-----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, VHfzAhRyiDVMKjhX07GRteL5/R6p9URrKRRYkPJH9i6xpS4b3iy7uhFLYhoVloE3 BIrqIvgm1MK9xy7kHCj16Q== 0000950109-96-002175.txt : 19960416 0000950109-96-002175.hdr.sgml : 19960416 ACCESSION NUMBER: 0000950109-96-002175 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960415 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH LILY MINING CO CENTRAL INDEX KEY: 0000072655 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 870159350 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16740 FILM NUMBER: 96547340 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 1 FORM 10-K FORM 1O-K 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, 1995 -------------------------------------------------- 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 of (I.R.S. Employer Identification No.) 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, 1996: $4,370,328 ----------- Number of shares outstanding of registrant's common stock, $.10 par value, as of March 21, 1996: 28,057,403 ---------- 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[ ]. The Company's Proxy Statement for the 1996 Annual Meeting of Shareholders is incorporated by reference in Part III, Items 10, 11, 12 and 13. Exhibit index on consecutive page 28 Page 1 of 30 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 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 26 PART III -------- Item 10. Directors and Executive Officers of the Registrant 27 Item 11. Executive Compensation 27 Item 12. Security Ownership of Certain Beneficial Owners and Management 27 Item 13. Certain Relationships and Related Transactions 27 PART IV ------- Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 28 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. As a result of the Company selling its equity interest in Mahogany, Mahogany's financial statements are no longer consolidated with those of the Company. In September 1993, as a result of a change in corporate management, the Company's corporate head office moved to Scottsdale, Arizona. In May 1994, as a result of a further change in corporate management, the Company's corporate head office moved to Denver, Colorado. 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., a company incorporated under the laws of British Columbia, Canada ("Tamarine"). The Agreement provides 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. The Agreement contemplates that Tamarine will acquire other businesses and/or companies using shares of the Company's Common Stock and asset based financing. On November 24, 1995, Tamarine executed a Business Sale -3- Agreement with Atlay Cat Sales and Services Pty. Ltd. of Queensland, Australia, to acquire its business, known as Cougar Catamarans. Cougar Catamarans manufactures and sells boats ranging in size from 7.5 to 35 meters, which include passenger ferries, pleasure boats, scenic tour boats, fishing boats, dive boats, and patrol boats. Sales are made to countries in the Pacific Rim: Japan, Hong Kong, China, Singapore, New Zealand, the United States, Papua New Guinea, Tahid, Noumea, and the Maldives. The purchase price is $2,500,000 plus the value at closing of inventory and work in process. Closing of the Share Exchange is subject to a number of conditions including regulatory acceptance, approval by the shareholders of the Company and satisfactory results of due diligence investigations conducted by the Company and Tamarine. At December 31, 1995, North Lily had the following subsidiaries and affiliates: Minera Northern Resources S.A. ("Northern"), a Chilean limited liability company, 100% (active). 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, 1995, 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 16 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. -4- 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 had an agreement with Metals Concentrates International Inc. ("MCII") to purchase its copper precipitate for 1993. Operations at the Tuina mine were suspended in 1993 due to high transport, refining and treatment charges and reduced copper prices. As a result, the agreement with MCII was terminated. 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. 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. -5- 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. 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. -6- 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. 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. -7- 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, 1996, the Company has three employees in the U.S. through its joint projects, two in Chile through its joint Tuina project, and the following company officers: Stephen E. Flechner, President and Chief Executive Officer; W. Gene Webb, Executive Vice-President and Corporate Secretary; John R. Twohig, Vice-President of Corporate Development; and Nick DeMare, Treasurer. North Lily's office in Denver, Colorado is leased. The office of the Company's wholly owned Chilean subsidiary, which is leased, is located at Napoleon 3200 Suite 707, Las Condes - Santiago, Chile. 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. 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. -8- 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. (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 -9- 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 - 1996 The following table lists the properties in which the Company has an interest, and the 1996 exploration budget for each property. In approving the 1996 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. Property Portfolio ------------------
Approximate Property Interest Held 1996 Size by the Company Exploration Property Name State Location (Acres) as of 12/31/95 Budget - --------------- ------------------------ ------------- ------- ----------------- ---------------- San Simon Beni Bolivia 13,087 46% $120,000 /(2)/ Silver City Utah United States 20 50% - Tintic Utah United States 6,000 5% NSR/(1)/ 150,000 /(3)/ Tintic Utah United States 4,440 100% - Tuina Region II Chile 15,013 41% - --------- TOTAL $270,000 =========
-10- (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 1996. 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 1995 the Company assessed the capitalized costs of its mineral properties in the United States and Chile. In the opinion of management it was appropriate to write-off the remaining $71,397 carrying value and reverse an accrual of $23,000 for the Nine Mile Property, for a net charge of $48,397 as abandonment of mineral properties. 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. 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, 1995. 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. -11- 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: 1996 $ 305,000 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. (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. -12- 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 (see also Item 3, Legal Proceedings). 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 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. 1995 Activities: - ---------------- During 1995, Yuma commissioned UM Engineering ("UM") to prepare an independent bankable feasibility study on the economics of a solvent extraction / electrowinning ("SX/EW") plant for the Tuina Project. UM delivered its report in July, 1995 (the "UM Report"). The UM Report concluded that, based on current reserves of approximately 38,000 tons of recoverable copper, a 6,000 ton per year plant could generate a rate of return of 26% and achieve payout in approximately four years. In addition, the economics of the SX/EW plant could be improved by: conducting a mining survey to increase proven reserves; obtaining other ore sources from surrounding properties; and/or decreasing the capital investment by using second hand equipment or subcontracting parts of the operation. 1996 Planned Activities: - ------------------------ Activities on the Tuina Project have been curtailed pending completion of Yuma's proposed acquisition of Mahogany's 59% interest in Phoenix. Yuma is currently funding ongoing costs relating to the Tuina Project. It is expected that once this transaction closes Yuma will proceed with bringing the Tuina copper project into production. Yuma, Mahogany and Company management are reviewing and assessing alternatives to further improve the economics of the Tuina Project. TINTIC PROPERTIES Ownership: - ---------- The properties are held 100% by the Company. -13- 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 8,115 acres of patented lode mining 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, the Company entered into a ten-year mining lease with Centurion Mines Corporation, a non-affiliated mining company, covering approximately 6,000 acres. The lease, which specifically excludes the mine dumps and tailings, Silver City mill, and existing grazing leases, requires a production royalty equal to a 5% NSR. During 1991 North Lily renegotiated its mining lease. The lessee is required to make advance royalty payments of $27,500 in 1992, $27,500 in 1993, $27,500 in 1994 and $75,000 thereafter (payments to 1996 have been received). The lessee is also required to fulfil a work commitment with respect to the leased premises at a minimum cost to lessee of $50,000 in 1992, $50,000 in 1993 and $150,000 during each succeeding year. 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 1996 Activities: - ------------------------ The property remains subject to a lease agreement with Centurion Mines Corporation who are operators of the property. Centurion Mines Corporation 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. 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. 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. -14- 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.
Production ounces 1995 1994 1993 - ----------------------------------- ---- ---- ---- Gold equivalent -0- -0- 737 Silver conversion rate N/A N/A 90:1
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 1996 Activities: - ------------------------ The remaining reclamation costs have been budgeted for $440,000 of which $220,000 is the Company's share. Approximately $165,000 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 1996 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, 1995, the Company has paid $40,338 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. -15- 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. The Companies have paid $25,000 to date and are required to pay: $10,000 on March 31, 1996 (paid) and $10,000 on April 30, 1996; $40,000 on November 12, 1996; $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. 1995 Activities: - ---------------- Minimal work was performed on the San Simon Property in 1995. Planned 1996 Activities: - ------------------------ The Companies are seeking a joint venture partner to help exploit the San Simon Property and have had discussion with several major mining companies. If the Companies are unable to conclude any arrangements the Companies will commence work on the San Simon Property pursuant to the terms of its agreements. 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 1995 on these properties. Costs relating to these properties were mostly written off in prior years. As at Decenber 31, 1995 the Company is carrying these properties at $8,395. Item 3. LEGAL PROCEEDINGS ----------------- On March 10, 1994, Frank B. Hammond, John Pappas, and Dallas Schaff, individually and on behalf of themselves and all others similarly situated as a class, filed an action in the United States District Court for the District of South Carolina, Greenville Division, against North Lily Mining Company, International Mahogany Corp. and a number of other parties consisting primarily of former directors and officers. The Plaintiffs alleged that the August 6, 1993 -16- transaction involving the disposition of International Mahogany Corp. was wrongful. On October 27, 1994, the United States District Court in Greenville, South Carolina, dismissed the lawsuit (the "South Carolina Action"). On July 11, 1994, the Company and William E. Grafham filed a complaint in the United States District Court for the District of Colorado against Clarence Taylor, Dorothy Frank, The Bottom Line, Inc., Taylor Frank & Associates, Inc., John W. Brown III, and Century Capital Corp. of South Carolina. The complaint alleged that in connection with the South Carolina Action, the defendants solicited $250 from each shareholder of the Company and in connection with such solicitation, the defendants published false and defamatory information concerning the Company and Mr. Grafham. In March 1995, a judgment was entered against the defendents in the amount of $1,000,000. Subsequent thereto, the defendents (1) consented to the entry of a permanent injunction enjoining them from making and/or publishing false and defamatory statements concerning the Company, Mr. Grafham, the South Carolina Action, and this lawsuit and (2) agreed that they will not bring any action against Mr. Grafham or the Company that is identical to or similar in nature to the South Carolina Action. In exchange for this agreement, Mr. Grafham and the Company agreed not to pursue their claims for additional monetary damages. The Company considered that it was unlikely to realize on the judgment entered against the defendents. 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 vacation pay owing as significantly higher. The Company disputes Mr. Holcomb's computation. The Company also disputes any award for treble damages. Mr. Holcomb's motion for summary judgment regarding the applicability of the statute which would award treble damages was denied on April 3, 1995. A trial date of April 30, 1996 has been scheduled. During 1992, a dispute developed over a Chilean mining contractor's billings to the Company's affiliate in Chile, Compania Minera Phoenix SA ("Phoenix"). Subsequently, Phoenix and the mining contractor agreed to settle the dispute through arbitration and an agreement was reached with the mining contractor in February 1994. In settlement of all claims, Phoenix agreed to pay the mining contractor $180,000. To date payments of $120,000 have been made and the final instalment of $60,000 has not been paid as the Contractor has subsequently gone bankrupt. 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. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. -17- 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:
1995 High Low ---- ----- ----- First quarter $0.19 $0.12 Second quarter $0.25 $0.12 Third quarter $0.22 $0.12 Fourth quarter $0.16 $0.06 1994 High Low ---- ----- ----- First quarter $0.53 $0.38 Second quarter $0.34 $0.19 Third quarter $0.38 $0.12 Fourth quarter $0.25 $0.09
On March 21, 1996, the high bid price of the common stock was $0.125 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 March 21, 1996, there were 10,494 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. -18- Item 6. SELECTED FINANCIAL DATA -----------------------
1995 1994 1993 1992 1991 -------------- ---------------- ------------ ------------ ------------- Revenues - - $ 1,409,836 $ 3,194,916 $ 13,134,403 Loss from continuing operations before extraordinary items $ (995,782) $ (2,071,147) $(6,286,733) $(4,697,928) $(11,929,642) Loss before extraordinary items $ (995,782) $ (2,071,147) $(6,271,619) $(5,210,307) $(11,934,592) Net loss $ (612,062) $ (2,071,147) $(6,271,619) $(5,210,307) $(11,934,592) Loss per share from continuing operations before extraordinary items $ (0.04) $ (0.09) $ (0.27) $ (0.25) $ (0.63) Loss per share before extraordinary items $ (0.04) $ (0.09) $ (0.27) $ (0.25) $ (0.63) Net loss per share $ (0.03) $ (0.09) $ (0.27) $ (0.28) $ (0.63) Total assets from continuing operations $ 4,313,967 $ 5,105,048 $ 6,354,791 $21,049,824 $ 27,975,190 Total assets $ 4,313,967 $ 5,105,048 $ 6,354,791 $22,467,197 $ 31,739,931 Non-current liabilities $385,000/(2)/ $1,168,223/(3)/ - - - Book value per share/(1)/ $ 0.12 $ 0.13 $ 0.22 $ 0.23 $ 0.58 Cash dividends declared - - - - -
/(1)/ Based on the outstanding number of shares less treasury stock. /(2)/ Comprises of $165,000 of unpaid 1994 salaries and $220,000 unpaid 1995 salaries to officers. /(3)/ Includes $354,250 of indebtedness to be settled by the issuance of Company stock, at an ascribed price of $0.30 per share, and $165,000 of unpaid salaries to officers of the Company in which the officers have the option to accept common shares of the Company, at an ascribed price of $0.30 per share. 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. -19- 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 April 18, 1995 and August 22, 1995, on December 4, 1995 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 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. Closing of the Mahogany-Yuma Agreement is subject to regulatory approval, securing the water rights for the Tuina Project by April 30, 1996 (the "Water Rights Approval Date"), and the completion by Yuma of a financing of at least U.S. $1,500,000 within 30 days of the Water Rights Approval Date. If the Water Rights Approval Date does not occur as contemplated, Yuma may elect to terminate the Mahogany-Yuma Agreement and in such circumstances, the Company must reimburse Yuma for the Yuma Payments. The reimbursement would be payable by the Company from proceeds from the subsequent sale of its interest in the Tuina Project, or commercial production commences on the Tuina Project. If the Water Rights Approval Date occurs by May 31, 1996, and Yuma is unable to close the Yuma Purchase Agreement and Mahogany agrees to an extension of the closing, then Yuma shall lose the rights to reimbursement of 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. -20- The restructuring completed with Mahogany allows the Company to retain a substantial interest in the Tuina Project while eliminating the most significant debt of the Company. Disposition of International Mahogany Corp. By way of a letter agreement ("Letter Agreement") dated August 6, 1993, the Company agreed to sell its equity investment in Mahogany, which comprised an approximate 25% equity and 60% voting interest in Mahogany. Consideration received from the sale included: cash of $500,000; a non-interest bearing note in the amount of $500,000 ("Baja Note"); and 650,000 common shares of Baja Gold, Inc. ("Baja"), a Canadian publicly-traded precious metals exploration and development company listed on the Toronto Stock Exchange, and valued, for financial statement purposes, at $680,000, based on the August 6, 1993 closing stock market price of Baja. As a result of the Company selling its equity interest in Mahogany, Mahogany's financial results were no longer consolidated with those of the Company after the sale of Mahogany on August 6, 1993. In addition, under the terms of the Letter Agreement, Mr. Anton R. Hendriksz and Mr. Thomas L. Crom, previous Chairman of the Board and President of the Company, respectively, agreed to terminate their existing employment agreements and to provide consulting services to Mahogany and the Company for a 24-month period in consideration for certain future cash payments. The termination and consulting payments were to be shared equally by Mahogany and the Company. During 1993, the Company incurred charges of $212,500 as its share of the termination and consulting payments. As at December 31, 1994, $156,250 remained unpaid. During 1995, the Company issued 275,000 shares, at an ascribed value of $0.30 per share, in settlement of the $156,250 due to the former officers, recording a gain of $73,750 on settlement. Results of Operations The Company incurred a loss of $612,062 ($0.03 per share) for the year ended December 31, 1995, compared to losses of $2,071,147 ($0.09 per share) for 1994 and $6,271,619 ($0.27 per share) for 1993. There were no revenue, no depletion and depreciation charges and no cost of sales for 1995 or 1994. The lack of revenue, depletion and depreciation charges and cost of sales during 1995 and 1994 were 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. The Company, for the year ended 1993, had revenue of $1,409,836, depletion and depreciation costs of $504,415 and cost of sales of $2,490,296. On August 6, 1993, the Company sold its equity investment in Mahogany. The results of Mahogany's operations are no longer included with those of the Company's after its sale. There was a