-----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, OlVaBjblx4YBqKdPxEPbldwGq6N9oXC8yHtaJdd7Ow/2s+8qUKWchsPoewS9MmsS RTenCP3mhW3mXxBOVH3Kfw== 0000927356-97-000492.txt : 19970508 0000927356-97-000492.hdr.sgml : 19970508 ACCESSION NUMBER: 0000927356-97-000492 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970507 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH LILY MINING CO CENTRAL INDEX KEY: 0000072655 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 870159350 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16740 FILM NUMBER: 97596911 BUSINESS ADDRESS: STREET 1: 1800 GLENARM PLACE STREET 2: STE 210 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032940427 MAIL ADDRESS: STREET 1: 1800 GLENARM PL STREET 2: STE 210 CITY: DENVER STATE: CO ZIP: 80202 10-K/A 1 FORM 10-K IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-K/A IS BEING FILED IN PAPER PURSUANT TO TEMPORARY HARDSHIP EXEMPTION. FORM 1O-K/A AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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 ---------------------------------------------------- Commission file number 0-16740 ------------------------------------------------------- NORTH LILY MINING COMPANY ------------------------- (Exact name of registrant as specified in its charter) Utah 87-0159350 - -------------------------------- ------------------------------------ State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization 210 - 1800 Glenarm Place, Denver, Colorado 80202 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 294-0427 ---------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock $.10 par value None - ------------------------------------ ----------------------------------------- Securities registered pursuant to section 12(g) of the Act: N/A ------------------------------------ (Title of class) Indicate by check mark whether the registrant (l) 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 the filing requirements for at least the past 90 days. Yes X No_______ ------- Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 21,1997: $1,017,321 ------------ Number of shares outstanding of registrant's common stock, $.10 par value, as of March 21, 1997: 2,992,122 ----------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this chapter) 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 amendments to this Form 10-K[_]. Exhibit index on consecutive page 33 Page 1 of 35 pages INDEX ----- PART I ------
Page Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III -------- Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 27 Item 12. Security Ownership of Certain Beneficial Owners and Management 30 Item 13. Certain Relationships and Related Transactions 31 PART IV ------- Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 33
PART 1 ITEM 1. BUSINESS -------- GENERAL AND HISTORICAL BACKGROUND - --------------------------------- North Lily Mining Company ("North Lily") was incorporated in Utah in 1916 and was a subsidiary of Anaconda Company from 1925 until 1949. During this period, the Company produced gold, silver, lead, zinc and copper from the North Lily Mine in the Tintic Mining District, Utah. From 1949 to 1987, the Company was primarily engaged in the acquisition, exploration, and development of mining properties. From 1988 to 1991, a Company subsidiary, International Mahogany Corp. ("Mahogany"), a Canadian publicly-traded mining company listed on the Toronto Stock Exchange, jointly with International Corona (Mahogany had a 70% working interest), placed the Jolu Mine in Northern Saskatchewan, Canada, into production and produced approximately 204,000 ounces of gold. In 1991, the Company and Mahogany acquired the Tuina copper property in Chile, South America. Since 1991, the Company and Mahogany have jointly been developing the Tuina copper project. The Company and Mahogany have also operated a small heap leach tailing recovery operation in Utah which has produced approximately 33,000 ounces of gold and gold equivalent since 1988, and is now in the reclamation stage. By way of a letter agreement dated August 6, 1993, North Lily sold to Baja Gold, Inc. ("Baja"), a Canadian publicly-traded precious metals exploration and development company listed on the Toronto and Vancouver Stock Exchanges, North Lily's equity investment in Mahogany, consisting of 4,114,958 Class B subordinate voting shares and 150,000 Class A common shares of Mahogany (in aggregate representing an approximate 25% equity and 60% voting interest). Consideration received from Baja included: cash of $500,000; a note issued by Baja in the amount of $500,000, which was sold at face value on December 22, 1993 to reduce amounts owing to Mahogany; and 650,000 common shares of Baja, valued, for financial statement purposes, at $680,000, based on the August 6, 1993 closing stock market price of Baja. On April 12, 1995, the Company and Mahogany concluded an agreement on the restructuring of the ownership interests of the Tuina project. In settlement of the Company's outstanding debt to Mahogany of $797,481, the Company has reduced its effective interest in the Tuina project from 50% to 41%. The agreement also contains provisions in which the Company may be required to further reduce its interest in the Tuina project and, in certain circumstances, recapture the interest relinquished. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion. On November 17, 1995, the Company executed an Agreement and Plan of Share Exchange (the "Agreement") with Tamarine Ventures Ltd. ("Tamarine"), a company incorporated under the laws of British Columbia, Canada. The Agreement provided for the issuance, at closing, of one post-reverse stock split share of Common Stock of the Company in exchange for each four common shares of Tamarine, thereby making Tamarine a wholly-owned subsidiary of the Company (the "Share Exchange"). At the closing of the Share Exchange, the Company would issue 2,000,000 post-reverse split shares of its Common Stock to the shareholders of Tamarine. On November 22, 1996, the Company terminated the Agreement and abandoned its plan to acquire Tamarine. Effective December 8, 1996, the Company implemented a one-for-ten reverse split on the outstanding shares of Common Stock. All of the per share amounts have been restated to reflect this reverse stock split. At December 31, 1996, North Lily had the following subsidiaries and affiliates: -3- MINERA NORTHERN RESOURCES S.A. ("Northern"), a Chilean limited liability company, 100% (inactive). TENHARD RESOURCES, INC., a Montana corporation, 100% (inactive). COMPANIA MINERA PHOENIX S.A., ("Phoenix") (formerly Compania Minera San Martin S.A.), a Chilean limited liability company, 41% owned by Northern (active). MINERA SAN LORENZO LIMITADA ("San Lorenzo"), a Chilean limited liability company, 50% owned by Northern (inactive). North Lily and its subsidiaries are collectively referred to as "the Company". Throughout this report, unless otherwise specified, all dollar amounts refer to U.S. dollars. From time to time management has written off certain costs associated with various properties when it has become apparent that such costs would not be recoverable. Management believes that the financial statements included herein reflect capitalized costs (under Mineral Properties) that can be recovered and that no further write-downs are necessary at this time. The Company has a number of mineral properties in three countries; the United States, Chile and Bolivia. The Company has interests in one project in the United States and, as at December 31, 1996, a 41% equity interest in a copper project in Chile and a 46% interest in an exploration gold property in Bolivia. Historically, the Company's principal mineral target has been gold. North Lily's common shares traded on the over-the-counter market for approximately 60 years and, beginning in May of 1985, were included in the National Association of Securities Dealers, Inc. system (NASDAQ Symbol: NLMC). FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS - --------------------------------------------- The Company and its subsidiaries are primarily engaged in the gold and copper business. (See Note 14 of Notes to Consolidated Financial Statements). SALES AND MARKETING - ------------------- Gold, silver and copper can be readily sold on numerous markets throughout the world and it is not difficult to ascertain the market price for such metals at any particular time. The Company's 50% owned Silver City mine produced gold and silver ore which was processed at Handy & Harman refineries, and then sold to precious metal traders on a competitive basis. The Silver City mine ceased mining operations in February, 1993. Residual gold leaching continued during 1993 and the reclamation process was implemented in 1994. The Company's 41% owned Tuina mine produced copper precipitate which was transported from Chile, South America and sold in the United States to a metal trader on a competitive basis. The number of companies willing to purchase copper precipitates is limited. The Company does not plan to resume production of copper precipitates and has determined the most effective production process for the Tuina property is a solvent extraction/electrowinning process ("SX/EW"). An SX/EW production process would allow the Company to manufacture cathode copper at the mine site with significantly reduced operating costs. In addition cathode copper is more readily marketable and the marketing costs for this product are also significantly lower. In order for the Company to produce copper utilizing the SX/EW process, an SX/EW plant is required to be constructed at the mine site. FOREIGN INVESTMENT IN CHILE - --------------------------- Any investment in Chile in excess of U.S. $10,000 must enter the country through the Official Foreign Exchange Market, either under Chapter XIV of the Compendium of Foreign Exchange regulations of the Central Bank or under Decree Law 600 (D.L. -4- 600), the Foreign Investment Statute. Both laws guarantee access by foreign investors to the Official Foreign Exchange Market in order to repatriate capital and profits. The following is a brief summary of the significant aspects of these laws. CHAPTER XIV 1. The minimum investment amount is U.S. $10,000. Each remittance or investment must be separately registered and approved by the Central Bank of Chile. 2. The investment may enter the country and be valued in freely convertible foreign currency or in credits. 3. The capital invested may be repatriated after 36 months from the date of entrance into the country. Profits arising from the investment may be exported at any time. 4. The general tax regime described in Government Regulations below is applicable. 5. In order to repatriate invested capital and/or profits from the investment, the petitioner must deposit the equivalent in local currency at a Chilean bank and must obtain the prior approval of the Central Bank. An affidavit must be sworn attesting that the local currency used originates exclusively from the business to which the original investment was made or from the sale or liquidation of the original investment. Corresponding taxes must have previously been paid. D.L. 600 1. The minimum investment amount is U.S. $25,000. After the approval of the Foreign Investment Committee, a contract is entered into between the investor and the State of Chile. Thereafter remittances or investments may be made under the contract and each individual remittance need not be registered. 2. The investment may enter the country and be valued in: - freely convertible foreign currency, - tangible assets, - credits, - capitalization of foreign loans and debts, or - capitalization of profits qualifying for remittance aboard. 3. The capital invested may be repatriated after 12 months have elapsed from the date of entrance into the country. Profits arising from the investment may be remitted any time. 4. Foreign investors have the right to elect to be subject to taxation at a fixed overall income tax rate of 42% on taxable income for a 10 year term which may be extended up to 20 years for projects in excess of U.S. $50,000,000 in the manufacturing and extractive industries. Out of the overall rate 15% First Category Tax is payable annually on accrued taxable income. An additional tax of 27% is payable on dividends or distributed profits. The investor may waive this right and become subject to the general taxation regime described below in Government Regulations. 5. In order to repatriate capital contributions and/or profits, the petitioner must deposit the equivalent in local currency at a Chilean bank and obtain the prior approval of the Central Bank. An affidavit must be sworn attesting that the local currency used originates exclusively from the business to which the original investment was made or from the sale or liquidation of the original investment. Corresponding taxes must have previously been paid. -5- To date all of the Company's investment in Chile has been made via D.L. 600. GOVERNMENT REGULATIONS - ---------------------- The Company's mining, processing and exploration activities are subject to various laws governing the protection of the environment, prospecting, development, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, mine safety and other matters. Mining operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies. Failure to comply with applicable laws and regulations may result in orders being issued that may cause operations to cease or be curtailed or may require installation of additional equipment. Violators may be required to compensate those suffering loss or damage by reason of violations and may be fined if convicted of an offense under such legislation. The Company believes it is in compliance with all material laws and regulations applicable to it or its operations. Additional legislation or amendments may be proposed from time to time that might affect the Company's business. The Company is unable to predict in advance which proposals may be enacted or their effective dates. Such changes could, however, require increased capital or operating expenditures or both, and could prevent or delay certain operations by the Company. Outlined below are some of the more significant aspects of governmental controls and regulations which materially affect the Company. In the United States the Company is subject to federal and state income taxes, state and local franchise taxes, personal property taxes and state severance taxes. State severance taxes vary between the states and within a single state. The amount of the tax, based on a percentage of the value of the mineral being extracted, may vary from mineral to mineral. Operations are subject to taxation by each locality in which mineral properties are owned or business is done. Because many state and local tax laws are not uniform, the Company runs a risk of double taxation on portions of its income by various jurisdictions. This may adversely effect earnings, if any. In Chile the Company is subject to income taxes on earnings, if any. A "first category" tax rate of 15% is applied on taxable income. Amounts distributed from Chile to non-residents are subject to an additional tax of 35%, against which the "first category" corporate tax may be credited. The current combined effect of these taxes on distributed income for non-residents is an effective tax rate of 35%. There are no taxes on the value of the mineral being extracted. There are also some minor municipal taxes. ENVIRONMENTAL REGULATIONS - ------------------------- UNITED STATES Legislation and implementing regulations adopted or proposed by the United States Environmental Protection Agency, the Bureau of Land Management ("BLM") and comparable agencies in various states directly and indirectly affect the mining industry in the United States. These laws and regulations address potential contamination of air, soil and water from mining operations. In particular, legislation such as the Federal Water Pollution Control Act, the Comprehensive Environmental Response and the Compensation and Liability Act impose effluent standards, new source performance standards, air quality and emission standards, waste disposal requirements and other requirements with respect to present, and in some cases past mining and mineral processing, including gold mining. -6- U.S. mine operators must comply with the Federal Mine Safety and Health Act, which is enforced by the Mine Safety and Health Administration ("MSHA"), an agency within the Department of Labour. All mines, both underground and surface, are subject to inspections by MSHA. The Occupational Safety and Health Administration also has jurisdiction over safety and health standards not covered by the Federal Mine Safety and Health Act, although there are areas where the authority of both administrative agencies overlap. With respect to operations in the United States, the Montana Department of Lands administers the Montana Metal Mine Reclamation Act and the Montana Environmental Policy Act, the purposes of which are to protect the usefulness, productivity and scenic values of the State's lands and waters and to reclaim to beneficial use the lands used for metal mining. The Montana Department of Health and Environmental Sciences administers and enforces air, water and waste regulations through various bureaus existing under that Department, such as the Montana Air Quality Act and the Montana Water Quality Act. The Water Rights Bureau under the Montana Department of Natural Resources and Conservation, reviews existing and proposed surface and ground water rights and uses. Existing laws and regulations with respect to the reclamation of mining operations are in place and may necessitate substantial planning and bonding requirements. The Company may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for, or production of, minerals may have upon the environment. It may be anticipated that future legislation will significantly emphasize the protection of the environment, and that as a consequence, the activities of the Company may be more closely