................................... 9 PLAN OF DISTRIBUTION....................................................... 11 LEGAL PROCEEDINGS.......................................................... 13 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................................................................... 13 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................................. 14 DESCRIPTION OF CAPITAL STOCK............................................... 16 INTEREST OF NAMED EXPERTS AND COUNSEL...................................... 17 DISCLOSURE OF COMMISSION POTION ON INDEMNIFICATION FOR SECURITY LIABILITY..................................................... 17 DESCRIPTION OF BUSINESS.................................................... 18 MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 25 DESCRIPTION OF PROPERTY.................................................... 31 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 35 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................... 40 EXECUTIVE COMPENSATION..................................................... 41 EXPERTS.................................................................... 52 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 53 ADDITIONAL INFORMATION AVAILABLE........................................... 53 FINANCIAL STATEMENTS....................................................... 54 ABOUT THIS PROSPECTUS Back Cover 2 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this Prospectus. You should read the entire Prospectus carefully, including the "RISK FACTORS" section. THE OFFERING: Resale of 2,785,715 shares of Common Stock by Selling Shareholders in market or negotiated transactions. OUR BUSINESS: We are engaged in the exploration for gold and silver mineralization and the development and production from successful properties. The Company has not had revenues from mining operations since 1990. Our only owned property is the Tonkin Springs property located on the Battle Mountain-Cortez gold trend in Nevada. We are presently in the exploration stage for gold and silver at the Tonkin Springs property where we have a milling facility in place and an estimate of mineralized material of 30.7 million tons with average grade of 0.045 ounce gold per ton. We are currently evaluating the Tonkin Springs property to determine if the property can be put back into production. Our current plans are to prepare amendments to required governmental permits which would allow us to recommence production at Tonkin Springs and which could involve minor modification of the milling facilities including the use of flotation technology which we have licensed from Newmont Mining Corporation. We will be required to raise additional funding to complete these plans and to provide for corporate overhead which funding could include secured debt, sale of a royalty interest on the property, and sale of additional Common Stock or a possible joint venture. We also have an approximate 30 percent minority stock investment in an affiliated company, Gold Resource Corporation, which is currently exploring an underground zinc, silver and lead base metal property in Hidalgo state, Mexico and a gold property in the state of Oaxaca, Mexico. We are managing the affairs of Gold Resource under a contract, however, Gold Resource Corporation is responsible to provide all its required funding. See "BUSINESS" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-CONTRACT WITH GOLD RESOURCE CORPORATION". OUR PRINCIPAL EXECUTIVE OFFICES: Address: 2201 Kipling Street, Suite 100 Lakewood, CO 80215-1545 Telephone Number: (303) 238-1438 TOTAL SHARES OUTSTANDING PRIOR TO THE OFFERING: 16,383,533 SHARES BEING OFFERED FOR RESALE TO THE PUBLIC: 2,785,715 SHARES BEING ISSUED WHEN AND IF THERE IS EXERCISE OF WARRANTS: 428,572 3 TOTAL SHARES OUTSTANDING AFTER THE OFFERING: 16,812,105 PRICE PER SHARE TO THE PUBLIC: Indeterminate, sales will be made either as market prices on the date of sale or negotiated prices. TOTAL PROCEEDS RAISED BY OFFERING: None. (See "DESCRIPTION OF CAPITAL STOCK" regarding warrants.) USE OF PROCEEDS FROM THE SALE OF SHARES BY THE COMPANY: Not applicable. OTC BULLETIN BOARD SYMBOL: USGL PLAN OF DISTRIBUTION: Market transactions through licensed broker-dealers or negotiated transactions, in the case of Selling Shareholders. Issuance of shares pursuant to exercise and conversion of warrants in the case of the Company. MANAGEMENT: Our executive management is made up of William W. Reid, president, chief executive officer and director, William F. Pass, vice president, chief financial officer and secretary, David C. Reid, vice president and director, and our non-executive, outside director is John W. Goth. Unless otherwise indicated, "we," "us" and "our" refer to U. S. Gold Corporation and our subsidiaries. The Company's significant subsidiary is Tonkin Springs LLC, which owns the Tonkin Springs project in Eureka County, Nevada. RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. WE BELIEVE THESE ARE ALL THE MATERIAL RISKS CURRENTLY FACING OUR BUSINESS, BUT ADDITIONAL RISKS WE ARE NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED BY THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS OR ANY APPLICABLE PROSPECTUS SUPPLEMENT, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES. 4 1. GOING CONCERN RISK COULD RESULT IN COMPANY NOT CONTINUING IN BUSINESS. The Company's ability to continue as a going concern is contingent upon our ability to secure financing, increase equity through sale of securities and attain profitable operations. Due to these uncertainties our independent accountants have included a going concern limitation in its audit report as of and for the year ended December 31, 2001. See "FINANCIAL STATEMENTS." 2. NO RESERVES AT TONKIN SPRINGS PROPERTY COULD RESULT IN PROPERTY NOT MOVING BEYOND EXPLORATION STAGE. The estimate of mineralized material for the Tonkin Springs property does not include reserves. Mineralized material or deposit is a mineralized body which has been delineated by appropriate drilling and/or underground sampling to support a sufficient tonnage and average grade of metal(s). Under Securities and Exchange Commission standards, such a deposit does not qualify as a reserve until a comprehensive evaluation, based upon unit cost, tonnage, grade, price, recoveries costs and other factors, concludes economic feasibility. To achieve determination of proven and probable reserves, it will be necessary for the Company to engage an outside engineering firm to assess geologic data and to develop an economic model demonstrating commercial feasibility of the property. The Tonkin Springs Property may not move beyond the exploration stage. 3. COMPLIANCE WITH ENVIRONMENTAL REGULATION REQUIRED TO ATTAIN OPERATIONS. In connection with our proposed Tonkin Springs property activities, we are required to comply with various federal, state and local laws and regulations pertaining to the discharge of materials into the environment or otherwise relating to the protection of the environment all of which can increase the costs and time required to attain operations. We are in the process of obtaining environmental permits, licenses or approvals required for potential operations at Tonkin Springs, however, we may not be successful in obtaining the required authority to commence any development and operation, or such authority may not be obtained in a timely basis. We may not be able to complete our evaluation program due to permitting problems or other causes and thus may be unable to potentially develop the property before expending all monies raised. The Tonkin Springs Property may not move beyond the exploration stage. 4. LACK OF FUNDING FOR BUSINESS PLAN. We may be unable to secure additional funding necessary to allow us to cover corporate overhead and project holding costs, obtain necessary operating permits, fund any required construction and working capital to potentially commence successful operations at the Tonkin Springs project and profitably develop the property. The Company may not be successful in obtaining the additional funding necessary to protect its assets and/or to meet its financial obligations. The Tonkin Springs Property may not move beyond the exploration stage. 5. DEPENDENCE UPON AFFILIATE COMPANY FOR REVENUES COULD NEGATIVELY IMPACT FINANCIAL CONDITION. During 2002, the Company received most of its revenue from a management contract with GRC at the monthly rate of $30,000 of which $300,000 has been earned but remains unpaid and has not been accrued as of the date of this Prospectus. GRC is a new mining company which does not have operations and 5 is primarily funded by equity investment. Therefore, this revenue source is uncertain and risky at this time. If the Company does not receive payments under the GRC management contract that would negatively impact its financial condition. 6. POTENTIAL FOR LOSS OF INTEREST IN PROPERTIES. Our interest in the claims making up the Tonkin Springs property require certain annual payments to various governmental authorities and to leaseholders in the cases of property subject to leases along with certain minimum work commitments associated with certain of those property leases. If we are unable to meet the financial, fees, and work commitments required, we could lose the right to develop those properties. 7. TITLE TO MINERAL PROPERTIES CAN BE UNCERTAIN. The mineral properties making up the Tonkin Springs property consist of leases of unpatented mining claims and unpatented mining claims. Unpatented mining claims provide only possessory title. The validity of unpatented mining claims are often uncertain and such validity is often subject to contest. Unpatented mining claims are unique property interests in the United States and are generally considered subject to greater title risk than patented mining claims or real property interests that are owned in fee simple. The validity of unpatented mining claims in the United States, in terms of both their location and maintenance, is dependent on strict compliance with a complex body of federal and state statutory and case law. In addition, there are few public records that definitely control the issues of validity and ownership of unpatented mining claims. We have not generally obtained title opinions, with the attendant risk that title to some properties, particularly title to undeveloped properties, may be defective. The present status of our unpatented mining claims located on public lands allows us the exclusive right to mine and remove valuable minerals, such as precious and base metals. We also are allowed to use the surface of the land solely for purposes relating to mining and processing of any mineralization. However, legal ownership of the land remains with the United States. We remain at risk that the mining claims may be forfeited either to the United States or to rival private claimants due to failure to comply with statutory requirements as to location and maintenance of the claims. 8. FLUCTUATING GOLD PRICE COULD NEGATIVELY IMPACT BUSINESS PLAN. The potential for profitability of gold mining operations at Tonkin Springs and the value of the Tonkin Springs project is directly related to the market price of gold. The market price of gold fluctuates widely and is affected by numerous factors beyond the control of our Company. The market price for gold may decrease which could make development of Tonkin Springs uneconomic, could make it more difficult for the Company to raise funding necessary to achieve operations at Tonkin Springs, or could make such operations, if achieved, unprofitable. 9. OTHER MINING RISKS COULD NEGATIVELY IMPACT OPERATIONS. The operations of the Company are subject to all of the hazards and risks normally incident to developing and operating mining properties. These risks include: 6 * insufficient economic mineralized material * fluctuations in production costs that may make mining not economical * significant environmental and other regulatory restrictions * labor disputes * unanticipated variations in grade and other geologic problems * water conditions * difficult surface or underground conditions * metallurgical and other processing problems * mechanical and equipment performance problems * failure of pit walls or dams * force majeure events, including natural disasters * and the risk of injury to persons, property or the environment Any of these risks can materially and adversely affect, among other things, the development of properties, production quantities and rates, costs and expenditures and production commencement dates. 10. COMPETITIVE BUSINESS CONDITIONS PUTS COMPANY AT DISADVANTAGE. The exploration for, and the acquisition and development of gold properties are subject to intense competition and the size and financial condition of the Company puts it at a disadvantage with its competitors and makes investment in the Company more risky than in other companies active in exploration and mining activities. Companies with greater financial resources, larger staffs, more experience, and more equipment for exploration and development may be in a better position than the Company to compete for such mineral properties. Our present limited cash flow means that our ability to compete for properties to be explored and developed is more limited than in the past. We believe that competition for acquiring mineral prospects will continue to be intense in the future. 11. LACK OF PROFITS AND CASH FLOW FROM MINING OPERATIONS COULD IMPACT FUTURE OPERATIONS. For 2001 and 2000 the Company recorded net losses of $136,450 or $0.01 per share, and $117,916 or $0.01 per share respectively, and did not generate any cash flow from mining operations. As a result, we have relied upon payments from third parties under various transactions, deferral of payments by related parties, and funding from other sources, including sale of equity securities, to satisfy cash requirements. 12. LIMITED NUMBER OF COMPANY PROSPECTS. Our only current mining project is the Tonkin Springs project which we own 100%. We also have an approximate 30 percent minority stock ownership position in an affiliated company, Gold Resource Corporation ("GRC"), which is exploring a silver, lead, zinc base metal property in Mexico. Neither of these projects has any operations. The Company must commence such operations to derive revenues. Therefore, we are dependent on the success of a limited number of projects. 13. VOLATILITY OF STOCK PRICE COULD IMPACT VALUATION. Our Common Stock is quoted on the OTC Bulletin Board System. We have experienced significant volatility in 7 price and trading volumes over the last several years. There could be limited liquidity for our Common Stock. (See "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS"). 14. PENNY STOCK DISCLOSURE REQUIREMENTS COULD LIMIT PRICE AND LIQUIDITY OF OUR COMMON STOCK. Our Common Stock is subject to the Penny Stock disclosure requirements as defined in the 1934 Exchange Act which imposes increased disclosure requirements between potential investors and their brokers. These requirements may have the effect of reducing the level of trading activity in the secondary markets and therefore having a negative effect on the price and liquidity of our stock. 15. LEGISLATION COULD NEGATIVELY IMPACT BUSINESS PLAN. Proposed federal legislation could negatively impact our ability to operate in the future. A number of bills have been introduced in the U.S. Congress over past years that would revise in various respects the provisions of the Mining Law of 1872. If enacted, such legislation could substantially increase the cost of holding unpatented mining claims and could impair the ability of companies to develop mineral resources on unpatented mining claims. Our financial performance could therefore be affected adversely by passage of such legislation. Pending possible reform of the Mining Law of 1872, Congress has put in place a moratorium which prohibits acceptance or processing of most mineral patent applications. 16. LACK OF PERSONNEL SUBJECTS COMPANY TO ADDITIONAL RISKS. We are a small Company with only five employees and thus our success depends on the services of key employees in the three executive positions. The loss of the services of one or more of these executive employees could have a material adverse effect on us. The Company does not carry life insurance on its key employees. 17. CONFLICTS OF INTEREST COULD ARISE WITH MANAGEMENT. Messers William and David Reid are both officers and directors of both the Company and GRC, an affiliate of the Company. Conflicts of interests could arise between these persons duties as officers and directors of the Company and their respective positions as officers and directors of GRC. 18. Potential Environmental Liability for Other Properties. We have transferred our interest in several mining properties over past years and we could remain potentially liable for environmental enforcement actions related to our prior ownership of such properties. The Company is responsible for the reclamation obligations related to the Tonkin Springs Properties. 19. CONTINUING RECLAMATION OBLIGATIONS FOR TONKIN SPRINGS COULD REQUIRE ADDITIONAL FUNDING. As owner of the Tonkin Springs property, we are responsible for the reclamation obligations related to disturbances located on the property. The current estimate of reclamation costs of disturbances on the property is approximately $1.83 million which estimate has been filed with and approved by appropriate federal and state governmental agencies. As required by regulatory requirements, we have in place a cash bond in the amount of $1.84 million to secure the reclamation of the property. However, that cash bond could be 8 inadequate to cover the costs of reclamation which could subject the Company to additional bond funding obligations or actual reclamation costs. 20. INSUFFICIENT AUTHORIZED STOCK TO FUND BUSINESS PLAN. The Company does not have additional shares of authorized but unissued Common Stock which is not otherwise reserved for warrants and for options. Therefore the Company has no available shares of Common Stock which otherwise could be sold to meet future financing needs without approval by shareholders for an increase to the authorize number of shares of Common Stock of the Company. The Company anticipates requesting its shareholders to increase the authorized number of shares of Common Stock from 18,000,000 to 35,000,000 shares at its next meeting of shareholders. It takes the affirmative vote of two-thirds of the outstanding shares to approve an increase to the authorized number of shares of the Company and the approval of this number of outstanding shares may be difficult to obtain. 21. POTENTIAL DILUTION TO EXISTING SHAREHOLDERS. If the shareholders of the Company approve an increase to the authorized number of shares of Common Stock of the Company and some or all of those shares are subsequently issued, the existing shareholders respective ownership of the Company would be diluted and issuance of such shares could result in a change of control of the Company. DETERMINATION OF OFFERING PRICE The Selling Shareholders and their pledges, donees, transferees or other successors in interest may offer the shares of our Common Stock from time to time after the date of this prospectus and will determine the time, manner and size of each sale in over-the-counter market or otherwise, at market process prevailing at the time of sale, at prices related to prevailing market prices, or at negotiated prices. The exercise price of the outstanding warrants, $0.53/share, was determined as the approximate bid price of the Common Stock at the time of the commitment. SELLING SECURITY HOLDERS The following table sets forth information regarding the beneficial ownership of our Common Stock by the persons we expect will be the Selling Shareholders, based on the number of shares of Common Stock and warrants outstanding as of November 30, 2002. Except as otherwise noted in the footnotes below, we are not aware of any purchases or sales of our Common Stock by the Selling Shareholders subsequent to November 30, 2002. The shares in the "Shares That May Be Sold" column reflect shares beneficially owned and to be sold by each Selling stockholder. Each of the Selling Shareholders listed below has agreed that, during the effectiveness of the registration statement of which this prospectus is a part, such Selling stockholder will sell shares of Common Stock only pursuant to such registration statement. 9 Shares Owned Shares That May be Sold After Offering (1)(2) ------------------------- --------------------- Selling Shareholders Number Percentage Number Percentage - -------------------- --------- ---------- -------- ---------- Excalibur Limited Partnership (3) 1,285,715 7.8% 0 0% Global Gold & Precious(4) 125,000 * 0 0% 1056149 Ontario Ltd. c/o HSBC Securities (Canada) Inc.(5) 50,000 * 0 0% John Ryan(6) 375,000 2.3% 0 0% Michaux-Gestion Paris(7) 250,000 1.5% 0 0% ING Ferri a/c 2000024(8) 125,000 * 0 0% Concord Bank Limited(9) 50,000 * 0 0% Excelsior Mining Fund(10) 125,000 * 0 0% R. Clarke(11) 75,000 * 0 0% Arlington Group PLC(12) 187,500 1.1% 0 0% Kayjay Reality Inc.(13) 112,500 * 0 0% GUNDYCO in Trust for 25,000 * 0 0% Account No. 500-1327427(14) * Less than 1% (1) The number in the "Shares Beneficially Owned After the Offering" column assumes that the maximum number of shares that may be sold listed in the previous column are actually sold in the offering. (2) Includes the 428,572 shares of Common Stock underlying warrants that are exercisable as of June 30, 2002 or that will become exercisable within 60 days hereafter and are deemed to be outstanding for the purposes of calculating the beneficial ownership of owner, but are not deemed to be outstanding for the purposes of computing the beneficial ownership of any other person. (3) Excalibur Limited Partnership is an Ontario, Canada limited partnership the sole general partner of which is William Hechter. (4) Global Gold & Precious is a gold and precious mutual fund company based in Paris, France with investment manager Jean Bernard Guyon. (5) 1056149 Ontario Ltd. is an Ontario, Canada private foreign investment management company controlled by Marilyn Barker. (6) Mr. John Ryan is a Canadian individual who makes his own investment decisions. (7) Michaux-Gestion Paris is a private foreign investment management company based in Paris, France with investment manager Remy Bert. (8) ING Ferri a/c 2000024 is the account of Societe Parisienne Gestion, a private foreign investment management company based in Paris, France with investment manager Yves Tailleur. (9) The Concorde Bank Limited is a bank registered in Barbados, West Indies with investment manager Norbert Marchal. 10 (10) Excelsior Mining Fund is registered in Nassau (Bahamas) and is managed by Lion Resources Management Ltd, London, England. (11) Mr. R. Clark is an individual living in France who makes his own investment decisions. (12) The Arlington Group PLC is a private foreign venture capital firm based in London, England. (13) Kayjay Realty Inc. is a business based in Ontario, Canada, and the investment account is managed by HSBC Securities (Canada) Inc. (14) GUNDYCO in Trust for Account No. 500-1327427 is managed by CIBC Wood Gundy for the benefit of Minh-Thu Dao-Huy, an individual living in Canada. None of the above are affiliates of United States broker-dealers, nor at the time of purchase did any of the above have any agreements or understandings, directly or indirectly, with any persons to distribute the securities. PLAN OF DISTRIBUTION We are registering the shares of our Common Stock at the request of the Selling Shareholders. We will pay the costs and fees of registering the shares, but the Selling Shareholders will pay any brokerage commissions, discounts or other expenses relating to the sale of the shares. We have agreed with the Selling Shareholders to indemnify each other against certain liabilities, including liabilities arising under the Securities Act, that relate to statements or omissions in the registration statement of which this prospectus forms a part. We may suspend the use of this prospectus and any supplements in certain circumstances due to pending corporate developments. The Selling Shareholders and their pledges, donees, transferees or other successors in interest may offer the shares of our Common Stock from time to time after the date of this prospectus and will determine the time, manner and size of each sale in over-the-counter market or otherwise, at market prices prevailing at the time of sale, or at prices related to prevailing market prices, or at negotiated prices. The Selling Shareholders may negotiate, and will pay, brokers or dealers commissions, discounts or concessions for their services. In effecting sales, brokers or dealers engaged by the Selling Shareholders may allow other brokers or dealers to participate. However, the Selling Shareholders and any brokers or dealers involved in the sale or resale of the shares may qualify as "underwriters" within the meaning of the section 2(a)(11) of the Securities Act. In addition, the brokers' or dealers' commissions, discounts or concessions may qualify as underwriters' compensation under the Securities Act. If any of the Selling Shareholders qualifies as an "underwriter," it will be subject to the prospectus delivery requirements of section 5(b)(2) of the Security Act of 1933. The methods by which the Selling Shareholders may sell the shares of our Common Stock include: A block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block, as principal, in order to facilitate the transaction; Purchases by a broker or dealer, as principal, in a market maker capacity or otherwise and resale by the broker or dealer for its account; Ordinary brokerage transactions and transactions in which a broker solicits purchases; Privately negotiated transactions; 11 Any combination of these methods of sale; or Any other legal method In addition to selling their shares under this prospectus, the Selling Shareholders may transfer their shares in other ways not involving market makers or established trading markets, including directly by gift, distribution, or other transfer, or sell their shares under Rule 144 of the Securities Act rather than under this prospectus, if the transaction meets the requirements of Rule 144. Regulation M under the Securities Exchange Act of 1934 provides that during the period that any person is engaged in the distribution, as defined in Regulation M, of our shares of Common Stock, such person generally may not purchase our Common Stock. The Selling Shareholders are subject to these restrictions, which may limit the timing of purchases and sales of our Common Stock by the Selling Shareholders. This may affect the marketability of our Common Stock. The Selling Shareholders may use agents to sell the shares. If this happens, the agents may receive discounts or commissions. If required, a supplement to his prospectus will set forth the applicable commission or discount, if any, and the names of any underwriters, brokers, dealers or agents involved in the sale of the shares. The Selling Shareholders and any underwriters, brokers, dealers or agents that participate in the distribution of our Common Stock offered hereby may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, and any profit on the sale of shares by them and any discounts, commissions, concessions or other compensation received by them may be deemed to be underwriting discounts and commissions under the Securities Act. The Selling Shareholders may agree to indemnify any broker or dealer or agent against certain liabilities relating to the selling of the shares, including liabilities arising under the Securities Act. Upon notification by the Selling Shareholders that any material arrangement has been entered into with a broker or dealer for the sale of the shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, we will file a supplement to this prospectus, if required, pursuant to Rule 424(b) under the Securities Act, disclosing the material terms of the transaction. In recognition of the fact that each Selling shareholder may wish to be legally permitted to sell its shares when it deems appropriate, we have agreed with the Selling Shareholders to file with the Securities and Exchange Commission, or SEC, under the Securities Act of 1933, as amended (which we refer to in this prospectus as the Securities Act), a registration statement on Form SB-2, of which this prospectus forms a part, with respect to the resale of the shares, and we have agreed to prepare and file such amendments and supplements to the registration statement as may be necessary to keep the registration statement effective until the earlier of two years or when the shares are no longer required to be registered for sale by the Selling Shareholders. 12 LEGAL PROCEEDINGS There are no legal procedures involving the Company. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The following table sets forth certain information as to each officer and director of the Company:
Board Positions With Position Name Age the Company Held Since Term Expires - ---- --- -------------- ---------- ------------ William W. Reid 54 President, Chief 1979 At Next Meeting of Executive Officer Shareholders or When and Director Successor is Elected John W. Goth 75 Director 1987 Term Expires At Next Meeting of Shareholders or When Successor is Elected David C. Reid 52 Vice President 1993 Term Expires and Director At Next Meeting of Shareholders or When Successor is Elected William F. Pass 56 Vice President, n/a n/a Chief Financial Officer, Secretary
WILLIAM W. REID-PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Mr. Reid, a founder of the Company, has served as a Director and the President of the Company since its inception in 1979. Mr. Reid devotes substantially all of his time to the business and affairs of the Company. Mr. Reid is also president and chairman of the board of directors of Gold Resource Corporation ("GRC"), a private corporation and an affiliate of the Company. The Company, including Mr. Reid, manages the affairs of GRC under a management contract between the Company and GRC which contract expires December 31, 2002. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-CONTRACT WITH GOLD RESOURCE CORPORATION.") Effective January 1, 1994, Mr. Reid and the Company entered into an employment contract as discussed further under Executive Compensation, Employment Contracts. 13 JOHN W. GOTH-DIRECTOR Mr. Goth has been a director of the Company since 1987. Mr. Goth also serves on the board of directors of Royal Gold, Inc., a publicly traded company. For the past ten years, Mr. Goth has been a self-employed mining consultant. DAVID C. REID-VICE PRESIDENT EXPLORATION AND DIRECTOR Effective October 19, 1993, Mr. David Reid was appointed a member of the Board of Directors of the Company. On January 1, 1994, Mr. Reid became an employee and officer of the Company with the title Vice President Exploration and entered into an employment contract with the Company as discussed further under Executive Compensation, Employment Contracts. Mr. Reid devotes substantially all of his time to the business and affairs of the Company. Mr. Reid is also vice president and a board member of GRC. The Company, including Mr. Reid, manages the affairs of GRC under a management contract between the Company and GRC which contract expires December 31, 2002. . (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-CONTRACT WITH GOLD RESOURCE CORPORATION.") From January 1, 1993 through December 31, 1993, Mr. Reid was an employee of TSVLP and sole director and president of U.S. Environmental Corporation, a wholly-owned subsidiary of the Company and 0.5 percent owner and limited partner in TSVLP. From September 1, 1991 through December 31, 1992, Mr. Reid was a consultant to the Company. Prior to September 1991, Mr. Reid was an employee and officer (secretary) of the Company and served as a director. WILLIAM F. PASS-VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SECRETARY Mr. Pass joined the Company in June 1988 and was appointed Corporate Secretary on September 1, 1991 and effective January 1, 1994, was made Vice President Administration. Effective February 1, 1996, Mr. Pass was appointed Vice President, Chief Financial Officer and Corporate Secretary. Mr. Pass devotes substantially all of his time to the business and affairs of the Company. The Company, including Mr. Pass, manages the affairs of GRC under a management contract between the Company and GRC which contract expires December 31, 2002. Effective January 1, 1994, Mr. Pass and the Company entered into an employment contract as discussed further under Executive Compensation, Employment Contracts. There are no family relationships between officers and directors of the Company except that David C. Reid, an officer and director of the Company, is brother to William W. Reid, president of the Company and director. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number of shares of the Company's common stock owned beneficially as of November 30, 2002, by each person known by the Company to have owned beneficially more than five percent of such shares then outstanding, by each person serving as a director of the Company, the Executive Officers, and all of the Company's officers and directors as a group. 14 Percentage of Class Name and Address of Number Beneficially Beneficial Owner Type of Ownership of Shares Owned - ------------------- ----------------- ------------ ------------- William W. Reid Record and Beneficial 572,295(1) 3.4% 25 Downing St. No. 1-501 Denver, CO 80218 David C. Reid Record and Beneficial 404,970(2) 2.4% 2201 Quitman St. Denver, CO 80212 William F. Pass Record and Beneficial 175,000(3) 1.1% 14820 W. 58th Pl. Golden, CO 80403 John W. Goth Record and Beneficial 115,000(4) 0.7% 15140 Foothill Road Golden, CO 80401 Placer Dome U.S. Inc. Record and Beneficial 975,000 5.8% Suite 600-1055 Dunsmuir St. Vancouver, British Columbia, Canada V7X 1L3 (5) Resource Investment Beneficial 3,162,373 18.8% Trust PLC Ocean House 10/12 Little Trinity Lane London, England EC4V 2DH United Kingdom French American Record and Beneficial 2,197,265 13.1% Banking Corporation 499 Park Avenue New York, NY 10022 Excalibur Limited Record and Beneficial 1,285,715(7) 7.7% Partnership (6) 33 Prince Arthur Avenue Toronto, Ontario, Canada M5X 1E4 All officers and 1,267,265 7.2% directors as a group (4 persons) 15 (1) This number includes an option to purchase 508,295 shares at $.16 per share which are exercisable within 60 days of the date of this prospectus. (2) This number includes an option to purchase 385,000 shares at $.16 per share which are exercisable within 60 days of the date of this prospectus. (3) This number includes an option to purchase 170,000 shares at $.16 per share which are exercisable within 60 days of the date of this prospectus. (4) This number consists of an option to purchase 115,000 shares at $.16 per share which are exercisable within 60 days of the date of this prospectus. (5) Placer Dome U.S. Inc. is a wholly owned subsidiary of Placer Dome Inc., a Canadian public company. (6) Excalibur Limited Partnership is an Ontario, Canada limited partnership the general partner of which is William Hechter. (7) This percentage includes warrants to purchase 428,572 shares of Common Stock which are exercisable within 60 days of the date of this prospectus. DESCRIPTION OF CAPITAL STOCK The Company has only one class of securities that being Common Stock, par value $0.10 per share. The Company's authorized capital stock consists of 18,000,000 shares of Common Stock. As of November 30, 2002, there were 16,383,533 shares of the Company's Common Stock outstanding. The holders of Common Stock are entitled to one vote for each share of Common Stock held of record on all matters submitted to stockholders including the election of directors. Cumulative voting for directors is not permitted. The holders of Common Stock are not entitled to any preemptive rights and the shares are not redeemable or convertible. All outstanding Common Stock is, and all Common Stock offered hereby will be, when issued and paid for, fully paid and nonassessable. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding or otherwise reserved under obligations for issuance by the Company) by the affirmative vote of the holders of a two-thirds of the stock of the Corporation entitled to vote at a duly called and held meeting of the shareholders of the Company. The Company has issued warrants to certain Selling Shareholders to purchase up to 428,572 shares of Common Stock of the Company at exercise price of $.53/share and which warrants expire May 30, 2004. The Company will receive $227,143 if all the warrants are exercised. The Articles of Incorporation as well as the Bylaws of the Company do not include any provision that would delay, defer or prevent a change in control of the Company. However, as a matter of Colorado law, certain significant 16 transactions would require the affirmative vote of two-thirds of the shares eligible to vote at a meeting of shareholders which requirement could result in delays to or greater cost associated with a change in control of the Company. OPTIONS There are currently outstanding options to purchase 2,048,295 shares of our Common Shares held by our executives and directors. Those executives officers and directors have collectively agreed not to exercise an aggregate of 870,000 option shares until and unless there are sufficient authorized but unissued Common Shares available in the future which are then reserved by the board of directors to allow exercise of such option shares. Those executive officers have agreed to this voluntary limitation under their respective stock option agreements in order to allow the sale of Common Shares and warrants to the Selling Shareholders subject to this prospectus Of this number, William W. Reid has agreed to not exercise 380,000 option shares, William F. Pass has agreed to not exercise 125,000 option shares, David C. Reid has agreed not to exercise 280,000 option shares, and John W. Goth has agreed not to exercise 85,000 option shares. The option shares subject to this exercise limitation could become available to the agreeing executive officers and directors for exercise if and when our shareholders approve an increase to our authorized number of Common Shares. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-EXECUTIVE OFFICERS.") INTEREST OF NAMED EXPERTS AND COUNSEL There are no interested party transactions of the Company and named experts or counsels. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES LIABILITIES Article VII of the Company's Amended and Restated Articles of Incorporation states that the Company may provide indemnification of each director, officer, and any employee or agent of the Company, his heirs, executors and administrators, against expenses reasonably incurred or any amounts paid by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being or having been a director, officer, employee or agent of the Company to the full extent permitted by the laws of the State of Colorado now existing or as such laws may hereinafter be amended. Under this provision, the Company may advance moneys to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to above. The individual shall repay the monies if the individual does not fulfill certain conditions. The Company has not obtained director's and officer's liability insurance coverage. Insofar as indemnification for liabilities arising under the Securities Act 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 Commission such indemnification is against public policy as expressed in the Securities 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 17 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 its is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. DESCRIPTION OF BUSINESS U.S. Gold Corporation ("U.S. Gold" or the "Company") was organized under the laws of the State of Colorado on July 24, 1979 under the name Silver State Mining Corporation. On June 21, 1988, by vote of our shareholders, we changed our name from Silver State Mining Corporation to U.S. Gold Corporation. Since its inception, we have been engaged in the exploration for, development of, and the production and sale of gold and silver, as well as base metals, and have conducted such activities in various western U.S. states and Mexico. The Company has not had revenues from mining operations since 1990. Our only directly owned property currently is the Tonkin Springs gold property which is located in Eureka County, Nevada. We are presently in the exploration stage for gold and silver at the Tonkin Springs property. Our 100 percent ownership interest in this property is held in the name of Tonkin Springs LLC, a Delaware limited liability company also referred to as "TSLLC" which in turn is owned 99.5 percent by Tonkin Springs Venture Limited Partnership, which is a Nevada limited partnership also referred to as "TSVLP" and 0.5 percent by U.S. Environmental Corporation, a Colorado corporation and subsidiary of the Company. TSVLP, in turn, is likewise owned 100 percent by two of our wholly-owned subsidiaries. Our 100 percent ownership in TSLLC was achieved effective October 17, 2001 upon the withdrawal from TSLLC of our former partner, Tonkin Springs Holding Inc., also referred to as "TSHI", who prior to their withdrawal held 60 percent ownership in TSLLC and were the project managers. We recognized neither a gain nor a loss on the withdrawal of TSHI from TSLLC in 2001. During the term of TSHI's interest in TSLLC, the Tonkin Springs property costs were paid by TSHI and in addition TSHI made certain other payments to us. With the withdrawal of TSHI from TSLLC we must now provide for the holding costs related to Tonkin Springs. We are currently evaluating the Tonkin Springs property to determine if the property can be put back into production. In that regard, we have licensed certain technology from Newmont Mining Company ("Newmont") called N2TEC(R) which, if employed successfully at Tonkin Springs, would allow for the concentration of sulfide gold mineralization (See "Patents, Trademarks, Licenses, Franchises, Concessions.") In October 2002, the Company received a project evaluation report on Tonkin Springs from an independent engineering firm 18 commissioned to develop independent estimates of development capital costs as well as operating costs under certain assumptions provided by the Company of tons and grade of assumed mill feed. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.") We also have an equity investment in an affiliate company, GRC, a private Colorado corporation. At November 30, 2002, the Company held approximately 30 percent of the outstanding shares in GRC. William W. Reid and David C. Reid, executive officers of the Company, personally own collectively approximately 38 percent of GRC as of that date. Through the GRC investment we have the opportunity to participate in potential business activities in Mexico. Effective August 23, 2001, GRC leased a prospective silver/lead/zinc mining property in the Zimapan Mining District in the state of Hidalgo, Mexico designated GRC's Zimapan Project. GRC is currently involved with exploratory drilling program at the Zimapan Project. In November 2002, GRC leased a gold exploration property in the state of Oaxaca, Mexico, designated the El Aguila project, for which GRC intends to commence an exploration program. We are managing all activities of GRC under a management contract and GRC is responsible for funding the Zimapan and El Aguila Projects. GRC is currently involved in an effort to raise funds through the private sale of its Common Stock with the proceeds to be used, in part, to fund its exploration drilling programs at the Zimapan and El Aguila Projects in 2002, property maintenance costs and corporate overhead. The shares of GRC are not currently publicly traded. . (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-CONTRACT WITH GOLD RESOURCE CORPORATION.") We are pursuing financing for our operations which could include issuance of our equity in public or private transactions, the sale of a portion of our assets including sale of a royalty interest at Tonkin Springs, and borrowing with secured, unsecured or convertible debt. The Company does not have additional shares of authorized but unissued Common Stock which is not otherwise reserved for warrants and for options. Therefore the Company has no available shares of Common Stock to meet future financing needs. It takes the affirmative vote of two-thirds of the outstanding shares to approve an increase to the authorized number of shares of the Company and the approval of this number of outstanding shares may be difficult to obtain (See "RISK FACTORS".) It is presently uncertain if any such financing will be available to us, or will be available on terms acceptable to us. We may also consider a potential merger with another company, which would normally require approval by shareholders of the Company. In addition, we have begun the evaluation of the potential of recommencing gold production at the Tonkin Springs project utilizing the known mineralized material and existing facilities to the extent possible. This involves the evaluation of the financial aspects and operational issues involved and the processes necessary to recommence production. In addition, this process also involves identification, engineering and estimation of the additional capital investment required as well as the evaluation of and estimation of the time required to seek amendments of our existing regulatory permits and authorities or new ones to allow resumption of operations. We could also seek a joint venture partner at Tonkin Springs to participate in this evaluation process and funding for any operations. 19 GENERAL The Company is primarily engaged in the precious metals and base metals mining business in the continental United States and through an equity investment in an affiliate company, in Mexico. However, we may also evaluate and develop properties outside the United States. The Company owns the Tonkin Springs gold mine located in Eureka County, Nevada. As a mining company, our activities include, at various times and to various degrees, exploration, land acquisition, geological evaluation and feasibility studies of properties and, where warranted, development and construction of mining and processing facilities, mining and processing and the sale of gold and other metals and by-products. We may also enter into joint ventures, partnerships or other arrangements to accomplish these activities. All refined bullion would be either sold to outside companies, delivered in satisfaction of spot or forward sale delivery contracts, or held in inventory for later disposition. ASSUMPTION OF 100 PERCENT OWNERSHIP AND CONTROL OF TONKIN SPRINGS PROJECT. Effective October 17, 2001, we assumed 100 percent ownership of the Tonkin Springs Project located in Eureka County, Nevada upon the withdrawal of TSHI from TSLLC. TSLLC owns the assets of the Tonkin Springs Project. Prior to TSHI's withdrawal from TSLLC, TSHI held a 60 percent ownership interest in TSLLC and were the managers of the project, and we were 40 percent owners. After the withdrawal of TSHI, TSVLP owned 100% of TSLLC and assumed management and funding responsibilities for TSLLC. The TSLLC agreements provided for withdrawal of a member. However, TSVLP and TSHI had certain disputes regarding the obligations and responsibilities of TSHI in connection with and following TSHI's withdrawal from TSLLC effective October 17, 2001. These issues were resolved under a Settlement Agreement dated October 31, 2001, also referred to as the "Settlement Agreement." Under the Settlement Agreement, TSHI paid i) remaining payments due to TSVLP in the amount of $90,000, ii) $60,000 for the remaining 2001 Program and Budget for TSLLC, iii) $19,347 in actual costs of repairs to pad liner at the Project caused by wind damage prior to October 17, 2001, iv) funded in the name of TSLLC $437,900 into the restricted cash bond to secure reclamation of the properties, and TSHI committed up to and funded through an escrow account $250,000 to be used to pay for the costs associated with the Mitigation Work Program, also referred to as the "Work Program", within the TSP-1 pit area of the Tonkin Springs project. The Work Program entailed plugging of certain drill holes which were a requirement of certain existing permits issued by regulatory authorities. The Work Program was approved by appropriate governmental agencies and was administered by the engineering firm Steffen Robertson & Kirsten (U.S.), Inc., also referred to as "SRK". TSLLC, TSHI and SRK have entered into a Technical Services Agreement dated December 18, 2001 to govern the Work Program. In exchange for the above payments and funding commitments by TSHI, the parties have agreed under the Settlement Agreement to release each other from any further obligations under 20 the TSLLC agreements. Activities under the Work Program commenced during the first quarter of 2002 and were completed by June 30, 2002 and the final report was completed July 29, 2002 at an estimated cost of approximately $218,000. Under the TSLLC agreements, TSHI was required to fund all costs of TSLLC until their withdrawal. During the period from February 26, 1999 through October 17, 2001, TSHI has reported that it spent approximately $5.1 million at Tonkin Springs including exploration expenditures in the approximate amount of $2.6 million, reclamation and bonding of approximately $.5 million and holding costs of approximately $2.0 million. During the period of TSHI's involvement with TSLLC it paid TSVLP an aggregate $1,720,000 (the "Project Payments") as partial consideration for the terms and conditions of the TSLLC agreements of which $540,000 were received in each of years 2001 and 2000. Prior to formation of TSLLC in 1999, the Company's 40% ownership interest in the Tonkin Springs properties was subject to a Project Joint Venture under a 1993 Agreement with Gold Capital Corporation, a Colorado corporation, the owner of 60 percent. Effective February 26, 1999, TSVLP and Gold Capital terminated the 1993 Agreement and each retained their respective 40% and 60% undivided interests in Tonkin Springs. Gold Capital then immediately sold it's 60% interest in Tonkin Springs to TSHI, and then TSHI and TSVLP each immediately contributed their respective undivided interests in Tonkin Springs into the TSLLC in exchange for 40% and 60%, respectively, of the equity stock of TSLLC. The Company recognized neither a gain nor a loss on the termination of the 1993 Agreement or with the contribution of its 40% undivided interest in the Properties to the TSLLC. On December 18, 2001, the Company signed a Technology Option Agreement with Newmont Technologies Limited, a subsidiary of Newmont related to Newmont's commercially proven and proprietary N2TEC(R) Flotation Technology. On May 30, 2002 the Company and Newmont executed a non-exclusive technology license that allows the Company to use the Newmont technology to process sulfide gold mineralization at Tonkin Springs. Terms of the license agreement with Newmont include an initial license fee of $50,000, which was fully paid as of November 30, 2002 and ongoing net smelter return production royalty of 2% of net revenues derived from precious metal concentrates produced utilizing the Newmont technology. LOAN SETTLEMENT AGREEMENT WITH FABC Effective February 21, 1992, the Company entered into a Loan Settlement Agreement with its former senior secured lender, French American Banking Corporation ("FABC"). As partial consideration to FABC under that agreement the Company entered into an agreement between Tonkin Springs Gold Mining Company ("TSGMC"), a wholly owned subsidiary of the Company, and FABC entitled Agreement 21 To Pay Distributions, which requires TSGMC to pay a limited portion of certain distributions, if any, from TSVLP to FABC. TSVLP has complete control of such distributions, if any, to TSGMC. Under the terms of the Agreement To Pay Distributions, TSGMC is required to pay to FABC (i) the first $30,000 of retained distributions, as defined in such agreement, received from the TSVLP, plus (ii) an amount equal to 50% of such retained distributions after TSGMC has first received and retained $500,000 of such retained distributions. This obligation to FABC shall terminate after FABC has been paid a total of $2,030,000 thereunder. No amounts have been paid FABC to date under this obligation. COMPETITIVE BUSINESS CONDITIONS AND GOLD PRICE The exploration for, and the acquisition and development of gold properties are subject to intense competition. Companies with greater financial resources, larger staffs, more experience, and more equipment for exploration and development may be in a better position than the Company to compete for such mineral properties. Our present limited funding means that our ability to compete for properties to be explored and developed is more limited than in the past. We believe that competition for acquiring mineral prospects will continue to be intense in the future. The market price for gold depends on numerous factors beyond our control, including production or sales by other gold producing nations, sales and leasing of gold reserves by governments and central banks, a low rate of inflation and a strong U.S. dollar, global and regional depression or reduced economic activity, and speculative trading. MAJOR CUSTOMERS During recent years the Company has been dependent upon Project Payments from former partners at Tonkin Springs and management contract revenues from affiliates of the Company for its only source of revenues. Sales of concentrates of mineralized material or of refined gold and silver bullion, if any, derived from future operations are anticipated to be made to unaffiliated companies. We believe that the loss of these customers for concentrates or for refined gold and silver would not affect our business. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS On May 30, 2002 we finalized the non-exclusive license agreement with Newmont and the Company can now use Newmont's commercially proven N2TEC(R) technology to process sulfide gold mineralization at Tonkin Springs (see "DESCRIPTION OF BUSINESS-Assumption of 100 Percent Ownership and Control of Tonkin Springs"). We also own three United States patents (expiring in 2008) covering various aspects of our bio-oxidation technology. No research and development expenditures have been incurred during the last two years. None of the patents of the Company have generated any operations nor are being utilized by others. The Company is not actively engaged in any efforts to exploit the technology represented by these patents nor our knowledge of bio-oxidation. The Company may 22 determine not to maintain these patents in the future as they may have no foreseeable future value. We do not own any trademarks, licenses, franchises or concessions, except mining interests granted by governmental authorities and private landowners. No portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. GOVERNMENT REGULATIONS In connection with mining, milling and exploration activities, we are subject to extensive Federal, state and local laws and regulations governing the protection of the environment, including laws and regulations relating to protection of air and water quality, hazardous waste management, mine reclamation and the protection of endangered or threatened species. Prior to the commencement of any mining operations at the Tonkin Springs properties, if any, the Company will have to secure various regulatory permits from federal, state and local agencies. These governmental and regulatory permits generally govern the processes being used to operate, the stipulations concerning air quality and water issues, and the plans and obligations for reclamation of the properties at the conclusion of operations. At the Tonkin Springs properties, certain existing governmental or regulatory permits will require modification or reissue to reflect any resumed mining activities. The material State of Nevada permits that will need to be modified to operate Tonkin Springs include the Water Pollution Control Permit which current permit expires by its term April 15, 2005 (amendment expected to require approximately six months for approval after satisfactory submission), Air Quality Emissions Permit which current permit expires October 23, 2005 (amendment expected to take sixty days from satisfactory submission), Artificial Pond Permits (recently renewed with expiration date of April 30, 2007), and the Reclamation Permit which will be submitted contemporaneously to both the Nevada Division of Environmental Protection ("NDEP") and the Bureau of Land Management ("BLM") for their review and approval. Any amendment to the reclamation plan and the associated BLM Plan of Operations are expected to take six to nine months for approval after satisfactory submission. The current approved Plan of Operations and Reclamation Plan (which includes the $1.83 million cash bond) is valid until changes in the status of the properties requires modification or until required for update by the regulators to reflect future cost estimate changes. The time frame when the Company would be prepared and able to submit the above noted permitting data with the appropriate governmental authorities for modification to reflect any planned activities is uncertain at this time and is dependent upon the Company's ability to secure additional funding. The Tonkin Springs Property may not move beyond the exploration stage. A number of bills have been introduced in the U.S. Congress over the past years that would revise in various respects the provisions of the Mining Law of 1872. If enacted, such legislation could substantially increase the cost of holding unpatented mining claims and could impair the ability of companies to develop 23 mineral resources on unpatented mining claims. Under the terms of these bills, the ability of companies to a obtain patent on unpatented mining claims would be nullified or substantially impaired, and most contain provisions for the payment of royalties to the federal government in respect of production from unpatented mining claims, which could adversely affect the potential for development of such claims and the economics of operating new or even existing mines on federal unpatented mining claims. Pending possible reform of the Mining Law of 1872, Congress has put in place a moratorium which prohibits acceptance or processing of most mineral patent applications. It is not possible to predict whether any change in the Mining Law of 1872 will, in fact, be enacted or, if enacted, the form the changes may take. COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS In connection with any mining, milling and exploration activities, we are required to comply with various federal, state and local laws and regulations pertaining to the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company or TSLLC have obtained, or are in the process of obtaining, environmental permits, licenses or approvals required for potential operations, if any. Management is not aware of any material violations of environmental permits, licenses or approvals issued with respect to our operations. As 100% interest owner of TSLLC the Company is responsible for the reclamation obligations related to disturbances at Tonkin Springs. The current estimate of reclamation costs related to the existing disturbances of the Properties is approximately $1.83 million which estimate has been approved by appropriate governmental agencies [the Nevada Department of Environmental Protection ("NDEP") and the Federal Bureau of Land Management ("BLM").] As set forth under various governmental requirements, bonding of reclamation under Nevada and BLM has been funded for the Tonkin Springs Properties in the form of cash bonds posted in the amount of $1.83 million secured by TSLLC restricted cash deposits. Actual reclamation, generally, will be commenced upon the completion of mining operations in various locations of the Properties and generally thereafter upon the completion of the remaining operations at the Properties. The Mitigation Work Program (as discussed further in "Management's Discussion and Analysis of Financial Condition and Results of Operations") have satisfied certain requirements of the reclamation obligations for the Properties but is not anticipated to result in a significant reduction of the estimated reclamation cost estimate for the entire property. The Company believes it is in compliance with Federal, state and local requirements regarding reclamation bonding and other guarantees. The Company has in place a) cash bonding of $44,584 in favor of the State of Nevada Department of Conservation and Natural Resources for pad expansion, monitoring wells and tailings pond permits (aggregate required amount $40,911), b) cash bonding of $50,000 in favor of BLM for property wide exploration (aggregate required amount $47,200), and c) cash bonding of $1,742,451 for project reclamation jointly administered by the State of Nevada and the BLM (aggregate required amount 24 $1,737,866). Therefore, as of June 30, 2002, the Company had $1,837,035 in aggregate balances of restrictive cash deposits which secure $1,825,977 in various bond and permit requirements to governmental authorities. The Company has transferred its interest in several mining properties over the past years. We could remain potentially liable for environmental enforcement actions related to our prior ownership interest of such properties. However, we have no reasonable belief that any violation of relevant environmental laws or regulations has occurred regarding these transferred properties. We are not currently subject to any material pending administrative or judicial enforcement proceedings arising under environmental laws or regulations. Environmental laws and regulations may be adopted and enacted in the future which may have an impact on our operations. We cannot now accurately predict or estimate the impact of any such future laws or regulations on our current and prior operations. EMPLOYEES At November 30, 2002, we had 5 employees, each of whom were employed on a full-time basis. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW: Tonkin Springs is the only direct property interest of the Company and is reflected by 100 percent ownership of TSLLC, a Delaware limited liability company, by subsidiaries of the Company, following the withdrawal from TSLLC by TSHI effective October 17, 2001. Since October 17, 2001 the Company has consolidated TSLLC in its consolidated financial statements. Under the terms of the Settlement Agreement, TSHI funded the costs of TSLLC through December 31, 2001 and made certain additional payments to the Company. The Company is now responsible for providing funding for TSLLC. As discussed further below, during the nine month period ended September 30, 2002, the Company raised $818,154 through the sale of restricted common stock in private sale transactions and as of September 30, 2002 the Company had negative working capital balance of $(225,459). The Company will be required to raise significant amounts of additional funding in order to be able to meet its obligations, protect its assets, and carryout its business plan. The Company has suffered recurring losses from operations and has no current source of operating revenues. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that might result from the outcome of this uncertainty. The Company has begun the evaluation of the potential of commencing gold production operations at the Tonkin Springs project which could incorporate 25 utilizing the known mineralized material and existing facilities to the extent possible. This involves evaluation of the financial aspects, operational issues and the processes necessary in order to recommence production. In addition, this process also involves identification, engineering and estimation of the additional capital investment required as well as the evaluation of and estimation of the time required to seek amendments of or new regulatory permits and authorities to allow such resumption of operations, if any. In October 2002 the Company received a project evaluation report on Tonkin Springs prepared by an independent engineering firm commissioned to develop independent estimates of development costs as well as operating costs under certain assumptions provided by the Company of tons and grade of assumed mill feed. The Company cautions that mineralized material or deposit is a mineralized body which has been delineated by appropriate drilling and/or underground sampling to support a sufficient tonnage and average grade of metal(s), and is not a reserve. The Company is pursuing additional financing for its operations which could include the sale of a portion of its assets including sale of a royalty interest at Tonkin Springs, borrowing with secured, unsecured or convertible debt, or issuance of equity of the Company in public or private transactions. The Company may also consider third party joint venture participation at its Tonkin Springs project and may consider a potential merger with another company which merger would normally require approval by shareholders of the Company. The Company does not presently have additional shares of authorized but unissued common stock which are not otherwise reserved for outstanding warrants and for option but if shares presently reserved for outstanding stock options to executive officers and directors were made available, the Company could sell an additional approximate 1,100,000 shares as of November 30, 2002. However, without such release of shares reserved under stock option agreements, the Company has no available shares of common stock to meet future financing needs. The Company is considering requesting its shareholders to approve an increase to the authorized capital of the Company. It takes the affirmative vote of two-thirds of the outstanding shares to approve an increase to the authorized number of shares of the Company and the approval of this number of outstanding shares may be difficult to obtain. The Company does not presently have any of the additional required funding secured but is actively seeking such funding. It is presently uncertain if any such financing will be available to the Company, or will be available on terms acceptable to the Company. The Company is also unable to predict the time frame when addition funding, from any source, may be secured, if at all. If the Company is unable to secure additional funding it may be unable to protect its assets and meet its financial obligations. INTEREST IN TSLLC As noted above, effective October 17, 2001, the Company assumed 100% ownership in TSLLC upon the withdrawal by TSHI, and the Company is now responsible for all funding required for the Tonkin Springs properties. For the years ended December 31, 2000 and 2001, TSHI spent $631,753 and $641,218, respectively, in holding 26 costs for the Tonkin Springs project. During the period of TSHI's involvement with TSLLC it also paid the Company an aggregate $1,720,000 in Project Payments as partial consideration for the terms and conditions of the TSLLC agreements of which $540,000 were recorded as revenue in each of years 2001 and 2000. The TSLLC agreement provided for withdrawal of TSHI effective October 17, 2001. However, TSVLP and TSHI had certain disputes regarding the obligations and responsibilities of TSHI in connection with and following TSHI's withdrawal from TSLLC that were resolved under a Settlement Agreement dated October 31, 2001 (the "Settlement Agreement"). Under the Settlement Agreement, TSHI i) paid the Company an aggregate $169,437 and ii) funded in the name of TSLLC $437,900 into the restricted cash bond to secure reclamation of the properties, and iii) committed up to and funded through an escrow account deposit $250,000 to be used to pay for the costs associated with the Mitigation Work Program (also referred to as the "Work Program") within the TSP-1 pit area of the Tonkin Springs project. The Work Program entailed plugging of certain drill holes as required under certain existing permits issued by regulatory authorities, and the Work Program was completed as of June 30, 2002 at a total cost of approximately $218,000. In exchange for the above payments and the TSHI funding, the parties agreed to release each other from any further obligations under the TSLLC agreement. ACTIVITIES AT TONKIN SPRINGS PROPERTIES During 2001, TSLLC, under direction of TSHI, was involved with the analysis of historic exploration data, exploration drilling on the property as well as other exploration efforts. During 2002, the Company has been involved with evaluating the potential of putting Tonkin Springs into production. Continuing a program begun in 1998, TSLLC obtained a final report from Newmont related to test work on Tonkin Springs ore using Newmont's proprietary and commercially proven N2TEC(R) flotation technology. In December 2001, the Company entered into an option agreement with Newmont concerning this technology and effective May 31, 2002 the Company and Newmont entered into a non-exclusive technology license agreement under which the Company has the right to use the N2TEC(R) technology at Tonkin Springs in return for a 2 percent net smelter return royalty on production using the technology and certain annual payments. The Company believes that the use of N2TEC(R) technology at Tonkin Springs could enhance the economic potential of the project. LIQUIDITY AND FINANCIAL CONDITION At December 31, 2001, the Company had working capital of $43,439 made up of current assets of $72,089 and current liabilities of $28,650. As of September 30, 2002, the Company had negative working capital of $(225,459) made up of current assets of $23,600 and current liabilities of $249,059 including related party liabilities of $137,663. During the remainder of year 2002, the Company anticipates that it will earn $90,000 in monthly fees from GRC, an affiliate of 27 the Company, under a management contract whereby the Company manages the business affairs of GRC. GRC is currently involved in raising equity funding in order to carry out its own business objectives and commitments which include cash payments of $30,000 per month to the Company under the management contract. Through September 30, 2002, GRC has paid $30,000 to the Company thereunder, however the Company has determined it in the best interest of the Company to continue to provide services under the management contract to GRC and not to call GRC into payment default. It is uncertain at this time if GRC will be successful in raising sufficient funding required to meet its business objectives and commitments. If GRC is not able to meet its required payments to the Company that situation will be detrimental to the financial condition of the Company. During the nine month period ended September 30, 2002, the Company raised $818,154 through the sale of 2,357,143 shares of restricted common stock plus warrants in private sale transactions which funding has be used to pay for costs at Tonkin Springs and corporate overhead with the balance added to general working capital. This was the primary source of working capital. As noted above, the Company will require additional funding to carry out its business plan and attain profitable operations, or to enter into other business arrangements. However, it is presently uncertain if any such financing in adequate amounts will be available to the Company, or will be available on terms acceptable to the Company. The Company has begun the evaluation of the potential of development and mining of mineral resources of the Tonkin Springs properties. The minimum funding requirements to maintain the Tonkin Springs properties on a care and maintenance basis (which entails regular inspection of the physical and plant assets and activities, as necessary, to maintain and protect the mechanical integrity of such assets while in a state of non-operation) is approximately $500,000 per year and includes annual lease payments of $150,000, mineral claim fees to the BLM and county governments of approximately $130,000, miscellaneous periodic permit fees of approximately $25,000, county property tax of approximately $25,000 as well as the costs of two site employees and other property related costs of approximately $170,000 per year. In addition, a mineral lease requires annual work commitment expenditures of $300,000 which are assumed to be satisfied with property development expenditures if such efforts move forward. The annual cost of corporate overhead for the Company is approximately $500,000, a portion of which is allocated to the Tonkin Springs holding costs within the statement of operations. The Company's financial statements are prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses for the years ended December 31, 2001 and 2000 of $(136,450) and $(117,916), respectively, and a loss of $(1,118,177) for the nine month period ended September 30, 2002. In addition to these losses, the Company has no current source of operating revenues and needs to secure financing to remain a going concern. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that might result from the outcome of this uncertainty. 28 Net cash provided by operations increased to $26,139 for the year ended December 31, 2001 from $19,111 for the corresponding period of 2000, reflecting receipt of $495,000 in Project Payments from TSHI in year 2001 as compared to $540,000 for 2000, as well as $79,347 in payments from TSHI during 2001 related project holding costs upon their withdrawal from TSLLC. Interest received increased from $90 in 2000 to $38,277 in 2001 reflecting interest related to restrictive cash deposits that secure reclamation costs at the Tonkin Springs project. Cash paid to suppliers and employees increased from $517,300 during 2000 to $583,861 during the 2001 period reflecting the assumption of responsibility for TSLLC holding costs effective October 17, 2001 and modest increase in cash paid to suppliers and employees related to corporate overhead. Cash flows from investing activities increased from $(2,665) for 2000 to $3,500 in 2001 reflecting sale and purchase of assets during 2001. Cash flow from financing activities decreased from $(10,681) in 2000 to $(11,795) reflecting increased principal payments on installment purchase contracts. Net cash used by operations increased to $(828,540) for the nine month period ended September 30, 2002 compared to cash provided by operations of $774 for the corresponding period of 2001. The increase in cash used by operations is primarily the result of receipt of $405,000 in Project Payments from TSHI in the 2001 period and none during the 2002 period. Additionally, the assumption of monetary responsibilities for TSLLC, which we did not have during the nine months ended September 30, 2001, required substantial amounts of cash. These payments included annual lease payments of $170,000 and annual claim and permitting fees of $161,786. . Cash flow from investing activities was $(34,502) for the 2002 period compared to $-0- in the 2001 period, reflecting a $20,000 payment for a technology license, a short-term operating loan of $30,000 to GRC, offset by the proceeds from the sale of assets of $15,498. Cash flow from financing activities of $818,154 related to the sale of common stock, the borrowing from and repayment to executive officers of $29,358 in loans made to the Company, and a small increase in the principal payments on installment purchase contracts during the 2002 period. RESULTS OF OPERATIONS 2001 COMPARED TO 2000 For 2001, the Company recorded a net loss of $136,450 or $.01 per share, compared to a loss for 2000 of $117,916 or $.01 per share. For both 2001 and 2000, the Company recorded $540,000 in Project Payments from TSHI. Under the 2000 Management Contract with GRC the Company received equity securities in GRC of 613,336 and 666,664 shares, respectively, for the years ended 2000 and 2001. The revenue associated with the GRC management contract has been recorded at the approximate cost of providing the services to GRC, consisting of $186,000 and $164,000 for years 2000 and 2001, respectively. General and administrative expense increased approximately $20,608 in 2001 to $496,073 primarily reflecting $20,000 increased salary expense. In addition, general and administrative expenses were reduced by $22,544 in higher allocation of staff expense to the 29 cost of services provided under the GRC management contract to $185,933 in 2001 from $163,389 in 2000. The Company recorded a realization reserve for the full amount of the revenue related to the GRC shares earned under the above noted management contract. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS-Contract With Gold Resource Corporation.") NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO 2001 For the nine month period ended September 30, 2002, the Company recorded a net loss of $(1,118,177) or $(.07) per share, compared to a loss for the corresponding period of 2001 of $(119,787) or $(.01) per share. For the 2002 period the Company recorded $30,000 in revenues for cash fees under the management contract with GRC while for the corresponding period of 2001 revenues of $139,643 representing receipt of GRC shares under the previous management contract were recorded. An additional $240,000 in management fee revenue related to the GRC management contract during the 2002 period have not been recorded as revenue until receipt is reasonably assured. For the 2001 period the Company recorded $360,000 in Minimum Payments from TSHI which payments terminated effective upon the withdrawal of TSHI from TSLLC. General and administrative expense decreased approximately $128,358 in 2002 to $245,518 reflecting a $63,529 increase in salary and benefit expense for employees reduced by higher allocation of general and administrative expense to other expense categories. The allocation of general and administrative costs, primarily staff costs, to Tonkin Springs holding costs in the 2002 period was $217,909 (compared to $-0- in the 2001 period) and during the 2002 period costs allocated to services provided under the GRC management contract decreased $27,919 to $111,724. During the 2002 period, holding and other costs for TSLLC totaled approximately $802,103 which includes $170,000 related to advance minimum royalty payment for a mineral property lease, $157,800 in annual claim fees and various permit expenses paid to regulatory agencies and $128,875 in project evaluation costs and $217,909 in allocated overhead expense primarily reflecting corporate staff costs, while for the corresponding period of 2001 Tonkin Springs project holding costs were funded by TSHI. For the 2001 period a realization reserve of $139,643 was recorded related to the GRC shares earned under the management contract. Effective January 1, 2002, the Company and GRC entered into the 2002 Management Contract which expires by its term December 31, 2002. Under the 2002 Management Contract the Company is to be paid $30,000 per month to provide general management of GRC business activities through December 31, 2002. As with the prior contract, GRC is responsible for all funding needed. Through September 30, 2002, GRC has paid only $30,000 of the $270,000 earned under the contract. However, the Company and its independent director have determined it is in the best interest of the Company to continue to provide services under that contract and not to call GRC into payment default. Executive officers of the Company personally own approximately 38% of GRC as of September 30, 2002. The 1,280,000 shares of GRC owned by the Company represents approximately 30% of GRC outstanding shares as of September 30, 2002. GRC's unaudited operating loss for the nine month periods ended September 30, 2002 and 2001 is approximately $493,203 and $188,670, respectively, of which the 30 Company's share would be approximately $152,582 and $62,751, respectively. Under equity accounting, the Company has not recorded its share of GRC's operating losses to date since such recognition would reduce its zero basis investment in GRC to below zero. The overhead expense of the Company allocated to the management contract during the nine months ended September 30, 2002 and 2001 totals $111,724 and $139,643, respectively, representing allocation of staff time. DESCRIPTION OF PROPERTY TONKIN SPRINGS PROPERTIES HISTORY In late 1989, the Company substantially completed construction of a 1,500 ton-per-day milling facility at the Tonkin Springs property designed to process sulfide gold mineralization through the use of bacteria to oxidize the sulfide mineralization prior to extraction of the gold through the conventional milling process utilizing cyanidation to dissolve the gold and activated carbon to capture the gold through adsorption. The construction cost of the mill was approximately $31 million. The Company operated the integrated mill facility in a start-up mode commencing in March 1990. However, the mill facility did not reach commercial operation by June 1990, and because of severe liquidity problems we put the operation on stand-by status beginning in June 1990. Since 1990 we have had various joint venture and similar partners at the Tonkin Springs Project, most recently TSHI, who withdrew from the TSLLC effective October 17, 2001, after which the Tonkin Springs Properties are owned 100% by the Company. Exploration and other mineral related activities have occurred at the Tonkin Springs property area since the 1950's, when prospecting for mercury and barite was active. Between 1966 and 1980, several companies including Homestake Mining Company and Placer Amex, conducted exploration including road building, surface sampling and drilling on portions of the property. Precambrian Exploration, Inc. ("PEX") subsequently staked several mining claims and continued drilling and developed a mineral resource. In 1985 the Company joint-ventured the property with PEX and later bought their interest in the project. Between 1985 and 1988 the Company built and operated an oxide heap leach operation. In 1988 it began developing the sulfide resource and built a mill to process that ore using bio-oxidation followed by standard cyanidation to recover the gold. The Tonkin Springs property area has been drilled with approximately 2,800 holes averaging about 200 feet in depth. Drilling has included reverse circulation, down-the-hole hammer, core and air-track drilling. The Company did the great majority of drilling between 1984-1990 but joint-venture partners Homestake Mining also drilled 86 RC and core holes (79,288 feet) between 1991-1992 and Agnico-Eagle Mines drilled 107 RC holes (63,575 feet) from 1999-2001. Based on the drilling to date as well as other information the Tonkin Springs property has an estimate of mineralized material of 30.7 million tons with an average grade of 0.045 ounces gold per ton. 31 GENERAL The Company owns the Tonkin Springs gold mining property located in Eureka County, Nevada, which assets are held by TSLLC, a Delaware limited liability company. The Tonkin Springs properties are located on the Battle Mountain-Cortez Trend, approximately 45 miles northwest of Eureka, Nevada. TSLLC is owned 100% by subsidiaries of the Company. During the period February 26, 1999 through October 17, 2001, the Company held a 40% equity interest in TSLLC with TSHI holding the remaining 60 percent and its affiliate, Tonkin Spring Management Company, being manager. However, effective October 17, 2001, TSHI withdrew from TSLLC and as provided in the agreement transferred its ownership interest to TSVLP. After the withdrawal of TSHI, TSVLP assumed management responsibilities for TSLLC. Tonkin Springs is an open-pit gold mining and processing project consisting of unpatented mining claims, an integrated milling facility, and support facilities on approximately 23,640 acres of Federal land located along the Battle Mountain - Cortez Trend approximately 45 miles northwest of the town of Eureka in Eureka County, Nevada. Part of the mineralized material at the Project is contained in sulfides and will require concentration and/or pre-treatment prior to final processing. An important part of the mineralized material at the Project is in oxide form, located at the Tonkin North deposit, and is amenable to conventional extraction methods. ` The Company has held an interest in Tonkin Springs since 1984 and historically produced approximately 26,000 ounces gold from an oxide ore heap leach operation during 1985 through 1988 prior to construction of the mill facilities to process sulfide mineralization discussed further above under "History." RECENT ACTIVITIES AT TONKIN SPRINGS During 2001, TSLLC was involved with the analysis of historic exploration data, exploration drilling on the property as well as other exploration efforts. During 2002, the objectives for Tonkin Springs include evaluation of possible production from the known gold mineralization at the property. