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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-6202-2
NORD RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 85-0212139
---------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8150 WASHINGTON VILLAGE DRIVE, DAYTON OHIO 45458
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 433-6307
NOT APPLICABLE
--------------------------------------------------
Former name, former address and former fiscal
year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Common shares outstanding as of September 30, 1996: 19,838,408
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NORD RESOURCES CORPORATION
AND SUBSIDIARIES
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Financial Statements:
Balance Sheets - September 30, 1996
and December 31, 1995 1
Statements of Operations - Quarter and Three
Quarters ended September 30, 1996 and 1995 2
Statements of Cash Flows -
Three Quarters ended
September 30, 1996 and 1995 3
Notes to Condensed Financial Statements 4-11
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12-16
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 17
ITEM 2-5. Inapplicable 17
ITEM 6. Exhibits and Reports on Form 8-K 17
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NORD RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,874 $ 6,054
Short Term Investments 6,820
Restricted Cash - SRL 2,431
Accounts Receivable 6,530 5,541
Accounts Receivable - related party 16 9
Inventories - at lower of cost (first-in, first-out) or market:
Finished and Semi-Finished 1,607 1,271
Supplies 1,675 1,725
-------- --------
3,282 2,996
Prepaid Expenses 676 459
-------- --------
TOTAL CURRENT ASSETS 20,198 17,490
RESTRICTED CASH AND INVESTMENTS 2,373 2,607
INVESTMENTS IN AND ADVANCES TO AFFILIATES 8,741 8,338
INVESTMENT IN SRL 66,178 63,517
PROPERTY, PLANT AND EQUIPMENT, net 32,426 34,374
OTHER ASSETS 10,612 9,584
-------- --------
$ 140,528 $ 135,910
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 2,683 $ 2,705
Accounts Payable - related party 2,292 4,065
Notes Payable 3,678
Accrued Expenses 2,238 2,132
Unearned Income 1,500
Obligations to Lenders - SRL 22,374 23,458
Obligations in Default 2,652 2,991
Current Maturities of Long-Term Debt 226 190
-------- --------
TOTAL CURRENT LIABILITIES 37,643 35,541
LONG-TERM DEBT 1,330 1,520
OTHER LONG-TERM LIABILITIES 7,525 6,863
MINORITY INTEREST 1,584 3,023
STOCKHOLDERS' EQUITY:
Common Stock 198 158
Additional Paid-in Capital 68,008 58,137
Retained Earnings 24,405 30,833
Cumulative Foreign Currency Translation Adjustment 282 282
Minimum Pension Liability (447) (447)
-------- --------
92,446 88,963
-------- --------
$ 140,528 $ 135,910
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial statements
1
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NORD RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
QUARTER ENDED THREE QUARTERS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C>
REVENUES:
Sales $ 9,357 $ 8,557 $ 26,199 $ 28,691
Other Revenues 276 237 285
--------- --------- --------- ---------
TOTAL REVENUES 9,357 8,833 26,436 28,976
COSTS AND EXPENSES:
Cost of Sales 9,811 8,933 27,855 28,790
Selling, General & Administrative
Expenses 2,162 2,667 6,933 8,156
--------- --------- --------- ---------
TOTAL OPERATING COSTS & EXPENSES 11,973 11,600 34,788 36,946
--------- --------- --------- ---------
(LOSS) FROM OPERATIONS (2,616) (2,767) (8,352) (7,970)
OTHER INCOME (EXPENSE):
Interest Income 252 146 637 482
Interest Expense (217) (139) (525) (485)
Provision for Impairment of Investment in
Rutile Segment (3,000)
Litigation Recoveries 2,325 150 2,725
Equity in Net Earnings of Affiliate 135 617 223 862
Minority Interest 482 449 1,439 1,246
--------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) 652 3,398 1,924 1,830
--------- --------- --------- ---------
NET EARNINGS (LOSS) $ (1,964) $ 631 $ (6,428) $ (6,140)
--------- --------- --------- ---------
--------- --------- --------- ---------
NET EARNINGS (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $ (.10) $ .04 $ (.35) $ (.39)
--------- --------- --------- ---------
--------- --------- --------- ---------
AVERAGE SHARES 19,838 15,839 18,131 15,839
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed financial statements
2
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NORD RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF
CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
SEPTEMBER 30
-----------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (6,428) $ (6,140)
Adjustments to reconcile net (loss) to
net cash provided by operating activities:
Changes in Assets and Liabilities (1,026) 2,176
Minority Interest (1,439) (1,246)