significant reduction in revenue in 1993, compared to prior years, due to the winding-down of operations at the Silver City Joint Venture and the decision to suspend operations at the Tuina mine. During 1993 the Silver City operation produced 737 ounces of gold and gold equivalent at Silver City which was sold at an average price of $318 per ounce. Prior to suspending operations at Tuina, 2.0 million pounds of copper precipitate was produced and sold at an average price of $0.58 per pound of precipitates during 1993. The Company does not anticipate any revenue during 1996 from its current properties. During 1993, the Company incurred costs of $517,303 at the Silver City property site. These costs included costs to produce the gold and gold equivalents for the year as well as site reclamation costs. At the Tuina property, the Company incurred costs of $1,972,993 to produce 2.0 million pounds of copper precipitate. General and administrative costs for 1995 was $842,547 compared to $862,735 in 1994 and $1,721,390 in 1993. During 1995 there was a reduction in the Company's share of general and administrative costs relating to the Tuina Project, -21- primarily due to Yuma's funding of these costs; however, the reduced costs were mainly offset by increased head office costs. As a result of the Company selling its equity investment in Mahogany in 1993, general and administrative costs for 1994 were reduced from prior years. With the change of Company management in August 1993, new Company management took certain steps to reduce ongoing Company general and administrative costs. Employment of head office staff in San Francisco was terminated. The Company's head office space in San Francisco was vacated and employment of staff in Santiago, Chile was reduced. The above measures, including the agreement with respect to the departure of the Company's previous Chairman and President, resulted in an aggregate charge to Company earnings in 1993 of $512,933 and is reflected as restructuring costs for in 1993. The Company maintains a small exploration department which has assumed the responsibility of reviewing and maintaining all Company properties. Costs for maintaining the Company's title and rights to resource properties are also included in exploration and property holding costs. During 1995, the Company spent $60,390 on exploration and property holding costs compared with $432,425 in 1994 and $430,089 in 1993. During 1995, the Company recorded a gain of $359,470 from the disposition of its mineral properties. Of this amount $309,970 arose from the exchange of a 9% ownership interest in Phoenix in settlement of $797,481 due to Mahogany. The gain has been recorded as an extraordinary item. During 1995, Company management reviewed the carrying values of its remaining mineral properties and determined to write off the remaining $71,397 carrying value and reverse 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. During 1993, properties with book values of $52,912 were abandoned, with a corresponding charge to earnings. In addition, in 1994 the Company recognized a $300,000 provision for diminution in value of the Nine Mile property. No provision was recognized in 1993. As a result of steadily declining cash balances and general reduction in interest rates for funds on deposit, the Company has earned substantially lower amounts of interest since 1993. Unless the Company sells for cash one of its resource properties, the Company is not expected to earn any significant amounts of interest in future years. Although the Company has experienced a decline in its cash balances since 1993, the Company has not relied on debt financing of any significance. Accordingly, the Company has not incurred any large interest charges for the years ended 1995 to 1993. During 1995, the Company realized $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. For the year ended 1993, the Company disposed of marketable securities with a book value of $939,521 for proceeds of $927,639 realizing a loss of $11,882. 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. During 1993, Company management wrote down the value of this mill equipment by $482,338. On May 6, 1993, the Company sold all its shares in a subsidiary, Dragon Mining Corp., realizing a gain of $729,547 on the sale. -22- On August 6, 1993, the Company agreed to sell its 25% equity-owned subsidiary, Mahogany. Consideration received included cash of $500,000, a note for $500,000 and 650,000 common shares of Baja, valued at $680,000. The Company recognized a loss of $2,928,595 in 1993 on the sale of Mahogany. During 1993, the Company's former subsidiary, Mahogany, decided to dispose of its oil and gas interests. Generally accepted accounting principles required that the Company's oil and gas interests be reported separately as discontinued operations in the Consolidated Statements of Operations. Effective June 3, 1993, Mahogany Minerals U.S. Inc., which held substantially all of the oil and gas interests, was sold for $1,200,000 resulting in a loss of $144,778. During 1993, prior to its disposal, the oil and gas operations generated earnings of $205,234. As a result the Company recorded, net of minority interest, total earnings of $15,114 related to discontinued operations. 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. 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 -23- 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 ($283,820 Cdn.) from Baja, secured by 150,000 common shares of Baja. The notes bear interest at 7% per annum. These funds were used to meet a portion of the Tuina operating costs. During 1995, the Company was advanced $74,532 (Cdn. $100,000) from a private corporation related to a director of the Company. The Company subsequently issued a promissory note and borrowed $97,167 (Cdn. $130,000) from a third party, secured by 90,000 common shares of Baja. The promissory note bears interest at 8% per annum. The funds from the promissory note were used to repay the advance from the related party and reduce Company liabilities. Subsequent to December 31, 1995, the Company sold 210,000 common shares of Baja for net proceeds of $338,576 (Cdn. $465,000). Substantially all of the funds were then used to retire all of the promissory notes and outstanding accrued interest, totalling $335,625. In order to improve the Company's liquidity position during 1995 the Company issued 1,455,835 shares, at an ascribed price of $0.30 per share, 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 $385,000, comprising of $165,000 of unpaid 1994 salaries ("1994 Compensation") and $220,000 of unpaid 1995 salaries ("1995 Compensation"), until January 2, 1997. The 1994 Compensation will be settled with cash, if available, or the issuance of shares of the Company, at an ascribed price of $0.30 per share. The officers have agreed to receive only a 75% portion of the 1995 Compensation in cash and the remaining 25% portion as deferred compensation. The cash portion will be paid only upon the Company completing a financing and the deferred compensation will be paid only in the event that the Company generates operating cash flow or completes a major financing. The deferred compensation may be either settled with cash or the issuance of the Company's common stock, at a predetermined price per share, at the officer's election. 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, 1995 the Company had a working capital deficiency of $486,629, a decrease of $4,253 from its working capital deficiency of $490,882 at December 31, 1994. The Company reports a use of funds of $742,073 from operating activities for the year ended December 31, 1995. This compares to a use of funds of $895,353 and $2,816,949 for 1994 and 1993, respectively. During the year ended December 31, 1995, the Company generated cash of $389,637 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. 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. During 1993, the Company was provided cash of $1,587,023 from investment activities. The Company received cash of $500,000 from the sale of its interest in Mahogany, $927,639 from the net sale of marketable securities and investments, $400,000 from the sale of its oil and gas operations and $199,178 in property payments and foreign tax recoveries. The Company used $46,249 to acquire equipment, $300,091 to acquire marketable -24- securities and at the time of disposition of Mahogany, Mahogany had cash of $93,439 which was no longer reflected in the consolidated results of the Company. For the year ended December 31, 1995, the Company was provided funds of $435,997 from financing activities compared to $559,595 provided in 1994 and $195,146 provided in 1993. In 1995, the Company issued $200,000 common stock pursuant to a private placement of 1,000,000 shares, received further advances of $163,546 from Mahogany and increased its promissory notes by $107,451. The Company advanced $35,000 in contemplation of its acquisition of Tamarine Ventures Ltd. In 1994, financing activities comprised of $358,258 in net advances by Mahogany and the issuance of $201,337 in promissory notes to Baja. For the year ended December 31, 1993, subsequent to the sale of Mahogany, the Company received funds of $195,146 in advances from Mahogany. 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. 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. 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 provides 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 -25- 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 is subject to a number of conditions including regulatory acceptance, approval by the shareholders of the Company and satisfactory results of due diligence investigations conducted by the Company and Tamarine. The Agreement contemplates that Tamarine will acquire other businesses and/or companies using shares of the Company's Common Stock and asset based financing. On November 24, 1995, Tamarine executed a Business Sale Agreement with Atlay Cat Sales and Services Pty. Ltd. of Queensland, Australia, to acquire its business, known as Cougar Catamarans. Cougar Catamarans manufactures and sells boats ranging in size from 7.5 to 35 meters, which include passenger ferries, pleasure boats, scenic tour boats, fishing boats, dive boats, and patrol boats. Sales are made to countries in the Pacific Rim: Japan, Hong Kong, China, Singapore, New Zealand, the United States, Papua New Guinea, Tahid, Noumea, and the Maldives. The purchase price is $2,500,000 plus the value at closing of inventory and work in process. Of the purchase price, $500,000 is to be made in shares of the Company's Common Stock. The Company is acquiring Tamarine in order to achieve near term operating cash flow, long term growth and access to opportunities in South East Asia. Tamarine management has expertise and relationships in the fast ferry industry and in the emerging economies of South East Asia. Entrance into the new industry of light weight aluminum fast ferries (for passengers and also for cargo) positions the Company in an expanding multi-billion dollar infrastructure industry with focus on the burgeoning economies of South East Asia, which are also producing major new mineral discoveries for the mining industry. 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 -------------------------------------------------- Not applicable. -26- PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- Information as to Directors for Item 10 is incorporated by reference to the material appearing under the caption "Election of Directors" in North Lily's Proxy Statement. For information as to Executive Officers, see Part I. The executive officers of the registrant are listed below: Executive Officers of the Registrant ------------------------------------
Executive Officer Name Age Since Position with the Registrant - --------------------------- --- ------------ -------------------------------- Stephen E. Flechner 53 1994 President and Chief Executive Officer and Director W. Gene Webb 57 1994 Executive Vice-President, Corporate Secretary and Director John R. Twohig 43 1996 Vice-President, Corporate Development Nick DeMare 41 1994 Principal Financial and Accounting Officer and Treasurer
No family relationships exist between the executive officers of the registrant. No arrangements or understandings exist between any executive officer and any other person appointed by which the executive officer was elected or appointed. Item 11. EXECUTIVE COMPENSATION ---------------------- Information for Item 11 is incorporated by reference to the material appearing under the captions "Election of Directors" and "Executive Compensation" in North Lily's Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- Information for Item 12 is incorporated by reference to the material appearing under the captions "Voting Securities", "Shareholdings of Management" and "Shareholdings of Certain Persons," in North Lily's Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Information for Item 13 is incorporated by reference to the material appearing under the caption "Transactions with Management" in North Lily's Proxy Statement. -27- 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 __, 1996) Consolidated Balance Sheets, (December 31, 1995 and 1994) Consolidated Statements of Operations, (December 31, 1995, 1994 and 1993) Consolidated Statements of Shareholders' Equity, (December 31, 1995, 1994 and 1993) Consolidated Statements of Cash Flows, (December 31, 1995, 1994 and 1993) Notes to Consolidated Financial Statements 2. Financial Statements Schedules: Schedule VIII - Valuation and Qualifying Accounts 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. - ------------ ------------------------------------------- -------- 2.1 Agreement and Plan of Share Exchange with Tamarine Ventures Ltd. N/A 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 10.7 Stephen E. Flechner Employment Agreement 27.0 Financial Data Schedule
-28- 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. (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. -29- 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 11, 1996 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 11, 1996 By: /s/Stephen E. Flechner ---------------------------------------- Stephen E. Flechner Chief Executive Officer, President and Director April 11, 1996 By: /s/W. Gene Webb ---------------------------------------- W. Gene Webb Executive Vice-President, Corporate Secretary and Director April 11, 1996 By: /s/Nick DeMare ---------------------------------------- Nick DeMare Principal Financial and Accounting Officer and Treasurer April 11, 1996 By: /s/Theodore E. Loud ---------------------------------------- Theodore E. Loud Director April 11, 1996 By: /s/John R. Twohig ---------------------------------------- John R. Twohig Vice-President Corporate Development and Director April 11, 1996 By: /s/Nigel Horsley ---------------------------------------- Nigel Horsley Director -30- EX-2.1 2 AGREEMENT & PLAN OF SHARE EXCHANGE Exhibit 2.1 AGREEMENT AND PLAN OF SHARE EXCHANGE This Agreement and Plan of Share Exchange is made this 17th day of November, 1995, by and among NORTH LILY MINING COMPANY, a Utah corporation ("NLMC"), TAMARINE VENTURES LTD., a company incorporated under the laws of the Province of British Columbia ("TVL"), and the persons identified on the signature page hereof (together, the "Sellers"), each a shareholder of TVL, and provides for a process by which the TVL will become a wholly-owned subsidiary of NLMC. WHEREAS, NLMC is a mining company resident in the State of Colorado whose Common Stock is listed for trading on NASDAQ; and WHEREAS, TVL has expertise in the marine and technology transfer industries and has various pending corporate opportunities including, but not limited to, the following: an option to acquire 100% interest of a workboat manufacturing company in Cornwall, Great Britain; an option to acquire a manufacturer of catamarans in Queensland, Australia; and a letter of intent to acquire a marine and mining engineering company and manufacturer of catamarans in Queensland, Australia; and WHEREAS, NLMC desires to acquire, on the terms and subject to the conditions and in the manner reflected below, the outstanding shares of capital stock of TVL; and WHEREAS, TVL believes that it is desirable and in the best interests of TVL that its business be combined with that of NLMC, and desires that the acquisition proposal of NLMC be made available to the shareholders of TVL; and WHEREAS, NLMC is proceeding with the contemplated transaction in reliance upon such support documentation agreements and representations provided and contemplated in this Agreement; and WHEREAS, NLMC and TVL hereby agree to provide the complete schedules as described herein on or before November 27, 1995; NOW, THEREFORE, the parties to this Agreement and Plan of Share Exchange do hereby agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the terms identified below in this Article I shall have the meanings indicated, unless a different and common meaning of the term is clearly indicated by the context, and variants and derivatives of the following terms shall have correlative meanings. To the extent that certain of the definitions set forth below suggest, indicate, or express agreements between or among parties to this Agreement, or contain representations or warranties or covenants of a party, the parties agree to the same by execution of this Agreement. The parties to this Agreement agree that agreements, representations, warranties, and covenants expressed in any part or provision of this Agreement shall for all purposes of this Agreement be treated in the same manner as other such agreements, representations, warranties, and covenants contained elsewhere in this Agreement, and the Article or Section of this Agreement within which such an agreement, representation, warranty, or covenant appears shall have no separate meaning or effect on the same. 1.1 Accumulated Funding Deficiency. An "accumulated funding deficiency," as defined in ERISA Section 302(a)(2) or the last two sentences of Section 412(a)(2) of the Code, or, in either case, successor provisions to such provisions adopted by amendments to ERISA or the Code, as the case may be, and including, in each case, other provisions of ERISA or the Code or such other law, modifying, amending, interpreting, or otherwise affecting the application of such provisions, either in general or as applied to the nature or circumstances of a particular Entity that is a party to, or is affected by or in involved in the Share Exchange and with respect to which Entity the use of the term in this Agreement, or in the particular location in this Agreement, is relevant. 1.2 Affiliate. When used with respect to a person, an "affiliate" of that person is a person Controlling, Controlled by, or under common Control with that person. 1.3 Agreement. This Agreement and Plan of Share Exchange including all of its schedules and exhibits and all other documents specifically referred to in this Agreement that have been or are to be delivered by a party to this Agreement to another such party in connection with the Share Exchange or this Agreement, and including all duly adopted amendments, modifications, and supplements to or of this Agreement and such schedules, exhibits, and other documents. 1.4 Audited Financial Statements. The balance sheet, income statement, statement of stockholders' equity, and statement of cash flows or, in each instance, equivalent statements as commonly provided to shareholders, as at December 31, 1994 and for the three years then ended, in the case of NLMC, and as at July 31, 1995 and for the period then ended, in the case of TVL, in each instance as reported on by Auditors. 1.5 Auditors. With respect to NLMC, Coopers & Lybrand, and with respect to TVL, Casson & Shpak, Chartered Accountants, in each instance, independent certified public accountants currently being retained for the purpose of auditing financial statements of that party. With respect to any report hereafter issued by Auditors, the term shall mean that firm of independent certified public accountants of national reputation that the Entity in question reasonably selects to serve as its auditors. 1.6 Balance Sheet. The most recent balance sheet included in the Audited Financial Statements or Unaudited Financial Statements, as the case may be. 1.7 Closing. The completion of the Share Exchange, to take place as described in Article II. 2 1.8 Code. The Internal Revenue Code of 1986, as amended and in effect at the time of execution of the Agreement. 