regulated to further the cause of environmental protection. Such legislation, as well as future interpretation of existing laws, may require substantial increases in equipment and operating costs to the Company and delays, interruptions, or a termination of operations, the extent of which cannot now be predicted. CHILE With respect to operations in Chile, the government administers and enforces mining laws and regulations. These laws and regulations are principally administered by Servicio Nacional de Geologia y Minas ("Sernageomin"). No bonding requirements or environmental impact statements are required in Chile. However, the current government in Chile has indicated that additional regulations or laws may be introduced which emphasize the protection of the environment. As a consequence, the activities of the Company may be more closely regulated to further the cause of environmental protection. Such legislation, as well as future interpretation of existing laws, may require substantial increases in equipment and operating costs to the Company and delays, interruptions, or a termination of operations, the extent of which cannot now be predicted. EMPLOYEES AND FACILITIES - ------------------------ As of March 31, 1997, the Company has three employees in the U.S. through its joint projects, and the following company officers: Stephen E. Flechner, President and Chief Executive Officer; W. Gene Webb, Executive Vice-President and Corporate Secretary; and Nick DeMare, Treasurer. North Lily's office in Denver, Colorado is leased. ITEM 2. PROPERTIES ---------- The Company has acquired and maintained its mining claims in a manner that is consistent with common industry practice and believes that title to all its material properties and mineral interests is satisfactory. -7- UNITED STATES All of the Company's properties in the United States consist of unpatented and patented mining claims, and are owned by the Company or its subsidiaries or leased from third parties. Unpatented mining claims are located upon public land pursuant to procedures established by the General Mining Law of 1872 and related laws of the various states. Requirements for the location of a valid mining claim on public land depend on the type of claim being located and the relevant state law, but generally include discovery of valuable minerals, erecting a monument and posting on it a location notice, marking the boundaries of the claim, and filing a certificate of location with the county in which the claim is located and with the BLM. If the statutes and regulations for the location of a mining claim are complied with, the locator obtains a valid possessory right to the claim and the right to mine, remove and sell the contained minerals. To maintain an otherwise valid claim, a claimant must also annually perform a specified amount of work, or pay rental fees directly to the BLM, and make certain additional filings with the county and the BLM. Failure to perform such work or make the required filings in a timely manner may render the mining claim void or voidable. Because mining claims are self-initiated and self-maintained, they possess some unique vulnerabilities not associated with other types of property interests. It is impossible to ascertain the validity of unpatented mining claims from public real estate records alone, and therefore, it can be difficult or impossible to confirm that all of the requisite steps have been followed for location and maintenance of a claim. If the validity of an unpatented mining claim is challenged by the federal government or by claimants of conflicting rights to the ground, the claimant has the burden of proving the present economic feasibility of mining minerals located within the claim as well as the steps taken to perfect the claim's location. Thus, it is conceivable that during times of falling metals prices, claims which were valid when located could become invalid if challenged. The patent procedure permits claimants to purchase from the federal government fee title to claims upon demonstrating that the mineral deposit on the claims can be mined at a profit and by satisfying other procedural requirements. Patented mining claims are similar to other fee real property interests. Significant portions of the Company's United States properties consist of patented mining claims on which the Company's relevant local counsels have given their opinion that the Company, or the entity through which the Company holds rights to mine the property, has good title. CHILE In Chile the State is the owner of all mineral and fossil substances regardless of the surface ownership, but mining concessions may be obtained for the purpose of exploring or exploiting the underlying property in accordance with a jurisdictional process regulated by the Mining Code. The acquisition of title to new exploration mining concessions is a detailed jurisdictional process which can be divided into three stages: (1) The recording of the application for an exploration mining concession ("Pedimento") covering the desired ground before the Court and Mining Register of the relevant county ("Comuna") where the ground is located and its publication in the official Gazette. All persons (except certain government officials, some of their relatives and other similar persons) may prospect on any land not cultivated or enclosed. -8- (2) The request for a Court judgment formally constituting and granting the concession ("Sentencia") during which process a judge checks the procedure and the payment of certain fees, and representatives of the National Geological and Mining Service check the technical aspects of the title to the ground. (3) The issuance by the court of the constituting "Sentencia" whereby a two- year exploration mining concession is granted from the date of the "Sentencia". This "Sentencia" then has to be published in extract in the official Gazette and recorded in the corresponding Mining Register within a certain period of time. Prior to its expiration the owner of an exploration mining concession may conduct all kinds of exploration activities, may apply for an exploitation mining concession ("Pertenencia") to the corresponding judge (which also requires a jurisdictional process), and may request easements or facilities from neighbour concessions or from surface land owners, as necessary. Prior to expiration of exploration mining concessions, a single extension for a further two years can be applied for, however, in order to obtain such extension, the area of the concession must be reduced by 50%. An alternative to extension is to obtain one or more exploitation mining concessions (or Pertenencia) over the same ground. In order to obtain an exploitation mining concession (which permits commencement of production from a mineral property) it is necessary to go through a process which is similar in its structure to that for obtaining an exploration mining concession but requires a longer time period. An application ("Manifestacion") for the concession must initially be recorded and, following certain additional procedures, a request for a formative survey of the concession ("Mensura") is made. Following the survey (location on the ground of the boundaries of the concession) and certain additional procedures, including opportunities for third parties to put forward opposition to the survey of the concession, a formative judgment ("Sentencia") is issued and the exploitation mining concession is formally granted. All exploitation mining concessions are granted for an indefinite period. "Pedimento", as well as exploration mining concessions and exploitation mining concessions ("Concessions") are transferable and irrevocable but only Concessions can be mortgaged. Both are regulated by the same civil law rules that regulate real estate and fixed assets, save that they are not subject to attachments. Chilean mining law recognizes a preference to a Concession owner and not to the land surface owner because the State is interested in the development of mining resources. However, in the case of houses and their immediately surrounding lands, or lands where vineyards and fruit trees are planted, only the owner may grant the permission to a Concession holder to obtain easements and surface rights. The owner of a Concession, commencing as of the date of the request of the Sentencia, has to pay a yearly licence fee to the State in order to maintain its property over the same. Lack of payment may cause loss of ownership through auction by the State, although the licence fee can be paid up to the day of auction to prevent any loss. License fees are significantly higher for exploitation mining concessions than for exploration mining concessions. EXPLORATION BUDGET - 1997 The following table lists the properties in which the Company has an interest, and the 1997 exploration budget for each property. In approving the 1997 budgets for mineral properties, the Company considers a number of factors, among them are: total capital resources available to the Company, joint venture participation, terms of joint venture agreement (if applicable), estimated length of time before the property could be placed into production and activity in the immediate area, evaluation of preliminary geological data, anticipated costs and geologic location. -9- PROPERTY PORTFOLIO ------------------ Approximate Interest Held 1997 Property Size by the Company Exploration Property Name State Location (Acres) as of 12/31/96 Budget - --------------- --------- ------------- -------------- --------------- ------------- San Simon Beni Bolivia 13,087 46% $120,000/(2)/ Silver City Utah United States 20 50% - Tintic Utah United States 6,000 4%NSR/(1)/ 150,000/(3)/ Tintic Utah United States 4,114 100% - Tuina Region II Chile 15,013 41% - -------- TOTAL $270,000 ========
(1) NSR - Net Smelter Return (2) Minimum work commitment to be incurred on the property, of which the Company's portion is $60,000. (3) Minimum expenditure commitment to be incurred by lessee of property Due to the Company's current financial situation it does not plan to conduct any significant exploration activities in 1997. Activities will be limited to making required property payments to maintain the Company's interest, unless a joint venture or acquisition and related financing is accomplished. During 1996 the Company assessed the capitalized costs of its mineral properties in the United States and Chile. In the opinion of management no write-downs of carrying values were required. RESERVES MINERALS - -------- The proven and probable ore reserves stated in this report are geologic reserves that reflect drill-based estimates of the quantities and grades of mineralized material at the Company's mines which the Company believes can be recovered and sold at prices in excess of the cash cost of production. The estimates are based largely on current costs and on the projected prices and demand for the minerals based upon factors relevant to each mine. Ore reserves are based on calculations of geologic reserves provided to the Company by the operator. The Company has reviewed but has not independently confirmed those calculations. Ore reserves are reported as general indicators of minimum mine life. Changes in reserves represent general indicators of the results of efforts to develop additional reserves as existing reserves are depleted through production. Grades of ore fed to process may be different from stated reserve grades because of variation in grades in areas mined from time to time, mining dilution and other factors. Recovered grades reflect variations in the characteristics and payable content of ore fed to process and the success of efforts to improve processing efficiencies. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. MINERAL PROPERTIES The Company has acquired rights to various mineral properties in Chile, Bolivia and the States of Montana and Utah. The following is a description of certain of the Company's mineral properties. -10- TUINA PROJECT Ownership: - ---------- The Tuina properties are held by Phoenix, a Chilean company that is owned 41% by the Company and 59% by Mahogany at December 31, 1996. During 1995, the Company, Mahogany and Yuma Gold Mines Limited ("Yuma") entered into a number of agreements which may result in Yuma acquiring Mahogany's interest in the Tuina properties. Yuma may also increase its ownership in the Tuina property by a further 15%. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Description of Property: - ------------------------ The property is located approximately 60 kilometers (37 miles) east of Calama, in Region II in the Country of Chile and consists of a total of 6,080 hectares (15,013 acres). Hectares - Net -------------- 394 San Jose Lease 5,686 Other properties ----- 6,080 ===== Mineralization: - --------------- To date the Company has calculated a mineable tonnage of 3.5 million metric tonnes of copper ore contained in the San Jose and San Martin pits at an estimated soluble copper grade of 1.1%. The estimated stripping ratio to mine this tonnage would be 2.3 to 1. Description of Property Agreements: - ----------------------------------- (1) San Jose Lease: --------------- The San Jose Lease covers an area of 394 hectares and hosts all, or substantially all, of the current proven reserves. There are two known areas of copper mineralization on this property called the San Jose pit and the San Martin pit. To date all production has been from properties held under this lease. During 1994 Phoenix renegotiated its lease on the property (the "Operating Lease"). The Operating Lease has a term of 30 years and requires a payment of 5% of the copper produced with a minimum payment of 16 tonnes of copper per month. Under the terms of the Operating Lease the obligation to make the minimum lease payments has been waived until August 1995 and in return a payment of $200,000 was made. This $200,000 payment represented an advance payment against which future lease payments could be offset. Since August 1995 the minimum lease payments have been partially met through application of this advance payment. The minimum lease payment is a cost which is funded by Yuma pursuant to the Tuina agreements. In addition Phoenix has agreed to make certain bank payments while the Operating Lease is in effect. The payments required of Phoenix are shown below: 1997 $ 291,000 1998 $ 278,000 1999 $2,285,000 Included in the 1999 payments is a lump sum payment of approximately $2,196,000. This amount is payable only if Phoenix is producing from the leased claims. Phoenix has also agreed to pay the property owner $8,000 per month, for the lease of certain equipment. This agreement will allow the Company to continue using the equipment after the lease on the mineral properties has expired. This obligation to pay $8,000 per month will only commence when the Operating Lease is terminated or when it expires. -11- (2) Other Properties: ----------------- The Company has the exploration rights for an additional 5,686 hectares which are not subject to any underlying royalties or agreements. The Company is in the process of transforming these exploration rights to exploitation rights. There are two known areas of copper mineralization on this property called Inca and Milagro. Prior Activities: - ----------------- Since its acquisition in June 1991, the Company has expanded the camp facilities to accommodate 120 persons and completed a detailed mine plan for the production of copper precipitate. In December 1991 the first section of the leach pad was completed. In 1991 and 1992 the Company carried out several drill programs on the properties. The Company started mining operations in the first quarter of 1992, producing copper precipitates. Mining stopped later in 1992 due to a dispute with the mining contractor. The mining contractor was able to obtain a temporary embargo during 1992 preventing the Company from achieving its planned levels of production. The embargo was removed during the fourth quarter of 1992 and new contracts were signed with a replacement contractor to provide services for crushing, transportation, drilling and blasting. Due to high transportation and refining and treatment charges and reductions in the price of copper, the Tuina Mine was experiencing negative cash flow throughout 1993. As a result of these factors, the Company and Mahogany suspended production of copper precipitates and put the mine on a care and maintenance program. Employment of a significant portion of the mine's workforce was terminated and the mine office in Calama was closed during 1993. The last shipment of copper precipitates was made in July 1993. A reverse circulation drill program was completed in 1994. The drill program has confirmed a probable (geological) reserve of approximately 1.772 million tonnes grading 1.7% total copper (1.1% soluble) at the San Jose pit, and a probable (geological) reserve of 2.075 million tonnes grading 1.3% total copper (1.2% soluble) at the San Martin pit. At both prospects sulfide mineralization was encountered below the oxide zone. 1997 Planned Activities: - ------------------------ Activities on the Tuina Project are currently curtailed pending the results of a revised feasibility study for a 12,000 ton per day SX/EW plant proposed by Yuma. The water rights have been secured and Yuma now has to either elect to close the Mahogany -Yuma Agreement, subject to regulatory approval, or terminate the agreement. If Yuma elects to terminate the agreement, Mahogany and the Company would not owe Yuma any funds for past expenditures incurred by Yuma. If Yuma elects to purchase the 10% interest then the Company would be required to pursue a joint operating agreement with Yuma, pursuant to which it would pay one-third of the expenditures expended by Yuma on the cost of securing the water rights and 26% of all other costs incurred. These costs would be deducted from payments due from Yuma for the 10% interest to be purchased by Yuma from the Company. Yuma is currently conducting drilling on the property and on completion of this drilling, Bateman has been engaged