ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth information regarding persons serving on the Company's Board of Directors, and persons nominated to serve on the Company's Board of Directors. Each Director serves a three-year term. Pursuant to the Company's Articles, the election of directors is on a rotational basis so that, as nearly as possible, the terms of the office of one-third of the directors expire at each annual general meeting. Under the British Columbia Company Act, a majority of the Directors must be Canadian residents.
- -------------------- (1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of Environmental Committee. (4) Member of Executive Committee. (5) Member of Corporate Governance and Nominating Committee.
EXECUTIVE OFFICERS
The Company's executive officers are appointed annually by the Board of Directors to serve for the ensuing year or until the successors have been appointed. Information regarding the Company's executive officers, as of April 30, 1998, is included under the caption "Executive Officers of the Company" appearing in Part I of this Annual Report on Form 10-K. The following former executive officers served the Company during some or all of fiscal year 1997 that have since left:
PHILLIPS S. BAKER, JR. joined the Company in January 1994, as Vice President, Finance and Chief Financial Officer. Prior to joining Pegasus, Mr. Baker worked seven years for Battle Mountain Gold Company, most recently as Treasurer. He also worked as a public accountant for Arthur Andersen & Company. He is an Attorney and Certified Public Accountant. Mr. Baker left the Company in March 1998.
TERRY D. BAUER joined the Company in October 1990 and was appointed Vice President, Environmental and Governmental Affairs in April 1994. Prior to joining Pegasus, he served one year as Manager of Reclamation Services for Morrison-Knudsen, Inc. and eight years as Vice President of Sunbelt Mining Company, a mineral resource subsidiary of Public Service Company of New Mexico, with responsibility for engineering and environmental management. Mr. Bauer left the Company in October 1997.
ERIC B. OVLEN joined the Company in October 1994 as Vice President, Administration. Mr. Ovlen brought 20 years of general management, administration, and human resources experience with multinational companies to Pegasus. Mr. Ovlen spent the last five years before he joined the Company, as Vice President of Administration at Oki Semiconductor of Sunnyvale, California. Mr. Ovlen left the Company in October 1997.
JAMES P. GEYER joined the Company in 1987 and was appointed Vice President, Operations in October 1995. Prior to joining the Company, Mr. Geyer worked 13 years for ASARCO and AMAX in various operating and engineering positions. Mr. Geyer is a mining engineer from the Colorado School of Mines. Mr. Geyer left the Company in February 1997.
FAMILY RELATIONSHIPS
There are no family relationships between any of the nominees, directors or executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Under the securities laws of the United States, the Company's directors and executive officers, and any persons holding more than 10 percent of the Company's Common Shares, are required to report their initial ownership of the Company's Common Shares and any subsequent changes in that ownership to the Securities and Exchange Commission (the "Commission") and the U.S. Stock Exchange upon which the Company's Common Shares are listed for trading. Throughout 1997 and until they were delisted on January 16, 1998, the Company's Common Shares traded in the U.S. on the American Stock Exchange. Specific due dates for these reports have been established and the Company is required to disclose in this Proxy Statement and Information Circular any failure to file by these dates. No Company officer or director has failed to timely file any such reports in 1997. In making these disclosures, the Company has relied solely on written representations of its directors and executive officers and copies of the reports that they have filed with the Commission.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Under the Securities Exchange Act of 1934, as amended, and certain rules promulgated thereunder, the Company is required to disclose in this Annual Report the involvement of the Company's directors, director nominees and executive officers in certain legal proceedings, including bankruptcy proceedings under U.S. bankruptcy laws affecting the Company. On January 16, 1998, the Company filed a Voluntary Petition for Relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code before the U.S. Bankruptcy Court in Reno, Nevada. The circumstances surrounding that filing are discussed in "Items 1 and 2 - Business and Properties."
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table provides certain summary information concerning compensation paid or accrued by the Company and its subsidiaries for the fiscal year ended December 31, 1997, to or on behalf of the Company's Chief Executive Officer and each of the six other most highly compensated executive officers of the Company (four of which remained executive officers at the end of the Company's fiscal year and all of which are hereafter referred to as the "Named Executive Officers"). The table also discloses their compensation for the years 1995 and 1996.