1.9 Consideration. A total of 2,000,000 Post-Reverse Split shares of Common Stock of NLMC. 1.10 Control. Generally, the power to direct the management or affairs of an Entity. 1.11 Disclosure Document. The document delivered by NLMC to TVL and by TVL to NLMC containing certain disclosures as described in Article IV hereof. 1.12 Entity. A corporation, partnership, sole proprietorship, joint venture, or other form of organization formed for the conduct of a business whether active or passive. 1.13 ERISA. The Employee Retirement Income Security Act of 1974, as amended and in effect at the time of execution of this Agreement. 1.14 GAAP. Generally Accepted Accounting Principles, as in effect on the date of any statement, report, or determination that purports to be, or is required to be, prepared or made in accordance with GAAP. GAAP shall mean U.S. GAAP for NLMC, Canadian GAAP for TVL, and Australian GAAP for NQEA and Cougar. All references herein to financial statements prepared in accordance with GAAP shall mean in accordance with GAAP consistently applied throughout the periods to which reference is made. 1.15 Inventories. The stock of raw materials, work-in-process, and finished goods, including but not limited to finished goods purchased for resale, held by NLMC or TVL, as the case may be, for manufacturing, assembly, processing, finishing, sale, or resale to others (including other Subsidiaries or divisions), from time to time in the ordinary course of business in the form in which such inventories then are held or after manufacturing, assembling, finishing, processing, incorporating with other goods or items, refining, or the like. 1.16 Liabilities. At any point in time the obligations of a person or Entity, whether known or unknown, contingent or absolute, recorded on its books or not, arising or resulting in any way from facts, events, agreements, obligations, or occurrences that existed or transpired at a prior point in time. 1.17 Local Counsel. Special counsel retained by either Counsel to NLMC or Counsel to TVL, as the case may be, to advise as to certain matters of state law or local law in states or localities in which Counsel to NLMC, or Counsel to TVL, as the case may be, desires such Local Counsel. In all instances, due care shall be exercised in the selection of Local Counsel. 1.18 Multiemployer Plan. A "multiemployer plan," as defined in ERISA Section 3(37) or Section 414(f) of the Code, or, in either case, successor provisions to such provisions adopted by 3 amendments to ERISA or the Code, as the case may be, and including, in each case, other provisions of ERISA, of the Code, or of other law, and regulations adopted under ERISA or the Code or such other law, modifying, amending, interpreting, or otherwise affecting the application of such provisions, either in general or as applied to the nature or circumstances of a particular Entity that is a party to, or is affected by or is involved in the Share Exchange, and with respect to which Entity the use of the term in this Agreement, or in the particular location in this Agreement, is relevant. 1.19 NLMC. North Lily Mining Company, a Utah corporation, which, under the terms of this Agreement, is acquiring all of the outstanding capital stock of TVL. 1.20 Pension Plan. A "pension plan" or "employee pension benefit plan," as defined in Section 3(2) of ERISA or successor provisions to such provision adopted by amendments to ERISA and including other provisions of ERISA or of other law, and regulations adopted under ERISA or such other law, modifying, amending, interpreting, or otherwise affecting the application of such provision, either in general or as applied to the nature or circumstances of a particular Entity that is a party to, or is affected by or is involved in the Share Exchange and with respect to which Entity the use of the term in this Agreement, or in the particular location in this Agreement, is relevant. 1.21 Plan Termination. A termination of a Pension Plan, whether partial or complete, within the meaning of Title IV of ERISA. 1.22 Post-Reverse Split. Subsequent to the proposed 1-for-10 reverse stock split of NLMC. 1.23 Prohibited Transaction. A "prohibited transaction," as defined in Section 406 of ERISA or Section 4975(c) of the Code, or, in either case, successor provisions to such provisions adopted by amendments to ERISA or the Code, as the case may be, and including, in each case, other provisions of ERISA, of the Code or of other law, and regulations adopted under ERISA or the Code or such other law, modifying, amending, interpreting, or otherwise affecting the application of such provisions, either in general or as applied to the nature or circumstances of a particular Entity that is a party to, or is affected by or is involved in the Share Exchange and with respect to which Entity the use of the term in this Agreement, or in the particular location in this Agreement, is relevant. 1.24 Proprietary Right. Trade secrets, copyrights, patents, trademarks, service marks, customer lists, and all similar types of intangible property developed, created, or owned by NLMC or TVL, or used by NLMC or TVL in connection with its business, whether or not the same are entitled to legal protection. 1.25 Receivable. Accounts receivable, notes receivable, and other obligations appearing as assets on the books of NLMC or TVL, and customarily reflected as assets in balance sheets of entities prepared in accordance with GAAP, indicating moneys owed to the entity. 4 1.26 Reportable Event. A "reportable event," as defined in Section 4043(b) of ERISA or successor provisions to such provision adopted by amendments to ERISA, and including other provisions of ERISA or of other law, and regulations adopted under ERISA or such other law, modifying, amending, interpreting, or otherwise affecting the application of such provision, either in general or as applied to the nature or circumstances of a particular Entity that is a party to, or is affected by or is involved in the Share Exchange and with respect to which Entity the use of the term in this Agreement, or in the particular location in this Agreement, is relevant. 1.27 Sellers. The shareholders of TVL who are, pursuant to this Agreement, agreeing to sell their common shares of TVL to NLMC, as identified on the signature page hereto. 1.28 Share Exchange. The exchange of common shares of TVL by NLMC from the Sellers for shares of NLMC Common Stock, as provided in Article II of this Agreement. 1.29 Subsequent Transactions. The completion of the acquisition of Atlay Cats Sales & Service Pty. Limited, doing business as Cougar Catamarans ("Cougar") and the acquisition of NQEA Australia Pty. Ltd. ("NQEA"), to take place as described in Article III. 1.30 Subsidiary. With respect to any Entity, another Entity of which fifty percent (50%) or more of the effective voting power, or the effective power to elect a majority of the board of directors or similar governing body, or fifty percent (50%) or more of the true equity interest, is owned by such first Entity, directly or indirectly. 1.31 TVL. Tamarine Ventures Ltd., a company incorporated under the laws of the Province of British Columbia, which will, pursuant to the various transactions described in this Agreement, become a wholly-owned subsidiary of NLMC. TVL shall include Tamarine Ventures Ltd. And each of its Subsidiaries, both separately and together as a consolidated whole, unless and except to the extent expressly indicated otherwise. 1.32 Unaudited Financial Statements. The balance sheet, income statement, statement of stockholders' equity, and statement of cash flows or, in each instance, equivalent statements as commonly provided to shareholders, as at September 30, 1995 and for the nine months then ended, in the case of NLMC, and as at _______, 19__ and for the ___ months then ended, in the case of TVL, in each instance prepared in accordance with GAAP. 1.33 Welfare Plan. A "welfare plan" or an "employee welfare benefit plan," as defined in Section 3(1) of ERISA or successor provisions to such provision adopted by amendments to ERISA and including other provisions of ERISA or of other law, and regulations adopted under ERISA or such other law, modifying, amending, interpreting, or otherwise affecting the application of such provision, either in general or as applied to the nature or circumstances of a particular Entity that is a party to, or is affected by or is involved in the Share Exchange and with respect to which Entity the use of the term in this Agreement, or in the particular location in this Agreement, is relevant. 5 ARTICLE II SHARE EXCHANGE 2.1 Share Exchange. On the Closing Date, and at the Closing Time, subject in all instances to each of the terms, conditions, provisions, and limitations contained in this Agreement, the Sellers shall sell, transfer, convey, and assign to NLMC, free and clear of any and all liens and charges, and NLMC shall acquire from the Sellers, their common shares without par value, of TVL, as identified in Schedule 2.1 hereto, comprising, as to each such Seller, his, her, or its entire ownership of equity securities of TVL, in exchange for the Consideration, as described herein, payable for each common share of TVL held by the Sellers. 2.2 Consideration. Each of the Sellers shall be entitled to receive, on and subject to each of the terms, conditions, and provisions of this Agreement, one (1) Post-Reverse Split share of Common Stock of NLMC for each two (2) common shares of TVL owned by the Seller. 2.3 Stock Legends. Certificates representing shares of Common Stock of NLMC shall bear a legend restricting transfer of the shares of the Common Stock represented by such stock certificate in substantially the form set forth below: "The Shares represented by this certificate have been offered and sold in an "offshore transaction" in reliance upon Regulation S as promulgated by the Securities and Exchange Commission. Accordingly, the shares represented by this certificate have not been registered under the Securities Act of 1933 (the "Act") and may not be offered for sale, sold, or otherwise transferred in the United States or to a "U.S. Person" (as defined under Regulation S) except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 2.4 Closing. The Closing hereunder shall take place at the offices of NLMC in Denver, Colorado or at such other place as NLMC and TVL may agree upon, on the Closing Date. 2.5 Parties to the Agreement. By executing this Agreement, each of the Sellers agrees to be bound by it and by any amendment, modification, or change in or to it or any of its provisions that is accepted by Sellers holding a majority of all of the shares of Common Stock of TVL held by all of the Sellers in the aggregate; provided, however, that no such amendment, modification, or change shall treat any shareholder who does not consent thereto less favorably than it treats any shareholder who does consent thereto. 2.6 Management of NLMC. Upon the Closing hereunder, the board of directors of NLMC shall be comprised of Stephen E. Flechner, W. Gene Webb, William C. Bleimeister, John R. Twohig, John B. Holland, and Nigel Horsley. The officers shall be as follows: Stephen E. Flechner, Chairman; John W. Twohig, President; W. Gene Webb, Secretary; and Nigel Horsley, Executive Vice President. 6 ARTICLE III SUBSEQUENT TRANSACTIONS 3.1 Cougar Acquisition. Pursuant to the terms of the [name of document], TVL has agreed to acquire the business and assets of Atlay Sales and Services Pty. Ltd. and Cougar Catamarans Ltd. ("Cougar"), incorporated in the State of Queensland, Australia. It is anticipated that this acquisition will be completed by NLMC issuing such number of Post-Reverse Split shares of NLMC Common Stock that will upon closing of trading at the closing date equal US$250,000 and by the company resulting from the Share Exchange (the "Merged Company") remitting cash in the amount of US$2,250,000, in four quarterly payments. 3.2 NQEA Acquisition. Pursuant to the terms of an anticipated Share Purchase Agreement, TVL has agreed to acquire NQEA Australia Pty. Ltd., a company incorporated in the State of Queensland, Australia. It is anticipated that this acquisition will be accomplished by NLMC and/or TV remitting cash payment in the amount of $200,000 (Australian) upon signing the Share Purchase Agreement and a further $800,000 (Australian) within 30 days, and the balance of $24,000,000 (Australian) upon closing 120 days after signing. 3.3 Additional Consideration. Upon achieving $4.7 million (Australian) in net profits after tax within the Merged Company group for distribution as required by the Board of Directors of the NASDAQ-listed Merged Company, the Sellers shall be entitled to receive, on and subject to each of the terms, conditions, and provisions of this Agreement, a total of 2,000,000 Post-Reverse Split shares of Common Stock of NLMC. Each of the Sellers shall be entitled to receive, on and subject to each of the terms, conditions, and provisions of this Agreement, one (1) Post-Reverse Split share of Common Stock of NLMC for each two (2) common shares of TVL formerly owned by the Seller. The shares so issued shall have the same restrictive legend set forth in Section 2.3 hereof. ARTICLE IV REPRESENTATIONS AND WARRANTIES The following representations and warranties are hereby made (i) by NLMC to the Sellers with respect to NLMC and (ii) by TVL to NLMC with respect to TVL: 4.1 Organization and Qualification. It is, and each of its Subsidiaries is, a corporation duly organized, validly existing, and in good standing under the laws of its respective jurisdiction of incorporation and each has the requisite corporate power and authority to carry on its business as it is now being conducted. Each of it and its Subsidiaries is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned or leased by it, or the nature of its activities, is such that qualification as a foreign corporation in that jurisdiction is required by law. 7 4.2 Capitalization. (1) NLMC. The authorized capital stock of NLMC consists of 30,000,000 shares of common stock, $.10 par value. There is no other capital stock authorized for issuance. As of the date of NLMC's Unaudited Balance Sheet, 23,551,012 shares of common stock were validly issued and outstanding, fully paid, and nonassessable, no shares were reserved for issuance, nor were there outstanding any options, warrants, convertible instruments, or other rights, agreements, or commitments to acquired common stock of NLMC, except as fully and completely described on Schedule 4.2(1) hereto. Since the date of NLMC's Unaudited Balance Sheet, no shares of NLMC's capital stock, or options, warrants, or other rights, agreements, or commitments (contingent or otherwise) obligating NLMC or any of its Subsidiaries to issue shares of capital stock, have been executed or issued. (2) TVL. The authorized capital stock of TVL consists of 100,000,000 common shares, without par value. There is no other capital stock authorized for issuance. As of the date of TVL's Unaudited Balance Sheet, 11,500,000 common shares were validly issued and outstanding, fully paid, and nonassessable, no shares were reserved for issuance, nor were there outstanding any options, warrants, convertible instruments, or other rights, agreements, or commitments to acquired common stock of TVL, except as fully and completely described on Schedule 4.2(2) hereto. Since the date of TVL's Unaudited Balance Sheet, no shares of TVL's capital stock, or options, warrants, or other rights, agreements, or commitments (contingent or otherwise) obligating TVL or any of its Subsidiaries to issue shares of capital stock, have been executed or issued. 4.3 Authority Relative to this Agreement. This Agreement has been duly and validly executed and delivered by it and constitutes a valid and binding agreement of it and is enforceable in accordance with its terms. It has all requisite corporate power and authority to enter into this Agreement and to carry out the Share Exchange contemplated hereby, and its doing so has been duly and sufficiently authorized, subject only to shareholder approval and governmental regulatory approvals as and to the extent specifically set forth elsewhere in this Agreement. 4.4 Absence of Breach; No Consents. The execution, delivery, and performance of this Agreement, and the performance by it of its obligations hereunder, do not, except as disclosed in Schedule 4.4, (1) conflict with or result in a breach of any of the provisions of its Articles of Incorporation or Bylaws or of any of its Subsidiaries; (2) contravene any law, ordinance, rule, or regulation of any State or Commonwealth or political subdivision of either or of the United States or of any applicable foreign jurisdiction, or contravene any order, writ, judgment, injunction, decree, determination, or award of any court or other authority having jurisdiction, or cause the suspension or revocation of any authorization, consent, approval, or license, presently in effect, which affects or binds, it or any of its Subsidiaries or any of its or their material properties, except in any such case where such contravention will not have a material adverse effect on its or its Subsidiaries' business, 8 condition (financial or otherwise), operations, or prospects, taken as a whole, and will not have a material adverse effect on the validity of this Agreement or on the validity of the consummation of the Share Exchange; (3) conflict with or result in a material breach of or default under any material indenture or loan or credit agreement or any other material agreement or instrument to which it or any of its Subsidiaries is a party or by which it or they or any of its or their material properties may be affected or bound; (4) other than consents disclosed in its Disclosure Document, require the authorization, consent, approval, or license of any third party; or (5) constitute grounds for the loss or suspension of any permits, licenses, or other authorizations used in its business. 4.5 Brokers. No broker, finder, or investment banker is entitled to any brokerage, finder's, or other fee or commission in connection with this Agreement or the Share Exchange or any related transaction based upon any agreements, written or oral, made by or on behalf of it or any of its Subsidiaries. It does not have any obligation to pay finder's or broker's fees or commissions in connection with the exercise of options to renew or extend real estate leases to which it is a party. 