to perform a bankable feasibility study. TINTIC PROPERTIES Ownership: - ---------- The properties are held 100% by the Company. Description of Property: - ------------------------ The property is located in the Tintic Mining District, Utah and Juab Counties in the State of Utah, approximately 80 miles south of Salt Lake City. The property comprises (1) surface and mineral rights on approximately 7,741 acres of patented lode mining -12- claims and other patented land owned in fee simple; (2) 2,200 acres of patented land with agricultural and mineral rights; (3) city lots in Eureka, Utah, covering 21 acres; (4) 104 acres of unpatented mining claims; and (5) 20 acres without mineral rights. In addition, the Company owns 28 acres of patented lode mining claims and two unpatented lode mining claims in the Tintic Mining District, Juab County, Utah. Mineralization: - --------------- There are currently no gold reserves identified on the properties, however deep exploration targets are renewing the interest of several companies. Description of Property Agreements: - ----------------------------------- The Company owns the Tintic properties outright and has no obligations for underlying payments other than annual fees to the State of Utah. On January 23, 1987, as extended on April 7, 1997, the Company entered into a mining lease with Centurion Mines Corporation ("Centurion"), a non-affiliated mining company, covering approximately 3,000 acres. The lease, which specifically excludes the mine dumps and tailings, Silver City mill, and existing grazing leases, shall continue until January 23, 2003. Thereafter, the lease shall continue as long as production from the leased premises, or production from adjoining Centurion lands within one thousand feet of the boundary of any portion of the leased premises, is being conducted by Centurion on a continuing basis. Centurion is required to pay advance royalties of $75,000 annually (payments to 1997 have been received) and a production royalty equal to 4% NSR. The Company will also receive a production royalty equal to a 2% NSR from Centurion on any production within one thousand feet of the leased premises. Centurion is still required to fulfil a work commitment with respect to the leased premises at a minimum cost of $150,000 each year through the term of the lease. On November 22, 1996, the Company sold approximately 374 acres of its holdings in the Tintic Mining District to the Tintic Utah Metals L.L.C. for $65,000. These acres are still subject to the Centurion mining lease and the Company retains the lease rentals, less property taxes, and a 4% NSR. Prior Activities: - ----------------- To date the lessee has made all lease payments and has fulfilled all work commitments on exploration and development in the Tintic Mining District since negotiating the lease agreement. Planned 1997 Activities: - ------------------------ Approximately 3,000 acres remain subject to a lease agreement with Centurion who are operators of the property. Centurion have advised the Company that they will be spending at least $150,000 in exploration work on the property in order to fulfil their work commitments. The other approximately 8,000 acres have a future potential real estate value as commuter suburbs, new business communities and rural retreats occur in the corridor developing south from Salt Lake City towards this area. The Company has contacted various real estate development companies to develop this acreage. The Company will continue to pursue this opportunity during 1997. SILVER CITY JOINT VENTURE Ownership: - ---------- The joint venture property is owned 50% by North Lily and 50% by Mahogany. Description of Property: - ------------------------ The joint venture property is located in Juab County, approximately 80 miles south of Salt Lake City, Utah and consists of approximately 20 acres. -13- Mineralization: - --------------- The Silver City Joint Venture was a project designed to extract gold and silver from a previous mine's tailings using a heap leach process. The project is now undergoing reclamation work, while considering leaching opportunities, and it is not known if the project will produce any further gold or gold equivalent. Description of Property Agreement: - ---------------------------------- Pursuant to an agreement dated July 21, 1987, the Company conveyed a 50% undivided beneficial interest, in the joint property, to Magellan Resources Inc. ("Magellan"), a wholly-owned subsidiary of Mahogany. To earn its 50% interest Magellan funded the initial $300,000 development expenditures of the joint venture. Prior Activities: - ----------------- All necessary environmental and building permits were obtained for the heap leach facility in early 1988. Construction of the facility and pad was completed by June 1988 at a total capitalized cost of approximately $1,700,000. The joint venture was considered to be in a pre-production status until October 1, 1988. The excess of revenues from costs from June 1988 through September 1988 were netted against capitalized costs, which reduced capitalized costs by $500,267. Silver City produced gold and silver through heap leaching with cyanide. The gold and silver is recovered through zinc precipitation. A gold/silver ore is produced at the plant and then sold to a refinery. To date Silver City has processed only the mineral tailings dumps from the nearby area. During 1994 the Company proceeded with the closure and reclamation of the Silver City heap leach facility. The Company sold non-essential equipment and leased and commenced use of carbon columns to recover precious metals and base metals in the pregnant solution for income and reclamation purposes. Planned 1997 Activities - ----------------------- The remaining reclamation costs have been budgeted for $385,000 of which $192,500 is the Company's share. Approximately $174,000 in state reclamation bonds have been jointly posted. After reclamation work is completed, to the satisfaction of regulatory authorities, the reclamation bonds are to be returned. Funding of reclamation work in 1997 remains a substantial burden to the Company. SAN SIMON PROPERTY Ownership: - ---------- On April 1, 1995, the Company and Akiko Gold Resources Ltd. ("Akiko"), entered into a letter of agreement (the "San Simon Agreement") with Robert S. Friberg and Marcelo Claure Z. (jointly "Friberg/Claure") whereby Friberg/Claure agreed to acquire mineral properties located in the San Simon region of Bolivia on behalf of Akiko and the Company (collectively the "Companies"). Friberg/Claure will retain an 8% carried interest, with the Companies funding all costs and obligations on a 50/50 basis. To date Friberg/Claure have acquired four concessions (the "San Simon Property") from a third party. Friberg/Claure are to transfer the San Simon Property to a Bolivian subsidiary to be established by the Company. The Companies do not anticipate any further properties to be acquired under the San Simon Agreement. Through December 31, 1996, the Company has paid $171,825 to Friberg/Claure relating to costs incurred pursuant to the San Simon Agreement and property payments made on the San Simon Property. Description of Property: - ------------------------ The San Simon Property consists of four concessions, known as "Pedro Ricardo I" and "Pedro Ricardo II", "Machetero I" and "Machetero II" and is located in northeastern Bolivia, adjacent to the Brazilian border within the Amazon Basin, in the area of San Simon, Canton Mategua, Province of Itenez, State of Beni and consists of approximately 5,300 hectares. -14- Mineralization: - --------------- There are no known gold reserves on the San Simon Property at this time. Description of Property Agreement: - ---------------------------------- Pursuant to the terms of a property concession agreement entered into on behalf of the Companies, the Companies are required to make total payments of $300,000 to the vendor over a three year period. Through December 31, 1996, the Companies have paid $85,000 and are required to pay: $40,000 on May 12, 1997; $50,000 on November 12, 1997 and $125,000 on May 12, 1998. The San Simon Property is also subject to a 5% net profits interest ("NPI") in favour of the vendor. The Companies may purchase a 2% NPI at any time during the exploration phase upon payent of $1,700,000. The Companies would then also hold a right of first refusal on a 2% NPI of the remaining 3% NPI. The term of the agreement is for twenty years and the Companies can terminate the agreement without penalty on 30 days notice. Pursuant to the San Simon Agreement, the Companies have also agreed to a yearly work commitment of $30,000 per quarter. In addition, the Companies may be obligated to pay Friberg/Claure the following amounts: $10,000, in cash or common stock of the Companies, upon the first transfer of a property to a Bolivian subsidiary, to be established by the Companies; $20,000, in cash or common stock of the Companies, when a total of $200,000 has been spent on the properties acquired pursuant to the San Simon Agreement; $50,000 upon completion of a feasibility study on any properties acquired pursuant to the San Simon Agreement. Prior Activities: - ----------------- The Companies are not aware of any prior work on the San Simon Property. However, the region was worked on as early as 1688 and recently sporadic production has taken place from gold-rich zones adjacent to the San Simon Property by a number of local miners. It is estimated that they are removing approximately two kilograms of gold per day by using crude mining methods. The 1996 field program consisted of soil geochem and stream concentrate sampling conducted by the Company and Barrick. Geologists from Activation Laboratories (ACT) completed two soil geochem lines on the north-south arm of the Machetero I claim. These samples were sent to the ACT lab for enzyme leach testing. The results of stream concentrate samples detected three highly anomalous samples on the Machetero I claim block. Planned 1997 Activities: - ------------------------ The Companies are actively seeking a joint venture partner to help exploit the San Simon property. Several companies are currently reviewing the data. In addition, the Companies plan to do further field work this summar which will include stream concentrate sampling and geochem and rock sampling and mapping to delineate drill targets. MONTANA PROPERTIES The Company holds various interests in a number of properties in the State of Montana. There are no obligations for underlying payments other than annual state fees to the State of Montana. The Company has not conducted any exploration work in 1996 on these properties. During 1996 the Company sold its Grey Eagle property for proceeds of $215,292, of which $107,292 has been received. Costs relating to this and other properties were mostly written off in prior years. ITEM 3. LEGAL PROCEEDINGS ----------------- In August 1994, George Holcomb filed a complaint against the Company in the Superior Court for the County of Maricopa, Arizona. Mr. Holcomb seeks vacation pay which was not paid to him when his employment with the Company terminated, together with interest thereon, treble damages, costs, and attorney fees. During November, 1994, the Company paid $20,834 to Mr. Holcomb, representing the Company's calculation of vacation pay owed. Mr. Holcomb, however, had calculated the -15- vacation pay owing as significantly higher. Final settlement with Mr. Holcomb was reached in June, 1996, in which the Company agreed to pay an initial payment of $15,000 and has agreed to pay a final payment of $80,000. The cost of this settlement is being paid on a 50:50 basis by the Company and Mahogany. During 1996, the initial payment of $15,000 was made and the Company has accrued $40,000 for its share of the settlement. Should Mahogany not honor its commitment to pay its share of this settlement agreement, the Company will be obliged to pay the full settlement amount. On June 23, 1993, Jack M. Scanlon and Carolyn M. Scanlon; Dr. Richard Urwiller and Roberta Urwiller, Dr. William Inkret, Jr., M.D., individually and Dr. William Inkret, Jr., M.D., P.C., a corporation and profit sharing trust; Dr. Richard Granberg and Mary Granberg, on behalf of themselves and all other person similarly situated, filed an action in the United States District Court for the District of Montana, Butte Division, against Magellan Resources Inc., a corporation; Mahogany International Inc. (sic), a corporation, former subsidiaries of North Lily Mining Company, a corporation, their former parent corporation; Ruen Drilling, a corporation, Longyear Company, a corporation; and other unknown John Doe persons and corporations. The plaintiffs allege, that, as a result of exploration activity in the Southern Cross area of Montana, local ground water supplies have been contaminated and reduced. No specific stated claim for damages have been made at this time. Despite studies prepared privately and by the Department of State Lands (Montana) in 1992 which found no evidence of earlier claims, the Plaintiffs continue to seek alternative legal approaches against the defendants. Initial discovery proceedings have been completed. The Company believes the claims are without merit and have instructed its legal counsel to file for a summary judgment for dismissal. The Company and other third parties filed a Summary Judgement for the dismissal of this lawsuit and has received favorable disposition thereof, awaiting execution by the federal court. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On November 22, 1996, the Company held its annual meeting of shareholders. The following matters were voted upon at the meeting:
- ------------------------------------------------------------------------------------------ Matter Votes For Votes Against Votes Abstained Election of Directors/(1)/ Stephen E. Flechner 19,675,900 762,139 Theodore E. Loud 19,612,932 825,107 John R. Twohig 19,420,952 1,017,087 W. Gene Webb 19,491,498 946,541 Proposal for Reverse Stock Split 17,037,587 1,831,756 190,802 Proposal to Acquire Tamarine Ventures/(2)/ 9,177,945 1,216,100 367,103 Proposal to Adopt 1996 Stock Option Plan 7,971,555 2,055,632 517,627 Proposal to Adopt 1996 Restricted Stock Plan 8,069,131 1,908,359 567,324 Proposal to Authorize Preferred Stock/(3)/ 8,044,764 2,047,294 452,756 - ------------------------------------------------------------------------------------------
NOTES: (1) All of the directors were elected. On November 23, 1996, Mr. Twohig submitted his resignation. (2) Although this proposal received the requisite shareholder approval, the Board of Directors determined to abandon the acquisition. (3) The shareholders did not approve this proposal by the requisite affirmative vote of a majority of the outstanding shares. All of the matters set forth above were approved by the shareholders, except for the proposal to authorize preferred stock. -16- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------- North Lily's common stock has traded on the over-the-counter market for approximately 60 years and was included in the NASDAQ system beginning May of 1985 (symbol: NLMC). The range of high and low bid prices for each fiscal quarter during the two most recently completed fiscal years and the current fiscal year as reported on NASDAQ is as follows:
1996 High Low ---- ----- ----- First quarter $1.87 $0.62 Second quarter $3.12 $0.62 Third quarter $2.81 $0.93 Fourth quarter $1.56 $0.38 1995 High Low ---- ----- ----- First quarter $2.50 $1.25 Second quarter $2.96 $1.25 Third quarter $2.50 $1.25 Fourth quarter $1.87 $0.62
On March 21, 1997, the high bid price of the common stock was $0.34 per share. The above bid quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. As of April 9, 1997, there were 10,211 shareholders of record of North Lily's common stock. North Lily has not paid or declared any cash dividends and does not anticipate paying dividends for the foreseeable future. It is expected that any net income will be retained by North Lily for the development of its business. ITEM 6. SELECTED FINANCIAL DATA -----------------------
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues - - - $ 1,409,836 $ 3,194,916 Loss from continuing operations before extraordinary item $ (662,557) $ (995,782) $(2,071,147) $(6,286,733) $(4,697,928) Loss before extraordinary item $ (662,557) $ (995,782) $(2,071,147) $(6,271,619) $(5,210,307) Net Loss $ (662,557) $ (922,032) $(2,071,147) $(6,271,619) $(5,210,307) Loss per share from continuing operations before extraordinary item $ (0.23) $ (0.43) $ (0.89) $ (2.70) $ (2.53) Loss per share before extraordinary item $ (0.23) $ (0.43) $ (0.89) $ (2.69) $ (2.80) Net loss per share $ (0.23) $ (0.39) $ (0.89) $ (2.69) $ (2.80) Total assets from continuing operations $3,622,261 $4,201,720 $ 5,105,048 $ 6,354,791 $21,049,824 Total assets $3,622,261 $4,201,720 $ 5,105,048 $ 6,354,791 $22,467,197
-17-
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Non-current liabilities $ 625,000 $ 385,000 $ 1,168,223 - - Book value per share/(1)/ $ 0.83 $ 1.11 $ 1.27 $ 2.16 $ 2.26 Cash dividends declared - - - - -