Depreciation, Depletion and Amortization 2,963 2,814
Provision for Impairment - Investment in SRL 3,000
Equity in Net (Earnings) loss of affiliate (223) (862)
-------- --------
Net Cash Provided By (Used In) Operating Activities (6,153) (258)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (384) (476)
Additions to Other Assets (1,659) (1,666)
Purchase of Short-Term Investments (6,820)
(Increase) Decrease in Investments in and Advances to Affiliates (181) 137
Increase in Investment in SRL (1,315) (603)
-------- ---------
Net Cash (Used In) Investing Activities (10,359) (2,608)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional Indebtedness 50
Payment of Indebtedness (543) (608)
Increase in Notes Payable 3,678
Restricted Cash and Investments 235 246
Issuance of Common Stock 9,912
-------- ---------
Net Cash Provided by (Used In) Financing Activities 13,332 (362)
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,180) (3,228)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,054 8,946
-------- ---------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 2,874 $ 5,718
-------- ---------
-------- ---------
</TABLE>
See notes to condensed financial statements
3
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NORD RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
1. FINANCIAL STATEMENTS
The balance sheet at December 31, 1995 is condensed financial information
taken from the financial statements, which are audited, but the independent
auditors' report included a disclaimer of opinion for an uncertainty
relating to the ability of the Company to continue as a going concern. The
interim financial statements are unaudited. In the opinion of management,
all adjustments necessary to present fairly the financial position and
results of operations for the interim periods presented, which consist of
normal recurring adjustments, except for the $3 million provision recorded
at March 31, 1995 for impairment in the Company's investment in SRL, have
been made. The results shown for the first three quarters of 1996 are not
necessarily indicative of the results that may be expected for the entire
year.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which was effective for the Company beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue
to apply APB Opinion No. 25, which recognizes compensation cost based on
the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based compensation awards
to employees and will disclose the required pro forma effect on net income
and earnings per share in its year end financial statements.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of," which requires review for
impairment of long-lived assets whenever changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption
of SFAS No. 121 has had no effect on the financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1995 annual report
to shareholders.
4
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2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Nord
Resources Corporation, its majority-owned subsidiaries and its 50% interest
in a rutile mining operation ("SRL") (collectively the "Company"). All
significant intercompany transactions and balances are eliminated.
SRL as used in these financial statements includes Sierra Rutile Holdings,
Sierra Rutile Limited (the mining operation) and other subsidiaries of both
the Company and Sierra Rutile Holdings that are economically dependent on
the mining operation. As a result of the situation described in Note 3,
the Company's 50% investment in SRL is carried at the cost basis of
accounting in the consolidated balance sheets.
Investments in 20% to 40%-owned affiliates and joint ventures and in
affiliates or joint ventures in which the Company's investment may
temporarily be in excess of 40% are carried using the equity method.
On an interim basis, all costs subject to recurring year-end adjustments
have been estimated and allocated ratably to the quarters. Income taxes,
if necessary, have been provided based on the estimated tax rate for the
respective years after excluding infrequently occurring items whose
specific tax effect is reported during the same interim period as the
related transaction.
The accompanying condensed financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
financial statements do not contain any adjustments that might be necessary
should the Company be unable to continue as a going concern.
Certain reclassifications have been made to the September 30, 1995
financial statements to conform to the classifications used in 1996. These
reclassifications had no effect on results of operations or stockholders'
equity as previously reported.
