Filed Pursuant to Rule 424(b)(3)
Registration No.s 333-133565, 333-129939 and 333-123216
PROSPECTUS SUPPLEMENT
Number 2
to
Prospectus dated May 22, 2006
of
CAPITAL GOLD CORPORATION
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This prospectus supplement no. 2 supplements the information provided in our
prospectus dated May 22, 2006 and supplement no. 1 dated June 19, 2006. This
prospectus supplement should be read in conjunction with that Prospectus, which
is to be delivered with this prospectus supplement.
The date of this Prospectus Supplement is August 16, 2006.
Project Finance Credit Facility
On August 15, 2006, we entered into a credit agreement (the "Credit
Agreement") involving our wholly-owned subsidiaries Minera Santa Rita S. de R.L.
de C.V. ("MSR") and Oro de Altar S. de R.L. de C.V. ("Oro"), as borrowers, us,
as guarantor, and Standard Bank PLC ("Standard Bank"), as the lender and the
offshore account holder. Under the Credit Agreement, MSR and Oro have agreed to
borrow money in an aggregate principal amount of up to US$12.5 million (the
"Loan") for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico (the "Mine"). We are guaranteeing
the repayment of the loan and the performance of the obligations under the
Credit Agreement. The Loan is scheduled to be repaid in fourteen quarterly
payments with the first principal payment due after certain Mine start-up
production and performance criteria are satisfied, which we believe will occur
in the first calendar quarter of 2008. The Loan bears interest at LIBOR plus
4.00%, with LIBOR interest periods of 1, 2, 3 or 6 months and with interest
payable at the end of the applicable interest period.
The Credit Agreement contains covenants customary for a project financing
loan, including but not limited to restrictions (subject to certain exceptions)
on incurring additional debt, creating liens on our property, disposing of any
assets, merging with other companies and making any investments. We are required
to meet and maintain certain financial covenants, including (i) a debt service
coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt service
coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage ratio of
at least 1.6 to 1.0, (iv) a project life coverage ratio of at least 2.0 to 1.0
and (v) a minimum reserve tail. We are also required to maintain a certain
minimum level of unrestricted cash, and upon meeting certain Mine start-up
production and performance criteria, MSR and Oro will be required to maintain a
specified amount of cash as a reserve for debt repayment.
The Loan will be secured by all of the tangible and intangible assets and
property owned by MSR and Oro pursuant to the terms of a Mortgage Agreement, a
Non-Possessory Pledge Agreement, an Account Pledge Agreement and certain other
agreements to be entered into in Mexico (the "Mexican Collateral Documents").
MSR and Oro will not be able to borrow under the Credit Agreement until the
Mexican Collateral Documents have been formalized under Mexican law. As
additional collateral for the Loan, we, together with our subsidiary, Leadville
Mining & Milling Holding Corporation, will pledge all of our ownership interest
in MSR and Oro. In addition to these collateral arrangements, MSR and Oro will
be required to deposit all proceeds of the Loan and all cash proceeds received
from operations and other sources in an offshore, controlled account with
Standard Bank. Absent a default under the loan documents, MSR and Oro may use
the funds from this account for specific purposes such as approved project costs
and operating costs.
As part of the fee for entering into and closing the Credit Agreement, we
have issued to Standard Bank 1,150,000 shares of our restricted common stock and
a warrant for the purchase of 12,600,000 shares of our common stock at an
exercise price of $0.317 per share, expiring on the earlier of (a) December 31,
2010 or (b) the date one year after the repayment of the Credit Agreement. We
have agreed to register for resale the foregoing shares and shares issuable upon
exercise of the warrant.
Rights Agreement
On August 14, 2006, our Board of Directors declared a dividend (the
"Dividend") of one Series B common share purchase right (a "Right") for each
outstanding share of common stock, par value $.0001 per share. The Dividend is
payable to holders of record on August 14, 2006. In connection with the
Dividend, we entered into a Rights Agreement with American Stock Transfer &
Trust Company as Rights Agent (the "Rights Agreement"), specifying the terms of
the Rights.
2
The Rights will impose a significant penalty upon any person or group that
acquires beneficial ownership of 20% or more of our company's outstanding common
stock without the prior approval of the Board. The Rights Agreement provides an
exemption for any person who is, as of August 15, 2006, the beneficial owner of
20% or more of our outstanding common stock, so long as such person does not,
subject to certain exceptions, acquire additional shares of our common stock
after that date. The Rights Agreement will not interfere with any merger or
other business combination approved by the Board.
The following is a summary of the terms of the Rights Agreement.
The Rights. The Rights will initially trade with, and will be inseparable
from, our existing common stock. The Rights are evidenced only by certificates
that represent shares of existing common stock. New Rights will accompany any
new shares of common stock we issue until the Distribution Date described below.