4.6 Absence of Material Differences from Disclosure Document. Except as specifically disclosed in its Disclosure Document: (1) No Undisclosed Liabilities. Neither it nor any of its Subsidiaries has any Liabilities which are not adequately reflected or reserved against on the face of its Unaudited Balance Sheet, except Liabilities incurred since the date of its Unaudited Balance Sheet in the ordinary course of business and consistent with past practice. Without limiting the foregoing, (a) there are no unpaid leasehold improvements at any of its facilities or locations for which it is or will be responsible, and (b) there are no deferred rents due to lessors at or with respect to any of such facilities or locations, and (c) its Disclosure Document sets forth, as a part thereof, each of its Liabilities in an amount in excess of $_____ and the aggregate amount of Liabilities to each person to whom such aggregate exceeds $_____. (2) No Material Adverse Change. Since the date of its Unaudited Balance Sheet, other than as contemplated or caused by this Agreement, there has not been (a) any material adverse change in its business, condition (financial or otherwise), operations, or prospects; (b) any damage, destruction, or loss, whether covered by insurance or not, having a material adverse effect on its business, condition (financial or otherwise), operations, or prospects; (c) any entry into or termination of any material commitment, contract, agreement, or transaction (including without limitation, any material borrowing or capital expenditure or sale or other disposition of any material asset or assets) by it, other than this Agreement and agreements executed in the ordinary course of business; (d) any redemption, repurchase, or other acquisition for value of its capital stock by it, or any issuance of the capital stock of it or any of its Subsidiaries or of securities convertible into or rights to acquire any such capital stock or any dividend or distribution declared, set aside or paid on its capital stock; (e) any transfer by it of, or right granted by it under, any material lease, 9 license, agreement, patent, trademark, trade name, or copyright; (f) any sale or other disposition of any asset of it or of any of its Subsidiaries, or any mortgage, pledge, or imposition of any lien or other encumbrance on any asset of it or of any of its Subsidiaries, other than in the ordinary course of business, or any agreement relating to any of the foregoing; or (g) any default or breach by it or any of its Subsidiaries in any material respect under any contract, license, or permit. Since the date of its Unaudited Balance Sheet, it and its Subsidiaries have conducted their businesses only in the ordinary and usual course, and, without limiting the foregoing, no changes have been made in (a) executive compensation levels; (b) the manner in which other employees of it and its Subsidiaries are compensated; (c) supplemental benefits provided to any such executives or other employees; or (d) inventory levels in relation to sales levels, except, in any such case, in the ordinary course of business and, in any event, without material adverse effect on its business, condition (financial or otherwise), operations, or prospects. (3) Taxes. It and its Subsidiaries have properly filed or caused to be filed all federal, state, local, and foreign income and other tax returns, reports, and declarations that are required by applicable law to be filed by them, and have paid, or made full and adequate provision for the payment of, all federal, state, local, and foreign income and other taxes properly for the periods covered by such returns, reports, and declarations, except such taxes, if any, as are adequately reserved against in its Unaudited Balance Sheet. (4) Litigation. (a) No material investigation or review by any governmental entity with respect to it or any of its Subsidiaries is pending or, to the best of its knowledge, threatened (other than inspections and reviews customarily made of businesses such as its business), nor has any governmental entity indicated to it an intention to conduct the same; and (b) there is no action, suit, or proceeding pending or, to the best of its knowledge, threatened against or affecting it or its Subsidiaries at law or in equity, or before any federal, state, municipal, or other governmental department, commission, board, bureau, agency, or instrumentality. Its Disclosure Document includes a brief description of each litigation matter included therein, except claims (including punitive damage claims, if any) for amounts of less than $150,000. (5) Employees. There are, except as disclosed in its Disclosure Document, no collective bargaining, bonus, profit sharing, compensation, or other plans, agreements, trusts, funds, or arrangements maintained by it or any of its Subsidiaries for the benefit of their directors, officers, or employees, and there are no employment, consulting, severance, or indemnification arrangements, agreements, or understandings between it or any of its Subsidiaries, on the one hand, and any current or former directors, officers, or other employees (or Affiliates thereof) of it or any of its Subsidiaries, on the other hand. Its Disclosure Document identifies each person whose income from it in the fiscal year ended on the date of its Audited Balance Sheet exceeded, or 10 whose income from it in the fiscal year begun immediately thereafter is at a rate exceeding, $____ per annum, and describes each contractual arrangement for the employment or compensation of each such person. It is not, and following the Closing will not be, bound by any express or implied contract or agreement to employ, directly or as a consultant or otherwise, any person for any specific period of time or until any specific age except as specified in agreements in writing identified in its Disclosure Document or executed pursuant to the provisions hereof, if any. (6) Compliance with Laws. Each of it and its Subsidiaries is in substantial compliance with all, and has received no notice of any violation of any, laws or regulations applicable to its operations, including, without limitation, the use of premises occupied by it, or with respect to which compliance is a condition of engaging in any aspect of the business of it and its Subsidiaries and each has all permits, licenses, zoning rights, and other governmental authorizations necessary to conduct its business as presently conducted. (7) Ownership of Assets. Each of it and its Subsidiaries has, except as disclosed in its Disclosure Document, good, marketable, and insurable title, or valid, effective, and continuing leasehold rights in the case of leased property, to all real property (as to which, in the case of owned property, such title is fee simple) and all personal property owned or leased by it or used by it in the conduct of its business in such a manner as to create the appearance or reasonable expectation that the same is owned or leased by it, free and clear of all liens, claims, encumbrances, and charges, except liens for taxes not yet due and minor imperfections of title and encumbrances, if any, which singly and in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or materially impair the use thereof. It does not know of any potential action by any party, governmental or other, and no proceedings with respect thereto have been instituted of which it has notice, that would materially affect its ability to use and to utilize each of such assets in its business or in the business of its Subsidiaries. It has received no notices from any mortgagee regarding properties leased by it. Its Disclosure Document contains a detailed listing of all assets that consist of (a) accounts receivable as provided in clause (13) below; (b) miscellaneous current assets in excess of $_____; (c) prepaid expenses in excess of $_____; (d) real property; and (e) gross aggregate additions for each of the past four years by location of (i) buildings and improvements, (ii) furniture and fixtures, (iii) leasehold improvements, and (iv) automobiles and trucks. (8) Proprietary Rights. It and its Subsidiaries among them possess full ownership of, or adequate and enforceable long-term licenses or other rights to use (without payment), all Proprietary Rights owned by or registered in the name of it or any of its Subsidiaries or used in the business of it or any of its Subsidiaries; it has not received any notice of conflict which asserts the rights of others with respect thereto; and each 11 of it and its Subsidiaries has in all material respects performed all of the obligations required to be performed by it, and is not in default in any material respect, under any agreement relating to any Proprietary Right. (9) Subsidiaries. All of its Subsidiaries (if any), direct or indirect, are identified in its Disclosure Document, it has no other Subsidiaries, and neither it nor any of its Subsidiaries described in its Disclosure Document is a partner of or joint venturer with any other person or Entity except as therein described. All of the issued and outstanding shares of capital stock of each Subsidiary are owned of record and beneficially by it or another Subsidiary of it, are validly issued, fully paid and nonassessable and are owned free and clear of all liens, charges, claims, pledges, security interests, equities, encumbrances, reservations, or contractual restrictions on transfer of any nature whatsoever; and no Subsidiary has outstanding any securities, warrants, options, or other rights convertible into or exchangeable or exercisable for any shares of its capital stock, and there are no contracts, commitments, understandings, arrangements, or restrictions by which any Subsidiary is bound to issue shares of its capital stock. (10) Trade Names. Its Disclosure Document identifies each trade name, fictitious business name, or other similar name under which it has conducted any part of the its business or in which it has utilized any of its assets during the ten (10) years preceding the date of this Agreement. (11) Employee Benefit Plans. Except as disclosed in its Disclosure Document: (a) Neither it nor any of its Subsidiaries maintains or contributes to any Pension Plan or any Welfare Plan, nor is it or any of its Subsidiaries presently, nor has it been within the last six years, a participating employer in any Multiemployer Plan. (b) All Pension Plans and Welfare Plans of it or its Subsidiaries have been administered in substantial compliance with their terms, ERISA, and, where applicable, the Code. The IRS has issued a favorable determination letter with respect to the qualification of each such Pension Plan and the exemption of any corresponding trust. A copy of the most recent determination letter for each Pension Plan has been furnished to the other party, and nothing has occurred since the date of any such determination letter that could cause the relevant Pension Plan or trust to lose such qualification or exemption. (c) With respect to each Pension Plan and each Welfare Plan: (i) there is no fact, including, without limitation, any Reportable Event, that exists that would constitute grounds for termination of such Plan or for the appointment by the appropriate United States District Court of a trustee to administer such plan, 12 in each case as contemplated by ERISA; (ii) neither it nor any Subsidiary nor any fiduciary, trustee, or administrator of any Pension Plan or Welfare Plan, has engaged in a Prohibited Transaction that could subject it or any Subsidiary to any material tax or any material penalty imposed by ERISA or the Code; and (iii) there is no material Accumulated Funding Deficiency with respect to any Pension Plan, whether or not waived. (d) There has been no Plan Termination that has occurred during the five-year period ending on the date hereof. (e) Neither it nor any Subsidiary has any knowledge of any material liability being incurred under Title IV of ERISA by it or any Subsidiary with respect to any Pension Plan maintained by a trade or business (whether or not incorporated) which is under common control with, or part of a controlled group of corporations with, it, within the meaning of Sections 414(b) or (c) of the Code. (f) No Welfare Plan is funded with a trust or other funding vehicle, other than insurance policies. (12) Facilities. Its facilities are (as to physical plant and structure) structurally sound and none of its facilities, nor any of the vehicles or other equipment used by it in connection with its business, has any material defects and all of them are in all material respects in good operating condition and repair, and are adequate for the uses to which they are being put; none of such its facilities, vehicles, or other equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs which are not material in nature or cost. It is not in breach, violation, or default of any lease with respect to or as a result of which the other party (whether lessor, lessee, sublessor or sublessee) thereto has the right to terminate the same, and it has not received notice of any claim or assertion that it is or may be in any such breach, violation, or default. (13) Accounts Receivable. All of its accounts receivable, whether or not reflected in its Audited and Unaudited Balance Sheets, represent transactions in the ordinary course of business, and are current and collectible net of any reserves shown on such Balance Sheets (which reserves are adequate and were calculated consistent with past practice). Its Disclosure Document specifically identifies (a) the aging of Receivables, (b) each Receivable in excess of $____, (c) each Receivable in an amount in excess of $____ that is more than ninety (90) days past due, and (d) each Receivable from a person or Entity from whom the aggregate of such Receivables exceeds $_____. 13 (14) Inventories. All of its Inventories, whether or not reflected in its Audited and Unaudited Balance Sheets, are of a quality and quantity usable and salable in the ordinary course of business, except for obsolete items and items of below standard quality, all of which, in the aggregate, are immaterial in amount. Items included in such Inventories are carried on its books, and are valued on its Audited and Unaudited Balance Sheets, at the lower of cost or market and, in any event, at not greater than their net realizable value, on a item- by-item basis, after appropriate deduction for costs of completion, marketing costs, transportation expense, and allocation of overhead. (15) Contracts. Except as identified in its Disclosure Document, it has no contracts, agreements, or understanding, whether express or implied, written or verbal, provided, however, that it may have, and its Disclosure Document need not identify, any such contracts, agreements, or understanding that fall into one of the following categories: (a) those that are terminable on notice of less than thirty-two (32) days and do not involve payments or obligations of more than $____ in any period or (b) those that involve aggregate payments or obligations remaining unpaid as of the date of the Agreement of less than $____. Its Disclosure Document shall, however, identify the aggregate amount of payment obligations remaining unpaid as of the date of the Agreement of all contracts exempt from disclosure by (b) above. Its Disclosure Document includes a brief summary of each such contract, agreement, or understanding identified therein. Without in any respect limiting the foregoing, its Disclosure Document contains a description of all leases of properties by it, including all amendments, supplements, extensions, and modifications thereof, identifying, inter alia, the date each such document was executed and its effective period. It is not a party to any executory contract to sell or transfer any part of any of its leasehold interests. True and accurate copies of all leases, and of all amendment, supplements, extensions, and modifications thereof, have heretofore been delivered to the other party by it. (16) Accounts Payable. The accounts payable reflected on its Audited Balance Sheet do, and those reflected in the most recent balance sheet included in the Unaudited Financial Statements do, and those reflected on its books at the time of the Closing will, reflect all amounts owed by it in respect of trade accounts due and other Payable, and its actual Liability in respect of such obligations was not, and will not be, on any of such dates, in excess of the amounts so reflected on the Balance Sheets, or its books, as the case may be. (17) Labor Matters. Except as set forth in its Disclosure Document, there are not activities or controversies, including, without limitation, any labor organizing activities, election petitions or proceedings, proceedings preparatory thereto, unfair labor practice complaints, labor strikes, disputes, slowdowns, or work stoppages, 14 pending or, to the best of its knowledge, threatened, between it or any of its Subsidiaries and any of its or their employees. (18) Insurance. It and its Subsidiaries have insurance policies in full force and effect which provide for coverages which are usual and customary in the business of it and its Subsidiaries as to amount and scope, and are adequate to protect it against any reasonably foreseeable risk of loss, including business interruption. Its Disclosure Document identifies each of its insurance policies, indicating the carrier, amount of coverage, annual premium, risks covered, placing broker or agent, and other relevant information as to each. It has not, within the past three (3) years, received any notice of cancellation of any insurance agreement. (19) Title to and Utilization of Real Properties. Except as disclosed in its Disclosure Document, it owns fee, simple, insured title to all real property identified herein or in any document referred to herein as owned by it, and has the unbridled right to use the same, and is not aware of any claim, notice, or threat to the effect that its right to own and use such property is subject in any way to any challenge, claim, assertion of rights, proceedings toward condemnation, or confiscation, in whole or in part, or is otherwise subject to challenge. Each parcel of real property owned or leased by it is free of any and all hazardous wastes, toxic substances, or other types of contamination or matters of environmental concern, and it and its Subsidiaries are not subject to any Liability resulting from or related to any such wastes, substances, contaminants, or matters of environmental concern in connection with any such property. It has, in conjunction with acquiring ownership of, or any leasehold interest in, any parcel of real property, (a) caused an audit and examination to be made as to the existence of any hazardous wastes, toxic substances, or other types of contamination or matters of environmental concern affecting each such property, which examination indicated that such property was free of any such wastes, substances, contaminants, or other matters of environmental concern, and it has delivered a copy of the report of such audit and examination to the other party; and (b) obtained an appropriate policy of title insurance insuring the interest of it or its Subsidiaries (as the case may be) in such property, which insurance policy was not subject to any exceptions not reasonably acceptable in the ordinary course of business, and a copy of which has been delivered to the other party. 4.7 Full Disclosure. The documents, certificates, and other writings furnished or to be furnished by or on behalf of it to the other party pursuant to the provisions of this Agreement, taken together in the aggregate, do not and will not contain any untrue statement of a material fact, or omit to state any material fact, or omit to state any material fact necessary to make the statements made, in the light of the circumstances under which they are made, not misleading. 4.8 Actions Since Balance Sheet. Except as set forth on its Disclosure Document, since the date of its Unaudited Balance Sheet, it has taken no actions that would be prohibited under the 15 provisions of this Agreement (without the prior consent of the other party) after the date of this Agreement. ARTICLE V SPECIFIC REPRESENTATIONS AND WARRANTIES OF NLMC NLMC hereby represents and warrants to the Sellers: 5.1 Disclosure. NLMC has heretofore delivered to NLMC and to the Sellers each of the following: (1) Annual report of NLMC on Form 10-K as filed with the Securities and Exchange Commission (the "Securities and Exchange Commission") for NLMC's fiscal year ended December 31, 1994; and (2) Quarterly reports of NLMC on Form 10-Q as filed with the SEC for each of the first three fiscal quarters of 1995, and all other reports of NLMC filed with the SEC, to the extent that such reports have been filed with the SEC after the filing of Form 10-K referred to in (1) above and prior to the execution hereof. Each of such documents, at the time it was prepared, and all of such documents taken together, did not and do not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. All of the financial statements contained in the foregoing documents were prepared from the books and records of NLMC. The Audited Financial Statements were prepared in accordance with GAAP, and fairly and accurately reflect the financial position and condition of NLMC as at the dates and for the periods indicated. The Unaudited Financial Statements were prepared in a manner not inconsistent with the basis of presentation used in the Audited Financial Statements, and fairly present the financial position and condition of NLMC as at and for the periods indicated, subject to normal year- end adjustments, none of which will be material. 5.2 Status of NLMC. NLMC is an issuer which has a class of securities registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and has filed all the material required to be filed pursuant to Section 13(a) or 15(d) of that Act for a period of at least 12 months immediately preceding this proposed Share Exchange made in reliance upon Regulation S. 5.3 No Directed Selling Efforts. NLMC represents and warrants that no directed selling efforts (as that term is defined Rule 901 of Regulation S promulgated under the Act) are being or will be made in the United States by the NLMC, an Affiliate, or any person acting on his behalf. 