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".) Continuing a program first begun by the Company in 1998, the Company was satisfied with results of test work on Tonkin Springs sulfide gold mineralization using Newmont's proprietary and commercially proven N2TEC(R) Flotation Technology. This process deals with the concentration of sulfide gold mineralization which can make transportation and/or further processing more efficient. Test work performed by Newmont on samples of Tonkin Springs sulfide mineralization involved grinding the ore followed by flotation using the N2TEC(R) Flotation Technology process to concentrate the gold bearing sulfides. While the test work was limited in sample size and scope, the tests did indicate that the sulfide ores from Tonkin Springs are amenable to Newmont's flotation technology with total gold recovery from the combined concentrates as well as 32 through conventional processing of the oxide portion of the mineralization of 88 to 91 percent. Newmont test work using the N2TEC(R) Flotation Technology has been successful in demonstrating its ability to concentrate sulfide gold mineralization from Tonkin Springs. The Company is considering using this technology to make flotation concentrates, which concentrates could then be sold for final processing. On May 30, 2002 the Company and Newmont executed a non-exclusive technology license that allows the Company to use the Newmont commercially proven technology to process sulfide gold mineralization at Tonkin Springs (See "DESCRIPTION OF BUSINESS-Assumption of 100 Percent Ownership and Control of Tonkin Springs Project"). The license includes a net smelter return production royalty of 2% of net revenues derived from precious metal concentrates produced utilizing the Newmont technology. The company considers this an important step towards evaluating the possibility of gold production at Tonkin Springs. The sulfide gold mineralization using the N2TEC(R) Flotation Technology could then be placed into production at an estimated annual rate yet to be determined.. An initial 5-year production program is contemplated but could increase with additional successful drilling. The Company is of the opinion that because of the substantial existing asset base at the Tonkin Springs project, the amount of mineralized material already known on the property, the demonstrated ability to make flotation concentrates utilizing the N2TEC(R) Flotation Technology, Tonkin Springs can become a viable mining project. There are a number of risks inherent to this evaluation and to the ability of the Company to raise sufficient levels of funding required in hold and protect the Tonkin Springs project and to undertake its development and it is uncertain if the expectations of the Company can be realized. (See "RISK FACTORS.") The Company intends to and will be required to issue equity in public or private transactions and/or to sell a portion of its assets or to incur debt to raise additional working capital or enter into joint venture arrangements to fund future operations and corporate overhead expense. At the Tonkin Springs properties, access is provided by a county maintained road. Electrical power is provided through a substation located near the mill and operated by Sierra Pacific Power Company. Water is available through production wells which have been established on or adjacent to the site. The project also contains an assay laboratory and metallurgical pilot plant testing lab. In addition to the heavy equipment shop for repair and maintenance of mining equipment, a repair shop and warehouse building is situated adjacent to the mill building. The site also contains facilities to store and distribute propane, diesel fuel and gasoline. An administrative building is available for office management and administrative personnel. Potable water will be brought in from outside the project. GEOLOGY Host rocks for gold mineralization at Tonkin Springs consist of a sequence of Paleozoic rocks that were subsequently faulted, intruded and mineralized. Gold-bearing solutions originated at depth and migrated up along fracture systems until reaching fractured rock or chemically favorable rock suitable for 33 deposition of mineralized material. Later volcanism, faulting, erosion and sedimentation affected the mineralized material. The oldest sedimentary rocks identified at Tonkin Springs are the Ordovician Vinini siliclastic, carbonate and greenstone lithologies. The Vinini is well exposed and makes up most of the central core of the property. It has been divided into three distinct units: the Telephone Member, the Rooster Member and the Coils Member. The Telephone Member is the lowest member and is comprised of thin to medium-bedded, gray, blocky, sandy to silty carbonates, calcareous carbon shales, micrites, and thin-bedded limestone in the upper part. All ore developed to date in the gold resource at Tonkin Springs is in the Vinini Formation or intrusives in contact with the Vinini and is within or adjacent to low-angle and high-angle structures. The Devonian Devils Gate and Denay Formation carbonates units are integrated into the Vinini package and may have been back-thrusted into this position throughout the central core of the claim area. These same units are also exposed on the western side of the property. Permian Garden Valley Formation clastic sediments and Cretaceous Newark Canyon Formation clastic sediments flank the area in isolated exposures to the north, east and west. Lithologies vary from coarse chert pebble conglomerates, fine-grained limestone to immature coarse clastic limestone. Both of these units have been juxtaposed against and on top of the Vinini via high angle and thrust faults. Tertiary rhyolite, rhyodacite and andesite volcanic units flank the project area to the east, west and north and occur within the interior on the southern end of the property. The dominant structures mapped at Tonkin are high angle faults and open folds that trend northwest, north and northeast. The fault dips are primarily steeply to the east. Southeast low angle shearing is evident in pit wall exposures. Mineralization identified to date occurs in clusters located along a northwest trend. There is a strong east-northeast component to each of these clusters which possibly represents an east-northeast fold axis created by strike slip faulting along master faults on the eastern and western edges of the range. The increased ground preparation due to folding and the intersection with northwest shearing and thrust faulting appears to be the locus of mineralization. In some instances mineralization is also spatially associated with igneous dikes and sills. CLAIMS As of November 30, 2002, the Tonkin Springs project consists of a total of 1,215 unpatented mining and mill site claims encompassing approximately 37 square miles. Of that amount, an aggregate of 370 of the unpatented mining claims covered by the Project are leased from unaffiliated third parties pursuant to two mining leases. One lease at Tonkin North, which covers 269 claims, has an initial term which expires December 31, 2006 and may be extended from year to 34 year, up to a maximum term of 99 years, by production from the leased claims. Each lease contains certain conditions and other requirements for annual payments, as well as expenditures or work to be performed in order to retain the leased claims. The Tonkin North lease requires an annual advance royalty in the amount of $150,000, or the value of 450 ounces of gold, whichever is greater, which royalty is payable in January of each year which has been paid for year 2002. The lease also requires production royalties of 5% of the gross sales price of gold or silver but provides for recapture of annual advance royalties previously paid which had a balance at November 30, 2002 of approximately $2.6 million. TSLLC is required to perform an annual work commitment and the lease includes a defined area of interest extending from the boundaries of certain claims. Certain of the claims which are included in the Tonkin North lease are also subject to a 1% net smelter return royalty (defined as gross revenues from sales of minerals, less refining costs, transportation costs, severance, production and sales taxes, and sales commissions) payable to Precambrian Exploration, Inc. after $15 million in gross revenues are realized from the claims. In 1994, 215 claims covering approximately 4,400 acres adjacent to the Tonkin Springs project were acquired from an unaffiliated third party. The claims are subject to a royalty of 1% of net smelter returns for gold when the indexed price of gold is $350 per ounce or more, and a royalty of 1% of net smelter returns for silver when the indexed price of silver is $3.50 per ounce or more. No royalties are payable at lower indexed prices. The indexed prices shall reflect adjustments based on the Producer's Price Index, sub-index Finished Goods Excluding Foods, as published by the United States Department of Commerce. An aggregate of 913 of the unpatented mining claims covered by the Project, as well as 33 mill sites claims, are owned by TSLLC. A total of 317 of these claims are subject to a royalty of 2% of net smelter returns, which becomes payable to Precambrian Exploration, Inc. after $50 million in gross revenues is realized from the claims. Precambrian Exploration, Inc. is an unaffiliated third party and predecessor in interest to the claims. Precambrian may elect to receive its royalty in the form of gold and silver upon proper notice to TSLLC. Of the total of 1,215 mining claims encompassing the Tonkin Springs project, 698 are not subject to any royalties. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS IBK CAPITAL CORP. On December 17, 2001 the Company and GRC, an affiliate of the Company, jointly entered into an agreement with IBK Capital Corp. of Toronto, Ontario, Canada ("IBK") whereby IBK agreed to separately assist the Company as well as GRC in efforts to seek and arrange equity investment. The Company and GRC determined to jointly seek the assistance of IBK since both the Company and GRC were 35 interested in raising equity funding and IBK represented that since the shares of the Company are publicly traded and the shares of GRC are not, the pools of potential investors who might be contacted by IBK for equity investment would generally be different groups and therefore would not result in any conflict of interest between the interests of the Company and GRC. IBK is a limited market dealer based in Canada whose business includes seeking funding for public and private companies from institutional and exempted investors. That joint agreement had a term of six months but has been extended by the parties until December 3, 2002. The agreement provides for an initial work fee of $16,192 of which $15,882 was to be first deducted from the commission due IBK, if any, of 9% computed on any money raised for the Company and/or GRC, plus a non-accountable expense advance of $2,267, both of which were paid by GRC in December, 2001. To date, IBK has not concluded any transactions concerning or for the benefit of GRC. Under various transactions arranged by IBK during 2002 for the Company, IBK has been paid by the Company total fees and commissions of $80,100 which includes $15,882 paid by GRC to IBK in 2001 and which was deductible from commissions due to IBK by the Company. The Company has reimbursed GRC in 2002 for the $15,882 paid by them to IBK during 2001. EXECUTIVE OFFICERS During a portion of 2002, the Company elected not to pay certain salaries to its three executive officers in the aggregate amount of approximately $109,163 as of September 30, 2002 in order to conserve working capital. In addition, the three executive officers made cash advances to the Company to allow the payment of field personnel wages and certain critical payments. The maximum aggregate amount of such advances from the three executive officers was $29,358 which amounts of such advances were repaid to the executive officers effective May 31, 2002. Commencing July 1, 1998, the three executive officers of the Company voluntarily deferred a portion of their individual salaries in order to conserve working capital of the Company. As of September 30, 2002, the total amount of such voluntary deferral was $506,093 with William W. Reid owed $259,530, William F. Pass owed $116,793 and David C. Reid owed $129,770. There are currently outstanding stock option agreements to purchase 2,048,295 shares of our Common Shares held by our executive officers and directors. Those executive officers and directors have collectively agreed not to exercise an aggregate of 840,000 option shares until and unless there are sufficient authorized but unissued Common Shares available in the future which are then reserved by the board of directors to allow exercise of such option shares. Those executive officers and directors have agreed to this voluntary limitation under their respective stock option agreements in order to allow the sale of Common Shares and warrants to the Selling Shareholders subject to this prospectus. Of this number, William W. Reid has agreed to not exercise 365,000 option shares, William F. Pass has agreed to not exercise 121,000 option shares, David C. Reid has agreed not to exercise 273,000 option shares, and John W. Goth 36 has agreed not to exercise 81,000 option shares. The option shares subject to this exercise limitation could become available to the agreeing executive officers and directors for exercise if and when our shareholders approve an increase to our authorized number of Common Shares. CONTRACT WITH GOLD RESOURCE CORPORATION GRC was formed in August 1998 by founders William W. Reid and David C. Reid to provide a corporate vehicle for potential future personal business activities. GRC remained inactive until the 2000 Management Contract with the Company discussed below. At its formation and through July 1, 2000, a majority of the outstanding equity of GRC was owned by its founders. As of September 30, 2002, in addition to GRC's founders and the Company, the other owner of five percent or more of the capital stock of GRC is RMB International (Dublin) Limited, which owns approximately 15% of GRC's outstanding capital stock. Throughout the history of GRC, William W. Reid has served as president and chief executive officer as well as chairman of the board of directors while David C. Reid has served as vice president and a member of the board. William W. Reid and David C. Reid were and are the sole directors of GRC and there have been no other executive officers of GRC. During year 1999 and through the second quarter of 2000 the Company actively evaluated mining opportunities in Mexico and in fact made proposals to the owners of at least three properties. The Company's proposals to those property owners were rejected however, primarily because the Company could not offer any up-front cash nor could the Company demonstrate an ability to raise funding sufficient to meet the financial and other obligations under those proposed transactions. The board of directors then concluded that the Company could not negotiate competitively for property acquisitions in Mexico due to its limited resources and its inability to raise additional equity funding due to a lack of authorized but unissued shares and decided to curtail activities in Mexico. In June 2000 William W. Reid and David C. Reid made a proposal to the independent directors of the Company, John W. Goth and Douglas J. Newby, as to a possible way the Company could participate in opportunities in Mexico while limiting any direct funding obligations to that effort through equity participation with a then inactive private Colorado corporation, GRC. The concept presented to the Company was that William W. Reid and David C. Reid would commit to an aggregate $50,000 in funding to GRC at the rate of $.50/share of GRC stock in order to pay for the costs of evaluating and potentially acquiring one or more mining properties in Mexico. The Company could earn an equity position in GRC through the management of the affairs of GRC under a management contract for a specific period of time. The Company would have no obligation to fund expenses of GRC. The business plan of GRC was to raise additional equity funding from non-related parties if and when a mineral property of merit was acquired. The independent directors of the Company negotiated and finalized the terms of the transaction with GRC and the management agreement entered into July 1, 2000 was first drafted by the Company, reviewed and finalized by legal counsel representing the Company, and executed on behalf of the Company by its independent directors, Mr. Goth and Mr. Newby, as discussed in more detail below. GRC has no employees; however GRC does retain 37 the services of a Mexican national under a consulting arrangement since GRC secured its mineral property located in the state of Hidalgo, Mexico, effective August 23, 2001, described further below. Through August 31, 2001, GRC was funded only by investment of its founders as discussed above. Only during September 2001, following the lease of the Zimapan property in Mexico, did GRC commence private placement sale of its restricted stock to third parties. Therefore, until September 2001, there were no sales of GRC equity securities to third parties and no market for such shares. Effective July 1, 2000, the Company and GRC, an affiliate company, entered into the 2000 Management Contract under which the Company provided general management of GRC business activities through December 31, 2001 in exchange for 1,280,000 shares of GRC. GRC was responsible for all of its own operational funding, as needed. The 1,280,000 shares of GRC owned by the Company represents approximately 30% of GRC capitalization as of September 30, 2002. Through the 2000 Management Contract the Company has the opportunity to participate, through an equity interest ownership in GRC, in potential business activities in Mexico. The Company earned its equity ownership interest in GRC under the 2000 Management Contract with existing personnel and with no additional costs other than that related to the existing level of corporate overhead during the contract period. Effective January 1, 2002, the Company and GRC entered into a new contract, the 2002 Management Contract, which expires by its term December 31, 2002. Under the 2002 Management Contract the Company is to be paid $30,000 per month to provided general management of GRC business activities through December 31, 2002. Through September 30, 2002, GRC has paid $30,000 to the Company under the 2002 Management Contract and owes the Company an additional $240,000 as of September 30, 2002. While the Company has the right to terminated the 2002 Management Contract for the current unpaid fees thereunder, the Company and the independent director have determined that it is in the best interest of the Company for GRC's first monies raised to be used to commence the drilling program at the Zimapan Project, as discussed further below, and for the Company to look towards subsequent equity funding by GRC as a source for GRC to make the contractual payments to the Company. Therefore the Company does not intend to call GRC into default under the 2002 Management Contract, but if not paid, could require GRC to issue equivalent value in GRC's stock in satisfaction thereof. As with the prior contract, GRC is responsible for all funding needed and intends to and is currently raising funds through the sale of GRC stock. John W. Goth and Douglas J. Newby, the independent directors of the Company approved the 2000 Management Contract and John W. Goth, as the sole independent director at the time, approved the 2002 Management Contract with GRC. Messers William W. Reid and David C. Reid, each officers and directors of the Company have approximately 38% aggregate ownership of GRC as of June 30, 2002. William F. Pass, an officer of the Company, was granted by GRC a non-qualified stock option to purchase 200,000 shares of GRC common stock at an exercise price of $.50 per share. The 2002 Management Contract terminates December 31, 2002 and may be terminated by either party for cause with 30 days prior written notice. Conflicts of interests could arise between these persons duties as officers and directors of the Company and their respective responsibilities to GRC. (See "RISK FACTORS."). 38 Effective August 23, 2001 GRC leased a prospective silver/lead/zinc mining property in the Zimapan Mining District in the state of Hidalgo, Mexico. This project has been designated by GRC its Zimapan Project. GRC has commenced a drilling program at the Zimapan Project during the second quarter of 2002. Effective November 1, 2002, GRC announced that it had leased a second property located in the state of Oaxaca, Mexico, designated GRC's El Aguila property, which is primarily a gold and silver exploration stage project. As noted above, the Company is managing all activities under the 2002 Management Contract and GRC is responsible for funding of its properties. GRC is currently involved in an effort to raise funds through the sale of its common stock to fund additional drilling programs, property maintenance costs and corporate overhead. During the period from September 2001 through September 20, 2002, GRC has reported that it has raised approximately $443,000 from sale of its stock. During August 2002, the Company made a $30,000 non-interest bearing and unsecured loan the to GRC in order to allow GRC to make a critical $50,000 lease payment on the Zimapan property. The independent director of the Company, Mr. John W. Goth, approved this loan in advance. GRC has committed to repay this loan from the first unrestricted proceeds of future equity sales of GRC stock. Through November 30, 2002, GRC repaid $12,250 of the loan to the Company. With regard to corporate opportunities and potential conflicts of interest among and between the Company and GRC, the Company is primarily focused on activities in Nevada and the western United States and any business opportunities in these locations would be first available to the Company. Conversely, GRC is focused on corporate opportunities in Mexico and any business opportunities in Mexico would be first available to GRC. If the board of directors of either the Company or GRC first elect not to evaluate a particular business opportunity for any reason, the other company would be free to undertake that particular business opportunity without conflict of interest related to corporate opportunity between the Company and GRC. As noted above, the shares of GRC are not currently publicly traded. Therefore, the Company has recorded the revenue earned under the 2000 Management Contract at the approximate cost of providing the services to GRC under the contract, $186,000 and $164,000, respectively, for the years ended December 31, 2001 and 2000. The shares of GRC earned under the 2000 Management Contract have been assessed by the Company to be of indeterminable value since there is not a market for such shares. The Company has therefore recorded a valuation reserve for the revenue associated with the GRC shares earned during 2001 and 2000. The effect of the valuation reserve is that the investment in GRC shares is carried at a net zero basis. Under the 2000 Management Contract, the 1,280,000 shares of GRC earned by the Company have a stated value of $.50/share for an aggregate $604,000 stated value. Under equity accounting, the Company has not recorded its share of GRC's operating losses to date since such recognition would reduce its zero basis investment in GRC to below zero. GRC's unaudited operating loss for year 2001 and 2000 is approximately $357,634 and $205,850, respectively, of 39 which the Company's share would be approximately $121,538 and $41,063, respectively. The overhead expense of the Company allocated to the management contract for year 2001 and 2000 totals $185,933 and $163,398, respectively, primarily representing allocation of staff time. GRC's unaudited operating loss for the nine month periods ended September 30, 2002 and 2001 is approximately $492,203 and $188,670, respectively, of which the Company's share would be approximately $152,582 and $62,751, respectively. The unaudited balance sheet of GRC as of September 30, 2002 reflects total assets of $110,860 made up of primarily $3,772 in cash and $107,088 in property rights and other assets, and liabilities of $280,545 including $270,000 payable to the Company made up of the $30,000 loan to GRC by the Company and $240,000 for services under the 2002 Management Contract (which the Company has not recognized in revenue until receipt from GRC is reasonably assured). Shareholders' equity for GRC at September 30, 2002 is $(169,594). The overhead expense of the Company allocated to the GRC management contracts for the nine month periods ended September 30, 2002 and 2001 totals $111,724 and $139,643, respectively, representing allocation of staff time. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock trades on the OTC Bulletin Board under the symbol "USGL." The tables below set forth the high and low sales prices for our common stock as reflected on the OTC Bulletin Board, for the fiscal years ended December 31, 2001 and year to date, 2002. Quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and do not necessarily represent prices at which actual transactions were effected. Fiscal Year Ended December 31, 2002 High Low - ----------------- ---- ---- First Quarter $.41 $.33 Second Quarter $.71 $.39 Third Quarter $.53 $.32 Fourth Quarter (to 12/2/02) $.55 $.27 Fiscal Year Ended December 31, 2001 High Low - ----------------- ---- ---- First Quarter $.48 $.13 Second Quarter $.47 $.31 Third Quarter $.47 $.38 Fourth Quarter $.46 $.39 Fiscal Year Ended December 31, 2000 High Low - ----------------- ---- ---- First Quarter $.31 $.19 Second Quarter $.27 $.22 Third Quarter $.25 $.13 Fourth Quarter $.19 $.11 40 As of November 30, 2002 there were approximately 7,500 record holders for our common stock. No dividends have ever been paid with respect to our common stock and we do not anticipate the payment of dividends in the foreseeable future. EXECUTIVE COMPENSATION COMPENSATION OF OFFICERS Pension Plan - ------------ On December 10, 1985, the Company's Board of Directors adopted a Simplified Employee Pension Plan ("SEP"). The Company intends to make a determination of contributions under the SEP on an annual basis, based upon review by the Board of Directors of the performance of the Company. No contribution was made for the calendar years 2001 or 2000. Under the SEP, the Company has the option of contributing a certain amount directly to its employees' Individual Retirement Accounts. The Plan covers all employees of the Company with certain participation requirements, however the Company is not required to make any contributions in a given year. If contributions are made, they must be made to all eligible employees. Contributions made under the SEP in any one calendar year for any one employee may not be more than the smaller of $25,500 for calendar year 2001 or 15% of that employee's total compensation. Equity Compensation Plans - ------------------------- The following table summarizes the total compensation of the Executive Officers of the Company for the Company's three fiscal years ended December 31, 2001. Except as set forth below under "Non-Qualified Stock Option and Stock Grant Plan," "2002 Stock Option and Stock Grant Plan" and "Pension Plan," there were no compensation plans for which cash or non-cash distributions, other than salaries, were made during the last fiscal year:
Summary Compensation Table Long Term Compensation ---------------------------- Awards Payouts ------ ------- Annual Compensation Securities All Name and Principal --------------------- Underlying LTIP Other Position Year Salary Bonus Options Payouts($) Compensation - ------------------ ---- ---------- ----- ----------- ---------- ------------ William W. Reid, 2001 $256,803(1) $ - - $ - $ - President and CEO 2000 $247,230(1) $ - - $ - $ - 1999 $239,530(1) $ - 888,295(4) $ - $ - William F. Pass, 2001 $116,401(2) $ - - $ - $ - Vice President, 2000 $112,093(2) $ - - $ - $ - Chief Financial 1999 $108,802(2) $ - 295,000(4) $ - $ - Officer and Secretary David C. Reid, 2001 $128,999(3) $ - - $ - $ - Vice President 2000 $124,212(3) $ - - $ - $ - 1999 $119,972(3) $ - 665,000(4) $ - $ -
41 (1) Commencing during 1998, the executive voluntarily deferred a portion of his base salary in order to conserve working capital of the Company. During 1999, $219,652 was paid including the $30,576 accrued wages from year 1998 and $50,455 was deferred. During 2000, $189,051 was paid and $58,180 was deferred. During 2001, $189,236 was paid and $67,567 was deferred. The amount of deferred salary due to William Reid at December 31, 2001 totals $200,048. (2) Commencing during 1998, the executive voluntarily deferred a portion of his base salary in order to conserve working capital of the Company. During 1999, $99,858 was paid including the $13,760 accrued wages from year 1998 and $22,703 was deferred. During 2000, $85,912 was paid and $26,181 was deferred. During 2001, $85,996 was paid and $30,405 was deferred. The amount of deferred salary due to William Pass at December 31, 2001 totals $90,022. (3) Commencing during 1998, the executive voluntarily deferred a portion of his base salary in order to conserve working capital of the Company. During 1999, $110,034 was paid including the $15,288 accrued wages from year 1998 and $25,226 was deferred. During 2000, $95,123 was paid and $29,090 was deferred. During 2001, $95,215 was paid and $33,784 was deferred. The amount of deferred salary due to David Reid at December 31, 2001 totals $100,024. (4) On January 20, 1999, stock options to purchase 1,848,295 shares to Executive Officers were voluntarily terminated without consideration and options to purchase an aggregate of 1,848,295 shares at exercise price $.16 per share were granted to Executive Officers, resulting in no compensation expense. Option Grants in Last Fiscal Year - --------------------------------- During 2001 no grants of stock options were made pursuant to the Non-Qualified Stock Option and Stock Grant Plan (the "Old Plan") to Executive Officers. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Table - -------------------------------------------------------------------------------- Value - ----- Shown below is information at December 31, 2001 with respect to the exercised and unexercised options to purchase the Company's common stock to Executive Officers under the Old Plan. No options were exercised by Executive Officers during year ended December 31, 2001. 42 Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options Held at at Name December 31, 2001 (1) December 31, 2001 (2) - ---- ---------------------- --------------------- William W. Reid 888,295 $346,435 William F. Pass 295,000 $115,050 David C. Reid 665,000 $259,350 (1) These options were exercisable at December 31, 2001. (2) Based upon the close price as reported by OTC Bulletin Board as of December 31, 2001 ($0.39 per share). SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Non-Qualified Stock Option and Stock Grant Plan - ----------------------------------------------- Shown below is information at December 31, 2001 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
Equity Compensation Plan Information Number of securities (a) remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding securities Plan category warrants and rights warrants and rights reflected in column (a)) - ------------- ----------------------- -------------------- ------------------------ Equity compensation plans approved by security holders 2,048,295 $.16/share 142,470 Equity compensation plans not approved by security holders None None None Total 2,048,295 $.16/share 142,470
43 The executive officers of the Company have voluntarily agreed not to exercise an aggregate of 870,000 option shares in order to allow the Company additional shares available to be sold by the Company to raise working capital (See "Description of Capital Stock-Options"). MATERIAL TERMS OF EQUITY COMPENSATION PLANS Non-Qualified Stock Option and Stock Grant Plan - ----------------------------------------------- The Non-Qualified Stock Option and Stock Grant Plan, as Amended (also as referred to as the "Old Plan") was adopted by the Company effective March 17, 1989. The Old Plan terminates by its terms on March 16, 2009. Under the Old Plan a total of 2,500,000 shares of Common Stock were reserved for issuance thereunder. As of August 31, 2002, there are outstanding stock option agreements under the Old Plan for an aggregate 2,048,295 shares, as described further above. General Information Regarding the Old Plan - ------------------------------------------ Under the Old Plan non-qualified stock options ("Options") and/or stock grants of Common Stock of the Company may be granted to key persons. The Old Plan was established to advance the interests of the Company and its stockholders by affording key persons, upon whose judgment, initiative and efforts the Company may rely for the successful conduct of their businesses, an opportunity for investment in the Company and the incentive advantages inherent in stock ownership in the Company. This Old Plan gives the Board broad authority to grant Options and make stock grants to key persons selected by the Board while considering criteria such as employment position or other relationship with the Company, duties and responsibilities, ability, productivity, length of service or association, morale, interest in the Company, recommendations by supervisors, and other matters, and to set the option price, term of option, and other broad authorities. Options shall not be granted at less than the fair market value at the date of grant and may not have a term in excess of 10 years. Shares issued to optionees upon exercise of Options or upon stock grants under the Old Plan are "restricted securities" as defined under the Securities Act of 1933, unless a Form S-8 Registration Statement covering such shares is effective. Restricted shares cannot be freely sold and must be sold pursuant to an exemption from registration (such as Rule 144) which exemptions typically impose conditions on the sale of the shares. Tax Effects on Participants - --------------------------- Non-Qualified Stock Options. A non-qualified stock option results in no taxable income to the optionee or deduction to us at the time it is granted. An optionee exercising such an option will, at that time, realize taxable compensation in the amount of the difference between the option price and the then market value of the shares. Subject to the applicable provisions of the Code, a deduction for federal income tax purposes will be allowable to us in the year of exercise in an amount equal to the taxable compensation realized by the optionee. 44 The optionee's basis in such shares is equal to the sum of the option price plus the amount includible in his income as compensation upon exercise. Any gain (or loss) upon subsequent disposition of the shares will be long-term or short-term gain (no loss), depending upon the holding period of the shares. If a non-qualified option is exercised by tendering previously-owned shares of the Company's common stock in payment of the option price, then, instead of the treatment described above, the following will apply. A number of new shares equal to the number of previously-owned shares tendered will be considered to have been received in a tax-free exchange; the optionee's basis and holding period for such number of new shares will be equal to the basis and holding period of the previously-owned shares exchanged. The optionee will have compensation income equal to the fair market value on the date of exercise of the number of new shares received in excess of such number of exchanged shares; the optionee's basis in such excess shares will be equal to the amount of such compensation income, and his holding period in such shares will begin on the date of exercise. Stock Grants. A stock grant results in taxable income to the grantee and deduction to the Company at the time of the grant for the market value of the stock grant. 2002 Stock Option and Stock Grant Plan - -------------------------------------- On August 8, 2002, the Board of Directors of the Company authorized and approved the 2002 Stock Option and Stock Grant Plan (the "2002 Plan"), but agreed that no options granted thereunder would be exercisable or in the case of stock grants, no stock grants would be made, until and unless the 2002 Plan was approved by the shareholders at the next meeting of shareholders or a meeting of shareholders within 12 months, which ever is earlier. On August 8, 2002 the Board of Directors granted incentive stock options to the three executive officers of the Company, contingent upon the approval by shareholders of the 2002 Plan, in the aggregate of 2,025,000 shares at exercise price of $.32/share and expiring August 8, 2012, as discussed further below. The Company's current Old Plan will be frozen for grants of new stock options and stock grants upon such shareholder approval of the 2002 Plan and, in addition, outstanding stock option agreements with the three executive officers of the Company covering options for aggregate 1,848,295 shares at exercise price of $.16/share expiring January 21, 2004 under the Old Plan will be voluntarily terminated by those three executive officers upon approval of the 2002 Plan. The Board of Directors has agreed to reduce the reserved shares under the Old Plan to 200,000 shares (the number necessary to cover an existing stock option agreement for 200,000 shares at exercise price of $.16/share and expiring January 21, 2004 with a non-executive director of the Company). The 2002 Plan anticipates that the shareholders will approve a proposal for Amendment to the Articles of Incorporation to Increase Authorized Shares of the Company. Should the shareholders approve the 2002 Plan but not approve a proposed increase to the authorized shares of the Company, in that circumstance the 2002 Plan would be effective but the number of shares reserved thereunder would be no more than the number of shares currently available from authorized but unissued shares less i) the 115,000 shares reserved under the Old Plan for the outstanding stock 45 option agreement with a director, and ii) shares reserved for warrants, or a maximum of 1,072,895 shares as of the date of this Prospectus. To clarify, while Mr. John W. Goth, a director, has an option agreement under the Old Plan for 200,000 shares, effective June 1, 2002, Mr. Goth voluntarily agreed with the Company not to exercise 85,000 options shares in order to allow the Company to raise additional working capital. The following is a summary description of the 2002 Plan. General 2002 Plan Information - ----------------------------- The name of the 2002 Plan is the "2002 Stock Option and Stock Grant Plan." U.S. Gold Corporation is the company whose securities are to be offered pursuant to the 2002 Plan. The 2002 Plan has been established to closely align the interests of management of the Company and its affiliates with its shareholders, and to maintain competitive compensation levels for such persons through provision of equity ownership in the form of incentive stock options ("ISOs") granted to its employees, non-qualified stock options ("NQOs") granted to its officers, directors, key employees and certain consultants, and stock grants to its officers, directors, key employees and certain consultants. The 2002 Plan is subject to ratification by the shareholders at the next annual or special meeting of shareholders and upon such ratification the Non-Qualified Stock Option and Stock Grant Plan, as Amended, will be frozen and the outstanding option agreements with the three executive officers of the Company thereunder for an aggregate of 1,848,295 shares at exercise price of $.16/share and expiring January 21, 2004, will be voluntarily terminated by such executives. No awards can be made under the 2002 Plan after August 8, 2012; provided, however, all awards made under the 2002 Plan prior to such date, shall remain in effect until such awards have been satisfied or terminated in accordance with their terms. The 2002 Plan is not subject to the Employee Retirement Income Security Act of 1974. The 2002 Plan is administered by a Committee appointed by the Board of Directors from its members (which may be the full Board). The members of the Committee sit at the pleasure of the Board and may be replaced by it. The Committee members are fiduciaries and have authority to designate the persons eligible to participate and receive awards under the 2002 Plan, set the option price and make and amend all rules and regulations relating to the 2002 Plan. On August 8, 2002, the following incentive stock options were made pursuant to the 2002 Stock Option and Stock Grant Plan subject to shareholder approval of the 2002 Plan including the incentive stock option agreements:
NEW PLAN BENEFITS 2002 Stock Option and Stock Grant Plan Incentive Stock Option Grants Name and Position Dollar Value ($) Number of Units (5) - ----------------- ---------------- ------------------- William W. Reid, President and CEO $288,000 Options for 900,000 shares at $.32/share (1) David C. Reid, Vice President $240,000 Options for 750,000 shares at $.32/share (2) William F. Pass, Vice President, $120,000 Options for 375,000 shares at $.32/share (3) Chief Financial Officer and Secretary Total Executive Group $648,000 Options for 2,025,000 shares at $.32/share (4) Non-Executive Director Group None N/A Non-Executive Officer Employee Group None N/A
46 (1) Exercisable 300,000 shares after 6 months of the date of grant, 300,000 shares after 17 months and 300,000 shares after 29 months, respectively, from date of grant. Option expires August 8, 2012. (2) Exercisable 250,000 shares after 6 months of the date of grant, 250,000 shares after 17 months and 250,000 shares after 29 months, respectively, from the date of grant. Option expires August 8, 2012. (3) Exercisable 125,000 shares after 6 months of the date of grant, 125,000 shares after 17 months and 125,000 after 29 months, respectively, from the date of grant. Option expires August 8, 2012. (4) Exercisable 675,000 shares after 6 months of the date of grant, 675,000 shares after 12 months, and 675,000 after 24 months, respectively, from the date of grant. Options expire August 8, 2012. (5) The market price of the Company's Common Stock as of the date of grant was $.32 per share. The closing market price of the Common Stock as of September 17, 2002 was $.51 per share. Securities to be Offered - ------------------------ 3,300,000 shares of common stock of the Company ($.10 par value) are to be reserved pursuant to the 2002 Plan. This number may change in the future, but any increase in such number must be approved by the shareholders of the Company at a duly called meeting. Employees Who May Participate in the Plan - ----------------------------------------- All employees of the Company are eligible (but not all may be selected) to participate in the 2002 Plan. Non-employee directors and consultants may also participate but are not entitled to receive incentive stock options. The Committee (or the Board if it chooses to act) shall select persons entitled to receive stock options under the 2002 Plan with each member exercising his/her discretion as to eligibility of an employee to receive the stock option. Purchase of Securities Pursuant to the Plan and Payment for Securities Offered - ------------------------------------------------------------------------------ There is no period of eligibility for an optionee to participate in the 2002 Plan, although the Committee may establish eligibility rules for new optionees and also establish "vesting" periods for the stock options granted to be effective. Stock options granted under the 2002 Plan can have a maximum duration of ten years, and no stock options can be granted after August 8, 2002 until or unless the 2002 Plan is approved by Shareholders. The Option exercise price is set by the Committee at the time of grant. In the case of ISOs, the price must equal (i) the fair market value of the common stock at the time of grant or (ii) 110% of the fair market value if, at the time the Option is granted, the Participant owns, directly or indirectly (as determined pursuant to Section 424(d) of the Code), more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary corporation of the Company). In the case of NQOs, the price is established by the Committee in its discretion with reference to fair market value at the time of grant, but such price may be less than the fair market value. There are no limits on the amount of shares an eligible employee can receive under the 2002 Plan; except that the 47 aggregate fair market value of common stock subject to an ISO granted to an employee which may be exercised for the first time by such employee in any calendar year cannot exceed $100,000. Optionees must pay the full purchase price for shares purchased under a stock option at the time of exercise, unless the Committee authorizes at time of grant payment by a promissory note, in shares of the Company's stock, by retention of shares under option, or a combination of the three. The 2002 Plan does authorize the Committee to grant options with rights to have stock withheld or rights to deliver stock already owned in payment of the exercise price of an option. The terms and conditions of such rights are set forth in an individual's stock option agreement. Employees are not required or permitted to contribute a part of his/her wages to the 2002 Plan. The Company does not issue periodic reports to employees who are granted options under the 2002 Plan. Securities issued under the 2002 Plan will be from authorized but unissued shares of the Company. There are no fees, commissions or other similar charges associated with issuance of shares of common stock under the Plan, except possible transfer agent costs. Resale Restrictions - ------------------- Shares issued to optionees upon exercise of stock options under the 2002 Plan are "restricted securities" as defined under the Securities Act of 1933, unless a Form S-8 Registration Statement covering such shares is effective. Restricted shares cannot be freely sold and must be sold pursuant to an exemption from registration (such as Rule 144) which exemptions typically impose conditions on the sale of the shares. Tax Effects of Plan Participation - --------------------------------- Incentive Stock Options. An incentive stock option results in no taxable income to the optionee or a deduction to us at the time it is granted or exercised. However, the excess of the fair market value of the shares acquired over the option price is an item of adjustment in computing the alternative minimum taxable income of the optionee. If the optionee holds the stock received as a result of an exercise of an incentive stock option for at least two years from the date of the grant and one year from the date of exercise, then the gain realized on disposition of the stock is treated as long-term capital gain. If the shares are disposed of during this period, however, (i.e., a "disqualifying disposition"), then the optionee will include in income, as compensation for the year of the disposition, an amount equal to the excess, if any, of the fair market value of the shares, upon exercise of the option over the option price (or, if less, the excess of the amount realized upon disposition over the option price). In such case, the Company will be entitled to a deduction, in the year of such a disposition, for the amount includible in the optionee's income. The optionee's basis in the shares acquired upon exercise of an incentive stock option is equal to the option price paid, plus any amount includible in his income as a result of a disqualifying disposition. Non-Qualified Stock Options. A non-qualified stock option results in no taxable income to the optionee or deduction to us at the time it is granted. An optionee 48 exercising such an option will, at that time, realize taxable compensation in the amount of the difference between the option price and the then market value of the shares. Subject to the applicable provisions of the Code, a deduction for federal income tax purposes will be allowable to us in the year of exercise in an amount equal to the taxable compensation realized by the optionee. The optionee's basis in such shares is equal to the sum of the option price plus the amount includible in his income as compensation upon exercise. Any gain (or loss) upon subsequent disposition of the shares will be long-term or short-term gain (or loss), depending upon the holding period of the shares. If a non-qualified option is exercised by tendering previously-owned shares of the Company's common stock in payment of the option price, then, instead of the treatment described above, the following will apply. A number of new shares equal to the number of previously-owned shares tendered will be considered to have been received in a tax-free exchange; the optionee's basis and holding period for such number of new shares will be equal to the basis and holding period of the previously-owned shares exchanged. The optionee will have compensation income equal to the fair market value on the date of exercise of the number of new shares received in excess of such number of exchanged shares; the optionee's basis in such excess shares will be equal to the amount of such compensation income, and his holding period in such shares will begin on the date of exercise. Stock Grants. A stock grant results in taxable income to the grantee and deduction to the Company at the time of the grant for the market value of the stock grant. Investment of Funds - ------------------- There is no investment of funds under the 2002 Plan. Withdrawal from the Plan; Assignment of Interest - ------------------------------------------------ There are no provisions for withdrawal by an optionee in the 2002 Plan. An optionee is not permitted to assign or pledge his/her stock options granted under the 2002 Plan, except by will or under the laws of descent and distribution. Forfeitures and Penalties - ------------------------- If an employee terminates his employment with the Company, except termination due to death or permanent disability, his/her stock options terminate 90 days after such termination of employment. Upon death or permanent disability of an optionee, he or she, or his/her successors or representatives may exercise any rights the optionee had at the date of death or disability for a period of one year. 49 Charges, Deductions and Liens - ----------------------------- Other than transfer agent fees, transfer taxes and similar charges, there are no other fees or costs to which an optionee is subject under the 2002 Plan. There are no provisions for creation of a lien to secure any obligations under the 2002 Plan. Administrative Provisions - ------------------------- With the consent of the Participant affected thereby, the Committee may amend or modify the terms of any outstanding Options in any manner, provided that the amended or modified terms are permitted by the 2002 Plan as then in effect. Without limiting the generality of the foregoing sentence, the Committee may, with the consent of the Participant affected thereby, modify the exercise price, number of shares or other terms and conditions of an Option, extend the term of an Option, accelerate the exercisability of an Option, accept the surrender of any outstanding Option, or, to the extent not previously exercised, authorize the grant of new Options in substitution for surrendered Options. The period during which an Option may be exercised shall be fixed by the Committee in its sole discretion at the time such Option is granted; provided, however, that in no event shall such period exceed 10 years from its date of grant or, in the case of a Participant who owns, directly or indirectly (as determined pursuant to Section 424(d) of the Code), more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary of the Company), 5 years from its date of grant. The maximum number of shares of Common Stock reserved for issuance under the Plan is subject to adjustment upon changes in capitalization of the Company as provided for in the Plan. The maximum number of shares authorized may also be increased from time to time by approval of the Board and, if required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of the Code or the rules of any exchange or the National Association of Securities Dealers, the stockholders of the Company. There are three executive officers and one outside director of the Company who qualify as Participants under the 2002 Plan. Shown below is information at December 31, 2001 with respect to the unexercised options to purchase the Company's common stock to Executive Officers and Directors under the Non-Qualified Stock Option and Stock Grant Plan, the "Old Plan". Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options Held at at Name December 31, 2001(1)(2) December 31, 2001 (3) - ---- ----------------------- --------------------- William W. Reid (4)(5) 888,295 $346,435 William F. Pass (4)(5) 295,000 $115,050 David C. Reid (4)(5) 665,000 $259,350 John W. Goth (4)(5) 200,000 $ 78,000 50 (1) These options were exercisable at December 31, 2001. (2) No options were exercised by Executive Officers during year ended December 31, 2001. (3) Based upon the close price as reported by OTC Bulletin Board as of December 31, 2001 ($0.39 per share). (4) Effective June 1, 2002, the executive officers and outside director of the Company have voluntarily agreed not to exercise an aggregate of 870,000 option shares in order to allow the Company additional shares available to be sold by the Company to raise working capital. Of this number, William W. Reid has agreed to not exercise 380,000 option shares, William F. Pass has agreed to not exercise 125,000 option shares, David C. Reid has agreed not to exercise 280,000 option shares, and John W. Goth has agreed not to exercise 85,000 option shares. The option shares subject to this exercise limitation could become available to the agreeing executive officers and directors for exercise if shareholders approve an increase to our authorized number of Common Shares as proposed in this proxy statement. (5) The three executive officers of the Company have agreed to voluntarily terminate options to purchase an aggregate of 1,848,295 shares at exercise price of $.16/share under the Old Plan upon shareholder approval of the 2002 Plan. Compensation of Directors - ------------------------- The Company reimburses its outside directors for reasonable expenses incurred by them in attending meetings of the Board of Directors or of Committees of the Board. No such expenses were incurred or paid during 2001 and 2000. Additionally, effective January 1, 1999, outside directors were paid $1,500 per quarter for services with an equal amount deferred. During 2001, Mr. Goth received total compensation of $6,000 for his service as outside director for 2000 with the remaining $6,000 unpaid, deferred and owed to him as of December 31, 2001 plus an additional $16,000 owned to Mr. Goth for deferred 2000, 1999 and 1998 directors pay. On January 20, 1999, stock options to purchase an aggregate 300,000 shares at exercise price of $0.28 to $0.53 and expiring February 2, 2002 to May 22, 2004 held by directors were voluntarily terminated without consideration. On January 20, 1999, options to purchase an aggregate of 300,000 shares at exercise price $.16 per share were granted to such directors pursuant to the Old Plan, resulting in no compensation expense. During 2001 a former director exercised 9,375 options at an exercise price of $.16 per share. During 2001 options to purchase 53,125 shares at exercise price of $.16 per share were exercised by a former director. Employment Contracts - -------------------- The Company entered into Employment Agreements effective January 1, 1994, as amended June 1, 1995 and July 21, 1998 with William W. Reid, William F. Pass, and David C. Reid (the "Employment Contracts") each of which was initially for a five-year term. The Employment Contracts shall be extended automatically by one year upon each anniversary date unless either the Company or employee provides the other party written notice prior to 120 days before such anniversary, that the Employment Contract will not be so extended. During 1998 the Company gave written notice under each Employment Contract that it was not automatically extending the term by an additional year which resulted in such contracts having a term of four years subject to the automatic extensions of one year each year 51 as discussed above. Therefore, each of the Employment Contracts have a current term through December 31, 2006. William W. Reid's Employment Contract provides for a base salary of $157,500 per year for the first year, $200,000 per year for the second year, and annual upward adjustments thereafter based upon increases in the Consumer Price Index (All Items-Urban), also referred to as the "CPI-U". William F. Pass' Employment Contract provides for a base salary of $75,000 per year for the first year, $90,000 per year for the second year, and annual upward adjustments thereafter based upon increases in the CPI-U. David C. Reid's Employment Contract provides for a base salary of $75,000 per year for the first year, $100,000 per year for the second year, and annual upward adjustments thereafter based upon increases in the CPI-U. During 1998, 1999, 2000 and 2001, the executives voluntarily deferred a portion of their base salary in order to conserve working capital. As of June 30, 2002, the Company owed salary to William Reid in the amount of $239,706, William F. Pass in the amount of $107,868 and David C. Reid in the amount of $119,853. Each of the Employment Agreements provides that the employee would be entitled to receive a termination payment from the Company in a lump sum equal to 2.9 times the employee's average annual compensation for the five taxable years immediately preceding the date of termination by the employee under certain circumstances (provided that the employee is not provided continued employment for a minimum of three years with compensation and other business terms equal to or more favorable to the employee than under the Employment Agreement) summarized as follows: i) the sale by the Company of substantially all of its assets to a single purchaser or to a group of affiliated purchasers; ii) the sale, exchange or other disposition, in one transaction or a series of related transactions, of at least 30 percent of the outstanding voting shares of the Company; iii) a decision by the Company to terminate its business and liquidate its assets; iv) the merger or consolidation of the Company with another entity or an agreement to such a merger or consolidation or any other type of reorganization; v) there is a material change in employee's authority, duties or responsibilities; or, vi) the Company acquires any stock or other investment in any business enterprise which acquisition or investment exceeds 40 percent of the net book value of the Company. Upon the death of an employee, the Company shall pay the employee's estate an amount equal to one year's salary; and upon termination by the Company following permanent disability of the employee, the Company shall pay the employee an amount equal to two years salary. EXPERTS The consolidated financial statements for the Company for the years ended December 31, 2001 and 2000 have been audited by Stark Winter Schenkein & Co., LLP. The name of such firm was changed from Stark Tinter & Associates, LLC to Stark Winter Schenkein & Co., LLP, effective August 31, 2001. 52 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in nor disagreements with accountants on accounting and financial disclosure. ADDITIONAL AVAILABLE INFORMATION The registration statement that contains this prospectus, including the exhibits to the registration statement, contain additional information about us and the securities the Selling Shareholders may offer under this prospectus. The Company's SEC filings, including the registration statement that contains this prospectus, are available to the public from the SEC's Internet site at http://www.sec.gov. You may also read and copy this information at the SEC's Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference room. 53 FINANCIAL STATEMENTS Index to Financial Statements Page - ----------------------------- ---- Years Ended December 31, 2001 and 2000- - --------------------------------------- Report of Independent Auditors.............................................. 55 Consolidated Statements of Operations for the years ended December 31, 2001 and 2000............................................ 56 Consolidated Balance Sheet at December 31, 2001............................. 57 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001 and 2000....................... 58 Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2000...................................... 59 Notes to Consolidated Financial Statements.................................. 60 Nine Month Periods Ended September 30, 2002 and 2001- (Unaudited) - ----------------------------------------------------------------- Consolidated Statements of Operations for the nine month periods ended September 30, 2002 and 2001............................. 73 Consolidated Balance Sheet at September 30, 2002............................ 74 Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2002......................... 75 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2001............................. 76 Notes to Unaudited Consolidated Financial Statements........................ 77 54 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders U.S. Gold Corporation Lakewood, Colorado We have audited the accompanying consolidated balance sheet of U.S. Gold Corporation as of December 31, 2001 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the two years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates make by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has no current source of operating revenues, and needs to secure financing to remain a going concern. These factors 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. As discussed in Note 13, the Company has restated the financial statements for the years ended December 31, 2001 and 2000 to correct an error in recording revenue and a corresponding reserve for realization related to a management service contract. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Gold Corporation as of December 31, 2001, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Stark Winter Schenkein & Co., LLP Stark Winter Schenkein & Co., LLP March 19, 2002 Denver, Colorado 55 U.S. GOLD CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Restated) For the years ended December 31, 2001 2000 ---- ---- Other revenue: Project payments-Tonkin Springs $ 540,000 $ 540,000 Management contract fees from Gold Resource Corporation ("GRC")(Note 12) 186,000 164,000 Interest income 9,392 90 Gain on sale of assets 10,583 - --------- --------- 745,975 704,090 --------- --------- Costs and expenses: General and administrative 496,073 475,465 Costs of services provided under Management contract with Gold Resource Corporation (Note 12) 185,933 163,389 Realization reserve-GRC shares earned under management contract (Note 12) 186,000 164,000 Interest 2,624 3,679 Depreciation 11,795 15,473 --------- --------- 882,425 822,006 --------- --------- (Loss) before income taxes (136,450) (117,916) --------- --------- Provision for income taxes (Note 6) - - --------- --------- Net (loss) $(136,450) $(117,916) ========= ========= Basic and diluted per share data: Basic $ (0.01) $ (0.01) ========= ========= Diluted $ (0.01) $ (0.01) ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 56 U.S. GOLD CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 (Restated) ASSETS Current assets: Cash and cash equivalents $ 72,089 ----------- Total current assets 72,089 ----------- Plant, equipment and vehicles (Note 5) Tonkin Springs plant and equipment, net 1,549,897 Other vehicles, office furniture and equipment, net 25,126 ----------- Total plant, equipment and vehicles, net 1,575,023 ----------- Investment in affiliate-Gold Resource Corporation, net of reserve for realization (Note 12) - Restrictive time deposits for reclamation bonding 1,832,138 Other assets 23,715 ----------- TOTAL ASSETS $ 3,502,965 =========== LIABILITIES, RESERVE & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 15,717 Installment purchase contracts (Note 10) 12,933 ----------- Total current liabilities 28,650 ----------- Related party payables, long-term (Note 12) 412,094 Installment purchase contracts (Note 10) 8,257 Reserve for reclamation (Note 3) 1,825,977 ----------- Total liabilities and reserve 2,274,978 ----------- Commitments and contingencies (Notes 4, 9 and 10) Shareholders' equity (Note 7): Common stock, $.10 par value, 18,000,000 shares Authorized; 14,026,390 shares issued and outstanding 1,402,639 Additional paid-in capital 31,975,303 Accumulated (deficit) (32,149,955) ----------- Total shareholders' equity 1,227,987 ----------- TOTAL LIABILITIES, RESERVE & SHAREHOLDERS' EQUITY $ 3,502,965 =========== The accompanying notes are an integral part of these consolidated financial statements. 57 U.S. GOLD CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 Common Stock ------------------------ Additional Par Paid-in Accumulated Shares Value Capital (Deficit) ---------- ---------- ----------- ----------- Balance, January 1, 2000 13,964,665 $1,396,466 $31,971,695 $(31,895,589) Exercise of stock options (Note 7) 9,375 938 562 - Treasury shares cancelled (520) (52) (58) - Net loss - - - (117,916) ---------- ---------- ----------- ------------ Balance, December 31, 2000 13,973,520 1,397,352 31,972,199 (32,013,505) Exercise of stock options (Note 7) 53,125 5,312 3,188 - Treasury shares cancelled (255) (25) (84) - Net loss - - - (136,450) ---------- ---------- ---------- ------------ Balance, December 31, 2001 14,026,390 $1,402,639 $31,975,303 $(32,149,955) ========== ========== =========== ============ The accompanying notes are an integral part of these consolidated financial statements. 58 U.S. GOLD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Restated) FOR THE YEARS ENDED DECEMBER 31 2001 2000 ---- ---- Cash flows from operating activities: Cash received from project distributions $ 495,000 $ 540,000 Cash received from TSHI upon TSLLC Withdrawal 79,347 - Cash paid to suppliers and employees (583,861) (517,300) Interest received 38,277 90 Interest paid (2,624) (3,679) Income taxes paid - - --------- --------- Cash provided by operating activities 26,139 19,111 --------- --------- Cash flows from investing activities: Capital expenditures (10,000) (2,665) Sale of assets 13,500 - --------- --------- Cash provided by (used in) investing activities 3,500 (2,665) --------- --------- Cash flows from financing activities: Payments on installment purchase Contracts (11,795) (10,681) --------- --------- Cash used in financing activities (11,795) (10,681) --------- --------- Increase in cash and cash equivalents 17,844 5,765 Cash and cash equivalents, beginning of year 54,245 48,480 --------- --------- Cash and cash equivalents, end of year $ 72,089 $ 54,245 ========= ========= Reconciliation of net loss to cash provided by operating activities: Net loss $(136,450) $(117,916) Items not requiring cash: Management contract fees paid in GRC stock (186,000) (164,000) Realization reserve for GRC stock 186,000 164,000 Depreciation, depletion and amortization 18,275 15,473 Decrease in other assets related to operations 3,038 18,299 Increase in liabilities related to operations 141,276 103,255 --------- --------- Cash provided by operating activities $ 26,139 $ 19,111 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 59 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: U.S. Gold Corporation (the "Company") was organized under the laws of the State of Colorado on July 24, 1979. Since its inception, the Company has been engaged in the exploration for, development of, and the production and sale of gold and silver. BASIS OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. The financial statements of Tonkin Springs LLC ("TSLLC") have been consolidated effective October 17, 2001 upon the withdrawal from TSLLC of Tonkin Springs Holding Inc. who prior to such withdrawal was 60% owner and manager of the project. STATEMENTS OF CASH FLOWS: The Company considers cash in banks, deposits in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents. EQUITY METHOD INVESTMENTS: Investment in common stock of Gold Resource Corporation, an affiliate of the Company, earned under a management contract dated July 1, 2000 is recorded under the equity method of accounting. The shares of Gold Resource earned under the contract have been assessed by the Company to be of undeterminable market value and have therefore been recorded at zero basis. See Footnote 13 for additional information. Prior to the withdrawal of Tonkin Springs Holding Inc. ("TSHI") from the Tonkin Springs LLC ("TSLLC"), the Company accounted for its 40% investment in TSLLC by the equity method of accounting. However, since TSHI was responsible for 100% of the funding required for TSLLC and since the Company did not have the contractual right to the economic benefits of such losses, the Company did not record its pro-rata share of TSLLC losses in its statement of operations. PLANT, EQUIPMENT AND VEHICLES: Plant, equipment and vehicles are carried at cost not in excess of their estimated net realizable value. Normal maintenance and repairs are charged to earnings while expenditures for major maintenance and betterments are capitalized. Examples of the latter would include mill facilities refurbishments and changes to the process equipment. Gains or losses on disposition are recognized in operations. EXPLORATION AND DEVELOPMENT COSTS: Costs of acquiring mining properties and any exploration and development costs are expensed as incurred unless proven and probable reserves exist and the property is a commercially minable property. 60 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Mine development costs incurred either to develop new ore deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are also capitalized. Costs incurred to maintain current production or to maintain properties on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment. The Company evaluates, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs to determine if these costs are in excess of their net realizable value and if an permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized mining costs and related property, plant and equipment costs are based upon expected future cash flows and/or estimated salvage value in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets." DEPRECIATION: Depreciation of plant, equipment and vehicles is computed using straight-line methods. Plant, equipment and vehicles are being depreciated over the estimated economic lives ranging from 3 to 5 years. PROPERTY RECLAMATION COSTS: The estimated reclamation cost obligation related to present disturbances at the Tonkin Springs Properties is carried as a liability. Changes to these estimates, or the estimated reclamation costs associated with other mineral properties, are accrued and charged over the expected life of each property using the units of production method. Ongoing environmental and reclamation expenditures are expensed as incurred. STOCK OPTION PLANS: The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for all stock option plans. Under APB Opinion 25, no compensation cost has been recognized for stock options issued to employees as the exercise price of the Company's stock options granted equals or exceeds the market price of the underlying common stock on the date of grant. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro forma information regarding net income as if compensation costs for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. REVENUE RECOGNITION: Project payments are recognized as revenue as earned. Gains on the sale of mineral interests includes the excess of the net proceeds from sales over the Company's net book value in that property. The Company recognizes management contract fees paid in the form of restricted equity securities as revenues when earned at the approximate cost of providing such management services. 61 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED PER SHARE AMOUNTS: Statement of Financial Accounting Standards No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period (14,011,400 for 2001 and 13,972,852 for 2000). Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company, similar to fully diluted earnings per share. As of December 31, 2001 and 2000, options are not considered in the computation of diluted earnings per share as their inclusion would be antidilutive. INCOME TAXES: The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 ("SFAS No. 109.") Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. BUSINESS RISKS: The Company continually reviews the mining risks it encounters in its operations. It mitigates the likelihood and potential severity of these risks through the application of high operating standards. The Company's operations have been and in the future may be, affected to various degrees by changes in environmental regulations, including those for future site restoration and reclamation costs. The Company's business is subject to extensive license, permits, governmental legislation, control and regulations. The Company endeavors to be in compliance with these regulations at all times. USE OF ESTIMATES: The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and assumptions that affect the amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2001. The respective carrying value of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments include cash and cash equivalents and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair value or they are receivable or payable on demand. 62 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED HEDGING ACTIVITIES: The Company applies FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" which was effective for fiscal years beginning after June 15, 2000. SFAS No. 133, "Accounting for Derivative Instruments and Hedging activities" requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Implementation of this standard did not have a material effect on the consolidated financial statements. REVENUE RECOGNITION: In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB No. 101"). SAB 101 provides guidance on applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements and is effective in the Company's fourth quarter of 2000. The implementation of SAB No. 101 did not impact the Company's operating results. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS: In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for the year beginning January 1, 2002; however certain provisions of that Statement apply to goodwill and other intangible assets acquired between July 1, 2001, and the effective date of SFAS 142. The Company does not believe the adoption of these standards will have a material impact on its financial statements. ASSET RETIREMENT OBLIGATIONS: In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations. 63 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSTS: In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations. 2. GOING CONCERN The Company's financial statements are prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses for the years ended December 31, 2001 and 2000 of $136,450 and $117,916, respectively. As discussed in Note 3, the Company's partner in the Tonkin Springs project withdrew effective October 17, 2001. Payments from the former partner were the Company's sole source of operating revenue during the years ended December 31, 2001 and 2000. The Company's ability to continue as a going concern is contingent upon its ability to secure financing, increase ownership equity and attain profitable operations. The Company is pursuing financing for its operations which could include issuance of equity of the Company in public or private transactions, the sale of a portion of its assets which could include sale of a royalty interest at Tonkin Springs, and borrowing with secured, unsecured or convertible debt. The Company may also consider third party joint venture participation at its Tonkin Springs project. It is presently uncertain if any such financing will be available to the Company, or will be available on terms acceptable to the Company. In addition, the Company has begun the evaluation of the potential of recommencing gold production operations at the Tonkin Springs project utilizing the known mineralized material and existing facilities to the extent possible. This involves the evaluation of the financial aspects and operational issued involved and the processes necessary to recommence production. In addition, this process also involves the identification, engineering and estimation of the additional capital investment required as well as the evaluation and estimation of the time required to seek amendments of or new regulatory permits and authorities to allow resumption of operations. The Company could also seek a joint venture partner at Tonkin Springs to participate in this evaluation process and funding for any operations. 64 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 3. TONKIN SPRINGS PROJECT The Company owns 100 percent of the Tonkin Springs LLC, a Delaware limited liability company ("TSLLC") which in turn owns the Tonkin Springs gold mine property located in Eureka County Nevada. The 100 percent ownership in TSLLC was achieved effective October 17, 2001 upon the withdrawal from TSLLC of our former partner, Tonkin Springs Holding Inc. ("TSHI") who prior to their withdrawal held 60 percent ownership in TSLLC and were the project managers. TSHI is owned by subsidiaries of Sudbury Contact Mines Limited, an Ontario, Canada corporation ("Sudbury")(SUD:TSE), which is itself a subsidiary of Agnico-Eagle Mines Limited, an Ontario, Canada corporation ("Agnico-Eagle") (AME:NYSE). Effective October 17, 2001 the Company commenced full consolidation of TSLLC into its consolidated financial statements. The Company is currently evaluating the Tonkin Springs property to determine if the property can be put back into production. The Company plans to and will be required to arrange additional funding through the sale of equity, assets or incurring debt in order to carryout its business objectives. After the withdrawal of TSHI, TSVLP assumed management responsibilities for TSLLC At December 31, 2001, the Company's ownership in TSLLC is held 99.5 percent by Tonkin Venture Limited Partnership, a Nevada limited partnership ("TSVLP") and 0.5 percent by U.S. Environmental Corporation, a Colorado corporation and subsidiary of the Company. TSVLP, in turn, is likewise owned 100% by two of our wholly-owned subsidiaries. The TSLLC agreements provided for withdrawal of a member. However, TSVLP and TSHI had certain disputes regarding the obligations and responsibilities of TSHI in connection with and following TSHI's withdrawal from TSLLC effective October 17, 2001. These issues were resolved under a Settlement Agreement dated October 31, 2001 (the Settlement Agreement). Under the Settlement Agreement, TSHI paid i) the remaining payment due to TSVLP in the amount of $90,000, ii) $60,000 for the remaining 2001 Program and Budget for TSLLC, iii) $19,347 in actual costs of repairs to pad liner at the Project caused by wind damage prior to October 17, 2001, and iv) funded in the name of TSLLC $437,900 into the restricted cash bond to secure reclamation of the properties, and TSHI committed up to and funded through an escrow account deposit $250,000 to be used to pay for the costs associated with the Mitigation Work Program (the Work Program) within the TSP-1 pit area of the Tonkin Springs project. The Work Program entails plugging of certain drill holes which were a requirement of certain existing permits issued by regulatory authorities. The Work Program has been approved by appropriate governmental agencies and is to be administered by the engineering firm Steffen Robertson & Kirsten (U.S.), Inc. (also referred to as "SRK"). TSLLC, TSHI and SRK have entered into a Technical Services Agreement dated December 18, 2001 to govern the Work Program. In exchange for the above payments and the TSHI Funding Commitments, the parties have agreed under the Settlement Agreement to release each other from any further obligations under the Agreement. The commencement of activities under the Work Program has commenced in January 2002 and is anticipated to be completed by June 30, 2002. 65 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 3. TONKIN SPRINGS PROJECT, CONTINUED Under the TSLLC agreements, TSHI was required to fund all costs of TSLLC until their withdrawal. During the period from February 26, 1999 through October 17, 2001, TSHI has reported that it spent approximately $5.1 million at Tonkin Springs including exploration expenditures in the approximate amount of $2.6 million, reclamation and bonding of approximately $.5 million and holding costs of approximately $2.0 million. The following is the summarized statement of operations for TSLLC for year ended December 31, 2000 and for the period from January 1, 2001 to October 17, 2001, all costs of which were funded by TSHI: Period from January 1 to Year Ended October 17, 2001 December 31, 2000 Interest income $ 70,135 $ 60,126 ----------- ------------ Exploration expense 720,838 1,162,281 Environmental 63,817 465,473 Property holding costs 641,218 631,753 Depreciation expense 36,947 46,345 ----------- ------------ 1,462,820 2,305,852 ----------- ------------ Net loss $(1,392,685) $(2,245,726) ============ ============ During the period of TSHI's involvement with TSLLC it paid TSVLP an aggregate $1,720,000 as partial consideration for the terms and conditions of the TSLLC of which $540,000 were received in each of years 2001 and 2000. On December 18, 2001, The Company signed a Technology Option Agreement with Newmont Technologies Limited, a subsidiary of Newmont Mining Corporation ("Newmont"), that will allow the Company to use Newmont's proprietary N2TEC(R) Flotation Technology at the Tonkin Springs property. Terms of the agreement with Newmont include an initial license fee of $50,000 (of which $10,000 was paid with the option agreement) and ongoing net smelter return production royalty of 2% of precious metals paid utilizing the Newmont technology. Upon finalization of the license agreement anticipated in 2002, the Company would be able to use Newmont's commercially proven technology to process sulfide gold mineralization at Tonkin Springs. As 100% interest owner of TSLLC the Company is responsible for the reclamation obligations related to disturbances at Tonkin Springs. The current estimate of reclamation costs of disturbances of the Properties is approximately $1.83 million which estimate has been filed with and approved by appropriate governmental agencies (the Nevada Department of Environmental Protection and the 66 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 3. Tonkin Springs Project, continued Federal Bureau of Land Management.) Bonding of reclamation under various Nevada and Federal Bureau of Land Management agencies by TSLLC is in place in the form of cash bonds posted in the amount of $1.83 million secured by a restricted cash deposits. Actual reclamation, generally, will be commenced upon the completion of operations at the Properties. 4. LOAN SETTLEMENT AGREEMENT WITH FABC On February 21, 1992, the Company entered into a Loan Settlement Agreement with its senior secured lender, The French American Banking Corporation ("FABC"). The Company discharged its debt to FABC and terminated all prior security interests related thereto. As part of the consideration to FABC under the Loan Settlement Agreement, the Company entered into an agreement between Tonkin Springs Gold Mining Company, a wholly-owned subsidiary of the Company ("TSGMC") and FABC entitled "Agreement To Pay Distributions," which requires TSGMC to pay a limited portion of certain distributions from TSVLP to FABC. TSVLP has complete control of such distributions, if any, to TSGMC. Under the terms of the Agreement To Pay Distributions, TSGMC is required to pay to FABC (i) the first $30,000 in cash or value of asset distributions, as defined in such agreement, received from TSVLP, plus (ii) an amount equal to 50 percent of such retained distributions in cash or value of asset distributions after TSGMC has first received and retained $500,000 of such retained distributions. This obligation to FABC shall terminate after FABC has been paid a total of $2,030,000 thereunder. 5. PLANT, EQUIPMENT AND VEHICLES At December 31, 2001, TSLLC plant, equipment and vehicles consisted of the following: Mill equipment $1,549,896 Buildings 92,719 Office equipment 3,157 Vehicles 8,222 ---------- Subtotal 1,653,994 ---------- Less accumulated depreciation (104,097) ---------- Total $1,549,897 ========== At December 31, 2001, furniture, equipment and vehicles, other than located at the Tonkin Springs project, consisted of the following: Office furniture and equipment $ 42,589 Trucks and autos 78,137 Equipment 19,451 ---------- Subtotal 140,177 ---------- Less: accumulated depreciation (115,051) ---------- Total $ 25,126 ========== 67 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 6. INCOME TAXES In various transactions entered into February 21, 1992, the Company had an ownership change, as that term is defined under Section 382 (g), IRC. As a result, the tax net operating loss carry forwards and the investment tax credit carry forwards are subject to annual limitations under Section 382 IRC, following the date of such ownership change. Except as noted below, the Company will receive no future benefits from net operating loss carryforwards or investment tax credit carryforwards existing as of the date of the ownership change. At December 31 2001, the Company estimates that tax loss carry forwards total approximately $4,200,000 expiring through year 2019. The Company has an additional capital loss carryforward of approximately $1,900,000 which are only available against capital gains from investment securities expiring in years 2002 and 2004. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 are presented below: Deferred tax assets: Alternative minimum tax credit carryfoward $ 11,200 Reclamation obligation 140,800 Net operating loss carryforward 927,400 Capital loss carryforward 268,400 Total gross deferred tax assets 1,347,800 ----------- Less valuation allowance (1,093,200) ----------- Net deferred tax assets 254,600 ----------- Deferred tax liabilities: Basis in TSVLP (254,600) ----------- Total gross deferred tax liabilities (254,600) Total net deferred tax asset $ - =========== The Company believes that it is unlikely that the net deferred tax asset will be realized. Therefore, the full valuation allowance has been provided for net deferred tax assets. The change in 2001 in the deferred tax asset valuation allowance is approximately $63,000. A reconciliation of the tax provision for 2001 and 2000 at statutory rates is comprised of the following components: 2001 2000 ---- ---- Statutory rate tax provision on book loss $(30,000) $(26,000) Book to tax adjustments: Valuation allowance 30,000 26,000 -------- -------- Tax provision $ - $ - ======== ======== 68 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 7. SHAREHOLDERS' EQUITY Stock options have been granted to key employees, directors and others under the Non-Qualified Amended and Restated Stock Option and Stock Grant Plan (the "Plan"). Options to purchase shares under the Plan were granted at market value as of the date of the grant. The total number of shares that have been reserved under the Plan is 2,500,000. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used: (1) for the 1999 grant: dividend yield of 0 percent; expected volatility of 4.6 percent; risk free interest rate of 5.4 percent; and expected life of 4.1 years.