SUMMARY COMPENSATION TABLE
- -------------------- (1) Amounts shown are U.S. dollars and include cash and non-cash compensation paid to or accrued on behalf of the Named Executive Officers, as well as amounts earned but deferred at the election of those officers. (2) Amounts shown include tax reimbursement payments and, to the extent such payments exceeded the lesser of $50,000 or 10 percent of such Named Executive Officer's total annual salary and bonus, perquisites and other personal benefits or property received from the Company by any Named Executive Officer for the last fiscal year. (3) Amounts shown in this column for the last fiscal year are derived from the following: Mr. Nennecker: annual Company payment to defined contribution plans ("DCP") of $7,125 and Company paid life insurance premiums of $4,488; (ii) Mr. Baker: annual
Company payment to the DCP of $7,125 and Company paid life insurance premiums of $409; (iii) Mr. Lonergan: annual Company payment to the DCP of $7,125 and Company paid life insurance premiums of $1,693; (iv) Mr. Bauer: annual Company payments to the DCP of $7,125, severance and outplacement payment of $410,770, and Company paid life insurance premiums of $1,006; (v) Mr. Clark: annual Company payments to the DCP of $1,041 and Company paid life insurance premiums of $420; (vi) Mr. Burkhart: annual payments to the DCP of $6,948 and Company paid life insurance premiums of $588; (vii) Mr. Ovlen: annual Company payments to the DCP of $7,125, severance and outplacement payment of $399,030, and Company paid life insurance premiums of $3,921. (4) Mr. Baker left the Company in March 1998. (5) Mr. Bauer left the Company in October 1997. (6) Mr. Ovlen left the Company in October 1997.
STOCK OPTIONS, STOCK APPRECIATION RIGHTS, STOCK AWARDS, AND UNIT AWARDS
The following table contains information concerning the grant of stock options under the Company's 1997 Stock Plan to the Named Executive Officers. During 1997, the Company did not grant any stock appreciation rights, or award stock or units, to the Named Executive Officers.
OPTION GRANTS IN 1997
- -------------------- (1) The 1997 Stock Plan (the "1997 Plan"), which became effective on January 8, 1997, provides for the granting of stock options, stock awards, stock appreciation rights and unit awards to officers and employees of the Company and its subsidiaries. The 1997 Plan is administered by the Compensation Committee of the Board.
Under the terms of the 1997 Plan, stock options may be granted in the form of incentive stock options (as defined in Section 422 of the Internal Revenue Code) or non-qualified-qualified stock options. Options granted are generally exercisable for up to ten (10) years following the date of grant at exercise prices equal to the fair market value of the Common Shares, as determined by reference to the closing price on a recognized stock exchange, on the date of the grant.
Payment of the exercise price of an option may be made in cash or, with the consent of the Compensation Committee, in Common Shares or a combination thereof. Options may be subject to such additional or different terms and conditions not inconsistent with the 1997 Plan as are prescribed by the Compensation Committee. The Compensation Committee has the power to permit an acceleration of the exercise terms of an option granted pursuant to the 1997 Plan upon such circumstances, and subject to such terms and conditions, as the Committee deems appropriate, including a change in control of the Company.
Options granted in 1997 were granted for a term of seven years with 25 percent of the option shares covered thereby becoming exercisable on the grant date (subject to insider trading rules) and with an additional 25 percent of the option shares becoming exercisable on each anniversary date, with full vesting occurring on the third anniversary date. Under the terms of the Company's 1997 Plan, the Compensation Committee retains discretion, subject to plan limits (and with the approval of The Toronto Stock Exchange and the Montreal Exchange), to modify the terms of outstanding options, and to reprice the options.
The 1997 Stock Plan also permits the Compensation Committee to authorize the issuance of stock appreciation rights, stock awards and unit awards. No stock appreciation rights were granted and no stock awards or unit awards were made in 1997.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides information, with respect to the Named Executive Officers, concerning the exercise of options during the year ended December 31, 1997, and unexercised options held as of the end of 1997:
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
- -------------------- (1) Market value of underlying securities at December 31, 1997, minus the exercise price of "in-the-money" options.
REPRICING, REPLACEMENT OR CANCELLATION AND REGRANT OF OPTIONS
The Company did not adjust or amend the exercise price of stock options previously awarded to any of the Named Executive Officers during 1997.
