-----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, FzGyueMcBoiuyMVZcMUhtz66/Hw+ikxJiUJbPSrH0qtzQ8pa/P3Ms2Qf4TwDytt9 L3mP5rc4OgTjz6BUj00DZw== 0000912057-97-012906.txt : 19970415 0000912057-97-012906.hdr.sgml : 19970415 ACCESSION NUMBER: 0000912057-97-012906 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970101 FILED AS OF DATE: 19970414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORD RESOURCES CORP CENTRAL INDEX KEY: 0000072316 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 850212139 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08733 FILM NUMBER: 97580052 BUSINESS ADDRESS: STREET 1: 8150 WASHINGTON VILLAGE DR CITY: DAYTON STATE: OH ZIP: 45458 BUSINESS PHONE: 5134336307 MAIL ADDRESS: STREET 1: 8150 WASHINGTON VILLAGE DRIVE CITY: DAYTON STATE: OH ZIP: 45458 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file No. 0-6202-2 NORD RESOURCES CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 85-0212139 - --------------------------------- -------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8150 Washington Village Dr. Dayton, Ohio 45458 - ----------------------------------------- ------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (937) 433-6307 --------------- Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class on which registered -------------------- ----------------------- Common Stock, par New York Stock Exchange value $.01 per share Securities registered pursuant to Section 12 (g) of the Act: None ---------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates, based on the closing price of $3.375 as of April 8, 1997, was $73,175,000. The number of shares of Common Stock outstanding as of April 8, 1997 was 21,838,428. DOCUMENTS INCORPORATED BY REFERENCE ------------------------------------ Proxy Statement to be dated April 25, 1997 (Part III). PART I ITEM 1. BUSINESS GENERAL Nord Resources Corporation ("Company") owns a 50% interest in Sierra Rutile Limited ("SRL"), a company engaged in the mining and processing of titanium dioxide (rutile and ilmenite - both industrial minerals), and a 35% interest in Nord Pacific Limited ("Pacific"), a company engaged in exploration for precious metal, base metal and strategic mineral properties and in the production of copper. In March 1997, the Company reached an agreement to sell for cash substantially all of the assets (except for cash and accounts receivable) of its 80%-owned kaolin and Norplex-Registered Trademark- operations (Nord Kaolin Company - "NKC"). The purchaser will assume certain reclamation and lease obligations of NKC, while the Company is responsible for settling NKC's remaining liabilities. In connection with the sale, for a 15 year period, the Company will receive a royalty from the purchaser if sales of Norplex-Registered Trademark- and certain other products exceed specified annual amounts. The financial statements of the Company reflect the accounts of NKC as discontinued operations, including a provision for loss on disposal and anticipated losses for the period January 1, 1997 through the expected closing date. The Company anticipates that the sale will be completed not later than April 30, 1997, as completion is contingent upon receiving satisfactory assignments of NKC's lease obligations to the purchaser. In January 1995, the mining location of SRL in Sierra Leone, West Africa was attacked by non-government forces. Due to concern for the safety of SRL's employees, the minesite was evacuated and mining operations were suspended, as security could not be assured for personnel in and around the minesite. During 1996 and continuing into 1997, a number of developments occurred which have allowed SRL to develop plans to resume its operations, targeting early 1998 for resumption of production. These events include the election of a civilian president of Sierra Leone in March 1996 and the November 1996 signing of a peace accord between the government and the opposing faction in Sierra Leone. Although a formal peace accord was signed, sporadic, isolated acts of aggression have continued to occur in Sierra Leone, which underlies the need for SRL to maintain adequate security in and around its mining operations. Beginning in the second quarter of 1996, SRL has maintained a small group of employees at the minesite to secure assets, perform limited maintenance and rehabilitation procedures and assess damage to assets. These employees have been supported by a private security force and no incidents have occurred in the areas in which the employees have been present. Resumption of the Sierra Leone operations is dependent upon a number of conditions including, (1) Sierra Leone having an acceptable political environment within which to operate, (2) SRL having adequate levels of security in and around the minesite 2 area, (3) SRL completing an accurate assessment of the cost of resuming operations, (4) SRL successfully renegotiating its operating agreements with the government of Sierra Leone and (5) SRL obtaining adequate levels of financing at acceptable terms. SRL employees at the minesite have reported that looting and damage to certain assets has occurred, primarily in foodstores, furniture and fixtures, small vehicles, housing and office buildings. The reports indicate that SRL's major assets remain substantially intact, but significant restoration efforts will be required to repair much of the equipment which has been idle and virtually unattended for over 2 years. SRL employees are compiling a detailed estimate of the cost to resume operations including repair or replacement of assets which have incurred damage and deterioration during the period of suspension of operations and costs to reestablish and train a workforce, replenish supplies and restore and recommission facilities. During 1995 the Company recorded an impairment of $3 million for its 50% share of the identified loss resulting from damage to assets. When additional information regarding losses is obtained, the Company will adjust the impairment reserve if necessary. If the above noted conditions for resuming operations in Sierra Leone are not satisfied, the Company may have to record an impairment reserve against a significant portion or possibly all of its investment in SRL, which is carried at $67.6 million at December 31, 1996. The Company carried insurance against certain political risks, as is further discussed under the heading "Political and Other Risks" of this Form 10-K. In 1997, the Company committed $500,000 as its share of funding for the cost of performing certain rehabilitation procedures which are critical to the mine reopening plan at SRL. These include development of a master plan for the rehabilitation of the mine and repair of the powerhouse and of a dam located in the Lanti mining deposit. Preliminary estimates indicate approximately $90 million may be required through 1998 for asset rehabilitation, completion of a new powerhouse and dredge, mine development and working capital. SRL's, the Company's and the 50% joint venture partner's efforts have been focused on obtaining a portion of these funds from lending sources, with each partner likely being required to fund any shortfall from its financial resources. As a result of the suspension of operations, SRL is in violation of certain covenants contained in its bank financing agreements. The total amount due from SRL to the lenders at December 31, 1996 is $43 million, payment of 50% of which is guaranteed by the Company. The lenders have agreed to forebear from requesting payment of amounts due under these agreements through July 1, 1997. SRL has initiated discussions with these lenders with a goal to reschedule payment of amounts outstanding under these loans and to identify the availability of additional funds from the current lenders and other lending sources which would be required to fund the rehabilitation program for SRL's operations and to complete a 1993 expansion program. The Company cannot project the willingness of the lenders to continue to provide modifications to the terms of the financing agreements which may be necessary beyond July 1, 1997 nor their or other lenders' willingness to provide funds for efforts to resume operations. Financial information with respect to the Company's foreign rutile segment is presented in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note Q - Major Customers and Note C - SRL of "Notes to 3 Financial Statements" of this Form 10-K. RUTILE SRL was established to mine and process titanium dioxide minerals (rutile and ilmenite) in Sierra Leone, West Africa and to market these products. Both rutile and ilmenite are used in the production of more highly concentrated titanium dioxide, which is used as a pigment in the manufacture of paint and many types of paper and plastic products. Titanium dioxide is also used in the production of fiberglass, enamels and coated fabrics. Rutile is used to a lesser extent in welding rod electrode coatings and in the production of titanium metal. SRL has leased from the government of Sierra Leone a total of 224 square miles until the year 2009, when the lease is subject to a renewal option of fifteen years on terms to be established at the time of renewal. A discussion of the status of the SRL operations is contained in the GENERAL section of this Item 1. PRODUCTION FACILITIES Amounts below represent 100% of the SRL operations. SRL's production facilities include a bucket-ladder dredge equipped with 68 buckets, each with a capacity of 28 cubic feet. The average digging rate of the bucket-ladder dredge under good conditions is about 1,100 metric tonnes ("tonnes":2,204.6 pounds) per hour. Production from this dredge totaled 8.4 million tonnes of crude ore in 1994 from which 138,000 tonnes of rutile was produced. Additional production capacity is available through use of a smaller, bucket-wheel dredge, with an average digging rate under good conditions of about 500 tonnes per hour. This dredge last operated in 1993. Annual production is dependent on the ore grade and other recovery factors inherent in the deposits, as well as down time for maintenance and equipment installation. The concentrating of the crude ore, which has a titanium dioxide content of between 1.5% and 2.0%, begins on the bucket-ladder dredge. The first stages of processing consist of primary and secondary scrubbing and two stages of screening. The bucket-wheel dredge pumps reclaimed ore to a supplemental wet processing plant where primary and secondary scrubbing and two stage screening are also carried out. The screened material, containing 2.7% to 3.0% titanium dioxide, is then pumped to the floating wet plant where slimes are removed by cyclones. The cyclone discharge, consisting of screened, deslimed sand containing about 4% titanium dioxide is then pumped to the concentrating section, consisting of banks of spiral separators. These increase the titanium dioxide content of this wet semi-concentrate to about 50%, which is pumped to shore for dewatering. From there it is transported by truck to the table plant where shaking tables are used to concentrate the material to a grade of about 60% titanium dioxide. This material is then fed to the dry plant where, following drying to less than 0.1% moisture, electrostatic and magnetic 4 separation complete the process, producing a final rutile product containing about 96% titanium dioxide and an ilmenite by-product containing about 64% titanium dioxide. During 1993, SRL began a production expansion and facilities improvement program, primarily the construction of a third dredge and a new power generating facility. The dredge was expected to cost $30 million and have expected annual production capacity of over 100,000 tonnes of finished rutile product while mining in the Gangama ore body, where it was to initially begin production. The new power generating facility, consisting of two 5 megawatt diesel generators which have been delivered to the minesite in Sierra Leone, was initially expected to be operational in mid-1995. The power generated by this facility was anticipated to be available to the third dredge, as described above, and to supplement the existing power generating equipment. Initial reports from minesite inspections indicate that these assets remain substantially intact; however, deterioration in their mechanical components has occurred in addition to numerous components having been either stolen or vandalized. The Company is not able to determine when these two facilities will be operational or the amount of additional cost which will be required to repair any damage and to complete construction. Other physical assets of SRL include support plant and equipment including a power plant, workshops, tugs, barges, concentrate loading facilities, administrative buildings and a "company town" of furnished homes for senior and intermediate staff. Significant looting and damage has occurred to foodstores, furniture and fixtures, small vehicles, housing and office buildings. RESERVES Amounts below represent 100% of the SRL operations. Based on drill hole testing and geological analysis carried out by SRL personnel, proven reserves as of December 31, 1994 were 278,244,000 tonnes of ore, averaging 1.43% recoverable rutile in the size ranges from which recovery is possible, which computes to 3,991,000 tonnes of recoverable rutile. Minimal production occurred during 1995 prior to suspension of operations. An update of the reserve estimates was not practical and the reserve estimate at December 31, 1996 is believed to reasonably approximate the estimates at December 31, 1994, which are disclosed below. Actual recovery has steadily improved and is now estimated at 75% of recoverable rutile, or about 3,000,000 tonnes. SRL's estimate of mineral reserves as of December 31, 1992 were reviewed and verified by independent consulting geologists in March 1993. The data below are derived therefrom. Reserves are located in four separate deposits in the Gbangbama area and five separate deposits in the Sembehun area. 5 Tonnes of proved recoverable reserves and recoverable rutile grade and tonnes for each of the Gbangbama deposits and the total for the Sembehun deposits are as follows (tonnes in 000's): CRUDE ORE RECOVERABLE RUTILE DEPOSIT TONNES GRADE TONNES ------- ------ ----- ------ GBANGBAMA: Lanti North 20,074 1.87% 376 Lanti South 51,582 1.69% 872 Gbeni 31,288 1.56% 488 Gangama 21,311 1.70% 362 SEMBEHUN 153,989 1.23% 1,893 ------- ----- 278,244 1.43% 3,991 ------- ----- ------- ----- SRL believes that additional exploration in the lease areas, or in other nearby areas for which exploration concessions may be obtained and in which there are indications of rutile mineralization, may identify additional reserves. The reserves at Sembehun are located in the Northern portion of SRL's mining concession, which is approximately 26 miles from the present plant location and the other 4 deposits. The mining operations in 1995 were exclusively in the Lanti North deposit, which is adjacent to the Lanti South and Gbeni deposits. The dredge presently under construction is expected to initially operate in the Gangama deposit. 6 SALES AND COMPETITION Amounts below represent 100% of the SRL operations. Sales in 1996 and 1995 were from stockpiled material. Following is a summary of sales for SRL: Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Tonnes Sold (in 000's): Rutile 3 8 152 Ilmenite --- --- 53 Geographical Location of Customers (% of Revenues): Rutile: U.S. --- --- 41% Non-U.S. 100% 100% 59% Ilmenite - U.S. --- --- 100% The potential customers for SRL's products consist primarily of five major companies, four of which were customers of SRL in 1994 (the last full year of operation). All of SRL's major customers as of the date of the suspension of mining operations had been long time customers and had long-term supply agreements with SRL, which were periodically subject to renewal. The supply agreements generally provide for a fixed rutile tonnage that each customer is expected to purchase under various pricing structures. Historically, each of the customers has purchased at least the minimum amounts required in their respective sales agreements. Although there is no indication that the current relationships with these customers is likely to change, in the event a major customer is lost or significantly reduces its orders, such loss or significant reduction could have a material adverse effect upon the financial condition and results of operations of the Company. As long as operations at the mine are suspended for reasons beyond the control of SRL, it will not be able to deliver the contracted amounts of rutile to its customers. These missed deliveries have been cancelled by SRL, due to force majeure. Certain contracts contain purchase commitments through 2002 but for less than SRL's expected production. In anticipation of resumption of operations in early 1998, SRL has entered into negotiations with various customers for 7 extended term contracts for the sale of its expected annual production of rutile. Although contracts for the sale of all of SRL's projected production beginning in 1998 have not been finalized as to price and volume, SRL is optimistic that prior to commencement of operations it will be able to negotiate acceptable contracts with the above noted four customers for the sale of a significant amount of production. The two principal minerals mined by titanium raw material producers are natural rutile (concentrated to 93% to 96% titanium dioxide) and ilmenite (concentrated to between 40% and 70% titanium dioxide, with an accompanying high iron content). SRL had been one of the world's largest producers of natural rutile, accounting for about 25% of the total. About 60% of the world's total was produced by companies in Australia, some of whom have greater financial resources than SRL, and about 15% was produced in South Africa. Minor production comes from the United States, India and Sri Lanka and nominal amounts from other sources. The world's known reserves of natural rutile are not sufficient to supply the world's raw material need for high titanium dioxide raw materials required for pigment. As a result, processes have been developed to upgrade ilmenite to provide high-content titanium dioxide substitutes known as slag and synthetic rutile, typically containing 85% - 92% or more titanium dioxide. However, since natural rutile remains a higher grade raw material source and contains less waste, it continues to be a preferred feedstock for the production of paint pigment. Any significant improvement in the economics of upgrading lower grade titanium minerals to higher grade titanium products other than slag and synthetic rutile could adversely affect SRL's competitive position. SRL's current plan, subject to the successful resumption of operations, is to increase annual natural rutile production to over 200,000 tonnes by 1999. The plan includes adding production from the new, partially built dredge, which is anticipated to be commissioned by late 1998, under the present mine reopening plan. SRL forecasts that market demand for rutile at that time should enable SRL to sell the production from the new dredge. However, the market demand and pricing for natural rutile and the competing slag and synthetic rutile has been susceptible to historical fluctuations due to domestic and worldwide economic cycles, which may have an impact on SRL's ability to sell the additional production at acceptable prices. SRL is considering negotiating additional contracts with its major customers and other new customers to sell this tonnage. EMPLOYEES As a result of the suspension of mining operations in Sierra Leone, SRL terminated all of its personnel in 1995 except for a core staff of about 40 senior expatriates and Sierra Leone nationals. SRL has historically been one of Sierra Leone's largest private employers. Current SRL projections indicate that once operations resume in Sierra Leone, after completion of the rehabilitation program, it expects to employ up to 25 expatriates and over 1,200 Sierra Leone nationals. 8 POLITICAL AND OTHER RISKS Sierra Leone is an independent republic on the West African coast. A former British colony, it is pro-western and retains ties to Great Britain through its membership in the Commonwealth. The economy of Sierra Leone has been based largely on agriculture, fishing and the mining of rutile, bauxite, gold and diamonds. During most of 1995 and into mid-1996 Sierra Leone was in a general state of civil unrest, including military actions by non-government forces, which resulted in the suspension of operations at the SRL mine. Discussions between representatives of the government of Sierra Leone and the opposing forces, which began in early 1996, culminated in the signing of a November 1996 peace agreement between the parties. Subsequently, it was announced that the United Nations Security Council approved sending Monitors (about 50) to Sierra Leone to monitor the disarmament and resettlement programmes contemplated by the peace agreement. The Monitors are expected to be supported by a contingent of approximately 700 armed troops. Funding for this process has not yet been secured and it is expected that it will take several weeks for the deployment to be effected once funding is provided. Presently, the SRL minesite is being protected by a private security force, which SRL anticipates having in place as a condition to the reopening of the mine. Sierra Leone's former one-party government was overthrown in late May 1992 by a group of young military officers, headed by Captain Valentine Strasser. The new ruling body was known as the National Provincial Ruling Council. In January 1996, Captain Strasser was deposed as president and was replaced by Brigadier General Julius Maada Bio, Chief of Defense Staff. In early 1996, for the first time in almost 20 years, democratic elections were held in Sierra Leone to elect a civilian government, including a president and parliamentary representatives. Mr. Ahmad Tejan Kabba, an attorney who worked in East Africa and New York for the United Nations Development Program, was elected president on March 15, 1996. Throughout the civil unrest in Sierra Leone, the government has worked closely with the International Monetary Fund ("IMF") and currently has an IMF Structural Adjustment Program in place, the objective of which is to help strengthen the economy. The government is receiving considerable economic support from multi-lateral international agencies including the World Bank, the European Economic Community and the IMF. Under the current Agreement between SRL and the Government of Sierra Leone, the Government has an option to purchase a 47% ownership interest in SRL on or after January 1, 2000 at a purchase price of $57.4 million. Both shareholders of SRL would sell equal interests in SRL if this purchase option is exercised. Under the agreement, SRL continues to maintain its currency outside of Sierra Leone and will not be subject to withholding tax on any shareholder dividend payments until the year 2000, after which the government has the right to impose a 10% withholding tax on dividends. The Agreement also defines the rate at which income tax, royalty and mining lease payments are to be made by SRL. 9 As Sierra Leone is a third-world country, the Company's investment in SRL is subject, at any time, to the potentially volatile effects of political instability and economic uncertainty often present in such countries, including civil strife and expropriation, excessive taxation and other forms of government interference. As a precaution to a change in political climate, the Company was insured by an agency of the U.S. government in an amount up to $15.7 million for its 50% share of loss to SRL's property due to political violence. The policy expired at the end of 1995. Based on the damage assessments performed in 1995, the Company filed a claim under this policy for its 50% share of damage to mine assets resulting from events which began in January 1995. The Company anticipates that further claims will be filed as additional information regarding damage to assets becomes available. In September 1996, the insurer made a provisional payment of $1.5 million to the Company, as it recognized that the Company's share of damage to SRL's assets is likely to exceed that amount. The Company is obligated to return any or all of this amount if it does not comply with certain provisions with respect to its efforts to repair damage at SRL or if the final amount of damage is less than that amount. The Company is not presently able to predict the extent or timing or amount of recoveries which may ultimately be available under this policy. NON-SEGMENT BUSINESSES The Company owns 35% of Nord Pacific Limited ("Pacific") (NASDAQ-NORPY), a company engaged in the production of copper and the exploration for gold, copper, nickel, cobalt and other minerals in Australia, Papua New Guinea, Mexico, Canada and the United States. Pacific's currently producing operation consists of a 40% interest in the Girilambone Copper mine which has been in production since May 1993 and a 50% interest in the Girilambone North Copper mine which has been in production since July 1996. At present annual production rates, it can sustain production from its present reserves through the year 2002. Pacific owns a 50% interest in a program to explore for additional copper near its present mining operation. This program has been successful in locating two massive medium-to-high grade pyrite-chalcopyrite sulphide ore bodies about 14 miles south-west of the present copper operations. A new treatment plant would be required to process the ore if the deposit is developed. This copper resource has been calculated at 9.75 million tonnes at a grade of 3.01% copper, containing 293,000 tonnes of copper metal, at depths of from 200 meters to 1000 meters below surface. The identified resource also is estimated to contain 65,000 ounces of gold and 3.4 million ounces of silver. Feasibility studies on this project will commence in 1997. Pacific also owns 100% of the Tabar Island gold project in Papua New Guinea, at which current exploration has been successful in extending known oxide gold mineralization on Simberi Island as well as identifying promising drilling results in other areas of the project. A feasibility study on the development of the oxide resources was completed in 1996. However, the economics of the project are marginal based on the currently identified minable gold reserves of approximately 220,000 ounces and depressed 10 gold prices. Accordingly, exploration efforts to prove additional reserves are being undertaken in 1997. In December 1996 the Company was granted a mining lease over these deposits. In addition, a major exploration and drilling program is planned in 1997 and 1998, testing oxide but particularly sulfide gold deposits on Simberi, Tatau and Tabar Islands. In addition, Pacific owns 35% of a nickel-cobalt-chromium property also located in Papua New Guinea ("Ramu Project"). Highlands Gold Properties Pty Limited ("Highlands"), holds 65% interest and is the manager of the project. Highlands, as operator, pursued a program of reserve drilling, metallurgical testwork, engineering studies and preparation of a Pre-Feasibility Study which was completed in mid-1996. Based on this study, the Company believes that the Ramu Project could become one of the lowest cost nickel producing properties in the world. Unit total operating costs when full production levels are reached are estimated to be approximately $1.39 per pound of nickel produced. After cobalt credits, based on a cobalt price of $8.00 per pound, these operating costs could be reduced to $0.67 per pound of nickel. Capital costs for development are estimated to be $763.7 million. The Pre-Feasibility Study assumes a mine life of 20 years, although it is expected that after operations start this will be extended. The study projects annual production of 32,670 tonnes (72 million pounds) of nickel and 2,770 tonnes (6.1 million pounds of cobalt), which will generate an annual, average, after tax cash flow of $150 million (at a nickel price of $3.50/lb and cobalt price of $8.00/lb) over its assumed 20 year life. Estimated nickel production costs, before cobalt credits, of $1.39/lb, and $0.67/lb after cobalt credits (assuming cobalt at $8.00/lb), place the proposed operation in the lower cost quartile of the cost curve. An independent report by Baring Brothers Burrows & Co Ltd, commissioned by Highlands in 1996, gave a mid-point valuation of $332 million for the entire Ramu project. Work on a detailed feasibility study is expected to commence in 1997 and it is estimated that this program will take approximately 18 months to complete. Development of the project will be dependent on the results of this feasibility study and on whether financing, if available, is obtained. Pacific also has interests in other properties which will require additional exploration to determine the existence of commercial mineral deposits, primarily gold. The Company has a 41.8% interest in a venture which owns an undeveloped parcel of over 200 acres of real property located in Manatee County, Florida. The venture has signed a letter of intent with a party to sell the undeveloped real property for $3,000,000. The purchase price will be paid over a four year period and the buyer has agreed to give and the venture has agreed to take a 7% purchase money first mortgage in the amount of $2,500,000. The venture will receive $500,000 at closing of this transaction. 11 ITEM 2. PROPERTIES Reference is made to Item 1 of this Form 10-K for information concerning the nature and location of the properties of the Company and identification of the major segment in which such properties is used. The SRL facilities in Sierra Leone sustained as yet undetermined damage as a result of civil disturbances. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Stockholders of the Company was held on November 20, 1996. The following proposals were approved at the Special Meeting: 1. To approve the sale to MIL (Investments) S. A. of 2,000,000 shares of Common Stock for $10 million. (Only 15,838,408 shares were initially eligible to vote on this proposal. In addition, broker non-votes of 5,108,452 were not included in the number of shares eligible to vote on this proposal.) Votes For - 6,496,253 Votes Against - 556,769 Abstentions - 31,311 Broker Non-Votes - 5,108,452 2. To amend the Corporation's Certificate of Incorporation to increase the authorized Common Stock of the Corporation from 40,000,000 shares to 50,000,000 shares. Votes For - 10,838,074 Votes Against - 1,326,873 Abstentions - 27,838 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) The following table sets forth, for the calendar periods indicated, the high and low closing sale price of the Company's Common Stock on the New York Stock Exchange Composite Tape. 1996 1995 --------------- -------------------- HIGH LOW HIGH LOW ----- ---- ---- ----- FIRST QUARTER 2 3/4 2 7 3 SECOND QUARTER 6 1/8 2 1/8 4 1/8 2 7/8 THIRD QUARTER 5 3/4 3 1/2 3 5/8 2 3/8 FOURTH QUARTER 6 4 2 3/8 1 7/8 (B) Approximate number of equity security holders at December 31, 1996: NUMBER OF TITLE OF CLASS HOLDERS OF RECORD -------------- ----------------- Common Stock 2,835 (C) The Company has never paid cash dividends on its Common Stock and does not expect to do so in the immediate future. 13 ITEM 6. SELECTED FINANCIAL DATA The following summary of certain financial information relating to the Company for the five years ended December 31, 1996 has been derived from the financial statements of the Company. Such information should be read in conjunction with the financial statements.