16 ARTICLE VI SPECIFIC REPRESENTATIONS AND WARRANTIES OF TVL TVL represents and warrants to NLMC as follows: 6.1 Financial Statements. TVL has heretofore delivered to NLMC the following: (1) The Audited Financial Statements of TVL; (2) The Unaudited Financial Statements of TVL; (3) Audited Financial Statements of NQEA; (4) Unaudited Financial Statements of Cougar; and (5) Projections, pertaining to the acquisition of Port Isaac, Cougar, and NQEA. All of the historical financial statements contained in such documents were prepared from the books and records of TVL. The Audited Financial Statements were prepared in accordance with GAAP, and fairly and accurately reflect the financial position and condition of TVL as at the dates and for the periods indicated. Without limiting the foregoing, at the date of TVL's Audited Balance Sheets, TVL owned each of the assets included in preparation of TVL's Audited and Unaudited Balance Sheet, and the valuation of such assets in TVL's Audited Balance Sheet is not more than their fair saleable value (on an item by item basis) at that date; and TVL had no Liabilities other than those included in TVL's Audited Balance Sheet, nor any Liabilities in amounts in excess of the amounts included for them in TVL's Audited Balance Sheet. The Unaudited Financial Statements included in the documents described above in this Section were prepared in a manner consistent with the basis of presentation used in the Audited Financial Statements, and fairly present the financial position and condition of TVL as at and for the periods indicated, subject to normal year- end adjustments, none of which will be material. The Projections reasonably reflect the results of operations that TVL expects it will achieve absent extraordinary events or unusual conditions of which it is not presently on notice. From the date hereof through the Closing Date, TVL will continue to prepare financial statements on the same basis that it has done so in the past, will promptly deliver the same to NLMC, and agrees that from and after such delivery the foregoing representations will be applicable to each financial statement so prepared and delivered. 6.2 Acquisition of Port Isaac - Offshore 105 and Offshore 125. It has performed fully the asset purchase agreement with Rod Baker, the proprietor of an unincorporated business known as Port Isaac Workboats ("Port Isaac"), thereby acquiring limited manufacturing, marketing, and distribution rights to two products produced by Port Isaac (with the exception of such rights as applicable within the European Union; related rights and interests to trade and brand names, registered and unregistered trademarks, design, and other intellectual property of Port Isaac; and certain molds, templates, drawings, and related materials, all pertaining to the "Offshore 105" and 17 "Offshore 125". All of the purchased assets have been duly and properly transferred to TVL or one of its Subsidiaries. 6.3 Acquisition of Port Isaac - Offshore 25 and Offshore Dory. It has executed an option agreement with Rod Baker (the "Port Isaac Option Agreement"), pursuant to which TVL was granted an option to acquire physical infrastructure of Port Isaac, consisting of the manufacturing shop, offices, store room, entries, a launching trailer, office fixtures, and other pieces of equipment and furnishings; molds, drawings, and templates for the "Offshore 25" and "Offshore Dory"; and marketing rights within the European Union. The Option Agreement has not been cancelled or terminated and TVL retains all rights and privileges granted therein. 6.4 Acquisition of Cougar. It has executed a Letter of Intent from Cougar (the "Cougar Letter of Intent"), pursuant to which TVL was granted a non- exclusive option to acquire the business and assets of Cougar. The Cougar Letter of Intent has not been cancelled or terminated, TVL has not taken any actions that would result in the breach of the Cougar Letter of Intent, and TVL retains all rights and privileges granted therein. 6.5 Acquisition of NQEA. It has executed a non-exclusive Letter of Intent to conclude a Share Purchase Agreement with owners of NQEA Australia Pty. Ltd. (the "NQEA Letter of Intent"), pursuant to which TVL will be granted the right to acquire all of the issued and outstanding capital stock of NQEA. The NQEA Letter of Intent has not been cancelled or terminated, TVL has not taken any actions that would result in the breach of the NQEA Letter of Intent, and TVL retains all rights and privileges granted therein. ARTICLE VII MUTUAL COVENANTS 7.1 Affirmative Covenants. From the date hereof through the Closing Date, NLMC and TVL covenant and agree with each other that each will take every action reasonably required of it in order to satisfy the conditions to closing set forth in this Agreement and otherwise to ensure the prompt and expedient consummation of the Share Exchange and the Subsequent Transactions substantially as contemplated hereby, and will exert all reasonable efforts to cause the Share Exchange and Subsequent Transactions promptly to be consummated, provided in all instances that the representations and warranties of the other parties in this Agreement are and remain true and accurate and that the covenants and agreements of the other parties in this Agreement are honored and that the conditions to its obligations set forth in this Agreement are satisfied or appear capable of being satisfied. Specifically, NLMC and TVL covenant and agree with each other that each will complete all exhibits and schedules referenced in this Agreement no later than 15 days from the execution of this Agreement. 7.2 Access and Information. NLMC and TVL shall each afford to the other and to the other's accountants, counsel, and other representatives reasonable access during normal business hours throughout the period prior to the Closing, and thereafter through the completion or 18 abandonment of the Subsequent Transactions, to all of its and its Subsidiaries' properties, books, contracts, commitments, records (including, but not limited to, tax returns), and personnel and, during such period, NLMC and TVL shall each promptly furnish to the other (1) all written communications to its directors or to its shareholders generally, (2) internal monthly financial statements when and as available, and (3) all other information concerning its or any of its Subsidiaries' business, properties, and personnel as the other may reasonably request, but no investigation pursuant to this Section 7.2 shall affect any representations or warranties made herein, or the conditions to the obligations of NLMC or TVL to consummate the Share Exchange contained in this Agreement. In the event of the termination of this Agreement, NLMC and TVL will, and will cause its representatives to, deliver to the other or destroy all documents, work papers, and other material, and all copies thereof, obtained by it or on its behalf from the other party (or any Subsidiary) as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof, and will hold in confidence all confidential information that has been designated as such by the other party in writing or by appropriate and obvious notation, and will not use any such confidential information except in connection with the Share Exchange or the Subsequent Transactions, until such time as such information is otherwise publicly available. NLMC and TVL and their respective representatives shall assert their rights hereunder in such manner as to minimize interference with the business of NLMC and TVL. 7.3 Expenses. Whether or not the Share Exchange is consummated, all costs and expenses incurred by each party in connection with this Agreement and the transactions contemplated hereby shall be paid by the respective party except as otherwise provided (directly or indirectly) herein. 7.4 Publicity. Prior to the Closing, any written news release by NLMC or TVL pertaining to this Agreement or the Share Exchange shall be submitted to the other for review and approval prior to release, and shall be released only in a form approved by the other party; provided, however, that (1) such approval shall not be unreasonably withheld, and (2) such review and approval shall not be required of releases if prior review and approval would prevent the timely and accurate dissemination of such press release as required to comply, in the judgment of counsel, with any applicable law, rule, or policy. 7.5 Updating of Exhibits and Disclosure Documents. NLMC and TVL covenant and agree with each other that each shall notify the other and the Sellers of any changes, additions, or events which may cause any change in or addition to any Schedules or Exhibits delivered by it under this Agreement, promptly after the occurrence of the same and at the Closing by the delivery of updates of all Schedules and Exhibits. No notification made pursuant to this Section shall be deemed to cure any breach of any representation or warranty made in this Agreement unless the other party specifically agrees thereto in writing, nor shall any such notification be considered to constitute or give rise to a waiver by the other party of any condition set forth in this Agreement. 7.6 Employment Contracts. Pending the Closing, and effective upon the consummation of the Share Exchange, NLMC and TVL covenant and agree and that each will exert its best efforts 19 to execute __ -year employment contracts with each of the persons identified on Schedule 7.6(A) at an annual salary equal to that set forth for such individual in such Schedule, in the form of Exhibit 7.6(A); such contracts shall provide that NLMC or TVL, as the case may be, may terminate them at any time for cause, or without cause may terminate them upon payment to the other party thereto of an amount equal to ______. NLMC or TVL, as the case may be, will also execute a noncompetition agreement with each of the individuals specified in Exhibit 7.6(B), the form of which will be substantially as in Exhibit 7.6(B) and will preclude such persons from engaging in business competitive with that of NLMC or TVL, as the case may be, directly or indirectly, alone or in collaboration with others, except with the written consent of NLMC or TVL, as the case may be, or as a shareholder of less than one percent (1%) of the common stock of a publicly held company engaged in one or more of such businesses. 7.7 Conduct of Business Pending the Share Exchange. NLMC and TVL covenant and agree with each other that, prior to the consummation of the Share Exchange and the Subsequent Transactions, or the termination of this Agreement pursuant to its terms, or the abandonment of the Subsequent Transactions, unless the other shall otherwise consent in writing, which consent shall not be unreasonably withheld or delayed, and except as otherwise contemplated by this Agreement or disclosed in its Disclosure Document, NLMC and TVL will each comply with each of the following: (1) Its business and the business of its Subsidiaries shall be conducted only in the ordinary and usual course, it shall use reasonable efforts and shall cause each of its Subsidiaries to use reasonable efforts to keep intact its and their business organizations and good will, keep available the services of their respective officers and employees and maintain good relationships with suppliers, lenders, creditors, distributors, employees, customers, and others having business or financial relationships with them, and it shall immediately notify the other party of any event or occurrence or emergency material to, and not in the ordinary and usual course of business of, it or any of its Subsidiaries; (2) It shall not (a) amend its Articles of Incorporation or Bylaws or (b) split, combine, or reclassify any of its outstanding securities, or declare, set aside, or pay any dividend or other distribution on, or make or agree or commit to make any exchange for or redemption of any such securities payable in cash, stock, or property, except that NLMC shall be permitted to amend its Articles of Incorporation to authorize 5,000,000 shares of Preferred Stock and to effect a 1-for-10 reverse split of its issued and outstanding shares of Common Stock; (3) Neither it nor any of its Subsidiaries shall (a) issue or agree to issue any additional shares of, or rights of any kind to acquire any shares of, its capital stock of any class, or (b) enter into any contract, agreement, commitment, or arrangement with respect to any of the foregoing; 20 (4) Neither it nor any of its Subsidiaries shall create, incur, or assume any long-term or short-term indebtedness for money borrowed or make any capital expenditures or commitment for capital expenditures, except in the ordinary course of business and consistent with past practice; (5) Neither it nor any of its Subsidiaries shall (a) adopt, enter into, or amend any bonus, profit sharing, compensation, stock option, warrant, pension, retirement, deferred compensation, employment, severance, termination, or other employee benefit plan, agreement, trust fund, or arrangement for the benefit or welfare of any officer, director, or employee; or (b) agree to any material (in relation to historical compensation) increase in the compensation payable or to become payable to, or any increase in the contractual term of employment of, any officer, director, or employee except, with respect to employees who are not officers or directors, in the ordinary course of business in accordance with past practice, except that NLMC shall be permitted to adopt a 1995 Stock Option Plan and 1995 Restricted Stock Plan; (6) Neither it nor any of its Subsidiaries shall sell, lease, mortgage, encumber, or otherwise dispose of or grant any interest in any of its assets or properties except for sales, encumbrances, and other dispositions or grants in the ordinary course of business and consistent with past practice, and, except for liens for taxes not yet due or liens or encumbrances that are not material in amount or effect and do not impair the use of the property, or as specifically provided for or permitted in this Agreement; (7) Neither it nor any of its Subsidiaries shall enter into, or terminate, any material contract, agreement, commitment, or understanding; (8) Neither it nor any of its Subsidiaries shall enter into any agreement, commitment, or understanding, whether in writing or otherwise, with respect to any of the matters referred to in paragraphs (1) through (7) above; (9) It will not hold any meetings of its board of directors, or any committee thereof, or of its shareholders, without inviting a representative selected by the other party to attend the same (although NLMC or TVL, as the case may be, may request that such representative absent himself or herself during that portion of any such meeting that pertains to issues arising under this Agreement); (10) It will continue properly and promptly to file when due all federal, state, local, foreign, and other tax returns, reports, and declarations required to be filed by it, and will pay, or make full and adequate provision for the payment of, all taxes and governmental charges due from or payable by it; (11) It will comply with all laws and regulations applicable to it and its operations; 21 (12) It will maintain in full force and effect insurance coverage of a type and amount customary in its business, but not less than that presently in effect. 7.8 Name Change. NLMC and TVL shall agree to a new name for NLMC which is mutually acceptable. ARTICLE VIII COVENANTS OF TVL 8.1 No Solicitation. TVL and its respective Subsidiaries and those acting on behalf of any of them will not, and TVL will use its best efforts to cause its officers, employees, agent, and representatives (including any investment banker) not, directly or indirectly, to solicit, encourage, or initiate any discussions with, or negotiate or otherwise deal with, or provide any information to, any person or Entity other than NLMC and its officers, employees, and agents, concerning any merger, sale of substantial assets, or similar transaction involving TVL or any Subsidiary or division of TVL, or any sale of any of its capital stock or of the capital stock or assets of any Subsidiary or division of TVL. TVL will notify NLMC immediately upon receipt of any inquiry, offer, or proposal relating to any of the foregoing. None of the foregoing shall prohibit providing information to others in a manner in keeping with the ordinary conduct of TVL's business, or providing information to government authorities. 8.2 Performance of Acquisition Agreements. TVL will exert its best efforts to perform fully the Port Isaac Option Agreement, the Cougar Letter of Intent, and the NQEA Letter of Intent, as well as any definitive agreements contemplated by such letters of intent, and further will not knowingly take any actions that would cause a breach of such agreements. 8.3 Access to Due Diligence Findings. TVL shall permit NLMC and its accountants, counsel, and other representatives full and complete access to all of TVL's findings with respect to due diligence investigations on Cougar and NQEA. Further, NLMC shall be permitted to participate in conducting the due diligence investigations to the extent such participation is feasible. ARTICLE IX CONDITIONS TO CLOSING 9.1 Conditions to Obligations of NLMC. The obligation of NLMC to effect the Share Exchange shall be subject to the fulfillment at or prior to the Closing of the following conditions, unless NLMC shall waive such fulfillment: (1) This Agreement and the transactions contemplated hereby and the 1-for-10 reverse stock split shall have received all approvals, consents, authorizations, and waivers from NLMC's shareholders and from governmental and other regulatory agencies and other third parties (including lenders, holders of debt securities, and lessors) required to consummate the Share Exchange; 22 (2) There shall not be in effect a preliminary or permanent injunction or other order by any federal or state court which prohibits the consummation of the Share Exchange; (3) TVL and the Sellers shall have performed in all material respects each of their agreements and obligations contained in this Agreement and required to be performed on or prior to the Closing and shall have complied with all material requirements, rules, and regulations of all regulatory authorities having jurisdiction relating to the Share Exchange; (4) No material adverse change shall, in the reasonable judgment of NLMC, have taken place in the business, condition (financial or otherwise), operations, or prospects of TVL since the date of TVL's Unaudited Balance Sheet other than those, if any, that result from the changes permitted by, and transactions contemplated by, this Agreement; (5) The representations and warranties of TVL set forth in this Agreement shall be true in all material respects as of the date of this Agreement and, except in such respects as, in the reasonable judgment of NLMC, do not materially and adversely affect the business, condition (financial or otherwise), operations, or prospects of TVL, as of the Closing Time as if made as of such time; (6) NLMC shall have received from TVL an officer's certificate, executed by the Chief Executive Officer and the Chief Financial Officer of TVL (in their capacities as such) dated the Closing Date, as to the satisfaction of the conditions in paragraphs (3), (4), and (5) above; (7) NLMC shall have received, on and as of the Closing Date, an opinion of Counsel to TVL, substantially as to the matters set forth in Sections 4.1, 4.2, 4.3, 4.4 (to the best of the knowledge of such counsel as to parts (2), (3), (4), and (5)), and 4.6 (4 through 11, 14, 16, and 18) (to the best of the knowledge of such counsel) of this Agreement, all subject to customary limitations reasonably acceptable to Counsel to NLMC, and which may be based on opinions of Local Counsel to the extent such Counsel is not admitted to practice in a jurisdiction relevant to such opinion, provided such opinion of Local Counsel is delivered to NLMC; a customary comfort letter from TVL's Auditors; and such other closing documents and instruments as NLMC shall reasonably request, in each case reasonably satisfactory in form and substance to NLMC and its counsel; (8) TVL shall have reduced its issued and outstanding common shares to 8,000,000; (9) There shall appear no material impediment to the due and timely completion of the Subsequent Transactions; 23 (10) TVL shall have consummated the Port Isaac Option Agreement; (11) An agreement to acquire Cougar's