2001 2000 ---- ---- Weighted Weighted Average Average Range of Exercise Range of Exercise Shares Prices Shares Prices --------- -------- -------- -------- Outstanding, beginning of year 2,101,420 $.16 2,110,795 $.16 Granted - - - - Exercised (53,125) $.16 (9,375) $.16 Canceled - - - - Expired - - - - --------- ---- --------- ---- Outstanding, end of year 2,048,295 $.16 2,101,420 $.16 Options exercisable, end of year 2,048,295 $.16 2,101,420 $.16 Weighted average fair value of option granted during year $ - $ -
The following table summarizes information about stock options outstanding at December 31, 2001: Options Outstanding Weighted Average - ------------------- ---------------------- Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/2001 Life Price at 12/31/01 Price - -------- ------------- ----------- --------- ----------- --------- $.16 2,048,295 2.1 yrs. $.16 2,048,295 $.16 8. EMPLOYEE BENEFIT PLANS On December 10, 1985, the Company's Board of Directors adopted a Simplified Employee Pension Plan ("SEP"). The Company intends to make a determination of contributions under the SEP on an annual basis, based upon review by the Board 69 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 8. EMPLOYEE BENEFIT PLANS, CONTINUED of Directors of the Company's financial statements as of its fiscal year end. The Company has not yet determined any contributions to the SEP for the year ended December 31, 2001 and no contribution was made for the year ended December 31, 2000. Under the SEP, the Company has the option of contributing a certain amount directly to its employees' Individual Retirement Accounts. The Plan covers all employees of the Company with certain participation requirements, however the Company is not required to make any contributions in a given year. If contributions are made, they must be made to all eligible employees. Contributions made under the SEP in any one calendar year for any one employee may not be more than the smaller of $25,500 or 15 percent of that employee's total compensation. 9. LEASE COMMITMENTS AND CONTINGENCIES The Company has leased office equipment a under non-cancelable operating lease which expires during December 2002. Future minimum lease payments as of December 31, 2001 are as follows: 2002 $3,185 Rent expense during the years ended December 31, 2001 and 2000 on all operating leases was approximately $12,260 and $10,385, respectively. A mineral property lease at Tonkin Springs requires annual payments of advance royalties in the minimum amount of $150,000. The Company has transferred its interest in several mining properties over the past years. The Company could remain potentially liable for environmental enforcement actions related to its prior ownership interest of such properties. However, the Company has no reasonable belief that any violation of relevant environmental laws or regulations has occurred regarding these transferred properties. 10. INSTALLMENT PURCHASE CONTRACTS The Company has installment purchase contracts collateralized by three vehicles bearing an average interest of 9.3 percent per annum. Future maturities under these contracts as of December 31, 2001 are as follows: 2002 $12,933 2003 $ 8,257 70 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 11. STATEMENTS OF CASH FLOWS The Company's statements of cash flows exclude the following non-cash investing and financing activities: 2001 2000 ------ ------ Stock options exercised in exchange for directors fees payable $8,500 $1,500 12. RELATED PARTY TRANSACTIONS Gold Resource Corporation- Effective July 1, 2000, the Company and Gold Resource Corporation ("GRC"), a private Colorado corporation and affiliate company, entered into a management contract (the "2000 Management Contract") under which the Company provided general management of GRC business activities through December 31, 2001 in exchange for 1,280,000 shares of GRC. The Company has recorded the revenue earned under the contract at the approximate cost of providing the services to GRC under the contract, $186,000 and $164,000 for the years ended December 31, 2001 and 2000, respectively. GRC is responsible for all funding needed. The 1,280,000 shares of GRC owned by the Company represents approximately 37% of GRC capitalization as of December 31, 2001. Through the 2000 Management Contract the Company has the opportunity to participate in potential business activities in Mexico with no additional funding, other than that related to the existing level of corporate overhead expenditures during the contract period. Effective January 1, 2002, the Company and GRC entered into a new management contract (the "2002 Management Contract") which expires by its term December 31, 2002. Under the 2002 Management Contract the Company is to be paid $30,000 per month to provided general management of GRC business activities through December 31, 2002. Through March 19, 2002, GRC has paid $30,000 to the Company. As with the prior contract, GRC is responsible for all funding needed and intends to and is currently raising funds through the sale of GRC stock. The independent director(s) of the Company approved both contracts with GRC. William W. Reid and David C. Reid, each officers and directors of the Company have approximately 43% aggregate ownership as of December 31, 2001. William F. Pass, an officer of the Company, was granted by GRC a non-qualified stock option to purchase 200,000 shares of GRC common stock at an exercise price of $.50 per share. The 2002 Management Contract terminates December 31, 2002 and may be terminated by either party for cause with 30 days prior written notice. The Company anticipates that performance under the contract will involve no more than approximately 50 percent of its available staff time. Effective August 23, 2001 GRC leased a prospective silver/lead/zinc mining property in the Zimapan Mining District in the state of Hidalgo, Mexico. This project has been designated by GRC its Zimapan Project. To GRC's knowledge the Zimapan Project has never been explored by modern drilling techniques and it intends to commence a drilling program at the Zimapan Project during 2002. As noted above, the Company is managing all activities under the 2002 Management 71 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 12. RELATED PARTY TRANSACTIONS, CONTINUED Contract and GRC is responsible for funding the Zimapan Project. GRC is currently involved in an effort to raise funds through the sale of its common stock required to fund the drilling program, property maintenance costs and corporate overhead. As noted above, the shares of GRC are not currently publicly traded. The shares of GRC earned under the 2000 Management Contract have been assessed by the Company to have indeterminable market value and the investment has therefore been fully reserved by a valuation allowance of $186,000 and $164,000 for the shares earned during the years ended December 31, 2001 and 2000, respectively. Under the 2000 Management Contract, the 1,280,000 shares of GRC earned by the Company have a stated value of $.50/share for an aggregate $604,000 stated value. Under equity accounting, the Company has not recorded its share of GRC's operating losses to date since such recognition would reduce its zero basis investment in GRC to below zero. GRC's unaudited operating loss for year 2001 and 2000 is approximately $357,634 and $205,850, respectively, of which the Company's share would be approximately $121,538 and $41,063, respectively. The balance sheet of GRC as of December 31, 2001 reflects total assets of $90,774, primarily $83,874 in cash and time deposits, $6,180 in property and other assets, and liabilities to third party vendors of $5,167, with shareholders' equity of $85,609. The overhead expense of the Company allocated to the management contract for year 2001 and 2000 totals $185,933 and $163,398, respectively, primarily representing allocation of staff time. Other Related Party Items- Commencing in 1998 the executive officers of the Company have voluntarily deferred a portion of their base salary in order to conserve working capital of the Company. As of December 31, 2001, the total amount of such voluntary deferral was $390,094 including $131,757 and $113,449 relating to year 2001 and 2000, respectively. Director fees in the amount of $22,000 remain unpaid as of December 31, 2001. All of these amounts are reflected as related party liabilities, long-term of the Company as of December 31, 2001. 13. ADJUSTMENTS TO PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS Certain adjustments have been made to the financial statements and footnote disclosure for 2001 and 2000 regarding the recognition of revenue related to equity securities earned under a management services contract with GRC as well as realization reserves related to those GRC equity securities. The changes increased Other revenue and Costs and expenses by $186,000 and $164,000 in 2001 and 2000, respectively and had no effect on Net (loss) for either period. 72 U.S. GOLD CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Restated) (Unaudited) Nine Month Period Ended September 30, September 30, 2001 2002 ------------------------------- Other revenues: Tonkin Springs Project payments $ - $ 405,000 Management contract fees from Gold Resource Corporation ("GRC") (Note 3) 30,000 139,643 Interest income 6,698 73 Gain on sale of assets 15,498 - ---------- -------- Total revenues 52,196 544,716 ---------- -------- Costs and expenses: General and administrative 245,518 373,876 Tonkin Springs holding and other costs 802,103 - Cost of services provided under management contract with GRC (Note 3) 111,724 139,643 Realization reserve-GRC shares earned under management contract (Note 3) - 139,643 Interest 2,705 2,073 Depreciation 8,323 9,268 ----------- --------- Total costs and expenses 1,170,373 664,503 ----------- --------- (Loss) before income taxes (1,118,177) (119,787) ----------- --------- Provision for income taxes - - ----------- --------- Net (loss) $(1,118,177) $(119,787) =========== ========= Basic and diluted per share data: Basic $ (0.07) $ (0.01) =========== ========= Diluted $ (0.07) $ (0.01) =========== ========= The accompanying notes are an integral part of these consolidated financial statements. 73 U.S. GOLD CORPORATION CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2002 (Restated) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 17,632 Prepaid expense and other current assets 5,968 ----------- Total current assets 23,600 ----------- Plant, equipment and vehicles: Tonkin Springs plant, equipment and vehicles, net 1,549,897 Other office furniture, equipment and vehicles, net 18,040 ----------- Total plant, equipment and vehicles, net 1,567,937 ----------- Investment in affiliate-GRC, net of reserve for realization (Note 3) - Restrictive time deposits for reclamation bonding 1,838,796 Affiliate loan receivable-GRC (Note 3) 30,000 Other assets 48,760 ----------- TOTAL ASSETS $ 3,509,093 =========== LIABILITIES, RESERVE & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 99,775 Accrued salaries and directors fees (Note 3) 137,663 Installment purchase contracts 11,621 ----------- Total current liabilities 249,059 ----------- Related party payables, long-term (Note 3) 506,093 Reserve for reclamation 1,825,977 ----------- Total liabilities and reserve 2,581,129 Shareholders' equity (Note 2) Common stock, $.10 par value, 18,000,000 shares authorized; 16,383,533 shares issued and outstanding 1,638,353 Additional paid-in capital 32,557,743 Accumulated (deficit) (33,268,132) ----------- Total shareholders' equity 927,964 ----------- TOTAL LIABILITIES, RESERVE & SHAREHOLDERS' EQUITY $ 3,509,093 =========== The accompanying notes are an integral part of these consolidated financial statements. 74 U.S. GOLD CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine Months Ended September 30, 2002 (Unaudited) Common Stock ------------------------ Additional Par Paid-in Accumulated Shares Value Capital (Deficit) ---------- ---------- ----------- ----------- Balance, January 1, 2002 14,026,390 $1,402,639 $31,975,303 $(32,149,955) Sale of Shares and Warrants for Cash at $.35/share, net of issuance cost (Note 2) 857,143 85,714 187,285 - Sale of Shares for Cash at $.40/share, net of issuance cost (Note 2) 1,500,000 150,000 395,155 - Net (loss) - - - (1,118,177) ---------- ---------- ----------- ------------ Balance, September 30, 2002 16,383,533 $1,638,353 $32,557,743 $(33,268,132) ========== ========== =========== ============= The accompanying notes are an integral part of these consolidated financial statements. 75
U.S. GOLD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30 (Restated and Unaudited) 2002 2001 ---- ---- Cash flows from operating activities: Cash received from GRC management contract (Note 3) $ 30,000 $ - Cash received from Tonkin Springs Project distributions - 405,000 Cash paid to suppliers (623,487) (114,797) Cash paid to employees (239,046) (287,429) Interest received 6,698 73 Interest paid (2,705) (2,073) Income taxes paid - - ----------- --------- Cash provided by (used in) operating activities (828,540) 774 ----------- --------- Cash flows from investing activities: Payment on license (20,000) - Loan to affiliate-GRC (Note 3) (30,000) - Sale of assets 15,498 - ----------- --------- Cash (used in) investing activities (34,502) - ----------- --------- Cash flows from financing activities: Sale of common stock & warrants for cash, net of issuance cost (Note 2) 818,154 - Borrowing from related parties (Note 3) 29,358 - Repayment of borrowing from related parties (Note 3) (29,358) - Payments on installment purchase contracts (9,569) (8,727) ----------- --------- Cash provided by (used in) financing activities 808,585 (8,727) ----------- --------- (Decrease) in cash and cash equivalents (54,457) (7,953) Cash and cash equivalents, beginning of period 72,089 54,245 ----------- --------- Cash and cash equivalents, end of period $ 17,632 $ 46,292 =========== ========= Reconciliation of net loss to cash provided by (used-in) operating activities: Net (loss) $(1,118,177) $(119,787) Items not providing or requiring cash: Management contract fees paid in GRC stock - (139,643) Accrued and deferred salaries, and directors fees; related parties (Note 3) 231,662 98,817 Realization reserve for GRC stock - 139,643 Depreciation, depletion and amortization 8,323 9,268 Directors fees paid by exercise of stock options - 8,000 (Increase) in other assets related to operations (37,671) (2,304) Increase in liabilities related to operations 87,323 6,780 ----------- --------- Cash provided by (used in) operating activities $ (828,540) $ 774 =========== =========
The accompanying notes are an integral part of these consolidated financial statements. 76 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. Certain adjustments have been made in the financial statements for September 30, 2001 to conform to accounting and financial statement presentation for the period ended September 30, 2002. These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB/A as of and for the year ended December 31, 2001. REVENUE RECOGNITION: The Company recognizes management contract fees as revenues when earned and when payment is received or reasonably assured at the value of the consideration received or in the absence of fair value of consideration received, at the approximate cost of providing such management services. PER SHARE AMOUNTS: Statement of Financial Accounting Standards No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the periods (14,958,533 and 13,973,730 for the nine month periods ended September 30, 2002 and 2001). Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company, similar to fully diluted earnings per share. As of September 30, 2002 and 2001 options and warrants are not considered in the computation of diluted earnings per share as their inclusion would be antidilutive. 77 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) 2. SHAREHOLDERS' EQUITY On December 17, 2001 the Company entered into an agreement with IBK Capital Corp. of Toronto, Ontario, Canada ("IBK") whereby IBK agreed independently to assist the Company in seeking and arranging equity investment. The agreement with IBK includes a 9% commission due IBK computed on any money raised by IBK for the Company. The agreement with IBK has been extended through March 20, 2003. Effective May 30, 2002 the Company entered into a subscription agreement with Excalibur Limited Partnership ("Excalibur"), an Ontario, Canada limited partnership, for the sale of restricted common shares and warrants for $300,000 (the "Initial Private Placement"). The net proceeds of $272,999 from the First Private Placement allowed the Company to pay several important obligations related to the Tonkin Springs Properties including the annual minimum royalty payment ($170,000) on one of the leased properties. Due to the important nature of these required obligations, the Company was willing to negotiate a lower price per share with Excalibur and to include issuance of warrants to secure that initial funding for the Company. Under the First Private Placement the Company issued 857,143 restricted common shares to Excalibur and gave Excalibur 428,572 common stock warrants exercisable until May 30, 2004 at an exercise price of $0.53 per share. No value was assigned to the warrants. The Excalibur agreement required that the Company file and have effective a registration statement for the Excalibur purchased shares within 90 days or pay a penalty to Excalibur in the amount of 1 percent per month. While the Company has filed a preliminary registration statement with the Securities and Exchange Commission that registration statement was not effective as of September 30, 2002. Therefore as of September 30, 2002, the Company has accrued $3,000 as an accrued liability for this obligation. The Initial Private Placement was arranged by IBK who was paid a commission of $27,000. During the period June 5, 2002 through June 30, 2002, the Company entered into various subscription agreements with sophisticated private investors for the sale of 1,500,000 shares of restricted common stock at $.40/share for aggregate of $600,000 (the "Second Private Placement") with net proceeds of $545,155. The Second Private Placement was also arranged by IBK who was paid an additional commission and costs of $54,000. The Company is obligated to file a registration statement with the Securities and Exchange Commission for shares subject to the Initial Private Placement and the Second Private Placement and to maintain the effectiveness of such registration statement for the lesser of 2 years or when such registration is no longer required. Effective June 1, 2002, and related to the Second Private Placement, the executive officers and outside director of the Company voluntarily agreed not to exercise an aggregate of 870,000 option shares under existing stock option agreements with the Company until and unless additional authorized but unissued shares are available and reserved for such options by the Board of Directors of the Company. The executive officers outside director took this action in order to allow the Company additional available shares to be sold in the Second 78 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) 2. SHAREHOLDERS' EQUITY, CONTINUED Private Placement in order to raise additional working capital. The option shares subject to these exercise limitations could become available to the executive officers and outside director for exercise if and when shareholders approve an increase to the authorized number of Common Shares of the Company. 3. RELATED PARTY TRANSACTIONS GOLD RESOURCE CORPORATION- The Company owns 1,280,000 shares of Gold Resource Corporation ("GRC"), a private Colorado corporation and affiliate company, which shares were earned under a management contract which expired December 31, 2001. These shares are restricted securities and there is no public market for such securities. The Company has recorded a valuation reserve for the revenue associated with the shares of GRC received under this contract. These shares represent approximately 30% of GRC capitalization as of September 30, 2002. Effective January 1, 2002, the Company and GRC entered into a management contract (the "2002 Management Contract") which expires by its term December 31, 2002. Under the 2002 Management Contract the Company is to be paid $30,000 per month to provide general management of GRC business activities through December 31, 2002. The Company recognizes revenues under this contract upon receipt of funds due to the significant uncertainty regarding the collection of the management fee. Through September 30, 2002, the Company has recognized revenue of $30,000 related to the 2002 Management Contract. During August 2002, the Company made a $30,000 short-term, non-interest bearing unsecured loan to GRC in order to allow GRC to make a critical $50,000 lease payment on the Zimapan property. The independent director of the Company, Mr. John W. Goth, approved this loan in advance. GRC has committed to repay this loan from the first unrestricted proceeds of future equity sales of GRC stock. OTHER RELATED PARTY ITEMS- During the nine month period ended September 30, 2002, the Company elected not to pay certain salaries to its three executive officers in the amount of $109,163 in order to conserve working capital. In addition, during the first and second quarters of 2002, the three executive officers made cash advances to the Company to allow the payment of field personnel wages and certain critical payments. The maximum aggregate amount of such advances from the three executive officers to the Company was $29,358 which amount was repaid effective May 30, 2002 from a portion of the proceeds from the Initial Private Placement discussed above. 79 U.S. GOLD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) 3. RELATED PARTY TRANSACTIONS, CONTINUED Commencing in 1998 the executive officers of the Company have voluntarily deferred a portion of their base salary in order to conserve working capital of the Company. As of September 30, 2002, the total cumulative amount of such voluntary deferral was $506,093 of which $116,000 and $98,817 is related to the nine months ended September 30, 2002 and 2001, respectively. Director fees in the amount of $28,500 remain unpaid as of September 30, 2002 of which $6,500 and $-0- related to the nine months ended September 30, 2002 and 2001, respectively. All of these other remaining related party liabilities are reflected in the financial statements of the Company as of September 30, 2002. 4. GOING CONCERN The Company's financial statements are prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses for the nine months ended September 30, 2002 of $1,118,177 and has a working capital deficit of $225,549 at September 30, 2002. The Company's ability to continue as a going concern is contingent upon its ability to secure financing, increase ownership equity and attain profitable operations. The Company is pursuing financing for its operations which could include the sale of a portion of its assets, borrowing with secured, unsecured or convertible debt, or issuance of equity of the Company in public or private transactions. The Company may also consider third party joint venture participation at its Tonkin Springs properties or it could consider a potential merger with another company. It is presently uncertain if any such financing will be available to the Company, or will be available on terms acceptable to the Company. 5. ADJUSTMENTS TO PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS. Certain adjustments have been made to the financial statements and footnote disclosure for 2001 regarding the recognition of revenue related to equity securities earned under a management services contract with GRC as well as realization reserves related to those GRC equity securities. The changes increased OTHER REVENUE and COSTS AND EXPENSES by $139,643 for the nine-months ended September 30, 2001 and had no effect on Net (loss) for either period. 80 (back cover) ABOUT THIS PROSPECTUS This prospectus is part of a registration statement we have filed with the SEC. Under this registration statement, the Selling Shareholders named herein may sell up to 2,785,715 shares of U.S. Gold Corporation Common Stock described in this prospectus in one or more offerings. This prospectus provides you with a general description of the Common Stock the Selling Shareholders may offer. Each time the Selling Shareholders sell Common Stock, they will provide a prospectus and, if applicable, a post-effective amendment that will contain specific information about the terms of that offering. The post effective amendment may also add, update or change information contained in this prospectus. You should read this prospectus and the applicable prospectus post effective amendments. The registration statement that contains this prospectus as well as any post effective amendments thereto, including the exhibits to the registration statement, contain additional information about us and the securities the Selling Shareholders may offer under this prospectus. You can read that registration statement at the SEC's website or at the SEC's offices mentioned under the heading "ADDITIONAL INFORMATION AVAILABLE" elsewhere in this prospectus. Until __________________, 2002, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. You should rely only on information contained in this prospectus. Neither U.S. Gold Corporation nor the Selling Shareholders have authorized any other person to provide you with information different from that contained in this prospectus. The Common Stock will not be offered in any jurisdiction where the offering is not permitted. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company indemnifies and holds harmless its directors, executive officers as well as certain other persons from any and all claims, actions, costs, expense, damages and liabilities, including without limitation, reasonable attorney's fees, arising out of or in connection with activities of those individuals in performance of their respective duties on behalf of our company, except in the case of gross negligence or willful misconduct, to the fullest extent permitted by applicable Colorado law. The Colorado Business Corporation Act (the "Act") allows indemnification of directors, officers, employees and agents of the Company against liabilities incurred in any proceeding in which an individual is made a party because he was a director, officer, employee or agent of the Company if such person conducted himself in good faith and reasonable believed his actions were in, or not opposed to, the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. A person must be found to be entitled to indemnification under this statutory standard by procedures designed to assure that disinterested members of the Board of Directors have approved indemnification or that, absent the ability to obtain sufficient numbers of disinterested directors, independent counsel or shareholders have approved the indemnification based on a finding that the person has met the standard. Indemnification is limited to reasonable expenses. In addition, the Company's By-Laws provide that the Company shall have the power to indemnify its officers, directors, employees and agents to the extent permitted by the Act. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. We will pay all expenses in connection with the issuance and distribution of the securities being registered. The following table sets forth expenses and costs related to this offering (other than underwriting discounts and commissions) expected to be incurred with the issuance and distribution of the securities described in this registration statement. All amounts are estimate except for the Securities and Exchange Commission's registration fee: SEC registration fee $ 106 Legal fees and expenses for U. S. Gold Corporation $ 20,000 Accountants fees and expenses $ 9,000 Printing and engraving expenses $ 1,500 Miscellaneous $ 1,000 -------- Total $ 31,606 II-1 Item 26. RECENT SALES OF UNREGISTERED SECURITIES. During the preceding three years, the Company has sold an aggregate of 2,785,715 shares of its Common Stock without registering those securities under the Securities Act, all of which shares of Common Stock are subject to and included for registration in this filing, as follows:
Section of Amount Price Total Underwriter Act for Date Purchaser Sold per share Offering Fee(1) Exemption - ---- --------- ---------- --------- ----------- ----------- ----------- 5/30/02 Excalibur Limited 857,143 $.35 $300,000 $27,000 Reg. D(15) Partnership (2) 428,572(3) $.53 $227,143(3) $20,443(3) Reg. D(15) 6/5/02 Global Gold 125,000 $.40 $50,000 $4,500 Reg. D(15) & Precious (4) 6/18/02 1056149 Ontario 50,000 $.40 $20,000 $1,800 Reg. D(15) Ltd. c/o HSBC Securities (Canada) Inc. (5) 6/18/02 John Ryan (6) 375,000 $.40 $150,000 $13,500 Reg. D(15) 6/18/02 Michaux-Gestion 250,000 $.40 $100,000 $9,000 Reg. D(15) Paris (7) 6/18/02 ING Ferri 125,000 $.40 $50,000 $4,500 Reg. D(15) a/c 2000024 (8) 6/18/02 Concord Bank 50,000 $.40 $20,000 $1,800 Reg. D(15) Limited (9) 6/20/02 Excelsior 125,000 $.40 $50,000 $4,500 Reg. D(15) Mining Fund (10) 6/28/02 R. Clarke (11) 75,000 $.40 $30,000 $2,700 Reg. D(15) 6/28/02 Arlington Group 187,500 $.40 $75,000 $6,750 Reg. D(15) PLC (12) 6/28/02 Kayjay Realty 112,500 $.40 $45,000 $4,050 Reg. D(15) Inc. (13) 6/28/02 GUNDYCO in 25,000 $.40 $10,000 $ 900 Reg. D(15) Trust for Account No. 500-1327427 (14)
- ------------------ (1) One December 17, 2002 the Company and GRC jointly entered into an agreement with IBK Capital Corp. of Toronto, Ontario, Canada ("IBK") whereby IBK agreed assist the Company and GRC in seeking and arranging equity investment independently for the Company as well as for GRC. The agreement provided commission due IBK of 9% computed on any money raised for the Company or for IBK. (2) Excalibur Limited Partnership is an Ontario, Canada limited partnership the sole general partner of which is William Hechter. (3) Represents 428,572 shares of Common Stock underlying unexercised warrants that are exercisable as of June 30, 2002 and expiring May 30, 2004. (4) Global Gold & Precious is a gold and precious mutual fund company based in Paris, France with investment manager Jean Bernard Guyon. (5) 1056149 Ontario Ltd. is an Ontario, Canada private foreign investment management company controlled by Marilyn Barker. II-2 (6) Mr. John Ryan is a Canadian individual who makes his own investment decisions. (7) Michaux-Gestion Paris is a private foreign investment management company based in Paris, France with investment manager Remy Bert. (8) ING Ferri a/c 2000024 is the account of Societe Parisienne Gestion is a private foreign investment management company based in Paris, France with investment officer Yves Tailleur. (9) The Concorde Bank Limited is a bank registered in Barbados, West Indies, with investment manager Norbert Marchal. (10) Excelsior Mining Fund is registered in Nassau (Bahamas) and is managed by Lion Resources Management Ltd, London, England. (11) Mr. R. Clark is a individual living in France who makes his own investment decisions. (12) The Arlington Group PLC is a private foreign venture capital firm based in London, England. (13) Kayjay Realty Inc. is a business based in Ontario, Canada, and the investment account is managed by HSBC Securities (Canada) Inc. (14) GUNDYCO in Trust for Account No. 500-1327427 is managed by CIBC Wood Gundy for the benefit of Minh-Thu Dao-Hoy, an individual living in Canada. (15) The Company relied on Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D promulgated under the Act. All purchasers are "Accredited Investors" as that term is defined in Regulation D. All purchasers had access to information that enabled them to evaluate the risks and merits to an investment in the Company. ITEM 16. EXHIBITS 3.0 Company's Articles of Incorporation, as Amended June 22, 1988, July 5, 1988, and December 20, 1991 (incorporated by reference from the Report on Form 10-KSB dated December 31, 1995, Exhibit 3.0). 3.1 Company's Bylaws, as Amended June 22, 1988 (incorporated by reference from the Report on Form 10-KSB dated December 31, 1995, Exhibit 3.1). 5 Opinion of Moye, Giles, O'Keefe, Vermeire & Gorrell LLP regarding legality of the securities covered by this Registration Statement (to be filed with Amendment No. 3). 10.1 Agreement To Pay Distributions dated February 21, 1992, by and between Tonkin Springs Gold Mining Company and French American Banking Corporation (incorporated by reference from the Report on Form 8-K dated February 21, 1992, Exhibit 4). 10.2 Amended and Restated Non-Qualified Stock Option and Stock Grant Plan, as amended effective December 8, 1993 (incorporated by reference from the Report on Form 10-KSB for the year ended December 31, 1993, Exhibit 10.14). 10.3 Amended Employment Agreement with William W. Reid dated June 1, 1995 (Incorporated by reference from the Report on Form 10-QSB for the period ended September 30, 1995, Exhibit 10.1). 10.4 Amended Employment Agreement with William F. Pass dated June 1, 1995 (Incorporated by reference from the Report on Form 10-QSB for the period ended September 30, 1995, Exhibit 10.2). II-3 10.5 Amended Employment Agreement with David C. Reid dated June 1, 1995 (Incorporated by reference from the Report on Form 10-QSB for the period ended September 30, 1995, Exhibit 10.3). *10.6 Members Agreement of the Members of Tonkin Springs LLC by and between Tonkin Springs Venture Limited Partnership and Tonkin Springs Holdings Inc. dated February 26, 1999 *10.7 Members' Agreement of the Members of Tonkin Springs LLC as Amended by and between Tonkin Springs Venture Limited Partnership and U.S. Environmental Corporation dated October 18, 2001. *10.8 Operating Agreement of the Members of Tonkin Springs LLC by and between Tonkin Springs Venture Limited Partnership and Tonkin Springs Holdings Inc. dated February 26, 1999. *10.9 Operating Agreement of the Members of Tonkin Springs LLC as Amended by and between Tonkin Springs Venture Limited Partnership and U.S. Environmental Corporation dated October 18, 2001. 10.10 Settlement Agreement between Tonkin Springs Holding Inc., and Tonkin Springs Management Co., and Tonkin Springs Venture Limited Partnership and Tonkin Springs LLC, dated October 31, 2001 (Incorporated by reference from the Report on Form 10-QSB for the period ended September 31, 2001, Exhibit 10.3.) *10.11 Technical Services Agreement dated December 18, 2001 between Tonkin Springs Holding Inc., Tonkin Springs Venture Limited Partnership and Tonkin Springs LLC, and Steffen Robertson & Kirsten (U.S.), Inc *10.12 Amendment to Employment Agreement with William W. Reid dated July 21, 1998. *10.13 Amendment to Employment Agreement with William F. Pass dated July 21, 1998 *10.14 Amendment to Employment Agreement with David C. Reid dated July 21, 1998. 10.15 Management Agreement dated effective July 1, 2000 between U.S. Gold Corporation and Gold Resource Corporation (Incorporated by reference from the Report on Form 10-QSB for the period ended June 30, 2000, Exhibit 6.a.) *10.16 Management Agreement dated effective January 1, 2001 between U.S. Gold Corporation and Gold Resource Corporation *10.17 Technology Option Agreement dated December 18, 2001 between Newmont Technologies Limited and U.S. Gold Corporation. II-4 *10.18 Non-Exclusive Technology License Agreement dated May 31, 2002 by and between Newmont USA Limited, d/b/a Newmont Mining Corporation and U.S. Gold Corporation *10.19 Subscription Agreement dated May 30, 2002 by and between Excalibur Limited Partnership and U.S. Gold Corporation. 10.20 Form of Subscription Agreement at $.40/share with various Selling Shareholders of the Common Stock of U.S. Gold Corporation (Incorporated by reference from the Report on Form 10-QSB for the period ended June 30, 2002, Exhibit 10.3). *10.21 2002 Stock Option and Stock Grant Plan dated August 8, 2002. *10.22 Incentive Stock Option Agreement dated August 8, 2002 between the Company and William W. Reid. *10.23 Incentive Stock Option Agreement dated August 8, 2002 between the Company and William WF. Pass. *10.24 Incentive Stock Option Agreement dated August 8, 2002 between the Company and David C. Reid. 21. Subsidiaries of the U.S. Gold Corporation (Incorporated by reference from the Report on Form 10-KSB for the year ended December 31, 2001, Exhibit 21). *23.1 Consent of Stark Winter Schenkein & Co., LLP. 23.2 The consent of Moye, Giles, O'Keefe, Vermeire & Gorrell LLP is included in Exhibit 5. - ----------------- * Filed herewith. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that it will: 1. File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: a. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; b. To reflect in the prospectus any facts or events, individually or together, represent a fundamental change in the information 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 II-5 deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of registration Fee" table in the effective registration statement. c. Include any additional or changed material information on the plan of distribution. 2. For the purposes of determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. 3. To file a post effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. 4. To supplement the prospectus, after the expiration on the warrant period, May 30, 2004, to set forth the results of the exercise of the warrants, if any, thereunder. 5. Insofar as indemnification for liabilities arising under the Securities Act 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 Commission such indemnification is against public policy as expressed in the Securities 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 its is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lakewood, State of Colorado, on December 4, 2002. U.S. GOLD CORPORATION (Registrant) /s/ William W. Reid - ------------------------------------- By: William W. Reid President and Chief Executive Officer and Chairman of the Board of Directors In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacity and on the dates stated. /s/ William W. Reid - -------------------------------------- Date: December 4, 2002 William W. Reid Title: Chairman of the Board of Directors /s/ William F. Pass - -------------------------------------- Date: December 4, 2002 William F. Pass Title: Vice President an Chief Financial Officer /s/ David C. Reid - -------------------------------------- Date: December 4, 2002 David C. Reid Title: Vice President and Member of the Board of Directors /s/ John W. Goth - -------------------------------------- Date: December 4, 2002 John W. Goth Title: Member of the Board of Directors II-7 EX-10 3 exh10_6.txt EXHIBIT 10.6 Exhibit 10.6 ------------ MEMBERS' AGREEMENT of the Members of TONKIN SPRINGS LLC A Delaware Limited Liability Company TABLE OF CONTENTS Page No. ----- ARTICLE I DEFINITIONS AND CROSS-REFERENCES................................ 1 1.1 Definitions........................................................... 1 1.2 Cross References...................................................... 1 ARTICLE II CONTRIBUTIONS AND PAYMENTS BY MEMBERS.......................... 1 2.1 Members' Initial Contributions........................................ 1 2.2 Additional Cash Contributions......................................... 2 2.3 Withdrawal or Deemed Withdrawal Prior to the Cut-Off Date............. 2 2.4 Minimum Work Commitment............................................... 3 2.5 Grant of Lien and Security Interest................................... 3 2.6 Financing of Major Development Programs............................... 4 2.7 Pledge and Subordination of Interests................................. 4 2.8 TSHI Payments to TSVLP................................................ 4 ARTICLE III REPRESENTATIONS AND WARRANTIES; TITLE TO ASSETS; INDEMNITIES.. 5 3.1 Representations and Warranties........................................ 5 3.2 Disclosures........................................................... 9 3.3 Loss of Title......................................................... 9 3.4 Limitation of Liability............................................... 9 3.5 Indemnification....................................................... 9 ARTICLE IV INTERESTS OF MEMBERS........................................... 10 4.1 Continuing Liabilities Upon Adjustments of Ownership Interests........ 10 4.2 Continuing Obligations and Environmental Liabilities.................. 10 4.3 Grant of Lien and Security Interest................................... 11 4.4 Subordination of Interests............................................ 11 ARTICLE V RELATIONSHIP OF THE MEMBERS..................................... 11 5.1 Transfer or Termination of Rights..................................... 11 5.2 Abandonment and Surrender of Properties............................... 11 5.3 Implied Covenants..................................................... 11 5.4 No Third Party Beneficiary Rights..................................... 11 ARTICLE VI ACQUISITIONS WITHIN AREA OF INTEREST........................... 12 6.1 General............................................................... 12 6.2 Notice to Non-Acquiring Member........................................ 12 6.3 Option Exercised...................................................... 12 6.4 Option Not Exercised.................................................. 12 6.5 Non-Compete Covenants................................................. 12 6.6 Campbell-Simpson Lease................................................ 12 ARTICLE VII GOVERNING LAW................................................. 13 7.1 Governing Law......................................................... 13 ARTICLE VIII GENERAL PROVISIONS........................................... 13 8.1 Notices............................................................... 13 8.2 Gender................................................................ 13 8.3 Currency.............................................................. 13 8.4 Headings.............................................................. 13 8.5 Waiver................................................................ 13 8.6 Modification.......................................................... 14 8.7 Force Majeure......................................................... 14 8.8 Rule Against Perpetuities............................................. 14 8.9 Further Assurances.................................................... 14 8.10 Entire Agreement; Successors and Assigns............................. 14 8.11 Counterparts......................................................... 14 i MEMBERS' AGREEMENT of the Members of TONKIN SPRINGS LLC A Delaware Limited Liability Company This Members' Agreement (the "Agreement") is made as of February 26, 1999 ("Effective Date") between TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP, a Nevada limited partnership ("TSVLP"), the address of which is 55 Madison Street, Suite 700, Denver, Colorado 80206, and TONKIN SPRINGS HOLDINGS INC., a Colorado corporation ("TSHI"), the address of which is 401 Bay Street, Suite 2302, Toronto, Ontario M5H2Y4, Canada. RECITALS A. Gold Capital Corporation, a Colorado corporation ("GCC") and TSVLP were parties to a Mining Venture Agreement dated December 31, 1993, as amended on March 7, 1997 and July 7, 1997 (the "1993 Agreement"). Pursuant to the 1993 Agreement, GCC and TSVLP formed the Venture. At all times while the 1993 Agreement remained in effect GCC was Manager of the Venture and had overall management responsibility for, and control of, Operations. GCC and TSVLP owned as tenants-in-common certain assets which were subject to the 1993 Agreement and included certain Properties situated in Eureka County, Nevada. These Properties and Assets are described in Exhibit A and defined in Exhibit D of the LLC Agreement (as defined in Recital C below). The 1993 Agreement has been terminated, with GCC being assigned and retaining an undivided 60% interest and TSVLP being assigned and retaining an undivided 40% interest in the Properties and Assets, free and clear of the 1993 Agreement and any and all Liens of GCC, TSVLP, or their respective Affiliates. B. Immediately following termination of the 1993 Agreement, and immediately prior to execution of this Agreement and the LLC Agreement, TSHI acquired GCC's undivided 60% interest in the Properties and Assets. C. TSVLP and TSHI wish to form and operate a limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. 18-101 et. seq. (the "Act") to own and operate the Properties and Assets. The name of the limited liability company shall be Tonkin Springs LLC (the "Company") and its affairs shall be governed by that certain Operating Agreement of Tonkin Springs LLC of even date herewith (the "LLC Agreement"). TSVLP and TSHI desire to enter into this Agreement to provide, amongst themselves, for their respective contributions to the Company and for certain other matters, all as set forth herein. NOW THEREFORE, in consideration of the covenants and conditions contained herein, TSVLP and TSHI agree as follows: ARTICLE I DEFINITIONS AND CROSS-REFERENCES I.1 Definitions. The terms defined herein shall have the defined meaning wherever used in this Agreement. Capitalized terms used but not defined in this Agreement shall have the meanings given thereto in the LLC Agreement. I.2 Cross References. References to exhibits are to Exhibits of the LLC Agreement. References to "Articles," "Sections" and "Subsections" refer to Articles, Sections and Subsections of this Agreement unless indicated otherwise. References to "Paragraphs" and "Subparagraphs" refer to paragraphs and subparagraphs of the referenced Exhibits. ARTICLE II CONTRIBUTIONS AND PAYMENTS BY MEMBERS II.1 Members' Initial Contributions. TSVLP, as its Initial Contribution, shall and does hereby transfer, convey, assign and contribute to the Company its undivided 40% interest in the Assets and any other right, title and interest held by TSVLP or its Affiliates in or to the Assets. TSHI, as its Initial Contribution, shall and does hereby transfer, convey, assign and contribute to the Company its undivided 60% interest in the Assets and any other right, title and interest held by TSHI or its Affiliates in or to the Assets. For purposes of determining TSVLP's and TSHI's initial or subsequently adjusted Ownership Interests, including the calculation of dilution under Section 4.1(b) of the LLC Agreement, and for no other purpose, the value of TSVLP's Initial Contribution 1 shall be deemed to be Two Million Dollars ($2,000,000) and the value of TSHI's Initial Contribution shall be deemed to be Three Million Dollars ($3,000,000). As of the Effective Date of this Agreement, after taking into account the Members' Initial Contributions, the opening balance in TSHI's Capital Account shall be zero and the opening balance in TSVLP's Capital Account shall be zero. TSVLP and TSHI shall take all such further action (and shall cause their Affiliates to take all such further action), including without limitation the execution, delivery, recordation and filing of appropriate deeds, bills of sale, assignments and other instruments of conveyance, as may be reasonably necessary, convenient or appropriate to accomplish or evidence their respective Initial Contributions. II.2 Additional Cash Contributions. Subject to TSHI's right of withdrawal as set forth in Section 2.3, TSHI agrees to contribute, in accordance with approved Programs and Budgets and the provisions of the LLC Agreement, one hundred percent (100%) of all costs of Operations, including but not limited to costs of holding and maintaining the Properties, permits and bonds for Operations, expenditures in respect of Exploration and, if warranted, Development and Mining, capital costs and working capital until the date (the "Cut-Off Date") on which TSHI has contributed and committed an aggregate of Four Million Dollars ($4,000,000) toward the costs of Exploration, including without limitation associated costs of permitting, environmental studies and Environmental Compliance, but excluding costs of holding the Properties. Such amounts contributed by TSHI prior to the Cut-Off Date shall be added to the Recoupment Amount in accordance with Exhibit D of the LLC Agreement, and credited to TSHI's Capital Account in accordance with Exhibit C of the LLC Agreement, but shall not be considered for purposes of adjusting TSVLP's and TSHI's Ownership Interests (ie, for purposes of calculating dilution) under Section 4.1 (b) of the LLC Agreement. Subsequent to the Cut-Off Date, the Members, subject to any election permitted by Section 4.1 of the LLC Agreement, and to the obligation of TSHI to advance funds to TSVLP as provided in said Section 4.1, shall be obligated to contribute funds to adopted Programs and Budgets pursuant to cash calls under Section 11.2 of the LLC Agreement in proportion to their respective Ownership Interests. II.3 Withdrawal or Deemed Withdrawal Prior to the Cut-Off Date. (a) In the event that TSHI fails to fund one hundred percent (100%) of all costs of Operations prior to the Cut-Off Date in accordance with the provisions of Section 2.2, and TSHI fails within thirty (30) days after its receipt of written notice from TSVLP setting forth in detail the specifics of such a default, either to cure the default or to contest in writing the occurrence of a default, TSHI shall be deemed to have withdrawn from this Agreement and from the Company. At any time prior to the Cut-Off Date, TSHI may also withdraw from this Agreement and the Company by providing to TSVLP not less than thirty (30) days prior written notice of withdrawal, which notice shall set forth the effective date of TSHI's withdrawal. Upon such withdrawal or deemed withdrawal, TSHI shall have no further right, title or interest in the Assets or the Company and its Ownership Interest shall be deemed transferred to TSVLP. TSHI's deemed withdrawal shall be effective upon its failure to cure or contest an alleged default within the aforementioned thirty (30) day period and TSHI's withdrawal shall be effective on the date set forth in TSHI's notice. However, notwithstanding TSHI's withdrawal or deemed withdrawal pursuant to this Section 2.3(a), TSHI shall remain obligated to TSVLP: (i) to fund Operations up to the amount of TSHI's agreed contribution to the remaining balance of the adopted Program and Budget in effect on termination; (ii) to complete its Minimum Work Commitment under Section 2.4 or, alternatively, to pay to TSVLP the deficiency or amount necessary to complete the Minimum Work Commitment; (iii) to pay to TSVLP any unpaid Monthly Minimum Payments that are due and payable under Section 2.8 within thirty-four (34) calendar months after the Effective Date; and (iv) to fund and satisfy all unfunded liabilities to third parties (whether such accrue before or after such withdrawal) arising out of Operations conducted subsequent to the Effective Date but prior to TSHI's withdrawal or deemed withdrawal until such time as TSHI shall have expended a total of Four Million Dollars ($4,000,000) in connection with Operations or in connection with this Agreement (whether pursuant to this Section 2.3 or otherwise) and thereafter to fund and satisfy its share (i.e., a share proportionate to its Ownership Interest immediately prior to its withdrawal or deemed withdrawal) of such unfunded liabilities to third parties arising out of Operations conducted subsequent to the Effective Date, but prior to TSHI's withdrawal or deemed withdrawal. Except as provided in the preceding sentence, upon TSHI's withdrawal or 2 deemed withdrawal pursuant to this Section 2.3(a), TSHI shall have no further liabilities or obligations whatsoever with respect to, under or arising out of the Assets, the Company, Operations, the LLC Agreement or this Agreement, including without limitation any obligation to make any payment or contribution or perform any covenant. Following TSHI's withdrawal or deemed withdrawal pursuant to this Section 2.3(a), TSVLP shall indemnify and hold harmless TSHI, its Affiliates and the Manager and their respective officers, employees and agents from and against any and all liabilities, obligations, claims, responsibilities, actions, demands, losses, costs and expenses, including but not limited to costs of litigation and reasonable attorneys' fees, with respect to, under or arising out of the Assets, the Company, Operations, the LLC Agreement or this Agreement, except for those liabilities and obligations expressly set forth in this Section 2.3(a) as retained by TSHI following its withdrawal or deemed withdrawal. (b) In the event that, prior to the Cut-Off Date, there is a breach of any of TSVLP's representations, warranties or covenants set forth in this Agreement or in the LLC Agreement that causes a Material Adverse Effect (as defined below in Section 2.3(c)), TSHI shall have the right to withdraw from this Agreement and the Company by providing written notice thereof to TSVLP, which notice shall set forth the effective date of TSHI's withdrawal. Upon such withdrawal, TSHI shall have no further right, title or interest in the Assets or the Company and its Ownership Interest shall be deemed transferred to TSVLP. Upon TSHI's withdrawal pursuant to this Section 2.3(b), TSHI shall have no further liabilities or obligations whatsoever with respect to, under or arising out of the Assets, the Company, Operations, the LLC Agreement or this Agreement, including without limitation any obligation to make any payment or contribution or perform any covenant, provided, however, TSHI shall remain obligated to TSVLP to fund and satisfy all unfunded liabilities to third parties (whether such accrue before or after such withdrawal) arising out of Operations conducted subsequent to the Effective Date but prior to TSHI's withdrawal until such time that TSHI shall have expended a total of Four Million Dollars ($4,000,000) in connection with Operations or in connection with this Agreement (whether pursuant to this Section 2.3 or otherwise) and thereafter to fund and satisfy its share (i.e., a share proportionate to its Ownership Interest immediately prior to its withdrawal or deemed withdrawal) of such unfunded liabilities to third parties arising out of Operations conducted subsequent to the Effective Date, but prior to TSHI's withdrawal or deemed withdrawal. Except as provided for in the preceding sentence, following TSHI's withdrawal pursuant to this Section 2.3(b), TSVLP shall indemnify and hold harmless TSHI, its Affiliates and the Manager and their respective officers, employees and agents from and against any and all liabilities, obligations, claims, responsibilities, actions, demands, losses, costs and expenses, including but not limited to costs of litigation and reasonable attorneys' fees, with respect to, under or arising out of the Assets, the Company, Operations, the LLC Agreement or this Agreement. (c) As used in Section 2.3(b), "Material Adverse Effect" means an effect that reduces or diminishes the fair market value of the Assets by more than Two Hundred and Fifty Thousand Dollars ($250,000) or that imposes a liability, obligation, Lien or Encumbrance in excess of Two Hundred and Fifty Thousand Dollars ($250,000). II.4 Minimum Work Commitment. On or before the third anniversary of the Effective Date, TSHI shall expend not less than Two Million Dollars ($2,000,000) in connection with Exploration upon or with respect to the Properties, including without limitation associated costs of permitting, environmental studies and Environmental Compliance, but exclusive of costs of holding the Properties (the "Minimum Work Commitment"). The Minimum Work Commitment shall be accounted for in accordance with Exhibit B of the LLC Agreement, including the administrative change provided for therein. Subject to force majeure under Section 8.7, the Minimum Work Commitment shall be a fixed obligation on the part of TSHI which shall not be excused by TSHI 's withdrawal or deemed withdrawal from this Agreement. The Minimum Work Commitment will constitute a part of the Four Million Dollar ($4,000,000) funding for Exploration to be provided by TSHI pursuant to Section 2.2, and not an additional obligation. II.5 Grant of Lien and Security Interest. TSVLP grants to TSHI a lien on and a security interest in (i) all of TSVLP's Ownership Interest, (ii) all of TSVLP's right, title and interest in the Company and the Assets, (iii) all of TSVLP's 3 right, title and interest arising under this Agreement or the LLC Agreement, whenever acquired or arising, and (iv) all proceeds from and accessions to the foregoing; provided, however, that this lien and security interest shall in no event apply to or burden any net smelter return ("NSR") royalty received by TSVLP pursuant to the LLC Agreement. The liens and security interests granted to TSHI will secure every obligation or liability of TSVLP created under this Agreement or the LLC Agreement. TSVLP hereby agrees to take all action necessary to preserve, protect and perfect such liens and security interests and hereby irrevocably nominates, constitutes and appoints TSHI and each of its officers holding office from time to time as the true and lawful attorney-in-fact and agent of TSVLP with power of substitution in the name of TSVLP to do any and all such acts and things or execute and deliver all such agreements, documents and instruments as TSHI reasonably considers necessary for that purpose. Without in any way limiting the generality of the foregoing, TSHI shall have the right to execute for and in the name of TSVLP all financing statements, financing change or continuation statements, conveyances, transfers, assignments, consents and other instruments as may be required for such purposes. This power of attorney shall not be revoked or terminated during the term of this Agreement or the term of the LLC Agreement, but shall terminate upon termination of either this Agreement or the LLC Agreement, whichever is earlier. In the event that TSHI executes any written power of attorney in its favor pursuant to this Section 2.5, TSHI shall promptly provide a copy of such instrument to TSVLP. Any lien or security interest granted by TSVLP to any third party upon or with respect to any of TSVLP's rights, title or interest in or to the Company or the Assets, TSVLP's Ownership Interest, TSVLP's rights under this Agreement or under the LLC Agreement or proceeds from and accessions to the foregoing, that is otherwise permitted under this Agreement and under the LLC Agreement ("TSVLP Third Party Liens"), shall expressly be subordinated to the liens and security interests held by TSHI; provided, however, that TSHI shall subordinate its liens and security interests to TSVLP Third Party Liens, other than those arising in connection with outstanding loans to TSVLP, in connection with secured Project Financings arranged or approved by the Manager for the benefit of both Members. Notwithstanding the foregoing, provided that TSVLP is in compliance with all the terms and conditions of this Agreement and the LLC Agreement and no amount of any Elected Loan or Demand Loan or other indebtedness of TSVLP to TSHI is outstanding then, upon request by TSVLP, TSHI shall subordinate its liens and security interests arising under this Section 2.5 to any TSVLP Third Party Liens that TSVLP may desire to grant to third parties in connection with secured financings, provided that: (i) such subordination shall expressly not apply to TSHI's liens, security interests and rights with respect to any subsequent Elected Loan, Demand Loan or other loan that TSHI may make to TSVLP thereafter, or to the rights and remedies that TSHI may have under this Agreement or the LLC Agreement in the event of default thereunder, or in the event of a breach of an obligation to contribute to an Approved Program and Budget pursuant to an election or deemed election in accordance with Article X of the LLC Agreement, including without limitation the right upon such default or breach to reduce TSVLP's Ownership Interest in accordance with the provisions of this Agreement and the LLC Agreement and to receive the portion of the Ownership Interest so reduced free and clear of all Liens and Encumbrances; (ii) (ii) all TSVLP Third Party Liens shall expressly be subordinated to the liens, security interests and rights of TSHI described above in clause (i) of this sentence; and ; (iii) all documentation reflecting TSVLP Third party Liens shall expressly indicate the exclusions from and conditions of such subordination stated in clauses (i) and (ii) of this sentence. II.6 Financing of Major Development Programs. In the event that, subsequent to the Cut-Off Date, a Program and Budget involving Development and requiring funding in excess of Twenty Million Dollars ($20,000,000) is approved, the Manager shall exercise reasonable efforts to attempt to obtain third party Project Financing for a substantial part of such Program and Budget for the benefit of both Members. II.7 Pledge and Subordination of Interests. Each Member shall pledge its Ownership Interest and, to the extent consistent with the final proviso of Section 2.5, subordinate any liens it may hold which are created under this Agreement to any secured Project Financing approved or arranged by the Manager for the benefit of both Members, including any modifications or renewals thereof. II.8 TSHI Payments to TSVLP. Upon execution of this Agreement, TSHI shall pay TSVLP One Hundred Ninety Thousand Dollars ($190,000). Commencing on the first day of each of the following thirty-four (34) calendar months, TSHI shall pay TSVLP the sum of Forty-Five Thousand Dollars ($45,000) in any month that is 4 prior to or is the month in which the Commencement of Commercial Production is achieved and the sum of Sixty Thousand Dollars ($60,000) in each month subsequent to the calendar month in which Commencement of Commercial Production occurs (the "Monthly Minimum Payments"). On the last day in the calendar month in which the Commencement of Commercial Production is achieved, TSHI shall pay TSVLP an additional amount to be calculated by multiplying: (i) Fifteen Thousand Dollars ($15,000); by (ii) the number of months from the Effective Date of this Agreement up to and including the month in which the Commencement of Commercial Production is achieved (the "Lump-Sum Payment"). In accordance with the definition of Recoupment Amount set forth in Exhibit D of the LLC Agreement, fifty percent (50%) of each of: (i) the One Hundred Ninety Thousand Dollar ($190,000) payment made by TSHI to TSVLP upon execution of this Agreement and (ii) the monthly Minimum Payments and (iii) the Lump Sum Payment, shall be added to the Recoupment Amount. In no event shall TSVLP be obligated to refund any such payments if its share of Cash Flow is insufficient to repay the Recoupment Amount, except from liquidation proceeds upon liquidation of the Company as provided in Section 14.3 of the LLC Agreement, provided, however, that under no circumstances shall TSVLP be required to contribute cash upon liquidation. ARTICLE III REPRESENTATIONS AND WARRANTIES; TITLE TO ASSETS; INDEMNITIES III.1 Representations and Warranties. (a) Capacity of the Members. As of the Effective Date, each Member warrants and represents to the other that: (1) it is a corporation or limited partnership, as the case may be, duly organized and in good standing in its state of incorporation or partnership organization and is qualified to do business and is in good standing in those states where necessary in order to carry out the purposes of this Agreement; (2) it has the capacity to enter into and perform this Agreement and all transactions contemplated herein and all corporate, partnership and other actions and consents required to authorize it to enter into and perform this Agreement have been properly taken or obtained; (3) it will not breach any other agreement or arrangement by entering into or performing this Agreement; and (4) this Agreement has been duly executed and delivered by it and is valid and binding upon it in accordance with its terms. (b) Representations and Warranties of TSVLP. The parties to this Agreement acknowledge and understand that: (i) since the effective date of the 1993 Agreement, GCC (and not TSVLP) has served as the manager thereunder; (ii) TSVLP has received some but not all reports that GCC, as manager, should have provided under the 1993 Agreement, and (iii) TSVLP makes no representations or warranties regarding the accuracy or completeness of the reports or information that were provided by GCC as the manager pursuant to the 1993 Agreement. Subject to the foregoing understandings, TSVLP makes the following representations and warranties to TSHI as of the time of the Effective Date immediately prior to the termination of the 1993 Agreement. (1) To the best of TSVLP's knowledge and belief, the Venture owns no Properties in fee simple. (2) With respect to those Properties in which the Venture holds an interest under leases or other Contracts, and to the best of TSVLP's knowledge and belief, and except as set forth in Exhibit J of the LLC Agreement:: (i) the Venture is in exclusive possession of such Properties; (ii) the Venture has not received any notice of breach or default of any of the terms or provisions of such leases or Contracts and no event, condition or occurrence exists which, after notice or lapse of time or both, would constitute a breach or default under any of the foregoing; (iii) such leases and Contracts do not limit in any way the right or the ability of the Venture, GCC or TSVLP to assign their rights thereunder or otherwise to perform fully their respective obligations with respect to the transactions contemplated under this Agreement or the LLC Agreement, (iv) such leases and Contracts are valid, enforceable and are in good standing; and (v) the title of the 5 Venture's lessor in such Properties covered thereby and the Venture's leasehold interest therein are free and clear of all defects, Liens, Encumbrances and Contracts, except for those specifically identified in Exhibit A of the LLC Agreement or in such leases or Contracts. With respect to those Properties in which the Venture holds an interest under leases or other Contracts and except as forth in Exhibit J of the LLC Agreement: (i) TSVLP has not received any notice of breach or default of any of the terms or provisions of such leases or Contracts; and (ii) the Venture's leasehold interest therein is free and clear of all defects, Liens, Encumbrances and Contracts, arising by, through or under TSVLP, except for those specifically identified in Exhibit A of the LLC Agreement or in such leases or Contracts. TSVLP will make available to TSHI all information concerning title to the Properties in TSVLP's possession or control, and has delivered to TSHI true, correct and complete copies of all leases and other Contracts relating to the Properties, together with all amendments, supplements and exhibits thereto, of which TSVLP has knowledge. (3) With respect to unpatented mining and mill site claims located by TSVLP or an agent or Affiliate of TSVLP that are included within the Properties (whether held directly or under lease or other Contract), except as provided in Exhibits A and J of the LLC Agreement and subject to the paramount title of the United States: (i) the unpatented claims were properly laid out and monumented; (ii) all required location and validation work was properly and timely performed; (iii) location notices and certificates were properly and timely recorded and filed with appropriate governmental agencies; (iv) to the best of TSVLP's knowledge and belief, all assessment work required to hold the unpatented claims has been performed in a manner consistent with that required of the Manager pursuant to Section 9.2(k) of the LLC Agreement through the assessment year ending September 1, 1998; (v) to the best of TSVLP's knowledge and belief, all affidavits of assessment work, notice of intent and other filings and holding, maintenance and rental fees and payments required to maintain the mining claims in good standing have been properly and timely recorded, filed or paid with appropriate governmental agencies; (vi) the claims are free and clear of defects, Liens, Encumbrances and Contracts arising by, through or under TSVLP and , to the best of TSVLP's knowledge and belief, are free and clear of all other defects, Liens, Encumbrances and Contracts; (vii) to the best of TSVLP's knowledge and belief, the Venture holds the entire undivided right, title and interest in and to the claims; and (viii)TSVLP has no knowledge of conflicting claims. Nothing in this Section 3.1 (b)(3), however, shall be deemed to be a representation or a warranty that any of the unpatented claims contain a discovery of minerals. With respect to those unpatented mining and mill site claims that were not located by TSVLP or an Affiliate of TSVLP, but are included within the Properties (whether held directly or under lease or other Contract), TSVLP makes the representations and warranties set forth in clauses (3)(i)(ii) and (iii) hereinabove (with the foregoing exceptions) to the best of its knowledge and belief. (4) To the best of TSVLP's knowledge and belief, with respect to the Assets, the Venture and the Operations, there are no pending or threatened actions, suits, claims or proceedings, except as expressly set forth in Exhibit M of the LLC Agreement. (5) To the best of TSVLP's knowledge and belief: (i) all of the Assets are identified in Exhibit A of the LLC Agreement, (ii) the Venture owns the entire undivided title to the Assets, free and clear of all defects, Liens, Encumbrances and Contracts except those specifically identified in Exhibit A of the LLC Agreement; and (iii) except with respect to unpatented claims, the Venture has good and marketable title to all of the Assets, except as expressly set forth in Exhibits A and J of the LLC Agreement. The Assets are free and clear of all defects, Liens, Encumbrances and Contracts arising by, through or under TSVLP except for those specifically identified in Exhibit A or Exhibit J of the LLC Agreement. TSVLP has obtained any and all consents, approvals and authorizations and given all notices, as are required in connection with the making of its Initial Contribution to the Company and the conveyance of its undivided forty percent (40%) interest in the Assets to the Company pursuant to Section 2.1, provided, however, that this representations and warranty applies only 6 to the extent said consents, approvals, and authorizations are required uniquely in connection with TSVLP's Initial Contribution and conveyance to the Company of its undivided interest in the forty percent (40%) interest in the Assets and would not be required in connection with GCC's Initial Contribution and conveyance to the Company of its undivided sixty percent (60%) interest in the Assets. To the best of TSVLP's knowledge and belief, and except as provided in Exhibits A and J, all Contracts pertaining in any way to the Assets are specifically described in Exhibit A of the LLC Agreement, all such Contracts are valid and in full force and effect, no breach thereof or default thereunder has occurred or been alleged, and all payments required to have been paid and all obligations required to have been performed thereunder as of the Effective Date have been fully paid or performed. (6) To the best of TSVLP's knowledge and belief, the Properties and the Assets and all Operations and activities conducted thereon and all conditions with respect thereto have been and are in compliance with all Environmental Laws and with all other Laws, except as expressly set forth in Exhibit F of the LLC Agreement. (7) TSVLP has made available to TSHI all information in TSVLP's possession regarding Permits and Bonds required to hold and operate the Assets. (8) To the best of TSVLP's knowledge and belief, the Venture has not used or permitted to be used, except in compliance with all Environmental Laws, any of the Assets or other facilities which the Venture currently owns and operates or previously owned or leased, to generate, manufacture, process, distribute, use, treat, store, dispose of, transport or handle any Hazardous Substance, except as expressly set forth in Exhibit F of the LLC Agreement. (9) To the best of TSVLP's knowledge and belief, no building, structure or improvement located on the Properties is or ever has been insulated with urea formaldehyde insulation, and none of such buildings or structures contain asbestos or PCBs, except as expressly set forth in Exhibit F of the LLC Agreement. (10) To the best of TSVLP's knowledge and belief, the Venture has never received any notice of, or been prosecuted for, non-compliance with any Environmental Laws or other laws, nor has the Venture settled any allegation of non-compliance prior to prosecution, except as expressly set forth in Exhibit F of the LLC Agreement. To the best of TSVLP's knowledge and belief, there are no notices, orders or directions relating to environmental matters requiring, or notifying the Venture that it is or may be responsible or liable in whole or in part, for, any containment, clean-up, remediation, responses, corrective action or damages to natural resources or any work, repairs, construction or capital expenditures to be made under Environmental Laws or other Laws, except as expressly set forth in Exhibit F of the LLC Agreement. (11) To the best of TSVLP's knowledge and belief, the Venture has not caused or permitted, nor has there been any Release of any Hazardous Substance on, in, around, from or in connection with any of the Assets, or their use, or any such Release on or from a facility which it previously owned or leased, or any such Release on or from a facility owned or operated by any third party but with respect to which the Venture is or may reasonably be alleged to have liability, except as expressly set forth in Exhibit F of the LLC Agreement. All Hazardous Substances and all other wastes and other materials and substances used in whole or in part by the Venture have been disposed of, treated and stored by the Venture in compliance with all Environmental Laws, except as expressly set forth in Exhibit F of the LLC Agreement. (12) To the best of TSVLP's knowledge and belief, TSVLP has made available to TSHI true and complete copies of all environmental audits, evaluations, assessments, studies or tests relating to the Assets and their use which are within the possession or control of TSVLP. 