YEAR ENDED DECEMBER 31 ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- SUMMARY OF OPERATIONS (In thousands except per share amounts) Revenues $ 35 $ 86 $ 30,590 $ 57,570 $ 73,988 Operating Costs and Expenses 3,477 4,842 32,137 49,448 64,786 Other Income (Expense): Interest income 948 656 830 369 488 Interest expense (117) (125) (1,044) (4,914) (3,243) Litigation recoveries 150 3,225 950 4,200 1,450 Shareholder litigation settlement (4,750) Impairment of assets (280) (3,175) (3,074) Gain on sale of 50% of rutile segment 1,527 Equity in earnings (loss) of affiliate 356 526 1,613 (1,299) (928) Income tax (expense) benefit (14,645) 1,562 (3,945) ---------- --------- --------- --------- --------- Earnings (loss) from continuing operations (2,385) (3,649) (12,316) 216 3,024 Earnings (loss) from discontinued operations: Kaolin (27,174) (4,610) (3,295) (8,578) (10,206) Perlite 106 (2,900) ---------- --------- --------- --------- --------- (27,174) (4,610) (3,295) (8,472) (13,106) (Loss) before extraordinary item and cumulative effect of change in accounting principle (29,559) (8,259) (15,611) (8,256) (10,082) Extraordinary item - loss on early extinguishment of debt (826) Cumulative effect of change in accounting principle 23,480 ---------- --------- --------- --------- --------- Net earnings (loss) $ (29,559) $ (8,259) $ (15,611) $ (9,082) $ 13,398 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- ---------
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YEAR ENDED DECEMBER 31 ------------------------------------------------------------ SUMMARY OF OPERATIONS (continued) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Earnings (loss) per common and common equivalent share: Primary: From continuing operations $ (.13) $ (.23) $ (.80) $ .02 $ .20 From discontinued operations (1.43) (.29) (.22) (.56) (.86) -------- ------- ------ ------ ------ (Loss) before extraordinary item and cumulative effect of change in accounting principle (1.56) (.52) (1.02) (.54) (.66) Extraordinary item (.06) Cumulative effect of change in accounting principle 1.55 -------- ------- ------ ------ ------ Net earnings (loss) $ (1.56) $ (.52) $(1.02) $( .60) $ .89 -------- ------- ------ ------ ------ -------- ------- ------ ------ ------ Fully diluted: From continuing operations $ .25 From discontinued operations (.72) ------ (Loss) before cumulative effect of change in accounting principle (.47) Cumulative effect of change in accounting principle 1.29 ----- Net earnings $ .82 ------ ------
15
DECEMBER 31 ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----- ------ ------ ------ ------ BALANCE SHEET DATA Working Capital (Deficiency) (1) $ 4,331 $ (15,367) $ (10,006) $ 23,170 $ 18,043 Total Assets 112,876 122,585 131,317 150,236 202,372 Long-Term Debt (1) 14,746 55,784 Stockholders' Equity 79,580 89,410 97,669 109,089 115,197 OTHER DATA Cash (Deficiency) from Operating Activities $ (4,948) $ (1,614) $ 7,360 $ 2,081 $ 5,541 Payments of Indebtedness 82 3,610 13,618 7,503 Capital Expenditures 16,378 10,064 6,762 Additional Indebtedness 5,650 5,000 21,606
(1) At December 31, 1996, 1995 and 1994, an additional $11.5 million, $15.3 million and $19.7 million, respectively, of liabilities have been classified as current because of present or possible covenant violations. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995. The statements contained in this report which are not historical fact are "forward looking statements" that involve various important risks, uncertainties, and other factors which could cause the Company's actual results for 1997 and beyond to differ materially from those expressed in such forward looking statements. These important factors include, without limitation, the risks and factors set forth below in "Economic Outlook" as well as other risks previously disclosed in the Company's securities filings. LIQUIDITY AND CAPITAL RESOURCES During the three year period ended December 31, 1996, the Company required funds for capital expenditures, debt payments and other long-term asset additions totaling $16.4 million, $3.7 million and $2.8 million, respectively. The Company's operating activities provided $798,000 cash (including $8.3 million used in discontinued operations), while additional debt totaling $5.7 million was incurred during the three year period, primarily for capital expenditures at SRL. The Company made $4.9 million of advances to SRL in 1996 and 1995 and received $19.9 million in 1996 from the private placement of 6,000,000 shares of its Common Stock. During 1994, the Company converted $2.9 million of its advances to Nord Pacific Limited ("Pacific") to shares of Pacific's common stock and in 1995, received a $167,000 dividend on its investment in Pacific. If Pacific is successful in completing a public offering of its common stock in Canada, the Company has agreed to purchase that number of additional shares of common stock from Pacific so that it would maintain approximately a 30% interest in Pacific. The Company estimates that the purchase price could approximate $4.5 million. The Company has agreed to make available, at its discretion, two demand loans for up to $1 million each to Pacific, one for operating needs and one for funding an escrow account required by a lender to Pacific. At December 31, 1996, the Company was owed $1,178,000 by Pacific. Any amount owed by Pacific at the date the above offering is completed will be used by the Company to pay a portion of the purchase price. As a result of the discontinuance of the kaolin operations, the Company's business consists of a 50% ownership in SRL and a 35% ownership in Pacific. The Company anticipates that its cash balances, including cash expected to be available upon completion of the sale of the kaolin assets, will be sufficient to fund its administrative activities for the foreseeable future. The Company has not made any commitment to provide funds to Pacific other than the current demand loans outstanding and does not anticipate that it will be requested to provide any funding to Pacific in the foreseeable future, once Pacific completes the aforementioned public offering. However, the Company expects to be required to fund SRL's cash needs as described below. 17 Due to the lengthy suspension of its operations, SRL has relied and will continue to rely on funds from the Company and its other 50% owner to sustain its operations. During 1996 and 1995, the Company provided SRL with $4.9 million as its 50% share of funding required by SRL for maintaining a limited workforce, payment of vendors, costs of security at the mine and interest on loans outstanding. The Company has sufficient funds to continue funding SRL at these annual levels for the foreseeable future; however, it is the Company's and SRL's intention to continue with plans for resumption of SRL's operations. Among other key factors in that process is the availability of adequate levels of funding. SRL's preliminary projections indicate that it may require approximately $90 million through 1998 for asset rehabilitation, completion of a new powerhouse and dredge, mine development and working capital. SRL has held advanced discussions with its current lenders and other lending sources to determine if funds would be available from these sources to fund a portion or all of the above requirements. The Company cannot determine if any additional funding will be available at terms which would be acceptable to SRL and the Company. To the extent funds are not available from these or other sources, the Company would be required to contribute its 50% share of SRL's cash requirements. However, the Company would likely not be able to fund a significant amount to SRL without obtaining capital from other sources. One source of cash could be from the payment of claims which have been and will be made by the Company under an insurance policy covering damage to assets at SRL due to political violence, as described below. A result of the suspension of the SRL operations is that SRL is not in compliance with certain financial and operational covenants under its bank financing agreements. At December 31, 1996, the Company's 50% share of SRL's obligations to the lenders is $21.6 million, payment of which has been guaranteed by the Company. The lenders have agreed to forebear through July 1, 1997 (extended from January 1, 1997) from accelerating payment of the outstanding indebtedness, to enable SRL to assess its future operating alternatives. The forebearance would terminate if a material change in conditions occurs, as determined by the lenders, and requires SRL to expend at least $500,000 each quarter to pay for its liabilities and purchases. In addition to discussing the availability of additional financing from these lenders, SRL has discussed revision of the terms of the present financing agreements, including deferral of payments to beyond 1999. SRL and the Company are not able to determine the willingness of the lenders to approve any modification of the present loan terms beyond July 1, 1997, at which date payment of the entire amount of the loans outstanding could be demanded by the lenders. After receipt of the expected proceeds from the sale of its kaolin assets, the Company would have sufficient funds to pay its share of amounts owed the lenders, if so required. However, it would then likely have to seek additional funding from other sources. The Company has filed a claim for damage due to political violence at SRL under a political risk insurance policy which has a coverage limit of $15.7 million. Additional claims are likely to be filed as more information becomes available as to damage at the mine and the cost to repair equipment. The Company has received a $1.5 million provisional payment from the insurer; however, it is not able to estimate the total amount 18 or timing of any future payments which may be received from claims under this policy. The Company is obligated to return any or all of this amount if it does not comply with certain provisions with respect to its efforts to repair damage at SRL or if the final amount of damage is less than that amount. The Company has pledged any proceeds in excess of $2.7 million it may receive under this policy as security under the bank financing agreements. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As described in Note J, the Company has an agreement to sell substantially all of the assets of Nord Kaolin Company ("NKC"); however, the sale has not yet closed. Upon the sale of NKC, SRL will be the remaining operating segment of the Company. If the lenders require the Company to pay its 50% share of the amounts owed by SRL or if the Company is required to provide a significant amount of funds to SRL for it to resume operations, the Company would pursue other options. All of the above factors create uncertainity as to the ability of the Company to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts should the Company be required to liquidate certain of its assets. The Company's ability to continue operating under its present structure is dependent upon having sufficient cash to meet its potential obligations, SRL's compliance with the terms and covenants of its financing agreements, obtaining additional financing or refinancing as may be required and ultimately resumption of successful operations at SRL. Management of the Company and SRL are continuing their efforts to reestablish the rutile mining operation and to identify sources of funds so that the SRL can meet its obligations and resume its operations. However, management cannot provide any assurance that these events will occur. The Company's principal financial requirements and anticipated sources and uses of funds for its rutile segment are described below. RUTILE (SRL) Activity reported below includes the Company's 50% share of the amounts recorded by SRL. Operating results are only for the year ended December 31, 1994 as the Company adopted the cost basis of accounting for its investment in SRL at December 31, 1994. During the above period, SRL utilized $16.4 million of its operational cash flow for capital expenditures, primarily for completion of the Lanti deposit development, enhancement and expansion of production and recovery processes and purchase of earth moving equipment, while $5.7 million was borrowed under the financing agreements. During the period, SRL made debt principal payments of $3.5 million. At December 31, 1996, the Company's 50% share of SRL's liabilities under its financing agreements total 19 $21.6 million, which has been classified in the Company's financial statements as a current liability due to covenant defaults. The financing agreements contain financial covenants, requirements for maintaining certain amounts of cash in escrow, restrictions on cash dividends from SRL and require SRL to complete certain capital improvements. The current forebearance provided by the lenders generally suspends certain of the above requirements. If SRL is successful in restructuring the above financing agreements, it is likely that many of the present terms and conditions will be modified. RESULTS OF OPERATIONS During 1996, the Company incurred a loss from continuing operations of $2.4 million compared to a loss of $3.6 million incurred in 1995. Selling, general and administrative expenses declined in 1996 primarily due to lower legal fees resulting from litigation being completed in 1995 and lower insurance costs due to the termination of a political risk policy related to the Company's investment in SRL. Results in 1995 included a $3.2 million litigation recovery and a $3.2 million provision for impairment, while minor amounts related to those situations were recorded in 1996. The Company incurred a loss from continuing operations of $3.6 million in 1995 compared to a loss of $12.3 million in 1994. Operating results in 1994 include the 50% owned operations of SRL, which are not consolidated by the Company beginning in 1995. Results in 1994 included $3.1 million of selling, general and administrative expenses and $950,000 of interest expenses related to SRL. Operating results in 1995 included $526,000 as the Company's share of earnings from an affiliate compared to $1.6 million as the Company's share of earnings in 1994. The Company recorded a provision for impairment of $3.2 million in 1995 relating primarily to its investment in SRL. Also affecting operating results was $3.2 million of income from the settlement of litigation in 1995 compared to $950,000 of income from the same source in 1994 and a $1.5 million gain on sale of 50% of SRL which the Company recorded in 1994. The Company recognizes the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. No amounts were recorded for domestic taxes in 1996 or 1995 and a minor refund was recorded in 1994, as the Company incurred net operating losses during those years and a valuation allowance was recorded for any deferred tax asset generated. The Company's foreign income tax expense (benefit) consists primarily of taxes related to earnings of SRL in Sierra Leone, where SRL's effective income tax rate is 37.5%, with a minimum amount of income tax paid equal to 3.5% of sales. Sierra Leone's method of depreciation is different from domestic tax law in that it allows SRL to elect when to take a depreciation deduction and there is no time limitation as to when any unused depreciation may be deducted. SRL enjoyed a tax holiday in Sierra Leone through June 1987 and during that holiday, it was not required to use any tax depreciation, creating a substantial difference between financial statement and tax depreciation. As a result of the suspension 20 of mining operations at SRL, the Company determined that a valuation allowance is required for SRL's deferred tax assets. Accordingly, the Company's tax provision for 1994 includes a charge of $14.1 million for this valuation allowance. Discussion of the revenue, cost of sales and operating earnings for the rutile segment is as follows: RUTILE (SRL) As previously discussed, the mining operations of this segment were suspended in January 1995 due to civil disturbances in Sierra Leone. The amounts disclosed for SRL include 50% of SRL's operations for the year ended December 31, 1994. At December 31, 1994, the Company adopted the cost basis of accounting for its investment in SRL, due to the above described suspension of mining operations in early 1995. Therefore, no operating results from SRL are included in the Company's statement of operations for the years ended December 31, 1996 and 1995. The Company's share of SRL's operating earnings were $3.8 million in 1994. Included in revenues are sales to 3 customers which exceeded 10% of the Company's revenues during 1994. Cost of sales as a percentage of sales was 79.1% in 1994 and general and administrative expenses were $3.1 million. INFLATION The Company has not been significantly affected by inflation in recent years and anticipates that it will not be significantly affected by inflation during 1997. The Company is not expected to be affected by changes in interest rates as it is not directly liable for any indebtedness. Also, all of the indebtedness of SRL, payment of 50% of which is guaranteed by the Company, is at fixed rates of interest. ECONOMIC OUTLOOK In March 1997 the Company entered into an agreement to sell the operating assets of the kaolin mining and Norplex-Registered Trademark- operation of its 80% owned subsidiary Nord Kaolin Company to Dry Branch Kaolin Company for a purchase price of $20,000,000, subject to adjustments and a royalty arrangement on the future sales of Norplex-Registered Trademark- products. The transaction is subject to obtaining certain consents of third parties. After this transaction is closed, the Company's remaining operating segment will be SRL. In this regard the economic outlook will focus primarily on SRL. SRL's primary market is the paint industry. Accordingly, operating results are hinged very closely to the general economic conditions in the United States and most of the western world. 21 Historically, demand for titanium based feedstocks, for the titanium dioxide pigment industry (the market for SRL products) has followed the major global business and economic cycles and generally has followed or exceeded regional GDP in their growth and consumption rates. The foundation for supply and demand and pricing for natural rutile is based to a significant degree on the world wide consumption of titanium dioxide pigments. These pigments represent the largest single application for titanium dioxide raw material feedstock, representing approximately 95% of the end use of these minerals as feedstock. The global Ti0(2) industry began recovering in 1994 after three years of declining prices caused by demand bottoming out in 1991 corresponding with the onset of unfortunately ill-timed implementation of new pigment plant capacities. After very strong growth in 1994, pigment consumption actually declined slightly in 1995. This lower than expected consumption of TiO(2) was largely the result of consumer inventory level adjustments. However, the magnitude and duration of the declining consumption in the second half of 1995 caught most of the pigment industry by surprise and producers generally did not cut back production until toward the end of the year. As a result, global pigment stocks held by producers were unusually high at the end of 1995. Latest estimates put pigment consumption in 1996 at around 3.32 million tonnes, a decline of approximately 0.8% from the 1995 figure. After two years of declining consumption, a reduction in stocks held by pigment producers and the expectation of stronger economic growth in most major economies during 1997, there is widespread expectation that pigment consumption will recover strongly in 1997 and 1998. Growth in consumption for the period to 2000 is expected to exceed long term average growth rates and total consumption in 2000 is forecast at 3.95 million tonnes. Thereafter, pigment consumption is expected to grow at average long term rates of approximately 2.9% per annum, although cyclical behavior will continue to occur. The rutile segment was poised to take advantage of the increased demand for high level titanium feedstocks and had implemented a program to increase its overall production of Ti0(2) feedstocks from its current level to 200,000 tonnes annually with a scheduled start-up of increased production capability in the fourth quarter of 1995. Unfortunately during January 1995, the rutile operations in Sierra Leone, West Africa came under military attack from non- government forces and were overrun by such forces. The Company and its other 50% owner (Consolidated Rutile Limited) suspended all operations at the minesite on January 20, 1995. In February 1996, a small contingent of employees of SRL was able to visit the minesite and perform a limited assessment of the facilities. Preliminary inspections confirm that major assets remain substantially intact; however, it is likely that the lack of regular maintenance has caused some damage. It was also confirmed that foodstores, small vehicles, housing, furniture and fixtures and office facilities have been damaged or severely looted. SRL is not yet able to estimate completely the extent of damage which has occurred. Security in the country and specifically at the minesite, appears to be improving and SRL expects to continue its inspections of the minesite with the goal of starting mine refurbishment in July 1997 with first production in early 1998. In February 1996 Sierra Leone held democratic presidential elections for the first time in almost twenty years and a civilian president was installed on March 15, 1996. Also on November 30, 1996 a peace 22 treaty was signed between rebel forces and the government of Sierra Leone. Both events are seen as positive developments toward peace and stability in Sierra Leone. The Company's financial results were negatively affected in 1996 by the situation at its rutile operation in Sierra Leone, West Africa. The suspension of these operations will also have a continuing negative impact on 1997 financial results. The Company also has a 35% ownership interest in Nord Pacific Limited. Nord Pacific Limited is engaged in the production of copper and in the exploration for gold, copper, nickel, cobalt and other minerals in Australia, Papua New Guinea and North America including Mexico. Nord Pacific Limited's only operation at this time is a copper mining and processing facility in eastern Australia. The earnings of this operation are directly affected by world economic growth and the increase or decrease in demand for copper. NEW ACCOUNTING PRONOUNCEMENTS The Company measures cost for stock options issued to employees using the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," which was adopted by the Company in 1996. Pursuant to the new standard, companies are encouraged, but not required, to adopt the fair value method of accounting for stock options and similar equity instruments. The Company has elected to continue measuring compensation cost in accordance with APB Opinion No. 25. In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This statement also requires that long-lived assets and certain intangible assets to be disposed of be reported at the lower of their carrying amount or fair value less costs to sell. The adoption of this statement on January 1, 1996 had no material effect on the financial statements of the Company. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share". The Company has not adopted this statement in its December 31, 1996 financial statements and has not yet determined what effect its adoption will have on subsequently filed financial statements. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS: PAGE ---- Independent Auditors' Report 25 Consolidated Balance Sheets 27 Consolidated Statements of Operations 28 Consolidated Statements of Stockholders' Equity 29 Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 24 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Nord Resources Corporation Dayton, Ohio We have audited the accompanying consolidated balance sheets of Nord Resources Corporation and Subsidiaries ("Company") as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express (or disclaim) an opinion on these statements based on our audits. We did not audit the financial statements of Sierra Rutile Limited (a 50% owned subsidiary) and related Rutile Segment entities (together the "Rutile Segment") for the three years in the period ended December 31, 1996, the Company's investment in which is accounted for on the cost method as of and for the years ended December 31, 1996 and 1995, and by proportionate consolidation for the year ended December 31, 1994. The Company's investment in the Rutile Segment constitutes 60% and 52% of consolidated total assets at December 31, 1996 and 1995, respectively, and none of the consolidated total revenues for each of the years ended December 31, 1996 and 1995, and 42% of the consolidated total revenues for the year ended December 31, 1994. Other auditors were engaged to audit the financial statements of the Rutile Segment prepared in conformity with accounting principles generally accepted in the United Kingdom as of and for each of the three years in the period ended December 31, 1996, and their report stated that they were unable to express an opinion on such financial statements because they were unable to complete substantial auditing procedures and because of the uncertain impact on the financial statement carrying amounts following civil unrest near the mine facilities of the Rutile Segment. The report of the other auditors has been furnished to us, and our report, insofar as it relates to the amounts included for the Rutile Segment, is based on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our report. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes A and C to the consolidated financial statements, operations of the Rutile Segment (the Company's sole remaining operating activity) have been suspended since January 1995 because of civil unrest in the area near the Rutile Segment's mine in Sierra Leone. As discussed in Note A, funds for repairs to mine assets and to restart operations of the mine may be required from the Company; the amount and availability of such funds cannot be presently determined. As discussed in Notes A and G, the 25 Rutile Segment is not in compliance with various bank financing agreements that are guaranteed by the Company and, although the Rutile Segment has received forebearance through July 1, 1997, the forebearance could be terminated in certain circumstances. Ultimately, the Company must attain profitable operations of the Rutile Segment and have access to sufficient funds from the Rutile Segment to sustain its operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Notes A and C. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Because of the possible material effects of the uncertainties referred to in the preceding paragraph and the inability of the other auditors to express an opinion on the financial statements of the Rutile Segment, we are unable to express, and we do not express, an opinion on the Company's consolidated financial statements for 1996, 1995 and 1994. Deloitte & Touche LLP Dayton, Ohio April 9, 1997 26 NORD RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS (NOTES A AND G) 1996 1995 - ----------------------- -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 15,583 $ 6,026 Restricted investments - available for sale (Note H) 2,376 Restricted cash - SRL (Notes C and G) 2,431 Accounts receivable 179 106 Prepaid expenses 163 227 Net assets of discontinued operations (Note J) 12,339 -------- -------- TOTAL CURRENT ASSETS 30,640 8,790 NET ASSETS OF DISCONTINUED OPERATIONS (Note J) 35,146 RESTRICTED CASH AND INVESTMENTS (Note H) 2,607 INVESTMENT IN AND ADVANCES TO AFFILIATES (Note D) 9,840 8,338 INVESTMENT IN SRL, at cost as described in Notes A and C 67,552 63,517 PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation and depletion (Note E) 27 547 OTHER ASSETS (Note F) 4,817 3,640 -------- -------- $112,876 $122,585 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY (Note A) 1996 1995 - ----------------------------- -------- -------- CURRENT LIABILITIES: Accounts payable $ 77 $ 221 Accrued expenses 539 478 Unearned revenue (Note C) 1,500 Obligations to lenders - SRL (Notes C and G) 21,620 23,458 Capital lease obligations - discontinued operations (Note J) 2,573 -------- -------- TOTAL CURRENT LIABILITIES 26,309 24,157 CAPITAL LEASE OBLIGATIONS -DISCONTINUED OPERATIONS (Note J) 2,991 RETIREMENT BENEFITS (Note I) 6,987 6,027 COMMITMENTS AND CONTINGENT LIABILITIES (Notes C and L) STOCKHOLDERS' EQUITY (Notes G and N): Common Stock, par value $.01 per share: authorized, 50,000,000 shares, issued and outstanding 21,838,408 -1996 and 15,838,408 -1995 218 158 Additional paid-in capital 77,950 58,137 Retained earnings, restricted (Notes G and N) 1,274 30,833 Cumulative foreign currency translation adjustment (Note D) 281 282 Minimum pension liability (Note I) (143) -------- -------- 79,580 89,410 -------- -------- $112,876 $122,585 -------- -------- -------- -------- See notes to consolidated financial statements 27 NORD RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 -------- -------- -------- REVENUES: Sales $ $ $ 30,262 Other 35 86 328 --------- --------- --------- Total Revenues 35 86 30,590 OPERATING COSTS AND EXPENSES: Cost of sales 23,947 Selling, general, and administrative expenses 3,477 4,842 8,190 --------- --------- --------- Total Operating Costs and Expenses 3,477 4,842 32,137 --------- --------- --------- (LOSS) FROM OPERATIONS (3,442) (4,756) (1,547) OTHER INCOME (EXPENSE): Interest income 948 656 830 Interest expense (117) (125) (1,044) Litigation recoveries (Note K) 150 3,225 950 Provision for impairment of investments: (Notes C and D) SRL (3,000) Other (280) (175) Gain on sale of 50% of rutile segment (Note C) 1,527 Equity in net earnings of affiliate (Note D) 356 526 1,613 --------- --------- --------- Total Other Income (Expense) 1,057 1,107 3,876 --------- --------- --------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX (EXPENSE) (2,385) (3,649) 2,329 INCOME TAX (EXPENSE) (Note O) (14,645) --------- --------- --------- (LOSS) FROM CONTINUING OPERATIONS (2,385) (3,649) (12,316) (LOSS) FROM DISCONTINUED OPERATIONS (Note J) (27,174) (4,610) (3,295) --------- --------- --------- NET (LOSS) $ (29,559) $ (8,259) $ (15,611) --------- --------- --------- --------- --------- --------- (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Note B): From continuing operations $ (.13) $ (.23) $ (.80) From discontinued operations (1.43) (.29) (.22) --------- --------- --------- Net (loss) $ (1.56) $ (.52) $ (1.02) --------- --------- --------- --------- --------- --------- Average shares 18,971 15,839 15,306 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements 28 NORD RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS EXCEPT SHARES)
Common Stock Cumulative Outstanding Foreign ---------------------------- Additional Currency Minimum Paid-in Retained Translation Pension Shares Amount Capital Earnings Adjustment Liability ----------- ------- ---------- -------- ---------- --------- Balance - December 31, 1993 15,139,974 $ 151 $ 53,856 $ 54,703 $ 379 $ 0 Net (loss) (15,611) Option activity 8,275 38 Issuance of common stock (Note K) 690,159 7 4,243 Foreign currency translation adjustment (97) ----------- ----- -------- -------- ------ ------ Balance - December 31, 1994 15,838,408 158 58,137 39,092 282 0 Net (loss) (8,259) ----------- ----- -------- -------- ------ ------ Balance - December 31, 1995 15,838,408 158 58,137 30,833 282 0 Net (loss) (29,559) Option activity 25 Issuance of common stock (Note N) 5,160,000 52 17,697 Conversion of loan into common stock (Note N) 840,000 8 2,091 Foreign currency translation (1) adjustment Minimum pension liability (Note I) (143) ----------- ----- -------- -------- ------ ------ Balance - December 31, 1996 21,838,408 $ 218 $ 77,950 $ 1,274 $ 281 $ (143) ----------- ----- -------- -------- ------ ------ ----------- ----- -------- -------- ------ ------
See notes to consolidated financial statements 29 NORD RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES (Note P): Rutile $ $ $ 12,040 Domestic (4,948) (1,614) (4,680) -------- -------- -------- Net cash provided by (used in) operating activities (4,948) (1,614) 7,360 -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures - Rutile (16,378) Net cash from sale of fixed assets - Domestic 219 65 Net cash proceeds from sale of 50% of SRL (gross proceeds, $56.8 million) - Domestic 2,000 Additions to other assets: Rutile (9) Domestic (1,229) (1,392) (179) Additional investment in SRL (3,442) (1,436) Decrease (increase) in investments in and advances to affiliates - Domestic (1,147) 155 (74) -------- -------- -------- Net cash (used in) investing activities (5,599) (608) (16,640) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Additional indebtedness - Rutile 5,650 Issuance of convertible loan - Domestic 2,099 Payments of indebtedness: Rutile (3,473) Domestic (82) (137) Restricted cash and investments: Rutile (158) Domestic 231 190 (194) Issuance of common stock - Domestic 17,774 37 -------- -------- -------- Net cash provided by financing activities 20,104 108 1,725 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,557 (2,114) (7,555) CASH AND CASH EQUIVALENTS - Beginning of year 6,026 8,140 19,774 CASH INCLUDED IN INVESTMENT IN RUTILE SEGMENT AT DECEMBER 31, 1994 (4,079) -------- -------- -------- CASH AND CASH EQUIVALENTS - End of year $ 15,583 $ 6,026 $ 8,140 -------- -------- -------- -------- -------- -------- CASH PAID FOR: Interest, net of $609 capitalized in 1994 $ 123 $ 85 $ 1,561 Income taxes 865 NON-CASH TRANSACTIONS: Conversion of advances to affiliate into common stock (Note D) 2,900 Conversion of loan into common stock (Note N) 2,099 Stock issued to settle long-term liability (Note K) 4,250 Minimum pension liability (Note I) (143)