3. INVESTMENT IN SRL
In January 1995, the Company's 50% owned rutile mining operation in Sierra
Leone was attacked by non-government forces. As a result, SRL was forced
to suspend mining operations and subsequently terminated all nonessential
personnel. The resumption of operations is dependent upon many factors
including existence of adequate security for SRL's employees and the
availability of adequate financing
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to pay for the cost of resuming operations. The cost of resuming
operations includes repair or replacement of assets which have incurred
damage and deterioration during the period of suspension of operations and
costs to reestablish and train a workforce, replenish supplies and restore
and recommission facilities. Until SRL personnel can complete a detailed
assessment of the condition of SRL's assets, it is not possible to
accurately estimate these costs. In addition, SRL will likely continue to
require funds to satisfy its obligations incurred while mining is
suspended. There is no certainty that adequate financing would be
available to fund the above noted costs, although management of the
Company, SRL and the other 50% owner of SRL are engaged in discussions with
potential financing sources. As a result of the above, management of SRL
cannot estimate when operations will resume at the Sierra Leone mine.
Prior to December 31, 1994, the Company proportionately consolidated its
share in each of the assets, liabilities and operations of SRL. As of
December 31, 1994, the Company adopted the cost basis of accounting for its
investment in SRL because the mine was no longer controlled by SRL. The
Company's investment includes original cost plus undistributed earnings
through December 31, 1994 plus SRL obligations to lenders, payment of which
is guaranteed by the Company, less any related restricted cash. Once SRL
is determined to have regained control of its mine, the Company intends to
resume proportional consolidation of SRL's accounts.
During the three quarters ended September 30, 1996 the Company contributed
$1.3 million as its 50% share of funding for SRL's cash needs, primarily to
satisfy vendor payments and the limited ongoing operational needs of SRL.
Summarized financial data for the Company's 50% share of SRL's operations
are as follows:
Three Quarters Ended
September 30,
----------------------
1996 1995
---- ----
(in thousands)
Revenues $1,656 $2,231
Less Costs and Expenses:
Cost of Sales 640 1,271
Selling, General and Administrative 2,600 3,295
Costs Related to Mine Shutdown 2,315
Provision for Impairment 3,000
Other Expense 1,540 1,105
Income Tax Expense 50 89
------- -------
Net (Loss) $ (3,174) $(8,844)
---------- --------
---------- --------
6
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Included in revenues for 1996 is $409,000 received in an insurance
settlement from claims made for costs related to the evacuation of the SRL
operations in Sierra Leone. Based on assessments of SRL's assets, an
impairment reserve of $3,000,000 was recorded in the first quarter of 1995
as the Company's 50% share of damage to assets. SRL will likely record an
additional impairment reserve when a detailed assessment of the condition
of SRL's assets is completed. Although SRL will incur costs to restart the
operations, the amount of an additional impairment and costs to restart the
operations, cannot be estimated currently. If adequate security in and
around SRL's operations is not attainable or the estimated costs of
resuming SRL's operations in Sierra Leone are prohibitive, the Company may
have to record an impairment reserve against a portion or possibly all of
its investment in SRL.
4. UNEARNED INCOME
The Company has received $1,500,000 from its insurer as an advance payment
on an initial damage claim that has been filed in connection with damage
to assets at SRL. When further information regarding damage to SRL's
assets is compiled and presented to the insurer, the Company anticipates
that it will receive additional compensation, however, if the covered
damage to SRL's assets is less than $3,000,000, the Company would have to
refund 50% of the difference to the insurer.
5. MINORITY INTEREST
The minority investor in Norplex, Inc. ("Norplex"), which owns 100% of NKC,
has an option to purchase an additional 31% interest in Norplex from the
Company for $36,000,000 through June 30, 1997, after which it expires if
unexercised. Under this option, the price received by the Company would be
reduced by an amount, determined at exercise date, equal to the cumulative
amount of temporary tax differences of Norplex plus operating losses used
by the Company multiplied by Norplex's marginal tax rate and the percentage
of Norplex owned by the investor after exercise. This amount is estimated
to be $5,900,000 at December 31, 1995, if the investor had exercised the
31% option at that date. Transactions with the minority investor in
Norplex include raw material purchases of $7,431,000 and $7,656,000 during
the three quarters ended September 30, 1996 and 1995, respectively.