Exercise Price. Each Right will allow its holder to purchase from us one
one-thousandth of a share of Series B Common Stock (a "Series B Share") for
$3.00 once the Rights become exercisable. This portion of a Series B Share will
give the stockholder dividend and liquidation rights that are senior, but
generally similar, to those carried by one share of common stock, and one
one-thousandth of the voting rights of one share of common stock. Prior to
exercise, the Right does not give its holder any dividend, voting or liquidation
rights.
Exercisability. The Rights will not be exercisable until
o 10 days after the public announcement that a person or group
has become an "Acquiring Person" by obtaining beneficial
ownership of 20% or more of our existing common stock, or, if
earlier,
o 10 business days (or a later date determined by the Board
before any person or group becomes an Acquiring Person) after
a person or group begins a tender or exchange offer which, if
completed, would result in that person or group becoming an
Acquiring Person.
The date when the Rights become exercisable is referred to as the
"Distribution Date." Until that date, the common stock certificates will also
evidence the Rights, and any transfer of shares of common stock will constitute
a transfer of Rights. After that date, the Rights will separate from the common
stock and be evidenced by book-entry credits or by Rights certificates that we
will mail to all eligible holders of common stock. Any Rights held by an
Acquiring Person are void and may not be exercised.
Consequences Of A Person Or Group Becoming An Acquiring Person.
o Flip In. If a person or group becomes an Acquiring Person, all
holders of Rights except the Acquiring Person may, for $3.00,
purchase shares of our common stock with a market value of
$6.00, based on the market price of the common stock prior to
such acquisition.
o Flip Over. If we are later acquired in a merger or similar
transaction after the Distribution Date, all holders of Rights
except the Acquiring Person may, for $3.00, purchase shares of
the acquiring corporation with a market value of $6.00, based
on the market price of the acquiring corporation's stock prior
to such merger.
3
Series B Share Provisions. Each one one-thousandth of a Series B Share, if
issued:
o will not be redeemable;
o will entitle holders to quarterly dividend payments of $0.001
per each one-thousandth of a Series B Share, or an amount
equal to the dividend paid on one share of our existing common
stock, whichever is greater;
o will entitle holders upon liquidation either to receive $1.00
per one-thousandth of a Series B Share or an amount equal to
the payment made on one share of our existing common stock,
whichever is greater;
o will have one one-thousandth of the voting power of one share
of our existing common stock;
o if shares of our existing common stock are exchanged via
merger, consolidation, or a similar transaction, will entitle
holders to a per share payment equal to the payment made on
one share of such common stock.
The value of one one-thousandth of a Series B Share should be roughly
approximate to the value of one share of our existing common stock.
Expiration. The Rights will expire on August 15, 2016.
Redemption. The Board may redeem the Rights for $0.001 per Right at any
time before any person or group becomes an Acquiring Person. If the Board
redeems any Rights, it must redeem all of the Rights. Once the Rights are
redeemed, the only right of the holders of Rights will be to receive the
redemption price of $0.001 per Right. The redemption price will be adjusted if
we effect a stock split or a dividend of common stock.
Exchange. After a person or group becomes an Acquiring Person, but before
an Acquiring Person owns 50% or more of our outstanding common stock, the Board
of Directors may extinguish the Rights by exchanging one share of the existing
common stock or an equivalent security for each Right, other than Rights held by
the Acquiring Person.
Anti-Dilution Provisions. The Board of Directors may adjust the purchase
price of the Series B Shares, the number of Series B Shares issuable and the
number of outstanding Rights to prevent dilution that may occur from a stock
dividend, a stock split, a reclassification of the Series B Shares or common
stock. No adjustments to the exercise price of less than 1% will be made.
Amendments. The terms of the Rights Agreement may be amended by the Board
of Directors without the consent of the holders of the Rights. After a person or
group becomes an Acquiring Person, the Board of Directors may not amend the
agreement in a way that adversely affects holders of the Rights.
Stockholder Approval. The Rights Agreement is effective immediately, but
will be terminated unless approved by a majority of our stockholders at a
meeting held on or prior to February 4, 2007, and any other applicable
stockholder ratification requirements of the Toronto Stock Exchange are
satisfied at such meeting.
4
By-Law Revisions
On August 14, 2006, the Board effected certain amendments to our bylaws.
The amendments:
o eliminate the ability of holders of 10% or more of our common
stock to cause us to call a special stockholders' meeting;
o require stockholders that seek to bring business before a
meeting of stockholders, including nominations of candidates
for election as directors, to provide notice of such business
to us, and certain other information, within a specified
period prior to the meeting;
o authorize the Board of Directors to determine the record date
applicable to any proposed stockholder action to be taken by
written consent without a meeting, and require us to appoint
an independent inspector to the review the validity and
sufficiency of any consents received in connection with any
such proposed action; and
o amend and restate the provisions of the bylaws relating to
indemnification, in particular by specifying certain
procedural aspects of any claim for indemnification and making
clear that our directors and officers may be entitled to the
advancement of expenses with respect to any proceeding where
indemnification may be sought, subject to the requirements of
applicable law.