See notes to consolidated financial statements. 30 NORD RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 A. BASIS OF PRESENTATION The Company owns a 50% interest in a natural resource property for production of rutile (titanium dioxide), which is sold primarily to the paint pigment industry in the United States, Europe and the Far East. The Company has a long-term business cycle. Production facilities and raw material supplies for the rutile operation are located in Sierra Leone, in west Africa. As Sierra Leone is a third-world country, the operations are subject, at any time, to the potentially volatile effects of political instability and economic uncertainty often present in such countries. The preparation of these financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. These estimates include losses related to discontinued operations and rates of return on investments, rates of discounting and salary escalation and other actuarial assumptions used to evaluate retirement benefits. Estimates of mineral reserves are used as a basis for amortization of certain of the Company's long-term assets. Events which have occurred in Sierra Leone since early 1995 indicate that an impairment of assets has occurred and the Company has recorded an impairment reserve based on information currently available. The amount of impairment will be adjusted when additional information becomes available. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Nord Resources Corporation, its majority-owned subsidiaries and its 50% interest in a rutile mining operation ("SRL") (collectively the "Company"). All significant intercompany transactions and balances are eliminated. SRL as used in these financial statements includes Sierra Rutile Holdings, Sierra Rutile Limited (the mining operation) and other subsidiaries of the Company and Sierra Rutile Holdings that are economically dependent on the rutile mining operation. Financial statement amounts relating to SRL represent the Company's 50% investment in SRL carried on the cost basis of accounting as described in "Investment in SRL". Results of operations exclude SRL beginning in 1995. See Note C for summarized financial 31 information regarding SRL. Investments in 20% to 40%-owned affiliates and joint ventures and in affiliates or joint ventures in which the Company's investment may temporarily be in excess of 40% are carried using the equity method. INVESTMENT IN SRL In January 1995, SRL's mining operation was attacked by non-government forces. Due to concern for the safety of its employees, SRL was forced to suspend mining operations and subsequently terminated all nonessential personnel. The resumption of operations is dependent upon many conditions including (1) Sierra Leone having an acceptable political environment within which to operate, (2) SRL having adequate levels of security in and around the minesite area, (3) SRL completing an accurate assessment of the cost of resuming operations, (4) SRL successfully renegotiating its operating agreements with the government of Sierra Leone and (5) SRL obtaining adequate levels of financing at acceptable terms. Cost of resuming operations includes repair or replacement of assets which have incurred damage and deterioration during the period of suspension of operations and costs to reestablish and train a workforce, replenish supplies and restore and recommission facilities. Until SRL personnel can complete a detailed assessment of the condition of SRL's assets, it is not possible to accurately estimate these costs. There is no certainty that adequate financing would be available to fund the above noted costs, although management of the Company, SRL and the other 50% owner of SRL are engaged in discussions with potential financing sources. The Company is not yet able to determine when operations will resume at the Sierra Leone mine. If the above noted conditions for resuming operations in Sierra Leone are not satisfied, the Company may have to record an impairment reserve against a significant portion or possibly all of its investment in SRL. Prior to December 31, 1994, the Company proportionately consolidated its share in each of the assets, liabilities and operations of SRL. As of December 31, 1994, the Company adopted the cost basis of accounting for its investment in SRL because the mine was no longer controlled by SRL. The Company's investment includes original cost plus undistributed earnings through December 31, 1994 plus SRL's obligations to lenders, payment of which is guaranteed by the Company, less any related restricted cash (see Notes C and G). The consolidated statements of operations and cash flows include the Company's proportionate share of operations and cash flows of SRL through December 31, 1994. The Company intends to resume proportional consolidation for its 50% share in each of the assets, liabilities and operations of SRL once SRL reestablishes its operations. At that time, the Company will recognize its share of SRL's operating results since January 1, 1995 in its statement of operations. If the Company had resumed proportional consolidation at December 31, 1996, it would have recognized 32 $11,728,000 as its share of SRL's operating loss since January 1, 1995. In 1995, the Company recorded an impairment of $3 million for its 50% share of the identified loss at SRL resulting from damage to assets. When additional information regarding losses is obtained, the Company will adjust the impairment reserve as necessary. The Company has filed a claim under an insurance policy which provides for compensation of up to $15.7 million of damage due to political violence in Sierra Leone. The Company will recognize any insurance recoveries when receipt is assured beyond a reasonable doubt (Note C). FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As described in Note J, the Company has an agreement to sell substantially all of the assets of Nord Kaolin Company ("NKC"); however, the sale has not yet closed. Upon the sale of NKC, SRL will be the remaining operating segment of the Company. If the political climate in Sierra Leone continues to be disruptive to business operations, if the cost to reestablish operations is economically prohibitive or if funding for repairs and start-up cost is not available, the Company may not be able to recover its investment in SRL. As described in Note G, SRL is not in compliance with several covenants contained in its bank financing agreements, although SRL has obtained a forebearance until July 1, 1997 from payment of amounts due the lenders. As a result of the above, the Company's 50% share of amounts due under the SRL loans of $21,620,000, payment of which is guaranteed by the Company, is classified as a current liability. All of the above factors create uncertainity as to the ability of the Company to continue as a going concern. SRL has initiated discussions with its lenders with a goal to reschedule payment of amounts outstanding under these loans and to identify the availability of additional funds from the current lenders and other lending sources which would be required to fund the rehabilitation program for SRL's operations and to complete a 1993 expansion program. The Company cannot project the willingness of the lenders to continue to provide modifications to the terms of the financing agreements which may be necessary beyond July 1, 1997 nor their or other lenders' willingness to provide funds for efforts to resume operations. If the lenders require the Company to pay its 50% share of the amounts owed by SRL or if the Company is required to provide a significant amount of funds to SRL for it to resume operations, the Company would likely have to pursue other options. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts should the Company be required to liquidate certain of its assets. The Company's ability to continue operating under its present structure is dependent upon having sufficient cash to meet its 33 potential obligations, SRL's compliance with the terms and covenants of its financing agreements, obtaining additional financing or refinancing as may be required and, ultimately, the resumption of successful operations at SRL. Management of the Company and SRL are continuing their efforts to reestablish the rutile mining operations and to identify sources of funds so that SRL can resume operations and meet its obligations. However, management cannot provide any assurance that these events will occur. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVESTMENTS AVAILABLE FOR SALE Investments classified as available for sale are stated at fair value, based on quoted market prices, with unrealized holding gains and losses excluded from operations and reported net of taxes, as a separate component of stockholders' equity until realized. A decline in the fair value of any available for sale security below cost that is deemed other than temporary is charged to operations, resulting in the establishment of a new cost basis for the security. Interest income is recognized when earned. Realized gains and losses from the sale of securities are included in operations and are derived using the specific identification method for determining the cost of securities sold. INVENTORIES Inventories are carried at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Equipment is depreciated using the straight-line method over the estimated useful lives of the assets ranging from two to five years. LONG-TERM ASSETS A significant amount of the Company's assets are of a long-term nature. In the preparation of its financial statements, the Company evaluates the carrying amount of these assets through application of a number of techniques including analysis of future cash flows, review of third party transactions with the Company, obtaining third party valuations of assets and review of the underlying operations of its affiliates. Any assets which may be deemed impaired are written down to their estimated recoverable 34 amount. In March 1995, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This statement also requires that long-lived assets and certain intangible assets to be disposed of be reported at the lower of their carrying amount or fair value less costs to sell. The adoption of this statement on January 1, 1996 had no material effect on the financial statements of the Company. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company measures compensation cost for stock options issued to employees using the intrinsic value based method under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Earnings (loss) per common and common equivalent share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the year adjusted for the dilutive effect of common stock equivalents when applicable. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". The Company has not adopted SFAS No. 128 in its December 31, 1996 financial statements and has not yet determined what affect its adoption will have on subsequently filed financial statements. RECLASSIFICATIONS Certain reclassifications have been made in the 1995 and 1994 consolidated financial statements to conform to the classifications used in 1996. C. SRL The Company sold 50% of its equity interest in SRL in 1993 and recognized a gain of $1,527,000 in the fourth quarter of 1994 as a result of receiving an additional $2,000,000 as a final payment from this sale. As explained in Note A, as of December 31, 1994 the Company adopted the cost basis of accounting for its investment in SRL. The consolidated statements of operations and 35 cash flows include the Company's proportionate share of operations and cash flows of SRL through December 31, 1994. During 1996 and 1995, the Company contributed $3,442,000 and $1,436,000, respectively, as its 50% share of funding for SRL's cash needs, primarily to satisfy vendor payments and the limited ongoing operational cash requirements of SRL. The following summarized financial information of the Company's 50% share of SRL, which is derived from SRL's financial statements. Based on an assessment of damage to SRL's assets, an impairment reserve of $3,000,000 was recorded in 1995 as the Company's 50% share of damage to assets. The impairment primarily related to the carrying cost of vehicles, foodstores, furniture and fixtures and certain buildings which have been stolen, looted or destroyed. It does not include any amount for repair or replacement of other equipment which may be damaged, as such amount cannot be determined until a more detailed inspection of the assets can be made. During the latter part of 1996 and into 1997, SRL began developing plans to resume operations, including obtaining a more accurate determination of the cost of repairing and replacing assets. When information becomes available from the above process, the Company will adjust the impairment reserve if necessary. DECEMBER 31 ----------------------- BALANCE SHEET DATA - SRL 1996 1995 - ------------------------ ------ ------ (In thousands) Current assets $ 3,804 $ 4,123 Property, plant and equipment 56,334 56,271 Other assets 1,701 1,815 Restricted cash 2,431 -------- -------- Total assets $ 61,839 $ 64,640 -------- -------- -------- -------- Obligations to lenders $ 21,620 $ 23,458 Other current liabilities 5,841 5,612 Other liabilities 5,049 1,551 -------- -------- Total liabilities 32,510 30,621 Foreign currency translation adjustment 4 (7) Company's share of equity 29,325 34,026 -------- -------- Total liabilities and stockholders' equity $ 61,839 $ 64,640 -------- -------- -------- -------- 36 The following is a reconciliation of the activity related to the company's cost basis investment in SRL (in thousands): Investment in SRL at December 31, 1994 $ 64,353 Provision for impairment (3,000) Additional investment 1,436 Changes in restricted cash and obligations to lenders 728 -------- Investment in SRL at December 31, 1995 63,517 Additional Investment 3,442 Changes in restricted cash and obligations to lenders 593 -------- Investment in SRL at December 31, 1996 $ 67,552 -------- -------- The following is summarized operating data for the Company's share of operations of SRL. Amounts represent the Company's 50% ownership of SRL. YEAR ENDED DECEMBER 31 ------------------------------------- OPERATING DATA - SRL 1996 1995 1994 - -------------------- ------ ------ ------ (In thousands) Sales $ 1,050 $ 1,876 $ 30,262 Other revenues 818 451 178 -------- --------- --------- Total revenues 1,868 2,327 30,440 Cost of sales 723 1,821 23,828 Termination and shutdown costs 5,250 Selling, general and administrative 3,364 609 3,073 -------- --------- --------- Total operating costs and expenses 4,087 7,680 26,901 Interest income 68 257 250 Reserve for impairment (3,000) Interest expense (2,494) (1,848) (952) -------- --------- --------- Total other (expense) (2,426) (4,591) (702) -------- --------- --------- Earnings (loss) before income tax (expense) (4,645) (9,944) 2,837 Income tax (expense) (56) (83) (14,692) -------- --------- --------- Net (loss) $ (4,701) $ (10,027) $ (11,855) -------- --------- --------- -------- --------- --------- 37 INCOME TAXES - SRL A deferred tax asset was generated primarily due to differences between financial and tax bases of plant and equipment in Sierra Leone. Sierra Leone's method of depreciation of plant and equipment is different from domestic tax law in that it allows SRL to elect when to take a depreciation deduction and there is no time limitation as to when the unused depreciation may be deducted. SRL enjoyed a tax holiday in Sierra Leone through June 1987 and during that holiday, it was not required to use any tax deduction for depreciation, creating a substantial difference between financial statement and tax bases of plant and equipment. As a result of the suspension of mining operations as described in Note A, the Company has determined that a valuation allowance is required for the deferred tax asset. Accordingly, income taxes of $14,645,000 in the Company's statement of operations for the year ended December 31, 1994 included a charge of $14,095,000 to increase the valuation allowance pertaining to SRL's deferred tax assets. The deferred tax asset of SRL at December 31, 1996 was $14,659,000 with a valuation allowance provided on the entire amount. COMMITMENTS - SRL In connection with the settlement of certain claims asserted by the government of Sierra Leone (government), SRL has agreed to commit $6 million for projects for the benefit of Sierra Leone. The projects, to be mutually agreed upon by the government and SRL, will be phased over a period not less than 3 years beginning in 1996. The Company anticipates that the capital projects, once they are determined, will benefit Sierra Leone and become an integral part of the mining operations of SRL. SRL anticipates entering into negotiations with the government of Sierra Leone to receive an extension of the period within which these projects can be completed. CONTINGENCIES - SRL The government of Sierra Leone has an option to acquire 47% of the shares of SRL beginning January 2000 at a purchase price of $57.4 million. Each of the shareholders of SRL would sell equal interests in SRL if this purchase option is exercised. The Company had certain amounts of insurance to cover risk of loss on its investment in SRL due to political violence and expropriation of SRL's assets. Under an insurance policy provided by an agency of the United States government, up to $15.7 million of coverage is provided for the Company's share of damage to property from political violence. This policy expired on December 31, 1995 and the insurer has elected not to renew the coverage. Based on the damage assessments performed to date, the Company filed a claim under this policy for its 50% share of damage to mine assets resulting from events which began in January 1995. The Company anticipates that further claims will be filed as additional information regarding damage to assets becomes available. The insurer has acknowledged that the policy would likely cover damage to SRL's assets as a result of the 38 January 1995 events. In September 1996, the Company received a $1.5 million provisional payment from the insurer under this policy, which has been recorded as unearned revenue in the financial statements. The Company is obligated to return any or all of this amount if it does not comply with certain provisions with respect to its efforts to repair damage at SRL or if the final amount of damage is less than that amount. The Company is not presently able to predict the extent or timing or amount of recoveries which may ultimately be available under this policy. The Company has pledged proceeds it may receive from this policy as collateral for a guarantee of SRL debt (Note G). D. INVESTMENTS IN AND ADVANCES TO AFFILIATES December 31 ----------------------- 1996 1995 ---- ---- (In thousands) Percent Owned ------ Nord Pacific Limited: Investment, at cost 35.2% $ 10,726 $ 10,726 Foreign currency translation adjustment 281 282 Equity in cumulative net (loss) (3,323) (3,679) Dividends received (167) (167) -------- -------- Total investment 7,517 7,162 Advances 1,178 31 -------- -------- Total Nord Pacific Limited 8,695 7,193 Manatee Gateway: Investment, at cost 41.8% 3,539 3,539 Less valuation allowance (2,394) (2,394) -------- -------- Total Manatee Gateway 1,145 1,145 -------- -------- $ 9,840 $ 8,338 -------- -------- -------- -------- 39 NORD PACIFIC LIMITED ("PACIFIC") In February 1994 in connection with a public offering by Pacific, the Company converted $2,900,000 of its advances to Pacific into 697,744 shares of common stock of Pacific. The Company's share of equity in net assets in excess of its investment is being amortized over ten years. In October 1996 the Company agreed to make available, at its discretion, up to $2,000,000 to Pacific. Any amount advanced to Pacific is payable on demand of the Company, and bears interest at the prime rate plus 1%. As of December 31, 1996, $947,000 has been advanced under this agreement. Pacific has filed a registration statement in Canada to sell up to 4,500,000 shares of its common stock in a public offering. The Company has agreed to purchase that number of shares of Pacific's common stock so that after the completion of the Canadian offering the Company would own approximately 30% of Pacific's common stock. The final purchase price of the stock is dependent on the price and number of shares sold in the Pacific offering and is estimated to be $4.5 million. There can be no assurance that the Canadian offering will be completed. The aggregate market value of the Company's investment in Pacific at December 31, 1996, based on the average of the bid and asked price (NASDAQ bid and asked) at December 31, 1996 of $6.25 per share, was $21,030,000. The following is summarized information from the audited financial statements of Pacific. The deferred exploration, development and other costs appearing on the balance sheet of Pacific relate primarily to three properties. The Company has obtained financial analyses of each of these properties from Pacific and based on review of the information supplied by Pacific and the position expressed by Pacific as to the expected recovery of its investment in these key properties, the Company believes that it will recover its investment in Pacific. 40 DECEMBER 31 --------------------------- BALANCE SHEET DATA - PACIFIC 1996 1995 - ---------------------------- ------ ------ (In thousands) Current assets $ 4,062 $ 6,730 Restricted cash 1,080 Forward currency exchange contracts 18 Premium on derivative financial instruments 311 960 Property, plant and equipment 5,411 5,919 Deferred exploration, development and other costs 29,939 19,977 -------- -------- Total assets 39,741 34,666 Current liabilities 7,150 6,790 Payable on derivative financial instruments 311 883 Deferred income taxes 3,740 1,120 Long-term debt 4,129 2,244 Retirement benefits 202 169 -------- -------- Shareholders' equity $ 24,209 $ 23,460 -------- -------- -------- -------- Company's share of equity (35.2%) $ 8,522 $ 8,281 -------- -------- -------- -------- YEAR ENDED DECEMBER 31 -------------------------------------- OPERATING DATA - PACIFIC 1996 1995 1994 - ------------------------ ------ ------ ------ (In thousands) Sales $ 16,178 $ 14,074 $ 11,293 Less costs and expenses (12,775) (11,038) (10,059) Forward currency transaction gain (loss) (114) (378) 515 Gain (loss) on foreign currency contracts 497 (279) 2,535 Copper contracts (loss) (304) Provision for taxes (2,620) (1,120) Other (expense) (245) (156) (295) -------- -------- -------- Net earnings $ 617 $ 1,103 $ 3,989 -------- -------- -------- -------- -------- -------- Charges from the Company included in costs and expenses $ 399 $ 361 $ 342 -------- -------- -------- -------- -------- -------- 41 The consolidated financial statements of Pacific include Pacific's proportionate interest in the assets, liabilities and costs and expenses of joint ventures related to copper mining. MANATEE GATEWAY The Company, through its wholly-owned subsidiary, Nord Manatee Ltd., has an interest in an inactive joint venture which holds approximately 200 acres of undeveloped real property in Manatee County, Florida. Contributions to the venture are required in the same ratios as the participants' interests. In 1996, Manatee Gateway executed a letter of intent to sell the property which resulted in a $175,000 provision for impairment being recorded by the Company in the fourth quarter of 1995. The Company expects the property to be sold in the second quarter of 1997. E. PROPERTY, PLANT AND EQUIPMENT December 31 ----------------------- 1996 1995 -------- -------- (In thousands) Mining, exploration and milling equipment $ 1,376 Office equipment $ 429 426 -------- -------- 429 1,802 Less accumulated depreciation and depletion 402 1,255 -------- -------- $ 27 $ 547 -------- -------- -------- -------- F. OTHER ASSETS December 31 ----------------------- 1996 1995 -------- -------- (In thousands) Non-qualified trusts for funding of retirement benefits: (Note I) Cash surrender value of life insurance, net of policy loans of $1,591 in 1996 and $1,393 in 1995 $ 2,342 $ 2,055 Investments - available for sale 1,903 970 Unamortized pension cost 109 149 Other 463 466 -------- -------- $ 4,817 $ 3,640 -------- -------- -------- -------- 42 G. INDEBTEDNESS December 31 ------------------------ 1996 1995 --------- --------- (In thousands) Sierra Rutile Limited (Notes A and C): Financing lines of credit $ 16,497 $ 16,497 Non-interest bearing bank financing 6,265 6,265 Interest (prepaid) accrued (1,142) 696 --------- --------- Obligations to lenders - SRL $ 21,620 $ 23,458 --------- --------- --------- --------- SRL (100%, WITH THE COMPANY'S SHARE NOTED PARENTHETICALLY) As of December 31, 1996, SRL owed $32,994,000 ($16,497,000) under financing agreements with four institutions which initially provided $48,000,000 ($24,000,000) of financing for a capital expansion program. The amounts outstanding bear interest at rates ranging from 7.2% to 11% per annum. The suspension of the rutile mining operation as described in Note A and violations of various financial covenants constitute events of default under these financing agreements. The lenders have agreed to forebear from accelerating payment of the loans or enforcing their rights against any collateral through July 1, 1997 to allow SRL time to determine the damage to the mining operation, assess the political situation in Sierra Leone and develop a plan for refinancing, rehabilitating and reopening the mining operation. During this period of forebearance, SRL is prohibited from making any dividend payment or any other payments to the Company except for reimbursement of operating or administrative expenses for the benefit of SRL. SRL's requirement to pay a commitment fee of up to 1% per annum of the unused amount of the lines has been waived through July 1, 1997. In addition, SRL is precluded from borrowing additional amounts under these agreements and is required to expend at least $500,000 each quarter to pay for its liabilities and purchases. The forebearance agreement would terminate if there is a material change in circumstances at SRL. As a condition to receiving the extension of the forebearance through July 1, 1997, SRL was required to prepay interest due under the financing agreements through July 1, 1997. Amounts due under the loans, along with prepaid interest of $2,284,000 ($1,142,000) at December 31, 1996 and accrued interest of $1,392,000 ($696,000) at December 31, 1995 have been classified in the balance sheets as a current liability. Under the forebearance, the lenders have agreed to release SRL from an obligation to maintain certain funds in escrow for payment of amounts due the lenders. From the amount in the escrow account at December 31, 1995, the lenders received $4,862,000 ($2,431,000) in 1996 as payment of all amounts (except principal) which was due the lenders during 1996. 43 SRL also owes $12,530,000 ($6,265,000) under a bank financing agreement which had no stated interest rate. This loan is also in default due to the above noted circumstances and has been classified in the balance sheet as a current liability. This lender is also a party to the above mentioned forebearance agreement, under which SRL agreed to pay interest at 10% during 1996 on scheduled payments of $1,671,000 ($835,500) due under this loan at December 31, 1995. Under the forebearance extension signed in late 1996, SRL prepaid interest at 10% for the period January 1, 1997 through June 30, 1997 on the entire amount owed to this lender. The financing agreements contain restrictive covenants relating to SRL including requirements to maintain minimum current and debt coverage ratios and a limit on indebtedness compared to net worth. In addition, SRL is restricted as to the amount of dividends it may declare in any one year to 90% of its cash balance as of the prior year end, with a maximum annual dividend of $7,500,000 ($3,750,000) prior to "project completion", as defined. SRL must also be in compliance with its financial covenants in order to pay a dividend. Additional covenants under these agreements include restrictions on change of control of SRL and limitations on additional indebtedness at SRL. Under these financing arrangements, SRL has committed to complete an $83,300,000 expansion program of which $58,000,000 had been expended. Prior to "project completion", the Company has guaranteed payment of its 50% share of amounts owed to the lenders. The completion of certain events are required for SRL to attain "project completion" including construction or procurement of certain capital assets, attainment of certain production and sales levels, generation of minimum amounts of net earnings and net worth and maintenance of certain financial ratios. Separately, as a condition to the forebearance and as security for its guarantee, the Company has pledged proceeds it may receive from claims made under a political risk insurance policy issued by an agency of the United States government (Note C). The Company will be able to retain the first $2.7 million of the proceeds. Any additional proceeds will be held in trust and funds shall be released from the trust when the Company's 50% share of the deferred principal payments have been made and no events of default exist under the financing agreements. 44 H. INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value and related carrying value of the Company's debt, excluding capital leases, at December 31, 1996 and 1995 were $21,620,000 and $23,458,000, respectively. The fair value of debt is equivalent to the face value because the SRL debt is classified as a current liability. Investments available for sale, consisting principally of municipal bonds and money market mutual funds, totaled $4,279,000 and $3,577,000 at December 31, 1996 and 1995, respectively. The amortized cost of these investments approximates estimated fair value. There were no sales of investments in 1996, 1995 or 1994. I. RETIREMENT BENEFITS The Company has an unfunded non-contributory defined benefit plan for certain of its executive officers and management personnel. The Company has non-qualified trusts which were established in 1989 related to this plan, and the trusts hold assets valued at $4,245,000 (Note F). Effective in 1995, the plan was amended to permit two officers to elect a discounted lump sum distribution limited to the amounts held in the trusts. The Company has committed to contribute $650,000 in 1997 to the trusts designated for one of these officers. 45 The following sets forth the funded status and amounts recognized in the Company's balance sheets: December 31 ------------------------ 1996 1995 --------- --------- (In thousands) Present value of accumulated benefit obligation: Estimated present value of vested benefits $ 6,809 $ 5,867 Estimated present value of non-vested benefits 21 31 --------- --------- Present value of accumulated benefit obligation 6,830 5,898 Estimated effect of salary and benefit increases 693 1,072 --------- --------- Projected benefit obligation 7,523 6,970 Unrecognized transition obligation (134) Unrecognized prior service cost (109) (128) Unrecognized net loss including effects of changes in assumptions (836) (960) Minimum pension liability 252 150 --------- --------- Accrued pension cost $ 6,830 $ 5,898 --------- --------- --------- --------- Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," requires recognition of a minimum pension liability. As of December 31, 1996, the Company recorded a minimum pension liability of $252,000 and an equity reduction of $143,000, and an asset of $109,000. 46 Net pension expense consists of the following components: Year Ended December 31 --------------------------------------- 1996 1995 1994 --------- --------- --------- (In thousands) Service costs - benefits earned during the period $ 133 $ 169 $ 42 Interest on projected benefit obligation 525 452 424 Net amortization and deferral 173 51 362 --------- --------- --------- Net pension expense $ 831 $ 672 $ 828 --------- --------- --------- --------- --------- --------- The discount rate was 7.25% in 1996, 7.5% in 1995 and 8% in 1994. The assumed rate of future pay increases was 4%. J. DISCONTINUED OPERATIONS In February 1997, the Company's Board of Directors approved a formal plan to sell substantially all the assets of the Company's 80% owned subsidiary, Nord Kaolin Company ("NKC"). The results of NKC, which comprises the Company's kaolin segment, are reported as discontinued operations in these financial statements. Under an agreement dated March 5, 1997, the Company has agreed to sell substantially all the assets (except cash and accounts receivable) for $20 million less $735,000 relating to certain accruals assumed by the purchaser. The purchaser will also assume certain lease obligations of NKC. At closing, the Company will receive $17.3 million in cash and $1.9 million will be paid into an escrow account with the final price subject to certain adjustments. The Company anticipates that only adjustments relating to the change in inventory levels through the closing date would be required and the remaining escrowed funds would be remitted to the Company within 30 days of closing. The Company will retain an estimated $5.1 million of NKC's accounts receivable and, at or prior to closing, will be required to pay certain obligations. In addition, for 15 years the Company will receive a royalty if annual sales of Norplex-Registered Trademark- and certain other products exceed specified amounts. The Company anticipates that the closing of the transaction will occur in April 1997, subject to the assumption of certain of NKC's leases by the purchaser. The Company is involved in discussions with lessors and the purchaser regarding release of liability relating to the mining equipment leases of NKC, payment of which is guaranteed by the Company. The amounts due under capital leases have been included in current liabilities because the lessors have not released the Company from liability. Operating leases to be assumed by the purchaser relating to mining equipment would require the following minimum lease 47 payments; 1997 - $2.7 million, 1998 - $2.7 million and 1999 - $1.4 million. The Company anticipates that these leases will be assumed by the purchaser and has made the satisfactory assumption of the leases a condition of closing. Year Ended December 31 --------------------------------------- 1996 1995 1994 --------- --------- --------- (In thousands) Operating loss from discontinued kaolin segment $ 5,762 $ 4,610 $ 3,295 Loss on disposal of kaolin segment 18,912 Estimated operating losses to disposal date 2,500 --------- --------- --------- Loss from discontinued operations $ 27,174 $ 4,610 $ 3,295 --------- --------- --------- --------- --------- --------- Sales from the discontinued operations of $33,635,000, $36,755,000 and $41,232,000 and the respective cost of sales, selling, general and administrative costs and interest expense for the years ended December 31, 1996, 1995 and 1994, respectively, have been reclassified from continuing operations in the statement of operations and are included in the loss from discontinued operations. The assets (liabilities) of discontinued operations are summarized as follows: December 31 ------------------------ 1996 1995 --------- --------- (In thousands) Current Assets $ 9,071 $ 8,700 Plant & equipment and deferred charges (at net realizable value in 1996) 20,237 39,771 Other current liabilities (10,902) (10,969) Accrued transaction costs (1,611) Estimated operating losses to disposal date (2,500) Long term liabilities (1,956) (2,356) --------- --------- Net Assets of Discontinued Operations $ 12,339 $ 35,146 --------- --------- --------- --------- Included in accrued transaction costs is $800,000 relating to severance and $811,000 relating to estimated legal and other termination costs. The NKC non-contributory defined benefit plan covering bargaining hourly employees is being assumed by the purchaser. 48 K. LITIGATION STOCKHOLDER During 1993, the plaintiffs and defendants agreed to the settlement of a class action complaint, filed initially in 1990, against the Company and certain of its officers and directors. The final settlement was approved by the United States District Court in December 1994 and the case was dismissed. The Company settled the litigation through issuance of 690,159 shares of its common stock at a value of $4,250,000 and payment of $500,000 in cash, plus the payment of notice and administration costs of $76,000. The amount of the settlement was recorded in the financial statements at December 31, 1993. The number of shares issued as part of the settlement was determined and included in shares outstanding in the fourth quarter of 1994 and distribution of the shares occurred in January 1995. RECOVERIES The Corporation has reached settlement with all defendants in civil actions it filed after receiving an award in 1992 from an arbitration initiated by SRL against a former sales agent. As a result, all proceedings related to this matter have been resolved. The Company is a party to other claims and lawsuits incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such matters, in the aggregate, will not have a material effect upon the Company's financial position or results of operations. L. COMMITMENTS The Company has agreements with certain employees of the Company or its affiliates which contain change in control provisions which would entitle two employees to receive three times their salary in the event of a change in control of the Company (as defined) and four other employees to receive up to two times their salary in the event of a change in control and a change in certain conditions of their employment. The maximum contingent liability under these agreements is approximately $3,126,000 at December 31, 1996. M. LEASES Minimum annual lease payments due through 1999 are $95,000. Total rent expense for leases during the years ended December 31, 1996, 1995 and 1994 was $216,000, $223,000 and $484,000, respectively. 49 N. STOCKHOLDERS' EQUITY STOCK OPTIONS Under the Company's various stock option plans, options have been granted at market price at date of grant (incentive stock options) and at less than market price at date of grant (non-qualified stock options). Options are generally exercisable beginning one year from date of grant and expire ten years from date of grant. At December 31, 1996, 239,852 shares are available for future option grants. The Company also has granted options to a consultant to purchase 150,000 shares of common stock at a purchase price of $5.63 per share and 50,000 shares of common stock at a purchase price of $7.00 per share, both of which expire on July 1, 1997. A summary of the option activity is as follows: Weighted Average Shares Exercise Price ---------- ---------------- Outstanding at December 31, 1993 1,581,139 $ 6.70 Granted 149,000 5.13 Exercised (8,275) 4.49 Terminated (85,485) 4.75 ---------- Outstanding at December 31, 1994 1,636,379 6.56 Granted 169,850 5.13 Terminated (183,753) 8.48 Expired (64,575) 5.12 ---------- Outstanding at December 31, 1995 1,557,901 6.41 Granted 205,980 2.99 Terminated (72,120) 6.50 Expired (32,400) 6.17 ---------- Outstanding at December 31, 1996 1,659,361 5.99 ---------- ---------- 50
1996 1995 1994 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------- ---------- --------- ---------- --------- ---------- --------- Options Exercisable at Year-End 1,463,481 $ 6.38 1,436,766 $ 6.53 1,496,679 $ 6.70 Weighted average fair value of options granted during year $ 1.46 $ 2.71
The assumptions used in determining the fair value of options granted during 1996 and 1995 are as follows: Expected Volatility 67% Expected Life of Grant Five Years Risk-Free Interest Rate 5.03% Expected Dividend Rate None The following table summarizes information about stock option plans and non-plan options at December 31, 1996:
Options Outstanding ------------------- Weighted Average Options Range of Exercise Prices per share Outstanding Contract Life Exercisable - ------------------------------------ ----------- ------------- ----------- $ 2.25 158,380 9.10 7,500 4.63 15,000 9.88 0 4.88 33,750 .83 33,750 5.00 118,735 8.13 118,735 5.13 223,220 6.16 223,220 5.50 64,280 5.63 64,280 5.61 35,550 .08 35,550 5.63 150,000 .50 150,000 6.13 30,000 9.42 0 6.50 15,000 4.83 15,000 6.63 54,850 .92 54,850 6.67 119,250 1.04 119,250 6.75 90,825 6.21 90,825 7.00 111,650 2.41 111,650 7.38 185,200 .83 185,200 7.75 123,010 4.40 123,010 8.00 90,000 2.08 90,000 8.25 40,661 1.92 40,661 --------- --------- $2.25 - 8.25 1,659,361 4.05 1,463,481 --------- --------- --------- ---------