7 (13) To the best of TSVLP's knowledge and belief, all Contracts are set forth in Exhibit L of the LLC Agreement. To the best of TSVLP's knowledge, the Venture has performed all of the obligations required to be performed by it and is entitled to all benefits under, and is not in default or alleged to be in default in respect of, any Contract to which it is a party or by which it is bound; all such Contracts are in good standing and in full force and effect, and no event, condition or occurrence exists which, after notice or lapse of time or both, would constitute a breach or default under any of the foregoing, except as set forth in Exhibit J or Exhibit L of the LLC Agreement. There are no Contracts in effect arising by or through TSVLP, except as set forth in Exhibit A of the LLC Agreement. (14) To the best of TSVLP's knowledge and belief, there are no commitments or Contracts for the disposition, sale, hedging, forward sales, or marketing of Products. (c) Additional Representations and Warranties of TSVLP. As of the time on the Effective Date at which it executes and enters into this Agreement, and as of the time on the Effective Date at which it transfers its interest in the Assets to the Company, TSVLP represents and warrants to TSHI that: (i) the 1993 Agreement has been duly and properly terminated; (ii) pursuant to such termination, TSVLP has been assigned and/or retained an individual forty percent (40%) interest in the Assets free and clear of Liens of GCC, TSVLP or their respective Affiliates; and (iii) between the time of termination of the 1993 Agreement, TSVLP has not granted any Lien or Encumbrance, entered into any Contract, transferred any right, title or interest or otherwise taken any action whatsoever with respect to the Assets. (d) Responsibility For Conditions Prior to the Effective Date. In the event that, in the future, any kind of party brings an action against TSHI or the Company arising out of any physical condition of the Properties existing prior to the Effective Date, and such condition does not constitute a breach of any of TSVLP's representation and warranties under this Agreement, TSHI shall not seek contribution from TSVLP in excess of forty percent (40%) of the resulting costs, losses and liabilities. (e) Survival and Construction of Representations and Warranties. (1) The representations and warranties set forth above in this Section 3.1 or below in Section 3.2 shall survive the execution and delivery of any instruments of Transfer contemplated under this Agreement and the making of TSVLP's and TSHI's Initial Contributions. (2) Where a representation or warranty in this Agreement is made "to the best of TSVLP's knowledge and belief" or "of which TSVLP has knowledge", that means to the actual knowledge of William W. Reid, David Reid or William Pass, provided that such individuals shall conclusively be charged with actual knowledge of all matters disclosed by files, documents, materials, computer programs and other information in the possession or under the control of such individuals, TSVLP or TSVLP's general partner or manager, provided further, however, that no such information shall be deemed to be "in the possession or under the control of" such Persons because it was "in the possession or under the control of" GCC unless such information has actually been provided to William W. Reid, David Reid, William Pass, TSVLP or TSVLP's general partner or manager. (3) Where the term "Venture" is used in this Section 3.1, such term shall mean the business arrangement of GCC and TSVLP under the 1993 Agreement, any present or former members, managers or participants under the 1993 Agreement, TSVLP, GCC, their respective Affiliates or any combination of the foregoing. (4) In the event that any of the Assets are subject to any defects, Liens, Encumbrances or contacts arising by, through or under TSVLP and such circumstance constitutes a breach of any of TSVLP's representations or warranties under this Agreement, TSHI shall have the right, but not the obligation, to cure or attempt to cure any such defects, or to pay off and discharge, in whole or in part, any such Liens or Encumbrances, in which case, without limiting any other remedies otherwise available to TSHI, TSHI may deduct and recover 8 amounts paid by it in connection with such actions from any or all amounts payable to TSVLP under this Agreement or under the LLC Agreement (provided that such amounts deducted by TSHI shall nevertheless be deemed paid by TSHI to TSVLP for all purposes of this Agreement and the LLC Agreement). TSVLP shall be subrogated to the rights of the holders of any such Liens or Encumbrances that TSHI pays off or discharges pursuant to the preceding sentence. Except as set forth above, an allegation or claim by TSHI of a breach of any representation of warranty of TSVLP hereunder that is disputed in writing and good faith by TSVLP shall not be justification for withholding any payments otherwise due TSVLP pursuant to Section 2.8 of this Agreement unless and until TSHI's claim of a breach of representation or warranty is upheld by a court of competent jurisdiction, provided, however, that if such claim is upheld by a court of competent jurisdiction then TSHI shall have the right of set-off provided for in the first sentence of this paragraph 3.1 (d) (4). (5) In the event that TSVLP owns a lesser interest in the Assets than as represented by TSVLP hereunder, all payments to TSVLP hereunder, including but not limited to distributions from the Company and payments by TSHI, but not including payments to TSVLP pursuant to Section 2.8, shall be payable to TSVLP only in the proportion that TSVLP's actual interest in the Assets bears to the interest represented by TSVLP. (6) Disclosures made under Exhibit F (Environmental Matters) shall not be deemed to be disclosures for purposes of any other Exhibit and shall not qualify or limit any representations, warranties, or covenants of TSVLP in this Agreement or the LLC Agreement other than those representations, warranties and covenants which are expressly made subject to Exhibit F. III.2 Disclosures. Each of the Members represents and warrants that it is unaware of any material facts or circumstances that have not been disclosed in this Agreement or the LLC Agreement which should be disclosed to the other Member in order to prevent the representations and warranties in this Article or Article VI of the LLC Agreement from being materially misleading. III.3 Loss of Title. Any failure or loss of title to the Assets, and all costs of defending, curing or perfecting title, shall be charged to the Business Account, except that in the event of costs or losses arising out of or resulting from any breach of the representations and warranties of TSVLP, TSVLP shall bear and pay all such costs and losses and shall indemnify, defend and hold harmless TSHI, the Company and the Manager from all such costs and losses. III.4 Limitation of Liability. The Members shall not be required to make any contribution to the capital of the Company except as otherwise provided in this Agreement, nor shall the Members in their capacity as Members or Manager be bound by, or liable for, any debt, liability or obligation of the Company whether arising in contract, tort, or otherwise. The foregoing shall not limit any obligation of a Member to (i) indemnify the other Member as expressly provided by this Agreement, (ii) restore a deficit Capital Account as required by Section 4.2 (b) of Exhibit C of the LLC Agreement or (iii) satisfy liabilities arising under Article IV or Section 5.2 of this Agreement. Any obligation herein to contribute capital to the Company may be compromised by written agreement of the Members, including by agreements providing for payments by an obligated Member directly to the other Member. III.5 Indemnification. (a) Each Member shall indemnify the other Member, and its Affiliates and their respective directors, officers, employees, agents and attorneys, (collectively "Indemnified Party") from and against all direct and indirect costs, expenses, damages, obligations, claims, demands, actions or liabilities, including reasonable attorneys' fees and other costs of litigation (either threatened or pending) arising out of or based on a breach by a Member ("Indemnifying Party") of any representation, warranty or covenant contained in this Agreement or the LLC Agreement, including without limitation: (i) any action taken for or obligation or responsibility assumed on behalf of the Company or another Member by a Member or any of its 9 directors, officers, employees, agents and attorneys, or Affiliates, in violation of Section 5.1 of the LLC Agreement; (ii) failure of a Member or its Affiliates to comply with the non-compete or Area of Interest provisions of Article VI hereof; (iii) any Transfer that causes termination of the tax partnership established by Section 5.2 of the LLC Agreement, against which the transferring Member shall indemnify the non-transferring Member as provided in Subsection 7.2(e) of the LLC Agreement and Article V of Exhibit C; and (iv) failure of a Member or its Affiliates to comply with the preemptive right under Section 7.3 of the LLC Agreement and Exhibit H of the LLC Agreement. (b) If any claim or demand is asserted against an Indemnified Party in respect of which such Indemnified Party may be entitled to indemnification under this Agreement, written notice of such claim or demand shall promptly be given to the Indemnifying Party. The Indemnifying Party shall have the right, but not the obligation, by notifying the Indemnified Party within thirty (30) days after its receipt of the notice of the claim or demand, to assume the entire control of (subject to the right of the Indemnified Party to participate, at the Indemnified Party's expense and with counsel of the Indemnified Party's choice) the defense, compromise or settlement of the matter, including, at the Indemnifying Party's expense, employment of counsel of the Indemnifying Party's choice. Any damages to the assets or business of the Indemnified Party caused by a failure by the Indemnifying Party to defend, compromise or settle a claim or demand in a reasonable and expeditious manner requested by the Indemnified Party, after the Indemnifying Party has given notice that it will assume control of the defense, compromise or settlement of the matter, shall be included in the damages for which the Indemnifying Party shall be obligated to indemnify the Indemnified Party. Any settlement or compromise of a matter by the Indemnifying Party shall include a full release of claims against the Indemnified Party which have arisen out of the indemnified claim or demand. ARTICLE IV INTERESTS OF MEMBERS IV.1 Continuing Liabilities Upon Adjustments of Ownership Interests. As between the Members, any reduction or elimination of either Member's Ownership Interest under Section 3.2 of the LLC Agreement or pursuant to a withdrawal or resignation of a Member from the Company, this Agreement or the LLC Agreement (other than a withdrawal or deemed withdrawal of TSHI prior to the Cut-Off Date, which shall be governed solely by Section 2.3 of this Agreement) shall not relieve such Member of its share of any liability, including, without limitation, Continuing Obligations, Environmental Liabilities and Environmental Compliance, arising, before or after such reduction or elimination, out of acts or omissions occurring or conditions existing prior to the Effective Date, or out of Operations conducted during the term of this Agreement but prior to such reduction or elimination, regardless of when any funds may be expended to satisfy such liability. For purposes of this Section and as between the Members, such Member's share of such liability shall be equal to its Ownership Interest at the time the act or omission giving rise to the liability occurred (or, as to such liability arising out of acts or omissions occurring or conditions existing prior to the Effective Date, equal to such Member's initial Ownership Interest). Should the cumulative cost of satisfying Continuing Obligations be in excess of cumulative amounts accrued or otherwise charged to the Environmental Compliance Fund as described in Paragraph 3.14 of Exhibit B of the LLC Agreement, each of the Members shall, as between the Members, be liable for its proportionate share (i.e., Ownership Interest at the time that the act or omission giving rise to such liability occurred) of the cost of satisfying such Continuing Obligations, notwithstanding that either Member has previously resigned from the Company or that its Ownership Interest has been reduced or eliminated pursuant to Section 4.2 or Section 4.3 of the LLC Agreement. Nothing in this Section 4.1 shall be construed as applicable to a withdrawal or deemed withdrawal of TSHI prior to the Cut-Off Date, which shall be governed solely by Section 2.3 of this Agreement. IV.2 Continuing Obligations and Environmental Liabilities. On dissolution of the Company under Section 14.1 of the LLC Agreement, each Member shall, as between the Members, remain liable for its respective share of liabilities to third 10 parties (whether such arises before or after such dissolution), including Environmental Liabilities and Continuing Obligations. In the event of the resignation of a Member pursuant to Section 14.2 of the LLC Agreement, the resigning Member's share of such liabilities shall be equal to its Ownership Interest at the time such liability was incurred (or, as to liabilities arising prior to the Effective Date, its initial Ownership Interest). Nothing in this Section 4.2 shall be construed as applicable to the withdrawal or deemed withdrawal of TSHI prior to the Cut-Off Date, which shall be governed solely by Section 2.3 of this Agreement. IV.3 Grant of Lien and Security Interest. (a) Subject to Section 4.4 hereof, each Member grants to the other Member a lien upon and a security interest in its Ownership Interest, including all of its right, title and interest in the Company and the Assets, whenever acquired or arising, and the proceeds from and accessions to the foregoing; provided, however, that t his lien and security interest shall in no event apply to or burden any NSR royalty granted to TSVLP pursuant to Section 4.3 of the LLC Agreement. (b) The Liens and security interests granted by Subsection 4.3(a) hereof shall secure every obligation or liability of the Member granting such lien or security interest to the other Member created under this Agreement or the LLC Agreement, including the obligation of the Member to repay an Elected Loan or a Demand Loan or to have its Ownership Interest adjusted as a result of failure to make such repayment. Each Member hereby agrees to take all action necessary to perfect such lien and security interest and hereby appoints the other Member its attorney-in-fact to execute, file and record all financing statements and other documents necessary to perfect or maintain such lien and security interest. IV.4 Subordination of Interests. Each Member shall, from time to time, take all necessary actions, including execution of appropriate instruments and agreements, to pledge and subordinate its Ownership Interest, any Liens it may hold which are created under this Agreement other than those securing repayment of an outstanding Elected Loan or Demand Loan, and any other right or interest it holds with respect to the Company and the Assets (other than any statutory lien of the Manager) to any secured borrowings for Operations approved by the Management Committee, including any secured borrowings relating to Project Financing, and any modifications or renewals thereof. ARTICLE V RELATIONSHIP OF THE MEMBERS V.1 Transfer or Termination of Rights. Neither Member shall Transfer all or any part of its rights or obligations under this Agreement, except in conjunction with a transfer or termination of the Member's Ownership Interest permitted by the LLC Agreement. Any such permitted assignment shall be subject to the consent requirements of Section 7.2 of the LLC Agreement. V.2 Abandonment and Surrender of Properties. The Member that desires to have the Company abandon or surrender all or part of the Properties pursuant to Section 12.2 of the LLC Agreement shall remain liable to the other Member for its share (determined by its Ownership Interest as of the date of such abandonment) of any liability with respect to such Properties, including, without limitation, Continuing Obligations, Environmental Liabilities and Environmental Compliance, whether accruing before or after such abandonment, arising out of activities conducted subsequent to the Effective Date and out of Operations conducted prior to the date of such abandonment, regardless of when any funds may be expended to satisfy such liability. Nothing in this Section 5.2 shall be construed as superseding the provisions of Section 2.3 with respect to the withdrawal or deemed withdrawal of TSHI prior to the Cut-Off Date. V.3 Implied Covenants. There are no implied covenants (including without limitation any implied covenants relating to the conduct of Exploration, Development, Mining or other activities upon or with respect to the Properties) contained in this Agreement other than those of good faith and fair dealing. V.4 No Third Party Beneficiary Rights. This Agreement shall be construed to benefit the Members and their respective successors and assigns only, and shall not be construed to create third party beneficiary rights in any other party, expressly including the Company, or in any governmental organization or agency, 11 except to the extent required to permit indemnification of a non-Member Indemnified Party pursuant to Subsection 3.5(a) hereof. ARTICLE VI ACQUISITIONS WITHIN AREA OF INTEREST VI.1 General. Any interest or right to acquire any interest in real property or mineral or water rights within the Area of Interest acquired during the term of this Agreement by or on behalf of either Member ("Acquiring Member") or any Affiliate of such Member shall, in accordance with and subject to the provisions in this Article VI, be subject to the terms and provisions of this Agreement and the LLC Agreement. TSVLP and TSHI and their respective Affiliates for their separate account shall be free to acquire lands and interests in lands outside the Area of Interest and to locate mining claims outside the Area of Interest. Failure of any Affiliate of either Member to comply with this Article shall be a breach by such Member of this Agreement. VI.2 Notice to Non-Acquiring Member. Within thirty (30) days after the acquisition of any interest or the right to acquire any interest in real property or mineral or water rights wholly or partially within the Area of Interest (except real property acquired by the Manager pursuant to a Program), the Acquiring Member shall notify the other Member of such acquisition by it or its Affiliate; provided that if the acquisition of any interest or right to acquire any interest pertains to real property or water or mineral rights partially within the Area of Interest, then all such real property or water or mineral rights (i.e., the part within the Area of Interest and the part outside the Area of Interest) shall be subject to this Article. The Acquiring Member's notice shall describe in detail the acquisition, the acquiring party if that party is an Affiliate, the lands and minerals and water rights covered thereby, the cost thereof, and the reasons why the Acquiring Member believes that the acquisition of the interest is in the best interests of the Members under this Agreement. In addition to such notice, the Acquiring Member shall make any and all information concerning the relevant interest available for inspection by the other Member. VI.3 Option Exercised. Within thirty (30) days after receiving the Acquiring Member's notice, the other Member may notify the Acquiring Member of its election to have the Company acquire the acquired interest. Promptly upon such notice, the Acquiring Member shall convey or cause its Affiliate to convey to the Company, by special warranty deed, all of the Acquiring Member's (or its Affiliate's) interest in such acquired interest, free and clear of all Encumbrances arising by, through or under the Acquiring Member (or its Affiliate) other than those to which both Members have agreed. Immediately upon such notice, the acquired interest shall become a part of the Properties for all purposes of this Agreement and the LLC Agreement. The Company shall promptly pay to the Acquiring Member the latter's actual out-of-pocket acquisition costs. VI.4 Option Not Exercised. If the other Member does not give such notice within the thirty (30) day period set forth in Section 6.3 hereof, it shall have no interest in the acquired interests, and the acquired interests shall not be a part of the Assets or continue to be subject to this Agreement or the LLC Agreement. VI.5 Non-Compete Covenants. Neither a Member that resigns pursuant to Section 14.2 of the LLC Agreement, or is deemed to have resigned pursuant to Sections 4.2 or 4.3 of the LLC Agreement, or that withdraws or is deemed to have withdrawn pursuant to Section 3.2 of this Agreement, nor any Affiliate of such a Member, shall directly or indirectly acquire any interest or right to explore or mine, or both, on any property any part of which is within the Area of Interest for twelve (12) months after the effective date of resignation. If a resigning Member, or the Affiliate of a resigning Member, breaches this Section, such Member shall be obligated to offer to convey to the non-resigning Member, without cost, any such property or interest so acquired (or ensure its Affiliate offers to convey the property or interest to the non-resigning Member, if the acquiring party is the resigning Member's Affiliate). Such offer shall be made in writing and can be accepted by the non-resigning Member at any time within forty five(45) days after the offer is received by such non-resigning Member. Failure of a Member's Affiliate to comply with this Section shall be a breach by such Member of this Agreement. VI.6 Campbell-Simpson Lease. Notwithstanding any provision of this Agreement or the LLC Agreement to the contrary, the Manager shall have the full right and 12 authority, but not the obligation, to enter into such amendments of the Campbell-Simpson Lease as the Manager deems appropriate, in its sole discretion, including without limitation for the purposes of adding claims to those leased thereunder, and to convey or quitclaim claims owned by the Company to the lessors under the Campbell-Simpson Lease in connection therewith, as the Manager deems appropriate in its sole discretion. ARTICLE VII GOVERNING LAW VII.1 Governing Law. Except for matters of title to the Assets Properties or their Transfer, which shall be governed by the law of their situs, this Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard for any conflict of laws or choice of laws principles that would permit or require the application of the laws of any other jurisdiction. ARTICLE VIII GENERAL PROVISIONS VIII.1 Notices. All notices, payments and other required or permitted communications ("Notices") to either Member shall be in writing, and shall be addressed respectively as follows: If to TSVLP: Tonkin Springs Venture Limited Partnership 55 Madison Street, Suite 700 Denver, Colorado 80206 Attention: President,U.S. Gold Corporation Telephone:(303) 322-8002 Facsimile: (303) 322-7866 With a Copy to: Randy L. Parcel, Esq. Perkins Coie LLP 1675 Broadway, Suite 2800 Denver, Colorado 80202 If to TSHI: Tonkin Springs Holdings Inc. 401 Bay Street, Suite 2302 Toronto, Ontario M5H2Y4 Canada Attention: President, Tonkin Springs Holdings Inc. Telephone: 416) 947-1212 Facsimile: (416) 367-4681 With a Copy to: Roger C. Adams, Esq. Ducker, Montgomery & Lewis, P.C. 1650 Broadway, Suite 1500 Denver, Colorado 80202 All Notices shall be given (a) by personal delivery to the Member; (b) by electronic communication, capable of producing a printed transmission and confirmation, (c) by registered or certified mail return receipt requested; or (d) by overnight or other express courier service. All Notices shall be effective and shall be deemed given on the date of receipt at the principal address if received during normal business hours, and, if not received during normal business hours, on the next business day following receipt, or if by electronic communication, on the date of such communication. Either Member may change its address by Notice to the other Member. VIII.2 Gender. The singular shall include the plural, and the plural the singular wherever the context so requires, and the masculine, the feminine, and the neuter genders shall be mutually inclusive. VIII.3 Currency. All references to "dollars" or "$" herein shall mean lawful currency of the United States of America. VIII.4 Headings. The subject headings of the Sections and Subsections of this Agreement and the Paragraphs and Subparagraphs of the Exhibits to this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. References to "hereunder" are, unless otherwise stated, references to this entire Agreement. VIII.5 Waiver. The failure of either Member to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach hereof shall not constitute a waiver of any provision of this Agreement or limit such Member's right thereafter to enforce any provision or exercise any right. 13 VIII.6 Modification. No modification or amendment of this Agreement shall be valid unless made in writing and duly executed by both Members. VIII.7 Force Majeure. Except for the obligation to make payments when due hereunder, the obligations of a Member arising under this Agreement or under the LLC Agreement shall be suspended to the extent and for the period that performance is prevented by any cause, whether foreseeable or unforeseeable, beyond its reasonable control, including, without limitation, labor disputes (however arising and whether or not employee demands are reasonable or within the power of the Member to grant); acts of God; Laws, instructions or requests of any government or governmental entity; judgments or orders of any court; inability to obtain on reasonably acceptable terms any public or private license, permit or other authorization; curtailment or suspension of activities to remedy or avoid an actual or alleged, present or prospective violation of Environmental Laws; action or inaction by any federal, state or local agency that delays or prevents the issuance or granting of any approval or authorization required to conduct Operations (including, without limitation, a failure to complete any review and analysis required by the National Environmental Policy Act or any similar state law); acts of war or conditions arising out of or attributable to war, whether declared or undeclared; riot, civil strife, insurrection or rebellion; fire, explosion, earthquake, storm, flood, sink holes, drought or other adverse weather condition; delay or failure by suppliers or transporters of materials, parts, supplies, services or equipment or by contractors' or TSHI's contractors' shortage of, or inability to obtain, labor, transportation, materials, machinery, equipment, supplies, utilities or services; accidents; breakdown of equipment, machinery or facilities; actions by native rights groups, environmental groups, or other similar special interest groups; or any other cause whether similar or dissimilar to the foregoing. The affected Member shall promptly give notice to the other Member of the suspension of performance, stating therein the nature of the suspension, the reasons therefor, and the expected duration thereof. The affected Member shall resume performance as soon as reasonably possible. During the period of suspension the obligations of both Members to advance funds pursuant to this Agreement or the LLC Agreement shall be reduced to levels consistent with then current Operations. VIII.8 Rule Against Perpetuities. The Members do not intend that there shall be any violation of the "rule against perpetuities", the "rule against unreasonable restraints on the alienation of property", or any similar rule. Accordingly, if any right or option to acquire any interest in the Properties or Assets, in an Ownership Interest, or the Company, or in any real property exists under this Agreement, such right or option must be exercised, if at all, so as to vest such interest within time periods permitted by applicable rules. If, however, any such violation should inadvertently occur, the Members hereby agree that a court shall reform that provision in such a way as to approximate most closely the intent of the Members within the limits permissible under such rules. VIII.9 Further Assurances. Each of the Members shall take, from time to time and without additional consideration, such further actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purposes of this Agreement or as may be reasonably required by lenders in connection with Project Financing. VIII.10 Entire Agreement; Successors and Assigns. This Agreement contains the entire understanding of the Members and supersedes all prior agreements and understandings between the Members relating to the subject matter hereof; provided that nothing in this Section 8.10 modifies or affects the LLC Agreement and the Members' obligations thereunder. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Members. VIII.11 Counterparts. This Agreement may be executed in any number of counterparts, and it shall not be necessary that the signatures of both Members be contained on any counterpart. Each counterpart shall be deemed an original, but all counterparts together shall constitute one and the same instrument. 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date. TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP By: Tonkin Springs Gold Mining Company, as its General Partner By: /s/ William W. Reid, President TONKIN SPRINGS HOLDINGS INC. By: /s/ Ebe Scherkus, President 15 EX-10 4 exh10_7.txt EXHIBIT 10.7 Exhibit 10.7 ------------ Members' Agreement of the Members of Tonkin Springs LLC as Amended by and between Tonkin Springs Venture Limited Partnership and U.S. Environmental Corporation dated October 18, 2001 MEMBERS' AGREEMENT AS AMENDED of the Members of TONKIN SPRINGS LLC, a Delaware Limited Liability Company TABLE OF CONTENTS Page No. ----- ARTICLE I DEFINITIONS AND CROSS-REFERENCES................................. 1 1.1 Definitions........................................................ 1 1.2 Cross References................................................... 1 ARTICLE II REPRESENTATIONS AND WARRANTIES; TITLE TO ASSETS; INDEMNITIES.... 1 2.1 Representations and Warranties..................................... 1 2.2 Limitation on Liability............................................ 2 2.3 Indemnification.................................................... 2 ARTICLE III INTERESTS OF MEMBERS........................................... 3 3.1 Continuing Liabilities Upon Adjustments of Ownership Interests..... 3 3.2 Continuing Obligations and Environmental Liabilities............... 3 3.3 Grant of Lien and Security Interest................................ 3 3.4 Subordination of Interests......................................... 3 ARTICLE IV RELATIONSHIP OF THE MEMBERS..................................... 3 4.1 Transfer or Termination of Rights.................................. 3 4.2 Abandonment and Surrender of Properties............................ 3 4.3 Implied Covenants.................................................. 4 4.4 No Third Party Beneficiary Rights.................................. 4 ARTICLE V ACQUISITIONS WITHIN AREA OF INTEREST............................. 4 5.1 General............................................................ 4 5.2 Notice to Non-Acquiring Member..................................... 4 5.3 Option Exercised................................................... 4 5.4 Option Not Exercised............................................... 4 5.5 Non-Compete Covenants.............................................. 4 5.6 Campbell-Simpson Lease............................................. 5 ARTICLE VI GOVERNING LAW.................................................. 5 6.1 Governing Law...................................................... 5 ARTICLE VII GENERAL PROVISIONS............................................. 5 7.1 Notices............................................................ 5 7.2 Gender............................................................. 5 7.3 Currency........................................................... 5 7.4 Headings........................................................... 5 7.5 Waiver............................................................. 6 7.6 Modification....................................................... 6 7.7 Force Majeure...................................................... 6 7.8 Rule Against Perpetuities.......................................... 6 7.9 Further Assurances................................................. 6 7.10 Entire Agreement; Successors and Assigns........................... 6 7.11 Counterparts....................................................... 6 i AGREEMENT This Amended Members' Agreement (the Agreement) is made effective as of October 18, 2001 (Effective Date) between TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP, a Nevada limited partnership (TSVLP), the address of which is 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545, and U.S. ENVIRONMENTAL CORPORATION, a Colorado corporation (USEC), the address of which is 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545. RECITALS A. Tonkin Springs Holding Inc., a Colorado corporation (TSHI) and TSVLP were parties to the Members' Agreement of Tonkin Springs LLC, dated February 26, 1999 (the 1999 Agreement). Pursuant to the 1999 Agreement, TSHI withdrew from the TSLLC effective October 18, 2001 and the equity interest of TSHI in TSLLC was thereby transferred to TSVLP as provided under Section 2.3 of the 1999 Agreement. B. Immediately prior to the withdrawal of TSHI from TSLLC, TSVLP sold and transferred to USEC a 1/2 of 1 percent equity interest in TSLLC. After such transfer and the withdrawal of TSHI, TSVLP shall own 99.5 percent equity interest in TSLLC and USEC shall own 0.5 percent equity interest in TSLLC. TSVLP and USEC are affiliates of each other. C. TSVLP and USEC amended the Operating Agreement of Tonkin Springs LLC effective as of October 18, 2001 (the LLC Agreement as Amended.) D. TSVLP and USEC desire to continue TSLLC and to thereby participate in the exploration, evaluation and, if justified, the development and mining of mineral resources within the Properties or any other properties acquired pursuant to the terms of this Agreement. E. TSVLP and USEC wish to continue to operate the limited liability company under the Delaware Limited Liability Company Act, 6 Del. C.18-101 et. seq. (the Act) to own and operate the Properties and Assets. The name of the limited liability company shall continue to be Tonkin Springs LLC (the Company) and its affairs shall be governed by that certain Operating Agreement as Amended of Tonkin Springs LLC of even date herewith. TSVLP and USEC desire to enter into this Agreement to provide, amongst themselves, for their respective contributions to the Company and for certain other matters, all as set forth herein. NOW THEREFORE, in consideration of the covenants and conditions contained herein, TSVLP and USEC agree as follows: ARTICLE I DEFINITIONS AND CROSS-REFERENCES I.1 Definitions. The terms defined herein shall have the defined meaning wherever used in this Agreement. Capitalized terms used but not defined in this Agreement shall have the meanings given thereto in the LLC Agreement as Amended. I.2 Cross References. References to exhibits are to Exhibits of the LLC Agreement as Amended. References to Articles, Sections and Subsections refer to Articles, Sections and Subsections of this Agreement unless indicated otherwise. References to Paragraphs and Subparagraphs refer to paragraphs and subparagraphs of the referenced Exhibits. ARTICLE II REPRESENTATIONS AND WARRANTIES; TITLE TO ASSETS; INDEMNITIES II.1 Representations and Warranties. (a) Capacity of the Members. As of the Effective Date, each Member warrants and represents to the other that: (1) it is a corporation or limited partnership, as the case may be, duly organized and in good standing in its state of incorporation or partnership organization and is qualified to do business and is in good standing in those states where necessary in order to carry out the purposes of this Agreement; 1 (2) it has the capacity to enter into and perform this Agreement and all transactions contemplated herein and all corporate, partnership and other actions and consents required to authorize it to enter into and perform this Agreement have been properly taken or obtained; (3) it will not breach any other agreement or arrangement by entering into or performing this Agreement; and (4) this Agreement has been duly executed and delivered by it and is valid and binding upon it in accordance with its terms. II.2 Limitation of Liability. The Members shall not be required to make any contribution to the capital of the Company except as otherwise provided in this Agreement, nor shall the Members in their capacity as Members or Manager be bound by, or liable for, any debt, liability or obligation of the Company whether arising in contract, tort, or otherwise. The foregoing shall not limit any obligation of a Member to (i) indemnify the other Member as expressly provided by this Agreement, (ii) restore a deficit Capital Account as required by Section 4.2 (b) of Exhibit C of the LLC Agreement as Amended or (iii) satisfy liabilities arising under Article IV or Section 5.2 of this Agreement. Any obligation herein to contribute capital to the Company may be compromised by written agreement of the Members, including by agreements providing for payments by an obligated Member directly to the other Member. II.3 Indemnification. (a) Each Member shall indemnify the other Member, and its Affiliates and their respective directors, officers, employees, agents and attorneys, (collectively Indemnified Party) from and against all direct and indirect costs, expenses, damages, obligations, claims, demands, actions or liabilities, including reasonable attorneys' fees and other costs of litigation (either threatened or pending) arising out of or based on a breach by a Member (Indemnifying Party) of any representation, warranty or covenant contained in this Agreement or the LLC Agreement as Amended, including without limitation: (i) any action taken for or obligation or responsibility assumed on behalf of the Company or another Member by a Member or any of its directors, officers, employees, agents and attorneys, or Affiliates, in violation of Section 5.1 of the LLC Agreement as Amended; (ii) failure of a Member or its Affiliates to comply with the non-compete or Area of Interest provisions of Article V hereof; (iii) any Transfer that causes termination of the tax partnership established by Section 5.2 of the LLC Agreement as Amended, against which the transferring Member shall indemnify the non-transferring Member as provided in Subsection 7.2(e) of the LLC Agreement as Amended and Article V of Exhibit C; and (iv) failure of a Member or its Affiliates to comply with the preemptive right under Section 7.3 of the LLC Agreement as Amended and Exhibit H of the LLC Agreement as Amended. (b) If any claim or demand is asserted against an Indemnified Party in respect of which such Indemnified Party may be entitled to indemnification under this Agreement, written notice of such claim or demand shall promptly be given to the Indemnifying Party. The Indemnifying Party shall have the right, but not the obligation, by notifying the Indemnified Party within thirty (30) days after its receipt of the notice of the claim or demand, to assume the entire control of (subject to the right of the Indemnified Party to participate, at the Indemnified Party's expense and with counsel of the Indemnified Party's choice) the defense, compromise or settlement of the matter, including, at the Indemnifying Party's expense, employment of counsel of the Indemnifying Party's choice. Any damages to the assets or business of the Indemnified Party caused by a failure by the Indemnifying Party to defend, compromise or settle a claim or demand in a reasonable and expeditious manner requested by the Indemnified Party, after the Indemnifying Party has given notice that it will assume control of the defense, compromise or settlement of the matter, shall be included in the damages for which the Indemnifying Party shall be obligated to indemnify the Indemnified Party. Any settlement or compromise of a matter by the Indemnifying Party shall include a full release of claims against the Indemnified Party which have arisen out of the indemnified claim or demand. 2 ARTICLE III INTERESTS OF MEMBERS III.1 Continuing Liabilities Upon Adjustments of Ownership Interests. As between the Members, any reduction or elimination of either Member's Ownership Interest under the LLC Agreement as Amended or pursuant to a withdrawal or resignation of a Member from the Company, this Agreement or the LLC Agreement as Amended shall not relieve such Member of its share of any arising out of Operations conducted during the term of this Agreement but prior to such reduction or elimination, regardless of when any funds may be expended to satisfy such liability. For purposes of this Section and as between the Members, such Member's share of such liability shall be equal to its Ownership Interest at the time the act or omission giving rise to the liability occurred. Should the cumulative cost of satisfying Continuing Obligations be in excess of cumulative amounts accrued or otherwise charged to the Environmental Compliance Fund as described in Paragraph 3.14 of Exhibit B of the LLC Agreement as Amended, each of the Members shall, as between the Members, be liable for its proportionate share (i.e., Ownership Interest at the time that the act or omission giving rise to such liability occurred) of the cost of satisfying such Continuing Obligations, notwithstanding that either Member has previously resigned from the Company or that its Ownership Interest has been reduced or eliminated pursuant to the LLC Agreement as Amended. III.2 Continuing Obligations and Environmental Liabilities. On dissolution of the Company under Section 14.1 of the LLC Agreement as Amended, each Member shall, as between the Members, remain liable for its respective share of liabilities to third parties (whether such arises before or after such dissolution), including Environmental Liabilities and Continuing Obligations. In the event of the resignation of a Member pursuant to Section 14.2 of the LLC Agreement as Amended, the resigning Member's share of such liabilities shall be equal to its Ownership Interest at the time such liability was incurred (or, as to liabilities arising prior to the Effective Date, its initial Ownership Interest). III.3 Grant of Lien and Security Interest. (a) Subject to Section 3.4 hereof, each Member grants to the other Member a lien upon and a security interest in its Ownership Interest, including all of its right, title and interest in the Company and the Assets, whenever acquired or arising, and the proceeds from and accessions to the foregoing. (b) The Liens and security interests granted by Subsection 3.3(a) hereof shall secure every obligation or liability of the Member granting such lien or security interest to the other Member created under this Agreement or the LLC Agreement as Amended. Each Member hereby agrees to take all action necessary to perfect such lien and security interest and hereby appoints the other Member its attorney-in-fact to execute, file and record all financing statements and other documents necessary to perfect or maintain such lien and security interest. III.4 Subordination of Interests. Each Member shall, from time to time, take all necessary actions, including execution of appropriate instruments and agreements, to pledge and subordinate its Ownership Interest, any Liens it may hold which are created under this Agreement and any other right or interest it holds with respect to Tonkin Springs LLC and the Assets (other than any statutory lien of the Manager) to any secured borrowings for Operations approved by the Management Committee, including any secured borrowings relating to Project Financing, and any modifications or renewals thereof. ARTICLE IV RELATIONSHIP OF THE MEMBERS IV.1 Transfer or Termination of Rights. Neither Member shall Transfer all or any part of its rights or obligations under this Agreement, except in conjunction with a transfer or termination of the Member's Ownership Interest permitted by the LLC Agreement as Amended. Any such permitted assignment shall be subject to the consent requirements of Section 7.2 of the LLC Agreement as Amended. IV.2 Abandonment and Surrender of Properties The Member that desires to have the Company abandon or surrender all or part of the Properties pursuant to Section 12.2 of the LLC Agreement as Amended shall remain liable to the other Member for its share (determined by its Ownership Interest as of the date of such abandonment) of any liability with respect to such Properties, including, without limitation, Continuing Obligations, Environmental Liabilities and 3 Environmental Compliance, whether accruing before or after such abandonment, arising out of activities conducted subsequent to the Effective Date and out of Operations conducted prior to the date of such abandonment, regardless of when any funds may be expended to satisfy such liability. IV.3 Implied Covenants. There are no implied covenants contained in this Agreement other than those of good faith and fair dealing. IV.4 No Third Party Beneficiary Rights. This Agreement shall be construed to benefit the Members and their respective successors and assigns only, and shall not be construed to create third party beneficiary rights in any other party, expressly including the Company, or in any governmental organization or agency, except to the extent required to permit indemnification of a non-Member Indemnified Party pursuant to Subsection 2.5(a) hereof. ARTICLE V ACQUISITIONS WITHIN AREA OF INTEREST V.1 General. Any interest or right to acquire any interest in real property or mineral or water rights within the Area of Interest acquired during the term of this Agreement by or on behalf of either Member (Acquiring Member) or any Affiliate of such Member shall, in accordance with and subject to the provisions in this Article V, be subject to the terms and provisions of this Agreement and the LLC Agreement as Amended. TSVLP and USEC and their respective Affiliates for their separate account shall be free to acquire lands and interests in lands outside the Area of Interest and to locate mining claims outside the Area of Interest. Failure of any Affiliate of either Member to comply with this Article shall be a breach by such Member of this Agreement. V.2 Notice to Non-Acquiring Member. Within thirty (30) days after the acquisition of any interest or the right to acquire any interest in real property or mineral or water rights wholly or partially within the Area of Interest (except real property acquired by the Manager pursuant to a Program), the Acquiring Member shall notify the other Member of such acquisition by it or its Affiliate; provided that if the acquisition of any interest or right to acquire any interest pertains to real property or water or mineral rights partially within the Area of Interest, then all such real property or water or mineral rights (i.e., the part within the Area of Interest and the part outside the Area of Interest) shall be subject to this Article. The Acquiring Member's notice shall describe in detail the acquisition, the acquiring party if that party is an Affiliate, the lands and minerals and water rights covered thereby, the cost thereof, and the reasons why the Acquiring Member believes that the acquisition of the interest is in the best interests of the Members under this Agreement. In addition to such notice, the Acquiring Member shall make any and all information concerning the relevant interest available for inspection by the other Member. V.3 Option Exercised. Within thirty (30) days after receiving the Acquiring Member's notice, the other Member may notify the Acquiring Member of its election to have the Company acquire the acquired interest. Promptly upon such notice, the Acquiring Member shall convey or cause its Affiliate to convey to the Company, by special warranty deed, all of the Acquiring Member's (or its Affiliate's) interest in such acquired interest, free and clear of all Encumbrances arising by, through or under the Acquiring Member (or its Affiliate) other than those to which both Members have agreed. Immediately upon such notice, the acquired interest shall become a part of the Properties for all purposes of this Agreement and the LLC Agreement as Amended. The Company shall promptly pay to the Acquiring Member the latter's actual out-of-pocket acquisition costs. V.4 Option Not Exercised. If the other Member does not give such notice within the thirty (30) day period set forth in Section 5.3 hereof, it shall have no interest in the acquired interests, and the acquired interests shall not be a part of the Assets or continue to be subject to this Agreement or the LLC Agreement as Amended. V.5 Non-Compete Covenants. Neither a Member that resigns pursuant to Section 14.2 of the LLC Agreement as Amended, nor any Affiliate of such a Member, shall directly or indirectly acquire any interest or right to explore or mine, or both, on any property any part of which is within the Area of Interest for twelve (12) months after the effective date of resignation. If a resigning Member, or the Affiliate of a resigning Member, breaches this Section, such Member shall be obligated to offer to convey to the non-resigning Member, 4 without cost, any such property or interest so acquired (or ensure its Affiliate offers to convey the property or interest to the non-resigning Member, if the acquiring party is the resigning Member's Affiliate). Such offer shall be made in writing and can be accepted by the non-resigning Member at any time within forty five(45) days after the offer is received by such non-resigning Member. Failure of a Member's Affiliate to comply with this Section shall be a breach by such Member of this Agreement. V.6 Campbell-Simpson Lease. Notwithstanding any provision of this Agreement or the LLC Agreement as Amended to the contrary, the Manager shall have the full right and authority, but not the obligation, to enter into such amendments of the Campbell-Simpson Lease as the Manager deems appropriate, in its sole discretion, including without limitation for the purposes of adding claims to those leased thereunder, and to convey or quitclaim claims owned by the Company to the lessors under the Campbell-Simpson Lease in connection therewith, as the Manager deems appropriate in its sole discretion. ARTICLE VI GOVERNING LAW VI.1 Governing Law. Except for matters of title to the Assets Properties or their Transfer, which shall be governed by the law of their situs, this Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard for any conflict of laws or choice of laws principles that would permit or require the application of the laws of any other jurisdiction. ARTICLE VII GENERAL PROVISIONS VII.1 Notices. All notices, payments and other required or permitted communications (Notices) to either Member shall be in writing, and shall be addressed respectively as follows: If to TSVLP: Tonkin Springs Venture Limited Partnership 2201 Kipling Street, Suite 100 Lakewood, Colorado 80215-1545 Attention: President, U.S. Gold Corporation Telephone: (303) 238-1438 Facsimile: (303) 238-1724 If to USEC: U.S. Environmental Corporation 2201 Kipling Street, Suite 100 Lakewood, Colorado 80215-1545 Attention: President, U.S. Environmental Corporation Telephone:(303) 238-1438 Facsimile: (303) 238-1724 All Notices shall be given (a) by personal delivery to the Member; (b) by electronic communication, capable of producing a printed transmission and confirmation, (c) by registered or certified mail return receipt requested; or (d) by overnight or other express courier service. All Notices shall be effective and shall be deemed given on the date of receipt at the principal address if received during normal business hours, and, if not received during normal business hours, on the next business day following receipt, or if by electronic communication, on the date of such communication. Either Member may change its address by Notice to the other Member. VII.2 Gender. The singular shall include the plural, and the plural the singular wherever the context so requires, and the masculine, the feminine, and the neuter genders shall be mutually inclusive. VII.3 Currency. All references to dollars or $ herein shall mean lawful currency of the United States of America. VII.4 Headings. The subject headings of the Sections and Subsections of this Agreement and the Paragraphs and Subparagraphs of the Exhibits to this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. References to hereunder are, unless otherwise stated, references to this entire Agreement. 5 VII.5 Waiver. The failure of either Member to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach hereof shall not constitute a waiver of any provision of this Agreement or limit such Member's right thereafter to enforce any provision or exercise any right. VII.6 Modification. No modification or amendment of this Agreement shall be valid unless made in writing and duly executed by both Members. VII.7 Force Majeure. The obligations of a Member arising under this Agreement or under the LLC Agreement as Amended shall be suspended to the extent and for the period that performance is prevented by any cause, whether foreseeable or unforeseeable, beyond its reasonable control, including, without limitation, labor disputes (however arising and whether or not employee demands are reasonable or within the power of the Member to grant); acts of God; Laws, instructions or requests of any government or governmental entity; judgments or orders of any court; inability to obtain on reasonably acceptable terms any public or private license, permit or other authorization; curtailment or suspension of activities to remedy or avoid an actual or alleged, present or prospective violation of Environmental Laws; action or inaction by any federal, state or local agency that delays or prevents the issuance or granting of any approval or authorization required to conduct Operations (including, without limitation, a failure to complete any review and analysis required by the National Environmental Policy Act or any similar state law); acts of war or conditions arising out of or attributable to war, whether declared or undeclared; riot, civil strife, insurrection or rebellion; fire, explosion, earthquake, storm, flood, sink holes, drought or other adverse weather condition; delay or failure by suppliers or transporters of materials, parts, supplies, services or equipment or by contractors' shortage of, or inability to obtain, labor, transportation, materials, machinery, equipment, supplies, utilities or services; accidents; breakdown of equipment, machinery or facilities; actions by native rights groups, environmental groups, or other similar special interest groups; or any other cause whether similar or dissimilar to the foregoing. The affected Member shall promptly give notice to the other Member of the suspension of performance, stating therein the nature of the suspension, the reasons therefore, and the expected duration thereof. The affected Member shall resume performance as soon as reasonably possible. During the period of suspension the obligations of both Members to advance funds pursuant to this Agreement or the LLC Agreement as Amended shall be reduced to levels consistent with then current Operations. VII.8 Rule Against Perpetuities. The Members do not intend that there shall be any violation of the rule against perpetuities, the rule against unreasonable restraints on the alienation of property, or any similar rule. Accordingly, if any right or option to acquire any interest in the Properties or Assets, in an Ownership Interest, or the Company, or in any real property exists under this Agreement, such right or option must be exercised, if at all, so as to vest such interest within time periods permitted by applicable rules. If, however, any such violation should inadvertently occur, the Members hereby agree that a court shall reform that provision in such a way as to approximate most closely the intent of the Members within the limits permissible under such rules. VII.9 Further Assurances. Each of the Members shall take, from time to time and without additional consideration, such further actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purposes of this Agreement or as may be reasonably required by lenders in connection with Project Financing. VII.10 Entire Agreement; Successors and Assigns. This Agreement contains the entire understanding of the Members and supersedes all prior agreements and understandings between the Members relating to the subject matter hereof; provided that nothing in this Section 7.10 modifies or affects the LLC Agreement as Amended and the Members' obligations thereunder. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Members. VII.11 Counterparts. This Agreement may be executed in any number of counterparts, and it shall not be necessary that the signatures of both Members be contained on any counterpart. Each counterpart shall be deemed an original, but all counterparts together shall constitute one and the same instrument. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date. TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP By: Tonkin Springs Gold Mining Company, as its General Partner By: /s/William W. Reid, President By: U.S. ENVIRONMENTAL CORPORATION By: /s/David C. Reid, President 7 EX-10 5 exh10_8.txt EXHIBIT 10.8 Exhibit 10.8 ------------ OPERATING AGREEMENT OF TONKIN SPRINGS LLC A Delaware Limited Liability Company TABLE OF CONTENTS Page No. ---- ARTICLE I. DEFINITIONS AND CROSS-REFERENCES................................ 1 1.1 Definitions........................................................... 1 1.2 Cross References...................................................... 1 ARTICLE II. NAME, PURPOSES AND TERM........................................ 1 2.1 Formation............................................................. 1 2.2 Name.................................................................. 2 2.3 Purposes.............................................................. 2 2.4 Limitation............................................................ 2 2.5 Term.................................................................. 2 2.6 Registered Agent; Offices............................................. 2 2.7 Record Title.......................................................... 2 ARTICLE III. INTERESTS OF MEMBERS.......................................... 2 3.1 Initial Ownership Interests........................................... 2 3.2 Changes in Ownership Interests........................................ 2 3.3 Documentation of Adjustments to Ownership Interests................... 3 ARTICLE IV. ADJUSTMENTS OF MEMBERS' INTERESTS AND RELATED LIABILITIES; TREATMENT OF CASHFLOW AND CERTAIN PAYMENTS................................. 3 4.1 Voluntary Reduction in Ownership Interests............................ 3 4.2 Default in Making Agreed Contributions................................ 4 4.3 Elimination of Minority Interest...................................... 5 4.4 Evidence of Changes in Ownership Interests............................ 5 4.5 Distributions......................................................... 5 4.6 Excluded Assets....................................................... 6 ARTICLE V. RELATIONSHIP OF THE MEMBERS..................................... 6 5.1 Limitation on Authority of Members.................................... 6 5.2 Federal Tax Elections and Allocations................................. 6 5.3 State Income Tax...................................................... 6 5.4 Tax Returns........................................................... 6 5.5 Other Business Opportunities.......................................... 6 5.6 Waiver of Rights to Partition or Other Division of Assets............. 7 5.7 Bankruptcy of a Member................................................ 7 5.8 Implied Covenants..................................................... 7 5.9 No Certificate........................................................ 7 5.10 Limitation of Liability............................................... 7 5.11 Indemnities........................................................... 7 5.12 No Third Party Beneficiary Rights..................................... 7 ARTICLE VI. REPRESENTATIONS AND WARRANTIES................................. 7 6.1 Capacity of the Members............................................... 7 ARTICLE VII. TRANSFER OF INTEREST; PREEMPTIVE RIGHT........................ 8 7.1 General............................................................... 8 7.2 Limitations on Free Transferability................................... 8 7.3 Preemptive Right...................................................... 9 ARTICLE VIII. MANAGEMENT COMMITTEE......................................... 9 8.1 Organization and Composition.......................................... 9 8.2 Decisions............................................................. 9 8.3 Meetings.............................................................. 10 8.4 Action Without Meeting................................................ 10 8.5 Matters Requiring Approval............................................ 10 ARTICLE IX. MANAGER........................................................ 10 9.1 Appointment........................................................... 10 9.2 Powers and Duties of Manager.......................................... 10 9.3 Standard of Care; Indemnification..................................... 13 9.4 Resignation; Deemed Offer to Resign................................... 13 9.5 Payments To Manager................................................... 14 9.6 Transactions With Affiliates.......................................... 14 9.7 Activities During Deadlock............................................ 14 i ARTICLE X. PROGRAMS AND BUDGETS............................................ 14 10.1 Initial Program and Budget............................................ 14 10.2 Operations Pursuant to Programs and Budgets........................... 14 10.3 Presentation of Programs and Budgets.................................. 14 10.4 Review and Adoption of Proposed Programs and Budgets.................. 14 10.5 Election to Participate............................................... 15 10.6 Deadlock on Proposed Programs and Budgets; Decision of a Member not to Fund other Member's Share............................. 15 10.7 Budget Overruns; Program Changes...................................... 15 10.8 Emergency or Unexpected Expenditures.................................. 15 10.9 Amendments to Programs and Budgets.................................... 15 ARTICLE XI. ACCOUNTS AND SETTLEMENTS....................................... 15 11.1 Monthly Statements.................................................... 15 11.2 Cash Calls............................................................ 15 11.3 Failure to Meet Cash Calls............................................ 16 11.4 Audits................................................................ 16 ARTICLE XII. PROPERTIES.................................................... 16 12.1 Royalties, Production Taxes and Other Payments Based on Production.... 16 12.2 Abandonment and Surrender............................................. 16 ARTICLE XIII. CONFIDENTIALITY, OWNERSHIP, USEAND DISCLOSURE OF INFORMATION................................................................ 16 13.1 Business Information.................................................. 16 13.2 Member Information.................................................... 17 13.3 Permitted Disclosure of Confidential Business Information............. 17 13.4 Disclosure Required By Law............................................ 17 13.5 Public Announcements.................................................. 17 13.6 Duration of Confidentiality........................................... 18 ARTICLE XIV. RESIGNATION AND DISSOLUTION.................................. 18 14.1 Events of Dissolution................................................. 18 14.2 Resignation........................................................... 18 14.3 Disposition of Assets on Dissolution.................................. 18 14.4 Filing of Certificate of Cancellation................................. 18 14.5 Right to Data After Dissolution....................................... 18 14.6 Continuing Authority.................................................. 18 ARTICLE XV. GOVERNING LAW ................................................. 19 15.1 Governing Law......................................................... 19 ARTICLE XVI. GENERAL PROVISIONS............................................ 19 16.1 Notices............................................................... 19 16.2 Gender................................................................ 19 16.3 Currency.............................................................. 20 16.4 Headings.............................................................. 20 16.5 Waiver................................................................ 20 16.6 Modification.......................................................... 20 16.7 Force Majeure......................................................... 20 16.8 Rule Against Perpetuities............................................. 20 16.9 Further Assurances.................................................... 20 16.10 Entire Agreement; Successors and Assigns............................. 20 16.11 Counterparts......................................................... 21 EXHIBITS A. Assets B. Accounting Procedures C. Tax Matters D. Definitions E. Net Smelter Royalty F. Environmental Matters G. Permits and Bonds H. Preemptive Rights I. [Intentionally Left Blank] J. Breaches and Defects Relating to Leases and Contracts K. [Intentionally Left Blank] L. Contracts M. Litigation N. [Intentionally Left Blank] O. [Intentionally Left Blank] P. Initial Program and Budget ii OPERATING AGREEMENT OF TONKIN SPRINGS LLC A Delaware Limited Liability Company This Operating Agreement of Tonkin Springs LLC (this "Agreement") is made as of February 26, 1999, ("Effective Date") between TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP, a Nevada limited partnership ("TSVLP"), the address of which is 55 Madison Street, Suite 700, Denver, Colorado 80206, and TONKIN SPRINGS HOLDING INC., a Colorado corporation ("TSHI"), the address of which is 401 Bay Street, Suite 2302, Toronto, Ontario, M5H2Y4, Canada. RECITALS A. Gold Capital Corporation, a Colorado corporation ("GCC") and TSVLP were parties to a Mining Venture Agreement dated December 31, 1993, as amended on March 7, 1997 and July 7, 1997 (the "1993 Agreement"). Pursuant to the 1993 Agreement, GCC and TSVLP formed the Venture. GCC at all times while the 1993 Agreement remained in effect, was Manager of the Venture and had overall management responsibility for, and control of Operations. GCC and TSVLP owned as tenants in common certain assets which were subject to the 1993 Agreement and included certain Assets, including certain properties situated in Eureka County, Nevada, these Properties and Assets are described in Exhibit A and defined in Exhibit D. The 1993 Agreement has been terminated, with GCC being assigned and retaining an undivided sixty percent (60%) interest and TSVLP being assigned and retaining an undivided forty percent (40%) interest in the Properties and Assets, free and clear of the 1993 Agreement and any and all Liens of GCC, TSVLP or their respective Affiliates. B. Immediately following termination of the 1993 Agreement and immediately prior to execution of this Agreement, TSHI acquired GCC's undivided sixty percent (60%) interest in the Properties and Assets. C. TSVLP and TSHI desire to participate in the exploration, evaluation and, if justified, the development and mining of mineral resources within the Properties or any other properties acquired pursuant to the terms of this Agreement. D. TSVLP and TSHI wish to form and operate a limited liability company under the Delaware Limited Liability Company Act, 6 Del.C. 18-101 et seq. (the "Act") to own and operate the Properties and Assets in accordance with the terms set forth in this Agreement. Such company (the "Company") shall be named Tonkin Springs LLC. Simultaneously with the execution of this Agreement, TSVLP and TSHI have also entered into a Members' Agreement and contributed, conveyed and transferred their respective interests in the Properties and Assets to the Company. NOW THEREFORE, in consideration of the covenants and conditions contained herein, TSVLP and TSHI agree as follows: ARTICLE I DEFINITIONS AND CROSS-REFERENCES 1.1 Definitions. The terms defined in Exhibit D and elsewhere herein shall have the defined meaning wherever used in this Agreement, including in Exhibits. 1.2 Cross References. References to "Exhibits," "Articles," "Sections" and "Subsections" refer to Exhibits, Articles, Sections and Subsections of this Agreement. References to "Paragraphs" and "Subparagraphs" refer to paragraphs and subparagraphs of the referenced Exhibits. ARTICLE II NAME, PURPOSES AND TERM 2.1 Formation. The Company has been duly organized pursuant to the Act and the provisions of this Agreement as a Delaware limited liability company by the filing of its Certificate of Formation (as defined in the Act) in the Office of the Secretary of the State of Delaware 2.2 Name. The name of the Company is "Tonkin Springs LLC" and such other name or names complying with the Act as the Manager shall determine. The Manager shall accomplish any filings or registrations required by jurisdictions in which the Company conducts its Business. 1 2.3 Purposes. The Company is formed for the following purposes and for no others, and shall serve as the exclusive means by which each of the Members accomplishes such purposes: (a) to conduct Exploration within the Area of Interest, (b) to acquire additional real property and other interests within the Area of Interest, (c) to evaluate the possible Development and Mining of the Properties, and, if justified, to engage in Development and Mining (d) to engage in marketing Products, and (e) to perform any other activity necessary, appropriate, or incidental to any of the foregoing, including but not limited to permitting, reclamation, closure and other environmental compliance activities. 2.4 Limitation. Unless the Members otherwise agree in writing, the Business of the Company shall be limited to the purposes described in Section 2.3, and nothing in this Agreement shall be construed to enlarge such purposes. 2.5 Term. The term of the Company shall begin on the Effective Date and shall continue for twenty (20) years from the Effective Date and for so long thereafter as the Manger is continuing to maintain the Properties or Products are produced from the Properties on a continuous basis, and thereafter until all materials, supplies, equipment and infrastructure have been salvaged and disposed of, and any required Environmental Compliance is completed and accepted, unless the Company is earlier terminated as herein provided. For purposes hereof, Products shall be deemed to be produced from the Properties on a "continuous basis" so long as production in commercial quantities is not halted for more than 24 months. 2.6 Registered Agent; Offices. The name of the Company's registered agent in the State of Delaware is The Corporation Trust Company or such other person as the Manager may select in compliance with the Act from time to time. The registered office of the Company in the State of Delaware shall be located at c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, DE 19801 or at any other place within the State of Delaware which the Manager shall select. The principal office of the Company shall be at any other location which the Manager shall select. 2.7 Record Title. Title to the Assets shall be held by the Company. ARTICLE III INTERESTS OF MEMBERS 3.1 Initial Ownership Interests. The Members shall have the following initial Ownership Interests: TSVLP - forty percent (40%) TSHI - sixty percent (60%) The Ownership Interests of the Members shall have no relationship to their Capital Accounts, which shall be determined solely as stated in the Members' Agreement and Exhibit C. 3.2 Changes in Ownership Interests. The Ownership Interests shall be eliminated or adjusted as follows: (a) Upon a default in the timely repayment of any part of an Elected Loan (following an election by either Member pursuant to Section 4.1 to contribute less to an adopted Program and Budget than the percentage equal to its Ownership Interest, or to contribute nothing to an adopted Program and Budget, and the making of an Elected Loan by the other Member); (b) In the event of default by either Member in making its agreed-upon contribution to an adopted Program and Budget, followed by an election by the other Member to invoke Section 4.2(b); (c) As provided in the Members' Agreement or in Section 4.3 of this Agreement; 2 (d) Upon Transfer by either Member of part or all of its Ownership Interest in accordance with Article VII; or (e) Upon acquisition by either Member of part or all of the Ownership Interest of the other Member, however arising. 3.3 Documentation of Adjustments to Ownership Interests. Each Member's Ownership Interest and related Capital Account balance shall be shown in the accounting records of the Company, as maintained by the Manager, and any adjustments thereto, including adjustments made under Article IV, shall be made monthly and shall be preceded by a notice to both Members with a written explanation of the basis such adjustments. ARTICLE IV ADJUSTMENTS OF MEMBERS' INTERESTS AND RELATED LIABILITIES; TREATMENT OF CASHFLOW AND CERTAIN PAYMENTS. 4.1 Voluntary Reduction in Ownership Interests. (a) After the Cut-Off Date, a Member may elect, as provided in Section 10.5, to limit its contributions to an adopted Program and Budget as follows: (i) To some lesser dollar amount than is proportionate to its respective Ownership Interest; or (ii) Not at all. If a Member elects to contribute to an adopted Program and Budget some lesser amount than its respective Ownership Interest, or not at all, the non-electing Member may advance to the electing Member funds sufficient to fulfill the electing Member's required contribution to an agreed Program and Budget and treat the same, together with any accrued interest, as a loan repayable within one year of the anniversary of the advance of such loan bearing interest from the date of the advance at the rate provided in Section 11.3 (an "Elected Loan); provided, however, that TSHI must advance to TSVLP the amount of any Elected Loan unless TSHI's Ownership Interest drops to fifty percent (50%) or lower by operation of dilution pursuant to Section 4.1(b) or Section 4.2. In connection with any such Elected Loan, the electing Member hereby grants to the non-electing Member a lien upon its Ownership Interest and a security interest in its rights under this Agreement, under the Members' Agreement and with respect to the Company, and the proceeds therefrom, provided, however, that in the event of any default under an Elected Loan, the non-electing Member agrees that its sole remedy shall be adjustment of the electing Member's Ownership Interest through dilution as provided in Section 4.1(b) below. Each of the Members hereby agree to take all action necessary to preserve, protect and perfect such liens and security interests and hereby irrevocably nominates, constitutes and appoints the non-electing Member and each of its officers holding office from time to time as the true and lawful attorney-in-fact and agent of the electing Member with power of substitution in the name of the electing Member to do any and all such acts and things or execute and deliver all such agreements, documents and instruments as the non-electing Member reasonably considers necessary for that purpose. Without in any way limiting the generality of the foregoing, the non-electing Member shall have the right to execute for and in the name of the electing Member all financing statements, financing or continuation change statements, conveyances, transfers, assignments, consents and other instruments as may be required for such purposes. This power of attorney shall not be revoked or terminated by any act or thing other than the termination of this Agreement pursuant to Section 14.1 or the withdrawal or deemed withdrawal of a Member pursuant to Section 2.3 of the Members' Agreement, or Section 4.3 of this Agreement, or the resignation of a Member pursuant to Section 14.2. (b) In the event any advance under any Elected Loan, together with all interest accrued thereon, has not been recouped and repaid in full out of the electing Member's share of Cash Flow or otherwise repaid in full within one year after the date such advance was made, then said advance, together with all interest accrued thereon, and all other advances then outstanding under the same Elected Loan or any other Elected Loan, together with all 3 interest accrued thereon (collectively and in the aggregate the "Default Amount") shall be in default if that Elected Loan, plus all interest accrued thereon, has not been repaid in full within five (5) business days of TSVLP's receipt of written notice of default from TSHI, and the electing Member's Ownership Interest shall immediately be recalculated by dividing: (i) the sum of (a) the deemed value of the electing Member's Initial Contribution under Section 2.1 of the Members' Agreement, and (b) the total of all of the electing Member's contributions under Section 2.2 of the Members' Agreement made subsequent to the Cut-Off Date, which contributions shall include, without limitation, the amount of all repayments of principal (but not interest) made on any Elected Loan or Demand Loan prior to the relevant date of default by: (ii) the sum of (a) Five Million Dollars ($5,000,000) (representing the aggregate deemed value of both Members' Initial Contributions under Section 2.1 of the Members' Agreement); (b) the amount of the electing Member's contributions calculated under clause 4.1(b)(i)(b) above; and (c) the total of the non-electing Member's contributions under Section 2.2 of the Members' Agreement made subsequent to the Cut-Off Date, which contributions shall include, without limitation, any Default Amount (including both the principal amount of all defaulted advances and all interest accruing thereon through the default date) plus the amount of any Demand Loan in default, together with interest accrued on such Demand Loan through the related default date; and then multiplying the result by one hundred, provided, however, that if the Ownership Interest of any Member falls to ten percent (10%) or less as a result of the foregoing calculation, then the provisions of Section 4.3. shall apply. The Ownership Interest of the other Member shall thereupon become the difference between one hundred percent (100%) and the recalculated Ownership Interest. For greater certainty, TSVLP will not be in breach or default of any obligation of this Agreement solely by reason of the fact that TSHI fails to advance to TSVLP the amount of an Elected Loan required by Section 4.1(a). 4.2 Default in Making Agreed Contributions. (a) If a Member elects or is deemed to have elected to contribute to an approved Program and Budget in accordance with Article X and then defaults in making a contribution or cash call required in connection therewith, the non-defaulting Member may advance the defaulted contribution on behalf of the defaulting Member and treat the same, together with any accrued interest, as a demand loan bearing interest from the date of the advance at the rate provided in Section 11.3 (a "Demand Loan"). The failure to repay a Demand Loan with five (5) business days after borrower's receipt of written notice of default from lender shall be a default. Each Member hereby grants to the other a lien upon its Ownership Interest and a security interest in its rights under this Agreement, under the Members' Agreement and with respect to the Company, and the proceeds therefrom, to secure any Demand Loan made hereunder, including interest thereon, reasonable attorneys fees and all other reasonable costs and expenses incurred in recovering the loan with interest and in enforcing such lien or security interest, or both. A non-defaulting Member may elect the applicable remedy under this Section 4.2(a) or under Section 4.2(b), or, to the extent a Member has a lien or security interest under applicable law, it shall be entitled to its rights and remedies at law and in equity. All such remedies shall be cumulative. The election of one or more remedies shall not waive the election of any other remedies. Each Member hereby irrevocably appoints the other its attorney-in-fact to execute, file and record all instruments necessary to perfect or effectuate the provisions hereof. (b) The Members acknowledge that if a Member elects or is deemed to have elected to contribute to an approved Program and Budget in accordance with Article X and then defaults in making a contribution or Cash Call required in connection therewith, or if a Member defaults in repaying a Demand Loan, as required hereunder, it will be difficult to measure the damages 4 resulting from such default. In the event of such default, as reasonable liquidated damages, the non-defaulting Member may, with respect to any such default not cured within 30 days after notice to the defaulting Member of such default, elect the following remedy by giving notice to the defaulting Member: (i) The non-defaulting Member may elect to have the defaulting Member's Ownership Interest permanently reduced in accordance with the mechanism and formula set forth in Section 4.1 (with respect to defaults under Elected Loans), and further reduced by multiplying the result by fifty percent (50%). The amount of Demand Loans which are in default, together with all interest accrued thereon, shall be added to the non-defaulting Member's contributions under Section 2.2 of the Members' Agreement when calculating the defaulting Member's reduced Ownership Interest. The non-defaulting Member's Ownership Interest shall, at such time, become the difference between one hundred percent (100%) and the further reduced Ownership Interest. Such reductions shall be effective as of the date of the default. (c) At the election of the Member providing an Elected Loan or a Demand Loan, a default under a Demand Loan shall constitute a default under an Elected Loan and vice versa. 4.3 Elimination of Minority Interest. Upon a reduction of a Member's Ownership Interest to ten percent (10%) or less pursuant to Section 4.1 or 4.2 (b)(i), such Member shall be deemed to have withdrawn from this Agreement and from the Company and to have automatically relinquished and transferred its entire Ownership Interest to the other Member. Upon such relinquishment, the withdrawing Member shall be granted an overriding two percent (2%) net smelter royalty (the "NSR", as defined in Exhibit E on Products subsequently extracted, removed and sold from the Properties, to be calculated and paid to the withdrawing Member in accordance with Exhibit E. The NSR shall be transferable by the withdrawing Member, subject to Article VII, and such Transfer shall be binding upon and inure to the benefit of such Member and their respective successors, heirs and assigns and shall be deemed to run with the Properties. 4.4 Evidence of Changes in Ownership Interests. An adjustment to an Ownership Interest shall not be evidenced by the execution, issuance or recording of certificates or other instruments, but each Member's Ownership Interest shall be shown in the books of the Company, as maintained by the Manager. Each Member shall be provided with appropriately detailed information regarding the basis and method of each such adjustments. 4.5 Distributions. (a) Prior to the Cut-off Date, proceeds from the sale of Products (if any) shall be distributed to TSHI until the Recoupment Amount balance of TSHI is zero, after which proceeds from the sale of Products shall be accounted for and distributed as provided in Section 4.5(b) of this Agreement and in Article II of Exhibit B. (b) After the Cut-Off Date, provided that no Member's initial Ownership Interest has been recalculated pursuant to Section 4.1 or Section 4.2, sixty percent (60%) of one hundred percent (100%) of positive Cash Flow shall be distributed to TSHI until TSHI has recovered the Recoupment Amount in full, without interest, from those distributions. While TSHI is so recovering the Recoupment Amount, the remaining forty percent (40%) of one hundred percent (100%) of positive Cash Flow shall be distributed to TSHI and TSVLP on a calendar quarter basis in proportion to their respective Ownership Interests. After TSHI has so recovered the Recoupment Amount, one hundred percent (100%) of positive Cash Flow shall be distributed to TSHI and TSVLP in proportion to their respective Ownership Interests. If a Member's Ownership Interest has been recalculated pursuant to Sections 4.1 or 4.2, all references in this Subsection 4.5(b) to "sixty percent (60%)" shall be converted into the percentage representing the recalculated Ownership Interest of TSHI and all references to "forty percent (40%)" shall be converted into the percentage representing the recalculated Ownership Interest of TSVLP. For greater certainty, and provided that no Member's Ownership Interest has been recalculated pursuant to Section 4.1 or 4.2, it is the intent of the Members that the effect of the foregoing provisions of this Section 4.5 5 shall be that (i) after the Cut-off Date and until TSHI has so recovered the Recoupment Amount (out of sixty percent (60%) of one hundred percent (100%) of positive Cash Flow), TSVLP shall receive sixteen percent (16%) of one hundred percent (100%) of Cash Flow, and TSHI shall receive eighty-four percent (84%) of one hundred percent (100%) of Cash Flow; and (ii) after TSHI has so recovered the Recoupment Amount (out of sixty percent (60%) of one hundred percent (100%) of positive Cash Flow ), TSVLP shall receive forty percent (40%) of one hundred percent (100%) of Cash Flow , and TSHI shall receive sixty percent (60%) of one hundred percent (100%) of Cash Flow . (c) Notwithstanding any provision of this Agreement to the contrary, Cash Flow (and any other distributions) otherwise due a Member receiving an Elected Loan or Demand Loan under this Agreement will first be used to pay-off and discharge all outstanding Elected Loan or Demand Loan obligations, including any accrued interest thereon, before any Cash Flow (or other distributions) is paid to the Member obligated under such loan. Amounts so distributed to pay-off or discharge Elected Loans or Demand Loans shall be deemed amounts distributed to the borrower thereunder for all purposes, including allocation of income for tax purposes. 4.6 Excluded Assets. Neither TSHI nor the Company shall have any ownership interest in the Excluded Assets, which are owned exclusively by TSVLP. The Company shall provide, free of charge to TSVLP, adequate outdoor space to continue to store and use the Excluded Assets until TSVLP removes them from the Properties. If, however, the Manager in good faith determines that the use or storage of the Excluded Assets will interfere with Operations, TSVLP shall promptly, and in no event later than 60 days after the Manager's notice in writing to TSVLP of such determination, relocate such Excluded Assets to a location reasonably designated by the Manager. With respect to the Champion/Partridge house trailer, model year 1989, serial no. 1694706906 IDA 098337, the Company shall provide, at the Company's cost, electrical, gas, water and phone utilities and services at the recreational vehicle park currently being utilized, until TSVLP removes the trailer therefrom. TSVLP shall be responsible for all property tax, insurance, and any other costs related to its use or ownership of the Excluded Assets. TSVLP also shall indemnify and hold harmless the Company, TSHI, the Manager, and their respective officers, employees and agents any liabilities, obligations, claims, responsibilities, actions, demands, losses, costs or expenses, including but not limited to costs of litigation and reasonable attorneys fees, arising out of or relating to the Excluded Assets, the use thereof or any damage thereto or loss thereof. ARTICLE V RELATIONSHIP OF THE MEMBERS 5.1 Limitation on Authority of Members. No Member is an agent of the Company solely by virtue of being a Member, and no Member has authority to act for the Company solely by virtue of being a Member. This Section 5.1 supersedes any authority granted to the Members pursuant to the Act. Any Member that takes any action or binds the Company in violation of this Section 5.1 shall be solely responsible for any loss or expense incurred by the Company, the other Member or the Manager as a result of the unauthorized action and shall indemnify and hold harmless the Company, the other Member and the Manager with respect to all such losses and expenses. 5.2 Federal Tax Elections and Allocations. The Company shall be treated as a partnership for federal income tax purposes, and no Member shall take any action to alter such treatment. Tax elections and allocations shall be made as set forth in Exhibit C. 5.3 State Income Tax. To the extent permissible under applicable law, the relationship of the Members shall be treated for state income tax purposes in the same manner as it is for federal income tax purposes. 5.4 Tax Returns. After approval of the Management Committee, any tax returns or other required tax forms shall be filed in accordance with Exhibit C. 5.5 Other Business Opportunities. Each Member shall have the right to engage in and receive full benefits from any independent business activities or operations outside of the Area of Interest, whether or not competitive with the Company, without consulting with, or obligation to, the other Member or the Company. The doctrines of "corporate opportunity" or "business opportunity" shall not be applied to the Business nor to any other activity or operation of any Member 6 outside the Area of Interest. Except as otherwise provided in Section 6.5 of the Members' Agreement, no Member shall have any obligation to the Company or any other Member with respect to any opportunity to acquire any property outside the Area of Interest at any time, or within the Area of Interest after the termination of the Company. Unless otherwise agreed in writing, neither the Manager nor any Member shall have any obligation to mill, beneficiate or otherwise treat any Products in any facility owned or controlled by the Manager or such Member. 5.6 Waiver of Rights to Partition or Other Division of Assets. The Members hereby waive and release all rights of partition, or of sale in lieu thereof, or other division of Assets, including any such rights provided by Law. 5.7 Bankruptcy of a Member. A Member shall cease to have any power as a Member or Manager or any voting rights or rights of approval hereunder upon bankruptcy, insolvency, dissolution or assignment for the benefit of creditors of such Member, and its successor upon the occurrence of any such event shall have only the rights, powers and privileges of a transferee enumerated in Section 7.2, and shall be liable for all obligations of the Member under this Agreement. In no event, however, shall a personal representative or successor become a substitute Member unless the requirements of Section 7.2 are satisfied. 5.8 Implied Covenants. There are no implied covenants (including without limitation any implied covenants relating to the conduct of Exploration, Development, Mining or other activities upon or with respect to the Properties) contained in this Agreement other than those of good faith and fair dealing. 5.9 No Certificate. The Company shall not issue certificates representing Ownership Interests in the Company. 5.10 Limitation of Liability. The Members shall not be required to make any contribution to the capital of the Company except as otherwise provided in this Agreement, nor shall the Members in their capacity as Members or Manager be bound by, or liable for, any debt, liability or obligation of the Company whether arising in contract, tort, or otherwise, except as expressly provided by this Agreement. 5.11 Indemnities. The Company may, and shall have the power to, indemnify and hold harmless any Member , the Manager or any other person from and against any and all claims and demands whatsoever arising from or related to the Business, the Company, the Assets, Operations or a Member's membership in the Company. 5.12 No Third Party Beneficiary Rights. This Agreement shall be construed to benefit the Members and their respective successors and assigns only, and shall not be construed to create third party beneficiary rights in any other party or in any governmental organization or agency. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1 Capacity of the Members. As of the Effective Date, each Member warrants and represents to the other that: (a) it is a corporation or limited partnership, as the case may be, duly organized and in good standing in its state of incorporation or partnership organization and is qualified to do business and is in good standing in those states where necessary in order to carry out the purposes of this Agreement; (b) it has the capacity to enter into and perform this Agreement and all transactions contemplated herein and all corporate, partnership and other actions and consents required to authorize it to enter into and perform this Agreement have been properly taken or obtained; (c) it will not breach any other agreement or arrangement by entering into or performing this Agreement; and (d) this Agreement has been duly executed and delivered by it and is valid and binding upon it in accordance with its terms. 