/(1)/ Based on the outstanding number of shares less treasury stock. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- CORPORATE PROFILE AND HISTORY North Lily was incorporated in Utah in 1916 and was a subsidiary of Anaconda Company from 1925 until 1949. During this period, the Company produced gold, silver, lead, zinc and copper from the North Lily Mine in the Tintic Mining District, Utah. From 1949 to 1987, the Company was primarily engaged in the acquisition, exploration, and development of mining properties. From 1988 to 1990, a Company subsidiary, International Mahogany Corp. ("Mahogany"), a Canadian publicly-traded mining company listed on the Toronto Stock Exchange, jointly with International Corona (Mahogany had a 70% working interest), placed the Jolu Mine in Northern Saskatchewan, Canada, into production and produced approximately 204,000 ounces of gold. In 1991, the Company and Mahogany acquired the Tuina copper property in Chile, South America. Since 1991, the Company and Mahogany have jointly been developing the Tuina copper project. The Company has also operated a small heap leach tailing recovery operation in Utah ("Silver City") which has produced approximately 33,000 ounces of gold and gold equivalent since 1988. Silver City is currently in the process of site reclamation work. RESTRUCTURING OF TUINA OWNERSHIP Effective April 12, 1995, the Company and Mahogany agreed to a restructuring of the ownership interest of the Tuina Project. In settlement of the Company's outstanding debt to Mahogany of $797,481, as at March 28, 1995, the Company reduced its ownership interest in Compania Minera Phoenix S.A. ("Phoenix") from 50% to 41%. The Company also agreed to terms by which the Company's remaining interest in the Tuina Project will be impacted. Subsequently, Mahogany agreed to sell its 59% interest in Phoenix to Yuma Gold Mines Limited ("Yuma"). The sale to Yuma was extended on several occasions and the terms subsequently revised (the "Mahogany-Yuma Agreement"). By previous agreements entered into in 1995, on May 3, 1996 Yuma entered into a revised agreement with the Company. In summary, the Company's remaining interest in Phoenix will, subject to receipt of regulatory approvals and completion of the Mahogany-Yuma Agreement, be impacted as follows: i) Yuma will receive an additional 5% interest in Phoenix in exchange for funded costs and the delivery of an independent bankable feasibility study in respect of the Tuina Project; ii) the Company would be required to sell a further 10% interest in Phoenix to Yuma for an initial payment of $145,000, less deductions for operating costs and the costs of securing the water rights for the Tuina Project. In addition, Yuma is required to make two further payments to the Company, due upon commencement of Tuina commercial production and one year thereafter. These payments are to be calculated in relation to the initial capital costs of the Tuina Project, from a high of $609,000 where the initial capital costs are less than $14,000,000 with graduating payments decreasing as capital costs increase, and may be made, at Yuma's election, in cash or shares of Yuma; and iii) all participants will be responsible for contributing their share of funding following completion and delivery of the Feasibility Study. The failure of any participant to contribute its share of funding will result in a dilution of that -18- participant's interest in accordance with a dilution formula. Once a participant's interest has been diluted to 10%, then the ownership interest will convert to a 10% net profits interest. Since April 13, 1995, Yuma has assumed all indebtedness of Phoenix, provided funding for the preparation of the feasibility study, the costs of securing the water rights for the Tuina Project and the ongoing costs of Phoenix. These costs are partially recoverable by Yuma (the "Yuma Payments") from the Company from the proceeds to be received from the sale of the 10% interest in Phoenix, as noted in item (ii) above. The water rights have been secured and Yuma now has to either elect to close the Mahogany - Yuma Agreement, subject to regulatory approval, or terminate the agreement. If Yuma elects to terminate the agreement, Mahogany and the Company would not owe Yuma any funds for past expenditures incurred by Yuma. If Yuma elects to purchase the 10% interest then the Company would be required to repay one-third of the expenditures expended by Yuma on the cost of securing the water rights and 26% of all other costs incurred. These costs would be deducted from the payments due from Yuma for the 10% interest to be purchased by Yuma from the Company. The Company and Mahogany have an agreement in principle to conduct the activities of the Tuina Project on a joint venture basis. The Company expects to enter into a definitive joint venture and operating agreement with Yuma after closing of the Mahogany-Yuma Agreement. RESULTS OF OPERATIONS The Company incurred a loss of $662,557 ($0.23 per share) for the year ended December 31, 1996, compared to losses of $922,032 ($0.39 per share) for 1995 and $2,071,147 ($0.89 per share) for 1994. Due to the continuation of reclamation work at the Silver City Joint Venture and the decision to suspend operations at the Tuina copper property in Chile during 1993, there were no revenue or cost of sales for 1996, 1995 or 1994. General and administrative costs for 1996 was $675,449 compared to $842,547 in 1995 and $862,735 in 1994. During 1996, the Company continued to reduce general and administrative costs, due to reduced corporate activities and the elimination of the Company's share of general and administrative costs relating to the Tuina Project, due to Yuma's funding of these costs. As a result general and administrative costs in 1996 were $167,098 lower than 1995 levels. During 1995, there was a reduction in the Company's share of general and administrative costs relating to the Tuina Project, primarily due to Yuma's funding of these costs, effective May, 1995; however, these reduced costs were mainly offset by increased head office costs. As a result general and administrative costs in 1995 were only $20,188 lower than 1994. During 1996, the Company spent $3,527 on general exploration and property holding costs compared with $60,390 in 1995 and $432,425 in 1994. The decrease in exploration and property holding costs in 1996 is attributable to Yuma's funding of Tuina Project costs throughout 1996 and the Company's financial condition. During 1996, the Company recorded a gain of $206,897 from the disposition of its Gray Eagle property, located in Montana. During 1995, the Company recorded a gain of $49,500 from the disposition of certain of its mineral properties. The Company also settled its indebtedness to Mahogany by reducing its ownership interest in Phoenix from 50% to 41%. The disposition of the 9% interest in Phoenix has resulted in the elimination of the Company's indebtedness to Mahogany and a reduction of the Tuina asset by $797,481. No dispositions of mineral properties were conducted in 1994. During 1996, Company management reviewed the carrying values of its remaining mineral properties and determined that no write-downs were required. In 1995, the Company wrote off the remaining $71,397 carrying value and reversed an accrual of $23,000 for anticipated property costs of its Nine Mile property, resulting in a net write off of $48,397. During 1994, Company management decided to terminate the Ashdown joint venture agreement. As a result of this decision, a write-down of $197,850 was charged against earnings in 1994. In addition, in 1994 the Company recognized a $300,000 provision for diminution in value of the Nine Mile property. -19- During 1996 and 1995, the Company realized $118,883 and $92,628 of gains from the sale of marketable securities, proceeds from which have been utilized to meet the Company's liquidity requirements. For the year ended 1994, the Company disposed of marketable securities with a book value of $495,309 for proceeds of $665,803, realizing a gain of $170,494. During 1995, the Company received $25,000 from the partial sale of the Company's mill equipment in Montana. The proceeds were credited towards the remaining scrap value. During 1994, the Company wrote-down the mill and equipment to its scrap value of $28,103, charging earnings by $371,897. In contemplation of a proposed acquisition of Tamarine Ventures Ltd. ("Tamarine"), the Company advanced a total of $176,751 to Tamarine. On November 22, 1996, the Company abandoned its plan to acquire Tamarine. To date the Company has been unsuccessful in having the advances repaid and accordingly, wrote off the advances in 1996. LIQUIDITY AND CAPITAL RESOURCES For the past three years the Company has experienced substantial losses and has continually sold non-essential Company assets to fund ongoing operations and property commitments and development. Management, in its efforts to ensure maximum fund availability, has reduced Company operating costs substantially and has deferred payment of fees for their services. The Company believes it holds properties with development potential. In order for the Company to develop its properties or property interests, the Company requires funds to pay Company overheads, pay property commitment costs and fund property development work. Resource property development is both costly and time consuming. Development of a property to a position of generating cash flow from underlying mineral sales is normally measured in years, and there is no guarantee of the property's ultimate financial success. The Company requires funds for its future operations. Funding is traditionally provided to corporations by way of funds from ongoing company operations, funds from the issuance of company debt instruments, funds from company equity issues and funds from the sale of Company assets. With the suspension of operations at the Tuina mine, and continuing reclamation work at Silver City, the Company does not have operations from which funds from ongoing Company operations can be accumulated. With the Company's present asset base, the Company is not able to generate funds from operations within the next two years at a minimum, except to the extent that: (a) Tuina may be brought into successful production in conjunction with the restructuring of the Tuina Project; and (b) a new project and financing may be acquired with Company stock. -20- Throughout 1993, 1994 and a portion of 1995, the Company did not generate sufficient funds to meet its proportionate share of costs and obligations on its joint property activities with Mahogany, its ongoing property cost commitments and its ongoing corporate expenses. During 1993, 1994 and 1995, a significant portion of the Company's capital resources was funded by advances from Mahogany. Approximately $1,215,000 and $358,258 was advanced to the Company by Mahogany during 1993 and 1994 respectively, and a further $163,546 was advanced during 1995. In December 1993, Mahogany stated that it was reluctant to fund any further Company capital requirements and in March 1994, demanded repayment of amounts due. On April 12, 1995, the Company and Mahogany agreed to the restructuring of the Tuina ownership to settle the Company's outstanding debt to Mahogany. See Restructuring of Tuina Ownership. During 1993, in response to its increasing financial pressures, the Company sold its equity interest in Mahogany, receiving: cash of $500,000, which was utilized to reduce some of the Company's liabilities and fund the Company's joint operation costs; a promissory note in the amount of $500,000 issued by Baja, which was subsequently sold to Mahogany at face value in order to reduce the Company's obligation to Mahogany and 650,000 common shares of Baja. During 1994, the Company sold 400,000 common shares of Baja for net proceeds of $553,314. A further $112,489 net proceeds were raised from the sale of other marketable securities. Sale proceeds were used to reduce Company liabilities and help fund Company property cost commitments. During 1995, the Company sold a further 10,000 common shares of Baja and other marketable securities for net proceeds of $153,649. The proceeds were used to reduce company liabilities. During 1994, pursuant to the issuance of promissory notes, the Company borrowed a total of $201,337 from Baja. These funds were used to meet a portion of the Tuina operating costs. During 1995, the Company was advanced $74,532 from a private corporation related to a director of the Company. The Company subsequently issued a promissory note and borrowed $97,167 from a third party. The funds from the promissory note were used to repay the advance from the related party and reduce Company liabilities. During 1996, the Company sold 150,000 common shares of Baja for net cash proceeds of $241,408. The funds received were then used to retire the promissory note and outstanding accrued interest owing to Baja, totalling $211,623. In addition, in 1996 the Company exchanged 50,000 common shares of Baja in settlement of the promissory note and outstanding accrued interest, totalling $97,167, owing to the third party. In order to improve the Company's liquidity position during 1995 the Company issued 145,583 shares in settlement of $510,500 of recorded indebtedness to former Company officers and related companies, recording an extraordinary gain of $73,750. Current officers of the Company have also agreed to defer repayment of indebtedness of $625,000, comprising $165,000 of unpaid 1994 salaries ("1994 Compensation") $220,000 of unpaid 1995 salaries ("1995 Compensation"), and $240,000 of unpaid 1996 salaries until January 2, 1998 ("1996 Compensation"). The 1994 Compensation will be settled with cash, if available, or the issuance of shares of the Company, at an ascribed price of $3.00 per share. The 1995 Compensation and 1996 Compensation may, at the option of the officer, be settled through the issuance of the Company's common stock, at a price of $0.65 per share. The Company has reviewed its asset base and has identified those assets that are considered to be non-essential for the Company's future growth, including small Company properties in Montana with little, if any, resource potential. In order for the Company to meet its current operating obligations and property commitments, the Company is required to sell all non-essential Company assets. Company management is, therefore, reviewing all other resource properties, and may be required to sell certain of them that do not meet its investment criteria. Although the Company has received expressions of interest in some of its resource properties, it is not currently negotiating with any third party for the sale of any of its resource properties. At December 31, 1996 the Company had a working capital deficiency of $274,762, a decrease of $14,144 from its working capital deficiency of $288,906 at December 31, 1995. The Company reports a use of funds of $557,098 from operating activities for the year ended December 31, 1996. This compares to a use of funds of $742,073 and $895,353 for 1995 and 1994, respectively. -21- During the year ended December 31, 1996, the Company generated cash of $319,992 from its investing activities. The Company received $241,408 from the sale of marketable securities, $280,292 from the disposition of certain mineral properties and $5,000 from the sale of equipment. The Company used $64,957 in the exploration of its mineral properties and advanced $141,751 to Tamarine. During 1995, the Company generated cash of $354,637 from its investing activities. The Company received $153,649 from the net sale of its marketable securities, $62,822 and $93,403 from the sale of mineral properties and equipment, respectively and $91,987 in net property payments. The Company used $35,000 to advance funds to Tamarine in 1995. During 1994, the Company was provided cash of $334,642 from investment activities. The Company received net proceeds of $665,803 from the sale of its marketable securities. The Company used $300,017 in the exploration of its mineral properties. An additional $31,144 was used to purchase equipment. For the year ended December 31, 1996, the Company was provided funds of $181,617 from financing activities compared to $470,997 provided in 1995 and $559,595 provided in 1994. In 1996, the Company issued $393,238 in common stock pursuant to a private placement and for services rendered and repaid the $211,621 in promissory notes. In 1995, the Company issued $200,000 common stock pursuant to a private placement of 100,000 shares, received further advances of $163,546 from Mahogany and increased its promissory notes by $107,451. In 1994, financing activities comprised of $358,258 in net advances by Mahogany and the issuance of $201,337 in promissory notes to Baja. The Company conducts its current mining and exploration activities in the United States, Chile and Bolivia. As a result, the Company is subject to certain risks, including expropriation, political instability, varying degrees of inflation and other uncertainties. FUTURE OPERATIONS In order to meet its obligations for operations and property agreement commitments, the Company is required to sell its non-essential assets and sell shares of its Common Stock. Remaining marketable securities will be sold and properties with little or no potential will be disposed. If the Company does not have the financial ability to develop a project on its own, future development may be done in conjunction with other parties. Company management is currently reviewing all resource properties with the view to identifying those properties that provide the most potential for future growth of the Company. Resource properties that do not meet management's investment criteria may be disposed. The Company owns various patented mineral claims. The Company is reviewing its current ownership of its various patent mining claims as to their real estate value both in the Tintic District, Utah and the Boulder Mountains in Montana. Both of these areas are located in expanding resort developments and in the Boulder Mountain area the real estate value is approaching $200 - $300 an acre. The Tintic properties are located on the west side of Utah Lake and this area has significant potential for resort development as the east side of Utah Lake is fully developed. The Tuina Project will remain suspended pending completion of the Mahogany-Yuma Agreement. It is expected that once this transaction closes Yuma will proceed with bringing the Tuina Project into production with the construction of an SX/EW plant facility. The Company is responsible for contributing its share of funding, of which any failure will result in a dilution of the Company's interest. In addition, Company management is aggressively seeking joint ventures and/or acquisitions and mergers and related financing to acquire gold and other natural resource properties that fit the Company's criteria. These criteria are technical/economic likelihood of success, sufficiently advanced exploration or development status, and proximity of cash flow, if possible. Management will review projects in North and South America, Africa and Asia for attractive gold and other natural resource properties. -22- PROPOSED SHARE EXCHANGE WITH TAMARINE VENTURES LTD. On November 17, 1995, the Company executed an Agreement and Plan of Share Exchange (the "Agreement") with Tamarine Ventures Ltd., a company incorporated under the laws of British Columbia, Canada ("Tamarine"). The Agreement provided for the issuance, at closing, of one post-reverse stock split share of Common Stock of the Company in exchange for each four common shares of Tamarine, thereby making Tamarine a wholly-owned subsidiary of the Company (the "Share Exchange"). At the closing of the Share Exchange, the Company would issue 2,000,000 post-reverse split shares of its Common Stock to the shareholders of Tamarine. Closing of the Share Exchange was subject to a number of conditions precedent, including regulatory acceptance, approval by the shareholders of the Company and satisfactory results of due diligence investigations conducted by the Company. On November 22, 1996, the Company terminated the Agreement and abandoned its plan to acquire Tamarine. In contemplation of the acquisition of Tamarine, the Company advanced $176,751 to Tamarine. To date the Company has been unsuccessful in having the advances repaid. Accordingly, the Company has fully provided for the advances to Tamarine. The Company will continue to pursue collection of the advances. IMPACT OF SFAS NO. 115 Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities", SFAS No. 115 required the Company to account for its marketable securities at market value. Unrealized gains and losses on securities classified as "available for sale" are included as a separate component of shareholders' equity as a marketable securities valuation adjustment. Previously, marketable securities were carried at the lower of their aggregate cost or market value and the unrealized losses net of unrealized gains were included in the determination of loss for the year. IMPACT OF SFAS NO. 109 Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for Income Taxes". SFAS No. 109 requires a change from the deferred method to the liability method of accounting for income taxes. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax laws and rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under this new standard, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under the deferred method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. The adoption of SFAS No. 109 did not have any impact on the consolidated financial statements. IMPACT OF INFLATION North Lily will be affected by inflation because market value of its potential products (gold and silver) tends to fluctuate with inflation. Other major costs should not increase at a rate in excess of inflation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The unaudited consolidated financial statements are filed under this Item beginning on page F-1 and the financial statements schedules required under Regulation S-X are filed pursuant to Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------------------- -23- On March 27, 1997, the Company engaged Wheeler Wasoff, P.C. to audit its financial statements for the fiscal year ended December 31, 1996. During the Company's two most recent fiscal years and the subsequent interim period preceding the engagement of this firm, the Company did not consult this firm regarding any of the matters identified in Item 304(a)(2) of Regulation S-K. The engagement of Wheeler Wasoff, P.C. coincided with the announcement by Coopers & Lybrand L.L.P. of its resignation on March 27, 1997. Coopers & Lybrand L.L.P. audited the Company's financial statements for each of the years ended December 31, 1994 and 1995. The report on such financial statements contained an explanatory paragraph regarding the Company's ability to continue as a going concern. The decision to change auditors was approved by the board of directors. During the Company's two most recent fiscal years and the subsequent period preceding the engagement of Wheeler Wasoff, P.C., there were no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of that firm, would have caused it to make reference to the subject matter of the disagreements in connection with its report. -24- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The following table sets forth the names and agest of all directors and executive officers of the Company as of the date of this report, indicating all positions and offices with the Company held by each such person:
NAME AGE POSITION WITH THE COMPANY BUSINESS EXPERIENCE Stephen E. Flechner 53 President and Chief May 1994 to present - President of the Company; Executive Officer and Director 1979 to 1993 - Vice President, General Counsel & Secretary, Gold Fields Mining Corp., Denver, Colorado; April 1993 to present - President of Akiko Gold Resources Ltd., Vancouver, British Columbia W. Gene Webb 57 Executive Vice President, May 1994 to present - officer and director of the Corporate Secretary and Company; September 1989 to March 1994 - Director President and director of Canadian Industrial Minerals Corp., Denver, Colorado; May 1989 to present - officer and director of Tellis Gold Mining Company, Vancouver, British Columbia; March 1990 to June 1994 - President and director of Jerez Investment Corp., Denver, Colorado; September 1978 to present - President and director of Ferret Exploration Company, Inc., Denver, Colorado Nick DeMare 42 Treasurer Chartered Accountant. May 1991 to present - President, Chase Management Ltd., Vancouver, British Columbia; February 1986 to April 1991 - Vice President and Chief Financial Officer, Ingot Management Ltd., Vancouver, British Columbia. Mr. DeMare is a director and/or officer of several publicly-traded Canadian companies. Theodore E. Loud 60 Director 1986 to present - President of TEL Advisors Inc. of Virginia, Charlottesville, Virginia, a registered investment adviser and corporate financial consulting company
Except as otherwise indicated below, no organization by which any officer or director previously has been employed is an affiliate, parent, or subsidiary of the Company. The directors of the Company are elected to serve until the next annual shareholders' meeting or until their respective successors are elected and qualify. Officers of the Company hold office until the meeting of the Board of Directors immediately following the next annual shareholders' meeting or until removal by the Board of Directors. Interim replacements for resigning directors and officers are appointed by the Board of Directors. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT -25- During the fiscal year ended December 31, 1996, there were no known failures to file on a timely basis Forms 3, 4, and/or 5 with the Securities and Exchange Commission as required by Section 16(a) of the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The following table sets forth in summary form the compensation received during each of the Company's last three completed fiscal years by the Chief Executive Officer of the Company and by each other executive officer of the Company whose total salary and bonus exceeded $100,000 in the Company's fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------------------------------------------------- OTHER RESTRICTED ANNUAL STOCK OPTIONS/ LTIP ALL OTHER NAME AND PRINCIPAL POSITION COMPEN AWARD(S) SARS PAYOUTS ($) COMPEN YEAR SALARY BONUS SATION ($) ($) (#) SATION ($) - ------------------------------------------------------------------------------------------------------------------------------ Stephen E. Flechner, 1996 $120,000/1/ -0- -0- -0- -0- -0- -0- President and Chief 1995 $110,000/1/ -0- -0- -0- -0- -0- -0- Executive Officer/2/ 1994 $82,500/2/ -0- -0- -0- 85,000 -0- -0- - ------------------------------------------------------------------------------------------------------------------------------ W. Gene Webb, Executive 1996 $120,000/1/ -0- -0- -0- -0- -0- -0- Vice President and 1995 $110,000/1/ -0- -0- -0- -0- -0- -0- Corporate Secretary 1994 $82,500/2/ -0- -0- -0- 85,000 -0- -0- - ------------------------------------------------------------------------------------------------------------------------------ William E. Grafham, former 1996 -0- -0- -0- -0- -0- -0- -0- Chairman of the Board, 1995 -0- -0- -0- -0- -0- -0- -0- President and Chief 1994 -0- -0- -0- -0- 12,000 -0- -0- Executive Officer/3 4/ - -----------------
(1) Unpaid as at December 31, 1996. In addition, Messrs. Flechner and Webb have each agreed to defer a portion of their salaries. See "Certain Transactions" below. (2) Unpaid as at December 31, 1994. Messrs. Flechner and Webb have each agreed to accept shares of Common Stock of the Company in settlement of these unpaid salaries. See also"Certain Transactions" below. (3) Mr. Grafham resigned as an officer of the Company as of May 17, 1994. On that date, Mr. Flechner became the Chief Executive Officer of the Company. (4) Mr. Grafham became the Chief Executive Officer of the Company as of October 25, 1993. Employment agreements with the Company's executive officers are described below in "Employment Agreements." The Company does not pay non-officer directors for their services as such nor does it pay any director's fees for attendance at meetings. Directors are reimbursed for any expenses incurred by them in their performance as directors. STOCK OPTION PLANS The Company adopted an Incentive Stock Option Plan (the "1984 Plan") in 1984 under which a total of 250,000 shares were available for grant to provide incentive compensation to officers and key employees of the Company. The 1984 Plan was administered by the Board of Directors. Options could be granted for up to 10 years at not less than the fair market value at the time of grant except that the term could not exceed five years and the price had to be 110% of fair market value for any person -26- who at the time of grant held more than 10% of the total voting power of the Company. Unless otherwise specified by the Board of Directors, options were exercisable as they vested at a rate of 2.77% per month, and terminated ten years after the date of grant. The 1984 Plan expired October 31, 1994. At December 31, 1996, options to purchase 187,250 shares at $2.03 were outstanding under the 1984 Plan. On November 22, 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") reserving an aggregate of 275,000 shares of the Company's Common Stock (the "Available Shares") for issuance pursuant to the exercise of stock options ("Options") which may be granted to employees, officers, and directors of the Company and consultants to the Company. The 1996 Plan provides for annual adjustment in the number of Available Shares, commencing December 31, 1996, to a number equal to 10% of the number of shares outstanding on December 31 of the preceding year or 275,000 shares, whichever is greater. The 1996 Plan provides that disinterested directors will receive automatic options grants to purchase 10,000 shares of the Company's Common Stock upon their initial appointment or election as directors, and on the date of each subsequent annual shareholders' meeting, which vest in 33-1/3% installments commencing on the first anniversary of the grant date. Grants to employee directors and officer/directors can be either Non-Qualified Stock Options or Incentive Stock Options, to the extent that they do not exceed the Incentive Stock Option exercise limitations, and the portion of an option to an employee director or officer/director that exceeds the dollar limitations of Code Section 422 will be treated as a Non-Qualified Stock Option. All options granted to disinterested directors will be Non-Qualified Options. The option price of any Incentive Stock Option may be not less than 100% of the Fair Market Value per share on the date of grant of the option; provided, however, that any Incentive Stock Option granted under the 1996 Plan to a person owning more than ten percent of the total combined voting power of the Common Stock will have an option price of not less than 110% of the Fair Market Value per share on the date of grant of the Incentive Stock Option. Each Non- Qualified Stock Option granted under the 1996 Plan will be at a price no less than 85% of the Fair Market Value per share on the date of grant thereof, except that the automatic stock option grants to disinterested directors will be at a price equal to the Fair Market Value per share on the date of grant. "Fair Market Value" per share as of a particular date is defined in the 1996 Plan as the last sale price of the Company's Common Stock as reported on a national securities exchange or on the NASDAQ System or, if none, the average of the closing bid and asked prices of the Company's Common Stock as reported by NASDAQ or, if such quotations are unavailable, the value determined by the Compensation Committee in its discretion in good faith. The exercise period of options granted under the 1996 Plan may not exceed ten years from the date of grant thereof. Incentive Stock Options granted to a person owning more than ten percent of the total combined voting power of the Common Stock of the Company will be for no more than five years. Unless otherwise specified in an optionee's agreement, options granted under the 1996 Plan to officers, officer/directors, disinterested directors who are not on the Compensation Committee, and employees will become vested with the optionee under the following schedule: 50% upon the first anniversary of the option grant and 12.5% upon each of the four three-month periods following the first anniversary. There were no individual grants of stock options or freestanding stock appreciation rights made during the fiscal year ended December 31, 1996. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES - ------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS AT FISCAL IN-THE-MONEY YEAR END (#) OPTIONS/SARS AT FISCAL YEAR END ($) - ----------------------------------------------------------------------------------------------------------------------------------
-27-
----------------------------------------------------------------------------------------------------------------------------------- NAME SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------------ Stephen E. Flechner -0- -0- 85,000/0 0/0 - ------------------------------------------------------------------------------------------------------------------------------------ W. Gene Webb -0- -0- 85,000/0 0/0 - ------------------------------------------------------------------------------------------------------------------------------------
On November 22, 1996, the Company also adopted the 1996 Restricted Stock Plan (the "Stock Plan") reserving an aggregate of 275,000 shares (the "Available Shares") of the Company's Common Stock for issuance to employees, officers, and directors of the Company and consultants to the Company. The Stock Plan provides for annual adjustment in the number of Available Shares, commencing December 31, 1996, to a number equal to 10% of the number of shares outstanding on December 31 of the preceding year or 275,000 shares, whichever is greater. Shares issued under this Stock Plan are "restricted" in the sense that they are subject to repurchase by the Company at cost during the vesting period. Unless otherwise specified in a participant's agreement, shares issued under the Stock Plan to officers, officer/directors, disinterested directors who are not on the Committee, and employees will become vested with the participant under the following schedule: 50% upon the first anniversary of the date of issuance and 12.5% upon each of the four three-month periods following the first anniversary. The Stock Plan provides that disinterested directors will receive automatic issuances of 10,000 shares of the Company's Common Stock upon their initial appointment or election as directors, and on the date of each subsequent annual shareholders' meeting, which vest in 33-1/3% installments commencing on the first anniversary of the issue date. The Company has no other long-term incentive plans. There are no arrangements pursuant to which directors of the Company are compensated in their capacities as such. EMPLOYMENT AGREEMENTS Effective May 16, 1994, Messrs. Flechner and Webb entered into employment agreements with the Company. The agreements provide for compensation consisting of annual salary of $120,000; benefits which shall include health and disability insurance, key-man life insurance, and retirement plan; an annual cash bonus, 50% of which may be taken in the Company's common stock at the election of Messrs. Flechner and Webb; and equity grants pursuant to the Company's incentive stock option plan and restricted stock plan. The term of the employment agreements is five years. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth information, as of April 9, 1997, with respect to the beneficial ownership of the Company's Common Stock by each person known by the Company to be the beneficial owner of more than five percent (5%) of the outstanding Common Stock, and by directors, nominees, and officers of the Company, and by officers and directors as a group.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS (2) CEDE & Co. 1,771,849 59.22% Box 20 Bowling Green Station New York, NY 10004
-28-
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS (2) Philadep & Co 458,842 15.34% 1900 Market Street 2nd Floor Philadelphia, PA 19103 Stephen E. Flechner 88,000 (3) 2.86% W. Gene Webb 85,000 (3) 2.76% Theodore E. Loud 7,000 0.23% Nick DeMare 5,730 (4) 0.19% All officers and directors as a group (4 persons) 185,730 (5) 5.86% - ---------------