51 A total of 1,899,213 shares are reserved for exercise of the above described stock options. The Company applies APB Opinion No. 25 in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for options granted to employees. Had compensation cost for the Company's option grants been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net loss and net loss per common and common equivalent share would have been adjusted to the pro forma amounts indicated below: Year Ended December 31, ------------------------- 1996 1995 --------- --------- Net Loss: As reported $ (29,559) $ (8,259) Pro Forma $ (29,675) $ (8,686) Net Loss per Common and Common Equivalent Share: As reported $ (1.56) $ (.52) Pro Forma $ (1.56) $ (.55) OTHER In April and October 1996, the Company sold 3,160,000 and 2,000,000 shares of common stock for $7.9 million ($2.50 per share) and $10 million ($5 per share) to a private investor. In April 1996, the Company entered into a $2.1 million convertible loan agreement with the same investor which in June 1996 was converted into 840,000 shares of common stock. As of December 31, 1996, this investor owned approximately 27.5% of the Company's outstanding shares of common stock. Retained earnings are not available for dividends because retained earnings of the Company are comprised of the cumulative amount of undistributed earnings of foreign subsidiaries, the distribution of which is limited under the terms of the financing lines of credit. 52 O. INCOME TAX Income tax expense (benefit) includes the following: Year Ended December 31 --------------------------------------- 1996 1995 1994 --------- --------- --------- Domestic: (In thousands) Currently payable $ (47) Reduction for use of net operating loss carryforwards Current deferred $ (7,262) $ (306) 283 Long-term deferred (3,146) (1,634) (2,009) Change in valuation allowance 10,408 1,940 1,726 --------- --------- --------- Total domestic $ 0 $ 0 (47) --------- --------- --------- --------- SRL: Currently payable 1,060 Current deferred (691) Long-term deferred 228 Change in valuation allowance 14,095 --------- Total SRL 14,692 --------- Income tax expense $ 14,645 --------- --------- As a result of the suspension of mining operations as described in Note A, the Company has determined that a valuation allowance is required for SRL's deferred tax assets. Accordingly, income tax expense for the year ended December 31, 1994 includes a charge of $14,095,000 to increase the valuation allowance pertaining to SRL deferred tax assets. The principal current and long-term deferred tax assets and (liabilities) are as follows: 1996 1995 -------- -------- (in thousands) Current domestic deferred tax assets: - ------------------------------------- Kaolin: Other $ 24 $ 57 Accrued expenses 264 249 Loss on disposal 7,280 Valuation allowance (7,568) (306) -------- -------- Total asset $ 0 $ 0 -------- -------- -------- -------- 53 Long-term domestic deferred tax assets and liabilities: - ------------------------------------------------------- ASSETS: Nord: Affiliate losses - Nord Pacific $ 1,641 $ 1,716 Deferred compensation 2,100 1,877 Impairment of investments and assets 814 1,105 NOL carryforwards 12,993 9,476 Tax credit carryforwards 2,840 3,497 Unearned revenue 510 Other 247 243 -------- -------- Total Nord 21,145 17,914 -------- -------- LIABILITIES: Kaolin: Mine development and exploration (861) (823) Depreciation (7,923) (8,546) Other (526) (244) -------- -------- Total Kaolin (9,310) (9,613) Nord: Total Nord (5) 383 -------- -------- Total liabilities (9,315) (9,230) -------- -------- Net domestic asset (liability) 11,830 8,684 Valuation allowance (11,830) (8,684) -------- -------- Total domestic $ 0 $ 0 -------- -------- -------- -------- The domestic valuation allowance for deferred tax assets represents a 100% valuation allowance. Based upon the earnings history of the Company's domestic operations, it is more likely than not that the Company will be unable to generate enough income to take advantage of the net operating loss carryforwards and related tax credits. Domestic income taxes have not been provided on undistributed earnings of SRL aggregating $28,400,000 at December 31, 1996 which the Company intends to reinvest in SRL. The unrecognized domestic deferred tax liability for the temporary differences related to the Company's investment in SRL was $6,400,000 at December 31, 1996. 54 Income taxes differ from the amount computed by applying the U.S. statutory federal income tax rate as follows:
Year Ended December 31 --------------------------------------- 1996 1995 1994 --------- --------- --------- (In thousands) Tax (benefit) at statutory rate $ (10,050) $ (2,808) $ (328) Increase (decrease) in taxes resulting from: Change in valuation allowance 10,408 1,940 15,821 Rate difference on foreign earnings 85 Percentage depletion (226) (272) (272) Non (taxable) deductible foreign (income) expense 1,020 (634) Other (132) 120 (27) --------- --------- --------- Income tax expense $ 0 $ 0 $ 14,645 --------- --------- --------- --------- --------- ---------
FEDERAL At December 31, 1996, the Company had a net operating loss carryforward for domestic income tax purposes totaling $38,216,000 available to be carried forward to future periods. This carryforward expires from 2006 to 2011. The Company also had general business credit carryforwards of $571,000, which expire from 1997 to 2011, and foreign tax credits of $1,229,000, which expire in 1997, available to reduce the Company's future tax liability. The Alternative Minimum Tax (AMT) requires a separate tax computation from regular tax, based on a 20% rate. For AMT purposes, net operating loss carryforwards are adjusted by certain tax preference items, including the percentage depletion deduction previously taken by the Company. The Company has paid $1,040,000 of AMT and such amount is available to be used as a credit in future years to the extent that regular tax exceeds the AMT. FOREIGN The Company's principal foreign interest is a 50% subsidiary (SRL) which is assessed income tax at a 37.5% rate with a minimum tax payment equal to 3.5% of net sales. 55 P. CASH FLOW STATEMENTS
Year Ended December 31 --------------------------------------- Increase (Decrease) in cash and cash equivalents 1996 1995 1994 --------- --------- --------- RUTILE SEGMENT (none in 1996 or 1995) - ------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (11,855) Adjustments to reconcile net (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 6,212 Deferred income taxes 13,632 Imputed interest expense 28 Cumulative effect of change in accounting principle Change in assets and liabilities: Accounts receivable (2,088) Inventories 1,142 Prepaid expenses (646) Accounts payable 3,234 Accrued expenses 1,110 Long-term liabilities 1,271 --------- Net cash provided by rutile operating activities $ 12,040 --------- --------- DOMESTIC - -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (29,559) $ (8,259) $ (3,756) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Equity in net (earnings) loss of affiliates (356) (526) (1,613) Depreciation, depletion and amortization 33 93 119 Gain on sale of 50% of rutile segment (1,527) Unearned revenue 1,500 Provision for impairment of investments 280 3,175 Loss from discontinued operations 27,174 4,610 3,295 Change in assets and liabilities, excluding effects of dispositions and discontinued operations: Accounts receivable (73) 477 84 Prepaid expenses 64 210 (256) Accounts payable (144) 160 (53) Accrued expenses 61 (246) (498) Retirement benefits 857 936 837 Net cash (used in) discontinued operations (4,785) (2,244) (1,312) --------- --------- --------- Net cash (used in) domestic operating activities $ (4,948) $ (1,614) $ (4,680) --------- --------- --------- --------- --------- ---------
56 Q. MAJOR CUSTOMERS The Company's decision to dispose of its domestic kaolin operation has resulted in the Company's only business segment being the rutile segment, which was not operating in 1996 and 1995 as described in Note C. Sales in 1994 include rutile sales to three customers of $9,920,000, $8,120,000 and $6,994,000. 57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by the above Items 10-13 is incorporated by reference from the Company's Proxy Statement to be dated April 25, 1997. 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The financial statements of Nord Resources Corporation are included in Part II, Item 8 of this Form 10-K PAGE ---- 2. Financial Statement Schedules: Independent Auditors' Report 60 Schedule II - Valuation and qualifying accounts 61 Nord Pacific Limited: Independent Auditors' Report 62 Consolidated Balance Sheets 63 Consolidated Statements of Operations 65 Consolidated Statements of Shareholders' Equity 66 Consolidated Statements of Cash Flows 67 Notes to Consolidated Financial Statements 68 (b) Reports on Form 8-K: The Company filed a report on Form 8-K dated October 16, 1996 reporting entering into an agreement to sell stock to a private investor. (c) Exhibits: See INDEX TO EXHIBITS 59 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Nord Resources Corporation Dayton, Ohio We have audited the consolidated financial statements of Nord Resources Corporation and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996; and have issued our report thereon dated April 9, 1997, which report disclaims an opinion on the consolidated financial statements as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 because of uncertainties relating to the ability of the Company to continue as a going concern and the inability of other auditors to express an opinion on the financial statements of the Rutile Segment; such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedules of Nord Resources Corporation and subsidiaries, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express (or disclaim) an opinion based on our audits. As explained in the fourth paragraph of our report, we are unable to express, and we do not express, an opinion on the Company's consolidated financial statements for 1996, 1995 and 1994. Accordingly, we are unable to express, and we do not express, an opinion on the consolidated financial statement schedules as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996. Deloitte & Touche LLP Dayton, Ohio April 9, 1997 60 NORD RESOURCES CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Column A Column B Column C Column D Column E - ------------------------------------------ ----------- --------- --------- ----------- Balance at Additions Beginning Charged to Balance of Costs and at End Description Period Expenses Deductions of Period - ------------------------------------------ ----------- ---------- ---------- ----------- YEAR ENDED DECEMBER 31, 1996 Estimated loss on disposal, including provision for estimated operating losses to disposal date $ $ 21,412 $ $ 21,412 -------- --------- --------- ---------- -------- --------- --------- ---------- Investment valuation allowance - Manatee Gateway $ 2,394 $ $ $ 2,394 -------- --------- --------- ---------- -------- --------- --------- ---------- Provision for impairment - Ilmenite equipment $ 855 $ 280 $ 1,135(1) $ -------- --------- --------- ---------- -------- --------- --------- ---------- Income tax valuation allowance $ 8,890 $ 10,408 $ $ 19,398 -------- --------- --------- ---------- -------- --------- --------- ---------- YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts $ 145 $ $ 145 $ -------- --------- --------- ---------- -------- --------- --------- ---------- Investment valuation allowance - Manatee Gateway $ 2,219 $ 175 $ $ 2,394 -------- --------- --------- ---------- -------- --------- --------- ---------- Provision for impairment - Ilmenite equipment $ 855 $ $ $ 855 -------- --------- --------- ---------- -------- --------- --------- ---------- Income tax valuation allowance $ 7,050 $ 1,940 $ $ 8,990 -------- --------- --------- ---------- -------- --------- --------- ---------- YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts $ 75 $ 70 $ $ 145 -------- --------- --------- ---------- -------- --------- --------- ---------- Investment valuation allowance - Manatee Gateway $ 2,219 $ $ $ 2,219 -------- --------- --------- ---------- -------- --------- --------- ---------- Provision for impairment - Ilmenite equipment $ 855 $ $ $ 855 -------- --------- --------- ---------- -------- --------- --------- ---------- Income tax valuation allowance $ 6,003 $ 15,821 $ 14,774(2) $ 7,050 -------- --------- --------- ---------- -------- --------- --------- ----------
(1) Equipment written off against the provision for impairment. (2) Represents the portion of the valuation allowance relating to SRL which was reclassified to Investment in SRL upon the adoption of the cost basis of accounting for SRL at December 31, 1994. (See Notes A and C) 61 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Nord Pacific Limited Hamilton, Bermuda We have audited the accompanying consolidated balance sheets of Nord Pacific Limited and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 (all expressed in U.S. dollars). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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 made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nord Pacific Limited and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE Chartered Accountants Hamilton, Bermuda March 14, 1997 62 NORD PACIFIC LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995 (IN THOUSANDS OF U.S. DOLLARS)
ASSETS (Note E) 1996 1995 - -------------------------------------------------- ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 439 $ 3,656 Accounts receivable (no allowance for doubtful accounts is considered necessary): Trade 1,868 1,172 Affiliates 21 40 Other 43 49 ---------- ---------- 1,932 1,261 Inventories: Copper 131 88 Supplies 195 183 ---------- ---------- 326 271 Forward currency exchange contracts (Note F) 76 1,022 Premium on copper contracts (Note F) 1,193 348 Prepaid expenses 96 172 ---------- ---------- TOTAL CURRENT ASSETS 4,062 6,730 RESTRICTED CASH (Note E) 1,080 FORWARD CURRENCY EXCHANGE CONTRACTS (Note F) 18 PREMIUM ON COPPER CONTRACTS (Note F) 311 960 DEFERRED COSTS ASSOCIATED WITH ORE UNDER LEACH, net of accumulated amortization of $8,569 in 1996 and $5,867 in 1995 (Note B) 7,897 5,606 PROPERTY, PLANT, AND EQUIPMENT at cost less accumulated depreciation (Note C) 5,411 5,919 DEFERRED EXPLORATION AND DEVELOPMENT COSTS: Girilambone, net of accumulated amortization of $1,199 in 1996 and $799 in 1995 (Note B) 4,471 1,356 Exploration prospects (Note D) 17,307 12,956 OTHER 264 59 ---------- ---------- $ 39,741 $ 34,666 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 63 NORD PACIFIC LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNT)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 - -------------------------------------------------- ---------- ---------- CURRENT LIABILITIES: Accounts payable: Trade $ 1,595 $ 1,613 Affiliates 276 32 ---------- ---------- 1,871 1,645 Note payable - Nord Resources Corporation (Note G) 947 Accrued expenses 1,067 822 Deferred gain on copper contracts (Note F) 1,565 Payable on copper contracts (Note F) 393 Current maturities of long-term debt (Note E) 1,700 3,930 ---------- ---------- TOTAL CURRENT LIABILITIES 7,150 6,790 LONG-TERM LIABILITIES: Long-term debt (Note E) 3,334 1,500 Payable on copper contracts (Note F) 311 883 Deferred income tax liability (Note K) 3,740 1,120 Obligation under purchase agreement (Note D) 795 744 Retirement benefits (Note L) 202 169 ---------- ---------- TOTAL LONG-TERM LIABILITIES 8,382 4,416 CONTINGENT LIABILITIES (Note M) SHAREHOLDERS' EQUITY (Notes G, I and N): Common stock, par value $.05 per share, authorized - 20,000,000 shares, issued and outstanding: 1996 - 9,515,654 and 1995 - 9,492,254 476 475 Additional paid-in capital 31,467 31,336 Accumulated deficit (8,532) (9,149) Foreign currency translation adjustment 798 798 ---------- ---------- 24,209 23,460 ---------- ---------- $ 39,741 $ 34,666 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 64 NORD PACIFIC LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ---------- ---------- ---------- SALES (Note I) $ 16,178 $ 14,074 $ 11,293 COSTS AND EXPENSES: Cost of sales (Note B) 8,969 7,664 7,289 Abandoned and impaired projects 191 352 35 General and administrative: Nord Resources Corporation (Note G) 415 361 318 Other 3,200 2,661 2,417 ---------- ---------- ---------- Total general and administrative 3,615 3,022 2,735 ---------- ---------- ---------- Total costs and expenses 12,775 11,038 10,059 ---------- ---------- ---------- OPERATING EARNINGS 3,403 3,036 1,234 OTHER INCOME (EXPENSE): Interest and other income 161 448 697 Interest and debt issuance costs (406) (604) (992) Forward currency exchange contracts gain (loss) (Note F) 497 (279) 2,535 Foreign currency transaction gain (loss) (114) (378) 515 Copper contracts (loss) (Note F) (304) ---------- ---------- ---------- TOTAL OTHER INCOME (EXPENSE) (166) (813) 2,755 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 3,237 2,223 3,989 PROVISION FOR INCOME TAXES (Note K) 2,620 1,120 ---------- ---------- ---------- NET EARNINGS $ 617 $ 1,103 $ 3,989 ---------- ---------- ---------- ---------- ---------- ---------- NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ .06 $ .12 $ .43 ---------- ---------- ---------- ---------- ---------- ---------- AVERAGE COMMON AND COMMON EQUIVALENT SHARES (In thousands) (Notes A and N) 10,053 9,559 10,800 ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 65 NORD PACIFIC LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARES)
Common Stock Additional ------------------------- Paid-in Accumulated Shares Amount Capital Deficit (Note N) -------------------------------------------------------- BALANCE - December 31, 1993 5,585,075 $ 279 $ 16,137 $ (13,773) Net earnings 3,989 Compensation relating to restricted shares 16 Issuance of common stock 3,200,000 160 12,304 Stock option activity 6,522 3 Conversion of long-term debt to common stock (Note G) 697,744 35 2,865 ---------- ---------- ---------- ---------- BALANCE - December 31, 1994 9,489,341 474 31,325 (9,784) Net earnings 1,103 Common stock issued relating to stock bonus plan 2,913 1 11 Dividend paid ($.05 per share) (468) ---------- ---------- ---------- ---------- BALANCE - December 31, 1995 9,492,254 475 31,336 (9,149) Net earnings 617 Compensation relating to options issued to non-employees 45 Exercise of stock options 23,400 1 86 ---------- ---------- ---------- ---------- BALANCE - December 31, 1996 9,515,654 $ 476 $ 31,467 $ (8,532) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 66 NORD PACIFIC LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS OF U.S. DOLLARS)
INCREASE (DECREASE) IN CASH 1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 617 $ 1,103 $ 3,989 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 1,278 1,258 995 Amortization 3,259 2,736 3,043 Compensation relating to non-qualified options, bonus shares and restricted stock 45 12 16 Unrealized (gain) loss on forward currency exchange contracts 988 977 (2,017) Foreign currency transaction loss (gain) 114 378 (515) Abandoned and impaired projects 191 352 35 Deferred costs associated with ore under leach (4,992) (3,558) (3,627) Deferred income taxes 2,620 1,120 Derivative financial instruments 304 Change in assets and liabilities: Accounts receivable (764) (36) (226) Inventories (45) (47) 171 Prepaid expenses 80 (139) 11 Accounts payable 158 709 (378) Accrued expenses and other liabilities 339 525 (613) ---------- ---------- ---------- Net cash provided by operating activities 4,192 5,390 884 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (771) (1,569) (727) Payment of obligation under purchase agreement (648) Deferred exploration costs (8,154) (4,099) (1,611) ---------- ---------- ---------- Net cash (used in) investing activities (8,925) (6,316) (2,338) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt (1,185) (4,703) (5,771) Additions to long-term debt 789 3,000 140 Net borrowings - Nord Resources Corporation 947 55 Stock option activity 87 3 Restricted cash 1,080 (56) 115 Issuance of common stock 14,266 Costs associated with issuance of common stock (265) (1,105) Dividends paid (468) ---------- ---------- ---------- Net cash provided by (used in) financing activities 1,453 (2,227) 7,703 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 63 (340) 596 ---------- ---------- ---------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,217) (3,493) 6,845 CASH AND CASH EQUIVALENTS - beginning of year 3,656 7,149 304 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS - end of year $ 439 $ 3,656 $ 7,149 ---------- ---------- ---------- ---------- ---------- ---------- CASH PAID FOR INTEREST $ 384 $ 449 $ 950 ---------- ---------- ---------- ---------- ---------- ---------- NON-CASH TRANSACTIONS: Purchase of derivative financial instruments (Note F) $ 311 $ 1,308 ---------- ---------- ---------- ---------- Conversion of long-term debt due to Nord Resources Corporation into common stock (Note G) $ 2,900 ---------- ----------
See notes to consolidated financial statements. 67 NORD PACIFIC LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN U.S. DOLLARS) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY DESCRIPTION Nord Pacific Limited (the "Company") operates in a single industry segment which includes the exploration for and development and production of precious and base metals and strategic mineral properties primarily in Australia and Papua New Guinea. Exploration activity carried on in North America, including Canada and Mexico, is primarily for gold. PRINCIPLES OF CONSOLIDATION The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its 40% interest in the Girilambone copper property in Australia and its 50% interest in the Girilambone North Project (collectively "Girilambone"). Financial statement amounts relating to Girilambone represent the Company's proportionate interest in the assets, liabilities and operations of Girilambone. All significant intercompany transactions are eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. CASH AND CASH EQUIVALENTS The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. DEFERRED COSTS ASSOCIATED WITH ORE UNDER LEACH Costs at Girilambone incurred with respect to ore under leach are deferred and amortized using the units of production method over the estimated reserves. Copper is projected to be recovered during the next 6 year period, based on the present proven reserves and copper within the leach pads. The Company continually evaluates and refines estimates used to determine the amortization and carrying amount of deferred costs associated with ore under leach based upon actual copper recoveries and operating plans. 68 PROPERTY, PLANT AND EQUIPMENT Non-mining property, plant and equipment is depreciated using the straight-line method over the estimated useful lives of the assets. Property, plant and equipment related to Girilambone is depreciated by the units-of-production method over the estimated reserves. DEFERRED EXPLORATION AND DEVELOPMENT COSTS All costs directly attributable to prospecting, exploration and development are deferred. Costs related to producing properties are amortized by the units-of- production method over the estimated reserves. Deferred costs are carried at cost, not in excess of anticipated future recoverable value, and are expensed when a project is no longer considered commercially viable. DEBT ISSUANCE COSTS Professional fees and expenses relating to the issuance of debt are capitalized and amortized over the term of the related borrowings. FOREIGN CURRENCY TRANSLATION The functional currency for operations conducted in Australia is the U.S. dollar. Adjustments to U.S. dollar balances as a result of changes in the exchange rate between U.S. dollars and Australian dollars are recognized currently in the statement of operations as foreign currency transaction gains and losses. Prior to March 31, 1993, the Australian dollar was the functional currency for the Company's operations conducted in Australia, and the resulting translation adjustments were accumulated as a separate component of shareholders' equity through March 31, 1993. FINANCIAL INSTRUMENTS Gains and losses related to qualifying hedges of anticipated copper sales are deferred and recognized in the statement of operations as a component of sales at the settlement date. Realized and unrealized gains and losses on forward currency exchange contracts and other derivative financial instruments that do not qualify as hedges are recognized currently in the statement of operations. Net unrealized gains and losses are included as assets or liabilities in the balance sheet. NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Net earnings per common and common equivalent share for the years ended December 31, 1996 and 1995 is calculated using the treasury stock method. Net earnings per common and common equivalent share is computed on a modified treasury stock method during 1994 as options outstanding exceeded 20% of the Company's shares outstanding at December 31, 1994. Under this method of computation, all options outstanding are presumed exercised, and proceeds are deemed to be applied to reduce borrowing with any excess proceeds applied to the purchase of U.S. government securities. Net earnings and average common and common equivalent shares are adjusted to include the effect of the above calculation in determining the Company's net earnings per common and common equivalent share. In February 1997, the Financial Accounting Standard Board issued Statement ("SFAS") No. 128, "Earnings Per Share." The Company has not adopted SFAS No. 128 in its December 31, 1996 financial statements and has not yet determined what affect its adoption will have on subsequently filed financial statements. 69 RESTATEMENT OF SHARE AND PER SHARE AMOUNTS Pursuant to the 1 for 5 reverse stock split of the Company's common stock, effective March 10, 1997, all share and per share amounts have been restated to reflect the reverse stock split. RECLASSIFICATIONS Certain reclassifications have been made in the 1995 and 1994 consolidated financial statements to conform to the classifications used in 1996. These reclassifications had no effect on net earnings or shareholders' equity as previously reported. ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires review for impairment of long-lived assets whenever changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 has had no effect on the Company's financial statements for the year ended December 31, 1996. . ACCOUNTING FOR STOCK-BASED COMPENSATION The Company measures compensation cost for stock options issued to employees using the intrinsic value based method under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." B. GIRILAMBONE The Company is a 40% joint venturer in the Girilambone Copper Property and a 50% joint venturer in the Girilambone North Copper Property ("Girilambone") in Australia. In 1996 mining commenced in the Girilambone North Project area and the ore from this property is being processed through the existing Girilambone plant. All costs incurred during mine development have been capitalized and are being amortized using the units of production method over the estimated reserves. During 1996 and 1995 the estimated reserves were increased based on improved ore grades. The effect of this change was to increase net earnings at Girilambone by $120,000 ($.01 per share) and $188,000 ($.02 per share) in 1996 and 1995, respectively. Following is summarized balance sheet data of Girilambone: 70
Amounts Included Total Girilambone In Accompanying Joint Ventures Financial Statements ------------------------- ------------------------- Balance Sheet Data December 31, December 31, (In thousands) 1996 1995 1996 1995 - ------------------ ---- ---- ---- ---- Current assets $ 2,260 $ 817 $ 913 $ 327 Deferred costs associated with ore under leach, net 18,648 14,015 7,897 5,606 Property, plant and equipment, net 12,494 13,651 5,019 5,460 Deferred exploration and development costs, net 13,688 7,386 4,471 1,356 ---------- ---------- ---------- ---------- Total assets 47,090 35,869 18,300 12,749 Current liabilities 3,412 2,437 1,436 975 ---------- ---------- ---------- ---------- Partners' equity $ 43,678 $ 33,432 $ 16,864 $ 11,774 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Company's share of equity $ 18,535 $ 13,373 Less: Eliminations (1,671) (1,599) ---------- ---------- Net assets recorded by Company $ 16,864 $ 11,774 ---------- ---------- ---------- ----------
Debt incurred related to Girilambone is the separate responsibility of each venturer and is not included in the joint ventures' financial statements. Copper production is distributed to each venturer based on its respective ownership interest. Sale of copper is the responsibility of each venturer. Cost and expense data related to the operation of the mine is as follows:
Year Ended December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Cost of Copper Sales: Total Girilambone Venture $ 21,993 $ 19,161 $ 18,223 Included in Financial Statements 8,969 7,664 7,289 General and Administrative: Total Girilambone Venture $ 569 $ 270 $ 235 Included in Financial Statements 257 108 94
71 C. PROPERTY, PLANT & EQUIPMENT December 31, 1996 1995 ---- ---- (In thousands) Land $ 292 $ 285 Plant, mining and milling equipment 8,914 8,216 Furniture and fixtures 655 638 -------- -------- 9,861 9,139 Less accumulated depreciation 4,450 3,220 -------- -------- $ 5,411 $ 5,919 -------- -------- -------- -------- D. DEFERRED EXPLORATION AND DEVELOPMENT COSTS Exploration prospects include the following: December 31, 1996 1995 ---- ---- (In thousands) Ramu $ 1,712 $ 1,511 Tabar Islands 13,167 8,666 Girilambone Exploration Area 2,207 2,635 Other 221 144 -------- -------- $ 17,307 $ 12,956 -------- -------- -------- -------- RAMU The Company entered into an agreement with its Ramu joint venturer to dilute its interest in the project. In return, the joint venturer was required to fund the next 5,000,000 Kina (Papua New Guinea currency) of expenditures on the project. As of December 31, 1996, the joint venturer has met and exceeded the required expenditure level. The Company had elected not to contribute its share of expenditures during the first three quarters of 1996, and its interest was reduced to 35% at September 30, 1996. However, the Company is now funding its share of expenditures on Ramu and intends to maintain its 35% interest. The Company currently does not have sufficient resources to fund its share of future commercial development costs, and would need to obtain additional funding for such costs. The Papua New Guinea government has a right to acquire an interest of up to 30% in Ramu, at a price pro-rata to the accumulated exploration expenditure, at any time prior to the commencement of mining. If it exercises this right, the government is required to contribute to further exploration and development expenditures in proportion to its equity in the project. 72 Another party may elect within 180 days of receiving details of any proposed commercial development of Ramu to participate in such development up to 10%. The interest is to be acquired from the Company and the joint venturer in proportion to their interests. TABAR ISLANDS In 1993 the Company increased its interest in the Tabar Islands project from 29% to 100%. The remaining purchase price at December 31, 1996, of $795,000 (A$1,000,000) is payable in December 1998. On December 3, 1996, the Company was granted a mining lease to develop and operate a gold mine on Simberi Island. While the government of Papua New Guinea will have no participating interest, once production has commenced, a royalty of 2% of sales will be payable to the government. The former joint venture owners have an option to reacquire 50% of the project if feasibility studies indicate that the project could produce 150,000 ounces or more of gold annually. Exercise of the option would require payment to the Company of 250% of its cumulative expenditures for mine development from July 1994 to the date the option is exercised. Expenditures from July 1994 through December 31, 1996, totaled approximately $7,300,000. Current reserves indicate that production would be less than 150,000 ounces of gold annually. GIRILAMBONE EXPLORATION AREA The Company has a 50% interest in an exploration joint venture related to areas adjacent to its Girilambone copper mine. Under the venture the Company is required to fund its 50% share of exploration costs. Exploration efforts are continuing in the Girilambone exploration area to identify additional mineable reserves. As the Company is still in the exploration and prefeasibility phase of all projects except Girilambone and the Girilambone North Project, additional efforts on all exploration properties will be required in order to determine the extent to which resources will be commercially viable and whether the deferred exploration and development costs ultimately will be realized. E. INDEBTEDNESS December 31, 1996 1995 ---- ---- (In thousands) Girilambone financing agreement $ 4,245 $ 5,430 Loan payable 789 -------- -------- 5,034 5,430 Less current maturities (1,700) (3,930) -------- -------- $ 3,334 $ 1,500 -------- -------- -------- -------- Maturities of long-term debt are as follows: (In thousands) 1997 $1,700 1998 1,700 1999 1,634 73 GIRILAMBONE FINANCING AGREEMENT In February 1997, the Company finalized the restructuring of its financing agreement with the Girilambone lender. The restructuring provides additional financing of $980,000, increasing the amount of financing available to $5,225,000, bearing interest at Singapore Interbank Offered Rates ("SIBOR") plus 1-1/2%. Principal payments are to be made quarterly beginning in March 1997 at the greater of $425,000 or 70% of available cash flow. The amount available of $980,000 was borrowed in February 1997 and the funds were used to repay the loan payable described below. The restructured agreement also contains certain debt coverage ratio requirements. During the period the loan is outstanding, the Company is required to maintain a reserve account with the lender sufficient to meet the next quarterly principal repayment. All cash proceeds generated from Girilambone operations are required to be deposited with the lender and must be used to pay any project costs, bank fees, interest, principal, and funding required in the reserve account before any cash is available to the Company. During 1996 the lender authorized the Company to utilize the funds from this reserve account for working capital needs and exploration activity and the Company has deposited $800,000 into this account as of February 28, 1997. LOAN PAYABLE At December 31, 1996, the Company had outstanding $789,000 under a loan facility provided by an Australian lender. This amount was repaid on February 28, 1997 with funds from the restructured Girilambone Financing Agreement. Accordingly, this loan is classified as long-term debt in the balance sheet. F. FINANCIAL INSTRUMENTS The Company utilizes certain financial instruments, primarily copper hedging agreements and forward currency exchange contracts. These financial instruments are utilized to reduce the risk associated with the volatility of commodity prices and fluctuations in foreign currency exchange rates, particularly the Australian dollar. The Company does not hold or issue financial instruments for trading purposes. COPPER AGREEMENTS To mitigate the effect of price changes on substantially all of its expected copper sales through March 31, 1998, the Company has entered into both swap and call option agreements for 1996 and 1997 and put options for the first quarter of 1998. The Company entered into both swap and call option agreements with a single counterparty on a total of 13.2 million pounds of copper which settle ratably each month during 1997. The swap agreements lock in a fixed forward price as a floor, with the purchase of call options above the floor permitting the Company to benefit from an increase in copper price above the call price. The copper swap agreements are designated as hedges up to the level of anticipated copper sales, with gains and losses deferred and reflected as a component of sales when each contract settles. The swap agreements with contract amounts in excess of the anticipated copper sales and the call options do not qualify as hedges and are recorded at market. Under this combination swap and call option arrangement, at the settlement date for each copper contract during 1997, the Company will receive $1.02 per pound plus the excess of market price (as determined by the London Metals Exchange) over $1.11 per pound. 74 In November 1996, the Company purchased put options at a cost of $.08 per pound of copper for 4.0 million pounds of copper maturing ratably each month from January 1998 through March 1998. This hedging program guarantees that the Company will receive a minimum of $.90 per pound of copper, and will benefit from any copper price above $.90 per pound. Sales for the years ended December 31, 1996, 1995 and 1994, include $1,058,000 of gains and $1,080,000 and 27,000 of losses, respectively, that were realized in settlement of copper hedging contracts. The following table summarizes the market value of the copper contracts determined based upon price quotes received from the counterparty to the agreements.