6. INDEBTEDNESS
As a result of the suspension of its mining operations resulting from civil
7
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disturbances in January 1995, SRL is not in compliance with certain
financial and operational covenants under its financing agreements. The
lenders have agreed to forebear from accelerating the maturities of the
loans or enforcing their rights against any collateral until January 1,
1997 to allow SRL time to determine the damage to the mining operations,
assess the political situation in Sierra Leone and develop and present a
plan for refinancing, rehabilitating and reopening the mining operation.
The forebearance agreement would terminate if there is a material change in
circumstances, including if certain actions are taken by the Company's
lessors as a result of current covenant violations under the leasing
agreements. As of September 30, 1996 and December 31, 1995, amounts due
the lenders by SRL have been classified in the balance sheet as a current
liability. SRL and the Company are currently discussing various topics
with the lenders, including extension of the forebearance period,
restructuring of the terms of the existing indebtedness and availability of
additional funding from the lenders for reopening the mine. At this time,
the Company cannot anticipate if discussions with the lenders will result
in any modifications to the existing structure of the indebtedness.
The financing agreements contain restrictive covenants relating to SRL
including requirements to maintain minimum current and debt coverage
ratios, a limit on indebtedness compared to net worth and a limit on the
amount of dividends. Additional covenants under these agreements include
restrictions on change of control of SRL and limitations on additional
indebtedness at SRL.
Separately, as part of the forebearance, and as security for its guarantee,
the Company has pledged proceeds it may receive from claims made under a
political risk insurance policy issued by an agency of the United States
government. The Company will be able to retain the first $2.7 million of
the proceeds. Any additional proceeds will be held in trust and funds
shall be released from the trust when the Company's 50% share of the
deferred principal payments have been made and no events of default exist
under the financing agreements.
On July 10, 1996 NKC obtained a revolving line of credit from a financial
institution. The line of credit is for a three year period with one year
renewal options and contains an early termination fee. Amounts borrowed
under the line bear interest at 2% above prime rate and are secured by
accounts receivable, inventory and equipment of NKC . The amount available
under the line is equal to 85% of eligible accounts receivable, as defined
in the agreement, up to $6,000,000. On September 30, 1996 NKC had borrowed
$3,678,000 under this line and $800,000 remained available to borrow.
8
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7. LEASES
NKC entered into lease agreements under which $21.7 million of equipment
has been provided to NKC. Payments under the leases are guaranteed by the
Company. Under the terms of the guaranty, the Company is required to
maintain minimum levels of (1) tangible net worth compared to total
liabilities and (2) cash flow relative to current maturities of long-term
debt. The lease agreements also place restrictions on the amount of cash
which NKC may transfer to the Company and limit repayment of advances
previously made by the Company to NKC in the event of a covenant violation.
The Company's ability to comply with the above covenants has been adversely
impacted by the suspension of SRL's operations and the Company is not in
compliance with the cash flow covenant at September 30, 1996. Although all
the lessors have not waived or modified the covenant the Company continues
to engage in ongoing discussions with the lessors and one lessor has waived
compliance with this covenant and the Company has received an indication
that certain of the remaining lessors may be willing to waive the covenant
violations and amend or modify the covenant. The lessors have the ability
to require liquidated damages ($12.6 million at September 30, 1996
including the $3.1 million noted below) and could also elect to retain
ownership of the leased equipment. The Company cannot predict that the
lessors would agree to any modifications on terms which would be acceptable
to the Company nor their willingness to continue to refrain from taking any
action to enforce their rights under the lease agreement in the event that
a waiver or modification of the covenant was not obtained.