7 ARTICLE VII TRANSFER OF INTEREST; PREEMPTIVE RIGHT 7.1 General. A Member shall have the right to Transfer to a third party, its Ownership Interest, or any beneficial interest therein (including without limitation any right or interest created pursuant to this Agreement or the Members' Agreement), solely as provided in this Article VII. 7.2 Limitations on Free Transferability. In addition to being subject to preemptive rights as described in Section 7.4 and Exhibit H, any Transfer by either Member under Section 7.1 shall be subject to the following limitations: (a) No Member shall Transfer any legal or beneficial right, title or interest (i) in or to the Company, the Properties or the Assets, or (ii) arising under this Agreement or the Members' Agreement (including, but not limited to, any royalty, profits, or other interest in the Products) except in conjunction with the Transfer of part or all of its Ownership Interest (provided that such restriction shall not apply to any NSR interest held by a former Member subsequent to its resignation or withdrawal from the Company and the relinquishment of its entire Ownership Interest); (b) So long as TSHI has not recovered all of the Recoupment Amount pursuant to Section 4.5 and so long as any Elected Loan or Demand Loan to TSVLP is outstanding, TSVLP shall not Transfer any interest in its Ownership Interest unless and until the transferee has executed and delivered a written subrogation agreement in favor of TSHI and the Company by which the Transferee assumes and becomes subject to all of the obligations, loans, defects, Liens and Encumbrances affecting TSVLP, its Ownership Interest or its rights under this Agreement or the Members' Agreement in a form approved by TSHI. No transferee of all or any part of a Member's Ownership Interest shall have the rights of a Member unless and until the transferring Member has provided to the other Member notice of the Transfer, and, except as provided in Subsections 7.2(f) and 7.2(g), the transferee, as of the effective date of the Transfer, has committed in writing to assume and be bound by this Agreement and the Members' Agreement to the same extent as the transferring Member; (c) Neither Member, without the consent of the other Member, shall make a Transfer that violates any Law, or results in the cancellation of any permits, licenses, or other similar authorization; (d) No Transfer permitted by this Article shall relieve the transferring Member of any liability of such transferring Member under this Agreement or under the Members' Agreement , whether accruing before or after such Transfer; (e) Any Member that makes a Transfer that shall cause termination of the tax partnership established by Section 5.2 shall indemnify the other Member for, from and against any and all loss, cost, expense, damage, liability or claim therefore arising from the Transfer, including without limitation any increase in taxes, interest and penalties or decrease in credits caused by such termination and any tax on indemnification proceeds received by the indemnified Member; (f) In the event of a Transfer of less than all of an Ownership Interest, the transferring Member and its transferee shall act and be treated as one Member under this Agreement; provided however, that in order for such Transfer to be effective, the transferring Member and its transferee must first: (i) agree, as between themselves, that one of them is authorized to act as the sole agent ("Agent") on their behalf with respect to all matters pertaining to this Agreement, the Members' Agreement and the Company; and (ii) provide written notice to the other Member, the Manager and the Company of the designation of the Agent, and in such notice warrant and represent to the other Member, the Manager and the Company that: (A) the Agent has the sole authority to act on behalf of, and to bind, the transferring Member and its transferee with respect to all matters pertaining to this Agreement, the Members' Agreement and the Company; 8 (B) the other Member, the Manager and the Company may rely on all decisions of, notices and other communications from, and failures to respond by, the Agent, as if given (or not given) by the transferring Member and its transferee; and (C) all decisions of, notices and other communications from, and failures to respond by, the other Member , the Manager or the Company to the Agent shall be deemed to have been given (or not given) to the transferring Member and its transferee. The transferring Member and its transferee may change the Agent (but such replacement must be one of them) by giving written notice to the other Member, the Manager and the Company, which notice must conform to Subsection 7.2(f)(ii). (g) TSVLP shall not grant any Encumbrance or allow any Lien to arise on or with respect to its Ownership Interest (or any other right, title or interest of TSVLP arising under this Agreement or the Members' Agreement), except for Encumbrances authorized by this Agreement or the Members' Agreement. 7.3 Preemptive Right. Any Transfer by either Member under Section 7.1 and any Transfer by an Affiliate in Control of either Member shall be subject to a preemptive right of the other Member to the extent provided in Exhibit H. Failure of a Member's Affiliate to comply with this Section and Exhibit H shall be a breach by such Member of this Agreement. ARTICLE VIII MANAGEMENT COMMITTEE 8.1 Organization and Composition. The Members hereby establish a Management Committee to determine overall policies, objectives, procedures, methods and actions under this Agreement. Except in the case of an emergency as provided for in Section 10.8, all Programs, Budgets, Project Financings and other significant matters concerning the Operations will be subject to the supervision of the Management Committee. The Management Committee shall consist of one (1) member appointed by TSHI and one (1) member appointed by TSVLP. Each Member may appoint one or more alternates to act in the absence of a regular member. Any alternate so acting shall be deemed a member. Appointments shall be made or changed by notice to the other Member and to the Manager. 8.2 Decisions. Each Member, acting through its appointed members shall have one vote on the Management Committee. Unless otherwise provided in this Agreement, the vote of the Member with an Ownership Interest over fifty percent (50%) shall determine all decisions of the Management Committee, except with respect to the matters listed expressly below, which shall require unanimous approval. (a) the abandonment, release, sale, exchange or other Transfer for value of any of the Assets, as described in Exhibit A, in any one transaction or series of related transactions if the value of such Assets or the proceeds in respect of such transaction or series or related transactions exceeds Two Hundred Fifty Thousand Dollars ($250,000), except for sales in the ordinary course of business and the abandonment, release, sale, transfer, disposition or retirement of obsolete Assets or Assets no longer useful, efficient or productive in connection with Operations; provided that any sale or disposition of the mill currently situated on the Properties or any essential component thereof shall require unanimous approval of the Management Committee, unless the reclamation and/or removal of the mill or any portion thereof is required by Law, Permits or regulatory authorities, in which case the Manager shall be authorized to conduct such reclamation and/or removal without further action of the Management Committee, and provided further that the requirements for unanimous approval of the Management Committee shall not apply with respect to the sale or disposition of any component added to the mill subsequent to the Effective Date. This Section 8.2(a) shall not apply to the sale of Products, including without limitation forward sales, future delivery contracts, hedging transactions, metals loans and other similar transactions; (b) the termination of or the winding-up of the Company, other than as provided in this Agreement; and (c) any processing of non-Company mineral products or materials through Company facilities. 9 8.3 Meetings. The Management Committee shall hold regular meetings at least quarterly in Denver, Colorado, or at other mutually agreed places. The Manager shall give 30 days' written notice to the Members of such regular meetings. Additionally, either Member may call a special meeting upon 30 days' notice to the Manager and the other Member. In case of emergency, reasonable notice of a special meeting shall suffice. There shall be a quorum if one or more members is present who represent Ownership Interests greater than fifty percent (50%) of all Ownership Interests. Each notice of a meeting shall include an itemized agenda prepared by the Manager in the case of a regular meeting, or by the Member calling the meeting in the case of a special meeting, but any matters may be considered with the consent of all Members. The Manager shall prepare minutes of all meetings and shall distribute copies of such minutes to the Members within 30 days after the meeting. The minutes, when signed by all Members, shall be the official record of the decisions made by the Management Committee and shall be binding on the Manager and the Members. If personnel employed in Operations are required to attend a Management Committee meeting, reasonable costs incurred in connection with such attendance shall be a Company cost. All other costs shall be paid for by the Members individually. 8.4 Action Without Meeting. In lieu of meetings, the Management Committee may hold telephone conferences, so long as all decisions are immediately confirmed in writing by the Members. 8.5 Matters Requiring Approval. Except as otherwise delegated to the Manager in Section 9.2, the Management Committee shall have exclusive authority to determine all management matters related to this Agreement. ARTICLE IX MANAGER 9.1 Appointment. TSHI shall have the right to appoint the initial Manager and hereby appoints Tonkin Springs Management Co., a Colorado corporation ("TSMC", an Affiliate of TSHI) as the initial Manager with overall management responsibility for Operations. TSMC shall serve until it resigns as provided in Section 9.4. 9.2 Powers and Duties of Manager. Subject to the terms and provisions of this Agreement, the Manager shall have the following powers and duties, which shall be discharged in accordance with adopted Programs and Budgets: (a) The Manager shall manage, direct and control Operations. (b) The Manager shall implement the decisions of the Management Committee, shall make all expenditures necessary to carry out adopted Programs, and shall promptly advise the Management Committee if it lacks sufficient funds to carry out its responsibilities under this Agreement. (c) The Manager shall: (i) purchase or otherwise acquire all material, supplies, equipment, water, utility and transportation services required for Operations, such purchases and acquisitions to be made on the best terms available, taking into account all of the circumstances; (ii) contract for services such as contract services for the Exploration, Development or Mining of the Properties, (iii) obtain such customary warranties and guarantees as are available in connection with such purchases and acquisitions; and (iv) keep the Assets free and clear of all Liens and Encumbrances, except for those existing at the time of, or created concurrent with, the acquisition of such Assets, or mechanic's or materialmen's Liens which shall be released or discharged in a diligent matter, or Liens and Encumbrances specifically approved by the Management Committee or created pursuant to the operation of this Agreement or the Members' Agreement. (d) The Manager shall conduct such title examinations and cure such title defects as may be advisable in the reasonable judgment of the Manager. 10 (e) The Manager shall: (i) make or arrange for all payments required by leases, licenses, permits, authorities, contracts and other agreements related to the Assets; (ii) pay all taxes, assessments and like charges on Operations and Assets except taxes determined or measured by a Member's sales revenue or net income. If authorized by the Management Committee, the Manager shall have the right to contest in the courts or otherwise, the validity or amount of any taxes, assessments or charges if the Manager deems them to be unlawful, unjust, unequal or excessive, or to undertake such other steps or proceedings as the Manager may deem reasonably necessary to secure a cancellation, reduction, readjustment or equalization thereof before the Manager shall be required to pay them, but in no event shall the Manager permit or allow title to the Assets to be lost as the result of the nonpayment of any taxes, assessments or like charges; and (iii) shall do all other acts reasonably necessary to maintain the Assets. (f) The Manager shall: (i) apply for all necessary permits, licenses and approvals; (ii) comply with applicable federal, state and local laws and regulations; (iii) notify promptly the Management Committee of any allegations of substantial violation thereof; (iv) prepare and file all reports or notices required for Operations; and (v) arrange for bonds and reclamation for both pre-existing and new conditions and disturbances of the Properties, at the Company's cost; The Manager shall not be in breach of this provision if a violation has occurred in spite of the Manager's good faith efforts to comply, and the Manager has timely cured or disposed of such violation through performance, or payment of fines and penalties. (g) The Manager shall prosecute and defend, but shall not initiate without consent of the Management Committee, all litigation or administrative proceedings arising out of Operations. The non-managing Member shall have the right to participate, at its own expense, in such litigation or administrative proceedings. (h) The Manager shall provide insurance for the benefit of the Company and the Members as reasonably determined by the Manager. (i) The Manager may dispose of Assets, whether through abandonment, surrender or Transfer, subject to the limitation set forth in Section 8.2(a) and Section 12.2. (j) The Manager shall have the right to carry out its responsibilities hereunder through agents, Affiliates or independent contractors. (k) The Manager shall perform or cause to be performed during the term of this Agreement all assessment and other work required by law in order to maintain the unpatented mining claims included within the Properties. The Manager shall have the right to perform the assessment work required hereunder pursuant to a common plan of exploration and continued actual occupancy of such claims and sites shall not be required. The Manager shall not be liable on account of any determination by any court or governmental agency that the work performed by the Manager does not constitute the required annual assessment work or occupancy for the purposes of preserving or maintaining ownership of the claims, provided that the work done is in accordance with the adopted Program and Budget. The Manager shall timely pay all fees and record with the appropriate county and file with the appropriate United States agency, affidavits or other documents required by law to maintain all such claims or sites. 11 (l) If authorized by the Management Committee, the Manager may: (i) locate, amend or relocate any unpatented mining claim or mill site or tunnel site, (ii) locate any fractions resulting from such amendment or relocation, (iii) apply for patents or mining leases or other forms of mineral tenure for any such unpatented claims or sites, (iv) abandon any unpatented mining claims for the purpose of locating mill sites or otherwise acquiring from the United States rights to the ground covered thereby, (v) abandon any unpatented mill sites for the purpose of locating mining claims or otherwise acquiring from the United States rights to the ground covered thereby, (vi) exchange with or convey to the United States any of the Properties for the purpose of acquiring rights to the ground covered thereby or other adjacent ground, and (vii) convert any unpatented claims or mill sites into one or more leases or other forms of mineral tenure pursuant to any federal law hereafter enacted. (m) The Manager shall keep and maintain all required accounting and financial records pursuant to the Accounting Procedure and in accordance with customary cost accounting practices in the mining industry. The Manager shall respond in a timely manner to all requests from Members for information necessary to meet filing deadlines imposed by Law. (n) The Manager shall keep the Management Committee advised of all Operations by submitting in writing to the Management Committee: (i) quarterly progress reports which include statements of expenditures and comparisons of such expenditures to the adopted Budget; (ii) periodic summaries of data acquired, reasonably in advance of Management Committee meetings; (iii) copies of reports concerning Operations, reasonably in advance of Management Committee meetings; (iv) a detailed final report within 30 days after completion of each Program and Budget, but in no event less often than annually, which shall include comparisons between actual and budgeted expenditures and comparisons between the objectives and results of Programs; and (v) such other reports as the Management Committee may reasonably request. At all reasonable times the Manager shall provide the Management Committee or the duly authorized representative of any Member (including representatives of any actual or potential lenders, equity investors or purchasers of a Member's Ownership Interest or NSR royalty that are duly authorized in writing by a Member) access to, and the right to inspect and copy all maps, drill logs, core tests, reports, surveys, assays, analyses, production reports, operations, technical, accounting and financial records, and other information acquired in Operations, including all computer files an databases related thereto. In addition, the Manager shall allow the non-managing Member or that Member's authorized representative or invitee, at that Member's sole risk and expense, and subject to reasonable safety regulations, to inspect the Assets and Operations at all reasonable times, so long as the inspecting Member does not unreasonably interfere with Operations. (o) The Manager shall undertake all other activities reasonably necessary to fulfill the foregoing. (p) The Manager shall have the right to require the Members to fully fund the Environmental Compliance Fund, in proportion to their respective 12 Ownership Interests, and in accordance with Section 3.14 of Exhibit B, with all reasonably anticipated costs of future reclamation, closure and Environmental Compliance. No Member who has resigned or withdrawn from the Company will be required to contribute additional funds to the Environmental Compliance Fund unless and until all contribution made to said Environmental Compliance Fund prior to such withdrawal or resignation have been spent or committed to be spent. (q) The Manager shall otherwise conduct Operations as it deems appropriate in its discretion. The Manager shall not be in default of any duty under this Section 9.2 if its failure to perform results from the failure of the Members to perform acts or to contribute amounts required of them by this Agreement. 9.3 Standard of Care; Indemnification. The Manager shall conduct all Operations in a good, workmanlike and efficient manner, in accordance with sound mining and other applicable industry standards and practices, and in accordance with the terms and provisions of leases, licenses, permits, contracts and other agreements pertaining to the Assets. The Manager shall not be liable to the non-managing Member for any act or omission resulting in damage or loss except to the extent caused by or attributable to the Manager's willful misconduct or gross negligence. The Members shall indemnify and hold harmless the Manager and its officers, employees and agents from and against any liabilities, obligations, claims, responsibilities, actions, demands, losses, costs or expenses, including but not limited to costs of litigation and reasonable attorneys fees, arising out of or relating to its activities as Manager, except that any liabilities or obligations arising directly from the Manager's gross negligence or willful misconduct shall be excluded form this indemnity. 9.4 Resignation; Deemed Offer to Resign. Except during the period following the Effective Date of this Agreement up to and including the Cut-off Date , the Manager may resign upon three months' prior notice to the other Member, in which case the other Member may elect to become the new Manager by notice to the resigning Member within 30 days after the notice of resignation. In the case of any resignation as Manager by TSMC, TSVLP shall be deemed to be the "other Member" and TSHI shall be deemed to be the resigning Member for purposes of this Section 9.4. If any of the following shall occur, the Manager shall be deemed to have offered to resign, which offer shall be accepted by the other Member, if at all, within 90 days following such deemed offer: (a) The Ownership Interest of the Member who serves as or who appoints the Manager (which, in the case of TSMC, shall be deemed to by TSHI) becomes less than fifty percent (50%); or (b) The Manager fails to perform a material obligation imposed upon it under this Agreement and such failure continues for a period of 30 days after notice from the other Member demanding performance; or (c) The Manager fails to pay or contest in good faith its bills within 60 days after they are due; or (d) A receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for a substantial part of its assets is appointed and such appointment is neither made ineffective nor discharged within 60 days after the making thereof, or such appointment is consented to, requested by, or acquiesced in by the Manager; or (e) The Manager commences a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect; or consents to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of any substantial part of its assets; or makes a general assignment for the benefit of creditors; or fails generally to pay its or Company debts as such debts become due; or takes corporate or other action in furtherance of any of the foregoing; or (f) Entry is made against the Manager of a judgment, decree or order for relief affecting a substantial part of its assets by a court of competent jurisdiction in an involuntary case commenced under any applicable bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in effect. 13 9.5 Payments To Manager. The Manager shall be compensated for its services and reimbursed for its costs hereunder in accordance with the Accounting Procedure. TSHI and TSVLP agree that all reviews and amendments of the Manager's charges pursuant to Section 3.13(e) of the Accounting Procedure shall be accomplished reasonably and in good faith. 9.6 Transactions With Affiliates. If the Manager engages Affiliates to provide services hereunder including, without limitation, services relating to milling or beneficiating Products, it shall do so on terms no less favorable to the Company than would be the case with unrelated persons in arm's-length transactions. 9.7 Activities During Deadlock. Subject to the contrary direction of the Management Committee and to the receipt of necessary funds, if (i) the Management Committee for any reason fails to adopt a Program and Budget, or if, (ii) a Member elects to contribute to an adopted Program and Budget in some lesser amount than its respective Ownership Interest, or not at all, and the other Member is not required to, and decides not to, advance an Elected Loan in accordance with Section 4.1, then, with respect to clause 9.7(ii), the adopted Program and Budget shall be deemed rescinded, and, with respect to both clauses 9.7(i) and (ii), the Manager shall continue Operations at levels comparable with the last adopted Program and Budget but in no event at levels which do not fully provide for the minimum holding costs of the Properties. For purposes of determining the required contributions of the Members and their respective Ownership Interests, the last adopted Program and Budget shall be deemed extended. ARTICLE X PROGRAMS AND BUDGETS 10.1 Initial Program and Budget. The Initial Program and Budget to which both Members have agreed is hereby adopted and is attached as Exhibit P. 10.2 Operations Pursuant to Programs and Budgets. Except as otherwise provided in Sections 9.7, 10.6, 10.7, 10.8 or 10.9 of this Agreement or in and Article VI of the Members Agreement, Operations shall be conducted, expenses shall be incurred, and Assets shall be acquired only pursuant to adopted Programs and Budgets. 10.3 Presentation of Programs and Budgets. Proposed Programs and Budgets shall be prepared by the Manager for a period of one (1) year or any longer period. Each adopted Program and Budget, regardless of length, shall be reviewed at least once a year at the annual meeting of the Management Committee. During the period encompassed by any Program and Budget, and at least two months prior to its expiration, a proposed Program and Budget for the succeeding period shall be prepared by the Manager and submitted to the Members. 10.4 Review and Adoption of Proposed Programs and Budgets. Within thirty (30) days after submission of a proposed Program and Budget, or a proposed Amendment thereto under Section 10.9, each Member shall submit in writing to the Management Committee: (a) Notice that the Member approves any or all of the components of the proposed Program and Budget; or (b) Modifications proposed by the Member to the components of the proposed Program and Budget; or (c) Notice that the Member rejects any or all of the components of the proposed Program and Budget. If a Member fails to give any of the foregoing responses within the allotted time, the failure shall be deemed to be a vote by the Member for adoption of the Manager's proposed Program and Budget. If a Member makes a timely submission to the Management Committee pursuant to Subsections 10.4(a), (b) or (c), then the Management Committee shall consult regarding the possible development of a Program and Budget acceptable to all Members (provided that no Member shall be obligated to agree to any actual change to a proposed Program and Budget in connection with such consultations) failing which the Management Committee shall determine a Program and Budget by majority vote of Ownership Interests. 14 10.5 Election to Participate. By notice to the Manager within 20 days after the final vote of the Management Committee adopting a Program and Budget for periods subsequent a Member may elect to contribute to such Program and Budget in some lesser amount than its respective Ownership Interest, or not at all, subject to the terms and conditions of Article IV. If a Member fails to so notify the Manager, the Member shall be deemed to have elected to contribute to such Program and Budget in proportion to its respective Ownership Interest as of the beginning of the period covered by the Program and Budget. 10.6 Deadlock on Proposed Programs and Budgets; Decision of a Member not to Fund other Member's Share. If: (i) the Members, acting through the Management Committee, fail to approve a Program and Budget by the beginning of the period to which the proposed Program and Budget applies, or, if (ii) a Member elects to contribute to an adopted Program and Budget in some lesser amount than its respective Ownership Interest, or not at all, and the other Member is not required to, and decides not to, advance an Elected Loan in accordance with Section 4.1, then the provisions of Section 9.7 shall apply. 10.7 Budget Overruns; Program Changes. The Manager shall immediately notify the Management Committee of any material departure from an adopted Program and Budget. If the Manager exceeds an adopted Budget by more than twenty percent (20%) then the excess over twenty percent (20%), unless directly caused by an emergency or unexpected expenditure made pursuant to Section 10.8 or unless otherwise authorized by the Management Committee or pursuant to an Amendment under Section 10.9, shall be for the sole account of the Manager and such excess shall not be included in calculations relating to the adjustment or dilution of Ownership Interests. Budget overruns of twenty percent (20%) or less shall be funded by the Members in the same manner and with the same consequences and effects as the Member provided funding for the then current Program and Budget. 10.8 Emergency or Unexpected Expenditures. In case of emergency, the Manager may take any reasonable action it deems necessary to protect life, limb or property, to protect the Assets or to comply with Environmental Laws or other Laws.. The Manager may make reasonable expenditures for unexpected events which are beyond its reasonable control and which do not result from a breach by it of its standard of care. The Manager shall promptly notify the Members of the emergency or unexpected expenditure, and the Manager shall be reimbursed for all resulting costs by the Members in the same manner and with the same consequences and effects as the Members provided the funding for the then current Program and Budget. 10.9 Amendments to Programs and Budgets. An adopted Program and Budget may be amended only prospectively by the Manager (the "Amendment") upon 30 days notice. The procedures for review and approval of proposed Amendments under this Section 10.9 shall be the same as the procedures for the review and approval of proposed Budgets and Programs under Section 10.4. ARTICLE XI ACCOUNTS AND SETTLEMENTS 11.1 Monthly Statements. The Manager shall promptly submit to the Management Committee monthly statements of account reflecting in reasonable detail the charges and credits to the Business Account during the preceding month. 11.2 Cash Calls. On the basis of each adopted or amended Program and Budget and subject to Sections 4.1 and 10.5 of this Agreement and Section 2.2 of the Members Agreement and the elections of the respective Members under such provisions, the Manager shall submit to each Member, a billing (or "cash call") for estimated cash requirements for each three month period during the term of such Program. Within ten (10) days after receipt of each such billing, each Member shall pay to the Manager its share of such estimated requirements. For greater certainty, costs and expenditures for Operations and working capital in support of approved Programs and Budgets shall include funding of reasonably anticipated costs of future reclamation, closure costs and Environmental Compliance. Time is of the essence of payment of such billings. The Manager shall at all times maintain a reasonable working capital reserve. All funds in excess of immediate cash requirements shall be invested in interest-bearing accounts with the Company's bank, for the benefit of the Business Account. 15 11.3 Failure to Meet Cash Calls. A Member that fails to meet cash calls in the amount and at the times specified in Section 11.2 shall be in default, and the amounts of the defaulted cash call shall bear interest from the date due at an annual rate equal to the Interest Rate, but in no event shall said rate of interest exceed the maximum permitted by Law. The non-defaulting Member shall have those other rights and remedies specified in Section 4.2. TSVLP shall not be in default hereunder with respect to any cash call for which TSHI is obligated to provide an Elected Loan under Section 4.1. 11.4 Audits. Unless waived by all Members in writing, the Manager shall order an audit of the accounting and financial records for each calendar year (or other mutually agreed accounting period). All written exceptions to and claims upon the Manager for discrepancies disclosed by such audit shall be made not more than 3 months after receipt of the audit report. Failure to make any such exception or claim within the 3 month period shall mean the audit is correct and binding upon the Members. The audits shall be conducted by a firm of certified public accountants selected by the Manager, unless otherwise agreed by the Management Committee. ARTICLE XII PROPERTIES; DISTRIBUTION OF PRODUCTION 12.1 Royalties, Production Taxes and Other Payments Based on Production. All required payments of production royalties, taxes based on production of Products, and other payments out of production to private parties and governmental entities, shall be determined and made by the Company in a timely manner and otherwise in accordance with applicable laws and agreements. The Manager shall furnish to the Members evidence of timely payment for all such required payments. In the event the Company fails to make any such required payment, any Member shall have the right to make such payment and shall thereby become subrogated to the rights of such third party; provided, however, that the making of any such payment on behalf of the Company shall not constitute acceptance by the paying Member of any liability to such third party for the underlying obligation. 12.2 Abandonment and Surrender. Either Member may request the Management Committee to authorize the Manager to surrender or abandon part or all of the Properties. If the other Member objects to such surrender or abandonment, then at the option of the objecting Member, the Company shall assign to the objecting Member or such other Person as the objecting Member specifies, by special warranty deed and without cost to the surrendering Member, all of the Company's interest in the Properties sought to be abandoned or surrendered, free and clear of all Encumbrances created by, through or under the Company or the surrendering Member, other than those to which both Members have agreed. Upon the assignment, such properties shall cease to be part of the Properties. 12.3 Reacquisition. If any Properties are abandoned or surrendered under the provisions of this Article XII, then, unless this Agreement is earlier terminated, neither Member nor any Affiliate thereof shall acquire any interest in such Properties or a right to acquire such Properties for a period of two years following the date of such abandonment or surrender. If a Member reacquires any Properties in violation of this Section 12.3, the other Member may elect by notice to the reacquiring Member within 45 days after it has actual notice of such reacquisition, to have such properties made subject to the terms of this Agreement and transferred, without charge, to the Company. In the event such an election is made, the reacquired properties shall thereafter be treated as Properties, and the costs of reacquisition shall be borne solely by the reacquiring Member and shall not be included for purposes of calculating the Members' respective Ownership Interests. 12.4 Disposition of Products by Manager. The Manager shall market and dispose of Products. Such dispositions by Manager shall be in good faith and in accordance with good industry practice, with the objective of obtaining the best possible price for the Products. The Manager shall have the right to enter into forward sales and hedging arrangements as approved by the Management Committee. ARTICLE XIII CONFIDENTIALITY, OWNERSHIP, USE AND DISCLOSURE OF INFORMATION 13.1 Business Information. All Business Information shall be owned jointly by the Members as their Ownership Interests are determined pursuant to this Agreement. Both before and after the termination of the Company, all Business 16 Information may be used by either Member for any purpose, whether or not competitive with the Business, without consulting with, or obligation to, the other Member. Except as provided in Sections 13.3 and 13.4, or with the prior written consent of the other Member, each Member shall keep confidential and not disclose to any third party or the public any portion of the Business Information that constitutes Confidential Information. 13.2 Member Information. In performing its obligations under this Agreement, neither Member shall be obligated to disclose any Member Information. If a Member elects to disclose Member Information in performing its obligations under this Agreement, such Member Information, together with all improvements, enhancements, refinements and incremental additions to such Member Information that are developed, conceived, originated or obtained by either Member in performing its obligation under this Agreement ("Enhancements"), shall be owned exclusively by the Member that originally developed, conceived, originated or obtained such Member Information. Each Member may use and enjoy the benefits of such Member Information and Enhancements in the conduct of the Business hereunder, but the Member that did not originally develop, conceive, originate or obtain such Member Information may not use such Member Information and Enhancements for any other purpose. Except as provided in Section 13.4, or with the prior written consent of the other Member, which consent may be withheld in such Member's sole discretion, each Member shall keep confidential and not disclose to any third party or the public any portion of Member Information and Enhancements owned by the other Member that constitutes Confidential Information. 13.3 Permitted Disclosure of Confidential Business Information. Either Member may disclose Business Information that is Confidential Information: (a) to a Member's officers, directors, partners, members, employees, Affiliates, shareholders, agents, attorneys, accountants, consultants, contractors, subcontractors or advisors, for the sole purpose of such Member's performance of its obligations under this Agreement; (b) to any party to whom the disclosing Member contemplates a Transfer of all or any part of its Ownership Interest, for the sole purpose of evaluating the proposed Transfer; (c) to any actual or potential lender, underwriter or investor for the sole purpose of not later than thirty (30) days evaluating whether to make a loan to or investment in the disclosing Member; or (d) to a third party with whom the disclosing Member contemplates any independent business activity or operation. The Member disclosing Confidential Information pursuant to this Section 13.3, shall disclose such Confidential Information to only those parties that have a bona fide need to have access to such Confidential Information for the purpose for which disclosure to such parties is permitted under this Section 13.3 and that have agreed in writing supplied to, and enforceable by, the other Member to protect the Confidential Information from further disclosure, to use such Confidential Information solely for such purpose and to otherwise be bound by the provisions of this Article XIII. Such writing shall not preclude parties described in Subsection 13.3(b) from discussing and completing a Transfer with the other Member. The Member disclosing Confidential Information shall be responsible and liable for any use or disclosure of the Confidential Information by such parties in violation of this Agreement and such other writing. 13.4 Disclosure Required By Law. Notwithstanding anything contained in this Article, a Member may disclose any Confidential Information if, in the opinion of the disclosing Member's legal counsel: (a) such disclosure is legally required to be made in a judicial, administrative or governmental proceeding pursuant to a valid subpoena or other applicable order; or (b) such disclosure is legally required to be made pursuant to State or Federal Securities Laws or the rules or regulations of a stock exchange or similar trading market applicable to the disclosing Member. Prior to any disclosure of Confidential Information under this Section 13.4, the disclosing Member shall give the other Member at least three (3) business days prior written notice (unless less time is permitted by such rules, regulations or proceeding) and, in making such disclosure, the disclosing Member shall disclose only that portion of Confidential Information required to be disclosed and shall take all reasonable efforts to preserve the confidentiality thereof, including, without limitation, obtaining protective orders and supporting the other Member in intervention in any such proceeding. 13.5 Public Announcements. Prior to making or issuing any press release or other public announcement or disclosure of Business Information that is not Confidential Information, a Member shall first consult with the other Member as 17 to the content and timing of such announcement or disclosure, unless in the good faith judgment of such Member, there is not sufficient time to consult with the other Member before such announcement or disclosure must be made under applicable Laws; but in such event, the disclosing Member shall notify the other Member, as soon as possible, of the pendency of such announcement or disclosure, and it shall notify the other Member before such announcement or disclosure is made if at all reasonably possible. Any press release or other public announcement or disclosure to be issued by either Member relating to this Business shall also identify the other Member. 13.6 Duration of Confidentiality. The provisions of this Article XIII shall apply during the term of this Agreement and for two years following termination of this Agreement pursuant to Section 14.1, and shall continue to apply to any Member who withdraws, who is deemed to have withdrawn, or who Transfers its Ownership Interest, for two years following the date of such occurrence. ARTICLE XIV RESIGNATION AND DISSOLUTION 14.1 Events of Dissolution. The Company shall be dissolved upon the occurrence of any of the following: (a) Upon expiration of term of the Company in accordance with Section 2.5; (b) Upon the unanimous written agreement of the Members; or (c) as otherwise provided by the Act. 14.2 Resignation. A Member may elect to resign from the Company (a) as set forth in the Members' Agreement or (b) by giving notice to the other Member of the effective date of resignation, which shall be the later of the end of the then current Program Period or thirty (30) days after the date of the notice. Upon resignation by a Member, the resigning Member shall be deemed to have transferred to the remaining Member all of its Ownership Interest, including all of its interest in the Assets and its Capital Account, without cost and free and clear of all Encumbrances arising by, through or under such resigning Member, except those described in Paragraph 1.1 of Exhibit A and those to which both Members have agreed. The resigning Member shall execute and deliver all instruments as may be necessary in the reasonable judgment of the other Member to effect the transfer of its interests in the Company and the Assets to the other Member. A resigning Member shall have no right to receive the fair value of his Ownership Interest pursuant to 18-604 of the Act. If within a sixty (60) day period both Members elect to withdraw, then the Company shall instead be deemed to have been terminated by the written agreement of the Members pursuant to Section 14.1(b). 14.3 Disposition of Assets on Dissolution. Promptly after dissolution under Section 14.1, the Manager shall take all action necessary to wind up the activities of the Company, in accordance with Exhibit C. All costs and expenses incurred in connection with the dissolution of the Company shall be expenses chargeable to the Business Account. 14.4 Filing of Certificate of Cancellation. Upon completion of the winding up of the affairs of the Company, the Manager shall promptly file a Certificate of Cancellation with the Office of the Secretary of State of the State of Delaware. If the Manager has caused the dissolution of the Company, whether voluntarily or involuntarily, then a person selected by a majority vote of the Members to wind up the affairs of the Company shall file the Certificate of Cancellation. 14.5 Right to Data After Dissolution. After dissolution of the Company pursuant to Subsections 14.1(a), (b), or (c), each Member shall be entitled to make copies of all applicable information acquired hereunder before the effective date of termination not previously furnished to it. 14.6 Continuing Authority. On dissolution of the Company under Section 14.1 the Member that was the Manager or that appointed the Manager prior to such dissolution (or the other Member in the event of a resignation by the Manager) shall have the power and authority to do all things on behalf of both Members that are reasonably necessary or convenient to: (a) wind up Operations (b) 18 complete reclamation, closure and other Environmental Compliance activities with respect to the Properties, and (c) complete any transaction and satisfy any obligation, unfinished or unsatisfied, at the time of such dissolution, if the transaction or obligation arises out of Operations prior to such dissolution. The Manager shall have the power and authority to grant or receive extensions of time or change the method of payment of an already existing liability or obligation, prosecute and defend actions on behalf of the Company and either or both Members, encumber Assets, and take any other reasonable action in any matter with respect to which the former Members continue to have, or appear or are alleged to have, a common interest or a common liability. ARTICLE XV GOVERNING LAW 15.1 Governing Law. Except for matters of title to the Assets or their Transfer, which shall be governed by the law of their situs, this Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard for any conflict of laws or choice of laws principles that would permit or require the application of the laws of any other jurisdiction. ARTICLE XVI GENERAL PROVISIONS 16.1 Notices. All notices, payments and other required or permitted communications ("Notices") to either Member shall be in writing, and shall be addressed respectively as follows: If to TSVLP: Tonkin Springs Venture Limited Partnership 55 Madison Street, Suite 700 Denver, Colorado 80206 Attention: President, U.S. Gold Corporation Telephone:(303) 322-8002 Facsimile: (303) 322-7866 With a Copy to: Randy L. Parcel, Esq. Perkins Coie LLP 1675 Broadway, Suite 2800 Denver, Colorado 80202 If to TSHI: Tonkin Springs Holdings Inc. 401 Bay Street, Suite 2302 Toronto, Ontario M5H2Y4 Canada Attention: President, Tonkin Springs Holdings Inc. Telephone: (416) 947-1212 Facsimile: (416) 367-4681 With a Copy to: Roger C. Adams, Esq. Ducker, Montgomery & Lewis, P.C. 1650 Broadway, Suite 1500 Denver, Colorado 80202 All Notices shall be given (a) by personal delivery to the Member, (b) by electronic communication, capable of producing a printed transmission and confirmation, (c) by registered or certified mail return receipt requested, or (d) by overnight or other express courier service. All Notices shall be effective and shall be deemed given on the date of receipt at the principal address if received during normal business hours, and, if not received during normal business hours, on the next business day following receipt, or if by electronic communication, on the date of such communication. Either Member may change its address by Notice to the other Member. 16.2 Gender. The singular shall include the plural, and the plural the singular wherever the context so requires, and the masculine, the feminine, and the neuter genders shall be mutually inclusive. 19 16.3 Currency. All references to "dollars" or "$" herein shall mean lawful currency of the United States of America. 16.4 Headings. The subject headings of the Sections and Subsections of this Agreement and the Paragraphs and Subparagraphs of the Exhibits to this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. References to "hereunder" are, unless otherwise stated, references to this entire Agreement. 16.5 Waiver. The failure of either Member to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach hereof shall not constitute a waiver of any provision of this Agreement or limit such Member's right thereafter to enforce any provision or exercise any right. 16.6 Modification. No modification of this Agreement shall be valid unless made in writing and duly executed by both Members. 16.7 Force Majeure. Except for the obligation to make payments when due hereunder, the obligations of a Member shall be suspended to the extent and for the period that performance is prevented by any cause, whether foreseeable or unforeseeable, beyond its reasonable control, including, without limitation, labor disputes (however arising and whether or not employee demands are reasonable or within the power of the Member to grant); acts of God; Laws, instructions or requests of any government or governmental entity; judgments or orders of any court; inability to obtain on reasonably acceptable terms any public or private license, permit or other authorization; curtailment or suspension of activities to remedy or avoid an actual or alleged, present or prospective violation of Environmental Laws; action or inaction by any federal, state or local agency that delays or prevents the issuance or granting of any approval or authorization required to conduct Operations (including, without limitation, a failure to complete any review and analysis required by the National Environmental Policy Act or any similar state law); acts of war or conditions arising out of or attributable to war, whether declared or undeclared; riot, civil strife, insurrection or rebellion; fire, explosion, earthquake, storm, flood, sink holes, drought or other adverse weather condition; delay or failure by suppliers or transporters of materials, parts, supplies, services or equipment or by contractors' or subcontractors' shortage of, or inability to obtain, labor, transportation, materials, machinery, equipment, supplies, utilities or services; accidents; breakdown of equipment, machinery or facilities; actions by native rights groups, environmental groups, or other similar special interest groups; or any other cause whether similar or dissimilar to the foregoing. The affected Member shall promptly give notice to the other Member of the suspension of performance, stating therein the nature of the suspension, the reasons therefore, and the expected duration thereof. The affected Member shall resume performance as soon as reasonably possible. During the period of suspension the obligations of both Members to advance funds pursuant to this Agreement shall be reduced to levels consistent with then current Operations. 16.8 Rule Against Perpetuities. The Members do not intend that there shall be any violation of the "rule against perpetuities", the "rule against unreasonable restraints on the alienation of property", or any similar rule. Accordingly, if any right or option to acquire any interest in the Properties or Assets, in an Ownership Interest, or the Company, or in any real property exists under this Agreement, such right or option must be exercised, if at all, so as to vest such interest within time periods permitted by applicable rules. If, however, any such violation should inadvertently occur, the Members hereby agree that a court shall reform that provision in such a way as to approximate most closely the intent of the Members within the limits permissible under such rules. 16.9 Further Assurances. Each of the Members shall take, from time to time and without additional consideration, such further actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purposes of this Agreement or as may be reasonably required by lenders in connection with Project Financing. 16.10 Entire Agreement; Successors and Assigns. This Agreement contains the entire understanding of the Members and supersedes all prior agreements and understandings between the Members relating to the subject matter hereof. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Members. 20 16.11 Counterparts. This Agreement may be executed in any number of counterparts, and it shall not be necessary that the signatures of both Members be contained on any counterpart. Each counterpart shall be deemed an original, but all counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date. TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP By: Tonkin Springs Gold Mining Company, as its General Partner By: /s/ William W. Reid, President TONKIN SPRINGS HOLDINGS INC. By: /s/ Ebe Scherkus, President 21 EX-10 6 exh10_9.txt EXHIBIT 10.9 Exhibit 10.9 ------------ Operating Agreement of the Members of Tonkin Springs LLC as Amended by and between Tonkin Springs Venture Limited Partnership and U.S. Environmental Corporation dated October 18, 2001. OPERATING AGREEMENT OF TONKIN SPRINGS LLC A Delaware Limited Liability Company As Amended Effective October 18, 2001 TABLE OF CONTENTS Page No. ---- ARTICLE I DEFINITIONS AND CROSS-REFERENCES.................................. 1 1.1 Definitions............................................................ 1 1.2 Cross References....................................................... 1 ARTICLE I NAME, PURPOSES AND TERM........................................... 1 2.1 Formation.............................................................. 1 2.2 Name................................................................... 1 2.3 Purposes............................................................... 1 2.4 Limitation............................................................. 2 2.5 Term................................................................... 2 2.6 Registered Agent; Offices.............................................. 2 2.7 Record Title........................................................... 2 ARTICLE III INTERESTS OF MEMBERS............................................ 2 3.1 Amended Ownership Interests............................................ 2 3.2 Changes in Ownership Interests......................................... 2 3.3 Documentation of Adjustments to Ownership Interests.................... 2 ARTICLE IV ADJUSTMENTS OF MEMBERS' INTERESTS AND RELATED LIABILITIES; TREATMENT OF CASHFLOW AND CERTAIN PAYMENTS..................... 2 4.1 Evidence of Changes in Ownership Interests............................. 2 4.2 Distributions.......................................................... 3 ARTICLE V RELATIONSHIP OF THE MEMBERS...................................... 3 5.1 Limitation on Authority of Members..................................... 3 5.2 Federal Tax Elections and Allocations.................................. 3 5.3 State Income Tax....................................................... 3 5.4 Tax Returns............................................................ 3 5.5 Other Business Opportunities........................................... 3 5.6 Waiver of Rights to Partition or Other Division of Assets.............. 3 5.7 Bankruptcy of a Member................................................. 3 5.8 Implied Covenants...................................................... 3 5.9 No Certificate......................................................... 3 5.10 Limitation of Liability................................................ 3 5.11 Indemnities............................................................ 4 5.12 No Third Party Beneficiary Rights...................................... 4 ARTICLE VI REPRESENTATIONS AND WARRANTIES................................... 4 6.1 Capacity of the Members................................................ 4 ARTICLE VII TRANSFER OF INTEREST; PREEMPTIVE RIGHT.......................... 4 7.1 General................................................................ 4 7.2 Limitations on Free Transferability.................................... 4 7.3 Preemptive Right....................................................... 5 ARTICLE VIII MANAGEMENT COMMITTEE........................................... 5 8.1 Organization and Composition........................................... 5 8.2 Decisions.............................................................. 5 8.3 Meetings............................................................... 6 8.4 Action Without Meeting................................................. 6 8.5 Matters Requiring Approval............................................. 6 i ARTICLE IX MANAGER.......................................................... 6 9.1 Appointment............................................................ 6 9.2 Powers and Duties of Manager........................................... 6 9.3 Standard of Care; Indemnification...................................... 8 9.4 Resignation; Deemed Offer to Resign.................................... 9 9.5 Payments To Manager.................................................... 9 9.6 Transactions With Affiliates........................................... 9 9.7 Activities During Deadlock............................................. 9 ARTICLE X PROGRAMS AND BUDGETS.............................................. 9 10.1 Operations Pursuant to Programs and Budgets........................... 9 10.2 Presentation of Programs and Budgets.................................. 10 10.3 Review and Adoption of Proposed Programs and Budgets.................. 10 10.4 Emergency or Unexpected Expenditures.................................. 10 10.5 Amendments to Programs and Budgets.................................... 10 ARTICLE XI ACCOUNTS AND SETTLEMENTS......................................... 10 11.1 Monthly Statements..................................................... 10 11.2 Cash Calls............................................................. 10 11.3 Failure to Meet Cash Calls............................................. 10 11.4 Audits................................................................. 11 ARTICLE XII PROPERTIES...................................................... 11 12.1 Royalties, Production Taxes and Other Payments Based on Production..... 11 12.2 Abandonment and Surrender.............................................. 11 12.3 Reaquisitions.......................................................... 11 12.4 Disposition of Products by Manager..................................... 11 ARTICLE XIII CONFIDENTIALITY, OWNERSHIP, USE AND DISCLOSURE OF INFORMATION.............................................................. 11 13.1 Business Information................................................... 11 13.2 Disclosure Required By Law............................................. 11 13.3 Public Announcements................................................... 12 13.4 Duration of Confidentiality............................................ 12 ARTICLE XIV RESIGNATION AND DISSOLUTION.................................... 12 14.1 Events of Dissolution.................................................. 12 14.2 Resignation............................................................ 12 14.3 Disposition of Assets on Dissolution................................... 12 14.4 Filing of Certificate of Cancellation.................................. 12 14.5 Right to Data After Dissolution........................................ 12 14.6 Continuing Authority................................................... 12 ARTICLE XV GOVERNING LAW................................................... 13 15.1 Governing Law.......................................................... 13 ARTICLE XVI GENERAL PROVISIONS.............................................. 13 16.1 Notices................................................................ 13 16.2 Gender................................................................. 13 16.3 Currency............................................................... 13 16.4 Headings............................................................... 13 16.5 Waiver................................................................. 13 16.6 Modification........................................................... 14 16.7 Force Majeure.......................................................... 14 16.8 Rule Against Perpetuities.............................................. 14 16.9 Further Assurances..................................................... 14 16.10 Entire Agreement; Successors and Assigns.............................. 14 16.11 Counterparts.......................................................... 14 ii OPERATING AGREEMENT OF TONKIN SPRINGS LLC A Delaware Limited Liability Company This Amended Operating Agreement of Tonkin Springs LLC (this Agreement) is made effective as of October 18, 2001, (the Effective Date) between TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP, a Nevada limited partnership (TSVLP), the address of which is 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545, and U.S. ENVIRONMENTAL CORPORATION (USEC), the address of which is 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545. RECITALS A. Tonkin Springs Holding Inc., a Colorado corporation (TSHI) and TSVLP were parties to the Operating Agreement of Tonkin Springs LLC, dated February 26, 1999 (the 1999 Agreement). Pursuant to the 1999 Agreement, TSHI withdrew from the TSLLC effective October 18, 2001 and the equity interest of TSHI in TSLLC was thereby transferred to TSVLP as provided under Section 2.3 of the 1999 Agreement. B. Immediately prior to the withdrawal of TSHI from TSLLC, TSVLP sold and transferred to USEC a 1/2 of 1 percent equity interest in TSLLC. After such transfer and the withdrawal of TSHI, TSVLP shall own 99.5 percent equity interest in TSLLC and USEC shall own 0.5 percent equity interest in TSLLC. TSVLP and USEC are affiliates of each other. C. TSVLP and USEC have amended the Members' Agreement of Tonkin Springs LLC effective as of October 18, 2001 (Members' Agreement as Amended.) D. TSVLP and USEC desire to continue TSLLC and to thereby participate in the exploration, evaluation and, if justified, the development and mining of mineral resources within the Properties or any other properties acquired pursuant to the terms of this Agreement. E. TSVLP and USEC wish to continue to operate the limited liability company under the Delaware Limited Liability Company Act, 6 Del.C. 18-101 et seq. (the Act) to own and operate the Properties and Assets in accordance with the terms set forth in this Agreement. Such company (the Company) shall continue under the named Tonkin Springs LLC. NOW THEREFORE, in consideration of the covenants and conditions contained herein, TSVLP and USEC agree as follows: ARTICLE I DEFINITIONS AND CROSS-REFERENCES 1.1 Definitions. The terms defined in Exhibit D and elsewhere herein shall have the defined meaning wherever used in this Agreement, including in Exhibits. 1.2 Cross References. References to Exhibits, Articles, Sections and Subsections refer to Exhibits, Articles, Sections and Subsections of this Agreement. References to Paragraphs and Subparagraphs refer to paragraphs and subparagraphs of the referenced Exhibits. ARTICLE II NAME, PURPOSES AND TERM 2.1 Formation. The Company has been duly organized pursuant to the Act and the provisions of this Agreement as a Delaware limited liability company by the filing of its Certificate of Formation and Certificate of Amendment (as defined in the Act) in the Office of the Secretary of the State of Delaware. 2.2 Name. The name of the Company is and shall continue to be Tonkin Springs LLC and such other name or names complying with the Act as the Manager shall determine. The Manager shall accomplish any filings or registrations required by jurisdictions in which the Company conducts its Business. 2.3 Purposes. The Company is formed for the following purposes and for no others, and shall serve as the exclusive means by which each of the Members accomplishes such purposes: (a) to conduct Exploration within the Area of Interest, 1 (b) to acquire additional real property and other interests within the Area of Interest, (c) to evaluate the possible Development and mining of the Properties, and, if justified, to engage in Development and Mining (d) to engage in marketing Products, and (e) to perform any other activity necessary, appropriate, or incidental to any of the foregoing, including but not limited to permitting, reclamation, closure and other environmental compliance activities. 2.4 Limitation. Unless the Members otherwise agree in writing, the Business of the Company shall be limited to the purposes described in Section 2.3, and nothing in this Agreement shall be construed to enlarge such purposes. 2.5 Term. The term of the Company shall begin on the Effective Date and shall continue for twenty (20) years from the Effective Date and for so long thereafter as the Manger is continuing to maintain the Properties or Products are produced from the Properties on a continuous basis, and thereafter until all materials, supplies, equipment and infrastructure have been salvaged and disposed of, and any required Environmental Compliance is completed and accepted, unless the Company is earlier terminated as herein provided. For purposes hereof, Products shall be deemed to be produced from the Properties on a continuous basis so long as production in commercial quantities is not halted for more than 24 months. 2.6 Registered Agent; Offices. The name of the Company's registered agent in the State of Delaware is The Corporation Trust Company or such other person as the Manager may select in compliance with the Act from time to time. The registered office of the Company in the State of Delaware shall be located at c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, DE 19801 or at any other place within the State of Delaware which the Manager shall select. The principal office of the Company shall be at any other location which the Manager shall select. 2.7 Record Title. Title to the Assets shall be held by the Company. ARTICLE III INTERESTS OF MEMBERS 3.1 Amended Ownership Interests. The Members shall have the following amended Ownership Interests: TSVLP - ninety nine and one half percent (99.5%) USEC - one half of one (0.5%) 3.2 Changes in Ownership Interests. The Ownership Interests shall be adjusted as follows: (a) As provided in the Members' Agreement as Amended Agreement; (b) Upon Transfer by either Member of part or all of its Ownership Interest in accordance with Article VII; or (c) Upon acquisition by either Member of part or all of the Ownership Interest of the other Member, however arising. 3.3 Documentation of Adjustments to Ownership Interests. Each Member's Ownership Interest and related Capital Account balance shall be shown in the accounting records of the Company, as maintained by the Manager, and any adjustments thereto, including adjustments made under Article IV, shall be made monthly and shall be preceded by a notice to both Members with a written explanation of the basis such adjustments. ARTICLE IV ADJUSTMENTS OF MEMBERS' INTERESTS AND TREATMENT OF CASHFLOW 4.1 Evidence of Changes in Ownership Interests. An adjustment to an Ownership Interest as provided in Section III shall not be evidenced by the execution, issuance or recording of certificates or other instruments, but each Member's Ownership Interest shall be shown in the books of the Company, as maintained by 2 the Manager. Each Member shall be provided with appropriately detailed information regarding the basis and method of each such adjustments. 4.2 Distributions. Provided that no Member's initial Ownership Interest has been adjusted pursuant to Section III, ninety nine and one half percent (99.5) of one hundred percent (100%) of positive Cash Flow shall be distributed to TSLLC and the remaining one half of one percent (0.5%) of one hundred percent (100%) of positive Cash Flow shall be distributed to USEC. ARTICLE V RELATIONSHIP OF THE MEMBERS 5.1 Limitation on Authority of Members. No Member is an agent of the Company solely by virtue of being a Member, and no Member has authority to act for the Company solely by virtue of being a Member. This Section 5.1 supersedes any authority granted to the Members pursuant to the Act. Any Member that takes any action or binds the Company in violation of this Section 5.1 shall be solely responsible for any loss or expense incurred by the Company, the other Member or the Manager as a result of the unauthorized action and shall indemnify and hold harmless the Company, the other Member and the Manager with respect to all such losses and expenses. 5.2 Federal Tax Elections and Allocations. The Company shall be treated as a partnership for federal income tax purposes, and no Member shall take any action to alter such treatment. Tax elections and allocations shall be made as set forth in Exhibit C. 5.3 State Income Tax. To the extent permissible under applicable law, the relationship of the Members shall be treated for state income tax purposes in the same manner as it is for federal income tax purposes. 5.4 Tax Returns. After approval of the Management Committee, any tax returns or other required tax forms shall be filed in accordance with Exhibit C. 5.5 Other Business Opportunities. Each Member shall have the right to engage in and receive full benefits from any independent business activities or operations outside of the Area of Interest, whether or not competitive with the Company, without consulting with, or obligation to, the other Member or the Company. The doctrines of corporate opportunity or business opportunity shall not be applied to the Business nor to any other activity or operation of any Member outside the Area of Interest. Except as otherwise provided in Section 6.5 of the Members' Agreement as Amended, no Member shall have any obligation to the Company or any other Member with respect to any opportunity to acquire any property outside the Area of Interest at any time, or within the Area of Interest after the termination of the Company. Unless otherwise agreed in writing, neither the Manager nor any Member shall have any obligation to mill, beneficiate or otherwise treat any Products in any facility owned or controlled by the Manager or such Member. 5.6 Waiver of Rights to Partition or Other Division of Assets. The Members hereby waive and release all rights of partition, or of sale in lieu thereof, or other division of Assets, including any such rights provided by Law. 5.7 Bankruptcy of a Member. A Member shall cease to have any power as a Member or Manager or any voting rights or rights of approval hereunder upon bankruptcy, insolvency, dissolution or assignment for the benefit of creditors of such Member, and its successor upon the occurrence of any such event shall have only the rights, powers and privileges of a transferee enumerated in Section 7.2, and shall be liable for all obligations of the Member under this Agreement. In no event, however, shall a personal representative or successor become a substitute Member unless the requirements of Section 7.2 are satisfied. 5.8 Implied Covenants. There are no implied covenants (including without limitation any implied covenants relating to the conduct of Exploration, Development, Mining or other activities upon or with respect to the Properties) contained in this Agreement other than those of good faith and fair dealing. 5.9 No Certificate. The Company shall not issue certificates representing Ownership Interests in the Company. 5.10 Limitation of Liability. The Members shall not be required to make any contribution to the capital of the Company except as otherwise provided in this 3 Agreement, nor shall the Members in their capacity as Members or Manager be bound by, or liable for, any debt, liability or obligation of the Company whether arising in contract, tort, or otherwise, except as expressly provided by this Agreement. 5.11 Indemnities. The Company may, and shall have the power to, indemnify and hold harmless any Member, the Manager or any other person from and against any and all claims and demands whatsoever arising from or related to the Business, the Company, the Assets, Operations or a Member's membership in the Company. 5.12 No Third Party Beneficiary Rights. This Agreement shall be construed to benefit the Members and their respective successors and assigns only, and shall not be construed to create third party beneficiary rights in any other party or in any governmental organization or agency. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1 Capacity of the Members. As of the Effective Date, each Member warrants and represents to the other that: (a) it is a corporation or limited partnership, as the case may be, duly organized and in good standing in its state of incorporation or partnership organization and is qualified to do business and is in good standing in those states where necessary in order to carry out the purposes of this Agreement; (b) it has the capacity to enter into and perform is Agreement and all transactions contemplated herein and all corporate, partnership and other actions and consents required to authorize it to enter into and perform this Agreement have been properly taken or obtained; (c) it will not breach any other agreement or arrangement by entering into or performing this Agreement; and (d) this Agreement has been duly executed and delivered by it and is valid and binding upon it in accordance with its terms. ARTICLE VII TRANSFER OF INTEREST; PREEMPTIVE RIGHT 7.1 General. A Member shall have the right to Transfer to a third party, its Ownership Interest, or any beneficial interest therein (including without limitation any right or interest created pursuant to this Agreement or the Members' Agreement), solely as provided in this Article VII. 7.2 Limitations on Free Transferability. In addition to being subject to preemptive rights as described in Section 7.4 and Exhibit H, any Transfer by either Member under Section 7.1 shall be subject to the following limitations: (a) No Member shall Transfer any legal or beneficial right, title or interest (i) in or to the Company, the Properties or the Assets, or (ii) arising under this Agreement or the Members' Agreement as Amended (including, but not limited to, any royalty, profits, or other interest in the Products) except in conjunction with the Transfer of part or all of its Ownership Interest in the Company and the relinquishment of its entire Ownership Interest; (b) Neither Member, without the consent of the other Member, shall make a Transfer that violates any Law, or results in the cancellation of any permits, licenses, or other similar authorization; (c) No Transfer permitted by this Article shall relieve the transferring Member of any liability of such transferring Member under this Agreement or under the Members' Agreement as Amended, whether accruing before or after such Transfer; (e) Any Member that makes a Transfer that shall cause termination of the tax partnership established by Section 5.2 shall indemnify the other Member for, from and against any and all loss, cost, expense, damage, liability or claim therefore arising from the Transfer, including without limitation any increase in taxes, interest and penalties or decrease in credits caused by such termination and any tax on indemnification proceeds received by the indemnified Member; 4 (f) In the event of a Transfer of less than all of an Ownership Interest, the transferring Member and its transferee shall act and be treated as one Member under this Agreement; provided however, that in order for such Transfer to be effective, the transferring Member and its transferee must first: (i) agree, as between themselves, that one of them is authorized to act as the sole agent (Agent) on their behalf with respect to all matters pertaining to this Agreement, the Members' Agreement as Amended and the Company; and (ii) provide written notice to the other Member, the Manager and the Company of the designation of the Agent, and in such notice warrant and represent to the other Member, the Manager and the Company that: (A) the Agent has the sole authority to act on behalf of, and to bind, the transferring Member and its transferee with respect to all matters pertaining to this Agreement, the Members' Agreement as Amended and the Company; (B) the other Member, the Manager and the Company may rely on all decisions of, notices and other communications from, and failures to respond by, the Agent, as if given (or not given) by the transferring Member and its transferee; and (C) all decisions of, notices and other communications from, and failures to respond by, the other Member, the Manager or the Company to the Agent shall be deemed to have been given (or not given) to the transferring Member and its transferee. The transferring Member and its transferee may change the Agent (but such replacement must be one of them) by giving written notice to the other Member, the Manager and the Company, which notice must conform to Subsection 7.2(f)(ii). 7.3 Preemptive Right. Any Transfer by either Member under Section 7.1 and any Transfer by an Affiliate in Control of either Member shall be subject to a preemptive right of the other Member to the extent provided in Exhibit H. Failure of a Member's Affiliate to comply with this Section and Exhibit H shall be a breach by such Member of this Agreement. ARTICLE VIII MANAGEMENT COMMITTEE 8.1 Organization and Composition. The Members hereby establish a Management Committee to determine overall policies, objectives, procedures, methods and actions under this Agreement. Except in the case of an emergency as provided for in Section 10.8, all Programs, Budgets, Project Financings and other significant matters concerning the Operations will be subject to the supervision of the Management Committee. The Management Committee shall consist of one (1) member appointed by TSVLP and one (1) member appointed by USEC. Each Member may appoint one or more alternates to act in the absence of a regular member. Any alternate so acting shall be deemed a member. Appointments shall be made or changed by notice to the other Member and to the Manager. 8.2 Decisions. Each Member, acting through its appointed members shall have one vote on the Management Committee. Unless otherwise provided in this Agreement, the vote of the Member with an Ownership Interest over fifty percent (50%) shall determine all decisions of the Management Committee8.3 Meetings. The Management Committee all hold regular meetings at least quarterly in Lakewood, Colorado, or at other mutually agreed places. The Manager shall give 30 days' written notice to the Members of such regular meetings. Additionally, either Member may call a special meeting upon 30 days' notice to the Manager and the other Member. In case of emergency, reasonable notice of a special meeting shall suffice. There shall be a quorum if one or more members is present who represent Ownership Interests greater than fifty percent (50%) of all Ownership Interests. Each notice of a meeting shall include an itemized agenda prepared by the Manager in the case of a regular meeting, or by the Member calling the meeting in the case of a special meeting, but any matters may be considered with the consent of all Members. The Manager shall prepare minutes of all meetings and shall distribute copies of such minutes to the Members within 30 days after the meeting. The minutes, when signed by all Members, shall be the official record of the decisions made by the Management Committee and shall be binding on the Manager 5 and the Members. If personnel employed in Operations are required to attend a Management Committee meeting, reasonable costs incurred in connection with such attendance shall be a Company cost. All other costs shall be paid for by the Members individually. 8.4 Action Without Meeting. In lieu of meetings, the Management Committee may hold telephone conferences, so long as all decisions are immediately confirmed in writing by the Members. 8.5 Matters Requiring Approval. Except as otherwise delegated to the Manager in Section 9.2, the Management Committee shall have exclusive authority to determine all management matters related to this Agreement. ARTICLE IX MANAGER 9.1 Appointment. TSVLP shall have the right to appoint the initial Manager and hereby appoints itself as Manager with overall management responsibility for Operations. TSVLP shall serve until it resigns as provided in Section 9.4. 9.2 Powers and Duties of Manager. Subject to the terms and provisions of this Agreement, the Manager shall have the following powers and duties, which shall be discharged in accordance with adopted Programs and Budgets: (a) The Manager shall manage, direct and control Operations. (b) The Manager shall implement the decisions of the Management Committee, shall make all expenditures necessary to carry out adopted Programs, and shall promptly advise the Management Committee if it lacks sufficient funds to carry out its responsibilities under this Agreement. (c) The Manager shall: (i) purchase or otherwise acquire all material, supplies, equipment, water, utility and transportation services required for Operations, such purchases and acquisitions to be made on the best terms available, taking into account all of the circumstances; (ii) contract for services such as contract services for the Exploration, Development or Mining of the Properties, (iii) obtain such customary warranties and guarantees as are available in connection with such purchases and acquisitions; and (iv) keep the Assets free and clear of all Liens and Encumbrances, except for those existing at the time of, or created concurrent with, the acquisition of such Assets, or mechanic's or materialmen's Liens which shall be released or discharged in a diligent matter, or Liens and Encumbrances specifically approved by the Management Committee or created pursuant to the operation of this Agreement or the Members' Agreement as Amended. (d) The Manager shall conduct such title examinations and cure such title defects as may be advisable in the reasonable judgment of the Manager. (e) The Manager shall: (i) make or arrange for all payments required by leases, licenses, permits, authorities, contracts and other agreements related to the Assets; (ii) pay all taxes, assessments and like charges on Operations and Assets except taxes determined or measured by a Member's sales revenue or net income. If authorized by the Management Committee, the Manager shall have the right to contest in the courts or otherwise, the validity or amount of any taxes, assessments or charges if the Manager deems them to be unlawful, unjust, unequal or excessive, or to undertake such other steps or proceedings as the Manager may deem reasonably necessary to secure a cancellation, reduction, readjustment or equalization thereof before the Manager shall be required to pay them, but in no event shall the Manager permit or allow title to the Assets to be lost as the result of the nonpayment of any taxes, assessments or like charges; and 6 (iii) shall do all other acts reasonably necessary to maintain the Assets. (f) The Manager shall: (i) apply for all necessary permits, licenses and approvals; (ii) comply with applicable federal, state and local laws and regulations; (iii) notify promptly the Management Committee of any allegations of substantial violation thereof; (iv) prepare and file all reports or notices required for Operations; and (v) arrange for bonds and reclamation for both pre-existing and new conditions and disturbances of the Properties, at the Company's cost; The Manager shall not be in breach of this provision if a violation has occurred in spite of the Manager's good faith efforts to comply, and the Manager has timely cured or disposed of such violation through performance, or payment of fines and penalties. (g) The Manage shall prosecute and defend, but shall not initiate without consent of the Management Committee, all litigation or administrative proceedings arising out of Operations. The non-managing Member shall have the right to participate, at its own expense, in such litigation or administrative proceedings. (h) The Manager shall provide insurance for the benefit of the Company and the Members as reasonably determined by the Manager. (i) The Manager may dispose of Assets, whether through abandonment, surrender or Transfer, subject to the limitation set forth in Section 12.2. (j) The Manager shall have the right to carry out its responsibilities hereunder through agents, Affiliates or independent contractors. (k) The Manager shall perform or cause to be performed during the term of this Agreement all assessment and other work required by law in order to maintain the unpatented mining claims included within the Properties. The Manager shall have the right to perform the assessment work required hereunder pursuant to a common plan of exploration and continued actual occupancy of such claims and sites shall not be required. The Manager shall not be liable on account of any determination by any court or governmental agency that the work performed by the Manager does not constitute the required annual assessment work or occupancy for the purposes of preserving or maintaining ownership of the claims, provided that the work done is in accordance with the adopted Program and Budget. The Manager shall timely pay all fees and record with the appropriate county and file with the appropriate United States agency, affidavits or other documents required by law to maintain all such claims or sites. (l) If authorized by the Management Committee, the Manager may: (i) locate, amend or relocate any unpatented mining claim or mill site or tunnel site, (ii) locate any fractions resulting from such amendment or relocation, (iii) apply for patents or mining leases or other forms of mineral tenure for any such unpatented claims or sites, (iv) abandon any unpatented mining claims for the purpose of locating mill sites or otherwise acquiring from the United States rights to the ground covered thereby, (v) abandon any unpatented mill sites for the purpose of locating mining claims or otherwise acquiring from the United States rights to the ground covered thereby, 7 (vi) exchange with or convey to the United States any of the Properties for the purpose of acquiring rights to the ground covered thereby or other adjacent ground, and (vii) convert any unpatented claims or mill sites into one or more leases or other forms of mineral tenure pursuant to any federal law hereafter enacted. (m) The Manager shall keep and maintain all required accounting and financial records pursuant to the Accounting Procedure and in accordance with customary cost accounting practices in the mining industry. The Manager shall respond in a timely manner to all requests from Members for information necessary to meet filing deadlines imposed by Law. (n) The Manager shall keep the Management Committee advised of all Operations by submitting in writing to the Management Committee: (i) quarterly progress reports which include statements of expenditures and comparisons of such expenditures to the adopted Budget; (ii) periodic summaries of data acquired, reasonably in advance of Management Committee meetings; (iii) copies of reports concerning Operations, reasonably in advance of Management Committee meetings; (iv) a detailed final report within 30 days after completion of each Program and Budget, but in no event less often than annually, which shall include comparisons between actual and budgeted expenditures and comparisons between the objectives and results of Programs; and (v) such other reports as the Management Committee may reasonably request. At all reasonable times the Manager shall provide the Management Committee or the duly authorized representative of any Member (including representatives of any actual or potential lenders, equity investors that are duly authorized in writing by a Member) access to, and the right to inspect and copy all maps, drill logs, core tests, reports, surveys, assays, analyses, production reports, operations, technical, accounting and financial records, and other information acquired in Operations, including all computer files an databases related thereto. In addition, the Manager shall allow the non-managing Member or that Member's authorized representative or invitee, at that Member's sole risk and expense, and subject to reasonable safety regulations, to inspect the Assets and Operations at all reasonable times, so long as the inspecting Member does not unreasonably interfere with Operations. (o) The Manager shall undertake all other activities reasonably necessary to fulfill the foregoing. (p) The Manager shall have the right to require the Members to fully fund the Environmental Compliance Fund, in proportion to their respective Ownership Interests, and in accordance with Section 3.14 of Exhibit B, with all reasonably anticipated costs of future reclamation, closure and Environmental Compliance. No Member who has resigned or withdrawn from the Company will be required to contribute additional funds to the Environmental Compliance Fund unless and until all contribution made to said Environmental Compliance Fund prior to such withdrawal or resignation have been spent or committed to be spent. (q) The Manager shall otherwise conduct Operations as it deems appropriate in its discretion. The Manager shall not be in default of any duty under this Section 9.2 if its failure to perform results from the failure of the Members to perform acts or to contribute amounts required of them by this Agreement. 