Number of Contracts Strike Price Fair Value or Notional Amount Per Tonne Asset (Liability) --------------------- ------------ ----------------- At December 31, 1996: Purchased call options 12 at 500 tonnes each $ 2,450 $ 142,000 Swap agreements 12 at 500 tonnes each 2,250 1,052,000 Purchased put options 3 at 600 tonnes each 1,984 273,000 At December 31, 1995: Purchased call options 21 at 500 tonnes each $ 2,635 - 2,450 $ 1,142,000 Swap agreements 21 at 500 tonnes each 2,435 - 2,250 (1,218,000) Purchased put options 3 at 500 tonnes each 2,350 2,000 Written call options 3 at 500 tonnes each 2,800 (59,000)
A deferred loss on swap agreements of $164,000 is included in Premium on Copper Contracts in the balance sheet at December 31, 1995. FORWARD CURRENCY EXCHANGE CONTRACTS The Company has entered into forward exchange contracts to protect against Australian currency fluctuations related to payment of a portion of the expected operating costs of Girilambone. Realized and unrealized gains and losses on these contracts are included currently in the results of operations. For the year ended December 31, 1996, the Company recognized a gain of $497,000 compared to a loss of $279,000 in 1995 and a gain of $2,535,000 in 1994 on these contracts. Outstanding contracts at December 31, 1996, total $12 million and mature in monthly installments of $800,000 at an average exchange rate of A$1.00 = U.S. $.7947. At December 31, 1995, outstanding contracts totaled $8,700,000. The Company is exposed to copper price fluctuations and currency risks in the event of nonperformance by the counterparties to the various agreements described above but has no off balance sheet risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the agreements. The Company does not obtain collateral or other security to support financial instruments subject to credit risk. The fair value of the Company's outstanding debt is not considered to be materially different from its carrying amount. 75 G. NORD RESOURCES CORPORATION Nord Resources Corporation ("Resources") owns approximately 35% of the outstanding common stock of the Company. In October 1996, Resources agreed to make available to the Company, at Resources' discretion, up to $1,000,000 in the form of an operating loan and up to an additional $1,000,000 to satisfy the requirements of the Company's debt service reserve account with the Girilambone lender. The loans are payable upon demand and bear interest at the prime rate plus 1%. If any unpaid balance remains outstanding at the close of business on March 31, 1997, Resources has the option to convert any or all of the unpaid principal at that date into shares of common stock of the Company. The conversion price would equal the average of the high and low sales price of the Company's common stock for a twenty day trading period prior to and including March 31, 1997. The amount owed to Resources under the operating loan at December 31, 1996, was $947,000. In February 1994, simultaneous with the closing of the Australian Offering, Resources converted $2,900,000 owed it by the Company into 697,744 shares of common stock of the Company at $4.15 per share. Interest expense under loans from Resources was $7,000 and $24,000 for the years ended December 31, 1996, and 1994, respectively. Resources provides certain services to the Company under a management agreement. Resources is reimbursed for all direct expenses and a portion of its overhead associated with the operations of the Company. H. OPERATING LEASES The Company leases its office space and certain equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Minimum annual lease payments under non-cancelable lease obligations for the years ended December 31 are as follows: 1997 $121,000 1998 74,000 1999 5,000 -------- $200,000 -------- -------- Rent expense for operating leases was $206,000, $238,000, and $239,000, for the years ended December 31, 1996, 1995 and 1994, respectively. I. SHAREHOLDERS' EQUITY STOCK OPTION PLANS AND OTHER OPTION GRANTS Under the Company's three stock option plans, options have been granted at market price at date of grant (incentive stock options) and at or less than market value at date of grant (non-qualified options). In addition, during 1996, 1995 and 1994, non-plan options totaling 224,000, 12,000 and 264,000 shares, respectively, have also been granted to officers and directors of the Company at or in excess of market value at date of grant. During 1996, 1995 and 1994, non-plan options for 33,600, 10,000 and 24,000 shares, respectively, were issued to certain consultants to the Company. 76 Options are generally exercisable beginning six months to three years from date of grant and expire over a five to ten year period from date of grant. At December 31, 1996, 207,078 shares are available for future grant under the stock option plans. A summary of the status of the Company's stock option plans and non-plan options as of December 31, 1996, 1995, and 1994 and changes during the years ending on those dates is presented below:
1996 1995 1994 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------- ------ ----- ------ ----- ------ ----- Outstanding at Beginning of Year 1,342,400 $ 3.95 4,142,000 $ 4.72 603,200 $ 3.55 Granted 347,200 4.50 401,200 4.00 3,618,800 4.90 Exercised (23,400) 3.75 (12,922) 2.65 Forfeited (2,000) 4.40 (3,200,800) 4.95 (67,078) 4.20 ---------- ---------- ---------- Outstanding at End of Year 1,664,200 4.05 1,342,400 3.94 4,142,000 4.72 ---------- ---------- ---------- ---------- ---------- ---------- Options Exercisable at Year-End 1,161,600 $ 3.95 910,400 $ 3.91 3,894,400 $ 4.74 Weighted average fair value of options granted during year $ 1.87 $ 1.66
The assumptions used in determining the fair value of options granted during 1996 and 1995 are as follows: Expected Volatility 55% Expected Life of Grant Three Years Risk-Free Interest Rate 5.03% Expected Dividend Rate None The following table summarizes information about stock option plans and non-plan options at December 31, 1996:
Options Outstanding ------------------- Weighted-Average Range of Exercise Prices Per Share Outstanding Contract Life Options Exercisable ---------------------------------- ----------- ---------------- ------------------- $2.54 216,000 4.00 Years 216,000 3.91 36,000 5.25 36,000 4.00 395,000 3.13 206,000 4.26 272,800 6.17 272,800 4.38 113,200 7.25 113,200 4.45 272,000 2.25 272,000 4.50 347,200 4.08 33,600 4.95 12,000 7.00 12,000 ---------- ----------- ---------- $2.54 - $4.95 1,664,200 4.15 Years 1,161,600 ---------- ----------- ---------- ---------- ----------- ----------
77 STOCK BONUS PLAN The 1990 Stock Bonus Plan provides for the issuance of up to 80,000 shares of common stock as incentive bonuses. At December 31, 1996, 76,193 shares have been awarded and 3,807 shares are available for future award. During 1995, the Company awarded 2,913 bonus shares under this plan at a weighted average price of $4.00 per share. A total of 1,875,085 shares have been reserved for exercise of stock options and for award under the Stock Bonus Plan. PUBLIC OFFERING On February 15, 1994, the Company completed an offering of its common stock in Australia. The offering consisted of 3,200,000 shares of the Company's common stock together with 3,200,000 detachable options to purchase additional shares of the Company's common stock. These options expired on June 30, 1995. OTHER The Company applies APB Opinion No. 25 in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for options granted to employees. For the years ended December 31, 1996 and 1995, compensation related to issuance of options to non-employees and bonus shares totaled $45,000 and $12,000, respectively. Had compensation cost for the Company's option grants been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net earnings and net earnings per common and common equivalent share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31, 1996 1995 ---- ---- (In thousands) Net Earnings As reported $ 617 $ 1,103 Pro forma $ 1 $ 656 Net Earnings Per Common and Common Equivalent Share As reported $ .06 $ .12 Pro forma $ - $ .07
78 J. SIGNIFICANT CUSTOMERS Sales in 1996 include copper sales to two customers of $11,309,000 and $2,521,000. Sales in 1995 include copper sales to two customers of $11,255,000 and $2,926,000. Sales in 1994 include copper sales to two customers of $9,622,000 and $1,543,000. Management believes the loss of either or both of these customers would not have any material adverse effect on the Company because of the ongoing demand for the quality copper produced at Girilambone. K. INCOME TAXES Under Bermuda law, the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that in the event any such taxes are imposed, the Company will be exempted from taxation until the year 2016. Although the Company is not subject to income taxes, it has subsidiaries which are subject to income taxes in their respective foreign countries. Net operating loss carryforwards of $4,100,000 which expire from 2005 through 2009 are available in the United States. These carryforwards are available only to reduce the separate taxable income of the Company's United States subsidiary. Exploration cost carryforwards of $800,000 and development cost carryforwards of $2,300,000 are available in Australia. These carryforwards, subject to certain restrictions, are available indefinitely only to reduce the separate taxable income of the Company's Australian operations. Exploration cost carryforwards of $15,900,000 are available in Papua New Guinea, provided sufficient projects are developed in that country. Carryforwards totaling $15,500,000 may be carried forward indefinitely against future earnings in Papua New Guinea. Carryforwards totaling $400,000 expire between the years 2000 and 2007. The principal deferred tax assets and (liabilities) for the United States, Australia, Papua New Guinea and Mexico are as follows: December 31, 1996 1995 ---- ---- (In thousands) Long-term deferred tax assets and (liabilities): United States: Deferred tax assets: Deferred compensation $ 68 $ 57 Net operating loss carryforwards 1,384 1,266 -------- -------- 1,452 1,323 Deferred tax (liabilities) - Depreciation (5) (11) Valuation allowance (1,447) (1,312) -------- -------- Total United States $ 0 $ 0 -------- -------- -------- -------- 79 Australia: Deferred tax assets: Exploration cost carryforwards 296 1,935 Development cost carryforwards 827 752 Other 203 74 -------- -------- 1,326 2,761 Deferred tax (liabilities): Unrealized gain on currency contracts (34) (368) Deferred leach costs (2,843) (2,018) Exploration and development costs (1,613) (1,040) Depreciation (448) (397) Other (128) (58) -------- -------- (5,066) (3,881) -------- -------- Total Australia $ (3,740) $ (1,120) -------- -------- -------- -------- Papua New Guinea: Deferred tax assets: Exploration cost carryforwards $ 4,029 $ 3,208 Deferred tax liability: Deferred exploration costs (3,891) (2,942) Valuation allowance (138) (266) -------- -------- Total Papua New Guinea $ 0 $ 0 -------- -------- Mexico: Operating loss carryforwards $ 497 $ 308 Valuation allowance (497) (308) -------- -------- Total Mexico $ 0 $ 0 -------- -------- -------- -------- A valuation allowance has been provided for 100% of the Company's net deferred tax assets in the United States, Papua New Guinea and Mexico based on the history of operating losses for the Company in these countries and limitations on use of the carryforwards. The Company had taxable income from its operations in Australia during 1996 and 1995, which required the utilization of all its trading loss carryforwards and a portion of its development cost carryforwards. 80
Year Ended December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Currently payable: Australia $ 2,934 $ 2,035 $ 1,150 Use of Australian carryforwards (2,934) (2,035) (1,150) ---------- ---------- ---------- 0 0 0 Change in deferred income taxes 2,424 1,389 1,731 Change in valuation allowance 196 (269) (1,731) ---------- ---------- ---------- Provision for income taxes $ 2,620 $ 1,120 $ 0 ---------- ---------- ---------- ---------- ---------- ----------
Principal reasons for the differences between the income taxes at the statutory U.S. rate and income tax expense as recorded:
Year Ended December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Income taxes at statutory U.S. tax rate $ 1,101 $ 756 $ 1,356 Permanent differences (34) 9 (6) Difference between Australian and U.S. tax rates 121 107 (53) Non-deductible losses of subsidiaries 1,000 1,006 528 Effect of Australian tax rate increase on deferred income tax assets (59) Decrease in Australian valuation allowance (651) (1,975) Other 432 (48) 150 ---------- ---------- ---------- Income tax expense $ 2,620 $ 1,120 $ 0 ---------- ---------- ---------- ---------- ---------- ----------
81 L. PENSION PLANS The Company has a defined contribution pension plan covering certain employees of its Australian operations. Under the terms of the plan, the Company contributes an amount equal to 10% of the employees wages. Pension costs were $47,000, $41,000 and $59,000, for the years ended December 31, 1996, 1995 and 1994 respectively. The Company is obligated to pay a lump sum benefit that matches the difference, if any, between the present value of an executive's retirement benefit under a previous plan and the cash value of an insurance policy at retirement. At December 31, 1996 and 1995, the cash surrender value of $209,700 and $174,100, respectively, has been offset against the accrued retirement benefits liability. Pension expense for the years ended December 31, 1996, 1995 and 1994, was $68,000, $59,000 and $76,000, respectively. Pension expense for 1996, 1995 and 1994, included $42,000, $36,000 and $62,000, respectively, of service cost and $26,000, $23,000, $14,000, respectively, of interest on the accrued benefit obligation. The projected benefit obligation at December 31, 1996 and 1995 was $501,000 and $413,000, respectively. The assumed discount rate, the estimated rate at which the plan could settle its liabilities, was 7% in 1996 and 7.5% in 1995. The assumed rate of future pay increase was 5% in all years presented. Pension expense and liability are determined on an annual basis. M. EMPLOYMENT AGREEMENTS The Company has agreements with two of its officers which contain change in control provisions which would entitle one officer to receive 50% of his salary and the other officer to receive 200% of his salary in the event of a change in control of the Company and a change in certain conditions of their employment. The maximum contingent liability under these agreements is approximately $526,000 at December 31, 1996. N. SUBSEQUENT EVENTS A special meeting of shareholders was held on February 17, 1997, where approval was given for 1) a reverse stock split whereby one new share of common stock, $.05 par value per share ("New Common Stock"), will be exchanged for every five shares of common stock, $.01 par value per share ("Old Common Stock"); 2) the sale of up to 4,500,000 shares of New Common Stock in an offering in Canada; and 3) the Board of Directors to delist the Company's common stock from the Australian Stock Exchange. There can be no assurance that the sale of common stock in the offering in Canada will be completed. The effective date for the reverse stock split was March 10, 1997. Each share of New Common Stock is equivalent to an American Depository Receipt ("ADR") currently trading on NASDAQ. The Company will terminate the ADR Program and delist the ADRs from the NASDAQ Stock Market, which termination will be effective on or about June 10, 1997. The Company has applied to the NASDAQ Stock Market to list the New Common Stock on the National Market System. Both the New Common Stock and the ADRs will be listed on the NASDAQ Stock Market during a transition period. All shares and per share amounts have been restated to reflect the reverse stock split. Effective March 5, 1997, the Company's Common Stock was delisted from the Australian Stock Exchange. 82 O. DIFFERENCE BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), which differ in certain respects from accounting principles generally accepted in Canada ("Canadian GAAP"). The Company noted only one material difference as it pertains to these consolidated financial statements. U. S. GAAP under SFAS No. 123 requires options issued to non-employees to be valued and a corresponding expense recorded in the financial statements. Canandian GAAP has no similar requirement. The net result of this difference is that under Canadian GAAP, earnings before income taxes and net earnings for the year ended December 31, 1996, would be increased by $45,000 and general and administrative expense would be reduced by the same amount. 83 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORD RESOURCES CORPORATION BY:s/EDGAR F. CRUFT ---------------------------------------------- EDGAR F. CRUFT CHAIRMAN OF THE BOARD (CHIEF EXECUTIVE OFFICER), PRESIDENT AND DIRECTOR APRIL 10, 1997 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. s/TERENCE H. LANG - ------------------------------------------------ TERENCE H. LANG SENIOR VICE PRESIDENT - FINANCE (CHIEF FINANCIAL OFFICER), TREASURER AND DIRECTOR APRIL 10, 1997 s/KARL A. FRYDRYK - ------------------------------------------------ KARL A. FRYDRYK SECRETARY, AND VICE PRESIDENT- CONTROLLER (CHIEF ACCOUNTING OFFICER) AND DIRECTOR APRIL 10, 1997 - ------------------------------------------------ J. MAX Y. BOULLE DIRECTOR APRIL 10, 1997 s/LEONARD LICHTER - ----------------- LEONARD LICHTER DIRECTOR APRIL 10, 1997 s/W. PIERCE CARSON - ------------------------------------------- W. PIERCE CARSON DIRECTOR APRIL 10, 1997 - ------------------------------------------- MARC FRANKLIN DIRECTOR APRIL 10, 1997 s/ALAN McKERRON - ------------------------------------------- ALAN McKERRON DIRECTOR APRIL 10, 1997 84 INDEX TO EXHIBITS PAGE NUMBER ------ 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION 2.1 Stock Purchase Agreement dated March 11, 1993 by and among Nord Kaolin Corporation ("NK Corp"), Registrant, Norplex, Inc. ("Norplex") and Kemira Holdings, Inc. ("Kemira"). Reference is made to Exhibit 2.1 of Registrant's Current Report on Form 8-K dated March 11, 1993, which exhibit is incorporated herein by reference. ** 2.2 Stock Purchase Agreement dated June 28, 1993 by and between Registrant and Consolidated Rutile Limited. Reference is made to Exhibit 2.2 of Registrant's Report on Form 8-K dated June 28, 1993, which exhibit is incorporated herein by reference. ** 3. ARTICLES OF INCORPORATION AND BY-LAWS 3.1 Certificate of Incorporation (as amended) of Regis- trant. Reference is made to Exhibit 3.1 of Regis- trant's Report on Form 10-K for the year ended December 31,1987, which exhibit is incorporated herein by reference. ** 3.2 Certificate of Amendment of Certificate of Incorporation of Registrant dated June 4, 1996. E-1 3.3 Certificate of Amendment of Certificate of Incorporation of Registrant dated November 20, 1996. E-2 3.4 Amended and Restated Bylaws of Registrant. Reference is made to Exhibit 3.2 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 3.5 Amendment No. 1 to Amended and Restated Bylaws of Registrant, dated February 1, 1996. E-3 85 PAGE NUMBER ------ 10. MATERIAL CONTRACTS 10.1 Loan Agreement between Development Authority of the City of Jeffersonville and of Twiggs County and Nord Kaolin Company, dated as of June 1, 1994. Reference is made to Exhibit 10.1 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.2 Shareholders Agreement dated March 11, 1993 by and among Norplex, Kemira, NK Corp. and Registrant. Reference is made to Exhibit 10.1 of Registrant's Report on Form 8-K dated March 11, 1993, which exhibit is incorporated herein by reference. ** 10.3 Lease Agreement dated May 15, 1988 between ATEL Financial Corporation and Nord Kaolin Company. Reference is made to Exhibit 10.31 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.4 Guaranty of Lease dated May 15, 1988 given by Regis- trant to ATEL Financial Corporation. Reference is made to Exhibit 10.32 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.5 Amendment and Waivers dated August, 1991 of Guaranty of Lease dated May 15, 1988 given by Registrant to ATEL Financial Corporation. Reference is made to Exhibit 19.6 of Registrant's Report on Form 10-Q for the period ended September 30, 1991, which exhibit is incorporated herein by reference. ** 10.6 Amendments and Waivers dated November, 1991 of Guaranty of Lease dated May 15, 1988 given by Registrant to ATEL Financial Corporation. Reference is made to Exhibit 10.75 of Registrant's Report on Form 10-K for the year ended December 31, 1991, which exhibit is incorporated herein by reference. ** 86 PAGE NUMBER ------ 10.7 Waiver, Consent and Agreement made March 11,1993 by and between Nord Kaolin Company and entities under ATEL Financial Corporation Lease Agreement. Reference is made to Exhibit 10.12 of Registrant's Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by reference. ** 10.8 License for Proprietary Pigment Technologies dated September 1, 1986 between Nord Kaolin Company and Industrial Progress, Inc. Reference is made to Exhibit 10.33 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.9 Addendum to License for Proprietary Pigment Technologies dated December, 1987. Reference is made to Exhibit 10.34 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.10 Stock Option Agreement and Second Addendum to License for Proprietary Pigment Technologies between Nord Kaolin Company and Industrial Progress, Inc., dated February 1, 1990. Reference is made to Exhibit 10.53 of Registrant's Report on Form 10-K for the year ended December 31, 1990, which exhibit is incorporated herein by reference. ** 10.11 Second Stock Option Agreement and Third Addendum to License for Proprietary Pigment Technology dated as of July 9, 1992 by and between Nord Kaolin Company and Industrial Progress, Inc. Reference is made to Exhibit 10.94 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.12 Joint Venture Agreement between Nord Southern Dolomite Company and Istria, N. V. forming Manatee Gateway No. I. Reference is made to Exhibit (10)(d) (i) of Registrant's Registration Statement on Form S-2 (No. 33-00961), which exhibit is incorporated herein by reference. ** 87 PAGE NUMBER ------ 10.13 Nord Resources Corporation Non-Qualified Stock Option Plan. Reference is made to Exhibit 10.16 to Registrant's Registration Statement on Forms S-3/S-8 (No. 2-92415), which exhibit is incorporated herein by reference. ** 10.14 Nord Resources Corporation 1982 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.17 to Registrant's Registration Statement on Forms S-3/S-8 (No. 2-92415), which exhibit is incorporated herein by reference. ** 10.15 Amendment No. 1 to Nord Resources Corporation 1982 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.32 of Registrant's Report on Form 10-K for the year ended December 31, 1987, which exhibit is incor- porated herein by reference. ** 10.16 Amendment No. 2 to Nord Resources Corporation 1982 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.17 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incor- porated herein by reference. ** 10.17 Amendment No. 3 to Nord Resources Corporation 1982 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.18 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.18 Amendment No. 4 to Nord Resources Corporation 1982 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.19 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incor- porated herein by reference. ** 10.19 Nord Resources Corporation 1987 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.33 of Registrant's Report on Form 10-K for the year ended December 31, 1987, which exhibit is incorporated herein by reference. ** 88 PAGE NUMBER ------ 10.20 Amendment No. 1 to Nord Resources Corporation 1987 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.20 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.21 Amendment No. 2 to Nord Resources Corporation 1987 Nord Incentive Stock Option Plan. Reference is made to Exhibit 10.22 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.22 Nord Resources Corporation 1989 Stock Option Plan. Reference is made to Exhibit 10.33 of Regis- trant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.23 Amendment No. 1 to Nord Resources Corporation 1989 Stock Option Plan. Reference is made to Exhibit 10.55 of Registrant's Report on Form 10-K for the year ended December 31, 1990, which exhibit is incorporated herein by reference. ** 10.24 Amendment No. 2 to Nord Resources Corporation 1989 Stock Option Plan. Reference is made to Exhibit 10.23 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.25 Amendment No. 3 to Nord Resources Corporation 1989 Stock Option Plan. Reference is made to Exhibit 10.26 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incor- porated herein by reference. ** 10.26 Nord Resources Corporation 1991 Stock Option Plan. Reference is made to Exhibit 10.24 of Registrant's Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by reference. ** 89 PAGE NUMBER ------ 10.27 Amendment No. 1 to Nord Resources Corporation 1991 Stock Option Plan. Reference is made to Exhibit 10.25 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.28 Amendment No. 2 to Nord Resources Corporation 1991 Stock Option Plan. Reference is made to Exhibit 10.29 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.29 Restated Deferred Compensation Agreement dated May 10, 1989 between Registrant and Terence H. Lang. Reference is made to Exhibit 10.9 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated by reference. ** 10.30 Amendment No. 1 to the Restated Deferred Comp- ensation Agreement between Registrant and Terence H. Lang, dated November 3, 1995. Reference is made to Exhibit 10.31 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.31 Restated Deferred Compensation Agreement dated May 10, 1989 between Registrant and Edgar F. Cruft. Reference is made to Exhibit 10.11 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.32 Amendment No. 1 to the Restated Deferred Compensation Agreement between Registrant and Edgar F. Cruft, dated July 7, 1995. Reference is made to Exhibit 10.34 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.33 Nord Resources Corporation Trust Agreement for Key Executives as Restated, dated July 7, 1995. Reference is made to Exhibit 10.35 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 90 PAGE NUMBER ------ 10.34 Amendment No. 1 to Trust Agreement for Key Executives as Restated, dated December 1, 1995. Reference is made to Exhibit 10.36 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.35 Split-Dollar Life Insurance and Supplemental Com- pensation agreement between Karl A. Frydryk and Registrant dated July 22, 1988. Reference is made to Exhibit 10.29 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.36 Nord Resources Corporation Split-Dollar Life Insurance and Supplemental Compensation Plan Trust Agreement, December 5, 1988. Reference is made to Exhibit 10.35 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.37 Change of Control Letter Agreement between Registrant and Edgar F. Cruft, dated May 10, 1989. Reference is made to Exhibit 10.27 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.38 Amendment No. 2 dated December 1, 1995 to Change of Control Agreement between Registrant and Edgar F. Cruft. Reference is made to Exhibit 10.40 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.39 Change of Control Letter Agreement between Registrant and Terence H. Lang, dated May 10, 1989. Reference is made to Exhibit 10.29 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 91 PAGE NUMBER ------ 10.40 Amendment No. 2 dated December 1, 1995 to Change of Control Agreement between Registrant and Terence H. Lang. Reference is made to Exhibit 10.42 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.41 Nord Resources Corporation Trust Agreement for Executive Severance Agreements, dated May 10, 1989. Reference is made to Exhibit 10.30 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.42 Change of Control Letter Agreement between Registrant and Karl A. Frydryk, dated May 10, 1989. Reference is made to Exhibit 10.32 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.43 Amendment No. 2 dated December 1, 1995 to Change of Control Agreement between Registrant and Karl A. Frydryk. Reference is made to Exhibit 10.45 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.44 Change of Control Letter Agreement between Registrant and William W. Wilcox, dated March 9, 1990. Reference is made to Exhibit 10.57 of Registrant's Report on Form 10-K for the year ended December 31, 1990, which exhibit is incorporated herein by reference. ** 10.45 Amendment No. 2 dated December 1, 1995 to Change of Control Agreement between Registrant and William W. Wilcox. Reference is made to Exhibit 10.47 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.46 Change of Control Letter Agreement between Registrant and James T. Booth, dated June 8, 1994. Reference is made to Exhibit 10.38 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 92 PAGE NUMBER ------ 10.47 Amendment No. 2 dated December 1, 1995 to Change of Control Agreement between Registrant and James T. Booth. Reference is made to Exhibit 10.49 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.48 Executive Loan Agreement dated September 10, 1987 between Terence H. Lang and Registrant. Reference is made to Exhibit 10.40 of Registrant's Report on Form 10-K for the year ended December 31, 1987, which exhibit is incorporated herein by reference. ** 10.49 Executive Loan Agreement dated August 8, 1988 between Edgar F. Cruft and Registrant. Reference is made to Exhibit 10.26 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.50 Executive Loan Agreement dated December 31, 1988 between Terence H. Lang and Registrant. Reference is made to Exhibit 10.27 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.51 Executive Loan Agreement dated September 19, 1989 between Edgar F. Cruft and Registrant. Reference is made to Exhibit 10.17 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.52 Agreement between The Government of the Republic of Sierra Leone and Sierra Rutile Limited ("SRL"), dated November 3, 1989. Reference is made to Exhibit 10.4 of Registrant's Report on Form 10-K for the year ended December 31, 1989, which exhibit is incorporated herein by reference. ** 10.53 Agreement dated November 17, 1992 amending Fifth Amendment to and Restatement of the Financing Agreement and Second Amendment and Restatement 93 PAGE NUMBER ------ of Credit between SRL and Export-Import Bank of the United States ("Eximbank"). Reference is made to Exhibit 10.5 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.54 Fifth Amendment to and Restatement of the Financing Agreement dated as of November 24, 1986 between SRL and Eximbank. Reference is made to Exhibit 4.14 of Registrant's Report on Form 10-K for the year ended December 31, 1988, which exhibit is incorporated herein by reference. ** 10.55 Second Amendment and Restatement of Credit Agreement dated as of December 1, 1982 between SRL and Eximbank. Reference is made to Exhibit 10(e)B(v) of Registrant's Registration Statement on Form S-2 (33-00961), which exhibit is incorporated herein by reference. ** 10.56 Letter Agreement dated October 12, 1993 between SRL and Eximbank. Reference is made to Exhibit 10.10 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.57 Letter Agreement dated November 17, 1993 between SRL and Eximbank. Reference is made to Exhibit 10.11 of Registrant's Report on Form 8-K dated Nov- ember 17, 1993, which exhibit is incorporated herein by reference. ** 10.58 Loan Agreement dated August 6, 1992 between DEG - Deutsche Investitions - Und Entwicklungsgesell Schaft MBH ("DEG") and SRL. Reference is made to Exhibit 10.73 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 94 PAGE NUMBER ------ 10.59 First Amendment dated November 20, 1992 to the Loan Agreement between DEG and SRL. Reference in made to Exhibit 10.74 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incor- porated herein by reference. ** 10.60 Amendatory Agreement dated November 17, 1993 between SRL and DEG. Reference is made to Exhibit 10.12 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.61 Investment Agreement dated June 30, 1992 between SRL and International Finance Corporation ("IFC"). Reference is made to Exhibit 10.75 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.62 Amendment No. 1 dated November 18, 1992 to Invest- ment Agreement between SRL and IFC. Reference is made to Exhibit 10.76 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.63 Amendatory Agreement dated November 17, 1993 bet- ween SRL and IFC. Reference is made to Exhibit 10.9 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.64 Loan Agreement dated January 24, 1992 between SRL and Commonwealth Development Corporation ("CDC"). Reference is made to Exhibit 10.77 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.65 Amendment dated November 17, 1992 of the Loan Agree- ment between SRL and CDC. Reference is made to Exhibit 10.78 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 95 PAGE NUMBER ------ 10.66 Amendatory Agreement dated November 5, 1993 between SRL and CDC. Reference is made to Exhibit 10.13 of Reg- istrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.67 Waiver Letter dated October 22, 1993 from CDC to SRL. Reference is made to Exhibit 10.14 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.68 Finance Agreement dated August 11, 1992 between SRL and Overseas Private Investment Corporation ("OPIC"). Reference is made to Exhibit 10.79 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.69 First Amendment dated November 24, 1992 to Finance Agreement between SRL and OPIC. Reference is made to Exhibit 10.80 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is inc- orporated herein by reference. ** 10.70 Agreement of Wavier and Second Amendment to Finance Agreement dated as of September 21, 1993 between SRL and OPIC. Reference is made to Exhibit 10.6 of Regis- trant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.71 Third Amendment to Finance Agreement dated as of November 17, 1993 between SRL and OPIC. Reference is made to Exhibit 10.7 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.72 Funding Agreement dated February 16, 1993 among SRL, OPIC and PNC Bank, National Association ("PNC"). Ref- erence is made to Exhibit 10.70 of Registrant's Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by reference. ** 96 PAGE NUMBER ------ 10.73 First Amendment to Funding Agreement dated November 12, 1993 among SRL, OPIC and PNC. Reference is made to Exhibit 10.8 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.74 Debenture dated November 17, 1992 made by SRL in favor of CDC, DEG, Eximbank, IFC and OPIC. Reference is made to Exhibit 10.81 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.75 Debenture dated November 17, 1992 made by SRL in favor of DEG, Eximbank, IFC, OPIC and CDC. Reference is made to Exhibit 10.85 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.76 First Amendment and Restatement of Project Funds Agreement dated as of November 17, 1993 among Registrant, CRL, Holdings, SRL, CDC, DEG, Eximbank, IFC and OPIC. Reference is made to Exhibit 10.17 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.77 Share Retention Agreement dated November 17, 1992 among CDC, DEG, Eximbank, IFC and OPIC and Registrant, Nord Rutile Company and SRL. Reference is made to Exhibit 10.83 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.78 First Amendment to Share Retention Agreement dated as of November 17, 1993 among Registrant, NR Company, CRL, Holdings, CDC, DEG, IFC, OPIC and Eximbank. Reference is made to Exhibit 10.18 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 97 PAGE NUMBER ------ 10.79 Pledge Agreement dated November 17, 1992 between SRL and DEG, Eximbank, IFC, OPIC and CDC. Reference is made to Exhibit 10.84 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.80 Cash Collateral Charge dated November 17, 1992 made by SRL in favor of DEG, Eximbank, IFC, OPIC and CDC. Reference is made to Exhibit 10.86 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.81 Trust Deed between Standard Chartered Bank Sierra Leone Limited, Financing Institutions and SRL. Reference is made to Exhibit 10.87 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.82 Security Sharing and Intercreditor Agreement dated November 17, 1992 among DEG, Eximbank, IFC, OPIC and CDC. Reference is made to Exhibit 10.88 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.83 Security Agreement dated November 17, 1992 among SRL and DEG, Eximbank, IFC, OPIC and CDC. Reference is made to Exhibit 10.90 of Reg- istrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.84 Subordination Agreement dated November 17, 1992 among DEG, Eximbank, IFC, OPIC and CDC and Registrant, Nord Rutile Corporation, Nord Rutile Company and SRL. Reference is made to Exhibit 10.89 of Registrant's Report on Form 10-K for the year ended December 31, 1992, which exhibit is incorporated herein by reference. ** 10.85 First Amendment to Subordination Agreement dated as of November 17, 1993 among Registrant, NR Company, CRL, Holdings, CDC, DEG, IFC, OPIC and Eximbank. Reference is made to Exhibit 10.19 of Registrant's Report on Form 8-K dated November 98 PAGE NUMBER ------ 17, 1993, which exhibit is incorporated herein by reference. ** 10.86 Arm's Length Agreement dated as of November 17, 1993 between CRL and SRL. Reference is made to Exhibit 10.15 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.87 First Amendment to Arm's Length Agreement dated as of November 17, 1993 between Registrant and SRL. Reference is made to Exhibit 10.16 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.88 Joint Venture Agreement dated as of November 17, 1993 among CRL, Registrant, NR Company and Holdings. Reference is made to Exhibit 10.1 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.89 Marketing Agreement dated as of November 17, 1993 among CRL, Registrant, NR Company, SRL, Holdings and TMMI. Reference is made to Exhibit 10.2 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.90 U.S. Marketing Agreement dated as of November 17, 1993 among CRL, Registrant, NR Company, SRL, Holdings and U.S. Partnership. Reference is made to Exhibit 10.3 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 10.91 General Partnership Agreement dated as of November 17, 1993 among CRL, CRL Delaware and Registrant. Reference is made to Exhibit 10.4 of Registrant's Report on Form 8-K dated November 17, 1993, which exhibit is incorporated herein by reference. ** 99 PAGE NUMBER ------ 10.92 Amendment to Mining Lease dated September 17, 1991 from the Ministry of Mines of the Government of Sierra Leone. Reference is made to Exhibit 10.12 of Amendment No. 2 to Registrant's Report on Form S-3 dated July 20, 1993, which exhibit is incorporated herein by reference. ** 10.93 Agreement between Sierra Rutile Limited and the Government of Sierra Leone dated 3 January, 1995. Reference is made to Exhibit 10.86 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.94 Letter dated February 22, 1995 regarding Sierra Rutile Limited Development Bank Financing. Reference is made to Exhibit 10.92 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.95 Agreement and Fourth Amending Agreement dated March 24, 1995 between Consolidated Rutile Limited and Registrant. Reference is made to Exhibit 10.93 of Registrant's Report on Form 10-K for the year ended December 31, 1994, which exhibit is incorporated herein by reference. ** 10.96 Letter Agreement signed by Registrant, Consolidated Rutile Limited and, SRL related to CDC, DEG, Eximbank, IFC and OPIC dated December 15, 1995. Reference is made to Exhibit 10.100 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 10.97 Guaranty among Registrant and DCD, DEG, Eximbank, IFC and OPIC dated February 28, 1996. Reference is made to Exhibit 10.101 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incorporated herein by reference. ** 100 PAGE NUMBER ------ 10.98 Pledge, Assignment and Security Agreement among Registrant and CDC, DEG, Eximbank, IFC and OPIC dated February 28, 1996. Reference is made to Exhibit 10.102 of Registrant's Report on Form 10-K for the year ended December 31, 1995, which exhibit is incor- porated herein by reference. ** 10.99 Letter Agreement dated December 19, 1996 between Registrant, SRL, Consolidated Rutile Limited and CDC, DEG, Eximbank, IFC and OPIC. E-4 10.100 Loan and Security Agreement by and between Congress Financial Corporation (Central) and Nord Kaolin Company, dated July 10, 1996. E-8 10.101 Promissory note between Registrant (payee) and Nord Pacific Limited (maker) dated October 24, 1996. E-51 101 21. SUBSIDIARIES OF REGISTRANT Jurisdiction in Name of Subsidiary Which Incorporated ------------------ ----------------- Sierra Rutile Limited Sierra Leone, West Africa Nord Kaolin Company Georgia PAGE NUMBER ------ 23. CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Deloitte & Touche LLP E-54 23.2 Consent of KPMG E-55 27. FINANCIAL DATA SCHEDULE E-56 99. ADDITIONAL EXHIBITS 99.1 Independent Auditors' Report to the Board of Directors and Shareholders, Sierra Rutile Limited, March 27, 1997 E-57 99.2 Independent Auditors' Report to the Board of Directors and Shareholders, Sierra Rutile America Inc., March 27, 1997 E-58 99.3 Independent Auditors' Report to the Board of Directors and Shareholders, Sierra Rutile Services Limited, March 27, 1997 E-59 99.4 Independent Auditors' Report to the Board of Directors and Shareholders, Sierra Rutile Holdings Limited, March 27, 1997 E-60 99.5 Independent Auditors' Report to the Board of Directors and Shareholders, Titanium Minerals Marketing International Limited, March 27, 1997 E-61 102 99.6 Independent Auditors' Report to the Board of Directors and Shareholders, Titanium Minerals Marketing International USA, March 27, 1997 E-62 ** Indicates that the exhibit is incorporated by reference in this Annual Report on Form 10-K from a previous filing with the Commission. 