Amendment of Mining Contract
On August 2, 2006, we amended the November 24, 2005 Mining Contract
between our subsidiary, Minera Santa Rita S.A. de C.V. ("MSR"), and Sinergia
Obras Civiles y Mineras, S.A. de C.V. ("Sinergia"). Pursuant to the amendment,
MSR's right to deliver the Notice to Proceed to Sinergia is extended to November
1, 2006. Provided that this Notice is delivered to Sinergia on or before that
date, with a specified date of commencement of the Work (as defined in the
contract) not later than February 1, 2007, the mining rates set forth in
Appendix A of the contract still apply; subject to adjustment for the rate of
inflation between September 23, 2005 and the date of commencement of the Work.
We also agreed to advance $200,000 of the $520,000 payable when the Work
commences under Section 5.8 of the contract.
Employment Agreements
Effective July 31, 2006, the last day of our fiscal year, we entered into
employment agreements with the following executive officers: Gifford A.
Dieterle, our President and Treasurer, Roger A. Newell, our Vice President of
Development, Jack V. Everett, our Vice President of Exploration, and Jeffrey W.
Pritchard, our Vice President of Investor Relations.
The agreements run for a period of three years and automatically renew for
successive one-year periods unless we or the executive provides the other party
with written notice of our or his intent not to renew at least 30 days prior to
the expiration of the then current employment period.
Mr. Dieterle is entitled to a base annual salary of at least $180,000 and
each of the other executives is entitled to a base annual salary of at least
$120,000. Each executive is entitled to a bonus or salary increase in the sole
discretion of our board of directors. In addition, each of the executives
received two year options to purchase an aggregate of 250,000 shares of our
common stock at an exercise price of $0.32 per share (the closing price on July
31, 2006).
5
We have the right to terminate any executive's employment for cause or on
30 days' prior written notice without cause or in the event of the executive's
disability (as defined in the agreements). The agreements automatically
terminate upon an executive's death. "Cause" is defined in the agreements as (1)
a failure or refusal to perform the services required under the agreement; (2) a
material breach by executive of any of the terms of the agreement; or (3)
executive's conviction of a crime that either results in imprisonment or
involves embezzlement, dishonesty, or activities injurious to us or our
reputation. In the event that we terminate an executive's employment without
cause or due to the disability of the executive, the executive will be entitled
to a lump sum severance payment equal to one month's salary, in the case of
termination for disability, and up to 12 month's salary (depending upon years of
service), in the case of termination without cause.
Each executive has the right to terminate his employment agreement on 60
days' prior written notice or, in the event of a material breach by us of any of
the terms of the agreement, upon 30 days' prior written notice. In the event of
a claim of material breach by us of the agreement, the executive must specify
the breach and our failure to either (i) cure or diligently commence to cure the
breach within the 30 day notice period, or (ii) dispute in good faith the
existence of the material breach. In the event that an agreement terminates due
to our breach, the executive is entitled to severance payments in equal monthly
installments beginning in the month following the executive's termination equal
to three month' salary plus one additional month's salary for each year of
service to us. Severance payments cannot exceed 12 month's salary.
In conjunction with the employment agreements, our board of directors
deeming it essential to the best interests of our stockholders to foster the
continuous engagement of key management personnel and recognizing that, as is
the case with many publicly held corporations, a change of control might occur
and that such possibility, and the uncertainty and questions which it might
raise among management, might result in the departure or distraction of
management personnel to the detriment of our company and our stockholders,
determined to reinforce and encourage the continued attention and dedication of
members of our management to their engagement without distraction in the face of
potentially disturbing circumstances arising from the possibility of a change in
control of our company, we entered into identical agreements regarding change in
control with the executives. Each of the agreements regarding change in control
continues through December 31, 2009 and extends automatically to the third
anniversary thereof unless we give notice to the executive prior to the date of
such extension that the agreement term will not be extended. Notwithstanding the
foregoing, if a change in control occurs during the term of the agreements, the
term of the agreements will continue through the second anniversary of the date
on which the change in control occurred. Each of the agreements entitles the
executive to change of control benefits, as defined in the agreements and
summarized below, upon his termination of employment with us during a potential
change in control, as defined in the agreements, or after a change in control,
as defined in the agreements, when his termination is caused (1) by us for any
reason other than permanent disability or cause, as defined in the agreement (2)
by the executive for good reason as defined in the agreements or, (3) by the
executive for any reason during the 30 day period commencing on the first date
which is six months after the date of the change in control. Each executive
would receive a lump sum cash payment of three times his base salary and
outplacement benefits. Each agreement also provides that the executive is
entitled to a payment to make him whole for any federal excise tax imposed on
change of control or severance payments received by him.
6