(1) Information with respect to beneficial ownership is based upon information furnished by each shareholder contained in filings made with the Securities and Exchange Commission. Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to the shares shown. (2) Based on 2,992,122 shares outstanding. Where the persons listed on this table have the right to obtain additional shares of Common Stock within 60 days from April 9, 1997, these additional shares are deemed to be outstanding for the purpose of computing the percentage of class owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage of any other person. (3) Includes 85,000 shares of Common Stock issuable upon exercise of presently exercisable options. (4) Includes 5,000 shares of Common Stock issuable upon exercise of presently exercisable options. (6) Includes 175,000 shares of Common Stock issuable upon exercise of presently exercisable options. CHANGES IN CONTROL No arrangements are known to the Company, including any pledge by any person of securities of the Company, the operation of which may, at a subsequent date, result in a further change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- During 1994, the Company was charged management, consulting, and office administration fees of $183,786 by private companies owned or controlled by William E. Grafham, a former officer and director of the Company. In addition, during 1994 these companies made disbursements on behalf of the Company. As of December 31, 1994, $265,000, which included an outstanding balance of $82,167 as of December 31, 1993, remained unpaid. As indicated in the table below, the indebtedness of $265,000 was paid in 1995 with the issuance of 88,333 shares of the Company's Common Stock. During 1994, 1995, and 1996, the Company was charged management, consulting, and office administration fees of $65,264 (Cdn.$91,488), $51,194 (Cdn.$70,400), and $43,806 (Cdn.$59,750), respectively, by private companies owned by Nick DeMare, an officer of the Company. As indicated in the table below, indebtedness of $50,000 was paid in 1995 with the issuance of 16,667 shares of the Company's Common Stock. As of December 31, 1996, $50,213 remained unpaid. In order to reduce its cash requirements during 1995, the Company negotiated with certain current and former directors and officers, related companies, and creditors to settle $354,250 of indebtedness and unpaid amounts through the issuance of Common Stock at an ascribed price of $3.00 per share to the following parties: -29-
Indebtedness to be Settled Ascribed Price Number of Creditor by Shares per Share Shares W.G. Ltd./1/ $265,000 $3.00 88,333 DNG Capital Corp./2/ $ 50,000 $3.00 16,667 Others $ 39,250 $3.00 13,083 Total $354,250 118,083
/1/ A private company owned by William E. Grafham /2/ A private company owned by Nick DeMare. All of the shares were issued in 1995. During 1993, Mr. Anton R. Hendriksz and Mr. Thomas L. Crom, then Chairman of the Board and President of the Company, respectively, agreed to terminate their existing employment agreements with the Company and to provide consulting services to International Mahogany Corp. ("Mahogany") and the Company for a 24- month period in consideration for cash payments of $125,000 and $100,000, respectively, and quarterly cash payments of $12,500 each over a 24-month period. The termination and consulting payments were to be shared equally by Mahogany and the Company. Subsequent to an initial payment in 1993 of $31,250 to Mr. Hendriksz and $25,000 to Mr. Crom (being the Company's share of one-half of their termination payments), the Company and Mahogany did not make further payments to Messrs. Hendriksz and Crom. Pursuant to a Settlement Agreement dated June 20, 1995, assignees of Messrs. Hendriksz and Crom agreed to accept 15,000 and 12,500 shares of the Company's Common Stock, respectively, in full settlement of all claims against the Company. On August 25, 1995, Turks Ltd., a private company of which W. Gene Webb is a director, borrowed $74,532 (Cdn.$100,000) and in turn loaned the money to the Company. The Company pledged 90,000 shares of Baja Gold Inc. stock as collateral to secure the loan. The loan was due November 30, 1995 and interest was charged at the rate of 8.875% per annum. Neither Turks Ltd. nor Mr. Webb received any compensation from this transaction. On October 3, 1995, the Turks, Ltd. loan principal described above was repaid with proceeds from a loan made to the Company by a non-affiliated third party. The loan was in the amount of $97,167 (Cdn.$130,000), was originally due December 31, 1995, and accrued interest at the rate of 8% per annum. The Company pledged 90,000 shares of Baja Gold Inc. Stock as collateral to secure the loan. The loan was extended to January 31, 1996 and paid as of that date. During 1994, the Company recorded $165,000 as due to officers relating to unpaid salaries to Messrs. Flechner and Webb. The officers originally agreed not to demand payment of this amount until January 2, 1996 (extended to January 2, 1998), at which time the indebtedness was to be either settled with cash, if available, or the issuance of shares of the Company, at an ascribed price of $3.00 per share. The amount remained outstanding at December 31, 1996. During 1995 and 1996, the Company recorded $210,000 and $220,000, respectively, as due to the officers as salary compensation. These amounts remained outstanding at December 31, 1996, and may, at the option of the officer, be settled through the issuance of the Company's common stock, at a price of $0.65 per share. Messrs. Flechner and Webb have agreed not to demand payment of amounts owed to them until January 2, 1998. During 1995, the Company and Akiko Gold Resources Ltd. ("Akiko"), a company with a director in common, entered into a letter agreement to acquire mineral properties located in the San Simon region of Bolivia. The Company has a 46% interest in the property and is responsible for 50% of the project's funding requirements. As at December 31, 1996, accounts payable include $66,534 for costs paid on the Bolivia property by Akiko on behalf of the Company. See Item 2. Properties. -30- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- A) The following documents are filed as part of this report: 1. Financial Statements: Report of Independent Accountants, (April 5, 1997) Report of Independent Accountants, (April 17, 1996) Consolidated Balance Sheets, (December 31, 1996 and 1995) Consolidated Statements of Operations, (December 31, 1996, 1995 and 1994) Consolidated Statements of Shareholders' Equity, (December 31,1996, 1995 and 1994) Consolidated Statements of Cash Flows, (December 31, 1996, 1995 and 1994) Notes to Consolidated Financial Statements 2. Financial Statements Schedules: All schedules have been omitted. All other schedules have been omitted because they are not required, are inapplicable, or the information is otherwise included in the financial statements or notes thereto. 3. Exhibits:
Consecutive Regulation Form lO-K 10-K Number Exhibit Page No. ----------- ------- --------- 3.1 Articles of Incorporation, as amended(1) N/A 3.2 Bylaws (2) N/A 10.1 Tuina Agreement (3) N/A 10.2 Employment Agreement (3) N/A 10.3 Amended Stock Option Agreement (3) N/A 10.4 Letter Agreement dated August 6, 1993 (4) N/A 10.5 Baja Gold Inc., Loan Documents (5) 10.6 W. Gene Webb Employment Agreement(6) 10.7 Stephen E. Flechner Employment Agreement(6) 27.0 Financial Data Schedule
Footnotes: (1) Incorporated by reference to the Exhibits to North Lily's Form 10-K for the fiscal year ended December 31, 1987. (2) Incorporated by reference to the Exhibits to North Lily's Form 10-K for the fiscal year ended December 31, 1983. (3) Incorporated by reference to the Exhibits to North Lily's Form 10-K for the fiscal year ended December 31, 1991. -31- (4) Incorporated by reference to the Exhibits to North Lily's Form 8-K dated August 6, 1993. (5) Incorporated by reference to the Exhibits to North Lily's Form 10-K/A for the fiscal year ended December 31, 1994. (6) Incorporated by reference to the Exhibits to North Lily's Form 10-K for the fiscal year ended December 31, 1995. -32- 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. NORTH LILY MINING COMPANY April 14, 1997 By: /s/ Stephen E. Flechner ------------------------------------------------ Stephen E. Flechner Chief Executive Officer and President 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. April 14, 1997 By: /s/ Stephen E. Flechner ------------------------------------------------ Stephen E. Flechner Chief Executive Officer, President and Director April 14, 1997 By: /s/ W. Gene Webb ------------------------------------------------ W. Gene Webb Executive Vice-President, Corporate Secretary and Director April 14, 1997 By: /s/ Nick DeMare ------------------------------------------------ Nick DeMare Principal Financial and Accounting Officer and Treasurer April 14, 1997 By: /s/ Theodore E. Loud ------------------------------------------------ Theodore E. Loud Director -33- INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders NORTH LILY MINING COMPANY: Denver, Colorado We have audited the accompanying consolidated balance sheet of North Lily Mining Company and Subsidiaries as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Lily Mining Company and Subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a working capital deficiency at December 31, 1996, losses from continuing operations for the year ended December 31, 1996, and no operating cash flow to meet ongoing obligations. In addition, there are certain potential liabilities which may have an adverse effect on the Company (see Note 14). These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, the net realizable value of its assets may be materially less than the amounts recorded on the balance sheet. /s/ Wheeler Wasoff WHEELER WASOFF, P.C. Denver, Colorado April 5, 1997 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors NORTH LILY MINING COMPANY: Denver, Colorado We have audited the accompanying consolidated balance sheet of North Lily Mining Company and Subsidiaries as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the two years then ended. 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. Those standards require that we plan and perform an 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 the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Lily Mining Company and Subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995 in accordance with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a working capital deficiency at December 31, 1995, losses from continuing operations for each of the two years ended December 31, 1995, and no operating cash flow to meet ongoing obligations. In addition there are certain potential liabilities which may have an adverse effect on the Company (see Note 14). These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, the net realizable value of its assets may be materially less than the amounts recorded on the balance sheet. /s/ Coopers & Lybrand COOPERS & LYBRAND L.L.P. San Francisco, California April 17, 1996 F-2 NORTH LILY MINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995 --------------------
1996 1995 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 67,026 $ 122,515 Marketable securities 39,655 448,800 Accounts receivable 37,985 44,687 Note receivable 108,000 - Inventory - 43,207 ------------ ------------ Total Current Assets 252,666 659,209 Advances - 35,000 Plant and equipment, net 57,162 278,111 Mineral properties, net 3,200,401 3,121,943 Other assets 112,032 107,457 ------------ ------------ Total Assets $ 3,622,261 $ 4,201,720 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 279,928 $ 381,326 Accrued and other liabilities 55,000 38,000 Reclamation liabilities 192,500 220,001 Notes payable - 308,788 ------------ ------------ Total Current Liabilities 527,428 948,115 Due to officers 625,000 385,000 ------------ ------------ Total Liabilities 1,152,428 1,333,115 ------------ ------------ Commitments and contingencies and going concern (Notes 1 and 14) Shareholders' Equity: Common stock, $0.10 par value; authorized 30,000,000 shares; issued and outstanding 2,992,122 and 2,594,667 shares as at December 31, 1996 and 1995, respectively 299,212 259,466 Additional paid-in capital 51,663,759 51,264,750 Accumulated deficit (49,501,408) (48,835,939) Treasury stock, at cost, 14,483 shares as at December 31, 1995 - (17,395) Marketable securities valuation adjustment 8,270 197,723 ------------ ------------ Total Shareholders' Equity 2,469,833 2,868,605 ------------ ------------ Total Liabilities and Shareholders' Equity $ 3,622,261 $ 4,201,720 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 NORTH LILY MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 --------------------
1996 1995 1994 ---------- ---------- ----------- Operating expenses: General and administrative $ 675,449 $ 842,547 $ 862,735 Exploration and property carrying costs 3,527 60,390 432,425 Abandonment of mineral properties - 48,397 197,850 Provision for diminution in value of mineral properties - - 300,000 ---------- ---------- ----------- Operating loss (678,976) (951,334) (1,793,010) Other income (expenses): Interest income 10,053 3,310 1,275 Interest expense (10,589) (17,242) - Net realized gain on sale of marketable securities 118,883 92,628 170,494 Gain on disposition of mineral properties 206,897 49,500 - Write-off of note receivable (176,751) - - Write-down of mill and mining equipment - - (371,897) Other, net (132,074) (172,644) (78,009) ---------- ---------- ----------- Loss before extraordinary item (662,557) (995,782) (2,071,147) Extraordinary item - gain on settlement of amounts due to former officers - 73,750 - ---------- ---------- ----------- Net Loss $ (662,557) $ (922,032) $(2,071,147) ========== ========== =========== Net loss per common share: Loss before extraordinary item $(0.23) $(0.43) $(0.89) ========== ========== =========== Net loss $(0.23) $(0.39) $(0.89) ========== ========== =========== Weighted average common shares outstanding 2,848,047 2,342,584 2,327,601 ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NORTH LILY MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 --------------------
Marketable Common Stock Additional Securities ---------------------- Paid-In Accumulated Treasury Valuation Shares Amount Capital Deficit Stock Adjustment Total --------- -------- ----------- ------------- --------- ---------- ----------- Balance, December 31, 1993 2,342,084 $234,208 $50,653,258 $(45,842,760) $(17,395) $ - $ 5,027,311 Net loss, year ended December 31, 1994 - - - (2,071,147) - - (2,071,147) --------- -------- ----------- ------------ -------- -------- ----------- Balance, December 31, 1994 2,342,084 234,208 50,653,258 (47,913,907) (17,395) - 2,956,164 Net loss, year ended December 31, 1995 - - - (922,032) - - (922,032) Common stock issued for services rendered 7,000 700 13,300 - - - 14,000 Common stock issued on settlement of debt 145,583 14,558 422,192 - - - 436,750 Company stock issued by private placement 100,000 10,000 190,000 - - - 200,000 Share issue costs - - (14,000) - - - (14,000) Marketable securities valuation adjustment - - - - - 197,723 197,723 --------- -------- ----------- ------------ -------- -------- ----------- Balance, December 31, 1995 2,594,667 259,466 51,264,750 (48,835,939) (17,395) 197,723 2,868,605 Net loss, year ended December 31, 1996 - - - (662,557) - - (662,557) Common stock issued for services rendered 55,000 5,500 79,500 - - - 85,000 Common stock issued by private placement 341,073 34,108 351,409 (2,912) 17,395 - 400,000 Share issue costs - - (31,762) - - - (31,762) Marketable securities valuation adjustment - - - - - (189,453) (189,453) Adjustment for fractional shares issued 1,382 138 (138) - - - - --------- -------- ----------- ------------ -------- -------- ----------- Balance, December 31, 1996 2,992,122 $299,212 $51,663,759 $(49,501,408) $ - $ 8,270 $ 2,469,833 ========= ======== =========== ============ ======== ======== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 NORTH LILY MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 _____________
1996 1995 1994 --------- --------- ----------- Cash flows from operating activities: Net loss $(662,557) $(922,032) $(2,071,147) --------- --------- ----------- Adjustments to reconcile net loss to net cash provided from (used for) operating activities: Depletion and depreciation 3,946 49,562 129,734 Provision for diminution in value of mineral properties - - 300,000 Abandonment of mineral properties - 48,397 197,850 Net realized gain on sale of marketable securities and investments (118,883) (92,628) (170,494) Gain on disposition of mineral properties (206,897) (49,500) - Write-off of advances 176,751 - - Write-down of mill and mining equipment - - 371,897 Indebtedness to be settled with shares - - 354,250 Decrease (increase) in accounts and note receivable (101,298) 4,514 12,995 Decrease in inventory 43,207 58,543 49,994 Decrease (increase) in other assets (4,575) (1,432) 22,009 Increase (decrease) in accounts payable (101,398) (21,629) 128,879 Increase (decrease) in accrued and other liabilities 17,000 (30,000) (288,439) Increase (decrease) in reclamation liabilities (27,501) 67,882 (97,881) Increase in due to officers 240,000 220,000 165,000 Other items 185,107 (73,750) - --------- --------- ----------- Total adjustments 105,459 179,959 1,175,794 --------- --------- ----------- Net cash used for operating activities (557,098) (742,073) (895,353) --------- --------- ----------- Cash flows from investing activities: Acquisition and exploration of mineral properties, net of option payments and foreign taxes received (64,957) 91,987 (300,017) Acquisition of equipment - - (31,144) Proceeds received on sale of equipment 5,000 93,403 - Proceeds from sale of marketable securities and investments 241,408 153,649 665,803 Purchase of marketable securities and investments - (12,224) - Proceeds from sale of mineral properties 280,292 62,822 - Advances (141,751) (35,000) - --------- --------- ----------- Net cash provided from investing activities 319,992 354,637 334,642 --------- --------- ----------- Cash flows from financing activities: Notes payable (211,621) 107,451 201,337 Advances from International Mahogany Corp. - 163,546 358,258 Proceeds from issuance of common stock, net of offering costs 393,238 200,000 - --------- --------- ----------- Net cash provided from financing activities 181,617 470,997 559,595 --------- --------- ----------- Net increase (decrease) in cash and cash equivalents (55,489) 83,561 (1,116) Cash and cash equivalents, beginning of year 122,515 38,954 40,070 --------- --------- ----------- Cash and cash equivalents, end of year $ 67,026 $ 122,515 $ 38,954 ========= ========= =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid during the year for: Interest $ 17,708 $ - $ 2,611 ========= ========= =========== Income taxes $ - $ - $ - ========= ========= =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (see Note 15)