9.3 Standard of Care; Indemnification. The Manager shall conduct all Operations in a good, workmanlike and efficient manner, in accordance with sound mining and other applicable industry standards and practices, and in accordance with the terms and provisions of leases, licenses, permits, contracts and other 8 agreements pertaining to the Assets. The Manager shall not be liable to the non-managing Member for any act or omission resulting in damage or loss except to the extent caused by or attributable to the Manager's willful misconduct or gross negligence. The Members shall indemnify and hold harmless the Manager and its officers, employees and agents from and against any liabilities, obligations, claims, responsibilities, actions, demands, losses, costs or expenses, including but not limited to costs of litigation and reasonable attorneys fees, arising out of or relating to its activities as Manager, except that any liabilities or obligations arising directly from the Manager's gross negligence or willful misconduct shall be excluded form this indemnity. 9.4 Resignation; Deemed Offer to Resign. The Manager may resign upon three months' prior notice to the other Member, in which case the other Member may elect to become the new Manager by notice to the resigning Member within 30 days after the notice of resignation. In the case of any resignation as Manager by TSVLP, USEC shall be deemed to be the other Member and TSVLP shall be deemed to be the resigning Member for purposes of this Section 9.4. If any of the following shall occur, the Manager shall be deemed to have offered to resign, which offer shall be accepted by the other Member, if at all, within 90 days following such deemed offer: (a) The Ownership Interest of the Member who serves or who appoints the Manager shall become less than fifty percent (50%); or (b) The Manager fails to perform a material obligation imposed upon it under this Agreement and such failure continues for a period of 30 days after notice from the other Member demanding performance; or (c) The Manager fails to pay or contest in good faith its bills within 60 days after they are due; or (d) A receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for a substantial part of its assets is appointed and such appointment is neither made ineffective nor discharged within 60 days after the making thereof, or such appointment is consented to, requested by, or acquiesced in by the Manager; or (e) The Manager commences a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect; or consents to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of any substantial part of its assets; or makes a general assignment for the benefit of creditors; or fails generally to pay its or Company debts as such debts become due; or takes corporate or other action in furtherance of any of the foregoing; or (f) Entry is made against the Manager of a judgment, decree or order for relief affecting a substantial part of its assets by a court of competent jurisdiction in an involuntary case commenced under any applicable bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in effect. 9.5 Payments To Manager. The Manager shall be compensated for its services and reimbursed for its costs hereunder in accordance with the Accounting Procedure. 9.6 Transactions With Affiliates. If the Manager engages Affiliates to provide services hereunder including, without limitation, services relating to milling or beneficiating Products, it shall do so on terms no less favorable to the Company than would be the case with unrelated persons in arm's-length transactions. 9.7 Activities During Deadlock. Subject to the contrary direction of the Management Committee and to the receipt of necessary funds, if the Management Committee for any reason fails to adopt a Program and Budget, the Manager shall continue Operations at levels comparable with the last adopted Program and Budget but in no event at levels which do not fully provide for the minimum holding costs of the Properties. ARTICLE X PROGRAMS AND BUDGETS 10.1 Operations Pursuant to Programs and Budgets. Operations shall be conducted, expenses shall be incurred, and Assets shall be acquired only pursuant to adopted Programs and Budgets. 9 10.2 Presentation of Programs and Budgets. Proposed Programs and Budgets shall be prepared by the Manager for a period of one (1) year or any longer period. Each adopted Program and Budget, regardless of length, shall be reviewed at least once a year at the annual meeting of the Management Committee. During the period encompassed by any program and Budget, and at least two months prior to its expiration, a proposed Program and Budget for the succeeding period shall be prepared by the Manager and submitted to the Members. 10.3 Review and Adoption of Proposed Programs and Budgets. Within thirty (30) days after submission of a proposed Program and Budget, or a proposed Amendment thereto under Section 10.9, each Member shall submit in writing to the Management Committee: (a) Notice that the Member approves any or all of the components of the proposed Program and Budget; or (b) Modifications proposed by the Member to the components of the proposed Program and Budget; or (c) Notice that the Member rejects any or all of the components of the proposed Program and Budget. If a Member fails to give any of the foregoing responses within the allotted time, the failure shall be deemed to be a vote by the Member for adoption of the Manager's proposed Program and Budget. If a Member makes a timely submission to the Management Committee pursuant to Subsections 10.4(a), (b) or (c), then the Management Committee shall consult regarding the possible development of a Program and Budget acceptable to all Members (provided that no Member shall be obligated to agree to any actual change to a proposed Program and Budget in connection with such consultations) failing which the Management Committee shall determine a Program and Budget by majority vote of Ownership Interests. 10.4 Emergency or Unexpected Expenditures. In case of emergency, the Manager may take any reasonable action it deems necessary to protect life, limb or property, to protect the Assets or to comply with Environmental Laws or other Laws. The Manager may make reasonable expenditures for unexpected events which are beyond its reasonable control and which do not result from a breach by it of its standard of care. The Manager shall promptly notify the Members of the emergency or unexpected expenditure, and the Manager shall be reimbursed for all resulting costs by the Members in the same manner and with the same consequences and effects as the Members provided the funding for the then current Program and Budget. 10.5 Amendments to Programs and Budgets. An adopted Program and Budget may be amended by the Manager (the Amendment) upon 30 days notice. The procedures for review and approval of proposed Amendments under this Section 10.5 shall be the same as the procedures for the review and approval of proposed Budgets and Programs under Section 10.3. ARTICLE XI ACCOUNTS AND SETTLEMENTS 11.1 Monthly Statements. The Manager shall promptly submit to the Management Committee monthly statements of account reflecting in reasonable detail the charges and credits to the Business Account during the preceding month. 11.2 Cash Calls. On the basis of each adopted or amended Program and Budget and subject to Section 10 of this Agreement and Section 2.2 of the Members' Agreement as Amended, the Manager shall submit to each Member, a billing (or cash call) for estimated cash requirements for each month during the term of such Program. Within ten (10) days after receipt of each such billing, each Member shall pay to the Manager its share of such estimated requirements. Time is of the essence of payment of such billings. The Manager shall at all times maintain a reasonable working capital reserve. All funds reasonably in excess of immediate cash requirements may be invested in interest-bearing accounts with the Company's bank, for the benefit of the Business Account. 11.3 Failure to Meet Cash Calls. A Member that fails to meet cash calls in the amount and at the times specified in Section 11.2 shall be in default, and the amounts of the defaulted cash call shall bear interest from the date due at an annual rate equal to the Interest Rate, but in no event shall said rate of interest exceed the maximum permitted by Law. 10 11.4 Audits. Unless waived by all Members in writing, the Manager shall order an audit of the accounting and financial records for each calendar year (or other mutually agreed accounting period). All written exceptions to and claims upon the Manager for discrepancies disclosed by such audit shall be made not more than 3 months after receipt of the audit report. Failure to make any such exception or claim within the 3-month period shall mean the audit is correct and binding upon the Members. The audits shall be conducted by a firm of certified public accountants selected by the Manager, unless otherwise agreed by the Management Committee. ARTICLE XII PROPERTIES; DISTRIBUTION OF PRODUCTION 12.1 Royalties, Production Taxes and Other Payments Based on Production. All required payments of production royalties, taxes based on production of Products, and other payments out of production to private parties and governmental entities, shall be determined and made by the Company in a timely manner and otherwise in accordance with applicable laws and agreements. The Manager shall furnish to the Members evidence of timely payment for all such required payments. In the event the Company fails to make any such required payment, any Member shall have the right to make such payment and shall thereby become subrogated to the rights of such third party; provided, however, that the making of any such payment on behalf of the Company shall not constitute acceptance by the paying Member of any liability to such third party for the underlying obligation. 12.2 Abandonment and Surrender. Either Member may request the Management Committee to authorize the Manager to surrender or abandon part or all of the Properties. If the other Member objects to such surrender or abandonment, then at the option of the objecting Member, the Company shall assign to the objecting Member or such other Person as the objecting Member specifies, by special warranty deed and without cost to the surrendering Member, all of the Company's interest in the Properties sought to be abandoned or surrendered, free and clear of all Encumbrances created by, through or under the Company or the surrendering Member, other than those to which both Members have agreed. Upon the assignment, such properties shall cease to be part of the Properties. 12.3 Reacquisition. If any Properties are abandoned or surrendered under the provisions of this Article XII, then, unless this Agreement is earlier terminated, neither Member nor any Affiliate thereof shall acquire any interest in such Properties or a right to acquire such Properties for a period of two years following the date of such abandonment or surrender. If a Member reacquires any Properties in violation of this Section 12.3, the other Member may elect by notice to the reacquiring Member within 45 days after it has actual notice of such reacquisition, to have such properties made subject to the terms of this Agreement and transferred, without charge, to the Company. In the event such an election is made, the reacquired properties shall thereafter be treated as Properties, and the costs of reacquisition shall be borne solely by the reacquiring Member and shall not be included for purposes of calculating the Members' respective Ownership Interests. 12.4 Disposition of Products by Manager. The Manager shall market and dispose of Products. Such dispositions by Manager shall be in good faith and in accordance with good industry practice, with the objective of obtaining the best possible price for the Products. The Manager shall have the right to enter into forward sales and hedging arrangements as approved by the Management Committee. ARTICLE XIII CONFIDENTIALITY, OWNERSHIP, USE AND DISCLOSURE OF INFORMATION 13.1 Business Information. All Business Information shall be owned jointly by the Members as their Ownership Interests are determined pursuant to this Agreement. Both before and after the termination of the Company, all Business Information may be used by either Member for any purpose, whether or not competitive with the Business, without consulting with, or obligation to, the other Member. Each Member shall keep confidential and not disclose to any third party or the public any portion of the Business Information that constitutes Confidential Information. 13.2 Disclosure Required By Law. Notwithstanding anything contained in this Article, a Member may disclose any Confidential Information if, in the opinion of the disclosing Member's legal counsel: (a) such disclosure is legally 11 required to be made in a judicial, administrative or governmental proceeding pursuant to a valid subpoena or other applicable order; or (b) such disclosure is legally required to be made pursuant to State or Federal Securities Laws or the rules or regulations of a stock exchange or similar trading market applicable to the disclosing Member. Prior to any disclosure of Confidential Information under this Section 13.2, the disclosing Member shall give the other Member at least three (3) business days prior written notice (unless less time is permitted by such rules, regulations or proceeding) and, in making such disclosure, the disclosing Member shall disclose only that portion of Confidential Information required to be disclosed and shall take all reasonable efforts to preserve the confidentiality thereof, including, without limitation, obtaining protective orders and supporting the other Member in intervention in any such proceeding. 13.3 Public Announcements. Prior to making or issuing any press release or other public announcement or disclosure of Business Information that is not Confidential Information, a Member shall first consult with the other Member as to the content and timing of such announcement or disclosure, unless in the good faith judgment of such Member, there is not sufficient time to consult with the other Member before such announcement or disclosure must be made under applicable Laws; but in such event, the disclosing Member shall notify the other Member, as soon as possible, of the pendency of such announcement or disclosure, and it shall notify the other Member before such announcement or disclosure is made if at all reasonably possible. Any press release or other public announcement or disclosure to be issued by either Member relating to this Business shall also identify the other Member. 13.4 Duration of Confidentiality. The provisions of this Article XIII shall apply during the term of this Agreement and for two years following termination of this Agreement pursuant to Section 14.1, and shall continue to apply to any Member who withdraws, who is deemed to have withdrawn, or who Transfers its Ownership Interest, for two years following the date of such occurrence. ARTICLE XIV DISSOLUTION 14.1 Events of Dissolution. The Company shall be dissolved upon the occurrence of any of the following: (a) Upon expiration of term of the Company in accordance with Section 2.5; (b) Upon the unanimous written agreement of the Members; or (c) as otherwise provided by the Act. 14.2 Resignation. A Member may elect to resign from the Company as set forth in the Members' Agreement as Amended. 14.3 Disposition of Assets on Dissolution. Promptly after dissolution under Section 14.1, the Manager shall take all action necessary to wind up the activities of the Company, in accordance with Exhibit C. All costs and expenses incurred in connection with the dissolution of the Company shall be expenses chargeable to the Business Account. 14.4 Filing of Certificate of Cancellation. Upon completion of the winding up of the affairs of the Company, the Manager shall promptly file a Certificate of Cancellation with the Office of the Secretary of State of the State of Delaware. If the Manager has caused the dissolution of the Company, whether voluntarily or involuntarily, then a person selected by a majority vote of the Members to wind up the affairs of the Company shall file the Certificate of Cancellation. 14.5 Right to Data After Dissolution. After dissolution of the Company pursuant to Subsections 14.1(a), (b), or (c), each Member shall be entitled to make copies of all applicable information acquired hereunder before the effective date of termination not previously furnished to it. 14.6 Continuing Authority. On dissolution of the Company under Section 14.1 the Member that was the Manager or that appointed the Manager prior to such dissolution (or the other Member in the event of a resignation by the Manager) shall have the power and authority to do all things on behalf of both Members that are reasonably necessary or convenient to: (a) wind up Operations (b) complete reclamation, closure and other Environmental Compliance activities with 12 respect to the Properties, and (c) complete any transaction and satisfy any obligation, unfinished or unsatisfied, at the time of such dissolution, if the transaction or obligation arises out of Operations prior to such dissolution. The Manager shall have the power and authority to grant or receive extensions of time or change the method of payment of an already existing liability or obligation, prosecute and defend actions on behalf of the Company and either or both Members, encumber Assets, and take any other reasonable action in any matter with respect to which the former Members continue to have, or appear or are alleged to have, a common interest or a common liability. ARTICLE XV GOVERNING LAW 15.1 Governing Law. Except for matters of title to the Assets or their Transfer, which shall be governed by the law of their situs, this Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard for any conflict of laws or choice of laws principles that would permit or require the application of the laws of any other jurisdiction. ARTICLE XVI GENERAL PROVISIONS 16.1 Notices. All notices, payments and other required or permitted communications (Notices) to either Member shall be in writing, and shall be addressed respectively as follows: If to TSVLP: Tonkin Springs Venture Limited Partnership 2201 Kipling Street, Suite 100 Lakewood, Colorado 80215-1545 Attention: William W. Reid, President Tonkin Springs Gold Mining Company, General Partner Telephone:(303)238-1438 Facsimile: (303)238-1724 If to USEC: U.S. Environmental Corporation 2201 Kipling Street, Suite 100 Lakewood, Colorado 80215-1545 Attention: David C. Reid, President Telephone: (303)238-1438 Facsimile: (303)238-1724 All Notices shall be given (a) by personal delivery to the Member, (b) by electronic communication, capable of producing a printed transmission and confirmation, (c) by registered or certified mail return receipt requested, or (d) by overnight or other express courier service. All Notices shall be effective and shall be deemed given on the date of receipt at the principal address if received during normal business hours, and, if not received during normal business hours, on the next business day following receipt, or if by electronic communication, on the date of such communication. Either Member may change its address by Notice to the other Member. 16.2 Gender. The singular shall include the plural, and the plural the singular wherever the context so requires, and the masculine, the feminine, and the neuter genders shall be mutually inclusive. 16.3 Currency. All references to dollars or $ herein shall mean lawful currency of the United States of America. 16.4 Headings. The subject headings of the Sections and Subsections of this Agreement and the Paragraphs and Subparagraphs of the Exhibits to this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. References to hereunder are, unless otherwise stated, references to this entire Agreement. 16.5 Waiver. The failure of either Member to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach hereof shall not constitute a waiver of any provision of this Agreement or limit such Member's right thereafter to enforce any provision or exercise any right. 13 16.6 Modification. No modification of this Agreement shall be valid unless made in writing and duly executed by both Members. 16.7 Force Majeure. Except for the obligation to make payments when due hereunder, the obligations of a Member shall be suspended to the extent and for the period that performance is prevented by any cause, whether foreseeable or unforeseeable, beyond its reasonable control, including, without limitation, labor disputes (however arising and whether or not employee demands are reasonable or within the power of the Member to grant); acts of God; Laws, instructions or requests of any government or governmental entity; judgments or orders of any court; inability to obtain on reasonably acceptable terms any public or private license, permit or other authorization; curtailment or suspension of activities to remedy or avoid an actual or alleged, present or prospective violation of Environmental Laws; action or inaction by any federal, state or local agency that delays or prevents the issuance or granting of any approval or authorization required to conduct Operations (including, without limitation, a failure to complete any review and analysis required by the National Environmental Policy Act or any similar state law); acts of war or conditions arising out of or attributable to war, whether declared or undeclared; riot, civil strife, insurrection or rebellion; fire, explosion, earthquake, storm, flood, sink holes, drought or other adverse weather condition; delay or failure by suppliers or transporters of materials, parts, supplies, services or equipment or by contractors' or subcontractors' shortage of, or inability to obtain, labor, transportation, materials, machinery, equipment, supplies, utilities or services; accidents; breakdown of equipment, machinery or facilities; actions by native rights groups, environmental groups, or other similar special interest groups; or any other cause whether similar or dissimilar to the foregoing. The affected Member shall promptly give notice to the other Member of the suspension of performance, stating therein the nature of the suspension, the reasons therefore, and the expected duration thereof. The affected Member shall resume performance as soon as reasonably possible. During the period of suspension the obligations of both Members to advance funds pursuant to this Agreement shall be reduced to levels consistent with then current Operations. 16.8 Rule Against Perpetuities. The Members do not intend that there shall be any violation of the rule against perpetuities, the rule against unreasonable restraints on the alienation of property, or any similar rule. Accordingly, if any right or option to acquire any interest in the Properties or Assets, in an Ownership Interest, or the Company, or in any real property exists under this Agreement, such right or option must be exercised, if at all, so as to vest such interest within time periods permitted by applicable rules. If, however, any such violation should inadvertently occur, the Members hereby agree that a court shall reform that provision in such a way as to approximate most closely the intent of the Members within the limits permissible under such rules. 16.9 Further Assurances. Each of the Members shall take, from time to time and without additional consideration, such further actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purposes of this Agreement or as may be reasonably required by lenders in connection with Project Financing. 16.10 Entire Agreement; Successors and Assigns. This Agreement contains the entire understanding of the Members and supersedes all prior agreements and understandings between the Members relating to the subject matter hereof. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Members. 16.11 Counterparts. This Agreement may be executed in any number of counterparts, and it shall not be necessary that the signatures of both Members be contained on any counterpart. Each counterpart shall be deemed an original, but all counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date. TONKIN SPRINGS VENTURE LIMITED PARTNERSHIP By: Tonkin Springs Gold Mining Company, as its General Partner By: /s/William W. Reid, President By: U.S. ENVIRONMENTAL CORPORATION By: /s/David C. Reid, President 14 EX-10 7 exh10_11.txt EXHIBIT 10.11 Exhibit 10.11 ------------- Technical Services Agreement dated December 18, 2001 between Tonkin Springs Holding Inc., Tonkin Springs Venture Limited Partnership and Tonkin Springs LLC, and Steffen Robertson & Kirsten (U.S.), Inc. TECHNICAL SERVICES AGREEMENT THIS TECHNICAL SERVICES AGREEMENT (this Agreement) is made and entered into effective as of December 18, 2001, by and between TONKIN SPRINGS HOLDINGS, INC., whose address is 401 Bay Street, Suite 2302, Toronto, Ontario M5H 2Y4, CANADA (TSHI), TONKIN SPRINGS LLC, whose address is 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215 (Tonkin Springs LLC) and STEFFEN ROBERTSON & KIRSTEN (U.S.), INC., whose address is 7175 W. Jefferson Avenue, Suite 3000, Lakewood, Colorado 80235 (SRK). RECITALS WHEREAS, TSHI and the Nevada Division of Environmental Protection (NDEP) entered into that certain TSP-1 WORK PLAN AGREEMENT dated as of November 30, 2001 (the NDEP Agreement), which contemplates a work program to locate, plug and properly abandon specific, historic, i.e. pre-1990, boreholes at the TSP-1 area of the Tonkin Springs project in Eureka County, Nevada. A copy of the NDEP Agreement is appended to this Agreement as Exhibit A. A copy of the work program approved by the NDEP (the Work Plan), including a list of the specific boreholes covered by the Work Plan, is appended to the NDEP Agreement; WHEREAS, TSHI and Tonkin Springs LLC (the owner of the Tonkin Springs project) and Tonkin Springs Venture Limited Partnership (TSVLP, the Manager of Tonkin Springs LLC) entered into a Settlement Agreement dated as of October 31, 2001 (the Settlement Agreement), which also contemplates the performance of the Work Plan and other matters. A copy of the Settlement Agreement is appended to this Agreement as Exhibit B; WHEREAS, pursuant to the NDEP Agreement and the Settlement Agreement: (i) the Work Plan is to be conducted on behalf of Tonkin Springs LLC but administered by and conducted under the direction of SRK; and (ii) the Work Plan is to be paid for out of the sum of $250,000 which TSHI has placed in escrow (the Escrow) with the Wells Fargo Bank Arizona, N.A. (the Escrow Agent). A copy of the Escrow Instructions from TSHI to the Escrow Agent are appended to this Agreement as Exhibit C; and WHEREAS, TSHI, Tonkin Springs LLC and SRK desire to enter into this Agreement in order to provide for the performance of the Work Plan on behalf of Tonkin Springs LLC under the direction and control of SRK, for payment for such services and for certain related matters. NOW, THEREFORE, in consideration of the covenants, obligations, terms and conditions set forth in this Agreement, TSHI, Tonkin Springs LLC and SRK agree as follows: Scope of Services. - ------------------ SRK shall implement, carry out, control, direct and make best efforts to complete the Work Plan. In accordance with Section 6.1 of this Agreement, SRK will, as agent on behalf of Tonkin Springs LLC, hire contractors (Contractors) to perform earth moving, surveying and drilling in connection with performance of the Work Plan. SRK shall supervise, control and direct all work conducted under this Agreement (the Work), including without limitation all Work performed by the Contractors. SRK shall perform all Work, and shall ensure that the Contractors perform all Work, in strict accordance with the Work Plan. SRK shall ensure that all Work is conducted in a good, workmanlike and safe manner, in as expeditious a manner as reasonably practicable and in accordance with all requirements of applicable law and regulations. Additionally, SRK shall ensure that the total cost of all Work does not exceed the sum of $250,000. Not more than $250,000 will be expended upon the Work Plan, regardless of results. TSHI and Tonkin Springs LLC acknowledge that the implementation of the Work Plan may not result in the elimination of acid generation in full and that additional mitigation steps outside the scope of the Work Plan may be necessary to eliminate acid generation to achieve full compliance with the regulatory requirements of the NDEP. 1 Upon contract execution, SRK shall provide twice monthly written progress reports to the NDEP, with copies to TSHI and Tonkin Springs LLC, concerning implementation of the Work Plan. In the event that SRK determines that it cannot complete the Work Plan by June 30, 2002, SRK shall immediately provide the NDEP, TSHI and Tonkin Springs LLC with written notification of such determination, together with SRK's best estimate as to the completion date. Within 30 days after completion of the Work Plan, SRK shall provide to TSHI and Tonkin Springs LLC, for their review and comment, a written draft of a summary completion report. The summary completion report shall include, at a minimum, the following: (i) a certification that the Work Plan has been completed; (ii) a summary of all activities included in the Work Plan; (iii) a summary of holes staked out, located and not located; (iv) a list of and supporting abandonment reports for all holes abandoned; (v) a map graphically depicting the holes that were staked out, located, not located, and abandoned; (vi) supporting documentation for holes not located, including a photographic record of the excavation bottom or a signed geotechnical log of the excavation; and (vii) any deviations from the Work Plan and rationale for such deviations, provided that SRK shall not deviate from the Work Plan except with specific, prior written consent of each of TSHI and Tonkin Springs LLC, which consent shall not be unreasonably withheld. Within 45 days after completion of the Work Plan, SRK shall submit the finalized summary completion report to the NDEP, with copies of that report to both TSHI and Tonkin Springs LLC. With respect to all reports to be provided by SRK to TSHI and Tonkin Springs LLC pursuant to this Agreement, SRK shall transmit those reports to those parties simultaneously. Each of TSHI and Tonkin Springs LLC will have the right to have a representative on-site to observe the conduct and performance of all or any portion of the Work and to provide any comments or suggestions with respect thereto to SRK, provided that: (i) comments and suggestions will be provided only to the designated representative of SRK and not to any of the Contractors or any other employees of SRK; and (ii) it is understood by all parties that the Work Plan will be carried out under the exclusive direction and control of SRK and that SRK shall make all final decisions as to the manner of performance and implementation of the Work Plan. For purposes of this Section 1.3: (i) Tonkin Springs LLC designates Mr. David Reid as its designated representative; (ii) TSHI designates William Fleshman as its designated representative; and (iii) SRK designates Steve Boyce as its designated representative. Compensation and Terms of Payment. - ---------------------------------- SRK will submit monthly invoices to the Escrow Agent for Work that has been conducted pursuant to the Work Plan, with reasonable documentation evidencing the performance of the Work. SRK will approve and forward invoices of any Contractors hired by SRK on behalf of Tonkin Springs LLC to the Escrow Agent. SRK will simultaneously provide copies of their own and Contractors' invoices and supporting documentation to each of TSHI and Tonkin Springs LLC. SRK will not submit to the Escrow Agent invoices covering Work performed by it or by Contractors, nor shall the Escrow Agent pay such invoices, unless and until SRK has obtained and provided to TSHI and Tonkin Springs LLC lien releases or waivers from SRK and/or the Contractors who performed such Work, as well as written releases of Tonkin Springs LLC and TSHI from any contractual or any other liability for payment with respect to such Work. In accordance with the Escrow Instructions, the Escrow Agent will pay SRK's and Contractors' invoices on the eleventh day after its receipt thereof from SRK, unless TSHI first provides the Escrow Agent with a written objection instructing the Escrow Agent not to pay such invoice. In that event, TSHI and SRK shall promptly consult in order to resolve any problems or discrepancies with respect to the invoice and, upon reaching such a resolution, TSHI shall instruct the Escrow Agent to pay the invoice, as the same may have been corrected or modified. Upon completion of the Work Plan, SRK shall submit its final invoice, clearly marked as such, to the Escrow Agent, with copies to TSHI and Tonkin Springs LLC as set forth in Section 2.1 above. Such invoice shall not be paid by the Escrow Agent unless and until SRK has provided TSHI and Tonkin Springs LLC with lien releases or waivers, and contractual and other payment liability releases of Tonkin Springs LLC and TSHI from SRK and all Contractors involved in the performance of the Work. SRK shall charge for Work performed by it in accordance with the attached SRK Standard Schedule of Fees. Invoices shall be organized on an item-by-item basis and shall itemize the charges for each item or portion of the Work performed. SRK shall include a summary of actual hours worked on the project by SRK's professional and technical employees, by classification and hourly rate. Direct, nonsalary, 2 reimbursable expenses, and other direct costs and expenses, shall be itemized separately in each invoice. SRK shall furnish copies of time sheets, expense reports, vendor invoices, and other documentation necessary to substantiate each invoice, at the request of either TSHI or Tonkin Springs LLC. SRK, TSHI and Tonkin Springs LLC acknowledge, agree and understand that, notwithstanding anything in this Agreement to the contrary: (i) there is only the Escrow sum of $250,000 available for payment for the Work (the Budget); (ii) part of the services being provided by SRK is to ensure that performance of the Work Plan does not exceed this Budget; (iii) SRK will not perform any Work, or contract for the performance of any Work by Contractors, if the performance of such Work would result in cost overruns in excess of the Budget, except with the express and specific prior written authorization of TSHI; and (iv) under no circumstances will TSHI be obligated under this Agreement to fund any amount in excess of the sum of $250,000 which it has already placed in Escrow, unless TSHI has provided the authorization described in (iii) above. The parties further acknowledge, agree and understand that TSHI's role under this Agreement and in connection with the Work Plan is purely financial (i.e. in connection with the funding and administration of the Escrow) and that it shall not direct or control the performance of the Work Plan, it being understood that it shall be SRK's exclusive responsibility to direct and control the performance of the Work Plan. Confidential Information. - ------------------------- SRK recognizes and acknowledges that it will have access to and may develop or become aware of certain information of Tonkin Springs LLC, TSHI or their respective affiliates (collectively, Tonkin Entities) and that such information constitutes confidential information of the Tonkin Entities. SRK shall not, during or after the term of this Agreement, use or disclose directly or indirectly any such confidential information to any person, firm, corporation, association, or other entity, except to Contractors engaged by SRK and to authorized representatives of the Tonkin Entities, for any reason or purpose whatsoever without the Tonkin Entities' prior written approval. SRK represents that it has entered into agreements with all of its employees requiring them not to disclose any such information. Only employees with a demonstrable need to know will be given access to information collected or developed under this Agreement. In the event of a breach or threatened breach by SRK of the provisions of this Section 3, the Tonkin Entities shall be entitled to a temporary restraining order or a preliminary injunction restraining SRK from using or disclosing, in whole or in part, such confidential information, and SRK consents to the entry of such a temporary restraining order or preliminary injunction without the necessity of the Tonkin Entities posting any bond in connection therewith and agrees that it shall not assert any defenses to any petition filed by the Tonkin Entities in a court of competent jurisdiction requesting such temporary restraining order and/or preliminary injunction, as the case may be. Nothing herein shall be construed as prohibiting the Tonkin Entities and its affiliates from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from SRK. The provision of this Section 3 shall survive the dissolution or termination of this Agreement. The obligations of this Section 3 do not apply to information which: (a) is or becomes part of the public domain without the breach of any obligation of confidentiality owed to the Tonkin Entities; or (b) is lawfully in the possession of SRK at the time it was acquired hereunder without the breach of any obligation of confidentiality owned to the Tonkin Entities; or (c) is required by law to be disclosed. In the event SRK receives any legal process purporting to require the production of confidential information to any court, agency, other tribunal, person, or entity, SRK shall immediately notify the Tonkin Entities, provide the Tonkin Entities with a copy of such legal process, and cooperate with the Tonkin Entities in any legal proceeding arising therefrom. Except for the reports and documents expressly required to be provided to the NDEP pursuant to Section 1 of this Agreement, SRK shall not communicate with governmental agencies concerning the Work or concerning SRK's or Contractors' performance of the Work without obtaining the prior approval of TSHI and Tonkin Springs LLC. Any reports, documents, or other information, regardless of form, that is collected or developed by SRK pursuant to this Agreement shall be exclusively the property of TSHI and Tonkin Springs LLC and all such reports, 3 documents, or information, and any copies thereof shall be turned over to TSHI and Tonkin Springs LLC at the conclusion of the Work, unless TSHI and Tonkin Springs LLC shall sooner request same. SRK may retain one hard copy of such documents for record purposes. Reuse of such documents by TSHI or Tonkin Springs LLC for other than the project covered by this Agreement shall be without liability to SRK. Termination. - ------------ The Agreement may be terminated at any time for good cause by mutual written notice of termination from TSHI and Tonkin Springs LLC to SRK. Such termination shall be effective in the manner specified in the notice, shall be without prejudice to any claims which TSHI or Tonkin Springs LLC may have against SRK, and shall be subject to the other provisions of this Agreement. On receipt of such notice, except to the extent otherwise directed, SRK shall immediately discontinue the Work and the placing of Contractor orders for materials, facilities, services and supplies in connection with the performance of the services and shall, if requested, make every reasonable effort to procure termination of existing contracts with Contractors upon terms satisfactory to TSHI and Tonkin Springs LLC. Thereafter, SRK shall be authorized to do only such Work as may be necessary to preserve and protect the services already in progress and as otherwise requested by TSHI and Tonkin Springs LLC. A complete settlement of all claims of SRK upon termination of the Agreement, as provided in the preceding paragraph, shall be made as follows: SRK shall within ten (10) days invoice the Escrow Agent for all obligations and commitments that SRK may have in good faith undertaken or incurred in connection with the services which have not been included in prior payments; for the reasonable cost of terminating existing contracts; for preserving, protecting, or disposing of property and performing any other necessary services after the notice of termination has been received; and for all services performed prior to the date of termination, in accordance with this Agreement. SRK shall simultaneously provide copies of such invoices, together with all supporting documents evidencing the performance of the Work at issue, to TSHI and Tonkin Springs LLC in accordance with the provisions of Section 2 above. The Escrow Agent shall pay SRK in accordance with and subject to the provisions of Section 2 above. Upon final settlement, SRK shall deliver to TSHI and Tonkin Springs LLC all reports, documents, drafts, notes, and all other information and data collected or prepared by SRK under this Agreement and deliver to TSHI and Tonkin Springs LLC lien releases or waivers, and contractual and other payment liability releases of Tonkin Springs LLC and TSHI, from SRK and all Contractors involved in the performance of the Work. Parties' Representations, Warranties, and Responsibilities. - ----------------------------------------------------------- SRK represents and warrants to TSHI and Tonkin Springs LLC that it has the authority to enter into this Agreement and to perform the Work and that it is licensed, certified and/or otherwise authorized to practice in the area of engineering and so licensed and certified to conduct business in the State of Nevada. SRK further represents and warrants that all Work performed by it hereunder will be: (a) in conformance with the terms of this Agreement; (b) performed in a skillful and workmanlike manner in accordance with appropriate industry standards; (c) performed by the proper number of experienced, skilled, and/or licensed personnel, qualified by education and experience to perform their assigned tasks; and (d) performed in accordance with the standards customarily provided by an experienced and competent professional technical consulting organization rendering the same or similar services. SRK covenants that the Contractors shall meet these standards and that the contracts with the Contractors shall contain these representations and warranties. SRK agrees to indemnify and hold TSHI, TSVLP and Tonkin Springs LLC (and their shareholders, members, managers, officers, principles, employees and agents) harmless from and against any and all losses, damages, costs, penalties, expenses (including, but not limited to, reasonable costs of investigation and legal expenses), liabilities, judgments, liens, suits, claims or demands arising out of any actual or threatened damage to property, including property of TSHI, TSVLP or Tonkin Springs LLC or injuries to or death of persons, including employees of TSHI, TSVLP or Tonkin Springs LLC arising from SRK's willful misconduct or negligent acts or omissions in connection with the Work, or any breach or threatened breach of this Agreement by SRK, excluding and to the extent of, the negligence or willful misconduct of TSHI, TSVLP or Tonkin Springs LLC. SRK shall require that all contracts with Contractors provide the indemnifications provided by SRK in this Section 5.2. 4 TSHI agrees to indemnify, defend and hold harmless SRK (and its officers, employees, and agents) against any and all claims, demands, suits, judgments, expenses, losses and damages, or injury to, or death of persons and for destruction of or damages to any property of SRK resulting directly from TSHI's (or its employees or agents) negligence or willful misconduct, except to the extent that any such expenses, losses or damages are attributable to the negligence or willful misconduct of SRK, its employees, agents, or the Contractors. Tonkin Springs LLC agrees to indemnify, defend and hold harmless SRK (and its officers, employees, and agents) against any and all claims, demands, suits, judgments, expenses, losses and damages, or injury to, or death of persons and for destruction of or damages to any property of SRK resulting directly from Tonkin Springs LLC's (or its employees or agents) negligence or willful misconduct, except to the extent that any such expenses, losses or damages are attributable to the negligence or willful misconduct of SRK, its employees, agents, or the Contractors. Notwithstanding paragraph 5.2, SRK shall assume all responsibility for and shall indemnify and hold harmless TSHI, TSVLP and Tonkin Springs LLC and each of their affiliates, against, and shall assume the defense of any claims, suits, or judgment brought against any of them under the Federal Employers Liability Act whenever employees of SRK or any of the Contractors claim or allege that they are employees of TSHI, TSVLP or Tonkin Springs LLC or their affiliates, within the meaning of said act, or that they are furthering operational activities of TSHI, TSVLP or Tonkin Springs LLC or their affiliates. In no event shall SRK, TSHI or Tonkin Springs LLC be liable to each other for lost revenues, lost profits, cost of capital, claims of instances or any special, indirect, incidental, or consequential or punitive damages pursuant to this Agreement. SRK promptly shall pay all wages due its workmen and employees required for the Work. SRK shall defend and protect Tonkin Springs LLC and TSHI from and against all claims, liens and liabilities which may arise as a result of SRK's failure to do so or the failure of any of the Contractors to pay their workmen or employees. If at any time there should be evidence of any lien, claim or encumbrance for which, or to which, Tonkin Springs LLC, TSHI, the Tonkin Springs project property or the production therefrom, is or might become subject or liable and which are: (i) attributable to labor, materials, supplies, equipment or services furnished to or required by any of the Contractors or SRK or any of their suppliers or vendors, or any other persons or entity for use on or in conjunction with those properties or SRK's or the Contractors' activities thereon; or (ii) attributable to payroll, withholding or other taxes or other indebtedness, resulting from or in connection with SRK's or any of the Contractors' work or operations in connection with the Work, SRK shall, upon demand by Tonkin Springs LLC or TSHI, immediately cause the release of such lien or pay such claim and deliver to Tonkin Springs LLC and TSHI a complete release or receipt satisfactory to Tonkin Springs LLC and TSHI discharging such lien, claim or encumbrance. Tonkin Springs LLC and/or TSHI at any time may pay and discharge such liens, claims and encumbrances, in which event SRK shall be obligated to immediately reimburse the paying party or parties in the amount so paid, together with reasonable costs and attorneys fees incurred by the paying party or parties. If TSHI instructs the Escrow Agent pursuant to paragraph 2.1 above not to pay an invoice submitted by SRK or a Contractor for Work performed under this Agreement when there are sufficient funds in the Escrow Account to pay that invoice, and SRK or the Contractor files a lien against any part of the Tonkin Springs project property with respect to Work covered by that invoice, TSHI shall have no liability to Tonkin Springs LLC to secure the release of that lien unless TSHI acted unreasonably in so instructing the Escrow Agent. If TSHI acted unreasonably in so instructing the Escrow Agent, it shall be obligated to secure the release of that lien, provided, however, that (a) TSHI's liability to Tonkin Springs LLC and the lien holder (whether SRK or a Contractor) with respect to the lien shall be limited to the amount of the lien, (b) the amount of the lien shall be paid, upon a determination that TSHI acted unreasonably or upon TSHI's subsequent election (in its sole discretion) to authorize the Escrow Agent pay the lien, solely from the Escrow Account, and (c) TSHI shall have no liability to Tonkin Springs LLC and the lien holder (whether SRK or a Contractor) for the payment of all or any portion of the lien once all funds in the Escrow Account have been disbursed, it being expressly understood and agreed that TSHI's liability under this Agreement is limited to the $250,000 previously deposited by it into the Escrow Account. If the parties do not resolve the issue of whether TSHI acted unreasonably in instructing the Escrow Agent not to pay an 5 invoice, the issue of whether TSHI acted unreasonably shall be resolved by binding arbitration in Denver, Colorado pursuant to the commercial arbitration rules of the American Arbitration Association. No other disputes under this Agreement shall be required to be resolved by arbitration, unless the parties to the dispute so agree in writing. Contractors. - ------------ In accordance with this Section 6.1, SRK will, as agent on behalf of Tonkin Springs LLC, hire Contractors to perform earth moving, surveying and drilling in connection with performance of the Work Plan. SRK shall supervise, control and direct all Work performed by Contractors and ensure that such Work is performed in strict accordance with the Work Plan, in a good, workmanlike and safe manner, in as expeditious a manner as reasonably practicable and in accordance with all requirements of applicable law and regulations. SRK shall not hire or enter into any contract with any Contractor without a written agreement between such Contractor and SRK (acting as the agent of Tonkin Springs LLC), and without the prior written approval of that agreement by both TSHI and Tonkin Springs LLC, which approval shall not be unreasonably withheld or delayed. Neither SRK nor any other party to this Agreement shall terminate any contract with a Contractor without the prior written consent of each of TSHI and Tonkin Springs LL C, which consent shall not be unreasonably withheld or delayed. Neither TSHI nor Tonkin Springs LLC shall provide instructions to any of the Contractors with respect to the Work, it being understood that the provision of such instructions is the responsibility of SRK and that any suggestions or requests from TSHI or Tonkin Springs LLC must instead be provided to SRK's representative in accordance with Section 1.3 of this Agreement. As between TSHI, SRK and Tonkin Springs LLC, SRK shall be responsible for the willful misconduct and negligent acts and omissions of any of the Contractors. TSHI and Tonkin Springs LLC may make reasonable requests for information and data concerning any and all Contractors under this Agreement, and SRK hereby agrees to submit such information and data promptly upon request. Each of TSHI and Tonkin Springs LLC shall pay their own costs and expenses in connection with heir respective reviews of proposed contracts and Contractors. Protection of Persons and Property. - ----------------------------------- SRK acknowledges and is aware, and hereby represents that it has made and will make the Contractors aware, that the Tonkin Springs property may contain hazardous substances, constituents, or contaminants, and subject to Section 5, SRK knowingly and voluntarily assumes all risk of injury and damages to SRK, SRK's personnel, and SRK's property and to the Contractors, Contractors' personnel, and Contractors' property, caused by exposure to such materials. SRK agrees to advise fully all of its employees and agents working for SRK at the property, as well as the Contractors, of the associated risks and of all necessary environmental, safety, and health procedures required by applicable state or federal law, regulation, or order. SRK covenants and warrants that all personnel, including SRK's employees, have been fully trained in accordance with applicable laws, rules or regulations. SRK agrees that it will report to TSHI and Tonkin Springs LLC, in writing, any personal injury of SRK's or Contractors' employees, within 24 hours of the injury or as soon as practicable. SRK shall have the right to use the office facility of Tonkin Springs LLC at the Tonkin Springs project, but no other facilities or equipment of Tonkin Springs LLC. Any long distance telephone charges, or any other incremental operating costs associated with SRK's work at the office facility, shall be borne solely by SRK. SRK agrees to maintain that office in a neat and clean manner. Insurance. - ---------- SRK agrees at all times during the term of this Agreement to maintain in full force and effect:(a) Worker's Compensation Insurance, including occupational disease in accordance with applicable statutory and regulatory requirements; (b) Employer's Liability Insurance, including coverage on all of SRK's employees engaged in the performance of the Work; (c) Commercial General Liability Insurance, including protective liability covering death or bodily injury and contractual liability; and (d) Professional Liability Insurance. SRK agrees to furnish to TSHI and Tonkin Springs LLC its certificates of insurance or other evidence satisfactory to TSHI and Tonkin Springs LLC to the effect that such 6 commercial general liability insurance has been procured, names TSHI, TSVLP and Tonkin Springs LLC as additional insureds, and is in force except for primary errors and omissions insurance, the certificates shall state that the policies of insurance are in force and cannot be canceled or otherwise terminated without thirty (30) days advance written notice. For the purpose of this Agreement, SRK shall carry the following types of insurance in the limits (which may be a combination of primary and excess coverage) specified below: Coverages Limits of Liability - --------- ------------------- Worker's compensation Statutory Employer's liability $1,000,000 Commercial general liability $1,000,000 per Occurrence, $1,000,000 aggregate Umbrella Liability $4,000,000 Automobile $1,000,000 combined single limit Professional liability $2,000,000 per occurrence and aggregate TSHI, Tonkin Springs LLC and SRK will require all Contractors to maintain in full force and effect: (a) Worker's Compensation Insurance, including occupational disease in accordance with applicable statutory and regulatory requirements; (b) Employer's Liability Insurance, including coverage on all of SRK's employees engaged in the performance of the Work; and (c) Commercial General Liability Insurance, including protective liability covering death or bodily injury and contractual liability. Contractors will agree to furnish to TSHI, Tonkin Springs LLC and SRK its certificates of insurance or other evidence satisfactory to TSHI, Tonkin Springs LLC and SRK to the effect that such commercial general liability insurance (a) has been procured, (b) names TSHI, TSVLP, Tonkin Springs LLC and SRK as additional insureds, and (c) is in force. The certificates shall state that the policies of insurance are in force and cannot be canceled or otherwise terminated without thirty (30) days advance written notice. For the purpose of this Agreement, Contractors shall carry the following types of insurance in the limits (which may be a combination of primary and excess coverage) specified below: Coverages Limits of Liability - --------- ------------------- Worker's compensation Statutory Employer's liability $1,000,000 Commercial general liability $1,000,000 per occurrence, $2,000,000 aggregate Automobile $1,000,000 combined single limit Independent Contractor. - ----------------------- In the performance of the services under this Agreement, SRK shall be an independent contractor, maintaining complete control of SRK's personnel and operations and the implementation of the Work Plan. As such, SRK shall pay all salaries, wages, expenses, social security taxes, federal and state unemployment taxes, and any similar taxes relating to the performance of this Agreement. SRK and its employees shall in no way be regarded as or act as agents or employees of TSHI or Tonkin Springs LLC. This Agreement does not and shall not be construed to create any partnership, joint venture or agency whatsoever. Notices. - -------- Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when hand delivered or deposited in the United States mail, certified or registered, return receipt requested, postage prepaid, addressed to the respective address of SRK, TSHI or Tonkin Springs LLC, as appropriate, set forth at the top of this Agreement or such other address(es) as either party shall designate by written notice to the 7 other. In addition, pursuant to this Agreement, any notice, report or other communication to TSHI shall also be provided to TSHI by facsimile to Mr. Anton Adamcik at (416) 367-4681 and any notice, report or other communication to Tonkin Springs LLC shall also be provided to Tonkin Springs LLC by facsimile to (303) 238-1724. Nonassignment. - -------------- TSHI and Tonkin Springs LLC have entered into this Agreement in order to receive the professional services of SRK. SRK will not make any assignment, by operation of law or otherwise, of all or any portion of the Work required under this Agreement without first obtaining the written consent of TSHI and Tonkin Springs LLC. However, the respective rights and obligations of TSHI and Tonkin Springs LLC hereunder shall inure to the benefit of and shall be binding upon the successors and assigns of TSHI and Tonkin Springs LLC, respectively. Miscellaneous. - -------------- The terms and provisions of Section 3, entitled Confidential Information, Section 5, entitled SRK's Representations, Warranties, and Responsibilities, Section 7, entitled Protection of Persons and Property, and Section 9, entitled Independent Contractor, shall survive the termination of this Agreement, howsoever brought about. SRK shall not be responsible hereunder for any delay, default or nonperformance of this agreement, if and to the extent that such delay or nonperformance is caused by an act of God, weather, accident, labor strike, fire, explosion, riot, rebellion, terrorist activity, sabotage, flood, epidemic, act of government authority or any other cause beyond the reasonable control of SRK.TSHI and Tonkin Springs LLC shall have the right to inspect and audit SRK's books, records and all associated documents relating to such costs. SRK agrees to maintain records and associated documents for a period of two years from the end of the calendar year in which such costs were incurred and to make such books and records available to TSHI and Tonkin Springs LLC at all reasonable times within the two-year period and for so long thereafter as any dispute remains unresolved. TSHI and Tonkin Springs LLC may photocopy any such books and records at their own expense. This Agreement shall be subject to and governed by the laws of the state of Colorado. The Work and performance of same shall comply with all applicable city, county, state, and federal codes, rules, regulations, and orders. Failure of any party to exercise any option, right, or privilege under this Agreement or to demand compliance as to any obligation or covenant of the other party shall not constitute a waiver of any such right, privilege, option, or performance, unless waiver is expressly required by this Agreement or is evidenced by a properly executed instrument. This Agreement may not be modified except by written amendment executed by the parties hereto. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and such counterparts shall together constitute and be one and the same agreement. This Agreement, together with the attachment and all documents, drawings, specifications, and instruments specifically referred to in the Agreement shall constitute the entire agreement between the parties, and no other proposals, conversations, bids, memoranda, or other matter shall vary, alter, or interpret its terms. The captions in this Agreement are for the convenience of the parties in identification of the several provisions and shall not constitute a part of this Agreement or be considered interpretative. In the event of any conflict or inconsistency between the terms and conditions of this Agreement and those of the Work Plan, the terms and conditions of this Agreement shall in all instances prevail and govern. 8 Dated as of the 18th day of December 2001. STEFFEN ROBERTSON & KIRSTEN (U.S.),INC. By: /s/ Robert W. Klumpp Its: Controller TONKIN SPRINGS HOLDINGS NC. By: /s/ Ebe Scherkus Its: Executive Vice President, Chief Operating Officer TONKIN SPRINGS LLC By: /s/ William F. Pass Its: Vice President 9 EX-10 8 exh10_12.txt EXHIBIT 10.12 Exhibit 10.12 ------------- Amendment to Employment Agreement Between U.S. Gold Corporation and William W. Reid The Employment Agreement dated January 1, 1994 as Amended effective June 1, 1995 (the "Employment Agreement") between U.S. Gold Corporation, a Colorado corporation (the "Employer") and William W. Reid (the Employee) is hereby amended effective as of July 21, 1998. Whereas, for good and valuable consideration, the receipt and adequacy of which are acknowledged, Employer and Employee hereby agree to Amend the Employment Agreement as follows: A. Section 4.1.4 Termination by the Employee is amended as follows: The existing first sentence of this Section which reads "Upon the occurrence of any of the following events this Agreement may be terminated by the Employee" is deleted and replaced with: "Upon the occurrence of any of the following events this Agreement may be terminated by the Employee, provided that the Employee is not provided continued employment for a guaranteed minimum of an additional three (3) years after the subject event with responsibilities, compensation and other business terms equal to or more favorable to the Employee than as provided in this Agreement." B. Subsection 4.1.4(v) shall be stricken and removed from the Employment Agreement. Except as specifically set forth in this Amendment, all provisions of the Employment Agreement remain in full force and effect. IN WITNESS WHEREFOF, Employer and Employee have executed this Amendment effective as of the date first set forth above. EMPLOYER U.S. Gold Corporation, a Colorado corporation By: /s/ William F. Pass, Vice President, Secretary and Chief Financial Officer EMPLOYEE /s/ William W. Reid EX-10 9 exh10_13.txt EXHIBIT 10.13 Exhibit 10.13 ------------- Amendment to Employment Agreement Between U.S. Gold Corporation and William F. Pass The Employment Agreement dated January 1, 1994 as Amended effective June 1, 1995 (the "Employment Agreement") between U.S. Gold Corporation, a Colorado corporation (the "Employer") and William F, Pass (the Employee) is hereby amended effective as of July 21, 1998. Whereas, for good and valuable consideration, the receipt and adequacy of which are acknowledged, Employer and Employee hereby agree to Amend the Employment Agreement as follows: A. Section 4.1.4 Termination by the Employee is amended as follows: The existing first sentence of this Section which reads "Upon the occurrence of any of the following events this Agreement may be terminated by the Employee" is deleted and replaced with: "Upon the occurrence of any of the following events this Agreement may be terminated by the Employee, provided that the Employee is not provided continued employment for a guaranteed minimum of an additional three (3) years after the subject event with responsibilities, compensation and other business terms equal to or more favorable to the Employee than as provided in this Agreement." B. Subsection 4.1.4(v) shall be stricken and removed from the Employment Agreement. Except as specifically set forth in this Amendment, all provisions of the Employment Agreement remain in full force and effect. IN WITNESS WHEREFOF, Employer and Employee have executed this Amendment effective as of the date first set forth above. EMPLOYER U.S. Gold Corporation, a Colorado corporation By: /s/ William W. Reid, President and Chief Executive Officer EMPLOYEE /s/ William F. Pass EX-10 10 exh10_14.txt EXHIBIT 10.14 Exhibit 10.14 ------------- Amendment to Employment Agreement Between U.S. Gold Corporation and David C. Reid The Employment Agreement dated January 1, 1994 as Amended effective June 1, 1995 (the "Employment Agreement") between U.S. Gold Corporation, a Colorado corporation (the "Employer") and David C. Reid (the Employee) is hereby amended effective as of July 21, 1998. Whereas, for good and valuable consideration, the receipt and adequacy of which are acknowledged, Employer and Employee hereby agree to Amend the Employment Agreement as follows: A. Section 4.1.4 Termination by the Employee is amended as follows: The existing first sentence of this Section which reads "Upon the occurrence of any of the following events this Agreement may be terminated by the Employee" is deleted and replaced with: "Upon the occurrence of any of the following events this Agreement may be terminated by the Employee, provided that the Employee is not provided continued employment for a guaranteed minimum of an additional three (3) years after the subject event with responsibilities, compensation and other business terms equal to or more favorable to the Employee than as provided in this Agreement." B. Subsection 4.1.4(v) shall be stricken and removed from the Employment Agreement. Except as specifically set forth in this Amendment, all provisions of the Employment Agreement remain in full force and effect. IN WITNESS WHEREFOF, Employer and Employee have executed this Amendment effective as of the date first set forth above. EMPLOYER U.S. Gold Corporation, a Colorado corporation By: /s/ William F. Pass, Vice President, Secretary and Chief Financial Officer EMPLOYEE /s/ David C. Reid EX-10 11 exh10_16.txt EXHIBIT 10.16 Exhibit 10.16 ------------- Management Agreement dated effective January 1, 2001 between U.S. Gold Corporation and Gold Resource Corporation. MANAGEMENT AND ADMINISTRATION AGREEMENT Between GOLD RESOURCE CORPORATION And U. S. GOLD CORPORATION THIS MANAGEMENT AND ADMINISTRATION AGREEMENT (the "Agreement") is made and entered into effective as of January 1, 2002, between Gold Resource Corporation, a Colorado corporation ("GRC"), whose address is 2201 Quitman Street, Denver, Colorado 80212-1115 and U.S. Gold Corporation, a Colorado corporation ("U.S. Gold"), whose address is 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545. ARTICLE I. RECITALS: 1.1 WHEREAS GRC has certain intended business activities including management and evaluation and potential development of mineral properties located in Mexico, related funding activities and general corporate administration (collectively Business Activities) and is interested in securing the management and administration of such Business Activities; and 1.2 WHEREAS U.S. Gold has the personnel, facilities and experience to provide GRC certain management and administrative services related to the Business Activities; 1.3 NOW THEREFORE, in consideration of the promises and of the mutual covenants, conditions, and obligations contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE II. SCOPE OF SERVICES TO BE PROVIDED 2.1 U.S. Gold agrees to provide the following general Management and Administrative Services to GRC as provided in this Agreement: 2.2 Executive Management. The time and services of the following individuals will be provided on an as-needed basis (anticipated to require, on average, no more than approximately 50% of the normal available work period): a) William W. Reid; b) William F. Pass, and c) David C. Reid, each whom are full-time executive employees of U.S. Gold. 2.3 Office Services. The office and infrastructure of U.S. Gold's Lakewood, Colorado offices will be made available to support the Business Activities of GRC including, but not limited to, non-exclusive use of computers, printers, telephones, facsimile, files storage, mail service. Any third party expenses for the direct benefit of GRC shall be paid directly by GRC. 2.4 Preparation of Agreements. U.S. Gold, on behalf of GRC, will prepare such drafts and negotiate with third parties any agreements related to Business activities, for final review, approval and execution, as directed by the Board of Directors of GRC. Any out of pocket costs related to such activities, including but not limited to travel costs, fees of attorneys, accountants and tax experts, shall be paid directly by GRC. 2.5 Financing Activity. U.S. Gold, on behalf of GRC, shall prepare such documents and make such presentations as necessary or appropriate towards the objective of raising funding for Gold Resource, including but not limited to equity, debt, and lease financings, except that under no circumstances shall U.S. Gold act as, or be construed as acting as financial advisor to, or underwriter or placement agent of any securities of GRC. All arrangements shall be reviewed, approved and executed as directed by the Board of Directors of GRC. Any out of pocket expenses related to such activities shall be paid directly by GRC. 2.6 Management of Consultants. U.S. Gold, on behalf of GRC, may and shall enter into consulting agreements with third parties for the furtherance of Business Activities, and shall work with and manage such consultants in such activities, 1 as directed by the Board of Directors of GRC. All direct and indirect costs and expenses related to such consultants, consulting agreements and related activities shall be paid directly by GRC. Examples include lawyers, accountants, engineers, engineering firms, field personnel, etc. 2.7 Management of Contracts. U.S. Gold, on behalf of GRC, shall enter into such contracts with third parties as required for the furtherance of Business Activities, and shall manage such contracts. All direct and indirect costs and expenses related to such contracts shall be paid directly by GRC. Examples include but are not limited to engineering design, facilities fabrication and construction, permitting, etc. 2.8 Establishment of Subsidiaries and Qualification to Conduct Business. U.S. Gold, on behalf of GRC and upon advice of consultants, shall create such business entities as necessary and appropriate including subsidiaries of GRC, to hold assets and conduct operations related to or in furtherance of Business Activities. 2.9 Opening of Bank Checking and Savings Accounts. U.S. Gold, on behalf and in the name of GRC, shall from time to time open checking and savings accounts at banks and other financial institutions to hold assets and conduct operations related to or in furtherance of Business Activities. 2.10 Maintenance of Books and Records. U.S. Gold will maintain checking and savings account records for and on behalf of GRC and shall prepare monthly budgets and monthly accounting for all activities. An annual independent audit, at the expense of GRC, shall be performed on the financial accounts of GRC. U.S. Gold will provide such independent auditors full access to all records and full cooperation in the conduct of such annual audit. ARTICLE III. CONSIDERATION TO U. S. GOLD 3.1 As consideration for the services provided by U.S. Gold under this Agreement, unless terminated early as provided herein, GRC shall pay to U.S. Gold $30,000.00 per month payable no later than the first business day of each month thereunder. ARTICLE IV. TERM OF AGREEMENT 4.1 The term of this Agreement, unless terminated earlier as provided in Section V below, shall be twelve (12) months commencing January 1, 2002 and terminating December 31, 2002. ARTICLE V. EARLY TERMINATION 5.1 This Agreement may not be terminated by either party other than for cause with 30-day prior written notice. 5.2 In the event that either party terminates this Agreement for cause, there shall be a prorate of the monthly payment to U.S. Gold as per Article 3.1 through the effective date of such termination. ARTICLE VI. REPRESENTATIONS, WARRANTIES AND COVENANTS 6.1 GRC hereby represents and warrants to U.S. Gold as of the date of this Agreement, and this Agreement is made in reliance on the following representations and warranties: a) GRC is a corporation duly organized, validly existing and in good standing under the laws of Colorado. GRC has full corporate power and authority, and all franchises, licenses and permits as are necessary to own its assets and to carry on its business as presently conducted and to consummate the transactions contemplated by this Agreement. 6.2 U.S. Gold hereby represents and warrants to GRC as of the date of this Agreement, and this Agreement is made in reliance on the following representations and warranties: 2 a) U.S. Gold is a corporation duly organized, validly existing and in good standing under the laws of Colorado. U.S. Gold has full corporate power and authority, and all franchises, licenses and permits as are necessary to carry on its business as presently conducted and to consummate the transactions and performance contemplated by this Agreement. b) William W. Reid, David C. Reid and William F. Pass are executive employees of U.S. Gold. ARTICLE VII. GOVERNING LAW 7.1 This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of Colorado, including all matters of construction, validity and performance. In WITNESS WHEREOF, the parties have executed this Agreement effective the first date set forth above. GOLD RESOURCE CORPORAITON By: /s/ William W. Reid, President November 29, 2001 U. S. GOLD CORPORATION By: /s/ John W. Goth, Independent Director November 29, 2001 3 EX-10 12 exh10_17.txt EXHIBIT 10.17 Exhibit 10.17 ------------- Technology Option Agreement dated December 18, 2001 between Newmont Technologies Limited and U.S. Gold Corporation. TECHNOLOGY OPTION AGREEMENT Preamble This is an agreement (the Agreement) between U.S. Gold Corporation, a Colorado corporation having a business address at 2201 Kipling St., Suite 100, Lakewood, Colorado 80215-1545 (USGC) and Newmont Technologies Limited, a Nevada Corporation having a business address at 10101 E. Dry Creek Road, Englewood, Colorado 8080112 (NTL). This Agreement is to be effective as of December 18, 2001 (Effective Date). Recitals A. NTL and/or its parent Newmont Mining Corporation (NMC) has patents and know-how concerning certain inert gas flotation technology (the N2TEC Flotation Technology) that has application to flotation of certain refractory sulfide gold ores, and NTL is interested in licensing others to operate within the scope of these patent rights and/or to use the know-how. B. USGC has at its Tonkin Springs Mine in Eureka County, Nevada refractory sulfide gold ores that appear to be amenable to processing with the N2TEC Flotation Technology and USGC is interested in possible implementation and use of the N2TEC Flotation Technology at an appropriate time during development at the Tonkin Springs Mine, but is not interested in entering into a license agreement with NTL at this time. C. NTL is willing to provide to USGC and USGC is willing to accept certain option rights according to the terms and conditions set forth below concerning possible future licensing and use of the N2TEC Flotation Technology for processing refractory sulfide gold ore at the Tonkin Springs Mine. Agreement 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings set forth below: Option Period means a period of time beginning with the Effective Date and expiring May 31, 2002. Negotiation Period means a period of time beginning with Exercise Of Option and expiring June 30, 2002. Exercise Of Option has the meaning as provided in section 2.2. Option Fee means the sum of $US10,000 (ten thousand United States dollars). 2. OPTION/EXERCISE OF OPTION/OPTION FEE. 2.1 NTL hereby grants to USGC an option to have NTL enter into good faith negotiations between NTL and USGC during the Negotiation Period to pursue agreement concerning definitive terms of a license agreement (the License Agreement) by which NTL would nonexclusively license NTL's and NMC's U.S. patents and know-how concerning the N2TEC Flotation Technology to USGC for use to process refractory sulfide gold ore at the Tonkin Springs Mine (NTL's and NMC's existing U.S. patents concerning the N2TEC Flotation Technology are listed in Exhibit A attached hereto). The License Agreement would include provisions to effect at least the following key concepts: (a) NTL would grant to USGC a nonexclusive license to NTL's and NMC's U.S. patents and know-how concerning the N2TEC Flotation Technology for use in flotation processing of refractory sulfide gold ore from the Tonkin Springs Mine. (b) USCG would pay to NTL license fees including (i) an initial license fee of $US50,000 (fifty thousand United States dollars), with USCG receiving a 1 credit against such initial license fee for payment of the Option Fee and (ii) ongoing production royalties, to be reported and paid quarterly, based on two percent (2%) of precious metals paid from concentrates prepared using the N2TEC technology, to be paid at NTL's option in- kind in concentrate containing gross precious metals that are calculated to net to the paid quantity or in money based on net smelter returns or an equivalent net return if subsequently processed by other than smelting, with the ongoing production royalties being subject to an annual minimum of $10,000 per year starting with the second year of the License Agreement. Upon expiration of the last-to-expire of NTL's and NMC's patents concerning the N2TEC(r) Flotation Technology, ongoing production royalties would thereafter be reduced by one-half. NTL would have a right to audit at least annually pertinent records concerning the Tonkin Springs Mine to verify the accuracy of ongoing production payments. USCG would be permitted to pay the initial license fee in installments due as follows: (i) $US30,000 (thirty thousand United States dollars) to be paid upon execution by USGC of the License Agreement (with the credit for payment of the Option Fee being applied against this installment), (ii) $US10,000 (ten thousand United States dollars) to be paid no later than three months following execution by USGC of the License Agreement and (iii) $US10,000 (ten thousand United States dollars) to be paid no later than six months following execution by USGC of the License Agreement. (c) Within the first two (2) years of the License Agreement, USGC would have an option to buy-out one-half or all of any further production royalties (including further annual minimums) at a rate of $US500,000 (five hundred thousand United States dollars) for buy-out of one-half (1% of precious metals paid from concentrates) or $1,000,000 (one million United States dollars) for buy-out of all (2% of precious metals paid from concentrates) of any further production royalties. (d) All improvements, enhancements, modifications and adaptations of any portion of the N2TEC Flotation Technology discovered or developed during the term of the License Agreement would be reported to and owned by NTL. (e) USGC would maintain in confidence and not use for any purpose other than exercise of its license rights all information and know-how concerning the N2TEC Flotation Technology, including all improvements, enhancements, modifications and adaptations. (f) NTL would commit to provide a reasonable amount of technical consultation during design, start-up and operation of a flotation operation implementing the N2TEC Flotation Technology at the Tonkin Springs Mine for at least the first two (2) years of the License Agreement. USGC would pay for all technical consultation provided by NTL, except that during the first two (2) years of the License Agreement, NTL would provide free of charge up to five (5) man days per year of technical consultation. (g) To the extent that NTL or NMC agrees to perform any additional test work for USGC related to amenability of the N2TEC Flotation Technology for processing refractory sulfide gold ore from the Tonkin Springs Mine, NTL or NMC would be paid for performing the test work. (h) NTL would make no representations or warranties (including any representations or warranties with respect to the validity of any patents, freedom to practice any technology or the quality or extent of any know-how or technical consultation services), except for a representation that NTL has the right to enter into the License Agreement. NTL would have no obligation to enforce any patents. USGC would have no right to enforce any of NTL's or NMC's patents. (i) The License Agreement would have a term that lasts until the last-to-expire of NTL's and NMC's U.S. patents concerning the N2TEC Flotation Technology and so long thereafter as the N2TEC Flotation Technology is used to process refractory sulfide gold ore from the Tonkin Springs Mine, provided that USGC would be permitted to prematurely terminate the License Agreement with at least three (3) months prior written notice to NTL, in which case USGC would immediately cease all use of N2TEC Flotation Technology. (j) The License Agreement would be interpreted construed and governed in accordance with the laws of the State of Colorado, without reference to 2 conflict of laws principles, and all disputes arising from or relating to the License Agreement would be within the exclusive jurisdiction of the state and/or federal courts located within the State of Colorado. 