business and assets shall be in full force and effect and TVL shall have exerted its best efforts to acquire NQEA; and (12) NLMC shall be satisfied with the due diligence investigations on Cougar and NQEA. 9.2 Conditions to Obligation of the Sellers. The obligation of the Sellers to effect the Share Exchange shall be subject to the fulfillment at or prior to the Closing of the following conditions, unless the Sellers shall, by a majority in interest of them as permitted under this Agreement, waive such fulfillment: (1) This Agreement and the Share Exchange shall have received all approvals, consents, authorizations, and waivers from governmental and other regulatory agencies and other third parties (including lenders, holders of debt securities, and lessors) required by law to consummate the Share Exchange; (2) There shall not be in effect a preliminary or permanent injunction or other order by any federal or state authority which prohibits the consummation of the Share Exchange; (3) NLMC shall have performed in all material respects its agreements and obligations contained in this Agreement required to be performed on or prior to the Closing; (4) The representations and warranties of NLMC set forth in this Agreement shall be true in all material respects as of the date of this Agreement and, except in such respects as do not materially and adversely affect the business of NLMC and its Subsidiaries, taken as a whole, as of the Closing Date as if made as of such time; and (5) The Sellers shall have received from NLMC an officers' certificate, executed by the Chief Financial Officer and the Chief Executive Officer of NLMC (in their capacities as such), dated the Closing Date, as to the satisfaction of the conditions of paragraphs (3) and (4) above (to the best of their knowledge where appropriate); (6) The Sellers shall have received, on and as of the Closing Date, an opinion of Counsel to NLMC, substantially as to the matters set forth in Sections 4.1, 4.2, 4.3, 4.4 (to the best of the knowledge of such counsel as to parts (2), (3), (4), and (5)), and 4.6 (4 through 11, 14, 16, and 18) (to the best of the knowledge of such counsel) of this Agreement, all subject to customary limitations, reasonably satisfactory in form and substance to TVL, and its counsel, and which may be based on opinions of Local Counsel to the extent such Counsel is not admitted to practice in a jurisdiction relevant to such opinion, provided such opinion of Local Counsel is delivered to TVL, and such other closing documents and instruments as TVL shall reasonably 24 request, in each case reasonably satisfactory in form and substance to TVL and its counsel; and (7) There shall appear no material impediment to the due and timely completion of the Subsequent Transactions. ARTICLE X SECURITIES AND SECURITY HOLDERS 10.1 Sellers' Ownership Representations. Each of the Sellers represents and warrants to NLMC, severally and not jointly, that (1) he, she, or it owns the common shares of TVL set forth opposite his, her, or its name on the signature pages of this Agreement, to be sold to NLMC at the Closing pursuant to the terms of this Agreement, free and clear of any and all liens, claims, encumbrances, and rights of others; and (2) he, she, or its is fully and freely authorized and entitled to sell, transfer, and convey free and clear title to the same to NLMC, without any further approval or authorization being required. 10.2 Investment Representation. Each of the Sellers, severally and not jointly, represents and confirms to NLMC: (1) He, she, or it is aware of the following restrictions on the shares of NLMC received as Consideration and as Additional Consideration pursuant to Section 3.3 hereof (the "Shares"): (a) The Shares have not been registered under the United States Securities Act of 1933 (the "Act") or any applicable state securities laws. (b) For the 40-day period following the issuance of the certificate evidencing the Shares, unless the Shares are registered under the Act, or an exemption from the registration requirements of the Act is available, the Shares may not be offered or sold in the United States or to any of the following (hereinafter referred to as a "U.S. Person"): (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. Person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; 25 (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) any partnership or corporation if: (A) organized or incorporated under the laws of any foreign jurisdiction; and (B) formed by a U.S. Person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in United States Securities and Exchange Commission Rule 501(a) under the Act) who are not natural persons, estates, or trusts. (2) This transaction has not taken place within the United States. The offer and sale as between the Sellers and NLMC has been made in an "offshore transaction," as that term in defined in Rule 902(i). Each Seller is acquiring the Shares for Seller's own account and not for or on behalf of any other person. This transaction is not part of a plan or scheme to evade the registration provisions of the Act. There is no prearranged agreement to resell the Shares in the United States. (3) Seller is not a citizen of the United States or a U.S. Person, as defined in subsection (1)(b) above of this Section 10.2. Seller was not formed for the purposes of engaging in this transaction. (4) The Shares shall not be sold to any citizen of the United States or to a U.S. Person, as defined in subsection (1)(b) above of this Section 10.2, until the 41st day following the issuance of the certificate evidencing the Shares. ARTICLE XI TERMINATION, AMENDMENT, WAIVER 11.1 Termination. This Agreement and the Share Exchange may be terminated at any time prior to the Closing, and either or both of the Subsequent Transactions may thereafter be terminated or abandoned after the Closing under this Agreement: (1) By mutual consent of NLMC and a majority in interest of the Sellers prior to the Closing; (2) By mutual consent of NLMC and TVL after the Closing; or 26 (3) By either NLMC or the Sellers, upon written notice to the other, if the conditions to the obligations of such canceling party or parties to consummate the Share Exchange, in the case of NLMC, as provided in Section 9.1, or, in the case of Sellers, as provided in Section 9.2, were not, or cannot reasonably be, satisfied on or before ______, 1996, unless the failure of condition is the result of the material breach of this Agreement by the party seeking to terminate. 11.2 Amendment. This Agreement may be amended by the Sellers and NLMC by action taken at any time, but no such amendment shall affect the obligations of TVL without its consent, and the Sellers shall act, as elsewhere in this Agreement provided, by a majority in interest of them. 11.3 Waiver. At any time prior to the Closing Date, NLMC, by action taken by its board of directors, and the Sellers, by action taken by a majority in interest of them, may (1) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (2) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (3) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. 11.4 Relief. In the event of liability on the part of the Sellers to NLMC in accordance with the provisions of this Agreement prior to the Closing hereunder, the parties recognize and acknowledge that monetary measures of damages will not reasonably be calculable inasmuch as the acquisition of TVL and its proposed acquisitions are difficult, if not impossible, to value, and that specific performance and injunctive relief should therefore be available to NLMC. 11.5 Option. Each of the undersigned Sellers, severally, hereby grants to NLMC the right, upon twenty-four (24) hours' written notice delivered to such Seller at the address set forth for such purpose on Schedule 11.5 hereto, at any time until seventy-two (72) hours after termination of this Agreement, to purchase from him, her, or it the number of shares of stock of TVL owned by such Seller as specified on Schedule 11.5 hereto, against delivery to such Seller of an amount equal to the Consideration per share payable hereunder, times the number of such shares of stock with respect to which such option is being exercised. Each Seller, with respect to such shares identified on Schedule 11.5 (1) agrees not to sell, transfer, pledge, hypothecate, or otherwise transfer such shares, or enter into any agreement to do the same, prior to the date of expiration of the option herein granted, and (2) grants to NLMC, for so long as the option herein granted shall remain in effect, the sole and exclusive right and power to vote the shares with respect to which the option is granted, with power and right of substitution, and in all respects appoints NLMC, with power of substitution, as the proxy and attorney-in-fact of such Seller to vote such shares in the place of Seller and with respect to any such vote the power to execute any and all documents and instruments in respect thereof in all respects with all right, power, and authority that the Seller himself, herself, or itself could exercise. The Seller agrees to provide any and all documents, evidences of authority, resolutions, et cetera, necessary to enable NLMC to exercise the power and authority herein granted. NLMC agrees not to exercise any power herein granted in any manner inconsistent with the 27 operation of TVL in the future in the same manner that it has been operated in the past, with the same directors, except that NLMC shall vote such shares in favor of the Share Exchange unless there shall have been proposed a similar or comparable transaction of greater value to the shareholders of TVL, in which event, NLMC shall vote such shares as it may determine in its discretion. 11.6 Resignation of Officers and Directors. Upon the execution of this Agreement, NLMC has elected John R. Twohig to the office of Vice President - - Corporate Development. NLMC has further increased its board of directors to five members and appointed John R. Twohig and Nigel Horsley to fill the vacancies created by such increase. Messrs. Twohig and Nigel shall agree to resign from all officer and director positions of NLMC if the Share Exchange shall not be consummated. ARTICLE XII GENERAL PROVISIONS 12.1 Arbitration. In the event that there shall be a dispute arising out of or relating to this Agreement, the Share Exchange, any document referred to herein or centrally related to the subject matter hereof, or the subject matter of any of the same, the parties agree that such dispute shall be submitted to binding arbitration in _______, under the auspices of, and pursuant to the rules of, the American Arbitration Association as then in effect, or such other procedures as the parties may agree to at the time, before a tribunal of three arbitrators, one of which shall be selected by each of the parties to the dispute and the third of which shall be selected by the two arbitrators so selected. Any award issued as a result of such arbitration shall be final and binding between the parties, and shall be enforceable by any court having jurisdiction over the party against whom enforcement is sought. 12.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice given at least five (5) days prior thereto): If to NLMC: North Lily Mining Company 1800 Glenarm Place, Suite 210 Denver, Colorado 80202 Attention: Stephen E. Flechner with a copy to: Fay M. Matsukage, Esq. 4582 S. Ulster Street Parkway, Suite 201 Denver, Colorado 80237 28 If to TVL, the Sellers, any of them, or any Affiliate of any of them: Tamarine Ventures Ltd. Suite 709, 700 West Pender Street Vancouver, British Columbia Canada V6C 1G8 Attention: John R. Twohig with a copy to: _____________________ _____________________ _____________________ 12.3 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 12.4 Survival of Representations, Warranties, Etc. The representations, warranties, covenants, and agreements of the parties contained hereto shall survive the Closing and any investigation of the other party made prior thereto. 12.5 De Minimis Claims. No party shall bring any action against the other party hereto with respect to the subject matter hereof unless the aggregate amount of all claims so brought in relation to the subject matter of this Agreement exceeds $50,000; provided, however, that the foregoing shall not prevent or preclude actions seeking injunctive or other equitable forms of relief. 12.6 Miscellaneous. This Agreement (1) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the parties, with respect to the subject matter hereof, except as specifically provided otherwise or referred to herein, so that no such external or separate agreements relating to the subject matter of this Agreement shall have any effect or be binding, unless the same is referred to specifically in this Agreement or is executed by the parties after the date hereof; (2) is not intended to confer upon any other person (other than shareholders of TVL) any rights or remedies hereunder; (3) shall not be assigned by operation of law or otherwise except for assignment of all or any part of the rights of NLMC hereunder, which may be freely assigned by NLMC so long as the obligations of NLMC under this Agreement remain obligations of, or their performance is guaranteed by, NLMC; and (4) shall be governed in all respects, including validity, interpretation, and effect, by the internal laws of the State of Colorado, without regard to the principles of conflict of laws thereof. This Agreement may be executed in two or more counterparts which together shall constitute a single agreement. 29 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be signed on the date first written above by their respective officers thereunder duly authorized. "NLMC" NORTH LILY MINING COMPANY By:/s/ Stephen E. Flechner ------------------------------------------- Stephen E. Flechner, President "TVL" TAMARINE VENTURES LTD. By:/s/ John R. Twohig ------------------------------------------- John R. Twohig, President "Sellers" EX-10.6 3 W. GENE WEBB EMPLOYMENT AGREEMENT Exhibit 10.6 NORTH LILY MINING COMPANY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, effective this 10th day of April, 1996, is by and between NORTH LILY MINING COMPANY, a Utah corporation (the "Company") and W. Gene Webb ("Employee")and supercedes any and all other Employment Agreements. WHEREAS, Employee has been employed by the Company and has developed considerable familiarity with and expertise in mining operations; and WHEREAS, Employee is expected to continue to make a major contribution to the profitability, growth, and financial strength of the Company; and WHEREAS, the Company considers the continued services of Employee to be in the best interest of the Company and its shareholders and desires to assure the continued services of Employee on behalf of the Company on an objective and impartial basis and without distraction or conflict of interest in the event of an attempt to obtain control of the Company; and WHEREAS, in accordance with the preceding paragraph, it is the desire of the Company that it provide the maximum possible benefit to Employee under tax and other applicable laws in the event of Employee's termination due to a change in control; and WHEREAS, Employee is willing to remain in the employ of the Company upon the understanding that the Company will provide income security upon the terms and subject to the conditions contained herein if Employee's employment is terminated voluntarily for good reason or involuntarily by the Company without good reason; and WHEREAS, Employee and the Company desire to provide for Employee's employment by the Company upon the terms and conditions set forth in this Employment Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained, the parties hereby agree as follows: 1. Employment. The Company hereby agrees to employ Employee and Employee hereby agrees to serve the Company as Director and Executive Vice President or in any other position consistent with Employee's status, to which he may hereafter be elected or appointed during the Employment Term (as hereinafter defined). 2. Employment Term. Employee's employment hereunder shall be for a term of five years commencing on April 10, 1996 unless earlier terminated pursuant to Sections 4, 5, and 13 of this Employment Agreement (the "Employment Term"). 3. Responsibilities. During the Employment Term, Employee shall render such services to the Company and its affiliates as are reasonably required by the Board of Directors of the Company and as may be required by virtue of the office(s) and positions held by Employee. 4. Incapacity. If during the Employment Term, Employee is prevented from performing duties or fulfilling responsibilities by reason of any incapacity or disability for a continuous period of six months, then the Company, in its sole and absolute discretion, may consider such incapacity or disability to be permanent and may, upon 90 days' written notice to Employee, terminate Employee's employment hereunder, but Employee shall continue to be eligible to receive any benefits to which he may be entitled under the terms of the Company's long-term disability plan for its employees. In the event of such disability, the Company shall pay Employee full compensation under Section 6 hereof until such termination. 5. Death. The Employment Term, unless terminated earlier, shall automatically terminate on the last day of the month in which the death of Employee occurs. 6. Compensation. Compensation for all services rendered pursuant to this Employment Agreement, the Company agrees to pay Employee a gross salary equal to at least $120,000 per year (the "Salary"), plus benefits, which shall include health and disability insurance, keyman life insurance and retirement plan. The Company will also make available to the Employee an annual cash bonus, Employee can elect to receive up to 50% of his annual cash bonus in common stock. The Company will provide equity grants which shall include an incentive and non-qualified stock option plan and a 2 restricted share option plan. The Compensation Package is subject to Annual Review in amounts to be agreed upon by the Company and the Employee. 7. Expenses. (a) During the Employment Term, the Company shall allow Employee reasonable travel, business entertainment, and other business expenses incurred in the performance of his duties hereunder, subject to the rules and regulations adopted by the Company for the handling of such business expenses. The Company will reimburse Employee for all such expenses upon presentation by him, from time to time, of an itemized account of such expenses. (b) To the extent permitted by the Company's articles of incorporation and applicable corporate law, the Company will reimburse Employee or his estate for all reasonable and necessary legal expenses and costs incurred by him or his estate in the defense of any and all cases, claims, or controversies arising out of any representations, omissions, acts, or failures to act, as the case may be, by Employee made in his capacity as promoter, agent, employee, officer, or director of the Company, whether or not such representations, omissions, act, or failures to act were authorized by the Company. The Company's duty under this paragraph shall commence on the date of this Agreement and shall continue forever without regard to whether Employee is employed by the Company. The Company shall reimburse Employee or his estate for such legal expenses and costs within 30 days of receipt of written evidence of such legal expenses. 8. Other Benefits. During the Employment Term, the Company shall provide Employee with the same insurance and other benefits that the Company makes available to other similarly situated employees. 9. Best Efforts. During the Employment Term, Employee shall devote full time and best efforts to the performance of all responsibilities to the Company and its affiliates and to further the businesses and interests of the Company and its affiliates. 10. Conflicts of Interest. The Company acknowledges that Employee has extensive experience and numerous contacts in the mining business. To reduce the potential for conflicts of interest which may arise between Employee and the Company, Employee shall afford the Company, with respect to opportunities which may come to 3 his attention involving mineral properties, the right of first refusal to undertake such opportunities on the same terms and conditions as shall be bona fide offered by third parties. In addition, should Employee propose to become involved in other mining activities or businesses, he shall disclose to the Board of Directors of the Company, prior to entering into any such transac tions the terms and conditions of any such proposed transactions. 