LONG-TERM INCENTIVE PLANS
The Company did not grant any long-term incentive compensation to any of the Named Executive Officers during 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Lindsay D. Norman (Chairman), Douglas R. Cook, Peter R. Kutney, and Michael A. Grandin. None of the Compensation Committee members serve or have served as officers or employees of the Company or its subsidiaries.
DIRECTORS' FEES AND OPTIONS
Each Director who is not an employee of the Company receives an annual Director's fee of $15,000 and an annual meeting fee of $20,000 regardless of the number of Board or committee meetings scheduled. Mr. Schulte, the Chairman of the Board, receives an additional annual fee of $21,000. Committee chairmen of the Audit, Compensation, Environmental and Corporate Governance and Nominating Committees (other than
Mr. Schulte) are paid an additional $5,000 annually. Directors are reimbursed for their travel and other expenses incurred in attending Board and committee meetings.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with each of the Named Executive Officers and certain other executive officers. The agreements, except as discussed below, provide for an immediate benefit to the employee upon termination by the Company without cause, by the employee for good reason, upon the death or disability of the employee or upon termination after a Change of Control, as defined in the agreements. The agreements provide that the employee will receive a lump sum amount equal to twice his current salary and employment search assistance upon termination for other than cause. The employee will receive a lump sum amount equal to two and one-half times his current annual salary if termination other than for cause occurs following a Change of Control, except for Mr. Nennecker, who will receive a lump sum amount equal to three times his current annual compensation, which includes bonus. If the employee dies or is disabled, compensation equal to six months' salary will be paid. The agreements also provide that after a Change in Control, all options will become immediately vested and require that other benefits, such as life and health insurance, be continued for a period of 12 months (24 months on termination other than for cause following a Change of Control). In addition, upon termination following a Change of Control, the Company will provide relocation benefits and price protection equal to the original purchase price plus improvements on the sale of the employee's residence. The term "Change of Control" is defined, for purposes of the agreements, as an event whereby any person, corporation, or other entity or group acquires, directly or indirectly, securities of the Company representing 20 percent of the combined voting power of the Company's then outstanding voting securities, or two incumbent directors are replaced by individuals who are not supported by management. These employment agreements are executory contracts, and under the Bankruptcy Laws may be assumed, rejected, or renegotiated. The contracts are currently being renegotiated.
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE
OVERVIEW OF COMPENSATION POLICY AND COMPONENTS
The Company's compensation policy as established by its Board is intended to provide competitive compensation to all employees, giving consideration to the relative contribution and performance of each individual employee. It is the Company's policy to compensate its executive officers at levels consistent with industry norms, primarily in the form of base salary, together with incentive compensation at targeted percentages of base salary. In addition, it is the Company's policy to grant stock options annually to each of its executive officers in amounts based upon the officer's responsibility and accountability so as to align their interests with the creation of shareholder value and to encourage their continuation with the Company. The precious metals mining industry is competitive with respect to recruitment and retention of qualified personnel; accordingly, during 1997 the Company's management acted to ensure that the Company's compensation practices were competitive with other producers of precious metals, thereby enabling it to attract and retain key employees.
For 1997, executive compensation consisted of three components: base salary, annual incentive opportunity, and long-term incentives (including stock options). Determining the compensation levels of the Company's executive officers is the responsibility of the Board, through its Compensation Committee (the "Committee"), which has overall responsibility for the Company's compensation policies to senior management. The Committee makes recommendations to the Board as to the salaries, incentive opportunities, and stock options awarded to the Company's Chief Executive Officer (the "CEO") and other executive officers.
In 1996, the Committee retained the services of an independent consultant to assist the Committee in setting base salary and incentive awards for the CEO and the executive officers by providing advice and survey information with respect to compensation paid by 13 medium-to-large-sized mining companies, which generally produce in excess of 200,000 ounces of gold annually (the "Comparison Group"). The Committee believes that the Comparison Group provides a more meaningful comparison than the broad-based peer group used in the performance graph because the Comparison Group companies are similar in size to the Company and compete directly with the Company for qualified personnel.
BASE SALARIES
For 1997, base salary ranges for the CEO and the other executive officers were established based upon surveys of similar positions in the Comparison Group. Placement within the range reflects the Committee's evaluation and assessment of the individual performance of each executive officer, time in position, and the overall financial condition of the Company. Base salaries are generally set at a level which is approximately equal to the 50th percentile of the comparable position in the Comparison Group.