2.2 Exercise Of Option requires that USGC provide to NTL during the Option Period effective written notice that USGC desires to commence good faith negotiations with NTL to pursue agreement between NTL and USGC concerning definitive terms for the License Agreement. Such written notice shall be effective only upon actual receipt by NTL. 2.3 Upon execution of this Agreement, USGC shall pay to NTL the Option Fee. 2.4 NTL represents that it has a good faith interest in nonexclusively licensing USGC to use the N2TEC Flotation Technology to process refractory sulfide gold ore from USGC's Tonkin Springs Mine and believes that good faith negotiations between NTL and USGC will lead to a definitive agreement for such a license. NTL's only obligation under this Agreement, however, shall be to in good faith enter into and in good faith participate in and pursue the negotiations with USGC during the Negotiation Period as provided in this Agreement. This Agreement grants no rights to USGC to any patents, know-how or other rights of NTL or NMC concerning the N2TEC Flotation Technology. USGC understands and acknowledges that there is no assurance that final agreement will actually be reached on definitive terms for the License Agreement and that USGC shall have no right to use the N2TEC Flotation Technology unless definitive terms for the License Agreement are finally agreed upon and the License Agreement containing such definitive terms is finalized and duly executed on behalf of both NTL and USGC prior to expiration of the Negotiation Period. Upon expiration of the Negotiation Period, NTL shall have no further obligations under this Agreement. 3. MISCELLANEOUS. 3.1 USGC shall not assign or otherwise transfer this Agreement, or any portion of this Agreement, without the prior written consent of NTL. NTL shall not assign or otherwise transfer this Agreement, or any portion of this Agreement, without the prior written consent of USGC; provided that NTL can without prior consent of USGC to transfer this Agreement, or any rights or obligations of NTL under this Agreement, to any affiliate(s) of NTL, including without limitation a right by NTL to delegate to any affiliate(s) of NTL any obligation under this Agreement or the License Agreement. 3.2 Time is of the essence of this Agreement. In particular, USGC understands and acknowledges that NMC is currently in negotiations with another company concerning a possible arrangement whereby NMC and/or NTL would license rights in the N2TEC Flotation Technology to the other company and the other company would then be the exclusive source for sublicensing the N2TEC Flotation Technology for use in non-Newmont operations, and in the event that NTL and USGC do not agree to definitive terms for the License Agreement and duly execute the License Agreement during the Negotiation Period, it is possible that NTL would not thereafter have an ability to license the N2TEC Flotation Technology to USGC for use at the Tonkin Springs mine and NTL can provide no assurances to USGC concerning the terms under which a sublicense to the N2TEC Flotation Technology might then be available from the other company. 3.3 All notices and payments made pursuant to this Agreement shall be delivered to the person/address as provided below, or to such other person/address as a party may hereafter designate in writing to the other party: If to NTL: K. Marc LeVier Newmont Technical Facility 10101 E. Dry Creek Road Englewood, CO 80112 If to USGC: William Reid U.S. Gold Corporation 2201 Kipling St., Suite 100 Lakewood, CO 80215-1515 3 3.4 This Agreement constitutes the entire agreement and understanding of the parties relating to licensing of rights to N2TEC Flotation Technology and this Agreement supercedes all previous communications, proposals, representations and agreements, whether oral or written, relating thereto, provided that a prior Nondisclosure Agreement between Newmont Gold Company (now NMC) and Tonkin Springs LLC (the Nondisclosure Agreement having been signed on behalf of Tonkin Springs LLC on January 25, 2000 and on behalf of Newmont Gold Company on February 1, 2000) shall be unaffected by this Agreement, and further provided that USGC, as the sole owner of Tonkin Springs LLC, shall be bound by the terms of that Nondisclosure Agreement, which Nondisclosure Agreement shall apply to any information disclosed to or otherwise made available to USGC in furtherance of this Agreement, and further provided that NTL shall be an intended beneficiary under such Nondisclosure Agreement and shall have a full right and authority to enforce any rights of NMC under such Nondisclosure Agreement. 3.5 This Agreement shall be interpreted construed and governed in accordance with the laws of the State of Colorado, without reference to conflict of laws principles. All disputes arising from or relating to this Agreement shall be within the exclusive jurisdiction of the state and/or federal courts located within the State of Colorado, and the parties hereby consent to such exclusive jurisdiction and waive objections to venue therein. 3.6 This Agreement shall be modified only by a writing signed by both parties, referring specifically to this Agreement and setting forth the specific modifications hereto. 3.7 Any headings of the various paragraphs and sections of this Agreement have been inserted for convenience only and shall not be deemed to be made a part of this Agreement. IN WITNESS WHEREOF, each party hereto acknowledges that the representative named below has the authority to execute this Agreement on behalf of the respective party to form a legally binding contract and has caused this Agreement to be duly executed on its behalf. Newmont Technologies Limited /s/ Douglas Scott Barr Name: Douglas Scott Barr Title: Vice President Date: December 18, 2001 U.S. Gold Corporation /s/ William W. Reid By: William W. Reid Title: President Date: December 18, 2001 4 EX-10 13 exh10_18.txt EXHIBIT 10.18 Exhibit 10.18 ------------- Non-Exclusive Technology Agreement by and between U.S. Gold Corporation and Newmont USA, d/b/a Newmont Mining Corporation dated May 31, 2002 NON-EXCLUSIVE TECHNOLOGY LICENSE AGREEMENT PREAMBLE This is an agreement (the "Agreement") between U.S. Gold Corporation, a Colorado corporation having a business address at 2201 Kipling St., Suite 100, Lakewood, Colorado 80215-1545 ("USGC") and Newmont USA Limited, d/b/a Newmont Mining Corporation, a Delaware Corporation having a business address at 1700 Lincoln Street, Suite 2800, Denver, Colorado 80203 ("NMC"). This Agreement is to be effective as of complete execution by both parties of the signature blocks provided below ("Effective Date"). RECITALS A. USGC is the owner, through wholly-owned subsidiaries, of mining claims located in Eureka County, Nevada, U.S.A., referred to as the Tonkin Springs Property, which contains refractory sulfide gold ores that would be desirable to concentrate following mining. B. NMC has technology, and patents relating to the technology, concerning preparation of flotation concentrates of refractory sulfide gold ores using an oxygen-deficient gas during comminution and/or flotation, known as the N2TEC technology, and USGC desires to obtain a license to the N2TEC technology for use to prepare flotation concentrates of refractory sulfide gold ore mined from the Tonkin Springs Property. C. Newmont Technologies Limited ("NTL"), a wholly-owned subsidiary of NMC, and USGC entered into an agreement titled Technology Option Agreement on December 18, 2001 ("Option Agreement"), under which USGC obtained an option to enter into good faith negotiations with NTL to pursue agreement on definitive terms for a non-exclusive license for use of the N2TEC technology at the Tonkin Springs Property. D. Pursuant to the Option Agreement, NMC, on behalf of NTL, and USGC have agreed to definitive terms for a non-exclusive technology license as set forth in this Agreement. AGREEMENT In consideration of the mutual covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree to the terms and conditions set forth below: 1. DEFINITIONS. For purposes of this Agreement and all exhibits hereto, the following terms shall have the meanings set forth below: "Affiliate" of a party means (a) any Person directly or indirectly owning, controlling, or holding with power to vote, fifty percent (50%) or more of the outstanding voting securities, membership interests, partnership interests or other equity interests of a party; and (b) any Entity fifty percent (50%) or more of whose outstanding voting securities, membership interests, partnership interests or other equity interests are directly or indirectly owned, controlled, or held with power to vote by the party or a Person described in (a). For purposes of the preceding sentence, "control" means possession, directly or indirectly, of the power to direct or cause direction of management and policies through ownership of voting securities, contract, voting trust, or otherwise. "Aggrieved Party" is defined in section 9.2. "Agreement" is defined in the preamble of this Agreement. "Allowable Deductions" means costs incurred by a USGC Party permitted as deductions in determining NSR, as provided in Exhibit B. "Breaching Party" is defined in section 9.2. 1 "Effective Date" is defined in the preamble of this Agreement. "Entity" means any Person other than a natural person. "Facility" means a single flotation processing facility located in Nevada, U.S.A., and processing ores mined only from the Tonkin Springs Property. "Improvement" means any development, enhancement, modification or adaptation to or of any portion of the NMC Flotation Technology conceived or first reduced to practice during the term of this Agreement. USGC shall ensure that appropriate agreements are put in place to assign to USGC all right, title and interest in and to any and all Improvements, or any portion thereof, made by any and all employees of USGC, Affiliates of USGC, the operator and contractors and consultants while involved with any portion of design (including any laboratory testing), engineering, construction, start-up, maintenance or operation of the Facility or the flotation process used at the Facility. "Indemnitee" is defined in section 7.3. "Licensed Field" means processing at the Facility Precious Metal Ores mined from the Tonkin Springs Property to prepare Licensed Concentrate. "Licensed Concentrate" means flotation concentrate prepared with use of the NMC Flotation Technology from Precious Metal Ore and that has a higher Precious Metal grade than the Precious Metal Ore. All flotation concentrate prepared at the Facility during the term of this Agreement shall be deemed to be produced with use of the NMC Flotation Technology if preparation of the flotation concentrate involves use of a nitrogen-enriched or other oxygen-deficient gas (oxygen-deficient as compared to air) as a flotation gas during flotation and/or to blanket any process equipment prior to or during flotation. "Licensed Dore" means dore or other similar crude metallic product prepared by a USGC Party from processing of Licensed Concentrate. "NMC" is defined in the Preamble of this Agreement. "NMC Confidential Information" means all technical, financial and business information relating to the NMC Flotation Technology disclosed to or otherwise made available by NMC, or by any Affiliate of NMC or any Third Party as permitted by NMC, to USGC, any Affiliate of USGC, the Operator or any Third Party for the benefit of USGC (including any consultants and contractors involved with any portion of design, engineering, construction, start-up, maintenance or operation of the Facility during the term of this Agreement). "NMC Flotation Technology" means any and all information, technology, know-how, trade secrets and software, including any Improvements, owned or controlled by NMC concerning the use of nitrogen or other oxygen-deficient gas in flotation of gold-bearing sulfide minerals, including the use of such nitrogen or other oxygen-deficient gas during preparation (e.g., grinding, milling, conditioning) of a slurry of particulate mineral feed for the flotation. As used in this definition "controlled" means that NMC has an independent legal right to grant, or to compel a wholly-owned Affiliate of NMC to grant, a nonexclusive license to USGC of a scope as provided in section 2.1 to the information, technology, know-how, trade secrets or software, as the case may be, without a royalty or other fee being due by NMC or any Affiliate of NMC in relation to the grant. "NMC Patents" means each and every United States patent and United States patent application now or hereafter owned or controlled during the term of this Agreement by NMC claiming any portion of the NMC Technology. Existing NMC patents are listed in Exhibit A. As used in this definition, "controlled" means that NMC has the legal right to grant, or to compel a wholly-owned Affiliate of NMC to grant, non-exclusive rights to the full extent of the patent or patent application, as the case may be, to USGC without a royalty or other fee being due by NMC or any Affiliate of NMC in relation to the grant. "NSR" means net smelter returns, determined as set forth in Exhibit B. "NTL" is defined in the recitals of this Agreement. "Operator" means, in the event that USGC does not itself operate the Facility, a Person authorized, directly or indirectly, by USGC to operate the Facility. The Operator may be an Affiliate of USGC or a Third Party. At any given time, there shall be no more than one Operator. 2 "Option Agreement" is defined in the recitals of this Agreement. "Option Fee" means the sum of $US10,000 (ten thousand United States dollars) paid by USGC to NMC pursuant to The Option Agreement. "Person" means a natural person, corporation, joint venture, partnership, limited partnership, limited liability company, trust, estate, business trust, association, governmental authority, or any other entity. "Precious Metal" means gold and silver. "Precious Metal Ore" means an ore in which Precious Metal represents the primary metal value in the ore. "Third Party" means any Person other than NMC, Affiliates of NMC, USGC and Affiliates of USGC. "Third Party Infringement Claim" means a legal claim for patent infringement based on use during the term of this Agreement of the NMC Flotation Technology at the Facility within the scope of the right and license of section 2.1 asserted by a Third Party against a USGC Party, with the legal claim premised on infringement of a U.S. patent claim reciting a combination of the use of nitrogen flotation gas, lead-containing activator and xanthate collector for flotation processing of refractory sulfide gold ores. For purposes of this definition, a legal claim is "asserted" by a Third Party against a USGC Party when a legal action has been filed in a U.S. court of competent jurisdiction and the USGC Party has been named as a defendant in the action and has been served with the complaint. It is not intended that any patent infringement claim that might be brought based on equipment at or operation of the Facility will constitute a Third Party Infringement Claim; rather, it is intended that only legal claims to infringement of a patent claim specifically reciting the noted combination of processing features shall be within the scope of Third Party Infringement Claim. "Tonkin Springs Property" means the mining claims located along the Battle Mountain-Cortez Trend in Eureka County, Nevada, U.S.A., that are owned or controlled, directly or indirectly, by USGC as of the Effective Date. USGC represents that all mining claims within the scope of the Tonkin Springs Property are as shown in Exhibit D. "USGC" is defined in the Preamble of this Agreement. "USGC Party" means each of USGC, an Affiliate of USGC and an Operator. 2. LICENSE GRANT/FREEDOM FROM LIABILITY FOR PATENT INFRINGEMENT. 2.1 License Grant. NMC hereby grants to USGC a non-exclusive, royalty-bearing right and license to practice within the Licensed Field the NMC Flotation Technology. USGC shall have a right to sublicense the right and license granted to USGC that is limited to sublicensing the Operator for the sole purpose of the Operator operating the Facility within the scope of the right and license granted to USGC. 2.2 Freedom from Liability for Patent infringement. USGC, and permitted sublicensees of USGC, shall be free of liability with respect to any infringement or other violation of the NMC Patents on account of exercise by USGC, or a permitted sublicense of USGC, of the right and license granted to USGC by NMC under section 2.1. 3. LICENSE FEES 3.1 Initial License Fee. Upon execution of this Agreement, an initial license fee of $US50,000 (Fifty Thousand United States dollars) shall be due from USGC to NMC, with USGC receiving a credit against such initial license fee for prior payment to NTL of the Option Fee; provided that USGC shall be permitted to pay the initial license fee to NMC in installments to be paid as follows: (i) $US30,000 (thirty thousand United States dollars) to be paid on the Effective Date (with the credit for prior payment to NTL of the Option Fee being applied against this installment), (ii) $US10,000 (ten thousand United States dollars) to be paid no later than three months following the Effective Date and (iii) $US10,000 (ten thousand United States dollars) to be paid no later than six months following the Effective Date. 3 3.2 Ongoing License Fees. USGC shall pay to NMC ongoing license fees equal to two percent (2%) of NSR of Licensed Concentrate. Payment to NMC of ongoing license fees for any unit of Licensed Concentrate shall be an obligation of USGC as of the date the unit of Licensed Concentrate is prepared, with payment to be made to NMC as provided in section 3.3. Beginning with calendar year 2003, the ongoing license fees shall be subject to an annual minimum of $US10,000 (ten thousand United States dollars) per calendar year during the term of this Agreement, including the Calendar Year during which this Agreement terminates. Upon expiration of the last to expire of the NMC Patents, the ongoing license fees shall thereafter be reduced by one-half (1/2), to one percent (1%) of NSR, but the annual minimum will continue to apply unchanged. 3.3 Payment of Ongoing license fees. Ongoing license fees are to be paid to NMC on a calendar quarterly basis, with ongoing license fees in relation to a calendar quarter to be paid to NMC not later than one month following the end of the respective calendar quarter (i.e., not later than the end of April in relation to the first quarter, the end of July in relation to the second quarter, the end of October in relation to the third quarter and the end of January of the following year in relation to the fourth quarter). Ongoing license fees for a unit of Licensed Concentrate are to be paid to NMC in relation to the calendar quarter in which the Third Party purchaser of the Licensed Concentrate or Licensed Dore makes payment on a sale made pursuant to section 3.6. 3.4 Reporting of Ongoing license fees. Within one month following the end of each calendar quarter, USGC shall deliver to NMC the following: (a) Written reports of a form as specified in Exhibit C. (b) A written itemization of Allowable Deductions used to determine NSR for the reported quarter, with the itemization identifying the payee of each Allowable Deduction (e.g., the relevant transportation company or insurer), the nature of each Allowable Deduction (e.g., transportation or insurance), and the amount of each Allowable Deduction. Written documentation from the payee shall be included to support each Allowable Deduction (c) In relation to all Licensed Concentrate prepared during the reported quarter, copies of all production reports from the Facility, all production assays (including head, tail and concentrate assays) and all metallurgical balance reports concerning gold and silver content (and the content of other metal values to the extent applicable). (d) In relation to all Licensed Dore prepared during the reported quarter, copies of all production reports from processing operation(s) where the production took place, all assays and all metallurgical balance reports concerning gold and silver content (and the content of other metal values to the extent applicable). (e) Copies of all available settlement documentation received during the quarter from Third Party purchasers of Licensed Concentrate and Licensed Dore. (f) Payment of Annual Minimum. For each calendar year for which the annual minimum provided in section 3.2 applies, any deficiency in ongoing royalty payments for the year relative to the annual minimum requirement shall be made with the final quarterly report in relation to that calendar year. 3.6 USGC Royalty Buy-Out Option. At any time prior to expiration of two (2) years following the Effective Date, USGC may, at USGC's sole option, buy-out a portion or all ongoing license fees on further Licensed Concentrate in increments of one percent (1%) of NSR, including buy-out of a proportionate share of future annual minimums (i.e., $US5,000 reduction in future annual minimums for each 1% NSR increment bought-out), by paying to NMC no later than the two (2) years following the Effective Date $US500,000(five hundred thousand United States dollars) for each one percent (1%) NSR increment being bought-out ($US1,000,000 to buy-out entire 2% of NSR). In the event of a buy-out, the ongoing license fees will be reduced by the bought-out increment(s) of NSR for all Licensed Concentrate prepared following the buy-out and the annual minimum will be reduced beginning with the calendar year during which the buy-out is made. USGC shall be permitted to exercise its buy-out option up to two times during the applicable two-year period. 4 3.7 Handling of Licensed Concentrate and Disposition of Metal Values. (a) All Precious Metals and other metals of value in Licensed Concentrate shall be disposed of by sale of Licensed Concentrate or Licensed Dore from a USGC Party to a Third Party purchaser, with the sale being an arms length sale transaction at fair market value only for money paid by the Third Party purchaser to a USGC Party, with payment being made on the sale by the Third Party purchaser at least as quickly as normal industry practice for like sales made in arms length transactions in relation to other mining operations in Nevada, U.S.A. (b) Promptly after preparation of a unit of Licensed Concentrate, but in no event later than 30 calendar days following preparation of the unit of Licensed Concentrate, either (i) the unit of Licensed Concentrate shall be delivered to a Third Party purchaser of the unit of Licensed Concentrate pursuant to a sale transaction as provided in subsection (a) or (ii) processing shall commence on the unit of Licensed Concentrate in a subsequent processing operation operated by a USGC Party for preparation of Licensed Dore in a timely manner according to the processing technology being used. Processing of a unit of Licensed Concentrate into Licensed Dore shall not be delayed relative to like processing of any other ores or concentrates being processed in the subsequent processing operation. Promptly after preparation of a unit of Licensed Dore, but in no event later than 30 days following preparation of the unit of Licensed Dore, the Licensed Dore shall be delivered to a Third Party purchaser of the Unit of Licensed Dore pursuant to a sale transaction as provided in subsection (a). USGC shall, and shall cause other USGC Parties, to use best efforts to maximize monies received from Third Party purchasers for sales of Licensed Concentrate and Licensed Dore. (c) Licensed Concentrate disposed of by sale to a Third Party purchaser pursuant to subsection (a) shall not have been commingled with other concentrates, ores or other materials prior to the sale. Licensed Concentrate processed to prepare Licensed Dore may be commingled with other concentrates and/or ores for processing in the subsequent processing operation so long as appropriate metallurgical accounting procedures are followed to permit accurate allocation in a miner-like fashion of value due to the processing of the Licensed Concentrate and due to the processing of the other concentrates and/or ores. In the case of such commingling, the Licensed Dore shall be an allocated portion of the dore or other similar crude metallic product resulting from the subsequent processing operation accurately determined based on the metallurgical accounting procedures. 4. TECHNICAL SUPPORT 4.1 Technical Consultation. NMC shall provide to UFSGC technical consultation as reasonably requested by USGC, to the extent that NMC is reasonably capable, concerning USGC's exercise of the right and license under section 2.1. NMC shall be paid for technical consultation provided to USGC; provided that up to the first five (5) man-days (8 hours per man-day) of technical consultation provided by NMC during each of the first two annual periods during the term of this Agreement following the Effective Date shall be provided by NMC without charge to USGC. Upon request of USGC, NMC will provide to USGC a schedule of consulting fee rates for NMC to provide technical consultation to USGC, such schedule of consulting fee rates to be subject to change with at least thirty (30) days advance written notice to USGC. In any event, USGC shall reimburse NMC for any incidental expenses incurred to provide the requested technical consultation, including all incidental travel, lodging and meal expenses. NMC's obligation to provide USGC with any technical consultation shall end upon the earlier to occur of (i) five (5) years after the Effective Date and (ii) two (2) years after commencement of use of the NMC Flotation Technology at the Facility. 4.2 Laboratory Testing. Upon request from USGC, NMC will consider performing laboratory flotation testing to further investigate application of the NMC Flotation Technology for implementation at the Tonkin Springs Property. NMC shall have no obligation to perform such testing. But if NMC does agree to perform such testing, then USGC shall pay for such testing based on personnel, laboratory facility and other charges to be provided by NMC. NMC will provide USGC only with factual data concerning test conditions and results of the tests. USGC assumes all responsibility for interpretation of such factual data. 5 5. RECORDS/AUDITING 5.1 Metallurgical Accounting and Maintenance of Records. USGC, or the Operator, shall implement and follow appropriate metallurgical accounting procedures, including appropriate monitoring of weight and grade, to permit accurate determination of Precious Metals content, and the content of other metals of value (if any), in Licensed Concentrate and Licensed Dore. USGC shall keep and maintain, and shall cause the Operator to keep and maintain, accurate records relating to exercise of the right and license under section The records kept and maintained by USGC shall be sufficient in detail to permit NMC to determine and verify any and all amounts due to NMC hereunder, and the records shall include documentation of appropriate sampling and quantity measurements for determination of the content of gold and silver (and other metal values to the extent applicable) in Licensed Concentrate. Each record shall be maintained in the United States at a normal business office of USGC, or the Operator as the case may be, for a period of at least two (2) years following the end of the calendar year to which the record pertains. 5.2 Audit of Records. NMC shall have a right to audit USGC's compliance with this Agreement, including an audit of USGC's and/or the Operator's records and metallurgical accounting procedures (including sampling and assaying frequency and procedures) during normal business hours to the extent deemed by NMC to be necessary to verify the amount and accuracy of any and all amounts due to NMC hereunder. NMC may exercise this right to audit no more frequently than once during any calendar year and shall provide USGC with at least thirty (30) days advance written notice prior to conducting an audit of USGC's records. The right to audit shall include the right to use professionals, such as accountants and attorneys of NMC's choice, to perform or assist in the performance of an audit. Prompt adjustment shall be made by USGC to compensate NMC for any errors or omissions disclosed by an audit. NMC's audit rights shall also extend to any relevant records maintained by and metallurgical accounting procedures performed by any permitted sublicensee or contractor, and USGC shall ensure that NMC has access to such records and metallurgical accounting procedures for purposes of conducting audits. If, based on an audit, it is determined that underpayments to NMC are five percent (5%) or more of the payments due during the period audited, then the reasonable costs of the audit shall be borne by USGC, otherwise the cost of the audit shall be borne by NMC. 5.3 Facility Visits. NMC shall have a right to visit the Facility, with at least six (6) months between visits, to witness the extent and nature of use of the NMC Flotation Technology at the Facility, and USGC shall upon request of NMC provide NMC with a complete description of operating parameters and specifications concerning use of the NMC Flotation Technology at the Facility. 6. INTELLECTUAL PROPERTY 6.1 Ownership. USGC acknowledges that, as between the parties and as subject to the right and license to USGC under section 2.1, all right, title and interest, including all intellectual property rights, in and to the NMC Flotation Technology shall be owned solely and exclusively by NMC. USGC shall promptly disclose in writing to NMC any Improvements. Furthermore, USGC hereby assigns, sells, transfers and otherwise conveys unto NMC all right, title and interest of USGC, including all patent and other intellectual property rights, in and to the Improvements. Neither party shall have any right in or to any technology or intellectual property of the other party, now existing or hereafter developed or acquired, except as expressly provided herein. 6.2 Protection of NMC Flotation Technology. NMC shall have complete discretion and control as to whether to seek patent or other protection of any and all of the NMC Flotation Technology, the manner in which protection is sought, and whether and how to maintain any of the NMC Patents or other intellectual property rights. At the request of NMC and at NMC's expense, USGC shall cooperate with and assist NMC to evidence, demonstrate or perfect NMC's right, title and interest in and to the Improvements, including preparing, filing and prosecuting relevant patent applications in the United States and other countries and including signing such documents and performing such acts, or having employees or others sign such documents or perform such acts, as requested by NMC. Furthermore, NMC shall have complete discretion and control concerning whether and how to enforce any intellectual property rights concerning the NMC Flotation Technology, including any of the NMC Patents, against any Third Party, and in the event that NMC pursues enforcement of any such intellectual property right, then NMC shall bear all costs and shall reap all rewards from such enforcement, including the benefits of any settlement. 6 7. REPRESENTATIONS AND WARRANTIES/INDEMNIFICATIONS/NOTICE OF CLAIMS 7.1 Representations and Warranties of NMC. NMC represents and warrants that NMC has the right to grant the right and license to USGC under section 2.1 and the freedom from liability under section 2.2. 7.2 No Other Representations or Warranties. Other than as expressly provided in section 7.1, NMC makes no representations or warranties, either express or implied. Without limiting the generality of the foregoing, NMC makes no representations and disclaims all warranties relating to, and assumes no responsibility for: (a) the validity or enforceability of any of the NMC Patents or any claims of the NMC Patents; (b) the ability of USGC or any permitted sublicensee of USGC to practice any of the NMC Flotation Technology free from infringement or other violation of any Third Party's patent or other rights; and (c) the safety or suitability for any purpose of the NMC Flotation Technology. NMC HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, AS TO THE USEFULNESS OR PERFORMANCE OF THE NMC FLOTATION TECHNOLOGY INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 7.3 Release/Indemnification. Except as otherwise specifically provided elsewhere in this Agreement, USGC shall indemnify, defend, and hold harmless NMC and NMC's Affiliates and their respective directors, officers, employees, and agents (each an "Indemnitee"), against and from any and all losses, claims, actions, suits (including costs and reasonable attorney fees), and damages to the extent the same arise out of or are in any way connected with USGC, USGC's Affiliates' or USGC's contractors', or any of their respective employee's, agent's or representative's, acts or omissions in any way related to the subject matter of this Agreement. Furthermore, USGC hereby completely releases each Indemnitee from any responsibility for, and agrees to defend, indemnify and otherwise hold harmless each Indemnitee from and against any and all claims, liability, loss, damages, costs and expenses, including reasonable attorney fees, arising in any way from or relating in any way to exercise by USGC, or any permitted sublicensee of USGC, of the right and license under section 2.1. 7.4 Notice of Third Party Infringement. USGC shall promptly notify NMC in writing of any actions by a Third Party of which USGC becomes aware during the term of this Agreement which USGC believes is infringing one or more of the NMC Patents. 7.5 Notice of Third Party Infringement Claims. USGC shall promptly notify NMC in writing of any claim, action or suit for infringement of a patent or other intellectual property right asserted or threatened to be asserted against USGC or a permitted sublicensee of USGC during the term of this Agreement based on use by USGC or the permitted sublicensee of any portion of the NMC Flotation Technology. 7.6 Defense Costs for Third Party Infringement Claim. In the event that during the term of this Agreement a Third Party Infringement Claim is asserted against a USGC Party, then NMC shall pay legal fees of the USGC Party for defending against the Third Party Infringement Claim, provided that NMC's obligation shall be capped at a cumulative cost to NMC for all Third Party Infringement Claims at the lesser of (i) $US250,000 (two hundred fifty thousand United States dollars) or (ii) the total license fees paid to NMC pursuant to Article 3 of this Agreement; provided that in any event USGC shall provide NMC supporting written documentation (including copies of invoices for legal fees) for all legal costs for which USGC seeks payment. In each event of a Third Party Infringement Claim, the USGC Party shall keep NMC informed concerning the progress of the proceeding, the USG Party shall at the request of NMC provide NMC with copies of all documents filed in the proceeding for which dissemination is not restricted by a secrecy order for the benefit of another party in the proceeding, and the USGC Party shall at the request of NMC consult with NMC concerning defense against the Third Party Infringement Claim and consider NMC's comments in relation to pursuing the defense. In the case of the limitation on NMC's commitment in (ii) above, when any or all of the license fees aid to NMC are paid after commencement of a Third Party Infringement Claim, then to the extent that USGC has a right to payment of legal fees based on an increasing cap due to those license fees, then USGC may obtain the payment from NMC by way of adjustment to license fee payments when USGC reports and pays the relevant license fees to NMC. 7 8. CONFIDENTIALITY 8.1 Obligations of Confidentiality. Without prior written consent from NMC, USGC shall not disclose any portion of the NMC Confidential Information to others, including Affiliates of USGC, and shall not use the NMC Confidential Information for any purpose other than the purpose of this Agreement, except to the extent specifically provided in section 8.2. 8.2 Exceptions to Obligations. USGC shall be excepted from the obligations of confidentiality of section 8.1 with respect to NMC Confidential Information to the extent that the NMC Confidential Information at issue: (a) is within the public domain or enters the public domain through no fault or wrongful act of USGC or any permitted sublicense to USGC; or (b) was in the unrestricted possession of USGC prior to receipt of the information from NMC or any Affiliate of NMC or any Third Party as permitted by NMC and such prior possession is evidenced by a writing existing prior to such receipt by USGC of the information; or (c) is received by USGC from a Third Party not under an obligation of confidentiality to NMC or an Affiliate of NMC, but only to the extent rightfully permitted by the Third Party; or (d) is reasonably necessary to comply with a court order or an order from another competent legal tribunal, but only to the extent required to comply with the order and only after informing NMC of the order and providing NMC with an opportunity to obtain a protective order or other legal protection for the NMC Confidential Information at issue; or (e) is disclosed to a permitted assignee or proposed assignee of USGC under section 10.2 and the assignee first agrees in a writing delivered to the other party to be bound to the provisions of this Article 8 to the same extent as required of USGC. (f) is disclosed by USGC to any of the following Persons engaged by USGC, directly or indirectly, as reasonably necessary to design, construct, start-up, maintain and operate the Facility during the term of this Agreement, but only after such Person has agreed in writing to be bound to obligations of confidentiality at least to an extent as required of USGC under this Article 8 except not including the exceptions of subsections (e)-(g) of this section 8.2, and NMC shall be an intended beneficiary of such obligations with full right and authority to enforce such obligations: Affiliates of USGC, the Operator, engineering contractors, technical consultants and the like. (g) is disclosed by USGC or a permitted sublicensee of USGC to any regulatory authority for the purpose of obtaining appropriate permits or like authorizations in relation to the Facility, provided that the disclosure to the regulating authority shall be only to the extent required for the purpose of obtaining the necessary permits or like authorizations. 8.3 Duration of Obligations. The obligations of USGC under section 8.1 with respect to any portion of NMC Confidential Information shall continue until one of the exceptions identified in section 8.2 applies to that portion of the NMC Confidential Information, provided that with respect to exceptions 8.2(d)-(g), the obligations of confidentiality shall be relieved only to the extent required for making the limited disclosure pursuant to the exception. 8.4 Return of NMC Confidential Information. At any time after termination of this Agreement for any reason and upon request of NMC, USGC shall send to NMC all writings and other physical embodiments of NMC Confidential Information; provided that USGC legal counsel may retain one copy of the physical embodiments solely for archival purposes. 8.5 Injunctive Relief. USGC acknowledges (i) that the NMC Confidential Information is a valuable asset of NMC, (ii) that NMC has no adequate remedy at law for a breach of obligations of USGC under section 8.1, and (iii) that NMC will suffer irreparable harm as a result of such a breach. Therefore, USGC agrees that NMC shall be entitled to obtain equitable relief, including temporary and permanent injunctive relief, without the obligation of posting a bond (cash or otherwise), in the event of actual or threatened unauthorized disclosure of the NMC Confidential Information by USGC or any permitted sublicensee of USGC. 9. TERM AND TERMINATION 9.1 Term. The term of this Agreement shall commence on the Effective Date and shall continue, unless earlier terminated as provided in section 9.2, until expiration of the last-to-expire of the NMC Patents and so long thereafter as any portion of the NMC Flotation Technology is practiced within the Licensed Field pursuant to the right and license of section 2.1. 8 9.2 Termination. This Agreement may be terminated prior to expiration of the term set forth in section 9.1 as follows: (a) In the event of a material breach of this Agreement by a party ("Breaching Party"), the other party ("Aggrieved Party") may terminate this Agreement; provided, however, that prior to terminating this Agreement the Aggrieved Party shall first provide written notice of the breach to the Breaching Party, after which the Breaching Party shall have a thirty (30) day period in which to cure the breach. If the breach remains uncured after the 30 day cure period, then the Aggrieved Party may for thirty (30) days following expiration of such cure period terminate this Agreement upon written notice of the termination to the Breaching Party. In the event that the Aggrieved Party fails to provide the written notice of termination within the thirty (30) day period following the cure period, then the Aggrieved Party must provide new notice of the breach to the Breaching Party and allow a new cure period prior to thereafter terminating the Agreement based on the same breach. Any and all statutes of limitation concerning actions involving the material breach at issue shall be tolled during the cure period. Failure of USGC to timely pay to NMC any sums due to NMC hereunder shall be deemed a material breach by USGC. (b) Upon written notice by a party to the other party in the event of any of (i) initiation of any bankruptcy or insolvency proceeding by or against the other party that is not dismissed within 90 days after the initiation, (ii) appointment of a receiver for the assets of the other party, or (iii) the sale of substantially all of the assets of the other party in connection with either (i) or (ii); provided, however, that prior to voluntary initiation by the other party of a bankruptcy or insolvency proceeding, the other party shall provide reasonable advance written notice of the pending initiation to the party and the parties shall consult with each other prior to the other party initiating the proceeding. (c) USGC may terminate this Agreement at any time with at least three (3) months advance written notice of the termination to NMC. 9.3 Effect of Termination. Upon termination of this Agreement pursuant to either section 9.1 or 9.2, the following shall apply: (a) The right and license of section 2.1 and the freedom from liability of section 2.2 shall end and all use of the NMC Flotation Technology at the Facility shall cease. (b) In any event, the following provisions shall survive termination of this Agreement: (i) Articles 1, 6,7, 8 and 10 shall survive indefinitely, (ii) sections 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 shall survive until such time as NMC has received full payment of the initial license fee and payment for all ongoing royalties (including annual minimums) in relation to Licensed Concentrate and (iii) sections 5.1 and 5.2 shall survive for two (2) years following the termination. (c) Termination of this Agreement shall in no way affect the rights of the parties accruing prior to the termination or the rights of a party to seek and recover damages or other relief for any breach by the other party. 10. MISCELLANEOUS 10.1 Manner of Payment. Any amount due to NMC hereunder shall be paid to NMC at the address provided for notices hereunder, unless otherwise instructed by NMC. At the request of NMC, the payments shall be made to NMC by electronic funds transfer to an account as designated by NMC. All amounts due to NMC shall be calculated and paid in United States dollars. 10.2 Assignability. The obligations of a party shall be binding upon and the rights of the party shall inure to the benefit of permitted successors and permitted assigns of the party, provided that any purported assignment of this Agreement or any portion thereof made in violation of this section shall be void ab initio. This Agreement is not assignable, in whole or in part, by either party without the prior written consent of the other party except as specifically set forth in (a) and (b) below: (a) In the case of NMC, NMC shall be permitted to assign to any Affiliate of NMC all or any part of this Agreement, including assignment of any rights of NMC and delegation of any obligations of NMC hereunder, without prior consent of USGC. (b) In the case of USGC, provided that USGC is not in breach of this Agreement then USGC shall be 9 permitted to assign USGC's entire interest in this Agreement, including all rights and obligations of USGC hereunder, to any Person acquiring a majority equity interest, directly or indirectly, in the Tonkin Springs Property, provided that such assignment by USGC shall not be effective until the assignee has agreed in a writing signed by the assignee and delivered to NMC to be bound by the terms of this Agreement in the place of USGC. USGC shall give NMC at least thirty (30) days advance written notice prior to making such an assignment. Following proper assignment, the assignee shall be liable to NMC for all obligations of USGC, whether accruing prior to or following the assignment, and USGC shall have continuing liability to NMC to an extent as provided in subsections (b) and (c) of section 9.2 as if the Agreement had been terminated with respect to USGC as of the date of the Assignment and this continuing liability of USGC following the assignment shall be joint and several with the assignee. Following a permitted assignment by USGC, NMC shall have no further obligations under Article 4 and shall have no further obligation to pay for legal defense costs under section 7.6, unless NMC otherwise agrees in a writing signed by NMC. Acquisition by a Third Party, directly or indirectly, of a majority interest in USGC or a majority equity interest in the Tonkin Springs Property, shall be deemed an assignment of this Agreement by USGC. 10.3 Relationship of the Parties. Neither party shall be an agent of the other party for any purpose and this Agreement does not establish any type of agency, partnership or joint venture relationship between the parties, and neither party shall perform any acts to bind or to purport to bind the other party in any way or to represent that the other party is in any way responsible or liable for its acts, statements or omissions. 10.4 Notices. All notices, payments, reports and other communications provided for herein shall be in writing and delivered to the other party at the respective address below, or such other address in the United States as a party may hereafter specify in writing: If to NMC: Newmont Technical Facility 10101 East Dry Creek Road Englewood, Colorado 80112 Attention: Gary Simmons/Marc LeVier With copy to: Newmont Mining Corporation 1700 Lincoln Street, Suite 2800 Denver, Colorado 80203 Attention: General Counsel If to USGC: U.S. Gold Corporation 2201 Kipling Street, Suite 100 Lakewood, Colorado 80215-1515 Attention: William Reid A notice hereunder shall be effective as of delivery to the receiving party at the specified address. In computing a period of time following a notice under this Agreement, the date on which the notice is delivered to the receiving party shall not be counted. 10.5 Modification. The parties acknowledge and agree that this Agreement may only be modified by an instrument in writing of equal formality, signed by duly authorized representatives of the respective parties hereto. 10.6 Non-Waiver. Each party agrees that any waiver by the other party to enforce any right hereunder on any occasion shall not establish a basis for claiming a waiver of any right by the other party on any subsequent occasion. 10.7 Entire Agreement. This Agreement, together with the exhibits attached hereto and which are incorporated herein by this reference, constitutes the entire agreement and understanding of the parties relating to the subject matter hereof and this Agreement supersedes all previous communications, proposals, representations and agreements, whether oral or written, relating thereto, including the Option Agreement. 10.8 Severability. Each party agrees that, should any provision of this Agreement be determined by a court of competent jurisdiction to violate or contravene any applicable law or policy, such provision shall be severed from this Agreement and the remainder of the provisions hereof shall continue in full force and effect. 10 10.9 Controlling Law and Jurisdiction. This Agreement shall be interpreted, construed and governed in accordance with the laws of the State of Colorado, U.S.A., without reference to conflict of laws principles. All disputes arising from or relating to this Agreement shall be within the exclusive jurisdiction of the state and/or federal courts located within the State of Colorado and the parties hereby consent to such exclusive jurisdiction and waive objections to venue therein; provided, however, that to the extent necessary in order to obtain an order or an injunction outside of the United States, the parties hereby consent to jurisdiction for such a proceeding of appropriate courts or other tribunals located outside of the United States. To the extent that a state and/or federal court located within the State of Colorado refuses to exercise jurisdiction hereunder, the parties agree that jurisdiction shall be proper in any court in which jurisdiction may be obtained notwithstanding this section. 10.10 Headings. The headings of the various articles and sections of this Agreement have been inserted for convenience only and shall not be deemed to be made a part of this Agreement. IN WITNESS WHEREOF, each party hereto acknowledges that the representative named below has the authority to execute this Agreement on behalf of the respective party to form a legally binding contract and has caused this Agreement to be duly executed on its behalf. NEWMONT USA LIMITED U.S. GOLD CORPORATION Name: /s/ Douglas Scott Bare Name: /s/ William W. Reid Title: V.P., Chief Title: President Technology Officer Date: 5/31/02 Date: 5/28/02 11 EXHIBIT A Current NMC Patents: 1. U.S. Pat. No. 5,653,945, having a term expiring April 18, 2015. 2. U.S. Pat. No. 5,837,210, having a term expiring April 18, 2015. 3. U.S. Pat. No. 6,210,648, having a term expiring April 18, 2015. EXHIBIT B Calculation of Net Smelter Returns (NSR) NSR for Licensed Concentrate shall be a calculated amount based on the value of all Precious Metals and other metals of value in the Licensed Concentrate less applicable Allowable Deductions. Determination of NSR for the different situations involving sale of Licensed Concentrate and sale of Licensed Dore are as follows: (a) When Precious Metal from Licensed Concentrate is produced in the form of a Licensed Dore sold to a Third Party purchaser, the applicable value of Precious Metals And other metals shall be the monies received from the sale, and the following Allowable Deductions shall be permitted: the cost of transporting and insuring the Licensed Dore from the mill at which the Licensed Dore is produced to the point of delivery of the Licensed Dore to the Third Party purchaser. (b) When Licensed Concentrate is sold to a Third Party purchaser, then the applicable value of the Precious Metals and other metals shall be the monies received from the sale and the following Allowable Deductions shall be permitted: the cost of transporting and insuring the Licensed Concentrate from the Facility to the point of delivery to the Third Party purchaser. EX-10 14 exh10_19.txt EXHIBIT 10.19 Exhibit 10.19 ------------- SUBSCRIPTION AGREEMENT BY AND BETWEEN U.S. GOLD CORPORATION and EXCALIBUR LIMITED PARTNERSHIP dated May 31, 2002 Name of Investor: Excalibur Limited Partnership Number of Units Subscribed: 857,143 THIS SUBSCRIPTION AGREEMENT (the "Agreement") is between U.S. GOLD CORPORATION (the "Company") and EXCALIBUR LIMITED PARTNERSHIP (the "Investor") who executes this Agreement as an investor in Units of the Company, as defined below. Section 1. General. This Agreement sets forth the terms under which Investor will invest in Units of the Company. The Investor's execution of this Agreement constitutes an irrevocable agreement to purchase the number of Units of the Company subscribed. Each Unit consists of one share of US$0.10 par value common stock of the Company (the "Share") and one half of one Share purchase warrant (each whole Share Purchase Warrant, a "Warrant") as set forth in this Agreement and the Common Share Purchase Warrants to Purchase 428,572 Common Shares of the Company as set forth as Exhibit "A" hereto. Each Unit will be issued at a price of US$0.35 per Unit. Each Warrant entitles the holder to subscribe for one additional Share (a "Warrant Share") at a price of US$0.53 per Warrant Share at any time on or before the day that is 24 months from the date of this Agreement. The Company's execution of this Agreement constitutes an irrevocable agreement to sell the number of Units, Shares and the Warrant Shares of the Company to Investor. Section 2. Investor's Subscription. The Investor hereby subscribes and agrees to pay for 857,143 Units of the Company and hereby tenders the Subscription Amount in United States dollars set forth on the signature page hereof to IBK Capital Corp, as agent for the Company, in cash, wire transfer or immediately available funds to the bank account set forth in Schedule "A" hereto. Section 3. Investor Representations and Warranties. The Investor represents and warrants and agrees with the Company that: (a) Information on Company. The Investor has been furnished with the Company's Form 10-KSB/A for the year ended December 31, 2001 as filed with the Securities and Exchange Commission (the "Commission") together with all subsequently filed forms 10-QSB, 8-K, and other publicly available filings made with the Commission. In addition, the Investor has received from the Company such other information concerning its operations, financial condition and other matters as the Investor has requested in writing, and considered all factors the Investor deems material in deciding on the advisability of investing in the Units. The Investor has also been given the opportunity to ask questions of, and to receive answers from, the Company concerning additional information as the Investor desired in order to evaluate an investment in the Company; (b) Residence of Purchase. The Purchaser is a resident of Canada and not a resident of the United States, and was offered the Units outside of the United States and inside of Canada and the Investor has no present intention of becoming a resident of domiciliary of any other country, state or jurisdiction; (c) Information on Investor. The Investor is an "accredited investor", as such term is defined in Regulation D promulgated by the Commission under the Securities Act of 1933, as amended (the "1933 Act"), is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable the Investor to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Investor has the authority and is duly and legally qualified to purchase and own the Units. The Investor is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof. The information set forth on the signature page hereto regarding the Investor is accurate. 1 (d) Compliance with Securities Act. The Investor understands and agrees that the Shares and Warrant Shares have not been registered under the 1933 Act, by reason of their issuance in a transaction that does not require registration under the 1933 Act (based in part on the accuracy of the representations and warranties of Investor contained herein), and that such Shares and Warrant Shares must be held unless a subsequent disposition is registered under the 1933 Act or is exempt from such registration. (e) Company Shares Legend. The Company Shares shall bear the following legend, unless same shall have been included in an effective registration statement under the 1933 Act: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." (f) Communication of Offer. The offer to sell the Shares and Warrant Shares were directly communicated to the Investor. At no time was the Investor presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer; (g) Investment Intent. The Shares and Warrant Shares subscribed for in this Agreement are being acquired by the Investor in good faith solely for the Investor's own account, for investment purposes only, and are not being purchased with a view to, or for the resale or distribution thereof; (h) Determination. The Investor understands that no United State federal or state agency has made any finding or determination as to the fairness for investment, or any recommendation or endorsement, of the Company or the Shares or Warrant Shares; (i) Other Ownership. The Investor owns no Shares, either of record or beneficially, of the Company or any affiliate thereof; (j) Correctness of Representations. The Investor represents that the foregoing representations and warranties are true and correct as of the date hereof. In addition, the Investor undertakes to notify the Company immediately of any changes in any representation, warranty or other information related to the Investor set forth in this Agreement. The foregoing representations and warranties shall survive the Closing Date. If more than one person is executing this Agreement, each representation, warranty and undertaking in this Agreement shall be a joint and several representation, warranty and undertaking of each such person. If the Company is a partnership, corporation, trust or other entity, the Investor further represents and warrants that (a) the Investor has enclosed with this Agreement appropriate evidence of the authority of the individual executing this Agreement to act on behalf of the Investor, and (b) the Investor was not specifically formed to acquire the Shares or Warrant Shares subscribed for in this Agreement. Section 4. Company Representations and Warranties. The Company represents and warrants and agrees with the Investor that: (a) Due Incorporation. The Company has been organized under the laws of the State of Colorado, United States of America. The Company and each of its subsidiaries, if any, is a corporation or limited partnership or limited liability company duly organized, validly existing and in good standing under the laws of the respective jurisdictions of their incorporation or registration and have the requisite corporate or other power to own their properties and to carry on their business as now being conducted. The Company and each of its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a material adverse effect on the business, operations or financial condition of the Company. 2 (b) Outstanding Stock. All issued and outstanding shares of common stock of the Company and each of its subsidiaries has been duly authorized and validly issued and are fully paid and non-assessable. (c) Authority; Enforceability. This Agreement and other agreements delivered together with this Agreement or in connection herewith have been duly authorized, executed and delivered by the Company and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; and the Company has full corporate power and authority necessary to enter into this Agreement, and such other agreements and to perform its obligations hereunder and under all other agreements entered into by the Company relating hereto. (d) Additional Issuances. There are no outstanding agreements or preemptive or similar rights affecting the Company's common stock or equity and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of any shares of common stock or equity of the Company or other equity interest in any of the subsidiaries of the Company except as described in the public reports or otherwise provided Investor. (e) Consents. No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company, or any of its affiliates, the National Association of Securities Dealers, Inc. ("NASD") or the Company's Shareholders is required for execution of this Agreement, and all other agreements entered into by the Company relating thereto, including, without limitation, the issuance and sale of the Shares and Warrants Shares, and the performance of the Company's obligations hereunder and under all such other agreements. (f) No Violation or Conflict. Assuming the representations and warranties of the Investor in this Agreement are true and correct and the Investor complies with its obligations under this Agreement, neither the issuance and sale of the Shares and Warrant Shares nor the performance of the Company's obligations under this Agreement and all other agreements entered into by the Company relating thereto by the Company will: (i) violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (A) the articles of incorporation, charter or bylaws of the Company, (B) to the Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company or any of its affiliates or over the properties or assets of the Company or any of its affiliates, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company or any of its affiliates is a party, by which the Company or any of its affiliates is bound, or to which any of the properties of the Company or any of its affiliates is subject, or (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which the Company, or any of its affiliates is a party except the violation, conflict, breach, or default of which would not have a material adverse effect on the Company; or (ii) result in the creation or imposition of any lien, charge or encumbrance upon the Shares or Warrant Shares or any of the assets of the Company, its subsidiaries or any of its affiliates. (g) The Shares and Warrant Shares. The Shares and Warrant Shares upon issuance: (i) are, or will be, free and clear of any security interests, liens, claims or other encumbrances, but are subject to restrictions upon transfer under the 1933 Act and State laws; (ii) have been, or will be, duly and validly authorized and on the date of issuance, and the date the exercise of the Warrants, the 3 Warrant Shares will be duly and validly issued, fully paid and nonassessable (and if registered pursuant to the 1933 Act, and resold pursuant to an effective registration statement will be free trading and unrestricted, provided that the Investor complies with the Prospectus delivery requirements); (iii) will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company; and (iv) will not subject the holders thereof to personal liability by reason of being such holders. (h) Litigation. There is no pending or, to the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its affiliates that would affect the execution by the Company or the performance by the Company of its obligations under this Agreement, and all other agreements entered into by the Company relating hereto. To the best knowledge of the Company there are no threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its affiliates which litigation if adversely determined could have a material adverse effect on the Company. (i) Reporting Company. The Company is a publicly-held company subject to reporting obligations pursuant to Sections 15(d) and 13 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and has a class of common shares registered pursuant to Section 12(g) of the 1934 Act. The Company's common stock is listed for trading on the OTC Bulletin Board ("Bulletin Board"). Pursuant to the provisions of the 1934 Act, the Company has filed all public reports and other materials required to be filed thereunder with the Securities and Exchange Commission during the preceding twelve months. (j) No Market Manipulation. The Company has not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the common stock of the Company to facilitate the sale or resale of the Securities or affect the price at which the Shares and Warrants Shares may be issued or resold. (k) Information Concerning Company. The public reports provided the Investor contain all material information relating to the Company and its operations and financial condition as of their respective dates which information is required to be disclosed therein. Since the date of the most recent financial statements included in public documents, and there has been no material adverse change in the Company's business, financial condition or affairs not disclosed to the Investor. The public reports do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances when made. (l) Dilution. The Company's executive officers and directors have studied and fully understand the nature of the Shares and Warrant Shares being sold hereby and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue Warrant Shares upon exercise of the Warrants by Investor is binding upon the Company and enforceable, except as otherwise described in this Agreement, regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. (m) Stop Transfer. The Shares and Warrant Shares are restricted securities as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale, resale or delivery of the Shares and Warrant Shares, except as may be required by federal securities laws. (n) Defaults. Neither the Company nor any of its subsidiaries is in violation of its Articles of Incorporation or ByLaws. Other than as disclosed in public reports, neither the Company nor any of its subsidiaries is (i) in default under or in violation of any other material agreement or instrument to which it is a party or by which it or any of its 4 properties are bound or affected, which default or violation would have a material adverse effect on the Company except as otherwise disclosed in documents provided or made available to the Investor, (ii) in default with respect to any order of any court, arbitrator or governmental body or subject to or party to any order of any court or governmental authority arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters, or (iii) to its knowledge in violation of any statute, rule or regulation of any governmental authority which violation would have a material adverse effect on the Company. (o) Intentionally left blank. (p) No General Solicitation. Neither the Company, nor any of its affiliates, nor to its knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Act) in connection with the offer or sale of the Shares and Warrant Shares. (q) Listing. The Company's common stock is quoted on, and listed for trading on the Bulletin Board. The Company has not received any oral or written notice that its Common Stock will be delisted from the Bulletin Board or that the Company's common stock does not meet all requirements for the continuation of such listing. (r) No Undisclosed Liabilities. The Company has no liabilities or obligations which are material, individually or in the aggregate, which are not disclosed in public reports, other than those incurred in the ordinary course of the Company's businesses since March 31, 2002 and which, individually or in the aggregate, would not reasonably be expected to have a material adverse effect on the Company's financial condition. (s) No Undisclosed Events or Circumstances. Since March 31, 2002, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the documents provided or made available to Investor. (t) Capitalization. The authorized and outstanding capital stock of the Company as of the date of this Agreement is 18,000,000 common shares authorized of which 14,026,390 common shares are outstanding at the date of this Agreement and prior to the issuance of Shares and Warrant Shares thereunder. Except as set forth in public reports, there are no options, warrants, or rights to subscribe to, securities, rights or obligations convertible into or exchangeable for or giving any right to subscribe for any shares of capital stock of the Company. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable. (u) Correctness of Representations. The Company represents that the foregoing representations and warranties are true and correct as of the date hereof in all material respects. The foregoing representations and warranties shall survive during the course and effectiveness of this Agreement. Section 5. Regulation D Offering. This Offering is being made pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended, afforded by Rule 506 of Regulation D promulgated thereunder. The Company has provided an opinion reasonably acceptable to Investor from the Company's legal counsel opining on the availability of the Regulation D exemption as it relates to the offer and issuance of the Units. The Company will provide, at the Company's expense, such other legal opinions in the future as are reasonably necessary for the exercise of the Warrants and issuance of the Shares and Warrant Shares. Section 6. Reissuance of Shares and Warrant Shares. The Company agrees to reissue certificates representing the Shares and Warrant Shares without the legends set forth in Sections 3(e) above at such time as (a) the holder thereof is permitted to and disposes of such Shares and Warrant Shares pursuant to Rule 144(d) and/or Rule 144(k) under the 1933 Act in the opinion of counsel reasonably satisfactory to the Company, or (b) upon resale subject to an 5 effective registration statement after the Shares and Warrant Shares are registered under the 1933 Act. The Company agrees to cooperate with the Investor in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Company and its counsel receive reasonably requested written representations from the Investor and selling broker, if any. Provided the Investor provides required certifications and representation letters, if any, if the Company fails to remove any legend as required by this Section 6 (a "Legend Removal Failure"), then beginning on the tenth (10th) day following the date that the Investor has requested the removal of the legend and delivered all items reasonably required by the Company to be delivered by the Investor, the Company continues to fail to remove such legend, the Company shall pay Investor, subject to a Legend Removal Failure, as liquidated damages and not a penalty an amount equal to one percent (1%) of the Purchase Price of the Shares and/or Warrant Shares subject to a Legend Removal Failure per day that such failure continues. If during any twelve (12) month period, the Company fails to remove any legend as required by this Section 6 for an aggregate of thirty (30) days, Investor holding Units subject to a Legend Removal Failure may, at its option, require the Company to purchase all or any portion of the Units subject to a Legend Removal Failure held by Investor or assignee at a price per share equal to 120% of the applicable Purchase Price. Section 7. Covenants of the Company. The Company covenants and agrees with the Investor as follows: (a) The Company will advise the Investor, promptly after it receives notice of issuance by the Securities and Exchange Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. (b) The Company shall promptly secure the listing of the Shares and Warrant Shares upon the exercise of the Warrants upon each national securities exchange, or automated quotation system, if any, upon which shares of common stock are then listed (subject to official notice of issuance) and shall maintain such listing so long as any Warrants are outstanding. The Company will maintain the listing of its Common Stock on the NASD OTC Bulletin Board (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock (the "Principal Market")), and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company will provide the Investor copies of all notices it receives notifying the Company of the threatened and actual delisting of the Common Stock from any Principal Market. (c) The Company shall notify the Commission, NASD, and applicable state authorities, in accordance with their requirements, if any, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Shares and Warrant Shares to the Investor and promptly provide copies thereof to Investor. (d) From the date of this Agreement and until at least two (2) years after the effectiveness of the Registration Statement on Form S-3 or such other Registration Statement, the Company will (i) cause its Common Stock, the Shares and the Warrant Shares to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, (ii) comply in all respects with its reporting and filing obligations under the Exchange Act, (iii) comply with all reporting requirements that are applicable to an issuer with a class of Shares and Warrant Shares registered pursuant to Section 12(g) of the Exchange Act, and (iv) comply with all requirements related to any registration statement filed pursuant to this Agreement. The Company will use its best efforts not to take any action or file any document (whether or not permitted by the Act or the Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Acts until two (2) years after the actual effective date of the Registration Statement on Form S-3. Until the resale of the Shares and Warrant Shares by the Investor, the Company will continue the listing of the Common Stock on the Bulletin Board and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of Bulletin Board. 6 (e) The Company undertakes to reserve on behalf of the Investor, from its authorized but unissued common stock, at all times that the Warrants are outstanding, a number of common shares necessary to allow fully the exercise of all such Warrant Shares. Section 8. Covenants of the Company and Investor Regarding Indemnification. (a) The Company agrees to indemnify, hold harmless, reimburse and defend Investor, Investor's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon Investor or any such person which results, arises out of or is based upon (i) any material misrepresentation by Company or breach of any warranty by Company in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by the Company of any covenant or undertaking to be performed by the Company hereunder, or any other agreement entered into by the Company and Investor relating hereto. (b) Investor agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, affiliates, control persons against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company or any such person which results, arises out of or is based upon (i) any material misrepresentation by Investor in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by Investor of any covenant or undertaking to be performed by Investor hereunder, or any other agreement entered into by the Company and Investors relating hereto. (c) The procedures set forth in this Section 8 shall apply to the indemnifications set forth in Sections 8(a) and 8(b) above. Section 9. Registration Rights. The Company hereby grants to the Investor the registration rights as set for in the Registration Rights Agreement, attached as Exhibit B to this Agreement. (a) In connection with each registration hereunder, the Investor will furnish to the Company in writing such information and representation letters with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration covering an underwritten public offering, the Company and the Investor agree to enter into a written agreement with the managing underwriter in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. (b) The Company and the Investor agree that the Investor will suffer damages if any registration statement required under this Section 9 and the Registration Rights Agreement is not filed within 30 days of the date of this Agreement and not declared effective by the Commission within 90 days of the date of this Agreement, and maintained in the manner and within the time periods contemplated by this Section 9 and the Registration Rights Agreement, and it would not be feasible to ascertain the extent of such damages with precision. Accordingly, (i) if the Registration Statement described in this Sections 9 and the Registration Rights Agreement is not filed within 30 days of the date of this Agreement, or is not declared effective by the Commission within 90 days of the date of this Agreement, or (ii) is filed and declared effective but shall thereafter cease to be effective (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed more than thirty (30) consecutive days per event and more than two events per year defined as a period of 365 days commencing on the date the Registration Statement is declared effective) (each such event referred to in clauses (i) and (ii) of this Section 9 is referred to herein as a "Non- Registration Event"), then, for so long as such Non-Registration Event shall continue, the Company shall pay the Investor, in cash, as Liquidated Damages an amount equal to one percent (1%) per month for each month or part thereof during the pendency of such Non-Registration Event, of the purchase price of the Units sold under this Agreement. Payments to be made pursuant to this Section 9.2 shall be due and payable within ten (10) business days after demand in immediately available funds. 7 Section 10. First Right of Refusal. For a period of twelve months from the date of this Agreement, Company agrees to give Investor a first right of refusal related only to the sale by the Company of its securities (being preferred convertible stock if authorized by the shareholders of the Company, common stock and debt convertible into common stock) as specifically provided in this Section 10. This first right of refusal shall not apply to (i) currently ongoing efforts by the Company to sell an additional 2,000,000 shares of common stock for cash; or (ii) to any transactions with strategic industry investors, being entities primarily active in the business of exploration and mining for precious metals. The Company is obligated to furnish Investor written notice of a pending or contemplated sale of securities of the Company in sufficient detail of the business terms to allow the Investor to evaluate the notice. Within 24 hours of the receipt of such written notice, Investor will notify Company in writing of Investor's binding offer and agreement to purchase such securities of the Company on the same terms and conditions as those set forth in the written notice from the company. If the Investor does not respond to the written notice from the Company within the 24 hour period, or the Investor declines during that period to exercise its first right of refusal, the Company will be free to finalize and close the contemplated transactions within 45 days from the expiration date and time of the first right of refusal. Section 11. Miscellaneous. (a) Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. (b) Entire Agreement; Assignment. This Agreement along with Schedules and Exhibits thereto represents the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties. No right or obligation of either party shall be assigned by that party without prior notice to and the written consent of the other party. (c) Execution. This Agreement may be executed by facsimile transmission, and in counterparts, each of which will be deemed an original. (d) Law Governing this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of Colorado or in the federal courts located in the state of Colorado. Both parties executing this Agreement and other agreements on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. 8 (e) This Agreement may not be assigned by the Investor, and any attempt by the Investor to assign this Agreement shall make this Agreement voidable at the option of the Company. Subject to the preceding sentence, this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the Investor. (f) All pronouns contained herein and any variation thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the parties hereto may require. IN WITNESS WHEREOF, this Agreement has been executed by the undersigned Investor on the date set forth below. TOTAL SUBSCRIPTION 857,143 Units for the Purchase Price of US$.35/Unit for Aggregate US$300,000.00 EXCALIBUR LIMITED PARTNERSIP Date: May 30, 2002 By: /s/ William Hechter Title: General Partner Address: c/o Excalibur Capital Management Inc., Attention William Hechter 33 Prince Arthur Avenue Toronto, Ontario, M5R 1B2, Canada ACCEPTED BY THE COMPANY on this 30 day of May, 2002. By: /s/ William W. Reid, President 9 EX-10 15 exh10_21.txt EXHIBIT 10.21 Exhibit 10.21 ------------- U.S. GOLD CORPORATION 2002 STOCK OPTION AND STOCK GRANT PLAN August 8, 2002 2002 STOCK OPTION AND STOCK GRANT PLAN ARTICLE 1. ESTABLISHMENT AND PURPOSE 1.1. Establishment. U.S. Gold Corporation, a Colorado corporation (the "Company") hereby establishes a plan providing for long-term stock-based compensation incentive awards for the performance by certain eligible individuals of services for the Company. The plan shall be known as the U.S. Gold Corporation, 2002 Stock Option and Stock Grant Plan (the "Plan"). 1.2. Purpose. The purpose of the Plan is to advance the interests of the Company and its stockholders by enabling the Company to attract and retain persons of ability to perform services for the Company by providing an incentive to such persons through equity participation in the Company and by rewarding such persons who contribute to the achievement by the Company of its long-term economic objectives. ARTICLE 2. DEFINITIONS The following terms shall have the meanings set forth below, unless the context clearly otherwise requires: 2.1. "Agreement" means a written stock option agreement and/or stock grant agreement entered into between the Company and a Participant relating to any options and/or stock grants to such Participant, as amended, supplemented, restated or replaced from time to time. 2.2. "Board" means the board of directors of the Company. 2.3. "Change in Control" means one or more of the events described in Section 11.1 of the Plan. 2.4. "Code" means the Internal Revenue Code of 1986, as amended. 2.5. "Committee" means the persons administering the Plan, as provided in Section 3.1 of the Plan. 2.6. "Common Stock" means the Common Stock of the Company, $.10 par value per share, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.7. "Disability" means the disability of the Participant as defined in the long-term disability plan of the Company then covering the Participant or, if no such plan exists, the permanent and total disability of the Participant as defined in Section 22(e) of the Code. 2.8. "Eligible Recipients" means employees, including, without limitation, officers and directors who are also employees of the Company, upon whose judgment, initiative and efforts the Company is, or will become, largely dependent for the successful conduct of its business, including, without limitation, individuals capable of making critical technical contributions to the development of the products and services of the Company, individuals identified as successor candidates for key management positions, and individuals essential to the successful integration of business acquisitions by the Company. "Eligible Recipients" shall mean, with respect to Non-Statutory Stock Options, the Company's directors, officers, advisors, agents, independent contractors and other unrelated third persons, or, if an employee of the Company, the recipient of a Non-Statutory Stock Option pursuant to the applicable provisions of the Plan. 2.9. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.10. "Fair Market Value" means, with respect to the Common Stock, as of any date: 1 (a) if the Common Stock is listed or admitted to unlisted trading privileges on any national securities exchange or is not so listed or admitted but transactions in the Common Stock are reported on the NASDAQ National Market, the NASDAQ SmallCap Market, the OTC Bulletin Board Service, or the Bulletin Board Exchange, as quoted as the closing price on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on that date (or the preceding business day if such date is a Saturday, Sunday, or a holiday); or (b) if the Common Stock is not so listed or admitted to unlisted trading privileges or reported on the NASDAQ National Market, the NASDAQ SmallCap Market, or the OTC Bulletin Board Service, or the Bulletin Board Exchange, and bid and asked prices therefore in the over-the-counter market are reported by the NASDAQ System or the National Quotation Bureau, Inc. (or any comparable reporting service), then the average of the closing bid and asked prices quoted on that day by any two independent persons or entities making a market for the Common Stock, such persons or entities to be selected by the Committee; or (c) if the Common Stock is not so listed or admitted to unlisted trading privileges or reported on the NASDAQ National Market System or other comparable reporting service, and such bid and asked prices are not so reported, such price as the Committee determines in good faith in the exercise of its reasonable discretion. 2.11. "Incentive Stock Option" or "ISO" means a right to purchase Common Stock granted to a Participant pursuant to Article 6 of the Plan that qualifies as an incentive stock option within the meaning of Section 422 of the Code. 2.12. "Non-Statutory Stock Option" or "NSO" means a right to purchase Common Stock granted to a Participant pursuant to Article 6 of the Plan that does not qualify as an Incentive Stock Option. 2.13. "Option" means an Incentive Stock Option or a Non-Statutory Stock Option. 