103 EX-3.2 2 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT -of- CERTIFICATE OF INCORPORATION -of- NORD RESOURCES CORPORATION It is hereby certified that: 1. The name of the corporation (hereinafter called the "Corporation") is NORD RESOURCES CORPORATION and the certificate of incorporation of the Corporation was filed on January 18, 1971. 2. The certificate of incorporation of the Corporation is hereby amended by striking Article 4 thereof and by substituting in lieu of said Article the following new Article 4: "4: The total number of shares of stock which the Corporation has authority to issue is Forty Million (40,000,000) and the par value of each such share is One Cent $.01) amounting in the aggregate to Four Hundred Thousand($400,000) Dollars." 3. The foregoing was duly adopted in accordance with Sections 141 and 242 of the Delaware General Corporation Law by resolution of the Board of Directors of the Corporation on June 3, 1996 and approved by the holders of a majority of the capital stock outstanding and entitled to vote at the annual meeting of shareholders of the Corporation on June 4, 1996. Signed as of the 4th day of June, 1996 /s/ Karl A. Frydryk ------------------------------ Karl A. Frydryk, Secretary ATTESTED TO: /s/ Leo E. Dugdale - ------------------------------- Leo E. Dugdale, Assistant Secretary EX-3.3 3 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT -of- CERTIFICATE OF INCORPORATION -of- NORD RESOURCES CORPORATION It is hereby certified that: 1. The name of the corporation (hereinafter called the ("Corporation") is NORD RESOURCES CORPORATION and the certificate of incorporation of the Corporation was filed on January 18, 1971. 2. The certificate of incorporation of the Corporation is hereby amended by striking Article 4 thereof and by substituting in lieu of said Article the following new Article 4: "4: The total number of shares of stock which the Corporation has authority to issue is Fifty Million (50,000,000) and the par value of each such share is One Cent ($.01) amounting in the aggregate to Five Hundred Thousand Dollars ($500,000)." 3. The foregoing was duly adopted in accordance with Sections 141 and 242 of the Delaware General Corporation Law by resolution of the Board of Directors of the Corporation on October 2, 1996 and approved by the holders of a majority of the capital stock outstanding and entitled to vote at a special meeting of shareholders of the Corporation on November 20, 1996. Signed as of the 20th day of November, 1996. /s/ Karl A. Frydryk ------------------------------ Karl A. Frydryk, Secretary ATTESTED TO: /s/ Leo E. Dugdale - ----------------------------------- Leo E. Dugdale, Assistant Secretary EX-3.5 4 EXHIBIT 3.5 Amendment No. 1 to Amended and Restated Bylaws of Nord Resources Corporation The first sentence of Article III, Section 3.02 of the Amended and Restated Bylaws of Nord Resources Corporation is Amended in its entirety to read: "The number of Directors which shall constitute the whole board shall not be less than five nor more than eleven." February 1, 1996 EX-10.99 5 EXHIBIT 10.99 December 19, 1996 Mr. Simon Hill Mr. John Hodder Commonwealth Development Corporation ("CDC") One Besborough Gardens London, SW 1 2JQ UNITED KINGDOM Mr. Hans-Peter Blume DEG - Deutsch Investitions und Entwicklungsgesellschaft mbH ("DEG") BelvederstrsBe 40 D-50933 Koln 41 (Mungersdorf) FEDERAL REPUBLIC OF GERMANY Mr. Clement Miller Export-Import Bank of the United Stares ("ExIm Bank") 811 Vermont Avenue, N.W. Washington, D.C. 20571 Mr. Navaid Burney International Finance Corporation ("IFC") 1801 K Street, N.W. Washington, D.C. 20433 Mr. John R. Aldonas Overseas Private Investment Corporation ("OPIC") 1100 New York Avenue, N.W. Washington, D.C. 20527 Re: Sierra Rutile Limited -- Extension of Forbearance Letter Dated December 15, 1995 ------------------------------------------ Gentlemen: 1. We refer to the Forbearance Letter ("Forbearance Letter") dated December 15, 1995 by and among Sierra Rutile Limited ("SRL" or "Company"), Consolidated Rutile Limited ("CRL") and Nord Resources Corporation ("Nord") (together, the "Guarantors") and each of the above-addressed institutions (together, the "Banks" and together with the Company and the Guarantors, the "Parties"). Capitalized terms that are -2- not defined in this Letter Agreement shall have the meanings ascribed to them in the Forbearance Letter. 2. The Forbearance Letter expires by its terms on January 1, 1997, but SRL and the Guarantors have asked each of the Banks for additional time to undertake the Remedial Measures. Accordingly, SRL and each Guarantor propose, effective on the date that the amounts described in Paragraph 3 below have been paid to the Banks pursuant to that paragraph, that the Forbearance Letter be amended as follows: (i) the definition of the term "Extended Forbearance Period" be amended by changing the period covered by that definition FROM "May 15, 1995 to January 1, 1997" TO "May 15, 1995 to July 1, 1997"; and (ii) in paragraph 7 of the Forbearance Letter, the scheduled payment date for deferred principal payments be changed FROM "January 1, 1997" TO "July 1, 1997"; (iii) in paragraph 4(ii) of the Forbearance Letter, the date "January 1, 1997" in the fourth sentence thereof be changed to "July 1, 1997". 3. In consideration for the Banks' agreement to the proposals set forth in the above paragraph 2, the Company shall, on or before December 31, 1996, transfer the following amounts to the Banks in accordance with the payment instructions set forth in Annex I to this letter: CDC US$594,723.29 DEG US$256,059.03 ExIm Bank US$596,482.67 IFC US$531,202.29 OPIC US$462,686.13 aggregating the amount of US$2,441,153.41, in immediately available funds. If, and to the extent that, at any time, all or any part of any of the foregoing amounts received by any Bank is rescinded or must be returned, in whole or in part, for any reason, whether in case of the bankruptcy, insolvency or reorganization of the Company or otherwise, each Guarantor shall pay to such Bank on demand under the terms of its guaranty referred to in subparagraph 4(iii) of the Forbearance Letter, in immediately available funds, fifty percent (50%) of the amount(s) so rescinded or returned. Each Bank will apply the funds received under this paragraph 3 against non-principal amounts payable to it during the last six (6) months of the Extended Forbearance Period (as defined after -3- giving effect to paragraph 2 of this Letter Agreement), as and when those amounts become due. If for any reason the Extended Forbearance Period ends before July 1, 1997, each Bank will apply any unapplied amount of such funds to SRL's loan obligations to such Bank in such manner as such Bank in its sole discretion may determine. 4. Except to the extent modified by this Letter Agreement, the Financing Documents, the Forbearance Letter, the Pledge, Assignment and Security Agreement dated as of February 28, 1996 made by Nord in favor of the Banks, the Guaranty dated as of February 28, 1996 made by Nord in favor of the Banks, the Guaranty dated as of February 28, 1996 made by CRL in favor of the Banks and each other document executed and delivered in connection with the Forbearance Letter, remain in full force and effect and embody the entire understanding of the Parties hereto, and supersede all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. The Forbearance Letter, as modified hereby, may not be further modified in any manner, except by written agreement signed by all of the Parties hereto. This Letter Agreement may be executed in any number of counterparts, all of which, taken together, shall constitute one and the same instrument and any of the Parties hereto may execute this Letter Agreement by signing any such counterpart. Execution may be evidenced by an originally signed original or by a telecopied signature. 5. This Letter Agreement shall be governed by the laws of the District of Columbia, without regard to the conflict of laws principles thereof. Please sign and return a copy of this Letter Agreement confirming your acknowledgment and agreement with the terms hereof. SIERRA RUTILE LIMITED By: /s/ Benny L. Bray Date: December 19, 1996 --------------------------------------- ------------------- Name: Benny L. Bray Title: Acting Chief Executive NORD RESOURCES CORPORATION By: /s/ Terence H. Lang Date: December 18, 1996 --------------------------------------- ------------------- Name: TERENCE H. LANG Title: SENIOR VICE PRESIDENT-FINANCE -4- CONSOLIDATED RUTILE LIMITED By: /s/ P.J. Housden Date: 20th December 1996 ---------------------------------- ----------------------- Name: P.J. Housden Title: Director DECEMBER 19, 1996 EXTENSION LETTER ACKNOWLEDGED AND AGREED TO BY: COMMONWEALTH DEVELOPMENT CORPORATION By: Date: ---------------------------------- ------------------ Name: Title: DEG - DEUTSCHE INVESTITIONS UND ENTWICKLUNGSGESELLSCHAFT MBH By: Date: ---------------------------------- ------------------ Name: Title: EXPORT-IMPORT BANK OF THE UNITED STATES By: Date: ---------------------------------- ------------------ Name: Title: INTERNATIONAL FINANCE CORPORATION By: Date: ---------------------------------- ------------------ Name: Title: OVERSEAS PRIVATE INVESTMENT CORPORATION By: Date: ---------------------------------- ------------------ Name: Title: EX-10.100 6 EXHIBIT 10.100 LOAN AND SECURITY AGREEMENT by and between CONGRESS FINANCIAL CORPORATION (CENTRAL) as Lender and NORD KAOLIN COMPANY as Borrower Dated: July 10, 1996 TABLE OF CONTENTS PAGE SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. CREDIT FACILITIES. . . . . . . . . . . . . . . . . . . . . . 8 2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . 8 2.2 [Intentionally Deleted]. . . . . . . . . . . . . . . . . . . 8 2.3 Availability Reserves. . . . . . . . . . . . . . . . . . . . 8 SECTION 3. INTEREST AND FEES. . . . . . . . . . . . . . . . . . . . . . 9 3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.2 Closing Fee. . . . . . . . . . . . . . . . . . . . . . . . . 9 3.3 Servicing Fee. . . . . . . . . . . . . . . . . . . . . . . . 9 3.4 Unused Line Fee. . . . . . . . . . . . . . . . . . . . . . . 9 3.5 Maximum Lawful Rate. . . . . . . . . . . . . . . . . . . . . 9 SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . 10 4.1 Conditions Precedent to Initial Loans. . . . . . . . . . . . 10 4.2 Conditions Precedent to All Loans. . . . . . . . . . . . . . 12 SECTION 5. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . 12 SECTION 6. COLLECTION AND ADMINISTRATION. . . . . . . . . . . . . . . . 13 6.1 Borrower's Loan Account. . . . . . . . . . . . . . . . . . . 13 6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . 13 6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.5 Authorization to Make Loans. . . . . . . . . . . . . . . . . 15 6.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 7. COLLATERAL REPORTING AND COVENANTS . . . . . . . . . . . . . 15 7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . 15 7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . 15 7.3 Inventory Covenants. . . . . . . . . . . . . . . . . . . . . 17 7.4 Equipment Covenants. . . . . . . . . . . . . . . . . . . . . 17 7.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . 18 7.6 Right to Cure. . . . . . . . . . . . . . . . . . . . . . . . 18 7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . 19 i PAGE ---- SECTION 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 19 8.1 Partnership Existence; Power and Authority . . . . . . . . . 19 8.2 Financial Statements; No Material Adverse Change . . . . . . 19 8.3 Chief Executive Office; Collateral Locations . . . . . . . . 19 8.4 Priority of Liens; Title to Properties . . . . . . . . . . . 20 8.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . 20 8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.7 Compliance with Other Agreements and Applicable Laws . . . . 20 8.8 Environmental Compliance . . . . . . . . . . . . . . . . . . 20 8.9 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . 21 8.10 Accuracy and Completeness of Information . . . . . . . . . . 22 8.11 Survival of Warranties; Cumulative . . . . . . . . . . . . . 22 SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . 22 9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . 22 9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . 22 9.3 Compliance with Laws, Regulations, Etc. . . . . . . . . . . 23 9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . 24 9.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.6 Financial Statements and Other Information . . . . . . . . . 24 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . 25 9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . 26 9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 26 9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . 26 9.11 Distributions. . . . . . . . . . . . . . . . . . . . . . . . 27 9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . 27 9.13 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . 27 9.14 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . 28 9.15 Further Assurances . . . . . . . . . . . . . . . . . . . . . 28 9.16 Payments to Kemira Pigments, Inc . . . . . . . . . . . . . . 28 9.17 Permitted Payments to Nord Resources . . . . . . . . . . . . 28 9.18 Security Interests of Kemira Pigments, Inc . . . . . . . . . 29 9.19 Insurance Policies . . . . . . . . . . . . . . . . . . . . . 29 9.20 Consigned Inventory. . . . . . . . . . . . . . . . . . . . . 29 9.21 Resolutions and Consents of Norplex, Inc. . . . . . . . . . 29 9.22 Accountant's Reliance Letter . . . . . . . . . . . . . . . . 29 SECTION 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . 30 10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . 30 10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ii PAGE ---- SECTION II. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . 33 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. . . . . . . . . . . . . . . . . . . . . . 33 11.2 Waiver of Notices. . . . . . . . . . . . . . . . . . . . . . 34 11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . 34 11.4 Waiver of Counterclaims. . . . . . . . . . . . . . . . . . . 34 11.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS . . . . . . . . . . . . . . 35 12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . 36 12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . 37 12.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . 37 iii INDEX TO EXHIBITS AND SCHEDULES Exhibit A Information Certificate Exhibit B List of Closing Documents Schedule 6.5 Authorized Officers of Borrower Schedule 8.4 Existing Liens Schedule 8.6 Existing Litigation Schedule 8.7 Existing Noncompliance with Agreements and/or Laws Schedule 8.8 Environmental Compliance Schedule 9.12 Permitted Affiliate Transactions iv LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated July 10, 1996 is entered into by and between Congress Financial Corporation (Central), an Illinois corporation ("Lender") and Nord Kaolin Company, a Georgia limited partnership ("Borrower"). W I T N E S S E T H: WHEREAS, Borrower has requested that Lender enter into certain financing arrangements with Borrower pursuant to which Lender may make loans and provide other financial accommodations to Borrower; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code ("UCC") shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural. All references to Borrower and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3. Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean all present and future rights of Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. 1.2 "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. 1.3 "Blocked Accounts" shall have the meaning set forth in Section 6.3 hereof. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.5 "Collateral" shall have the meaning set forth in Section 5 hereof. 1.6 "Eligible Accounts" shall mean Accounts created by Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and BONA FIDE sale and delivery of goods by Borrower or rendition of services by Borrower in the ordinary course of its business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; (b) such Accounts are not unpaid more than ninety (90) days after the date of the original invoice for them; (c) such Accounts comply with the terms and conditions contained in Section 7.2(c) of this Agreement; (d) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (e) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America or Canada, or, at Lender's option, if either: (i) the account debtor has delivered to Borrower an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender, sufficient to cover such Account, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determine); (f) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice; 2 (g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts; (h) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts or reduce the amount payable or delay payment thereunder; (i) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; (j) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or agent of or affiliated with Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise; (k) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, upon Lender's request, the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, has been complied with in a manner satisfactory to Lender; (l) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (m) such Accounts of a single account debtor or its affiliates do not constitute more than forty (40%) percent of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts); (n) such Accounts are not owed by an account debtor who has Accounts unpaid more than ninety (90) days after the date of the original invoice for them which constitute more than fifty (50%) percent of the total Accounts of such account debtor; (o) such Accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the credit limit with respect to such account debtors as determined by Lender from time to time (but the portion of the Accounts not in excess of such credit limit may still be deemed Eligible Accounts); and (p) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender. General criteria for Eligible Accounts may be established and revised from time to time by Lender in good faith. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. 1.7 "Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, 3 pollution and environmental matters, as now or at any time hereafter in effect, applicable to Borrower's business and facilities (whether or not owned by it), laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or hazardous, toxic or dangerous substances, materials or wastes. 1.8 "Equipment" shall mean all of Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures not forming part of the Real Estate, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located; PROVIDED, THAT, pumps, motors, parts and fuel held as inventory for maintenance shall not constitute Equipment. 1.9 "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.10 "ERISA Affiliate" shall mean any person required to be aggregated with Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. 1.11 "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof 1.12 "Financing Agreements" shall mean, collectively, this Agreement and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.13 "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Boards which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Section 9.13 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. 1.14 "General Intangibles" shall mean all of Borrower's now owned and hereafter acquired general intangibles, including, but not limited to, contract rights, tax and duty refunds, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, chooses in action and other claims but excluding therefrom, in any event, all Intellectual Property and any other license, document or instrument which, by its terms, prohibits any collateral or other assignment of or encumbrance upon the same. 4 1.15 "Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). 1.16 "Information Certificate" shall mean the Information Certificate of Borrower constituting EXHIBIT A hereto containing material information with respect to Borrower, its business and assets provided by or on behalf of Borrower to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.17 "Intellectual Property" shall mean all registered and unregistered patents, service marks, copyrights, trade names, applications for the foregoing and trade secrets now owned or hereafter acquired by the Borrower. 1.18 "Inventory" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, including those minerals which have been extracted or recovered at minehead, work in process, finished goods and all other inventory of whatsoever kind or nature, including pumps, motors, parts and fuel held as inventory for maintenance, wherever located. 1.19 "Loans" shall mean the Revolving Loans. 1.20 "Maximum Credit" shall mean the amount of $6,000,000. 1.21 "Mineral Rights" shall mean all of Borrower's now owned and hereafter existing or acquired rights to minerals other than those minerals which have been extracted or recovered at minehead, which minerals shall constitute Inventory of Borrower. 1.22 "Net Amount of Eligible Accounts" shall mean the gross amount of Eligible Accounts less (a) sales, excise or similar taxes included in the amount thereof and (b) returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto. 1.23 "Nord Resources" shall mean Nord Resources Corporation. 1.24 "NRC Debt Payments" shall mean those repayments made, by Borrower to Nord Resources (i) after September 30, 1996 for advances made by Nord Resources to Borrower (A) during the quarterly period occurring between January 1, 1996 and March 31, 1996 and (B) during the quarterly period occurring between April 1, 1996 and June 30, 1996, (ii) after December 31, 1996 for advances made by Nord Resources to Borrower during the quarterly period occurring between July 1, 1996 and September 30, 1996, (iii) after January 31, 1997 for advances made by Nord Resources to Borrower during the quarterly period occurring between October 1, 1996 and December 31, 1996 and (iv) after thirty days following the end of each calendar quarter occurring 5 after December 31, 1996 for advances made by Nord Resources to Borrower during such calendar quarter. 1.25 "Obligations" shall mean any and all Revolving Loans and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower to Lender and/or its affiliates, including principal, interest, charges, reasonable fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.26 "Obligor" shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrower. 1.27 "Payment Account" shall have the meaning set forth in Section 6.3 hereof. 1.28 "Permitted NRC Debt Payments" shall mean NRC Debt Payments owing by Borrower to Nord Resources which may only be made so long as (i) Lender receives, in form and substance satisfactory to Lender, quarterly operating results for the quarter of calendar year 1996 for which Borrower seeks to make a Permitted NRC Debt Payment within thirty (30) days of the end of such quarter (except in the case of repayment of any portion of the Supplemental NRC Advance which may only be paid on a date 30 days after the date of the initial funding under this Agreement), (ii) Lender concludes, in the sole discretion of Lender, that (x) no Event of Default has occurred and is then continuing and (y) Borrower is performing financially and operationally in a manner satisfactory to Lender and in accordance with Borrower's projections in all material respects, and (iii) immediately before and after making any NRC Debt Payment, unused Revolving Loan availability computed pursuant to Section 2.1 hereof shall not be less than $1,500,000 (except in the case of repayment of any portion of the Supplemental NRC Advance, in which case unused Revolving Loan availability computed pursuant to Section 2.1 hereof immediately before and after making such repayment shall not be less than $1,000,000). 1.29 "Permitted Support Services Payments" shall mean payments made by Borrower to, or distributions to its General Partner for payment to, Nord Resources for support and administrative services rendered by Nord Resources to Borrower and/or its General Partner from and after January 1, 1996 ("Support Services") together with interest thereon accruing at the rate then applicable to Revolving Loans under this Agreement from the tenth (10th) Business Day following the end of the calendar quarter during which such Support Services were rendered to the date the same are paid in full so long as (i) such payments are in an amount not exceeding the lesser of (A) the projected value of such Support Services specified in the projections provided by Borrower to Lender prior to such calendar quarter and (B) the actual value of such Support Services as determined by Lender in good faith, and (ii) immediately before and after making any such payments, unused Revolving Loan availability computed pursuant to Section 2.1 hereof shall not be less than $1,500,000. 6 1.30 "Permitted Tax Distributions" shall mean a distribution to Norplex, Inc. to which Lender has provided its prior written consent pursuant to Section 9.11 hereto made at one time during any fiscal year of the Borrower in respect of the immediately preceding fiscal year that does not exceed the sum of: (a) the product of (1) the Borrower's net taxable income for the immediately preceding year (after subtracting any applicable net operating losses for any preceding fiscal years) and (ii) the highest marginal federal income tax rate for C corporations having net taxable income for such year similar to that of Borrower; and (b) the product of (i) the Borrower's net taxable income for the immediately preceding year (after subtracting any applicable net operating losses for any preceding fiscal years) and (ii) the applicable state income tax rate(s) for C corporations having net taxable income for such year similar to that of the Borrower. 1.31 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.32 "Prime Rate" shall mean the rate from time to time publicly announced by Philadelphia National Bank, incorporated as CoreStates Bank, N.A., or its successors, at its office in Philadelphia, Pennsylvania, as its prime rate, whether or not such announced rate is the best rate available at such bank. 1.33 "Real Estate" shall mean the real property, improvements, fixtures sufficiently affixed to real property to become fixtures under applicable state law and interests in real property owned by Borrower and all proceeds thereof of whatever kind, including, without limitation, insurance proceeds, rents, profits and condemnation awards related thereto. 1.34 "Records" shall mean all of Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices or containers in or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person). 1.35 "Revolving Loans" shall mean the loans now or hereafter made by Lender to or for the benefit of Borrower on a revolving basis (involving advances, repayments and readvances) as set forth in Section 2.1 hereof. 1.36 "Supplemental NRC Advance" shall mean a loan from Nord Resources to Borrower funded after the date of this Agreement for the purpose of allowing Borrower to fund trade payments to Kemira Pigments, Inc. to induce Kemira Pigments, Inc. to release its security interests in the assets of Borrower. 7 1.37 "Unused Line" shall mean the amount by which $6,000,000 exceeds the average dally principal balance of the outstanding Revolving Loans during the immediately preceding month (or part thereof). 1.38 "Value" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) cost computed on a first-in-first-out basis in accordance with GAAP or (b) market value. SECTION 2. CREDIT FACILITIES 2.1 REVOLVING LOANS. (a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrower from time to time in amounts requested by Borrower up to the amount equal to: (i) eighty-five (85%) percent of the Net Amount of Eligible Accounts, LESS (ii) any Availability Reserves. (b) Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrower, reduce the lending formula with respect to Eligible Accounts to the extent that Lender determines in good faith that: (i) the dilution with respect to the Accounts for any period (based on the ratio of (A) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (B) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (ii) the general creditworthiness of account debtors has declined. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts or in establishing Availability Reserves. (c) Except in Lender's discretion, the aggregate amount of the Loans outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Loans, or the aggregate amount of all outstanding Loans, exceed the amounts available under the lending formulas or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrower shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. 2.2 [INTENTIONALLY DELETED]. 2.3 AVAILABILITY RESERVES. All Revolving Loans otherwise available to Borrower pursuant to the lending formulas and subject to the Maximum Credit and other applicable limits hereunder shall be subject to Lender's continuing right to establish and revise Availability Reserves. 8 SECTION 3. INTEREST AND FEES 3.1 INTEREST. (a) Borrower shall pay to Lender interest on the first day of each calendar month on the higher of (x) the average daily outstanding principal amount of the Obligations for the preceding month or (y) $2,000,000 at the rate of two (2.0%) percent per annum in excess of the Prime Rate, except that Borrower shall pay to Lender interest, at Lender's option, without notice, at the rate of four percent (4.0%) per annum in excess of the Prime Rate: (i) on the Obligations for the period from and after the effective date of termination or non-renewal hereof, or the date of the occurrence of an Event of Default, and for so long as such Event of Default is continuing as determined by Lender in good faith and until such time as Lender has received full and final payment of all such Obligations (notwithstanding entry of any against Borrower) and (ii) on the Revolving Loans at any time outstanding in excess of the amounts available to Borrower under Section 2 (whether or not such excess(es), arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default). All interest accruing hereunder on and after the occurrence of any of the events referred to in Sections 3.1(a)(i) or 3.1(a)(ii) above shall be payable on demand. (b) Interest shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrower to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. 3.2 CLOSING FEE. Borrower shall pay to Lender as a closing fee the amount of $60,000, which shall be fully earned as of and payable on the date hereof. 3.3 SERVICING FEE. Borrower shall pay to Lender monthly a servicing fee in an amount equal to $2,500 in respect of Lender's services for each month (or part thereof) while this Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be fully earned as of and payable in advance on the date hereof and on the first day of each month hereafter. 3.4 UNUSED LINE FEE. While this Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, Borrower shall pay to Lender monthly an unused line fee, which fee shall be payable on the first day of each month in arrears, equal at a rate equal to one-half of one percent (.50%) per annum calculated upon (i) the value of the Unused Line, if the value of the Unused Line is not greater than $4,000,000, or (ii) $2,000,000 if the value of the Unused Line is greater than $4,000,000. 