INCENTIVE COMPENSATION
The Committee determined that the goals of the Company's compensation policies would be achieved if the Company's executive officers were given the opportunity to earn, when performance warranted, cash compensation at levels that would place them at or about the 75th percentile with respect to overall compensation received by executive officers holding comparable positions with companies in the Comparison Group. Accordingly, the Committee determined that the CEO should be eligible for an incentive opportunity target of 80 percent of base salary, each Senior Vice President eligible for an incentive opportunity of 50 percent of base salary, each Vice President eligible for an incentive opportunity target of 44 percent of base salary, and the other officers were eligible for an incentive opportunity target of 30 percent of base salary.
In late 1995, the Committee adopted new annual and long-term incentive plans for executives designed to motivate executives to focus on and successfully manage those activities which have the greatest impact on the creation of shareholder value. These plans, which were effective for 1997, are driven by three fundamental performance measures ("value drivers") which the Committee believes have a direct impact on the creation of shareholder value: increased production, increased ore reserves, and increased cash available from growth.
The Annual Incentive Plan provides executives the opportunity to earn annual performance units, which are redeemed at the end of each year. One-half of the executives' target unit award is fixed at the beginning of the plan year, based on predetermined Company performance levels associated with each value driver: cash flow for growth, production, and net reserve increases.
In addition, variable units may be earned by an executive by meeting certain individual objectives in support of the three value drivers. An executive may earn up to two times his or her fixed unit award, depending on the level of accomplishment of his or her individual objectives.
The Value Creation Incentive Plan provides a long-term award opportunity for sustained performance by meeting three-year performance objectives tied to the three value drivers. The Plan creates a weighted market capitalization value for the Company based on its current levels of cash flow, production, and reserves. Participants receive value units commensurate with their accountability and responsibility for long-term value creation. The value units will increase or decrease in value over the three-year term of the grant, depending on whether cash flow, production, and reserves are increased or eroded. Participants will receive any increase in value of the units in cash, stock, stock options, or a combination of these.
Because of the financial condition of the Company, the Committee determined that no incentive compensation would be paid to the executive officers employed at year-end. In the fourth quarter, Mr. Nennecker received an amount equal to his target bonus as a measure to secure his retention through the Company's financial difficulties. Bonuses were paid to Messrs. Bauer and Ovlen as part of their respective severance packages.
STOCK OPTIONS, STOCK APPRECIATION RIGHTS, STOCK GRANTS AND UNIT GRANTS
Stock options are granted each year to the Company's employees, including the CEO and the Named Executive Officers, to encourage management of the Company from the perspective of an owner with an equity interest in the business, and to encourage the employees to continue as employees of the Company. Stock options granted to all employees eligible to receive awards, including the CEO and each Named Executive Officer, are based on the employee's overall position of responsibility and accountability, taking into account the participant's recent performance and ability to effect long-term value creation. In addition, each time an employee changes positions and assumes increased responsibilities, the Committee awards the
employee options based on the Committee's subjective assessment of the nature and importance of the increased responsibilities assumed.
On February 18, 1997, the Committee elected to award Mr. Nennecker options to purchase 136,600 Common Shares, under the 1997 Stock Plan, providing that the Plan was approved by the shareholders at the Company's Annual General Meeting on April 30, 1997. At this time, other Named Executive Officers, except Mr. Clark, received annual grants to purchase from 34,800 to 41,300 Common Shares, under the 1997 Stock Plan, providing that the Plan was approved by the shareholders at the Company's Annual General Meeting on April 30, 1997. The exercise price of such options was $8.375 per share, the fair market value of the underlying Common Shares on the date the options were granted, based on the closing price of the Common Shares on the American Stock Exchange on such date. On May 1, 1997, the Committee elected to award Mr. Clark options to purchase 75,000 Common Shares. The exercise price of such option was $6.875 per share, the fair market value of the underlying Common Shares on the date the options were granted, based on the closing price of the Common Shares on the American Stock Exchange on such date.
POLICY WITH RESPECT TO THE DEDUCTIBILITY OF COMPENSATION
To qualify the deductibility of compensation for Untied States federal income tax purposes, it is the Company's policy to meet the requirements for exclusion from the limit on deductibility imposed by Section 162(m) of the Internal Revenue Code by paying performance-based compensation, if possible. With respect to cases in which it is not possible to meet the requirements for exclusion from Section 162(m) of the Code, the Company intends to minimize any award of compensation in excess of the limit.