2.14. "Participant" (also referred to as the "Optionee") means an Eligible Recipient selected by the Committee from time to time during the term of the Plan to receive one or more Options or Stock Grants under the Plan. 2.15. "Person" means an individual, corporation, partnership, group, association or other "person" (as such term is used in Section 14(d) of the Exchange Act) other than the Company, a wholly owned subsidiary of the Company, or any employee benefit plan sponsored by the Company or a wholly owned subsidiary of the Company. 2.16. "Retirement" means the normal and approved early retirement of the Participant pursuant to and in accordance with the regular retirement/pension plan or practice of the Company then covering the Participant. 2.17. "Securities Act" means the Securities Act of 1933, as amended. 2.18. "Stock Grant" means a grant of Common Stock to a Participant. 2.19. "Tax Date" means the date any withholding tax obligation arises under the Code for a Participant with respect to an Option. ARTICLE 3. PLAN ADMINISTRATION 3.1. The Committee. The Plan shall be administered by the Board or by a committee of the Board consisting of not less than two persons; provided, however, that from and after the date on which the Company first registers a class of its equity securities under Section 12 of the Exchange Act, the Plan shall be administered by the Board in accordance with all applicable provisions of the Exchange Act and all references to "Committee" in this plan shall be deemed to mean the Board. Members of such a committee, if established, shall be appointed from time to time by the Board, shall serve at the pleasure of the Board and may resign at any time upon written notice to the Board. A majority of any such committee shall constitute a quorum, and the act of a majority of a quorum shall constitute the act of such committee. Action of such a committee may be taken without a meeting if unanimous written consent to such action is given. 2 A member of the committee may attend meetings in person or by means of telephone or other electronic communication whereby all committee members in attendance can simultaneously hear each other. Any such committee shall keep minutes of its meetings or actions by written consent and shall provide copies thereof to the Board to be kept with the corporate records of the Company. As used in the Plan, the term "committee" will refer either to the Board or to such a committee, if established. 3.2. Authority of the Committee. (a) In accordance with and subject to the provisions of the Plan, the Committee shall have the sole authority to determine the following: (i) the Eligible Recipients who shall be selected as Participants; (ii) the nature and extent of the Options to be granted to each Participant (including the number of shares of Common Stock to be subject to each Option, and the exercise price and the manner in which Options will become exercisable); (iii) the time or times when Options will be granted; (iv) the duration of each Option; (v) the restrictions and other conditions to which the exercise of Options may be subject; (vi) as well as the nature and extent of Stock Grants to be granted to each Participant (including the number of shares of Common Stock subject to such grant) consistent with the terms of the Plan and (vii) such other provisions of the Options and Stock Grants as the Committee may deem necessary or desirable and as consistent with the terms of the Plan. The Committee shall determine the form or forms of the Agreements with Participants which shall evidence the particular terms, conditions, rights and duties of the Company and the Participants with respect to Options or Stock Grants granted pursuant to the Plan, which Agreements shall be consistent with the provisions of the Plan. (b) With the consent of the Participant affected thereby, the Committee may amend or modify the terms of any outstanding Options in any manner, provided that the amended or modified terms are permitted by the Plan as then in effect. Without limiting the generality of the foregoing sentence, the Committee may, with the consent of the Participant affected thereby, modify the exercise price, number of shares or other terms and conditions of an Option, extend the term of an Option, accelerate the exercisability of an Option, accept the surrender of any outstanding Option, or, to the extent not previously exercised, authorize the grant of new Options in substitution for surrendered Options. (c) The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, revise, amend and revoke such rules and regulations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Agreement, in a manner and to the extent it shall be necessary or expedient to make the Plan or such Agreement fully effective. The Committee's decisions and determinations under the Plan need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Each determination, interpretation or other action made or taken by the Committee in good faith and pursuant to the provisions of the Plan shall be conclusive and binding for all purposes and on all persons, including, without limitation, the Company, the stockholders of the Company, the Committee and each of its members, the directors, officers and employees of the Company, and the Participants and their respective successors in interest. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option or Stock Grant granted under the Plan. ARTICLE 4. STOCK SUBJECT TO THE PLAN 4.1. Number of Shares. Subject to adjustment as provided in Section 4.3 below, the maximum number of shares of Common Stock that shall be reserved for issuance under the Plan shall be Three Million Three Hundred Thousand (3,300,000) shares of Common Stock, subject to adjustment upon changes in capitalization of the Company as provided in Section 4.3 of the Plan. The maximum number of shares authorized may also be increased from time to time by approval of the Board and, if required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of the Code or the rules of any exchange or the NASD, the stockholders of the Company. 4.2. Shares Available for Use. Shares of Common Stock that may be issued upon the exercise of Options or Stock Grants shall be applied to reduce the maximum number of shares of Common Stock remaining available for use under the Plan. Any 3 shares of Common Stock that are subject to an Option (or any portion thereof) that are retained and withheld by the Company as provided in Section 6.6 of the Plan, or which lapses, expires or for any reason is terminated unexercised shall automatically again become available for use under the Plan. 4.3. Adjustments. In the event of (a) any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, reverse stock split or combination of shares, rights offering or divestiture (including a spin-off) or any other change in the corporate structure or shares of the Company or any other corporation whose performance is relevant to the grant or vesting of an Option, (b) any purchase, acquisition, sale or disposition of a significant amount of assets or a significant business, any extraordinary dividend or any other similar transaction, or (c) any substitution by the Company of Options for, or assumption by the Company of, options of any other corporation, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) shall make such adjustment as it shall in its sole discretion deem equitable and appropriate (which determination shall be conclusive) as to the number and ki nd of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, the number, kind and exercise price of securities subject to outstanding Options; provided, however, that in the case of Incentive Stock Options, the Committee shall, to the extent not inconsistent with the best interest of the Company (such best interest to be determined in good faith by the Board in its sole discretion), use its best efforts to ensure that no adjustment under this Section 4.3 would (i) constitute a modification, extension or renewal of such Incentive Stock Option within the meaning of Section 422 and Section 425 of the Code, and the regulations promulgated by the Treasury Department thereunder, or (ii) under Section 422 of the Code and the regulations promulgated by the Treasury Department thereunder, be considered as the adoption of a new plan requiring stockholder approval. ARTICLE 5. PARTICIPATION 5.1. Generally. Participants in the Plan shall be those Eligible Recipients who, in the judgment of the Committee, have performed, are performing or during the term of an Option will perform, vital services in the management, operation and development of the Company and have significantly contributed, are significantly contributing or are expected to significantly contribute to the achievement of long-term corporate economic objectives. Participants may be granted from time to time one or more Options, as may be determined by the Committee in its sole discretion. The number, type, terms and conditions of Options granted to various Participants need not be uniform, consistent or in accordance with any plan, whether or not such Participants are similarly situated. Upon determination by the Committee that an Option is to be granted to a Participant, written notice shall be given such person, specifying the terms, conditions, rights and duties related thereto. Each Participant shall enter into an agreement with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Options shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of the related agreement with the Participant. Eligible Participants may also be granted Stock Grants by the Committee under stock grant agreements consistent with or in accordance with the Plan. 5.2. Advisors. (a) If the Company has not registered a class of its equity securities under Section 12 of the Exchange Act, any person engaged by the Company or one of its affiliated companies to render consulting or advisory services and who is compensated for such services (expressly excluding, however, any members of the Board in their capacity as directors of the Company) ("Consultants") shall not be eligible for the grant of an Option if, at the time of grant, either the offer or the sale of the Company securities to such Consultant constituted by such grant is not exempt under Rule 701 of the Securities Act ("Rule 701") because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not an actual person, or as otherwise provided by Rule 701, unless the Committee determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions. 4 (b) From and after the date on which the Company first registers a class of its equity securities under Section 12 of the Exchange Act, a Consultant shall not be eligible for the grant of a Option if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Committee determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. (c) Rule 701 and Form S-8 generally are available to consultants and advisors only if (i) they are natural persons, (ii) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent, and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain the markets with the issuer's securities. ARTICLE 6. STOCK OPTIONS 6.1. Grant. A Participant may be granted one or more Options under the Plan, and such Options shall be evidenced by an Agreement containing such terms and conditions, consistent with the other provisions of the Plan, as shall be determined by the Committee in its sole discretion. Without limiting the generality of the foregoing, the Committee may (vii) in the Agreement evidencing such Option, provide for the acceleration of the exercise date or dates of the subject Option upon the occurrence of specified events, and/or (viii) at any time prior to the complete termination of an Option, accelerate the exercise date or dates of such Option. The Committee may designate whether an Option is to be considered an Incentive Stock Option or Non-Statutory Stock Option; provided, however, that an Incentive Stock Option shall only be granted to a Participant who is an employee of the Company or one of its subsidiaries. The terms of the Agreement relating to a Non-Statutory Stock Option shall expressly provide that such Option shall not be treated as an Incentive Stock Option. Notwithstanding anything else in the Plan contained to the contrary, an Incentive Stock Option granted under the Plan to a Participant shall not be considered an Incentive Stock Option to the extent that the aggregate Fair Market Value on the date of grant of such Incentive Stock Option of all stock with respect to which incentive stock options held by such Participant, whether under the Plan or under any other plans of the Company or any of its subsidiaries, are exercisable for the first time by such Participant during any calendar year exceeds $100,000 (within the meaning of Section 422 of the Code or such other amount as may be prescribed by the Code from time to time). The determination shall be made by taking Incentive Stock Options into account in the order in which they were granted. If such excess only applies to a portion of an Incentive Stock Option, then the Committee, in its discretion, shall designate which shares shall be treated as shares to be acquired upon exercise of an incentive Stock Option. 6.2. Exercise. An Option shall become exercisable at such times and in such installments, if any, (which may be cumulative) as shall be determined by the Committee at the time the Option is granted; provided, however, that except as may otherwise be provided herein or unless otherwise determined by the Committee at or after its date of grant, no Option shall be exercisable prior to six months from its date of grant. Upon completion of its exercise period, an Option, to the extent not then exercised, shall expire. 6.3. Exercise Price. (a) Incentive Stock Options. The per share price to be paid by the Participant at the time an Incentive Stock Option is exercised shall be determined by the Committee, in its discretion, at the date of grant and shall be set forth in the Option Agreement; provided, however, that such price shall not be less than (i) 100% of the Fair Market Value of one (1) share of Common Stock on the date the Option is granted, or (ii) 110% of the Fair Market Value of one 5 (1) share of Common Stock on the date the Option is granted if, at that time the Option is granted, the Participant owns, directly or indirectly (as determined pursuant to Section 424(d) of the Code), more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary corporation of the Company). (b) Non-Statutory Stock Options. The per share price to be paid by the Participant at the time a Non-Statutory Stock Option is exercised shall be determined by the Committee in its sole discretion. 6.4. Duration. (a)Incentive Stock Options. The period during which an Incentive Stock Option may be exercised shall be fixed by the Committee in its sole discretion at the time such Option is granted; provided, however, that in no event shall such period exceed 10 years from its date of grant or, in the case of a Participant who owns, directly or indirectly (as determined pursuant to Section 424(d) of the Code), more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary of the Company), 5 years from its date of grant. (b) Non-Statutory Stock Options. The period during which a Non-Statutory Stock Option may be exercised shall be fixed by the Committee in its sole discretion at its date of grant; provided, however, that in no event shall such period exceed 10 years and one month from its date of grant. 6.5. Manner of Option Exercise. An Option may be exercised by a Participant in whole or in part from time to time, subject to the conditions contained herein and in the agreement evidencing such Option, by delivery, in person or through certified or registered mail, of written notice of exercise to the Company at its principal executive office at 2201 Kipling Street, Suite 100, Lakewood, Colorado 80215-1545, Attention: Corporate Secretary, and by paying in full the total Option exercise price for the shares of Common Stock to be purchased. Such notice of exercise shall be in a form satisfactory to the Committee and shall specify the particular Option (or portion thereof) that is being exercised and the number of shares with respect to which the Option is being exercised. Subject to compliance with the applicable provisions of the Plan, the exercise of the Option shall be deemed effective upon receipt by the Company's corporate secretary of such notice of exercise and payment complying with the terms of th e Plan and the agreement evidencing the Option. As soon as practicable after the effective exercise of the Option, the Participant shall be recorded on the stock transfer books of the Company as the owner of the shares purchased, and, subject to Section 10.1, the Company shall deliver to the Participant one (1) or more duly issued stock certificates evidencing such ownership. If a Participant exercises any Option with respect to some, but not all, of the shares of Common Stock subject to such Option, the right to exercise such Option with respect to the remaining shares shall continue until it expires or terminates in accordance with the terms. No Option shall be exercisable except in respect of whole shares and the exercise of an Option may be made with respect to no fewer than 1,000 shares at one time, unless fewer than 1,000 shares remain subject to the Option and the Option is exercised for all such remaining shares. 6.6. Payment of Exercise Price. The total purchase price of the shares to be purchased upon exercise of an Option shall be paid, to the extent permitted by applicable statutes and regulations: (i) in cash (including check, bank draft or money order); (ii) in the discretion of the Committee, at the time of the grant of the Option (A) by delivery of a promissory note (containing such terms and conditions as the Committee may in its discretion determine), (B) whole shares of the Company's Common Stock, or (C) the withholding of shares of Common Stock issuable upon such exercise of the Option; or (iii) any combination of the foregoing methods of payment or such other form of legal consideration that may be acceptable to the Committee and that is permitted for the issuance of shares under applicable law. In determining whether or upon what terms and conditions a Participant will be permitted to pay the purchase price of an Option in whole or in part in a form other than cash, the Committee may consider all rele vant facts and circumstances, including, without limitation, the tax and securities law consequences to the Participant and the Company and the financial accounting consequences to the Company. The permitted method or methods of payment of the amounts payable for an exercise of an Option, if other than in cash, shall be set forth in the applicable Agreement, and may be subject to such conditions as the Committee deems appropriate. Without limiting the generality of the foregoing, if a Participant is permitted to elect to have shares of Common Stock 6 issuable upon exercise of an Option withheld to pay all or any part of the amounts payable in connection with such exercise, then the Committee may reserve, in the applicable Agreement, the sole discretion to approve or disapprove such election at the time of exercise of such Option. 6.7. Rights as a Stockholder. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock covered by an Option until the Participant shall have become the holder of record of such shares, and no adjustments shall be made for dividends or other distributions or other rights as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine pursuant to Section 4.3 of the Plan. 6.8. Disposition of Common Stock Acquired Pursuant to the Exercise of Incentive Stock Options. Prior to making a disposition (as defined in Section 424(c) of the Code) of any shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option granted under the Plan before the expiration of two (2) years after its date of grant or before the expiration of one (1) year after its date of exercise and the date on which such shares of Common Stock were transferred to the Participant pursuant to exercise of the Option, the Participant shall send written notice to the Company of the proposed date of such disposition, the number of shares to be disposed of, the amount of proceeds to be received from such disposition and any other information relating to such disposition that the Company may reasonably request. The right of a Participant to make any such disposition shall be conditioned on the receipt by the Company of all amounts necessary to satisfy any Federal, state or local withholding and em ployment related tax requirements attributable to such disposition. The Committee shall have the right, in its sole discretion, to endorse the certificates representing such shares with a legend restricting transfer (and to cause a stop transfer order to be entered with the Company's transfer agent) until such time as the Company receives the amounts necessary to satisfy such withholding and employment-related tax requirements or until the later of the expiration of 2 years from the date of grant of such Incentive Stock Option and 1 year from its date of exercise and the date on which such shares were transferred to the Participant pursuant to the exercise of the Option. ARTICLE 7. STOCK GRANTS 7.1 Stock Grants. A Participant may be granted one or more Stock Grants under the Plan, and each such Stock Grant shall be evidenced by an Agreement containing such terms and conditions as shall be determined by the Committee in its sole discretion, consistent with the other provisions of the Plan. ARTICLE 8. EFFECT OF TERMINATION OF EMPLOYMENT OR SERVICES ON OPTIONS 8.1 Termination of Employment. Unless otherwise provided in the applicable Agreement, in the event a Participant's employment by or service with the Company is terminated for any reason, all outstanding options then held by the Participant which have been outstanding at least 6 months, and to the extent that they have vested on the date of termination shall continue to be immediately exercisable in full and remain exercisable for a period of 90 days, with respect to termination by any reason other than death or Disability, and 1 year, with respect to termination by reason of death or Disability. 8.2 Modification of Rights upon Termination. Notwithstanding the provisions of this Article, upon a Participant's termination of employment by or service with the Company the Committee may, in its sole discretion (which may be exercised before or following such termination), cause Options and Stock Appreciation Rights then held by such Participant to become exercisable in the manner determined by the Committee; provided, however, that no Option shall be exercisable after the expiration date thereof and any Incentive Stock Option that remains unexercised more than 90 days following employment or service termination by reason of Retirement or more than one year following employment or service termination by reason of Disability shall thereafter be deemed to be a Non-Statutory Option. 8.3 Date of Employment or Service Termination. For purposes of the Plan, a Participant's employment or service shall be deemed to have terminated on the effective date of such termination as determined in accordance with the standard practices of the Company; provided, however, that following a Change in Control of the Company, such date of termination shall be no earlier than the last day of the pay period covered by the Participant's final paycheck. 7 ARTICLE 9. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS 9.1. Employment or Service. Nothing in the Plan or in any Agreement evidencing an Option or a Stock Appreciation Right shall expressly or impliedly interfere with or limit in any way the right of the Company to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company for any particular period of time, in any particular capacity or at any particular level of compensation. 9.2. Nontransferability. No right or interest of any Participant in an Option or a Stock Appreciation Right prior to its exercise shall be assignable or transferable or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, including, without limitation, execution, levy, garnishment, attachment, pledge, divorce or bankruptcy. In the event of a Participant's death, a Participant's rights and interest in Options shall be transferable by testamentary will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options (to the extent permitted under the Plan) may be made by, the Participant's legal representatives, heirs or legatees. If, in the opinion of the Committee, a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for such person's affairs because of mental condition or physical condit ion, payment due such person may be made to, and such rights shall be exercised by, such person's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence satisfactory to the Committee of such status. 9.3. Non-Exclusivity of the Plan; Effect on Other Benefits. Nothing contained in the Plan is intended to amend, modify or rescind any previously approved compensation plans or programs entered into by the Company. The Plan will be construed to be in addition to any and all such other plans or programs. Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval will be construed as creating any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. ARTICLE 10. SHARE ISSUANCE AND TRANSFER RESTRICTIONS 10.1. Share Issuances. Notwithstanding any other provision of the Plan or any agreements entered into pursuant hereto, the Company shall not be required to issue or deliver any certificate for shares of Common Stock under the Plan (and an Option shall not be considered to be exercised, notwithstanding the tender by the Participant of any consideration therefore), unless and until each of the following conditions has been fulfilled: (a) There shall be in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws if the Committee, in its sole discretion, shall have determined to file, cause to become effective and maintain the effectiveness of such registration statement; or (ii) if the Committee has determined not to so register the shares of Common Stock to be issued under the Plan, (A) exemptions from registration under the Securities Act and applicable state securities laws shall be available for such issuance (as determined by counsel to the Company) and (B) there shall have been received from the Participant (or, in the event of death or disability, the Participant's heir(s) or legal representative(s)) any representations or agreements requested by the Company in order to permit such issuance to be made pursuant to such exemptions; and (b) There shall have been obtained any other consent, approval or permit from any state or federal governmental agency which the Committee shall, in its sole discretion upon the advice of counsel, deem necessary or advisable. 10.2. Share Transfers. Shares of Common Stock issued under the Plan may not be sold, assigned, transferred, pledged, encumbered or otherwise disposed of, whether voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, except pursuant to registration under the Securities Act and applicable state securities laws or pursuant to exemptions from such registrations. The Company may condition the sale, assignment, transfer, pledge, encumbrance or other disposition of such shares not issued pursuant to an effective and current registration statement under the Securities Act and all applicable state securities laws on the receipt from the party to whom the shares of Common Stock are to be so transferred of any representations or agreements requested by the Company to permit such transfer to be made pursuant to exemptions from registration under the Securities Act and applicable state securities laws. 8 10.3. Right of First Refusal. The applicable Agreement relating to any Option may contain such provisions as the Committee shall determine to the effect that if a Participant elects to sell all or any shares of Common Stock that such Participant acquired upon the exercise of an Option awarded under the Plan, then such Participant shall not sell such shares unless such Participant shall have first offered in writing to sell such shares to the Company at the lesser of (i) the Fair Market Value on a date specified in such offer (which date shall be at least 3 business days and not more than 15 business days following the date of such offer) and (ii) the price at which the Participant wishes to sell. 10.4. Legends. (a) Unless a registration statement under the Securities Act is in effect with respect to the issuance or transfer of shares of Common Stock under the Plan, each certificate representing any such shares shall be endorsed with a legend in substantially the following form, unless counsel for the Company is of the opinion as to any such certificate that such legend is unnecessary: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE LAWS, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. (b) In the event that there exists a right of first refusal as contemplated by Section 10.3, certificates representing shares issued upon exercise of Options shall bear a restrictive legend to the effect that transferability of such shares is subject to the restrictions contained in the Plan and the applicable Agreement. (c) If the Participant is the party to a buy-sell agreement with the Company, each certificate representing any shares of Common Stock issued or transferred under the Plan shall be endorsed with a legend in substantially the following form, unless counsel for the Company is of the opinion as to any such certificate that such legend is unnecessary: IN ADDITION, THE SALE, TRANSFER, ENCUMBRANCE, HYPOTHECATION, GIFT OR OTHER DISPOSITION OR ALIENATION OF SUCH SHARES OR ANY INTEREST THEREIN IS RESTRICTED BY AND SUBJECT TO THE TERMS OF A STOCKHOLDER PURCHASE AGREEMENT, A COPY OF WHICH MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE COMPANY AND ALL OF THE PROVISIONS OF WHICH ARE INCORPORATED IN THIS CERTIFICATE BY REFERENCE. BY ACCEPTING THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE, THE HOLDER AGREES TO BE BOUND BY THE TERMS OF SAID AGREEMENT. (d) The Committee, in its sole discretion, may endorse certificates representing shares issued pursuant to the exercise of Incentive Stock Options with a legend in substantially the following form: THE SALE, TRANSFER, ENCUMBRANCE, HYPOTHECATION, GIFT OR OTHER DISPOSITION OR ALIENATION OF SUCH SHARES OR ANY INTEREST THEREIN OF THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF ON OR BEFORE THE INCENTIVE STOCK OPTION HOLDING PERIODS WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY. ARTICLE 11. CHANGE IN CONTROL 11.1. Change in Control. For purposes of this Article, "Change in Control" means any one or more of the following events: (a) the sale, lease, exchange or other transfer of all or substantially all of the assets or business of the Company (in one transaction or in a series of related transactions) to any Person; (b) the approval by the stockholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; or (c) a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") pursuant to Section 13 or 15(d) of the Exchange Act, regardless of whether the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred at such time as any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% or more of the Common Stock or of the 9 combined vo ting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors. 11.2. Acceleration of Vesting. If a Change in Control of the Company shall occur, then, without any further action by the Committee or the Board, all outstanding Options which have been outstanding for at least 6 months shall become immediately exercisable in full and shall remain exercisable during the remaining term thereof, regardless of whether the Participants to whom such Options have been granted remain employed by the Company (but subject always to Article 8). Notwithstanding anything contained in the Plan to the contrary, the foregoing sentence shall not be applicable if provision shall be made in connection with the Change in Control for the assumption of outstanding Options by, or the substitution for such Options of, new options covering the stock of the surviving successor or purchasing corporation or a parent or subsidiary thereof, with appropriate adjustments as to the number, kind and option prices of shares subject to such options; 11.3. Limitation on Change in Control Payments. Notwithstanding anything in this Article above to the contrary, if, with respect to a Participant, acceleration of the vesting of an Option as provided above or the payment of cash in exchange for an Option as provided above (which acceleration or payment could be deemed a payment within the meaning of Section 280G of the Code), together with any other payments which such Participant has the right to receive from the Company or any corporation which is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute an "excess parachute payment" (as defined in Section 28OG of the Code), then the payments to such Participant shall be reduced to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that the determination as to whether any reduction in such payments under the Plan pursuant to this provision is necessary and, if so, which payment or payments will be reduced, shall be made by a nationally recognized accounting firm selected by the Participant and reasonably acceptable to the Company, and such determinations shall be conclusive and binding on the Company and the Participant with respect to its treatment of the payments for tax reporting purposes. ARTICLE 12. RIGHT TO WITHHOLD, PAYMENT OF WITHHOLDING TAXES The Company is entitled to (a) withhold and deduct from future wages of the Participant (or from other amounts which may be due and owing from the Participant to the Company), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements (i) attributable to the grant or exercise of an Option or Stock Grant or to a "disqualifying disposition" of shares of Common Stock acquired upon exercise of an Incentive Stock Option or (ii) otherwise incurred with respect to the Plan, an Option or Stock Grant, or (b) require the Participant promptly to remit the amount of such tax requirements to the Company before taking any action with respect to an Option. ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Options under the Plan shall conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no such amendment shall be effective, without approval of the stockholders of the Company, if stockholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange Act or any successor rule or Section 422 of the Code or under the applicable rules, regulations or requirements of any applicable securities exchange. No termination, suspension or amendment of the Plan shall alter or impair any outstanding Options without the consent of the Participant affected thereby; provided, however, that this sentence shall not impair the right of the Committee to take whatever action it deems appropriate under the Plan. ARTICLE 14. EFFECTIVE DATE OF THE PLAN 14.1. Effective Date. The Plan is effective as of August 8, 2002, the date it was adopted by the Board, subject to the approval of the stockholders of the Company; provided, however, that if approval of the Plan is not received by the stockholders of the Company within 12 months of the foregoing effective date of the Plan, then no Incentive Stock Options shall be issued under the Plan. 10 14.2. Duration of the Plan. The Plan shall terminate at midnight (local Denver time) on August 8, 2012, and may be terminated prior thereto by Board action, and no Option shall be granted after such termination. Notwithstanding the foregoing, no Incentive Stock Options shall be granted after the expiration of 10 years from the earlier of the date of adoption of the Plan or the date of stockholder approval. Options outstanding at Plan termination may continue to be exercised in accordance with their terms. ARTICLE 15. MISCELLANEOUS 15.1. Construction and Headings. The use of a masculine gender herein shall also include within its meaning the feminine, and the singular may include the plural, and the plural may include the singular, unless the context clearly indicates to the contrary. The headings of the Articles, Sections and their subparts in the Plan are for convenience of reading only and are not meant to be of substantive significance and shall not add or detract from the meaning of such Article, Section or subpart. 15.2. Expenses of Administration. Any and all expenses of administering the Plan shall be borne by the Company. 15.3. Public Policy. No person shall have any claim or right to receipt of an Option if, in the opinion of counsel to the Company, such receipt conflicts with law or is opposed to governmental or public policy. 15.4. Governing Law. The place of administration of the Plan shall be conclusively deemed to be within the State of Colorado, and the rights and obligations of any and all persons having or claiming to have an interest herein or hereunder or under any Option Agreement shall be governed by and construed exclusively and solely in accordance with the laws of the State of Colorado (without regard to the conflict of laws provisions of any jurisdiction), in all respects, including, without limitation, matters relating to the validity, construction, interpretation, administration, effect, enforcement and remedies of the Plan and of its rules and regulations, except to the extent that the domestic corporation laws of the Company's state of incorporation control the internal affairs of the Company. The parties agree to submit to the jurisdiction of the state and federal courts of Colorado with respect to matters relating to the Plan and agree not to raise or assert the defense that such forum is not convenient for such party. 15.5. Successors and Assigns. The Plan shall be binding upon and inure to the benefit of the successors and permitted assigns of the Company, including, without limitation, whether by way or merger, consolidation, operation of law, assignment, purchase or other acquisition of substantially all of the assets or business of the Company, and any and all such successors and assigns shall absolutely and unconditionally assume all of the Company's obligations hereunder. 15.6. Survival of Provisions. The rights, remedies, agreements, obligations and covenants of the parties contained in or made pursuant to the Plan, any agreement evidencing an Option and any other notices or agreements in connection therewith, including, without limitation, any notice of exercise of an Option, shall survive the execution and delivery of such notices and agreements and the exercise of any Option, the payment of the Option exercise price and the delivery and receipt of the Option shares, and shall remain in full force and effect. The Plan was duly adopted and approved by the Board of Directors as of August 8, 2002, and was approved by the shareholders of U.S. Gold Corporation, as of the __th day of (month), 200_. By: /s/ William W. Reid Title: President, Chief Executive Officer and Chairman of the Board of Directors 11 EX-10 16 exh10_22.txt EXHIBIT 10.22 Exhibit 10.22 ------------- U.S. GOLD CORPORATION INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as of August 8, 2002 (the "Date of Grant"), by and between U.S. Gold Corporation, a Colorado corporation (the "Company"), and WILLIAM W. REID (the "Optionee"). WITNESSETH: WHEREAS, on August 8, 2002, the Board of Directors determined that the Optionee should receive an Incentive Stock Option to purchase shares of the Company's Common Stock under the Company's 2002 Stock Option and Stock Grant Plan (the "Plan") in order to provide the Optionee with an opportunity for investment in the Company and additional incentive to pursue the success of the Company, said option to be for the number of shares, at the price per share and on the terms set forth in this Agreement; and WHEREAS, Optionee desires to receive an option on the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Grant of Incentive Stock Option. The Company hereby grants to Optionee, as a matter of separate agreement and not in lieu of salary or any other compensation for service, the right and option (the "Option") to purchase all or any part of an aggregate of 900,000 shares of reserved authorized and unissued $.10 par value Common Stock of the Company (the "Option Shares") pursuant to the terms and conditions set forth in this Agreement. This Option can not be exercised as provided herein, in whole or in part, until and unless the Plan and this Option are approved by the shareholders of the Company at a duly called and held meeting of shareholders. 2. Option Price. At any time when shares are to be purchased pursuant to the Option, the purchase price for each Option Share shall be $0.32 (the "Option Price"). 3. Option Period. The Option period shall commence as of the Date of Grant and shall terminate ten years from the Date of Grant, unless terminated earlier as provided in this Agreement. If an Optionee, for any reason, other than the Optionee's death, ceases to be employed by either the Company or a Subsidiary of the Company, any Option held by the Optionee at the time he ceases to be an employee may be exercised within 180 days after the date of such cessation, but only to the extent that the Option was exercisable according to its terms on the date of such cessation. After such 180-day period, any unexercised portion of an Option shall expire. Any Option held by an Optionee at the time of his death may be exercised by his estate, subject to any limitation otherwise applicable to such Option, only within twelve months of his death or such longer period as the Board of Directors of the Company may determine. This Option is exercisable by Optionee, cumulatively, over time, only as follows: (a) 300,000 shares on or after February 9, 2003. (b) An additional 300,000 shares on or after January 2, 2004. (c) An additional 300,000 shares on or after January 2, 2005. 4. Exercise of Option. As noted above, the Plan and the Option must be approved by the shareholders of the Company prior to any exercise of the Option. The Option can only be exercised, in whole or in part, as determined by the Board of Directors with written notice to Optionee, from reserved shares of authorized and unissued Option Shares subsequent to such approval by shareholders of the Company. (a) The Option may be exercised by delivering to the Company: (i) a Notice and Agreement of Exercise of Option, substantially in the form attached hereto as Exhibit A, specifying the number of Option Shares with respect to which the Option is exercised, and the method of payment, and 1 (ii) payment of the total purchase price of the shares upon Exercise, to the extent permitted by applicable statutes and regulations: (i) in cash (including check, bank draft or money order); (ii) by such other forms of payment as are acceptable to the Committee in its sole discretion, (iii) whole shares of the Company's Common Stock, (iv) the withholding of shares of Common Stock issuable upon such exercise of the Option; or (v) any combination of the foregoing methods of payment. Without limiting the foregoing, if a Optionee elects to have shares of Common Stock issuable upon exercise of an Option withheld to pay all or any part of the amounts payable in connection with such exercise including provision for payment of or provision for payment of any applicable withholding or similar taxes, then the Committee shall have the sole discretion to approve or disapprove such election at the time of any Exercise. (c) Promptly upon receipt of the Notice of Agreement and Exercise and the full payment of the Option Price by the Optionee the Company shall deliver to the Optionee a properly executed certificate or certificates representing the Option Shares being purchased. 5. Securities Laws Requirements. No Option Shares shall be issued unless and until, in the opinion of the Company, any applicable registration requirements of the Securities Act of 1933, any applicable listing requirements of any securities exchange on which stock of the same class is listed, and any other requirements of law or any regulatory bodies having jurisdiction over such issuance and delivery have been fully complied with. Pursuant to the terms of the Notice and Agreement of Exercise that shall be delivered to the Company upon each exercise of the Option, the Optionee shall acknowledge, represent, warrant and agree as follows: (a) All Option Shares shall be acquired solely for the account of the Optionee for investment purposes only and with no view to their resale or other distribution of any kind; (b) No Option Share shall be sold or otherwise distributed in violation of the Securities Act of 1933 or any other applicable federal or state securities laws; (c) If the Optionee is subject to reporting requirements under Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), he shall: (i) be aware that the actual accrual of any right under the Option to purchase Option Shares is an event that requires reporting on Form 4 under Section 16(a) of the Exchange Act. (ii) be aware that any sale by him or his immediate family of the Company's Common Stock within six months before or after the granting of any Option may create liability for him under Section 16(b) of the Exchange Act, (iii) consult with his counsel regarding the application of Section 16(b) of the Exchange Act prior to any exercise of the Option, and prior to any sale of the Company's Common Stock, (iv) assist the Company with the filing of a Form 3, 4 or 5 with the Securities and Exchange Commission, and (v) timely file all reports required under the federal securities laws, and (d) The Optionee shall report all sales of Option shares to the Company in writing on a form prescribed by the Company, including pre-notification in certain cases as provided in Section 6 below. The forgoing restrictions or notices thereof may be placed on the certificates representing the Option Shares purchased pursuant to the Option and the Company may refuse to issue the certificates or to transfer the shares on its books unless it is satisfied that no violation of such restrictions will occur. 6. Taxation Related Issues and Reporting Obligations. The Optionee is aware that the taxation issues related to Incentive Stock Options may be complicated and Optionee agrees to and shall seek personal tax advice regarding such issues. 2 Prior to making a disposition (as defined in Section 424(c) of the Code) of any shares of Common Stock acquired pursuant to the Exercise of this Option before the expiration of two (2) years after its date of grant and before the expiration of one (1) year after its date of exercise and the date on which such shares of Common Stock were transferred to the Optionee pursuant to exercise of the Option, the Optionee shall send written notice to the Company of the proposed date of such disposition, the number of shares to be disposed of, the amount of proceeds to be received from such disposition and any other information relating to such disposition that the Company may reasonably request. The right of a Optionee to make any such disposition shall be conditioned on the receipt by the Company of all amounts necessary to satisfy any Federal, state or local withholding and employment related tax requirements attributable to such disposition. The Committee may, in its sole discretion, endorse the certificates representing such Option shares with a legend restricting transfer (and to cause a stop transfer order to be entered with the Company's transfer agent) until such time as the Company receives the amounts necessary to satisfy such withholding and employment-related tax requirements or until the later of the expiration of 2 years from the date of grant of such Incentive Stock Option and 1 year from its date of exercise and the date on which such shares were transferred to the Participant pursuant to the exercise of the Option. 7. Transferability of Option. The Option shall not be transferable except by will or the laws of descent and distribution, and any attempt to do so shall void the Option. 8. Adjustment By Stock Split, Stock Dividend, Etc. If at any time the Company increases or decreases the number of its outstanding shares of Common Stock, or changes in any way the rights and privileges of such shares, by means of the payment of a stock dividend or the making of any other distribution on such shares payable in its Common Stock, or through a stock split or subdivision of shares, or a consolidation or combination of shares, or through a reclassification or recapitalization involving its Common Stock, the numbers, rights, and privileges of the shares of Common Stock included in the Option shall be increased, decreased or changed in like manner as if such shares had been issued and outstanding, fully paid and nonassessable at the time of such occurrence. 9. Merger or Consolidation. (a) Effect of Transaction. Upon the occurrence of any of the following events, if the notice requirements by Paragraph 8(b) has been given, the Option shall automatically terminate and be of no further force or effect whatsoever: (i) the merger or consolidation of the Company with one or more other corporations, regardless of which entity survives the transaction; (ii) the dissolution or liquidation of the Company; (iii) the appointment of a receiver for all, or substantially all, of the Company's assets or business; (iv) the appointment of a trustee for the Company after a petition has been filed for the Company's reorganization under applicable statutes; or (v) the sale, lease or exchange of all, or substantially all, of the Company's assets and business. (b) Notice of Such Occurrence. At least 15 days' prior written notice of any event described in Paragraph 8 (a), except the transactions described in Subparagraphs 8 (a) (iii) and (iv) as to which no notice shall be required, shall, at the Company's option, be given by the Company to the Optionee. After receipt of such notice, the Optionee may at any time before the occurrence of the event requiring the giving of notice exercise the unexercised portion of the Option as to all the shares covered thereby. Such notice shall be deemed to have been given when delivered personally to the Optionee or pursuant to the provisions of Paragraph 11 of this Agreement. If no such notice shall be given with respect to a transaction described in Subparagraphs 8(a) (i), (ii) or (v), the provisions of Paragraph 8(a) shall not apply and the Option shall not terminate upon the occurrence of such transaction. 3 10. Common Stock To Be Received Upon Exercise. Optionee understands that the Company is under no obligation to register the Option Shares under the Securities Act of 1933, as amended (the "Act") and that in the absence of any such registration, the Option Shares cannot be sold unless they are sold pursuant to an exemption from registration under the Act. The Company is under no obligation to comply, or to assist the Optionee in complying with any exemption from such registration requirement, including supplying the Optionee with any information necessary to permit routine sales of the Stock under Rule 144 of the Securities and Exchange Commission. Optionee also understands that with respect to Rule 144, routine sales of securities made in reliance upon such Rule can only be made in limited amounts in accordance with the terms and conditions of the Rule, and that in cases in which the Rule is inapplicable, compliance with either Regulation A or another disclosure exemption under the Act will be required. Thus, the Option Shares will have to be held indefinitely in the absence of registration under the Act or an exemption from registration. Furthermore, the Optionee fully understands that the Option Shares have not been registered under the Act and that they will be issued in reliance upon an exemption which is available only if Optionee acquires such shares for investment and not with a view to distribution. Optionee is familiar with the phrase "acquired for investment and not with a view to distribution" as it relates to the Act and the special meaning given to such term in various release of the Securities and Exchange Commission. 11. Privilege of Ownership. Optionee shall not have any of the rights of a shareholder with respect to the shares covered by the Option except to the extent that one or more certificates for such shares shall be delivered to him upon exercise of the Option. 12. Notices. Any notices required or permitted to be given under this Agreement shall be in writing and they shall be deemed to be given upon receipt by sender of sender's return receipt for acknowledgement of delivery of said notice by postage prepaid registered mail. Such notice shall be addressed to the party to be notified as shown below: Company: U.S. Gold Corporation 2201 Kipling St., Suite 100 Lakewood, Colorado 80215-1545 Optionee: At the address listed below his name on the last page of this Agreement. Any party may change its address for purposes of this paragraph by giving the other parties written notice of the new address in the manner set forth above. 13. General Provisions. This instrument: (a) contains the entire agreement among the parties, (b) may not be amended nor may any rights hereunder be waived except by an instrument in writing signed by the parties sought to be charged with such amendment or waiver, (c) shall be constructed in accordance with, and governed by, the laws of the State of Colorado, (d) shall be binding upon and shall inure to the benefit of the parties and their respective personal representatives and assigns, except as above set forth and (e) shall be subject to the provisions of the Plan, which Plan provisions shall govern if they conflict herein and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural as the identity of the parties hereto may require. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below, to be effective as of the date and year first above written. U.S. GOLD CORPORATION Date: August 8, 2002 By: /s/ William F. Pass, Vice President and Secretary OPTIONEE: Date: August 8, 2002 By: /s/ William W. Reid Address: 25 downing Street, #1-501 Denver, CO 80218 4 EX-10 17 exh10_23.txt EXHIBIT 10.23 Exhibit 10.23 ------------- U.S. GOLD CORPORATION INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as of August 8, 2002 (the "Date of Grant"), by and between U.S. Gold Corporation, a Colorado corporation (the "Company"), and WILLIAM F. PASS (the "Optionee"). WITNESSETH: WHEREAS, on August 8, 2002, the Board of Directors determined that the Optionee should receive an Incentive Stock Option to purchase shares of the Company's Common Stock under the Company's 2002 Stock Option and Stock Grant Plan (the "Plan") in order to provide the Optionee with an opportunity for investment in the Company and additional incentive to pursue the success of the Company, said option to be for the number of shares, at the price per share and on the terms set forth in this Agreement; and WHEREAS, Optionee desires to receive an option on the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Grant of Incentive Stock Option. The Company hereby grants to Optionee, as a matter of separate agreement and not in lieu of salary or any other compensation for service, the right and option (the "Option") to purchase all or any part of an aggregate of 375,000 shares of reserved authorized and unissued $.10 par value Common Stock of the Company (the "Option Shares") pursuant to the terms and conditions set forth in this Agreement. This Option can not be exercised as provided herein, in whole or in part, until and unless the Plan and this Option are approved by the shareholders of the Company at a duly called and held meeting of shareholders. 2. Option Price. At any time when shares are to be purchased pursuant to the Option, the purchase price for each Option Share shall be $0.32 (the "Option Price"). 3. Option Period. The Option period shall commence as of the Date of Grant and shall terminate ten years from the Date of Grant, unless terminated earlier as provided in this Agreement. If an Optionee, for any reason, other than the Optionee's death, ceases to be employed by either the Company or a Subsidiary of the Company, any Option held by the Optionee at the time he ceases to be an employee may be exercised within 180 days after the date of such cessation, but only to the extent that the Option was exercisable according to its terms on the date of such cessation. After such 180-day period, any unexercised portion of an Option shall expire. Any Option held by an Optionee at the time of his death may be exercised by his estate, subject to any limitation otherwise applicable to such Option, only within twelve months of his death or such longer period as the Board of Directors of the Company may determine. This Option is exercisable by Optionee, cumulatively, over time, only as follows: (a) 125,000 shares on or after February 9, 2003. (b) An additional 125,000 shares on or after January 2, 2004. (c) An additional 125,000 shares on or after January 2, 2005. 4. Exercise of Option. As noted above, the Plan and the Option must be approved by the shareholders of the Company prior to any exercise of the Option. The Option can only be exercised, in whole or in part, as determined by the Board of Directors with written notice to Optionee, from reserved shares of authorized and unissued Option Shares subsequent to such approval by shareholders of the Company. (a) The Option may be exercised by delivering to the Company: (i) a Notice and Agreement of Exercise of Option, substantially in the form attached hereto as Exhibit A, specifying the number of Option Shares with respect to which the Option is exercised, and the method of payment, and 1 (ii) payment of the total purchase price of the shares upon Exercise, to the extent permitted by applicable statutes and regulations: (i) in cash (including check, bank draft or money order); (ii) by such other forms of payment as are acceptable to the Committee in its sole discretion, (iii) whole shares of the Company's Common Stock, (iv) the withholding of shares of Common Stock issuable upon such exercise of the Option; or (v) any combination of the foregoing methods of payment. Without limiting the foregoing, if a Optionee elects to have shares of Common Stock issuable upon exercise of an Option withheld to pay all or any part of the amounts payable in connection with such exercise including provision for payment of or provision for payment of any applicable withholding or similar taxes, then the Committee shall have the sole discretion to approve or disapprove such election at the time of any Exercise. (c) Promptly upon receipt of the Notice of Agreement and Exercise and the full payment of the Option Price by the Optionee the Company shall deliver to the Optionee a properly executed certificate or certificates representing the Option Shares being purchased. 5. Securities Laws Requirements. No Option Shares shall be issued unless and until, in the opinion of the Company, any applicable registration requirements of the Securities Act of 1933, any applicable listing requirements of any securities exchange on which stock of the same class is listed, and any other requirements of law or any regulatory bodies having jurisdiction over such issuance and delivery have been fully complied with. Pursuant to the terms of the Notice and Agreement of Exercise that shall be delivered to the Company upon each exercise of the Option, the Optionee shall acknowledge, represent, warrant and agree as follows: (a) All Option Shares shall be acquired solely for the account of the Optionee for investment purposes only and with no view to their resale or other distribution of any kind; (b) No Option Share shall be sold or otherwise distributed in violation of the Securities Act of 1933 or any other applicable federal or state securities laws; (c) If the Optionee is subject to reporting requirements under Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), he shall: (i) be aware that the actual accrual of any right under the Option to purchase Option Shares is an event that requires reporting on Form 4 under Section 16(a) of the Exchange Act. (ii) be aware that any sale by him or his immediate family of the Company's Common Stock within six months before or after the granting of any Option may create liability for him under Section 16(b) of the Exchange Act, (iii) consult with his counsel regarding the application of Section 16(b) of the Exchange Act prior to any exercise of the Option, and prior to any sale of the Company's Common Stock, (iv) assist the Company with the filing of a Form 3, 4 or 5 with the Securities and Exchange Commission, and (v) timely file all reports required under the federal securities laws, and (d) The Optionee shall report all sales of Option shares to the Company in writing on a form prescribed by the Company, including pre-notification in certain cases as provided in Section 6 below. The forgoing restrictions or notices thereof may be placed on the certificates representing the Option Shares purchased pursuant to the Option and the Company may refuse to issue the certificates or to transfer the shares on its books unless it is satisfied that no violation of such restrictions will occur. 2 6. Taxation Related Issues and Reporting Obligations. The Optionee is aware that the taxation issues related to Incentive Stock Options may be complicated and Optionee agrees to and shall seek personal tax advice regarding such issues. Prior to making a disposition (as defined in Section 424(c) of the Code) of any shares of Common Stock acquired pursuant to the Exercise of this Option before the expiration of two (2) years after its date of grant and before the expiration of one (1) year after its date of exercise and the date on which such shares of Common Stock were transferred to the Optionee pursuant to exercise of the Option, the Optionee shall send written notice to the Company of the proposed date of such disposition, the number of shares to be disposed of, the amount of proceeds to be received from such disposition and any other information relating to such disposition that the Company may reasonably request. The right of a Optionee to make any such disposition shall be conditioned on the receipt by the Company of all amounts necessary to satisfy any Federal, state or local withholding and employment related tax requirements attributable to such disposition. The Committee may, in its sole discretion, endorse the certificates representing such Option shares with a legend restricting transfer (and to cause a stop transfer order to be entered with the Company's transfer agent) until such time as the Company receives the amounts necessary to satisfy such withholding and employment-related tax requirements or until the later of the expiration of 2 years from the date of grant of such Incentive Stock Option and 1 year from its date of exercise and the date on which such shares were transferred to the Participant pursuant to the exercise of the Option. 7. Transferability of Option. The Option shall not be transferable except by will or the laws of descent and distribution, and any attempt to do so shall void the Option. 8. Adjustment By Stock Split, Stock Dividend, Etc. If at any time the Company increases or decreases the number of its outstanding shares of Common Stock, or changes in any way the rights and privileges of such shares, by means of the payment of a stock dividend or the making of any other distribution on such shares payable in its Common Stock, or through a stock split or subdivision of shares, or a consolidation or combination of shares, or through a reclassification or recapitalization involving its Common Stock, the numbers, rights, and privileges of the shares of Common Stock included in the Option shall be increased, decreased or changed in like manner as if such shares had been issued and outstanding, fully paid and nonassessable at the time of such occurrence. 9. Merger or Consolidation. (a) Effect of Transaction. Upon the occurrence of any of the following events, if the notice requirements by Paragraph 8(b) has been given, the Option shall automatically terminate and be of no further force or effect whatsoever: (i) the merger or consolidation of the Company with one or more other corporations, regardless of which entity survives the transaction; (ii) the dissolution or liquidation of the Company; (iii) the appointment of a receiver for all, or substantially all, of the Company's assets or business; (iv) the appointment of a trustee for the Company after a petition has been filed for the Company's reorganization under applicable statutes; or (v) the sale, lease or exchange of all, or substantially all, of the Company's assets and business. (b) Notice of Such Occurrence. At least 15 days' prior written notice of any event described in Paragraph 8 (a), except the transactions described in Subparagraphs 8 (a) (iii) and (iv) as to which no notice shall be required, shall, at the Company's option, be given by the Company to the Optionee. After receipt of such notice, the Optionee may at any time before the occurrence of the event requiring the giving of notice exercise the unexercised portion of the Option as to all the shares covered thereby. Such notice shall be deemed to have been given when delivered personally to the Optionee or pursuant to the provisions of Paragraph 11 of this Agreement. If no such notice shall be given with respect to a transaction described in Subparagraphs 8(a) (i), (ii) or (v), the provisions of Paragraph 8(a) shall not apply and the Option shall not terminate upon the occurrence of such transaction. 3 10. Common Stock To Be Received Upon Exercise. Optionee understands that the Company is under no obligation to register the Option Shares under the Securities Act of 1933, as amended (the "Act") and that in the absence of any such registration, the Option Shares cannot be sold unless they are sold pursuant to an exemption from registration under the Act. The Company is under no obligation to comply, or to assist the Optionee in complying with any exemption from such registration requirement, including supplying the Optionee with any information necessary to permit routine sales of the Stock under Rule 144 of the Securities and Exchange Commission. Optionee also understands that with respect to Rule 144, routine sales of securities made in reliance upon such Rule can only be made in limited amounts in accordance with the terms and conditions of the Rule, and that in cases in which the Rule is inapplicable, compliance with either Regulation A or another disclosure exemption under the Act will be required. Thus, the Option Shares will have to be held indefinitely in the absence of registration under the Act or an exemption from registration. Furthermore, the Optionee fully understands that the Option Shares have not been registered under the Act and that they will be issued in reliance upon an exemption which is available only if Optionee acquires such shares for investment and not with a view to distribution. Optionee is familiar with the phrase "acquired for investment and not with a view to distribution" as it relates to the Act and the special meaning given to such term in various release of the Securities and Exchange Commission. 11. Privilege of Ownership. Optionee shall not have any of the rights of a shareholder with respect to the shares covered by the Option except to the extent that one or more certificates for such shares shall be delivered to him upon exercise of the Option. 12. Notices. Any notices required or permitted to be given under this Agreement shall be in writing and they shall be deemed to be given upon receipt by sender of sender's return receipt for acknowledgement of delivery of said notice by postage prepaid registered mail. Such notice shall be addressed to the party to be notified as shown below: Company: U.S. Gold Corporation 2201 Kipling St., Suite 100 Lakewood, Colorado 80215-1545 Optionee: At the address listed below his name on the last page of this Agreement. Any party may change its address for purposes of this paragraph by giving the other parties written notice of the new address in the manner set forth above. 13. General Provisions. This instrument: (a) contains the entire agreement among the parties, (b) may not be amended nor may any rights hereunder be waived except by an instrument in writing signed by the parties sought to be charged with such amendment or waiver, (c) shall be constructed in accordance with, and governed by, the laws of the State of Colorado, (d) shall be binding upon and shall inure to the benefit of the parties and their respective personal representatives and assigns, except as above set forth and (e) shall be subject to the provisions of the Plan, which Plan provisions shall govern if they conflict herein and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural as the identity of the parties hereto may require. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below, to be effective as of the date and year first above written. U.S. GOLD CORPORATION Date: August 8, 2002 By: /s/ William W. Reid, President and Chairman of the Board OPTIONEE: Date: August 8, 2002 By: /s/ William F. Pass Address: 14820 W. 58th Pl. Golden, CO 80403 4 EX-10 18 exh10_24.txt EXHIBIT 10.24 Exhibit 10.24 ------------- U.S. GOLD CORPORATION INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as of August 8, 2002 (the "Date of Grant"), by and between U.S. Gold Corporation, a Colorado corporation (the "Company"), and DAVID C. REID (the "Optionee"). WITNESSETH: WHEREAS, on August 8, 2002, the Board of Directors determined that the Optionee should receive an Incentive Stock Option to purchase shares of the Company's Common Stock under the Company's 2002 Stock Option and Stock Grant Plan (the "Plan") in order to provide the Optionee with an opportunity for investment in the Company and additional incentive to pursue the success of the Company, said option to be for the number of shares, at the price per share and on the terms set forth in this Agreement; and WHEREAS, Optionee desires to receive an option on the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Grant of Incentive Stock Option. The Company hereby grants to Optionee, as a matter of separate agreement and not in lieu of salary or any other compensation for service, the right and option (the "Option") to purchase all or any part of an aggregate of 750,000 shares of reserved authorized and unissued $.10 par value Common Stock of the Company (the "Option Shares") pursuant to the terms and conditions set forth in this Agreement. This Option can not be exercised as provided herein, in whole or in part, until and unless the Plan and this Option are approved by the shareholders of the Company at a duly called and held meeting of shareholders. 2. Option Price. At any time when shares are to be purchased pursuant to the Option, the purchase price for each Option Share shall be $0.32 (the "Option Price"). 3. Option Period. The Option period shall commence as of the Date of Grant and shall terminate ten years from the Date of Grant, unless terminated earlier as provided in this Agreement. If an Optionee, for any reason, other than the Optionee's death, ceases to be employed by either the Company or a Subsidiary of the Company, any Option held by the Optionee at the time he ceases to be an employee may be exercised within 180 days after the date of such cessation, but only to the extent that the Option was exercisable according to its terms on the date of such cessation. After such 180-day period, any unexercised portion of an Option shall expire. Any Option held by an Optionee at the time of his death may be exercised by his estate, subject to any limitation otherwise applicable to such Option, only within twelve months of his death or such longer period as the Board of Directors of the Company may determine. This Option is exercisable by Optionee, cumulatively, over time, only as follows: (a) 250,000 shares on or after February 9, 2003. (b) An additional 250,000 shares on or after January 2, 2004. (c) An additional 250,000 shares on or after January 2, 2005. 4. Exercise of Option. As noted above, the Plan and the Option must be approved by the shareholders of the Company prior to any exercise of the Option. The Option can only be exercised, in whole or in part, as determined by the Board of Directors with written notice to Optionee, from reserved shares of authorized and unissued Option Shares subsequent to such approval by shareholders of the Company. (a) The Option may be exercised by delivering to the Company: (i) a Notice and Agreement of Exercise of Option, substantially in the form attached hereto as Exhibit A, specifying the number of Option Shares with respect to which the Option is exercised, and the method of payment, and 1 (ii) payment of the total purchase price of the shares upon Exercise, to the extent permitted by applicable statutes and regulations: (i) in cash (including check, bank draft or money order); (ii) by such other forms of payment as are acceptable to the Committee in its sole discretion, (iii) whole shares of the Company's Common Stock, (iv) the withholding of shares of Common Stock issuable upon such exercise of the Option; or (v) any combination of the foregoing methods of payment. Without limiting the foregoing, if a Optionee elects to have shares of Common Stock issuable upon exercise of an Option withheld to pay all or any part of the amounts payable in connection with such exercise including provision for payment of or provision for payment of any applicable withholding or similar taxes, then the Committee shall have the sole discretion to approve or disapprove such election at the time of any Exercise. (c) Promptly upon receipt of the Notice of Agreement and Exercise and the full payment of the Option Price by the Optionee the Company shall deliver to the Optionee a properly executed certificate or certificates representing the Option Shares being purchased. 5. Securities Laws Requirements. No Option Shares shall be issued unless and until, in the opinion of the Company, any applicable registration requirements of the Securities Act of 1933, any applicable listing requirements of any securities exchange on which stock of the same class is listed, and any other requirements of law or any regulatory bodies having jurisdiction over such issuance and delivery have been fully complied with. Pursuant to the terms of the Notice and Agreement of Exercise that shall be delivered to the Company upon each exercise of the Option, the Optionee shall acknowledge, represent, warrant and agree as follows: (a) All Option Shares shall be acquired solely for the account of the Optionee for investment purposes only and with no view to their resale or other distribution of any kind; (b) No Option Share shall be sold or otherwise distributed in violation of the Securities Act of 1933 or any other applicable federal or state securities laws; (c) If the Optionee is subject to reporting requirements under Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), he shall: (i) be aware that the actual accrual of any right under the Option to purchase Option Shares is an event that requires reporting on Form 4 under Section 16(a) of the Exchange Act. (ii) be aware that any sale by him or his immediate family of the Company's Common Stock within six months before or after the granting of any Option may create liability for him under Section 16(b) of the Exchange Act, (iii) consult with his counsel regarding the application of Section 16(b) of the Exchange Act prior to any exercise of the Option, and prior to any sale of the Company's Common Stock, (iv) assist the Company with the filing of a Form 3, 4 or 5 with the Securities and Exchange Commission, and (v) timely file all reports required under the federal securities laws, and (d) The Optionee shall report all sales of Option shares to the Company in writing on a form prescribed by the Company, including pre-notification in certain cases as provided in Section 6 below. The forgoing restrictions or notices thereof may be placed on the certificates representing the Option Shares purchased pursuant to the Option and the Company may refuse to issue the certificates or to transfer the shares on its books unless it is satisfied that no violation of such restrictions will occur. 2 6. Taxation Related Issues and Reporting Obligations. The Optionee is aware that the taxation issues related to Incentive Stock Options may be complicated and Optionee agrees to and shall seek personal tax advice regarding such issues. Prior to making a disposition (as defined in Section 424(c) of the Code) of any shares of Common Stock acquired pursuant to the Exercise of this Option before the expiration of two (2) years after its date of grant and before the expiration of one (1) year after its date of exercise and the date on which such shares of Common Stock were transferred to the Optionee pursuant to exercise of the Option, the Optionee shall send written notice to the Company of the proposed date of such disposition, the number of shares to be disposed of, the amount of proceeds to be received from such disposition and any other information relating to such disposition that the Company may reasonably request. The right of a Optionee to make any such disposition shall be conditioned on the receipt by the Company of all amounts necessary to satisfy any Federal, state or local withholding and employment related tax requirements attributable to such disposition. The Committee may, in its sole discretion, endorse the certificates representing such Option shares with a legend restricting transfer (and to cause a stop transfer order to be entered with the Company's transfer agent) until such time as the Company receives the amounts necessary to satisfy such withholding and employment-related tax requirements or until the later of the expiration of 2 years from the date of grant of such Incentive Stock Option and 1 year from its date of exercise and the date on which such shares were transferred to the Participant pursuant to the exercise of the Option. 7. Transferability of Option. The Option shall not be transferable except by will or the laws of descent and distribution, and any attempt to do so shall void the Option. 8. Adjustment By Stock Split, Stock Dividend, Etc. If at any time the Company increases or decreases the number of its outstanding shares of Common Stock, or changes in any way the rights and privileges of such shares, by means of the payment of a stock dividend or the making of any other distribution on such shares payable in its Common Stock, or through a stock split or subdivision of shares, or a consolidation or combination of shares, or through a reclassification or recapitalization involving its Common Stock, the numbers, rights, and privileges of the shares of Common Stock included in the Option shall be increased, decreased or changed in like manner as if such shares had been issued and outstanding, fully paid and nonassessable at the time of such occurrence. 9. Merger or Consolidation. (a) Effect of Transaction. Upon the occurrence of any of the following events, if the notice requirements by paragraph 8(b) has been given, the Option shall automatically terminate and be of no further force or effect whatsoever: (i) the merger or consolidation of the Company with one or more other corporations, regardless of which entity survives the transaction; (ii) the dissolution or liquidation of the Company; (iii) the appointment of a receiver for all, or substantially all, of the Company's assets or business; (iv) the appointment of a trustee for the Company after a petition has been filed for the Company's reorganization under applicable statutes; or (v) the sale, lease or exchange of all, or substantially all, of the Company's assets and business. (b) Notice of Such Occurrence. At least 15 days' prior written notice of any event described in Paragraph 8 (a), except the transactions described in Subparagraphs 8 (a) (iii) and (iv) as to which no notice shall be required, shall, at the Company's option, be given by the Company to the Optionee. After receipt of such notice, the Optionee may at any time before the occurrence of the event requiring the giving of notice exercise the unexercised portion of the Option as to all the shares covered thereby. Such notice shall be deemed to have been given when delivered personally to the Optionee or pursuant to the provisions of Paragraph 11 of this Agreement. If no such notice shall be given with respect to a transaction 3 described in Subparagraphs 8(a) (i), (ii) or (v), the provisions of Paragraph 8(a) shall not apply and the Option shall not terminate upon the occurrence of such transaction. 10. Common Stock To Be Received Upon Exercise. Optionee understands that the Company is under no obligation to register the Option Shares under the Securities Act of 1933, as amended (the "Act") and that in the absence of any such registration, the Option Shares cannot be sold unless they are sold pursuant to an exemption from registration under the Act. The Company is under no obligation to comply, or to assist the Optionee in complying with any exemption from such registration requirement, including supplying the Optionee with any information necessary to permit routine sales of the Stock under Rule 144 of the Securities and Exchange Commission. Optionee also understands that with respect to Rule 144, routine sales of securities made in reliance upon such Rule can only be made in limited amounts in accordance with the terms and conditions of the Rule, and that in cases in which the Rule is inapplicable, compliance with either Regulation A or another disclosure exemption under the Act will be required. Thus, the Option Shares will have to be held indefinitely in the absence of registration under the Act or an exemption from registration. Furthermore, the Optionee fully understands that the Option Shares have not been registered under the Act and that they will be issued in reliance upon an exemption which is available only if Optionee acquires such shares for investment and not with a view to distribution. Optionee is familiar with the phrase "acquired for investment and not with a view to distribution" as it relates to the Act and the special meaning given to such term in various release of the Securities and Exchange Commission. 11. Privilege of Ownership. Optionee shall not have any of the rights of a shareholder with respect to the shares covered by the Option except to the extent that one or more certificates for such shares shall be delivered to him upon exercise of the Option. 12. Notices. Any notices required or permitted to be given under this Agreement shall be in writing and they shall be deemed to be given upon receipt by sender of sender's return receipt for acknowledgement of delivery of said notice by postage prepaid registered mail. Such notice shall be addressed to the party to be notified as shown below: Company: U.S. Gold Corporation 2201 Kipling St., Suite 100 Lakewood, Colorado 80215-1545 Optionee: At the address listed below his name on the last page of this Agreement. Any party may change its address for purposes of this paragraph by giving the other parties written notice of the new address in the manner set forth above. 13. General Provisions. This instrument: (a) contains the entire agreement among the parties, (b) may not be amended nor may any rights hereunder be waived except by an instrument in writing signed by the parties sought to be charged with such amendment or waiver, (c) shall be constructed in accordance with, and governed by, the laws of the State of Colorado, (d) shall be binding upon and shall inure to the benefit of the parties and their respective personal representatives and assigns, except as above set forth and (e) shall be subject to the provisions of the Plan, which Plan provisions shall govern if they conflict herein and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural as the identity of the parties hereto may require. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below, to be effective as of the date and year first above written. U.S. GOLD CORPORATION Date: August 8, 2002 By: /s/ William W. Reid, President and Chairman of the Board OPTIONEE: Date: August 8, 2002 By: /s/ David C. Reid Address: 2201 Quitman Street Denver, CO 80212 4 EX-23 19 exh23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement of U.S. Gold Corporation on Amendment No. 2 to Form SB-2, of our report dated March 19, 2002, on our audits of the consolidated balance sheet, and related statements of operations, changes in shareholders' equity and cash flows for U.S. Gold Corporation as of and for the years ended December 31, 2001 and 2000, which report is included in the Annual Report on Form 10-KSB, as amended. /s/ Stark Winter Schenkein & Co., LLP December 5, 2002 Denver, Colorado -----END PRIVACY-ENHANCED MESSAGE-----