11. Confidentiality Covenant. Employee agrees while employed by the Company and thereafter for a period of two years not, directly or indirectly, to disclose or use to the detriment of the Company or any of its affiliates (the term "affiliates" as used in this Employment Agreement is understood to mean subsidiaries, and parent and brother/sister corporations of the Company and any other entities over which the Company has at least 50% control) or for the benefit of any other person or firm any confidential informa tion or trade secrets which are not readily available in the public domain of the Company or any of its affiliates. Employee shall not, while employed by the Company or thereafter for a period of two years, directly or indirectly, induce, advise, recommend to, or participate in any effort to induce, any officer or employee of the Company or any of its affiliates. Furthermore, Employee shall deliver promptly to the Company upon termination of employment, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints, formulas, and other documents (and all copies thereof) relating to the business of the Company or any of its affiliates and all property associated therewith, then possessed or under the control of Employee. 12. Remedies for Breach. Employee acknowledges that the legal remedies for breach of the covenants contained in Sections 10 or 11 are inadequate, and therefore agrees that, in addition to any or all other remedies available to the Company and its affiliates in the event of a breach or a threatened breach of any covenant contained in Sections 10 or 11, the Company or any of its affili ates may: (a) Obtain preliminary and permanent injunctions against any and all such actions, and (b) Seek to recover from Employee monetary damages to the Company or its affiliates arising from such breach or threatened breach and all costs and expenses (including attorneys' fees) 4 incurred by the Company or any of its affiliates in enforcement of such covenants. 13. Grounds for Termination of Employment. In the event that Employee: (a) commits any material breach of the Employment Agreement or substantially fails to perform duties hereunder, and such breach or failure to perform results in, or is a material factor contributing to, a significant adverse change in the business of the Company or any of its affiliates, their businesses or reputations (other than by reason of his death or disability); (b) commits any dishonest, unethical, fraudulent, or felonious act in respect to duties either to the Company or any of its affiliates; (c) commits any willful malfeasance or gross negligence (in the discharge of duties to the Company or any of its affiliates) having a material adverse effect on the Company or any of its affiliates, their businesses, or reputations; or (d) fails to perform duties to the Company or any of its affiliates without cause or explanation; then the Company shall give written notice to Employee specifying the default and stating that if such default is not cured to the satisfaction of the Board of Directors of the Company within five business days, employment will be terminated. The Employment Term shall terminate automatically five business days after the date notice is given if the default has not been cured to the satisfac tion of the Company. 14. Effect of Termination of the Employment Term. Upon the termination of Employee's employment pursuant to Section 13 hereof, the parties' obligations hereunder, except as set forth in Sections 7(b) and 11 hereof, shall terminate; provided, however, that rights and remedies accruing prior to such termination or arising out of the breach of this Employment Agreement shall survive. In the event of a material, unexcused breach by the Company of its obligations hereunder which breach has not been cured within a reasonable time period (which shall not be less than 15 business days) after Employee has given written notice to the Board of 5 Directors of the Company specifying such breach in detail and demanding cure, the parties' obligations hereunder, except as set forth in Sections 7(b) and 11 hereof, shall terminate; provided, however, that rights and remedies accruing prior to such terminat ion or arising out of the breach of this Employment Agreement shall survive. 15. Termination Benefits. The Company agrees to pay to Employee the Termination Benefits specified herein if (a) control of the Company is acquired (as defined in Section 16(a) hereof) and (b) within three years after the acquisition of control occurs (i) the Company terminates the employment of Employee for any reason other than the causes specified in Section 13 hereof, death, Employee's attainment of age 65, or total and permanent disability, or (ii) Employee voluntarily terminates employment for good reason (as defined in Section 16(b) hereof). If Employee is entitled to Termination Benefits pursuant to this Section 15, the Company agrees to pay to Employee as termina tion compensation in a lump-sum payment within five business days of the termination of Employee's employment an amount to be computed by multiplying (i) Employee's average annual cash compensation payable by the Company which was included in the gross income of Employee for the most recent three calendar years (or for such shorter period that Employee has been employed by the Company) ending coincident with or immediately before the date on which control of the Company is acquired (or such portion of such period during which Employee was an employee of the Company), by (ii) 300%. (iii) The Company shall pay all health and disability insurance for a period of 18 months or until the employee is able to secure another policy equal to existing policy and pay any and all keyman life insurance in full and assign the policy to employee, (iv) The Company shall pay for the exercise of any and all outstanding stock options held by the employee and any cash bonuses due to the employee. For purposes of this Agreement, employment and compensation paid by any direct or indirect subsidiary of the Company will be deemed to be employment and 6 compensation paid by the Company. If Employee has not been employed for at least three full years by the Company, cash compensation paid within the last three years for less than a full year shall be used in the foregoing computation on an annualized basis. 16. Definitions. (a) As used in this Agreement, the "acquisition of control" means (i) attaining ownership of 25% or more of the shares of voting stock of the Company by any person or group (other than a person or group including Employee or with whom or which Employee is affiliated), or (ii) the occurrence of a "change of control" required to be described under the proxy disclosure rules of the Securi ties and Exchange Commission. (b) As used in this Agreement, the term "good reason" means, without Employee's written consent, (i) a change in status, position, or responsibilities which, in Employee's reasonable judgment, does not represent a promotion from existing status, position, or responsibili ties as in effect immediately prior to the change in control; the assignment of any duties or responsibilities which, in Employee's reasonable judgment, are inconsistent with such status, position, or responsibilities; or any removal from or failure to reappoint or re-elect Employee to any of such positions, except in connection with the termination for total and permanent disability, death, or the causes specified in Section 13 hereof, or by him other than for good reason; (ii) a reduction by the Company in Employee's base salary as in effect on the date hereof or as the same may be in creased from time to time during the term of this Agreement or the Company's failure to increase (within twelve months of Employee's last increase in base salary) Employee's base salary after a change in control in an amount which at least equals, on a percentage basis, the average percentage increase 7 in base salary for all executive and senior officers of the Company effected in the preceding twelve months; (iii) the relocation of the Company's principal executive offices to a location outside the San Bruno/San Francisco metropolitan area or the relocation of Employee by the Company to any place other than the location at which Employee performed duties prior to a change in control, except for required travel on the Company's business to an extent substantially consistent with business travel obligations at the time of a change in control; (iv) the failure of the Company to continue in effect any incentive, bonus, or other compensation plan in which Employee participates, including but not limited to the Company's stock option and restricted stock plans, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan), evidenced by Employee's written consent, has been made with respect to such plan in connection with the change in control, or the failure by the Company to continue Employee's participation therein, or any action by the Company which would directly or indirectly materially reduce participation therein; (v) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed or entitled under any of the Company's pension, profit sharing, life insurance, medical, dental, health and accident, or disability plans at the time of a change in control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Employee of any material fringe benefit enjoyed or entitled to at the time of the change in control, or the failure by the Company to provide the number of paid vacation and sick leave days to which Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect on the date hereof; (vi) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement; 8 (vii) any purported termination of Employee's employment which is not effected pursuant to Section 19 hereof; and for purposes of this Agreement, no such purported termination shall be effective; or (viii) any request by the Company that Employee partici pate in an unlawful act or take any action constituting a breach of Employee's professional standard of conduct. Notwithstanding anything in this Section 16(b) to the contrary, Employee's right to terminate the employment pursuant to this Section 16(b) shall not be affected by incapacity due to physical or mental illness. 17. Enforcement of Agreement. The Company is aware that upon the occurrence of a change in control the Board of Directors or a shareholder of the Company may then cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company to institute, or may institute litigation seeking to have this Agreement declared unenforceable, or may take or attempt to take other action to deny Employee the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company that Employee not be required to incur the expenses associated with the enforce ment of any rights under this Agreement by litigation or other legal action, nor be bound to negotiate any settlement of any rights hereunder, because the cost and expense of such legal action or settlement would substantially detract from the benefits intended to be extended to Employee hereunder. Accordingly, if following a change in control it should appear to Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other legal action designed to deny, diminish or to recover from Employee the benefits entitled to be provided to Employee hereunder, and that Employee has complied with all obligations under this Agreement, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice, at the expense of the Company as provided in this Section 17, to represent Employee in connection with the initiation or defense of any litigation or other legal action, whether such action is by or against the Company or any director, 9 officer, shareholder, or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Employee entering into an attorney-client relationship with such counsel, and in that connection the Company and Employee agree that a confidential relationship shall exist between Employee and such counsel. The reasonable fees and expenses of counsel selected from time to time by Employee as hereinabove provided shall be paid or reimbursed to Employee by the Company on a regular, periodic basis upon presenta tion by Employee of a statement or statements prepared by such counsel in accordance with its customary practices, up to a maximum aggregate amount of $500,000. Any legal expenses incurred by the Company by reason of any dispute between the parties as to enforceability of or the terms contained in this Agreement, notwithstanding the outcome of any such dispute, shall be the sole responsibility of the Company, and the Company shall not take any action to seek reimbursement from Employee for such expenses. 18. Severance Pay; No Duty to Mitigate. The amounts payable to Employee under this Agreement shall not be treated as damages but as severance compensation to which Employee is entitled by reason of termination of employment in the circumstances contem plated by this Agreement. The Company shall not be entitled to set off against the amounts payable to Employee of any amounts earned by Employee in other employment after termination of employment with the Company, or any amounts which might have been earned by Employee in other employment had other such employment been sought. 19. Notice of Termination. Any purported termination by the Company or by Employee shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 27 hereof. For purposes of this Agreement, a "Notice of Termina tion" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of this employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 20. Internal Revenue Code. Anything in this Agreement to the contrary notwithstanding, in the event that the independent 10 auditors of the Company determine that the payment by the Company to or for the benefit of Employee, whether paid or payable pursuant to the terms of this Agreement, would be nondeductible by the Company for federal income tax purposes because of the Internal Revenue Code, then the amount payable to or for the benefit of Employee pursuant to this Agreement (the "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 20, the "Reduced Amount" shall be the amount which maximizes the amount payable without causing the payment to be nondeductible by the Company. 21. Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective executors, administrators, heirs, personal representatives, successors, and assigns, but neither this Agreement nor any right hereunder may be assigned or transferred by either party hereto, any beneficiary, or any other person, nor be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy, or other legal process of any kind against Employee, his beneficiary, or any other person. Notwithstanding the foregoing, the Company will assign this Agreement to any corporation or other business entity succeeding to substantially all of the business and assets of the Company by merger, consolidation, sale of assets, or otherwise and shall obtain the assumption of this Agreement by such successor. 22. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof. All representations, promises, and prior or contemporane ous understandings among the parties with respect to the subject matter hereof are merged into and expressed in this Agreement, and any and all prior agreements between the parties with respect to the subject matter hereof are hereby cancelled. 23. Amendment. This Agreement shall not be amended, modified, or supplemented without the written agreement of the parties at the time of such amendment, modification, or supplement. 24. Governing Law. This Agreement shall be governed by and subject to the laws of the state of California. 25. Severability. The invalidity or unenforceability of any particular provision of this particular Agreement shall not affect the other provisions, and this Agreement shall be construed in all 11 respects as if such invalid or unenforceable provision has not been contained herein. 26. Captions. The captions in this Agreement are for convenience and identification purposes only, are not an integral part of this Agreement, and are not to be considered in the interpretation of any part hereof. 27. Notices. Except as specifically set forth in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or sent by registered or certified mail, postage prepaid, addressed to his residence in the case of Employee, or to its principal office in the case of the Company, or to such other address as shall be furnished in writing by any party to the others. 28. Waivers. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision or condition of this Agreement to be performed by such other party shall be deemed to be a valid waiver unless such waiver is in writing or, even if in writing, shall be deemed to be a waiver of a subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. "Company" NORTH LILY MINING COMPANY By: /s/Stephen E. Flechner ---------------------------- "Employee" W. Gene Webb /s/W. Gene Webb ------------------------------- 8:employmt.agt 12 EX-10.7 4 STEPHEN E. FLECHNER EMPLOYMENT AGREEMENT Exhibit 10.7 NORTH LILY MINING COMPANY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, effective this 10th day of April, 1996, is by and between NORTH LILY MINING COMPANY, a Utah corporation (the "Company") and Stephen E. Flechner ("Employee")and supercedes any and all other Employment Agreements. WHEREAS, Employee has been employed by the Company and has developed considerable familiarity with and expertise in mining operations; and WHEREAS, Employee is expected to continue to make a major contribution to the profitability, growth, and financial strength of the Company; and WHEREAS, the Company considers the continued services of Employee to be in the best interest of the Company and its shareholders and desires to assure the continued services of Employee on behalf of the Company on an objective and impartial basis and without distraction or conflict of interest in the event of an attempt to obtain control of the Company; and WHEREAS, in accordance with the preceding paragraph, it is the desire of the Company that it provide the maximum possible benefit to Employee under tax and other applicable laws in the event of Employee's termination due to a change in control; and WHEREAS, Employee is willing to remain in the employ of the Company upon the understanding that the Company will provide income security upon the terms and subject to the conditions contained herein if Employee's employment is terminated voluntarily for good reason or involuntarily by the Company without good reason; and WHEREAS, Employee and the Company desire to provide for Employee's employment by the Company upon the terms and conditions set forth in this Employment Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained, the parties hereby agree as follows: 1. Employment. The Company hereby agrees to employ Employee and Employee hereby agrees to serve the Company as President and C.E.O. or in any other position consistent with Employee's status, to which he may hereafter be elected or appointed during the Employment Term (as hereinafter defined). 2. Employment Term. Employee's employment hereunder shall be for a term of five years commencing on April 10, 1996 unless earlier terminated pursuant to Sections 4, 5, and 13 of this Employment Agreement (the "Employment Term"). 3. Responsibilities. During the Employment Term, Employee shall render such services to the Company and its affiliates as are reasonably required by the Board of Directors of the Company and as may be required by virtue of the office(s) and positions held by Employee. 4. Incapacity. If during the Employment Term, Employee is prevented from performing duties or fulfilling responsibilities by reason of any incapacity or disability for a continuous period of six months, then the Company, in its sole and absolute discretion, may consider such incapacity or disability to be permanent and may, upon 90 days' written notice to Employee, terminate Employee's employment hereunder, but Employee shall continue to be eligible to receive any benefits to which he may be entitled under the terms of the Company's long-term disability plan for its employees. In the event of such disability, the Company shall pay Employee full compensation under Section 6 hereof until such termination. 