COMPENSATION COMMITTEE
Lindsay D. Norman, Chairman Douglas R. Cook Peter R. Kutney Michael A. Grandin
FIVE YEAR TOTAL RETURN GRAPH
The following chart compares total cumulative shareholder return for $100 invested in Common Shares of the Company on December 31, 1992 with the cumulative total return of the S&P 500 Index and the TSE Gold & Silver Index for the five most recently completed fiscal years.
[GRAPH]
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the outstanding Common Shares of the Company, as of April 30, 1998, by each person known to the Company to own beneficially more than 5 percent of such Common Shares, and by each Director, each nominee for Director, and each officer named in the summary compensation table set out under the heading "Compensation Summary" below. Except as otherwise indicated, each named beneficial owner has voting and investment power with respect to the shares set forth opposite the owner's name.
- -------------------- (*) Less than 1 percent.
(1) Includes Common Shares subject to options exercisable within 60 days of May 1, 1998 as follows: Mr. Bell: 24,533 shares; Mr. Bradshaw: 17,278 shares; Mr. Cook: 55,233 shares; Mr. Grandin 22,933 shares; Mr. Kutney: 99,900 shares; Mr. Nennecker: 516,275 shares; Dr. Norman 56,800 shares; Mr. Petrina: 32,600 shares; Mr. Schulte: 42,300 shares; Mr. Clark: 18,750 shares; Mr. Baker: 224,825 shares; Mr. Bauer: -0- shares; Mr. Lonergan: 103,750 shares; Mr. Burkhart: 42,275 shares; Mr. Ovlen:-0- shares. (2) Based on 41,834,086 Common Shares outstanding as of May 1, 1998. (3) The business address of Alleghany Corporation is 375 Park Avenue, New York, NY 10152. (4) Includes the Named Executive Officers and two other executive officers.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 1997, Mr. Nennecker was indebted to the Company under a non-interest bearing loan made to him in connection with his employment. The largest amount of debt outstanding in this regard during such year was $458,481, and the amount outstanding as of May 7, 1998, was $30,126.
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data. Consolidated Financial Statements of the Company and its subsidiaries are incorporated under Item 8 of this Form 10-K.
(a)(2) No financial statement schedules are required
(a)(3) Exhibits
The exhibit numbers in the following list correspond to the numbers assigned to such exhibits in Item 601 of Regulation S-K. The exhibit numbers noted by an asterisk (*) indicate exhibits actually filed with this Annual Report on Form 10-K. All other exhibits are incorporated by reference into this Annual Report on Form 10-K.
PEGASUS GOLD INC. FORM 10-K DECEMBER 31, 1997
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) and the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.
PEGASUS GOLD INC.
Date: May 15, 1998 By: /s/ Werner G. Nennecker ------------- ------------------------------------------ Werner G. Nennecker, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date: May 15, 1998 By: /s/ Michelle G. Viau ------------- ---------------------------------------- Michelle G. Viau, Vice President, Finance and Chief Financial Officer
PEGASUS GOLD INC. FORM 10-K DECEMBER 31, 1997
PART IV
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: May 15, 1998 By: /s/ Lawrence I. Bell ------------ ----------------------------------------------- Lawrence I. Bell
Date: May 15, 1998 By: /s/ Peter M.D. Bradshaw ------------ ----------------------------------------------- Peter M.D. Bradshaw
Date: May 15, 1998 By: /s/ Douglas R. Cook ------------ ----------------------------------------------- Douglas R. Cook
Date: May 15, 1998 By: /s/ Michael A. Grandin ------------ ----------------------------------------------- Michael A. Grandin
Date: May 15, 1998 By: /s/ Peter R. Kutney ------------ ----------------------------------------------- Peter R. Kutney
Date: May 15, 1998 By: /s/ Werner G. Nennecker ------------ ----------------------------------------------- Werner G. Nennecker
Date: May 15, 1998 By: /s/ Dr. Lindsay D. Norman ------------ ----------------------------------------------- Dr. Lindsay D. Norman
Date: May 15, 1998 By: /s/ Anthony J. Petrina ------------ ----------------------------------------------- Anthony J. Petrina
Date: May 15, 1998 By: /s/ Fred C. Schulte ------------ ----------------------------------------------- Fred C. Schulte