3.5 MAXIMUM LAWFUL RATE. Notwithstanding anything to the contrary contained in SECTION 3 hereof or elsewhere in the Financing Agreements: (a) If at any time until payment in full of all of the Obligations, the interest payable hereunder would exceed the highest rate of interest permissible under any law which a court 9 of competent jurisdiction shall, in a final determination, deem applicable hereto (the "Maximum Lawful Rate"), then in such event and so long as the Maximum Lawful Rate would be so exceeded, the interest payable hereunder shall be calculated on the principal amount of the Obligations at the Maximum Lawful Rate; PROVIDED, HOWEVER, that if at any time thereafter the interest payable hereunder would be less than the Maximum Lawful Rate, Borrower shall, to the extent permitted by law, continue to pay interest on the principal amount of the Obligations at the Maximum Lawful Rate until such time as the total interest received by Lender on the principal amount of the Obligations is equal to the total interest which Lender would have received (but for the operation of this SECTION 3.5 since the Obligations were first advanced pursuant to this Agreement); thereafter, interest shall again be payable at the rates provided for in SECTION 3, unless and until such interest would again exceed the Maximum Lawful Rate, in which event this SECTION 3.5 shall again apply; and (b) In no event shall the total interest received by Lender, on the principal amount of the Obligations pursuant to the terms hereof exceed the amount which any lender could lawfully have received had the interest due hereunder been calculated for the full term hereof at the Maximum Lawful Rate. In the event interest payable hereunder is calculated at the Maximum Lawful Rate pursuant to this SECTION 3.5, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate provided by the number of days in the year in which such calculation is made. In the event that a court of competent Jurisdiction, notwithstanding the provisions of this SECTION 3.5, shall make a final determination that Lender has received interest under any of the Financing Agreements in excess of the Maximum Lawful Rate, Lender shall, to the extent permitted by law, promptly apply such excess first to any interest due and not yet paid under the Obligations hereunder, and then to the principal amount of the Obligations hereunder. Any excess then remaining shall be refunded to Borrower. SECTION 4. CONDITIONS PRECEDENT 4.1 CONDITIONS PRECEDENT TO INITIAL LOANS. Each of the following is a condition precedent to Lender making the initial Loans hereunder: (a) Lender shall have received evidence, in form and substance satisfactory to Lender, that Lender has valid perfected and first priority security interests in and liens upon the Collateral and any other property which is intended to be security for the Obligations or the liability of any Obligor in respect thereof, subject only to the security interests and liens permitted herein or in the other Financing Agreements; (b) all requisite partnership action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including, without limitation, records of requisite partnership action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate officers or governmental authorities; (c) no material adverse change shall have occurred in the assets, business or prospects of Borrower since the date of Lender's latest field examination and no change or event shall have occurred which would materially impair the ability of Borrower or any Obligor to 10 perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; (d) Lender shall have completed a field review of the Records and such other information with respect to the Collateral as Lender may require to determine the amount of Revolving Loans available to Borrower, the results of which shall be satisfactory to Lender, not more than eight (8) business days prior to the date hereof; (e) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, all documents and instruments described on the List of Closing Documents attached hereto as EXHIBIT B; (f) Lender shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee; (g) Lender shall have received, in form and substance satisfactory to Lender, a Credit Support and Intercreditor Agreement duly executed by Nord Resources; (h) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrower with respect to the Financing Agreements and such other matters as Lender may request; and (i) the other Financing Agreements and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender. (j) Lender shall have received, in form and substance satisfactory to Lender, all financial information, projections, budgets, business plans, cash flow reports, information on "trials" in process and such other matters and information as Lender may request; (k) Lender shall have completed a review of all existing purchase orders for any and all inventory, goods, services or other items held by Borrower, the results of which shall be satisfactory to Lender, in its sole discretion; (1) Lender shall have received and completed a review of the Annual Report for Repap Enterprises, Inc. for the fiscal year which ended on December 31, 1995, the results of which shall be satisfactory to Lender, in its sole discretion; (m) Lender shall be satisfied that on the date of the initial advance hereunder unused loan availability computed pursuant to Section 2.1 shall be not less than $750,000 (after deducting therefrom all checks and drafts previously drawn but not yet presented in respect of payment of invoices which are in excess of 60 days past the original invoice date thereof); and 11 (n) Lender shall have received, in form and substance satisfactory to Lender, and completed a review of all information and copies of all documents and such other matters and information as Lender may have requested related to the gross profit margins of the certain "Norplex" line of products which are sold, produced or distributed by Borrower, the results of which shall be satisfactory to Lender. 4.2 CONDITIONS PRECEDENT TO ALL LOANS. Each of the following is an additional condition precedent to Lender making Loans to Borrower, including the initial Loans and any future Loans: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Loan and after giving effect thereto; and (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan and after giving effect thereto. SECTION 5. GRANT OF SECURITY INTEREST To secure payment and performance of all Obligations, Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of Borrower, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): 5.1 Accounts; 5.2 all present and future monies, securities, credit balances, deposits, deposit accounts and other property of Borrower now or hereafter held or received by or in transit to Lender or its affiliates to the extent derived from the proceeds of any of the property described any of Sections 5.1, 5.3. 5.4 or 5.5 of the definition of Collateral herein or at any other depository or other institution from or for the account of Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts and other Collateral, including, without limitation, (a) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (b) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (c) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts or other Collateral, including, without limitation, returned, repossessed and reclaimed goods, and (d) deposits by and property of account debtors or other persons securing the obligations of account debtors; 5.3 Inventory and Equipment; 5.4 Records; 5.5 all present and future General Intangibles, chattel paper, documents, instruments, letters of credit, bankers' acceptances and guaranties to the extent the same (a) directly derive from 12 the proceeds or products of any of the property described above in Sections 5.1, 5.2, 5.3 or 5.4, (b) constitute tax or duty refunds or (c) constitute credits or refunds owing to, or claims or other chooses in action held by Borrower with respect to third parties which relate to or arise from Borrower's (i),railroad car usage and/or leasing, (ii) overfunding of insurance policy obligations and/or (iii) purchase, use, sale or return of goods constituting Inventory; 5.6 all products and proceeds of the foregoing, in any form, including, without limitation, insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing; and 5.7 PROVIDED, THAT, notwithstanding the foregoing subparts Sections 5.1, 5.2, 5.3, 5.4, 5.5 or 5.6 above, the Collateral shall NOT include any of the following: Mineral Rights, Real Estate, Intellectual Property or any other license, document or instrument which, by its terms, prohibits any collateral or other assignment of or encumbrance upon the same. SECTION 6. COLLECTION AND ADMINISTRATION 6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans and other Obligations and the Collateral, (b) all payments made by or on behalf of Borrower and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2 STATEMENTS. Lender shall render to Borrower each month a statement setting forth the balance in the Borrower's loan account(s) maintained by Lender for Borrower pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrower and conclusively binding upon Borrower as an account stated except to the extent that Lender receives a written notice from Borrower of any specific exceptions of Borrower thereto within thirty (30) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrower a written statement as provided above, the balance in Borrower's loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrower. 6.3 COLLECTION OF ACCOUNTS. (a) Borrower shall establish and maintain, at its expense, blocked accounts or lockboxes and related blocked accounts (in either case, "Blocked Accounts"), as Lender may specify, with such banks as are acceptable to Lender into which Borrower shall promptly deposit and direct its account debtors to directly remit all payments on Accounts and all payments constituting proceeds of Inventory or other Collateral in the identical form in which such payments are made, whether by cash, check or other manner. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to Lender, providing that all items received or deposited in the Blocked Accounts are the property of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all 13 funds received or deposited into the Blocked Accounts to such bank account of Lender as Lender may from time to time designate for such purpose ("Payment Account"). Borrower agrees that all payments made to such Blocked Accounts or other funds received and collected by Lender, whether on the Accounts or as proceeds of Inventory or other Collateral or otherwise shall be the property of Lender. (b) For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations two (2) business days following the date of receipt of immediately available funds by Lender in the Payment Account. For purposes of calculating the amount of the Revolving Loans available to Borrower such payments will be applied (conditional upon final collection) to the Obligations on the business day of receipt by Lender in the Payment Account, if such payments are received within sufficient time (in accordance with Lender's usual and customary practices as in effect from time to time) to credit Borrower's loan account on such day, and if not, then on the next business day. (c) Borrower and all of its affiliates, subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender. In no event shall the same be commingled with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person. The obligation of Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non-renewal of this Agreement. 6.4 PAYMENTS. All Obligations shall be payable to the Payment Account as provided in Section 6.3 or such other similar lockboxes or blocked accounts as Lender may designate from time to time. Lender may apply payments received or collected from Borrower or for the account of Borrower (including, without limitation, the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrower. Borrower shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 14 6.5 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the Loans based upon telephonic or other instructions received from anyone listed on SCHEDULE 6.5 purporting to be an officer of Borrower or other authorized person (in either event, listed on an authorization form previously submitted by Borrower) or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations. All requests for Loans hereunder shall specify the date on which the requested advance is to be made (which day shall be a business day) and the amount of the requested Loan. Requests received after 11:00 a.m. Chicago time on any day shall be deemed to have been made as of the opening of business on the immediately following business day. All Loans under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrower when deposited to the credit of Borrower or otherwise disbursed or established in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. 6.6 USE OF PROCEEDS. Borrower shall use the initial proceeds of the Loans provided by Lender to Borrower hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrower to Lender on or about the date hereof and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made by Lender to Borrower pursuant to the provisions hereof shall be used by Borrower only for general operating, working capital and other proper corporate purposes of Borrower not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System, as amended. SECTION 7. COLLATERAL REPORTING AND COVENANTS 7.1 COLLATERAL REPORTING, Borrower shall provide Lender with the following documents in a form satisfactory to Lender: (a) on a regular basis as required by Lender, a schedule of Accounts; (b) on a weekly basis or more frequently as Lender may reasonably request, (i) perpetual inventory reports, (ii) inventory reports by category and (iii) agings of accounts payable (on a monthly basis), (c) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrower; (d) agings of accounts receivable on a monthly basis or more frequently as Lender may reasonably request; and (e) such other reports as to the Collateral as Lender shall reasonably request from time to time. If any of Borrower's records or reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 ACCOUNTS COVENANTS. (a) Borrower shall notify Lender promptly of: (i) any material delay in Borrower's performance of any of its obligations to any account debtor or the assertion of any 15 claims, offsets, defenses or counterclaims by any account debtor, or any disputes with account debtors, or any settlement, adjustment or compromise thereof, (ii) all material adverse information relating to the financial condition of any account debtor of which Borrower's officers have actual knowledge and (iii) any event or circumstance which, to Borrower's knowledge would cause Lender to consider any then existing Accounts as no longer constituting Eligible Accounts. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor without Lender's consent, except in the ordinary course of Borrower's business consistent with past practices and policies disclosed to Lender prior to the date hereof. So long as no Event of Default exists or has occurred and is continuing, Borrower shall have the right to settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors or grant any credits, discounts or allowances. (b) Borrower shall promptly report to Lender any return of Inventory by an account debtor having a sales price in excess of $10,000. At any time that Inventory is returned, reclaimed or repossessed, the related Account shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments immediately delivered to Lender pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of Borrower's business in accordance with past practices and policies or material modifications thereof disclosed to Lender prior to the date hereof, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement, (v) none of the transactions giving rise thereto will violate any applicable State or Federal laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms. (d) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise. (e) Borrower shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrower, all chattel paper and instruments included within the scope of Collateral which Borrower now owns or may at any time acquire immediately upon Borrower's receipt thereof, except as Lender may otherwise agree. (f) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all 16 accounts debtors to make payment of Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrower shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. 7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Borrower's cost therefor and daily withdrawals therefrom and additions thereto; (b) Borrower shall conduct a physical count of the Inventory at least once each year, but at any time or times as Lender may request on or after an Event of Default, and promptly following such physical inventory shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count; (c) Borrower shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Borrower's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Lender's request, Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request on or after and during the continuance of an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology reasonably acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; (e) Borrower shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Borrower assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) except for sales made in conformity with Section 9.20 below, Borrower shall not sell Inventory to any customer on approval, or any other basis which entities the customer to return or may obligate Borrower to repurchase such Inventory; (h) Borrower shall keep the Inventory in good and marketable condition; and (1) Borrower shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval. 7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon Lender's request, Borrower shall, at its expense, at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender; (b) Borrower shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrower shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all 17 applicable laws; (d) the Equipment is and shall be used in Borrower's business and not for personal, family, household or farming use; (e) Borrower shall not remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Borrower or to move Equipment directly from one location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Borrower in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrower shall not permit any of the Equipment to be or become a part of or affixed to real property; and (g) Borrower assumes all responsibility and liability arising from the use of the Equipment. 7.5 POWER OF ATTORNEY. Borrower hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as Borrower's true and lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a) at any time an Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or other proceeds of Inventory or other Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies to collect any Account or other Collateral, (iv) sell or assign any Account upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Account, (vii) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto or any other Collateral, (v) sign Borrower's name on any verification of Accounts and notices thereof to account debtors and (vi) execute in Borrower's name and file any UCC financing statements or amendments thereto. Borrower hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or wilful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction. 7.6 RIGHT TO CURE. After notice to Borrower and failure to cure within 10 days thereafter (except in the event Lender reasonably believes such delay may have an adverse effect on (i) the perfection or priority of its Liens upon any Collateral or (ii) the enforceability on collectability of the Financing Agreements or Obligations), Lender, at Its option, may: (a) cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended in good faith to the Obligations and charge Borrower's account therefor, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. Any payment made or other action taken by Lender under this 18 Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at the cost and expense of Borrower, (a) Lender or its designee shall have complete access to all of Borrower's premises during normal business hours and after reasonable notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrower's books and records, including, without limitation, the Records, and (b) Borrower shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. SECTION 8. REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans Lender to Borrower: 8.1 PARTNERSHIP EXISTENCE; POWER AND AUTHORITY. Borrower is a limited partnership duly organized and validly existing under the laws of the State of Georgia, and duly qualified to do business in the State of Georgia, with requisite power and authority to (i) incur the indebtedness evidenced by this Agreement and (ii) execute and deliver this Agreement and the other Financing Agreements to which it is a party in the State of Illinois. The sole general partner ("General Partner") of Borrower is Norplex Inc., and the sole limited partner is Nord Limited. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder are all authorized by Borrower's Partnership Agreement (the "Partnership Agreement"), and will not result in any breach of, or constitute a default under, or result in the creation of any lien, charge or encumbrance (other than those contained in any of the Financing Agreements) upon any property or assets of Borrower under any indenture, loan or credit agreement or other instrument or agreement to which Borrower is a party or under the Partnership Agreement. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms. Borrower has no subsidiaries. 8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial statements relating to Borrower and its General Partner, which have been or may hereafter be delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operation of Borrower and its General Partner as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrower or its General Partner to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Borrower and its General Partner, since the date of the most recent audited financial statements furnished by Borrower and its General Partner to Lender prior to the date of this Agreement. 8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive office of Borrower and Borrower's Records concerning Accounts are located only at the address set forth 19 below and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Borrower to establish new locations in accordance with Section 9.2 below. The Information Certificate correctly identifies any of such locations which are not owned by Borrower and sets forth the owners and/or operators thereof and to the best of Borrower's knowledge, the holders of any mortgages on such locations. 8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral subject only to the liens indicated on SCHEDULE 8.4 hereto and the other liens permitted under Section 9.8 hereof. Borrower has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on SCHEDULE 8.4 hereto or permitted under Section 9.8 hereof. 8.5 TAX RETURNS. Except for 1995 returns for which extensions have been obtained, Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 8.6 LITIGATION. Except as set forth on the Information Certificate and SCHEDULE 8.6, there is no present investigation by any governmental agency pending, or to the best of Borrower's knowledge threatened, against or affecting Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of Borrower's knowledge threatened, against Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Borrower would result in any material adverse change in the assets, business or prospects of Borrower or would impair the ability of Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Leader to enforce any Obligations or realize upon any Collateral. 8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Borrower is not in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrower is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority, except as set forth on SCHEDULE 8.7. 8.8 ENVIRONMENTAL COMPLIANCE. (a) Except as set forth on SCHEDULE 8.8 hereto, Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of Borrower complies in all material respects with all 20 Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on SCHEDULE 8.8 hereto, there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor is any pending or to the best of Borrower's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any Environmental Law by Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower has transported, stored or disposed of any Hazardous Materials. (c) Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. 8.9 EMPLOYEE BENEFITS. (a) Borrower has not engaged in any transaction in connection with which Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, including any accumulated funding deficiency described in Section 8.9(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.9(d) hereof. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrower to be incurred with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which Borrower or any of its ERISA Affiliates is required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each employee pension benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee pension benefit plan, including any penalty or tax described in Section 8.9(a) hereof and any deficiency with respect to vested accrued benefits described in Section 8.9(d) hereof. (d) Except as set forth in the financial statements for the fiscal period ending December 31, 1995, the current value of all vested accrued benefits under all employee pension 21 benefit plans maintained by Borrower that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.9(a) hereof and any accumulated funding deficiency described in Section 8.9(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Neither Borrower nor any of its ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.10 ACCURACY AND COMPLETENESS OF INFORMATION. All information furnished by or on behalf of Borrower in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including, without limitation, all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business, assets or prospects of Borrower, which has not been fully and accurately disclosed to Lender in writing. 8.11 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrower shall now or hereafter give, or cause to be given, to Lender. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve, renew and keep in full, force and effect its valid existence as a duly organized partnership and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, tradenames, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. Neither Borrower, its General Partner nor its limited partner shall dissolve, sell or assign any interest in, or portion thereof, the partnership. Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its name, which notice shall set forth the new name and Borrower shall deliver to Lender a copy of the amendment to the Partnership Agreement of Borrower providing for the name change. 9.2 NEW COLLATERAL LOCATIONS. Borrower may open any new location within the continental United States provided Borrower (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including, without limitation, UCC financing statements. 22 9.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC. (a) Borrower shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local governmental authority, including, without limitation, the Employee Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including, without limitation, all of the Environmental Laws. (b) Borrower shall establish and maintain, at its expense, a system to assure and monitor its continued compliance with all Environmental Laws in all of its operations, which system shall include annual reviews of such compliance by employees or agents of Borrower who are familiar with the requirements of the Environmental Laws. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrower to Lender. Borrower shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall regularly report to Lender on such response. (c) Borrower shall give both oral and written notice to Lender immediately upon Borrower's receipt of any notice of, or Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by Borrower or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower transported, stored or disposed of any Hazardous Materials. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of Borrower in order to avoid any material non-compliance, with any Environmental Law, Borrower shall, at Lender's request and Borrower's expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests of the site where Borrower's non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Lender a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or Borrower's response thereto or the estimated costs thereof, shall change in any material respect. (e) Borrower shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including, without limitation, the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of Borrower and the preparation and 23 implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and discharge ail taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Borrower shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrower agrees to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrower such amount shall be added and deemed part of the Loans, PROVIDED, THAT, nothing contained herein shall be construed to require Borrower to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.5 INSURANCE. Borrower shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be reasonably satisfactory to Lender as to form, amount and insurer. Borrower shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Borrower fails to do so within 5 days after the notice thereof, Lender is authorized, but not required, to obtain such insurance at the expense of Borrower. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Borrower in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Borrower shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrower shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance reasonably satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by Borrower or any of its affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION. (a) Borrower and its General Partner shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of Borrower and its General Partner in accordance with GAAP and Borrower and its General Partner shall furnish or cause to be furnished to Lender: (i) within thirty (30) days after the end of each fiscal month, monthly unaudited consolidated financial statements (including in each case balance sheets, statements of income and loss and statements of shareholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its General Partner as of the end of and through such fiscal 24 month and (ii) within ninety (90) days after the end of each fiscal year, audited consolidated financial statements of Borrower and its General Partner (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its General Partner as of the end of and for such fiscal year, together with the letter of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrower or its General Partner and reasonably acceptable to Lender and in form and substance reasonably satisfactory to Lender. (b) Borrower shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations or which would result in any material adverse change in Borrower's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (c) Borrower shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all reports which its General Partner sends to its stockholders generally and copies of all reports and registration statements which its General Partner files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrower shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information respecting the Collateral and the business of Borrower and its General Partner, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrower and its General Partner (i) if required by applicable law to any court or other government agency or (ii) in any event to any participant or assignee or prospective participant or assignee. Borrower and its General Partner hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Borrower's expense, copies of the financial statements of Borrower and its General Partner and any reports or management letters prepared by such accountants or auditors on behalf of Borrower and its General Partner and to disclose to Lender such information as they may have regarding the business of Borrower and its General Partner. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrower to Lender in writing. 9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Borrower shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any stock or indebtedness to any other Person or any of its assets to any other Person (except for (i) sales of Inventory in the ordinary course of business so long as any proceeds of such Inventory sales are remitted to a Blocked Account or otherwise paid to Lender and (ii) the disposition of worn-out or obsolete Equipment or Equipment no longer used in the business of Borrower so long as (A) if an Event of Default exists or has occurred and is continuing, any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of $250,000 for all such Equipment disposed of in any fiscal year of Borrower), or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e) agree or take any action to do any of the foregoing. 25 9.8 ENCUMBRANCES. Borrower shall not create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including, without limitation. the Collateral, EXCEPT: (a) liens and security interests of Lender and Nord Resources; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books; (c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrower's business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to Borrower, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of real property which do not interfere in any material respect with the use of such real property or ordinary conduct of the business of Borrower as presently conducted thereon or materially impair the value of the real property which may be subject thereto; (e) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on Real Estate not to exceed $1,000,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of Borrower other than the Equipment or Real Estate so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; and (f) the security interests and liens set forth on SCHEDULE 8.4 hereto. 9.9 INDEBTEDNESS. Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligations or indebtedness EXCEPT (a) the Obligations; (b) trade obligations and normal accruals in the ordinary course of business not yet due and payable, or with respect to which the Borrower is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Borrower, and with respect to which adequate reserves have been set aside on its books; (c) purchase money indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; (d) obligations or indebtedness set forth on the Information Certificate; (e) to Nord Resources and (f) other indebtedness not described in subparts (a) through (e) above in an amount not exceeding at any time $200,000 in the aggregate; PROVIDED, THAT, (i) Borrower may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof except in the case of payments or distributions described in Sections 9.11, 9.16 and/or 9.17 which shall only be payable when and as permitted by such Sections, (ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrower shall furnish to Lender all default notices or other notices of a material nature or any written demands in connection with such indebtedness either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Borrower shall not, directly or indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, 26 dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, EXCEPT: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in: (i) short-term direct obligations of the United States Government, (ii) negotiable certificates of deposit issued by any bank satisfactory to Lender, payable to the order of the Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated A1 or P1; PROVIDED, THAT, as to any of the foregoing, unless waived in writing by Lender, Borrower shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments and (c) the guarantees set forth in the Information Certificate. 9.11 DISTRIBUTIONS. Borrower shall not, directly or indirectly, declare or make any distributions or other payments to its General Partner or its limited partner, except for Permitted Support Services Payments and Permitted Tax Distributions. Prior to the occurrence of any Permitted Tax Distribution, Borrower shall provide and/or cause to be delivered to Lender audited financial statements for the immediately preceding fiscal year and a written analysis of all state and federal income tax obligations (or benefits) for such fiscal year which Borrower would have incurred if Borrower was taxed at the applicable state income tax rate(s) and the highest marginal tax rate under federal tax law for C corporations with similar net taxable income together with such additional information as Lender may request pertaining to such tax obligations (or benefits). Lender will not unreasonably withhold or delay its written consent to any proposed Permitted Tax Distribution provided that Lender is satisfied that the amount of such Permitted Tax Distribution has been properly ascertained. 