The accompanying notes are an integral part of these consolidated financial statements. F-6 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 1. GOING CONCERN: During 1996, 1995, and 1994 the Company incurred net losses of $662,557, $922,032 and $2,071,147, respectively and at December 31, 1996 has a working capital deficiency of $274,762. During 1996 and 1995 the Company used cash in operating activities of $557,098 and $742,073, respectively. During 1993 the Company ceased operations at its Silver City mine and suspended mining operations at its Tuina mine (Note 8). As a result the Company has no operating cash flow to meet ongoing obligations over the past three years. The Company has continually been selling non-essential Company assets to fund ongoing operations and property commitments over the past three years. The Company requires financing to fund its future operations and will attempt to meet its ongoing liabilities as they fall due through the sale of marketable securities or mineral properties. There can be no assurance that the Company will be able to raise the necessary financing to continue in operations or meet its liabilities as they fall due or be successful in resolving its contingent liabilities (Note 14). Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, the Company may not be able to remain in operations and the net realizable value of its assets may be materially less than the amounts recorded on the consolidated balance sheets. See also Note 4. 2. NATURE OF OPERATIONS: The Company is engaged in mineral activities, including exploration, extraction, processing and reclamation. The Company's principal assets are its copper mine, located in Chile, and its mineral properties, located in Bolivia and the United States. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of North Lily Mining Company, a Utah corporation, and all of its subsidiaries (the "Company"). All significant intercompany transactions, accounts, and investments have been eliminated. See also Note 4. 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 amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been made by management with respect to the recoverability of the Company's investment in mineral properties and the liability for reclamation costs. Actual results could differ from those estimated. CASH EQUIVALENTS: The Company defines cash equivalents as all short-term, highly liquid investments with original maturity dates less than 90 days. As at December 31, 1996, there were no cash equivalents. F-7 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: MARKETABLE SECURITIES: Marketable equity securities are classified as available for sale and are carried at fair value, as determined by quoted published market prices. Unrealized losses and gains on available for sale securities are included as a separate component of shareholders' equity. Net realized gains and losses on security transactions are determined on the specific identification cost basis and are included in the determination of loss for the year. See Note 6. INVENTORY: Finished products are recorded at the lower of first-in, first-out cost or market. In-process heap leach ore, which principally includes unleached ore placed on heap leach pads, is valued at the lower of moving average production cost or net realizable value. Costs are removed from inventory on a first-in, first-out basis. Major mining and milling supplies are stated at the lower of first-in, first-out cost or market. PLANT AND EQUIPMENT: Plant and equipment is carried at cost net of write-downs. Mill and equipment are depreciated using the straight-line method over their estimated useful lives of 5 to 15 years or the units-of-production method based on estimated tons of ore reserves if the equipment is located at a producing property with a shorter economic life. Mining equipment is being depreciated using the straight-line method over their estimated useful lives of 3 to 15 years or the units-of-production method based on estimated tons of ore reserves if the equipment is located at a producing property with a shorter economic life. Office equipment and fixtures are being depreciated using the straight-line method over their estimated useful lives of 3 to 10 years. When such assets are sold or otherwise disposed of, the costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are charged to operations. Carrying values of plant and equipment are reviewed on a regular basis and, when necessary, are written down to their estimated recoverable amount. Substantially all mining plant and equipment is available for sale as of December 31, 1996. Accordingly, proceeds from the sale of mining plant and equipment is charged against the carrying cost, which approximates salvage value, until such time as the carrying cost is reduced to zero, at which time, gain on sale will be recognized. MINERAL PROPERTIES: Direct costs related to the acquisition, exploration and development of mineral properties held or controlled by the Company are deferred on an individual property basis until viability of a property is determined. General exploration costs are expensed as incurred. Management of the Company periodically reviews the recoverability of the capitalized mineral properties and mining equipment. Management's calculation of proven and probable reserves is based on engineering and geological estimates and financial estimates including mineral prices and operating costs. The Company depreciates its assets and accrues for reclamation on a units of production basis at each mine site over proven and probable reserves. Changes in the geological and engineering interpretation of the Company's ore bodies, mineral price and operating costs may change the Company's estimate of proven and probable reserves. It is reasonably possible that the Company's estimate of proven and probable reserves will change in the near term resulting in additional charges for depreciation F-8 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: and reclamation in future reporting periods. When it is determined that a project or property will be abandoned or its carrying value has been impaired, a provision is made for any expected loss on the project or property. Proceeds from the sale of mineral properties are charged against the carrying value of the properties, on an individual property basis, until such time as the carrying value of the individual properties is reduced to zero, at which time, gain on disposition is recognized. Investments in joint ventures are proportionately consolidated. IMPAIRMENT OF LONG-LIVED ASSETS: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standard ("SFAS") 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has determined that no impairment loss for 1996 need to be recognized for applicable assets of continuing operations. FOREIGN CURRENCY TRANSLATION: Results of operations for foreign subsidiaries, whose functional currency is other than the U.S. dollar, are translated using the average exchange rates during the period, while assets and liabilities are translated into U.S. dollars using current rates. Resulting translation adjustments are recorded in currency translation adjustments in shareholders' equity. For foreign subsidiaries whose functional currency is the U.S. dollar, currency gains and losses resulting from translation and transactions are determined using a combination of current and historical rates and are included in the results of operations. RECLAMATION COSTS: All of the Company's operations are subject to reclamation, site restoration and closure requirements. Post-closure reclamation, site restoration costs and closure costs for each producing mine are charged to operations over the expected life of the mine using the units of production method. Current expenditures relating to ongoing environmental and reclamation programs are expensed as incurred. The Company calculates its estimate of the ultimate reclamation liability based on current laws and regulations and the expected future costs to be incurred in reclaiming, restoring and closing its operating mine sites. It is reasonably possible that the Company's estimate of its ultimate reclamation liability will increase in the near term due to possible changes in laws and regulations and changes in cost estimates. INCOME TAXES: The Company has adopted the provisions of SFAS 109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, the deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. F-9 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED _________ 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: SHARE BASED COMPENSATION: In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. This new standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board ("APB") Opinion No. 25. The Company has elected to utilize APB No. 25 for measurement; and will, pursuant to SFAS No. 123, disclose supplementally the pro forma effects on net income and earnings per share of using the new measurement criteria. CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS: Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, investments in marketable securities and receivables. The Company places its short-term cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Generally, these investments mature within 90 days and therefore are subject to minimal risk. LOSS PER COMMON SHARE: Loss per common share is calculated using the weighted average number of shares outstanding during the year. Loss per common share computations for each of the three years presented do not include the effect of outstanding stock options, as their effect is antidilutive. 4. DISPOSITION OF INTERESTS IN COMPANIA MINERA PHOENIX S.A. Effective April 12, 1995, the Company and International Mahogany Corp. ("Mahogany") agreed to a restructuring of the ownership interest of the Tuina Project. In settlement of the Company's outstanding debt to Mahogany of $797,481, as at March 28, 1995, the Company reduced its ownership interest in Compania Minera Phoenix S.A. ("Phoenix") from 50% to 41%. During 1995, the Company also agreed to terms by which the Company's remaining interest in the Tuina Project will be impacted. Subsequently, Mahogany agreed to sell its 59% interest in Phoenix to Yuma Gold Mines Limited ("Yuma"). The sale to Yuma was extended on several occasions and the terms subsequently revised (the "Mahogany-Yuma Agreement"). On May 3, 1996 the Company and Yuma agreed to revise the terms of the agreement whereby the Company's remaining interest in Phoenix will be impacted. In summary, subject to receipt by Mahogany of regulatory approvals and completion of the Mahogany-Yuma Agreement, the Company's interest will be impacted as follows: i) Yuma will receive an additional 5% interest in Phoenix in exchange for funded costs and the delivery of an independent bankable feasibility study in respect of the Tuina Project; F-10 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 4. DISPOSITION OF INTERESTS IN COMPANIA MINERA PHOENIX S.A., CONTINUED: ii) the Company would be required to sell a further 10% interest in Phoenix to Yuma for an initial payment of $145,000, less deductions for operating costs and the costs of securing the water rights for the Tuina Project. In addition, Yuma is required to make two further payments to the Company, due upon commencement of Tuina commercial production and one year thereafter. These payments are to be calculated in relation to the initial capital costs of the Tuina Project, from a high of $609,000 where the initial capital costs are less than $14,000,000 with graduating payments decreasing as capital costs increase, and may be made, at Yuma's election, in cash or shares of Yuma; and iii) all participants will be responsible for contributing their share of funding following completion and delivery of the Feasibility Study. The failure of any participant to contribute its share of funding will result in a dilution of that participant's interest in accordance with a dilution formula. Once a participant's interest has been diluted to 10%, then the ownership interest will convert to a 10% net profits interest. Since April 13, 1995, Yuma has provided funding to Phoenix to cover operations, the preparation of the feasibility study and the costs of securing the water rights for the Tuina Project. These costs are partially recoverable by Yuma (the "Yuma Payments") from the Company from the proceeds to be received from the sale of the 10% interest in Phoenix, as noted in item (ii) above. The water rights have been secured and Yuma now has to either elect to close the Mahogany-Yuma Agreement, subject to regulatory approval, or terminate the agreement. If Yuma elects to terminate the Mahogany-Yuma Agreement, the Company would not owe Yuma any funds for the Yuma Payments. The Company and Mahogany have an agreement in principle to conduct the activities of the Tuina Project on a joint venture basis. The Company expects to enter into a definitive joint venture and operating agreement with Yuma after closing of the Mahogany-Yuma Agreement. 5. PROPOSED SHARE EXCHANGE WITH TAMARINE VENTURES LTD.: On November 17, 1995, the Company executed an Agreement and Plan of Share Exchange (the "Agreement") with Tamarine Ventures Ltd., a company incorporated under the laws of British Columbia, Canada ("Tamarine"). The Agreement provided for the issuance, at closing, of one post-reverse stock split share of Common Stock of the Company in exchange for each four common shares of Tamarine, thereby making Tamarine a wholly-owned subsidiary of the Company (the "Share Exchange"). At the closing of the Share Exchange, the Company would issue 2,000,000 post-reverse split shares of its Common Stock to the shareholders of Tamarine. Closing of the Share Exchange was subject to a number of conditions precedent, including regulatory acceptance, approval by the shareholders of the Company and satisfactory results of due diligence investigations conducted by the Company. On November 22, 1996, the Company terminated the Agreement and abandoned its plan to acquire Tamarine. In contemplation of the acquisition of Tamarine, the Company advanced $176,751 to Tamarine. To date the Company has been unsuccessful in having the advances repaid. Accordingly, the Company has fully provided for the advances to Tamarine. The Company will continue to pursue collection of the advances. F-11 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED _________ 6. MARKETABLE SECURITIES: As at December 31, 1996 and 1995 the Company has classified all investments in marketable securities as available for sale. The cost, gross unrealized holding gains, gross unrealized holdings losses, and fair value of available for sale securities are as follows:
Gross Gross Unrealized Unrealized Holdings Holdings Fair Cost Gains Losses Value At December 31, 1996 Equity Securities $ 31,385 $ 8,270 $ - $ 39,655 ======== ======== ======== ======== At December 31, 1995 Equity Securities $251,077 $197,723 $ - $448,800 ======== ======== ======== ======== At December 31, 1994 Equity Securities $299,874 $237,343 $ - $537,217 ======== ======== ======== ========
Proceeds from sales and dispositions of marketable securities were $339,704, $153,649, and $665,803 in 1996, 1995 and 1994, respectively, and related net realized gains included in income were $118,883, $92,628, and $170,494 in 1996, 1995 and 1994, respectively. The net change in the unrealized gain of marketable securities classified as available for sale included as a component of equity was a decrease of $189,453 and $39,620 for the years ended December 31, 1996 and 1995, respectively, and an increase of $6,526 for the year ended December 31, 1994. 7. PLANT AND EQUIPMENT: Plant and equipment consist of the following at December 31, 1996 and 1995:
1996 ------------------------------------------------ Accumulated Cost Depreciation Write-down Net ---------- ----------- ---------- -------- Mill and equipment $2,132,481 $1,092,966 $1,036,412 $ 3,103 Mining equipment 327,941 262,662 27,000 38,279 Office equipment and fixtures 85,562 69,782 - 15,780 ---------- ---------- ---------- -------- $2,545,984 $1,425,410 $1,063,412 $ 57,162 ========== ========== ========== ======== 1995 ------------------------------------------------ Accumulated Cost Depreciation Write-down Net ---------- ----------- ---------- -------- Mill and equipment $2,132,481 $1,092,966 $1,036,412 $ 3,103 Mining equipment 586,478 354,577 - 231,901 Office equipment and fixtures 220,898 177,791 - 43,107 ---------- ---------- ---------- -------- $2,939,857 $1,625,334 $1,036,412 $278,111 ========== ========== ========== ========
F-12 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 7. PLANT AND EQUIPMENT, CONTINUED: Included in mill and equipment is an idle mill facility held for sale. In 1996 and 1995, respectively, the Company received $5,000 and $25,000 from the sale of various components of the mill. Depreciation expense was $3,946, $49,562 and $129,734 for 1996, 1995 and 1994, respectively. 8. MINERAL PROPERTIES: The Company's investment in mineral properties at December 31, 1996 and 1995 is as follows:
1996 1995 ---------- ---------- Mineral properties $5,274,661 $5,328,528 Less:Accumulated depletion 867,260 999,585 Provision for diminution in value 1,207,000 1,207,000 ---------- ---------- $3,200,401 $3,121,943 ========== ==========
Below is a breakdown of various Company properties with their respective net carrying values at December 31, 1996 and 1995.