5. Death. The Employment Term, unless terminated earlier, shall automatically terminate on the last day of the month in which the death of Employee occurs. 6. Compensation. Compensation for all services rendered pursuant to this Employment Agreement, the Company agrees to pay Employee a gross salary equal to at least $120,000 per year (the "Salary"), plus benefits, which shall include health and disability insurance, keyman life insurance and retirement plan. The Company will also make available to the Employee an annual cash bonus, Employee can elect to receive up to 50% of his annual cash bonus in common stock. The Company will provide equity grants which shall include an incentive and non-qualified stock option plan and a restricted share option plan. The Compensation Package is subject 2 to Annual Review in amounts to be agreed upon by the Company and the Employee. 7. Expenses. (a) During the Employment Term, the Company shall allow Employee reasonable travel, business entertainment, and other business expenses incurred in the performance of his duties hereunder, subject to the rules and regulations adopted by the Company for the handling of such business expenses. The Company will reimburse Employee for all such expenses upon presentation by him, from time to time, of an itemized account of such expenses. (b) To the extent permitted by the Company's articles of incorporation and applicable corporate law, the Company will reimburse Employee or his estate for all reasonable and necessary legal expenses and costs incurred by him or his estate in the defense of any and all cases, claims, or controversies arising out of any representations, omissions, acts, or failures to act, as the case may be, by Employee made in his capacity as promoter, agent, employee, officer, or director of the Company, whether or not such representations, omissions, act, or failures to act were authorized by the Company. The Company's duty under this paragraph shall commence on the date of this Agreement and shall continue forever without regard to whether Employee is employed by the Company. The Company shall reimburse Employee or his estate for such legal expenses and costs within 30 days of receipt of written evidence of such legal expenses. 8. Other Benefits. During the Employment Term, the Company shall provide Employee with the same insurance and other benefits that the Company makes available to other similarly situated employees. 9. Best Efforts. During the Employment Term, Employee shall devote full time and best efforts to the performance of all responsibilities to the Company and its affiliates and to further the businesses and interests of the Company and its affiliates. 10. Conflicts of Interest. The Company acknowledges that Employee has extensive experience and numerous contacts in the mining business. To reduce the potential for conflicts of interest which may arise between Employee and the Company, Employee shall afford the Company, with respect to opportunities which may come to his attention involving mineral properties, the right of first 3 refusal to undertake such opportunities on the same terms and conditions as shall be bona fide offered by third parties. In addition, should Employee propose to become involved in other mining activities or businesses, he shall disclose to the Board of Directors of the Company, prior to entering into any such transac tions the terms and conditions of any such proposed transactions. 11. Confidentiality Covenant. Employee agrees while employed by the Company and thereafter for a period of two years not, directly or indirectly, to disclose or use to the detriment of the Company or any of its affiliates (the term "affiliates" as used in this Employment Agreement is understood to mean subsidiaries, and parent and brother/sister corporations of the Company and any other entities over which the Company has at least 50% control) or for the benefit of any other person or firm any confidential informa tion or trade secrets which are not readily available in the public domain of the Company or any of its affiliates. Employee shall not, while employed by the Company or thereafter for a period of two years, directly or indirectly, induce, advise, recommend to, or participate in any effort to induce, any officer or employee of the Company or any of its affiliates. Furthermore, Employee shall deliver promptly to the Company upon termination of employment, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints, formulas, and other documents (and all copies thereof) relating to the business of the Company or any of its affiliates and all property associated therewith, then possessed or under the control of Employee. 12. Remedies for Breach. Employee acknowledges that the legal remedies for breach of the covenants contained in Sections 10 or 11 are inadequate, and therefore agrees that, in addition to any or all other remedies available to the Company and its affiliates in the event of a breach or a threatened breach of any covenant contained in Sections 10 or 11, the Company or any of its affili ates may: (a) Obtain preliminary and permanent injunctions against any and all such actions, and (b) Seek to recover from Employee monetary damages to the Company or its affiliates arising from such breach or threatened breach and all costs and expenses (including attorneys' fees) incurred by the Company or any of its affiliates in enforcement of 4 such covenants. 13. Grounds for Termination of Employment. In the event that Employee: (a) commits any material breach of the Employment Agreement or substantially fails to perform duties hereunder, and such breach or failure to perform results in, or is a material factor contributing to, a significant adverse change in the business of the Company or any of its affiliates, their businesses or reputations (other than by reason of his death or disability); (b) commits any dishonest, unethical, fraudulent, or felonious act in respect to duties either to the Company or any of its affiliates; (c) commits any willful malfeasance or gross negligence (in the discharge of duties to the Company or any of its affiliates) having a material adverse effect on the Company or any of its affiliates, their businesses, or reputations; or (d) fails to perform duties to the Company or any of its affiliates without cause or explanation; then the Company shall give written notice to Employee specifying the default and stating that if such default is not cured to the satisfaction of the Board of Directors of the Company within five business days, employment will be terminated. The Employment Term shall terminate automatically five business days after the date notice is given if the default has not been cured to the satisfac tion of the Company. 14. Effect of Termination of the Employment Term. Upon the termination of Employee's employment pursuant to Section 13 hereof, the parties' obligations hereunder, except as set forth in Sections 7(b) and 11 hereof, shall terminate; provided, however, that rights and remedies accruing prior to such termination or arising out of the breach of this Employment Agreement shall survive. In the event of a material, unexcused breach by the Company of its obligations hereunder which breach has not been cured within a reasonable time period (which shall not be less than 15 business days) after Employee has given written notice to the Board of Directors of the Company specifying such breach in detail and 5 demanding cure, the parties' obligations hereunder, except as set forth in Sections 7(b) and 11 hereof, shall terminate; provided, however, that rights and remedies accruing prior to such terminat ion or arising out of the breach of this Employment Agreement shall survive. 15. Termination Benefits. The Company agrees to pay to Employee the Termination Benefits specified herein if (a) control of the Company is acquired (as defined in Section 16(a) hereof) and (b) within three years after the acquisition of control occurs (i) the Company terminates the employment of Employee for any reason other than the causes specified in Section 13 hereof, death, Employee's attainment of age 65, or total and permanent disability, or (ii) Employee voluntarily terminates employment for good reason (as defined in Section 16(b) hereof). If Employee is entitled to Termination Benefits pursuant to this Section 15, the Company agrees to pay to Employee as termina tion compensation in a lump-sum payment within five business days of the termination of Employee's employment an amount to be computed by multiplying (i) Employee's average annual cash compensation payable by the Company which was included in the gross income of Employee for the most recent three calendar years (or for such shorter period that Employee has been employed by the Company) ending coincident with or immediately before the date on which control of the Company is acquired (or such portion of such period during which Employee was an employee of the Company), by (ii) 300%. (iii) The Company shall pay all health and disability insurance for a period of 18 months or until the employee is able to secure another policy equal to existing policy and pay any and all keyman life insurance in full and assign the policy to employee, (iv) The Company shall pay for the exercise of any and all outstanding stock options held by the employee and any cash bonuses due to the employee. For purposes of this Agreement, employment and compensation paid by any direct or indirect subsidiary of the Company will be deemed to be employment and compensation paid by the Company. If Employee has not been employed for at least three full years by the Company, cash compensation paid within the last three years for less than a full year shall be used in the foregoing computation on an annualized 6 basis. 16. Definitions. (a) As used in this Agreement, the "acquisition of control" means (i) attaining ownership of 25% or more of the shares of voting stock of the Company by any person or group (other than a person or group including Employee or with whom or which Employee is affiliated), or (ii) the occurrence of a "change of control" required to be described under the proxy disclosure rules of the Securi ties and Exchange Commission. (b) As used in this Agreement, the term "good reason" means, without Employee's written consent, (i) a change in status, position, or responsibilities which, in Employee's reasonable judgment, does not represent a promotion from existing status, position, or responsibili ties as in effect immediately prior to the change in control; the assignment of any duties or responsibilities which, in Employee's reasonable judgment, are inconsistent with such status, position, or responsibilities; or any removal from or failure to reappoint or re-elect Employee to any of such positions, except in connection with the termination for total and permanent disability, death, or the causes specified in Section 13 hereof, or by him other than for good reason; (ii) a reduction by the Company in Employee's base salary as in effect on the date hereof or as the same may be in creased from time to time during the term of this Agreement or the Company's failure to increase (within twelve months of Employee's last increase in base salary) Employee's base salary after a change in control in an amount which at least equals, on a percentage basis, the average percentage increase in base salary for all executive and senior officers of the Company effected in the preceding twelve months; (iii) the relocation of the Company's principal executive offices to a location outside the San Bruno/San Francisco 7 metropolitan area or the relocation of Employee by the Company to any place other than the location at which Employee performed duties prior to a change in control, except for required travel on the Company's business to an extent substantially consistent with business travel obligations at the time of a change in control; (iv) the failure of the Company to continue in effect any incentive, bonus, or other compensation plan in which Employee participates, including but not limited to the Company's stock option and restricted stock plans, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan), evidenced by Employee's written consent, has been made with respect to such plan in connection with the change in control, or the failure by the Company to continue Employee's participation therein, or any action by the Company which would directly or indirectly materially reduce participation therein; (v) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed or entitled under any of the Company's pension, profit sharing, life insurance, medical, dental, health and accident, or disability plans at the time of a change in control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Employee of any material fringe benefit enjoyed or entitled to at the time of the change in control, or the failure by the Company to provide the number of paid vacation and sick leave days to which Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect on the date hereof; (vi) the failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement; (vii) any purported termination of Employee's employment which is not effected pursuant to Section 19 hereof; and for purposes of this Agreement, no such purported termination shall be effective; or (viii) any request by the Company that Employee partici- 8 pate in an unlawful act or take any action constituting a breach of Employee's professional standard of conduct. Notwithstanding anything in this Section 16(b) to the contrary, Employee's right to terminate the employment pursuant to this Section 16(b) shall not be affected by incapacity due to physical or mental illness. 17. Enforcement of Agreement. The Company is aware that upon the occurrence of a change in control the Board of Directors or a shareholder of the Company may then cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company to institute, or may institute litigation seeking to have this Agreement declared unenforceable, or may take or attempt to take other action to deny Employee the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company that Employee not be required to incur the expenses associated with the enforce ment of any rights under this Agreement by litigation or other legal action, nor be bound to negotiate any settlement of any rights hereunder, because the cost and expense of such legal action or settlement would substantially detract from the benefits intended to be extended to Employee hereunder. Accordingly, if following a change in control it should appear to Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other legal action designed to deny, diminish or to recover from Employee the benefits entitled to be provided to Employee hereunder, and that Employee has complied with all obligations under this Agreement, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice, at the expense of the Company as provided in this Section 17, to represent Employee in connection with the initiation or defense of any litigation or other legal action, whether such action is by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Employee entering into an attorney-client relationship with such counsel, and in that connection the Company and Employee agree that a confidential 9 relationship shall exist between Employee and such counsel. The reasonable fees and expenses of counsel selected from time to time by Employee as hereinabove provided shall be paid or reimbursed to Employee by the Company on a regular, periodic basis upon presenta tion by Employee of a statement or statements prepared by such counsel in accordance with its customary practices, up to a maximum aggregate amount of $500,000. Any legal expenses incurred by the Company by reason of any dispute between the parties as to enforceability of or the terms contained in this Agreement, notwithstanding the outcome of any such dispute, shall be the sole responsibility of the Company, and the Company shall not take any action to seek reimbursement from Employee for such expenses. 18. Severance Pay; No Duty to Mitigate. The amounts payable to Employee under this Agreement shall not be treated as damages but as severance compensation to which Employee is entitled by reason of termination of employment in the circumstances contem plated by this Agreement. The Company shall not be entitled to set off against the amounts payable to Employee of any amounts earned by Employee in other employment after termination of employment with the Company, or any amounts which might have been earned by Employee in other employment had other such employment been sought. 19. Notice of Termination. Any purported termination by the Company or by Employee shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 27 hereof. For purposes of this Agreement, a "Notice of Termina tion" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of this employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 20. Internal Revenue Code. Anything in this Agreement to the contrary notwithstanding, in the event that the independent auditors of the Company determine that the payment by the Company to or for the benefit of Employee, whether paid or payable pursuant to the terms of this Agreement, would be nondeductible by the Company for federal income tax purposes because of the Internal Revenue Code, then the amount payable to or for the benefit of Employee pursuant to this Agreement (the "Agreement Payments") 10 shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 20, the "Reduced Amount" shall be the amount which maximizes the amount payable without causing the payment to be nondeductible by the Company. 21. Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective executors, administrators, heirs, personal representatives, successors, and assigns, but neither this Agreement nor any right hereunder may be assigned or transferred by either party hereto, any beneficiary, or any other person, nor be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy, or other legal process of any kind against Employee, his beneficiary, or any other person. Notwithstanding the foregoing, the Company will assign this Agreement to any corporation or other business entity succeeding to substantially all of the business and assets of the Company by merger, consolidation, sale of assets, or otherwise and shall obtain the assumption of this Agreement by such successor. 22. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof. All representations, promises, and prior or contemporane ous understandings among the parties with respect to the subject matter hereof are merged into and expressed in this Agreement, and any and all prior agreements between the parties with respect to the subject matter hereof are hereby cancelled. 23. Amendment. This Agreement shall not be amended, modified, or supplemented without the written agreement of the parties at the time of such amendment, modification, or supplement. 24. Governing Law. This Agreement shall be governed by and subject to the laws of the state of California. 25. Severability. The invalidity or unenforceability of any particular provision of this particular Agreement shall not affect the other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision has not been contained herein. 26. Captions. The captions in this Agreement are for convenience and identification purposes only, are not an integral part of this Agreement, and are not to be considered in the 11 interpretation of any part hereof. 27. Notices. Except as specifically set forth in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or sent by registered or certified mail, postage prepaid, addressed to his residence in the case of Employee, or to its principal office in the case of the Company, or to such other address as shall be furnished in writing by any party to the others. 28. Waivers. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision or condition of this Agreement to be performed by such other party shall be deemed to be a valid waiver unless such waiver is in writing or, even if in writing, shall be deemed to be a waiver of a subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. "Company" NORTH LILY MINING COMPANY By:/s/W. Gene Webb ---------------------------- "Employee" Stephen E. Flechner /s/Stephen E. Flechner ------------------------------- 8:employmt.agt 12 -----END PRIVACY-ENHANCED MESSAGE-----