9.12 TRANSACTIONS WITH AFFILIATES. Except for Permitted Support Services Payments and Permitted Tax Distributions and as otherwise set forth on SCHEDULE 9.12, Borrower shall not enter into any transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than Borrower would obtain in a comparable arm's length transaction with an unaffiliated person. 9.13 COMPLIANCE WITH ERISA. Borrower shall not with respect to any "employee pension benefit plans" maintained by Borrower or any of its ERISA Affiliates: (a) (i) terminate any of such employee pension benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee pension benefit plans or any trust created thereunder which would subject Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA, (iii) fail to pay to any such employee pension benefit plan any contribution which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee pension benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee pension benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation or (vi) incur any withdrawal liability with respect to any multiemployer pension plan. 27 (b) As used in this Section 9.13, the term "employee pension benefit plans", "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA. 9.14 COSTS AND EXPENSES. Borrower shall pay to Lender on demand all reasonable costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including, but not limited to: (a) all reasonable costs and expenses of filing or recording (including UCC financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) reasonable costs and expenses and fees for insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; (c) reasonable costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) reasonable costs and expenses of preserving and protecting the Collateral; (e) reasonable costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including, without limitation, preparations for and consultations concerning any such matters); and (f) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. 9.15 FURTHER ASSURANCES. At the request of Lender at any time and from time to time, Borrower shall, at its expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of Borrower representing that all conditions precedent to the making of Loans contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans until Lender has received such certificate and, in addition, Lender has determined in good faith that such conditions are satisfied. Where permitted by law, Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. 9.16 PAYMENTS TO KEMIRA PIGMENTS, INC. Notwithstanding payments pursuant to, or distributions to its General Partner for payments pursuant to, the terms set forth in SECTION 9.11 hereof, any payments to Kemira Pigments, Inc. or any affiliate thereof for raw materials purchased in the ordinary course of business shall not be made until at least forty-five (45) days after the date of the original invoice evidencing the request for any such purchase. 9.17 PERMITTED PAYMENTS TO NORD RESOURCES. Borrower shall not make any payments or other distributions to or for the benefit of Nord Resources except for Permitted Support Services Payments, Permitted NRC Debt Payments and Permitted Tax Distributions. 28 9.18 SECURITY INTERESTS OF KEMIRA PIGMENTS, INC.. Borrower shall deliver to Lender no later than 30 days after the date hereof (i) evidence of the termination of all security interests of Kemira Pigments, Inc. in any and all assets of Borrower, including copies of duly executed and filestamped termination statements relating to all UCC financing statements filed by Kemira Pigments, Inc. against Borrower and (ii) copies of duly executed and file-stamped UCC financing statements and fixture filings filed by Nord Resources Corporation to evidence, perfect and maintain its security interests against Borrower in the offices of the (A) County Clerk of Twiggs County, (B) Twiggs County Recorder, (C) Washington County Recorder and (D) Wilkinson County Recorder. 9.19 INSURANCE POLICIES. Borrower shall, no later than 14 days after the date hereof, (i) deliver to Lender copies of all casualty, business interruption and liability insurance policies under which Borrower or Norplex, Inc. is a named insured, (ii) make its best effort to provide Lender a lender's loss payable endorsement on terms and conditions reasonably satisfactory to Lender and duly executed by the insurer and (iii) deliver to Lender a certificate of insurance naming Lender as an additional insured with respect to all liability policies under which Borrower or Norplex, Inc. is a named insured. 9.20 CONSIGNED INVENTORY. Borrower covenants and agrees that, within 30 days from the date hereof, it shall (i) take any and all actions necessary to protect, preserve and perfect any and all of Borrower's rights as a consignor of any Inventory sold on consignment including, without limitation, causing all necessary UCC financing statements to be filed in all appropriate jurisdictions naming the applicable customer as consignee, Borrower as consignor and Lender as assignee, (ii) filing all necessary UCC financing statements in all such jurisdictions naming Borrower as debtor and Lender as secured party, (iii) conduct UCC lien searches against any proposed consignee in each jurisdiction in which consigned goods are to be situated and follow all procedures under Section 9-114 of the Uniform Commercial Code to create, preserve and protect the perfection and senior priority of Borrower's and Lender's rights in any such goods to be consigned PRIOR TO delivery of such goods to the applicable consignee and (iv) provide Congress with copies of all underlying consignment agreements as well as evidence of compliance with the requirements of clauses (i), (ii) and (iii) above. With respect to any future sales of Inventory of Borrower on consignment, Borrower shall be required to obtain written consent of Lender and comply with all requirements of this Section 9.20 BEFORE permitting any Inventory to be delivered to any such proposed consignee. 9.21 RESOLUTIONS AND CONSENTS OF NORPLEX, INC. Borrower shall cause Norplex, Inc. to deliver to Lender no later than 21 days after the date hereof such consents and resolutions by the board of directors of Norplex, Inc. as Lender may deem necessary to ratify, confirm and approve all of the Financing Agreements executed by Norplex, Inc., including, without limitation, the Guarantee and Guarantor General Security Agreement dated contemporaneously herewith and any UCC financing statements. 9.22 ACCOUNTANT'S RELIANCE LETTER. Borrower shall make its best effort to obtain, within 30 days from the date hereof, an accountant's reliance letter from Deloitte & Touche L.L.P. on behalf of Borrower and Norplex, Inc. on terms and conditions reasonably satisfactory to Lender. 29 SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default", and collectively as "Events of Default": (a) Borrower fails to pay when due any of the Obligations or fails to perform any of the terms, covenants, conditions or provisions contained in any or all of Sections 9.1, 9.2, 9.5, 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.13, 9.14, 9.16, 9.17, 9.18, 9.19, 9.20, 9.21 or 9.22 hereof; (b) Borrower fails to perform any or all of the terms, covenants, conditions or provisions contained in any or all of Sections 9.3, 9.4, 9.6, or 9.15 and/or any other Financing Agreement (other than those of the type described in any or all of Section 10.1(a) hereof) and such failure shall continue unremedied for five (5) or more days after the earlier to occur of (i) Borrower's knowledge of such failure or (ii) Borrower's receipt of written notice from Lender of such failure; (c) any representation, warranty or statement of fact made by Borrower to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect, (d) any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender and in the event of any such failure to perform, any applicable notice or grace period has expired; (e) any judgment for the payment of money is rendered against Borrower or any Obligor in excess of $100,000 in any one case or in excess of $250,000 in the aggregate (after deducting therefrom all amounts for which, in the reasonable opinion of Lender, applicable insurance coverage is then payable), and shall remain undischarged, unbonded or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against Borrower or any Obligator or any of their assets, which could reasonably have a materially adverse effect on Borrower or its operations, business or assets; (f) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or Borrower or any Obligor, which is a partnership or corporation, dissolves or suspends or discontinues doing business; (g) Borrower or any Obligor becomes insolvent (however defined or evidenced), makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of 30 its filing or Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; (i) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by Borrower or any Obligor or for all or any part of its property; or (j) except for those matters set forth on SCHEDULE 8.4, any default by Borrower or any Obligor under any agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in any case in an amount in excess of $100,000, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by Borrower or any Obligor under any material contract, lease, license or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; (k) any change (x) in the partnership of Borrower including, but not limited to, dissolution, changes in partnership interests, or any modification or amendment of the Partnership Agreement or (y) in the controlling ownership of Norplex Inc.; (l) the indictment or threatened indictment of Borrower or any Obligor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any Collateral or any substantial part of the property of Borrower or such Obligor; (m) there shall be a material adverse change in the business, assets or prospects of Borrower or any Obligor after the date hereof; or (n) there shall be a breach or default under any of the other Financing Agreements and any applicable notice or grace period has expired. 10.2 REMEDIES. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrower or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Borrower of this Agreement or any of the 31 other Financing Agreements. Lender may, at any time or times, proceed directly against Borrower or any Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any Event of Default described in Sections 10.1(h) and 10.1(i), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all reasonable costs and expenses of collection or enforcement, including attorneys' fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of an Event of Default or an event which with notice or passage of time or both would constitute an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or reduce the lending formulas or amounts of Revolving Loans available to Borrower and/or upon an Event of Default, (ii) terminate any provision of this Agreement providing for any future Loans to be made by Lender to Borrower. 32 SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL WAIVER. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). (b) Borrower and Lender irrevocably consent and submit to the non-exclusive jurisdiction of the State of Illinois located in Chicago, Illinois and the United States District Court for the Northern District of Illinois and waive any objection based on venue or FORUM NON CONVENIENS with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrower or its property). (c) Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof with a copy, if notice is to Borrower, to: Spitzer & Feldman, P.C. 405 Park Avenue New York, New York 10022 Attn: K. Gliedman Fax: (212) 888-6680 and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Borrower shall appear in answer to such process, failing which Borrower shall be deemed in default and judgment may be entered by Lender against Borrower for the amount of the claim and other relief requested. (d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY 33 AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrower (whether in tort, contract, equity or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and nonappealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. 11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on Borrower which Lender may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. 11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision hereof shall be amended, modified or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender and Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, reasonable costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including, without limitation, amounts paid in settlement, court costs, and the reasonable fees and expenses of counsel, except to the extent they arise from the gross negligence or willful misconduct of any of such indemnities. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public 34 policy, Borrower shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 12.1 TERM. (a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on the date three (3) years from the date hereof (the "Renewal Date"), unless sooner terminated pursuant to the terms hereof; provided, that, Lender and Borrower may agree, in writing, to extend the Renewal Date to the date four (4) years from the date hereof at least sixty (60) days prior to the third anniversary of this Agreement, for a renewal fee payable by Borrower to Lender on the effective date of such extension equal to the greater of (i) $15,000 or (ii) one-quarter of one percent (.25%) of the Maximum Credit. Upon the effective date of termination or non-renewal of the Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrower for such purpose. Interest shall be due until and including the next business day, if the amounts so paid by Borrower to the bank account designated by Lender are received in such bank account later than 12:00 noon, Chicago time. (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrower of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (c) If for any reason this Agreement is terminated prior to the end of the then current term or renewal term of this Agreement, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrower agrees to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: 35 Amount Period ------ ------ (i) 2.O% of Maximum Credit Prior to and including the date one year from the date set forth on the first page hereof. (ii) 1.5% of Maximum Credit From the date one year from the date set forth on the first page hereof to and including the date two years from the date set forth on the first page hereof. (iii) 1.0% of Maximum Credit From the date two years from the date hereof until the date 60 days prior to the date three years from the date set forth on the first page hereof, or from year to year thereafter prior to 60 days prior to the anniversary of a Renewal Date. Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The early termination fee provided for in this Section 12.1 shall be deemed included in the Obligations. 12.2 NOTICES. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth below and to Borrower at its chief executive office set forth below, with a copy to: Spitzer & Feldman, P.C. 405 Park Avenue New York, New York 10022 Attn: K. Gliedman Fax: (212) 888-6680 or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 12.3 PARTIAL INVALIDITY. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 36 12.4 SUCCESSORS. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrower and their respective successors and assigns, except that Borrower may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may, after notice to Borrower, assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Loans or any other interest herein to another financial institution or other person, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. In the event of a partial assignment or sale of a participation, only one party included within the Lender group will have authority to act, send notices and receive notices on behalf of such group. 12.5 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. [signature page follows] 37 IN WITNESS WHEREOF. Lender and Borrower have caused these presents to be duly executed as of the day and year first above written. LENDER BORROWER CONGRESS FINANCIAL CORPORATION NORD KAOLIN COMPANY, a Georgia (CENTRAL) limited partnership By: /s/ [ILLEGIBLE] By: NORPLEX, INC., a Georgia -------------------------------- corporation. as the sole General Partner Title: Vice President ----------------------------- ADDRESS By: /s/ [ILLEGIBLE] --------------------------- 100 S. Wacker Drive Suite 1940 Title: Assistant Secretary Chicago, Illinois 60606 ------------------------ CHIEF EXECUTIVE OFFICE: P.O. Box 297 U.S. Highway 80 Jeffersonville, GA 31044 S-1 EX-10.101 7 EXHIBIT 10.101 PROMISSORY NOTE --------------- $2,000,000.00 (US) OCTOBER 24, 1996 ON DEMAND, FOR VALUE RECEIVED, the undersigned NORD PACIFIC LIMITED (the "Maker"), a corporation duly organized and existing under the laws of Bermuda, having a principal place of business at 22 Church Street, Hamilton, HM11, Bermuda, hereby promises to pay to the order of NORD RESOURCES CORPORATION (the "Payee"), at 8150 Washington Village Drive, Dayton, Ohio 45458, or at such other place as the Payee may, from time to time, direct by written notice to Maker, the outstanding principal amount hereunder, which shall be equal to the aggregate amount of those amounts set forth under the column titled "Advance" on the grid (the "Grid") attached hereto and hereby made a part hereof, with interest thereon at the "Prime Rate" (as defined below) plus one (1%) percent (the "Interest Rate"). All amounts advanced hereunder shall be at the sole discretion of the Payee and nothing stated herein is intended to, nor shall be deemed to, create any obligation on behalf of the Payee to advance any funds to Maker hereunder. All amount advanced hereunder shall be endorsed by the holder hereof on the Grid. In no event shall the aggregate amount of all advances (including any interest accrued thereon) made hereunder exceed TWO MILLION ($2,000,000.00) DOLLARS in United States currency. Notwithstanding anything to the contrary contained herein, all amounts of principal and interest outstanding under this Note shall be due and payable within five (5) days after the closing of any public offering of securities of Maker. Interest on any amounts advanced under this Note at the Interest Rate shall accrue and be computed from the date of each advance until the date of payment of the principal balance hereof, and shall be due and payable on or before the fifth (5th) calendar day of each month during the term of this Note. All payments of principal and interest on this Note shall be made at the office of Payee set forth above. The term "Prime Rate" as used shall mean the prime (base) rate published by The Chase Manhattan Bank, N.A., as such rate may be adjusted from time to time. In the event The Chase Manhattan Bank, N.A. shall, at any time while amounts remain due to Maker from Payee under this Note, cease to publish its prime rate, then the "Prime Rate" hereunder shall be the prime (base) rate published in the Wall Street Journal, as such rate may be adjusted from time to time. In the event that any amount of principal or interest under this Note is then outstanding as of March 31, 1997, the Payee, or holder of this Note, shall have the option to convert any or all of the then outstanding amount due under this Note, including accrued and unpaid interest, into fully paid and non-assessable shares of the common stock, $.01 par value (the "Common Stock"), of Maker (the "Conversion Shares") at a conversion price per share equal to the average of the high and low daily trading prices of the Common Stock on the NASDAQ National Market System (converted into American Deposit Receipts if then being traded thereon instead of Common Stock) for a period of twenty (20) trading days prior to and including March 31, 1997 (the "Conversion Value"). In the event of conversion in full, Maker's delivery to Payee of the fixed number of shares of Common Stock into which this Note is convertible will cancel Maker's obligation to pay the outstanding principal amount of this Note, plus accrued interest, for the period from the issue date of this Note to the Conversion Date. In the event of partial conversion, the Conversion Value of the Conversion Shares will be used first to pay any accrued and unpaid interest with the remainder reducing the then unpaid principal balance due hereunder. Such reduction will be properly reflected on the Grid. If an Event of Default (as hereinafter defined) occurs or is continuing, then the Payee may declare the principal and interest accrued on the principal balance of this Note to be due and payable immediately, by a notice in writing to Maker, and upon any such declaration such principal and interest shall become immediately due and payable. If an Event of Default specified in paragraphs (b) or (c) of the definition of "Event of Default" below occurs, the principal of this Note, and accrued interest thereon, shall, IPSO FACTO, become immediately due and payable without any declaration or other act by any person. Maker hereby agrees to pay all reasonable costs and expenses of Payee (including, without limitation, reasonable attorneys' fees) in connection with any collection proceeding relating to this Note. In addition to the foregoing and notwithstanding anything to the contrary contained in this Note, if the Conversion Date occurs on or after an Event of Default, Payee shall continue to have the right to convert this Note into Conversion Shares, if the Payee elects to do so. For purposes hereof, each of the following events shall constitute an "Event of Default": (a) default in the timely payment of the principal and accrued interest of this Note upon demand by Payee; (b) the entry of a decree or order by a court having jurisdiction over the parties hereto and the subject matter hereof, adjudging Maker a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of Maker under bankruptcy or similar law or any other applicable law, or appointing a receiver, liquidator, assignee, trustee, sequestrator or other similar official of Maker or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of thirty (30) consecutive days; or (c) the institution by Maker of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under Federal bankruptcy law or any other applicable Federal or state law, or the consent by it to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or similar official of Maker or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by Maker in furtherance of any such action. All payments hereunder shall be made in lawful money of the United States of America. -2- All amounts paid, transferred or issued to Payee pursuant to the Agreement and this Note shall be made free and clear of, and without any deduction or withholding on account of, taxes imposed by the United States of America. If Maker is required to make any deduction or withholding on account of any such tax then: (i) the amount to be paid, transferred or issued to Payee shall be increased to the extent necessary to ensure that after the making of that deduction or withholding, Payee receives on a net after tax basis what it would have received had no such withholding been required or made; and (ii) Maker shall indemnify Payee on an after tax basis against any such tax and all claims, liabilities and related costs and expenses of Payee in connection with the imposition or assertion of any such tax. Notwithstanding anything to the contrary contained in this Note, if the Note is assigned in whole or in part and such deduction or withholding is required from the amount to be paid, transferred or issued pursuant to the Agreement and this Note to the assignee whereas it would not have been required had it been paid, transferred or issued to the original Payee, the provisions of this paragraph shall not apply. This Note shall be governed by and construed in accordance with the laws of the State of New York. Any provision hereof which may prove unenforceable under any law shall not affect the validity of any other provision hereof. The Maker hereby waives presentment, demand for payment, notice of dishonor, protest and notice of protest, and any or all other notices or demands in connection with this Note. The liability of the Maker shall be unconditional and shall not be in any manner affected by any indulgence whatsoever granted or consented by the Payee, including, but not limited to, any extension of time, renewal, waiver or other modification. Any failure of the Payee to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time and from time to time thereafter. NORD PACIFIC LIMITED By: /s/ Terence H. Lang ------------------------------------ Name: TERENCE H. LANG Title: TREASURER -3- EX-23.1 8 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in (i) Registration Statement No. 33-34196 of Nord Resources Corporation on Form S-8, (ii) Post-Effective Amendment No. 1 to Registration Statement No. 33-25569 of Nord Resources Corporation on Form S-8/S-3, and (iii) Registration Statement No. 33-54600 of Nord Resources Corporation on Form S-8 of our report on the consolidated financial statements of Nord Resources Corporation and Subsidiaries dated April 9, 1997 (which disclaims an opinion on the Company's consolidated financial statements for 1996, 1995 and 1994 because of an uncertainty relating to the ability of the Company to continue as a going concern and the inability of other auditors to express an opinion on the financial statements of the Rutile Segment) appearing in the Annual Report on Form 10-K of Nord Resources Corporation for the year ended December 31, 1996. Deloitte & Touche LLP Dayton, Ohio April 9, 1997 E-54 EX-23.2 9 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in (i) Registration Statement No. 33-34196 of Nord Resources Corporation on Form S-8, (ii) Post-Effective Amendment No. 1 to Registration Statement No. 33-25569 of Nord Resources Corporation on Form S-8/S-3, and (iii)Registration Statement No. 33-54600 of Nord Resources Corporation on Form S-8 of our reports on the financial statements of Sierra Rutile Limited and Sierra Rutile Holdings Limited (each of which disclaims an opinion because of a scope limitation and uncertainties relating to the ability of the Company to continue as a going concern), and Titanium Minerals Marketing International USA and Titanium Minerals Marketing International Limited (each of which disclaims an opinion because of the significant uncertainties relating to the recoverability of amounts due from certain affiliates), and Sierra Rutile America Inc., (which contains a qualified opinion because of uncertainties relating to the recoverability of amounts due from certain affiliates), and Sierra Rutile Services Limited each dated 27 March 1997 appearing in the Annual Report on Form 10-K of Nord Resources Corporation for the year ended December 31, 1996. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORD RESOURCES CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 15,583 2,376 179 0 0 30,640 429 402 112,876 26,309 0 0 0 218 79,362 112,876 0 35 0 3,477 0 0 117 (2,385) 0 (2,385) (27,174) 0 0 (29,559) (1.56) 0
EX-99.1 11 EXHIBIT 99.1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Sierra Rutile Limited: We were engaged to audit the balance sheets of Sierra Rutile Limited as of December 31, 1996 and 1995, and the related profit and loss accounts and cash flow statements for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. As described in note 1 to the financial statements, production at the Company's mine was suspended following militant attacks on the mine and Company personnel in January 1995 and, due to subsequent occupation of the facilities by rebel forces, it became necessary to evacuate all employees. While limited access to the facilities was restored in 1996 and while major properties appear to be essentially intact, management continues to be unable to make an assessment of the impairment of the asset carrying values. Further, the Company has not yet been able to arrange the financing needed to make further progress in assessing and addressing the conditions of the mining properties or the requirements to resume operations. These circumstances create substantial doubt about the recoverability of asset carrying amounts, including prepaid royalties and deferred tax assets; the adequacy of the recorded liabilities, including accrued reclamation costs; and the ability of the Company to continue as a going concern. The recoverability issues grows more serious in light of the Company's discontinuance of depreciation and amortization and of its continued recognition of additional deferred tax benefits since suspension of production. Since we were unable to complete substantial auditing procedures due to the unavailability of sufficient evidential matter on asset impairments and because of the uncertain impact on financial statement carrying amounts of the current circumstances, we are unable to express, and we do not express, and opinion on these financial statements. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK EX-99.2 12 EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Sierra Rutile America Inc: We have audited the accompanying balance sheets of Sierra Rutile America Inc as of December 31, 1996 and 1995, and the related profit and loss accounts for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as discussed in the following paragraph, we conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Financial statements for two affiliated entities are accompanied by disclaimers of audit opinions related to suspension of mining operations of Sierra Rutile Limited and the occupation of the facilities by rebel forces. While access to the facilities was restored during 1996, Sierra Rutile Limited continues to be unable to make an assessment of the impairment of the asset carrying values. These circumstances in turn create the possibility that amounts due from certain affiliates in the accounts of the Company may not be fully recoverable and we are unable to satisfy ourselves as to that matter. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence of recoverability of amounts due from certain affiliates, the financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of Sierra Rutile America Inc as of December 31, 1996 and 1995, and the results of its operations for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles in the United Kingdom. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK EX-99.3 13 EXHIBIT 99.3 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Sierra Rutile Services Limited: We have audited the accompanying balance sheets of Sierra Rutile Services Limited as of December 31, 1996 and 1995, and the related profit and loss accounts for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sierra Rutile Services Limited as of December 31, 1996 and 1995, and the results of its operations for the years then ended in conformity with generally accepted accounting principles in the United Kingdom. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK EX-99.4 14 EXHIBIT 99.4 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Sierra Rutile Holdings Limited: We were engaged to audit the balance sheets of Sierra Rutile Holdings Limited as of December 31, 1996 and 1995, and the related profit and loss accounts for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. As described in note 1 to the financial statements of Sierra Rutile Limited, the principal wholly-owned subsidiary of the Company, production at the subsidiary's mine was suspended following militant attacks on the mine and subsidiary personnel in January 1995 and, due to subsequent occupation of the facilities by rebel forces, it became necessary to evacuate all employees. While limited access to the facilities was restored in 1996 and while major properties appear to be essentially intact, the subsidiary continues to be unable to make an assessment of the impairment of the asset carrying values. Further, the subsidiary has not yet been able to arrange the financing needed to make further progress in assessing and addressing the conditions of the mining properties or the requirements to resume operations. These circumstances create substantial doubt about the recoverability of asset carrying amounts, including prepaid royalties and deferred tax assets of the subsidiary; the adequacy of the recorded liabilities, including accrued reclamation costs, of the subsidiary; and the ability of the subsidiary and the Company to continue as a going concern. The recoverability issues grows more serious in light of the subsidiary's discontinuance of depreciation and amortization and of its continued recognition of additional deferred tax benefits since suspension of production. Since we were unable to complete substantial auditing procedures due to the unavailability of sufficient evidential matter on asset impairments and because of the uncertain impact on financial statement carrying amounts of both the subsidiary and the Company of the current circumstances described in the preceding paragraph, we are unable to express, and we do not express, an opinion on these financial statements. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK EX-99.5 15 EXHIBIT 99.5 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Titanium Minerals Marketing International Limited: We have audited the accompanying balance sheets of Titanium Minerals Marketing International Limited as of December 31, 1996 and 1995, and the related profit and loss accounts for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as discussed in the following paragraph, we conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Financial statements for two affiliated entities are accompanied by disclaimers or audit opinions related to suspension of mining operations of Sierra Rutile Limited and the occupation of the facilities by rebel forces. While access to the facilities was restored during 1996, Sierra Rutile Limited continues to be unable to make an assessment of the impairment of the asset carrying values. These circumstances in turn create the possibility that amounts due from certain affiliates in the accounts of the Company may not be fully recoverable and we are unable to satisfy ourselves as to the matter. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence of recoverability of amounts due from certain affiliates, the financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of Titanium Minerals Marketing International Limited as of December 31, 1996 and 1995, and the results of its operations for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles in the United Kingdom. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK EX-99.6 16 EXHIBIT 99.6 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Titanium Minerals Marketing International USA We have audited the accompanying balance sheets of Titanium Minerals Marketing International USA as of December 31,1996 and 1995, and the related profit and loss accounts for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as discussed in the following paragraph, we conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures on the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Financial statements for two affiliated entities are accompanied by disclaimers of audit opinions related to suspension of mining operations of Sierra Rutile Limited and the occupation of the facilities by rebel forces. While access to the facilities was restored during 1996, Sierra Rutile Limited continues to be unable to make an assessment of the impairment of the asset carrying values. These circumstances in turn create the possibility that amounts due from certain affiliates in the accounts of the Company may not be fully recoverable and we are unable to satisfy ourselves as to that matter. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence of recoverability of amounts due from certain affiliates, the financial statements referred to in the first paragraph above present fairly, in all material respects, the financial position of Titanium Minerals Marketing International USA as of December 31, 1996 and 1995, and the results of its operations for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles in the United Kingdom. /s/ KPMG KPMG 27 MARCH 1997 CHARTERED ACCOUNTANTS Reading, UK -----END PRIVACY-ENHANCED MESSAGE-----