1996 1995 ---------- ---------- U.S. PROPERTIES: --------------- Tintic $1,273,064 $1,404,593 Other - 8,395 ---------- ---------- 1,273,064 1,412,988 CHILEAN PROPERTY: ---------------- Tuina 1,755,512 1,668,617 BOLIVIAN PROPERTY: ----------------- San Simon 171,825 40,338 ---------- ---------- $3,200,401 $3,121,943 ========== ==========
During 1993 the Company's Silver City mining operation located in Utah ceased operations and commenced reclamation work. As at December 31, 1996, the Company has accrued $192,500 (1995 - $220,001) as its share of estimated net future costs to complete its share of the reclamation work. The Company also suspended production at its Tuina mine in Chile during 1993 due to negative cash flows. This operation is not expected to resume production until closing of the various reorganization agreements, completion of a feasibility study and successful financing of the construction of a solvent extraction/electrowinning plant to produce cathode copper. During 1996, the Company received $65,000 from partial sale of Tintic patent claims. In addition, the Company sold the Gray Eagle property for total proceeds of $215,292. Of this amount $108,000 is recorded as note receivable. This balance bears interest at 8.5% per annum. The principal and interest is repayable in full on August 21, 1997. As at December 31, 1996, the Company has accrued $3,301 as interest income and this amount is included in accounts receivable. See also Note 4. F-13 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 9. NOTES PAYABLE
1996 1995 Baja Gold, Inc. Promissory note (Cdn.$283,820), bearing interest at 7% per annum. 150,000 shares of Baja have been pledged as collateral for the promissory note $ - $211,621 Other Promissory note (Cdn.$130,000), bearing interest at 8% per annum. 90,000 shares of Baja have been pledged as collateral for the promissory note - 97,167 ------------ -------- $ - $308,788 ============ ========
In 1996, the Company: i) sold 150,000 shares of Baja Gold, Inc. and the funds received were used to retire the note payable and outstanding accrued interest of the Baja Gold, Inc. loan; and ii) transferred 60,000 shares of Baja Gold, Inc. common stock, valued at the current market price of $1.64 per share, to retire the outstanding "other" loan and related accrued interest in the aggregate amount of $98,296. 10. INCOME TAXES: Pretax loss from continuing operations consists of the following:
1996 1995 1994 ---------- --------- ------------ United States $(662,557) $(656,205) $(1,517,229) Foreign - (265,827) (553,918) --------- --------- ----------- $(662,557) $(922,032) $(2,071,147) ========= ========= ===========
For U.S. income tax reporting purposes, the Company has net operating loss carryforwards of approximately $19,400,000 expiring from 1998 to 2011. The Chilean loss carryforwards are approximately $3,215,000. Approximately $4,452,000 of the United States losses were acquired in the merger with Cumberland Gold, and utilization of these net operating losses is restricted to a maximum of $2,900,000 annually under Internal Revenue Code Section 382. In addition, the Company has U.S. capital loss carry-forwards of approximately $25,500,000, expiring 1998. The U.S. net operating loss and the capital loss carry-forwards are limited in their availability for use in any given year. In addition, certain other limitations are placed on the utilization of the net operating losses generated by the Company's subsidiaries. F-14 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 10. INCOME TAXES, CONTINUED: The Company has fully reserved the tax benefits of these operating losses because the likelihood of realization of the tax benefits cannot be determined. These carryforwards are subject to review by the Internal Revenue Service. The $3,740,000 tax benefit of the loss carryforward has been offset by a valuation allowance of the same amount. Of the total tax benefit, $184,000 is attributable to 1996. Temporary differences between the time of reporting certain items for financial and tax reporting purposes are primarily from using different methods of reporting depreciation costs, mineral exploration costs, advanced royalties and reclamation accruals. 11. STOCKHOLDERS' EQUITY: On December 9, 1996 the Company effected a 1 for 10 reverse stock split. The accompanying financial statements give retroactive effect to this reverse stock split for all periods presented. 12. STOCK OPTION AGREEMENTS: (a) 1984 Incentive Stock Option Plan: During 1984, the shareholders approved an incentive stock option plan (the "1984 Plan") for officers and key employees that provided for grants of options to purchase up to 30,000 shares of unregistered common stock. In 1990, the Board of Directors approved an amendment to the 1984 Plan to increase the shares available for option grants to 250,000. The options granted under the 1984 Plan are immediately exercisable at the fair market value of the free trading common stock on the date of grant or 110% of such value if the optionee owned more than 10% of the combined voting power of all classes of Company stock as of the grant date. The 1984 Plan expired October 31, 1994. The options outstanding at December 31, 1996 expire as follows: 170,000 - May 7, 2004 and 17,250 - October 31, 2004. A summary of the Company's 1984 stock option activity is as follows:
Number Option Price of Shares Per Share --------- ------------ Outstanding at December 31, 1993 6,000 $7.50 Granted 248,000 $2.03 Cancelled (6,000) $7.50 Cancelled (22,500) $2.03 --------- Outstanding at December 31, 1994 225,500 $2.03 Cancelled (28,250) $2.03 --------- Outstanding at December 31, 1995 197,250 $2.03 Cancelled (10,000) $2.03 --------- Outstanding at December 31, 1996 187,250 $2.03 =========
F-15 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 12. STOCK OPTION AGREEMENTS, CONTINUED: (b) 1996 Stock Option Plan: In 1996, the shareholders approved an incentive stock option plan (the "1996 Plan") for employees, directors and/or officers of the Company. The 1996 Plan reserves an aggregate of 275,000 shares (the "Available Shares") of the Company's Common Stock and provides for annual adjustments in the number of Available Shares, commencing December 31, 1996, to a number equal to 10% of the number of shares outstanding on December 31 of the preceding year or 275,000 shares, whichever is greater. The options granted under the Plan will become vested, 50% upon the first anniversary option grant and 12.5% upon each of the four three-month periods following the first anniversary. The purchase price shall be equal to the fair market value of the stock as of the date of issuance. No options were granted under the 1996 Plan in 1996. (c) 1996 Restricted Stock Plan: In 1996, the shareholders approved a restricted stock plan (the "1996 Restricted Plan") for employees, officers, and directors of the Company and consultants to the Company. The 1996 Restricted Plan reserves an aggregate of 275,000 shares (the "Available 1996 Restricted Shares") of the Company's Common Stock. The 1996 Restricted Plan also provides for annual adjustments under the same terms as the 1996 Plan. Shares under this plan are "restricted" in the sense that they are subject to repurchase by the Company at cost during the vesting period. The options granted under this plan will become vested under the same terms as the 1996 Plan. 13. RELATED PARTY TRANSACTIONS: (a) During 1996, the Company was charged management, consulting and office administration fees and salaries of $283,806 by officers and companies under significant influence of certain directors of the Company. As at December 31, 1996, $680,358 remained unpaid. Of this amount $625,000 and $55,358 have been included in due to officers and accounts payable, respectively. The Company's Bolivia properties are being acquired pursuant to an agreement entered into in 1995 with Akiko Gold Resources, Ltd. ("Akiko"), an entity whose president is also president of the Company. The Company has a 46% interest in the property and is responsible for 50% of the project's funding requirements. As at December 31, 1996, accounts payable includes $66,534 for costs paid on the Bolivia property by Akiko on behalf of the Company. (b) During 1995, the Company: i) was charged management, consulting, and office administration fees and salaries of $272,494 by officers and companies under significant influence of certain directors of the Company. At December 31, 1995, $416,079 remained unpaid of which $385,000 and $31,079 have been included in due to officers and accounts payable, respectively; F-16 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 13. RELATED PARTY TRANSACTIONS, CONTINUED: ii) issued 1,180,835 shares (pre-reverse stock split) of the Company in settlement of $354,250 of indebtedness. Of the amount, $315,000 were amounts owing to companies controlled by current and former officers and directors of the Company; and iii) was advanced $74,532 (Cdn. $100,000) by a corporation with a director who is also a director of the Company. The advance was repaid during the year. (c) During 1994, the Company was charged management, consulting and office administration fees and salaries of $271,350 by officers and companies under significant influence of certain current and former officers of the Company. The companies also made disbursements on behalf of the Company. As at December 31, 1994, $338,905 remained unpaid. Of this amount $150,000, $165,000 and $23,905 have been included in indebtedness to be settled with shares, due to officers and accounts payable, respectively. (d) See also Note 14(d). 14. COMMITMENTS AND CONTINGENCIES: (a) The Company has future commitments, and advance royalties payable for the base terms of certain agreements, assuming no extensions, as follows:
Tuina Bolivian Project Property Total ---------- --------- ---------- 1997 $ 121,000 $105,000 $ 226,000 1998 115,000 123,000 238,000 1999 904,000 - 904,000 ---------- -------- ---------- $1,140,000 $228,000 $1,368,000 ========== ======== ==========
Rent expense for 1996, 1995 and 1994 was $17,838, $11,928 and $12,769, respectively. (b) The Tuina project is subject to a 5% in-kind royalty on gross production, with a minimum of 16 tons of copper per month commencing August 1, 1995. Since April 15, 1995, Yuma has provided funding of all property payments, commitments and advance royalties with respect to the Tuina Project. See also Note 4. (c) The Company and other third parties are subject to a multi-count claim filed with the U.S. District Court in Butte, Montana claiming that, as a result of exploration activity in the Southern Cross area, local ground water supplies have been contaminated and reduced. Despite studies prepared privately and by the Department of State Lands (Montana) in 1992 which found no evidence of earlier claims, the plaintiff continues to seek alternative legal approaches against the defendants. Initial discovery proceedings were completed in 1995. The Company believes the claims are without merit and will continue to defend itself vigorously. The Company and other third parties filed for a Summary Judgement for dismissal of this lawsuit and have received favorable disposition thereof, awaiting execution by federal court. F-17 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 14. COMMITMENTS AND CONTINGENCIES, CONTINUED: (d) As at December 31, 1996, the Company has recorded $625,000 as due to officers for unpaid salaries for the period 1994 through 1996. The officers have agreed not to make demand for repayment until January 3, 1998. The balance due for 1994 of $165,000 is convertible into shares of the Company's common stock at $3.00 per share. The aggregate balance due for 1995 and 1996 of $460,000 is convertible, at the option of the officers, into shares of the Company's common stock at $0.65 per share. (e) During 1994, a former officer of the Company filed a complaint seeking unpaid vacation pay, together with interest thereon, treble damages, costs and attorney's fees. The Company subsequently paid the former officer $20,834 representing the Company's calculation of its share of amounts owed. Final settlement with the former officer was reached in 1996, in which the Company agreed to pay an initial payment of $15,000 and has agreed to pay a final payment of $80,000. The cost of this settlement is being paid on a 50:50 basis by the Company and Mahogany. During 1996, the initial payment was made and the Company has accrued an additional $40,000 for its share of the settlement. Should Mahogany not honor its commitment to pay its share of this settlement agreement, the Company will be obliged to pay the full settlement amount. 15. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: At December 31, 1996, 1995, and 1994, non-cash investing and financing activities are as follows:
1996 1995 1994 ------- ------- ------ Exchange of marketable securities on settlement of note payable and accrued interest $98,296 $ - $ - Common stock issued for services rendered 60,000 14,000 - Common stock issued for offering costs 25,000 - - Common stock issued on settlement of debt - 436,750 - Exchange of mineral property interest on settlement of amounts due to Mahogany - 797,481 -
16. SEGMENT INFORMATION: The following summary represents geographic information for the Company's United States, Chilean and Bolivian operations as of and for the years ended December 31, 1996, 1995 and 1994:
United States Chile Bolivia Total ------------- ---------- ------- ------------ 1996 Net loss $ (662,557) $ - $ - $ (662,557) Identifiable assets 1,694,924 1,755,512 171,825 3,622,261 1995 Net loss $ (656,205) $ (265,827) $ - $ (922,032) Identifiable assets 2,201,249 1,960,133 40,338 4,201,720 1994 Net loss $(1,517,229) $ (553,918) $ - $(2,071,147) Identifiable assets 2,249,173 2,855,875 - 5,105,048
16. SEGMENT INFORMATION, CONTINUED: F-18 NORTH LILY MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ The following summary represents segmented information for the Company's activities as of and for the years ended December 31, 1996, 1995 and 1994:
Gold and Silver Copper Total ------------ ---------- ------------ 1996 Net loss $ (662,557) $ $ (662,557) Identifiable assets 1,866,749 1,755,512 3,622,261 Depletion and depreciation 3,946 - 3,946 Mineral property expenditures, net 64,957 - 64,957 1995 Net loss $ (656,205) $ (265,827) $ (922,032) Identifiable assets 1,931,617 2,270,103 4,201,720 Depletion and depreciation 4,932 44,630 49,562 Abandonment of mineral properties 48,397 - 48,397 Mineral property recoveries (43,751) (48,236) (91,987) 1994 Net loss $(1,517,229) $ (553,918) $(2,071,147) Identifiable assets 2,249,173 2,855,875 5,105,048 Depletion and depreciation 41,875 87,858 129,733 Abandonment of and provision for mineral properties 497,850 - 497,850 Mineral property expenditures 59,819 240,198 300,017
F-19 EX-27 2 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 67,026 122,515 39,655 448,800 985 44,687 0 0 0 43,207 252,666 659,209 5,746,385 6,061,800 2,488,822 2,661,746 3,622,261 4,201,720 527,428 948,115 625,000 385,000 0 0 0 0 299,212 259,466 51,663,759 51,264,750 3,622,261 4,201,720 0 0 335,833 145,438 0 0 678,976 951,334 308,825 172,644 0 0 10,053 17,242 (662,557) (995,782) 0 0 (622,557) (995,782) 0 0 0 73,750 0 0 (662,557) (922,032) (0.23) (0.43) (0.23) (0.43) Due to Officers.
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