Certain of the leases have been considered capital leases under generally
accepted accounting principles and, accordingly, an asset has been
recognized by NKC, along with corresponding indebtedness. At September 30,
1996 the net book value of equipment leased under these capital leases was
$2.3 million, while $2.7 million of indebtedness was outstanding. As a
result of the lease covenant violation at September 30, 1996, the
indebtedness outstanding under the capital leases has been classified as an
Obligation in Default and a current liability in the Condensed Balance
Sheet at September 30, 1996. The liquidated damages associated with these
capital leases was $3.1 million at September 30, 1996.
If the lessors request payment of liquidated damages, the Company does not
presently have the financial resources available to pay the entire amount
of the liquidated damages. Consequently, the Company would have to seek
additional funds, if available, from as yet undetermined sources, which may
or may not be available to the Company on conditions acceptable to the
Company. If the lessors terminate the leases and take possession of the
equipment, such an event would have a material adverse effect on NKC's
ability to operate its business.
9
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8. NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net earnings (loss) per common share and common equivalent share is
computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding during the period adjusted for the dilutive
effect of common share equivalents when applicable.
9. EQUITY IN NET EARNINGS OF AFFILIATE
The Company has a 35% interest in Nord Pacific Limited at September 30,
1996. Summary financial data for the operations of Nord Pacific Limited
for the periods are as follows:
THREE QUARTERS ENDED SEPTEMBER 30
---------------------------------
1996 1995
---- ----
(in thousands)
Sales $ 11,441 $ 10,911
Less costs and expenses 9,530 8,101
Foreign currency transaction gain (loss) (68) (325)
Forward currency exchange contracts
gain (loss) 403 (203)
Copper contracts gain (loss) (378)
Other income (expense) (209) (128)
Provision for income taxes (1,320) (753)
--------- ---------
Net earnings $ 339 $ 1,401
--------- ---------
--------- ---------
The Company's share of the net earnings for the three quarters ended
September 30, 1996 and 1995 was $223,000 and $862,000, respectively.
10. LITIGATION
The Company has reached settlements with all defendants in SRL's action
against those allegedly responsible for certain allegedly improper and
fraudulent transactions against SRL which occurred prior to 1991. The
financial statements of the Company for the three quarters ended September
30, 1996 include a final payment of $150,000 in other income in connection
with these settlements.
10
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11. STOCKHOLDERS' EQUITY
On April 15, 1996 the Company sold 3,160,000 shares of Common Stock for
$7,900,000, or $2.50 per share to a private investor. Also on April 15,
1996 the Company entered into a loan agreement with the same investor
whereby $2,100,000 was loaned to the Company. The loan was converted into
840,000 shares of the Company's Common Stock in June 1996.
At the annual meeting of stockholders of the Company held in June 1996, the
number of authorized shares of Common Stock of the Company was increased to
40,000,000 shares.
12. SUBSEQUENT EVENTS
On October 16, 1996 the Company entered into an agreement to sell 2,000,000
shares of common stock to a private investor for $10,000,000. The closing
of this transaction is subject to stockholder approval and compliance with
the applicable provision of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and requires that there not be any material
adverse changes in the financial condition of the Company prior to closing.
A special stockholder meeting is scheduled for November 20, 1996 to vote on
approval of this transaction. This investor, which previously owned
4,000,000 shares of the Company's common stock, would own approximately
27.5% of the outstanding shares after completion of this transaction.
On October 23, 1996 the Company agreed to make available, at its
discretion, up to $2,000,000 to Nord Pacific Limited ("Pacific"), its 35%
owned affiliate. Any amount advanced to Pacific is payable on demand of
the Company, bears interest at the prime rate plus 1% and if not previously
paid is convertible into shares of common stock of Pacific as of March 31,
1997 at the option of the Company. As of November 10, 1996, $950,000 has
been advanced under this agreement.
11
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased from $6.1 million at December 31, 1995 to $2.9 million at
September 30, 1996. The Company's operating activities used $6.2 million in
cash during the first three quarters of 1996. The Company received $10 million
from the sale of securities to an investor and invested $6.8 million of the cash
in short-term investments. Cash of $1.7 million was used for additions to other
assets, $384,000 was used for capital expenditures and $1.3 million was advanced
to SRL during the first three quarters of 1996. The Company borrowed $3.7
million under a line of credit and paid $543,000 of indebtedness during the
first three quarters of 1996. The Company's cash flow from operating activities
for the first three quarters of 1996 benefitted from the receipt of $150,000 as
payment relating to the settlement of litigation and from a $1.5 million advance
payment from the Company's insurer for damage claims relating to SRL.
The Company anticipates that its domestic (non-SRL) operations will have
sufficient cash to fund its activities during 1996. To increase its sources of
cash NKC obtained a $6,000,000 line of credit on July 10, 1996. The amount
available under the line is based on eligible accounts receivable. At
September 30, 1996 NKC had borrowed $3.7 million and approximately $800,000 was
available under the line. In addition, the operations at NKC are projected to
improve so that NKC could generate cash to repay a portion of the advances
previously made by the Company. However, repayment of such advances would be
prohibited under the NKC lease agreements in the event that covenant violations
continue. The NKC line of credit also limits repayment of advances to the
Company unless certain financial conditions are met. This improvement in cash
flow of the kaolin segment is expected to result from increasing levels of sales
of its Norplex-Registered Trademark- and Norcal-Registered Trademark- line of
products, the amount and timing of which cannot be projected with any certainty.
The Company also expects to be required to fund SRL's operating cash needs as
further described below.
On April 15, 1996 the Company sold 3,160,000 shares of Common Stock for
$7,900,000, or $2.50 per share to a private investor. Also on April 15, 1996
the Company entered into a loan agreement with the same investor whereby
$2,100,000 was loaned to the Company. The loan was converted into 840,000
shares of the Company's Common Stock in June 1996. On October 16, 1996 the
Company entered into an agreement to sell to the same investor 2,000,000 shares
of Common Stock for $10,000,000. The closing of this transaction is subject to
shareholder approval and other conditions. A shareholder meeting is scheduled
for November 20, 1996 to vote on approval of this transaction. The Company has
indicated that it intends to use approximately $5,000,000 from this offering to
acquire additional shares of common stock from Nord Pacific Limited ("Pacific")
should Pacific complete a public offering of its stock. If such offering does
not occur these funds would
12
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be available for general corporate purposes.
On October 23, 1996 the Company agreed to make available, at its discretion, up
to $2,000,000 to Pacific under a demand note. The Company had advanced
$950,000 under this note as of November 10, 1996.
The Company expects that it will have sufficient cash for its working capital
needs during 1996 to allow NKC to continue to establish a market for its
Norplex-Registered Trademark- products and to fund its share of the ongoing
costs of maintaining SRL until a plan is commenced for resuming its operations.
The Company's cash balances plus the cash from the pending sale of the Company's
common stock, if it is received, would be available to provide SRL with funds to
refurbish the capital equipment and restart the operations at SRL. However,
based on preliminary estimates of funds which may be required by SRL, the
Company will likely have to seek additional sources of funds during 1996 and
1997. These sources could include proceeds from claims filed under the
Company's political risk insurance policies (currently limited to $2.7 million
available to the Company under the bank financing agreements) or obtaining
external funding at SRL to reduce demands on the Company's cash balances.
However, the Company cannot determine if any financing sources would be
available at terms acceptable to the Company and SRL. Unless the Company is
successful in obtaining additional funding, its cash reserves would be
inadequate for it to fund the costs for SRL to resume its operations or to
satisfy any demands for payment from the NKC's lessors or from SRL's lenders as
described below.
As a result of the suspension of its mining operations resulting from civil
disturbances in January 1995, SRL is not in compliance with certain financial
and operational covenants under its financing agreements. The lenders have
agreed to forebear from accelerating the maturities of the loans or enforcing
their rights against any collateral until January 1, 1997 to allow SRL time to
determine the damage to the mining operations, assess the political situation in
Sierra Leone and develop a plan for refinancing, rehabilitating and reopening
the mining operation. The forebearance agreement would terminate if there is a
material change in circumstances, including if certain actions are taken by
NKC's lessors as a result of current covenant violations under the leasing
agreements. As of September 30, 1996 and December 31, 1995, amounts due the
lenders by SRL have been classified in the balance sheet as a current liability.
SRL and the Company are currently discussing various topics with the lenders,
including extension of the forebearance period, restructuring of the terms of
the existing indebtedness and availability of additional funding from the
lenders for reopening the mine. At this time, the Company cannot anticipate if
discussions with the lenders will result in any modifications of the existing
structure of the indebtedness.
Due to the lengthy suspension of its production, SRL has been and will continue
to be relying on funds from the Company and its other 50% owner to sustain SRL.
In addition, SRL will need to seek funds through additional bank financing or
from other undetermined sources when a decision is made to resume operations in
Sierra Leone. SRL is unable to determine the amount of funds which will be
required for this purpose or if adequate funds
13
<PAGE>
would be available from undetermined sources on conditions acceptable to SRL and
the Company.
Payments under lease agreements at NKC are guaranteed by the Company. The
guarantee requires the Company to maintain minimum levels of tangible net worth
compared to total liabilities and of cash flow relative to current maturities of
long-term debt. The lease agreements also place restrictions on the amount of
cash which NKC may transfer to its owners and limitations on the repayment of
advances previously made by the Company to NKC in the event of a covenant
violation. At September 30, 1996, the Company was in violation of the cash flow
covenant and has requested a waiver of the covenant from the NKC lessors.
Although the Company has not received a waiver of the covenant from all the
lessors, the Company is engaged in ongoing discussions with the lessors and one
lessor has waived compliance with this covenant and the Company has received an
indication that certain of the other lessors may be willing to waive the
covenant violations and amend or modify the covenant. The Company cannot
predict whether or not lessors would agree to any modifications on terms which
would be acceptable to the Company or their willingness to continue to refrain
from taking any action to enforce their rights under the lease agreement in the
event that a waiver or modification of the covenant was not obtained. The
lessors have the ability to require liquidated damages ($12.6 million at
September 30, 1996) and could also elect to retain ownership of the leased
equipment.
The Company has filed an initial claim for damage due to political violence at
SRL under a political risk insurance policy. Additional claims are likely to be
filed as more information becomes available as to damage at the SRL mine and the
cost to repair equipment. The Company has received a $1.5 million advance
payment from the insurer as a prepayment of damage claims; however, it is not
able to estimate the total amount or timing of any future payments which may be
received from claims under this policy. If the covered damage to SRL's assets
is less than $3.0 million, the Company would have to refund 50% of the
difference to the insurer. The Company has pledged any proceeds in excess of
$2.7 million it may receive under this policy as security under the bank
financing agreements.
RESULTS OF OPERATIONS
The Company incurred a net loss for the three quarters ended September 30, 1996
of $6.4 million compared to $6.1 million in 1995. Since the Company has adopted
the cost basis of accounting for its investment in the rutile segment, the
results for 1996 and 1995 do not include any amounts relating to its operations;
however, the Company recorded a $3.0 million impairment against its investment
in the rutile segment in the first quarter of 1995. The kaolin segment reported
an increase in operating loss in 1996 compared to 1995 as a result of a decrease
in revenue and an increase in certain raw material and production costs in 1996
compared to 1995. The Company recorded $223,000 as its share of earnings from
Nord Pacific for the three quarters of 1996 compared to $862,000 for the three
quarters of 1995. The three quarters of 1995 benefitted from $2.7 million of
income
14
<PAGE>
recognized from the settlement of litigation compared to $150,000 for the same
period of 1996. General and administrative expenses decreased in 1996 compared
to 1995 as a result of reduction in legal expenses due to the settlement of
litigation in 1995 and lower cost for the Company's group insurance plans.
The net loss for the quarter ended September 30, 1996 was $2.0 million compared
to net income of $631,000 for the same period in 1995. This comparison is
affected by $2.3 million of income recognized in the third quarter of 1995 from
the settlement of litigation. The Company recorded $135,000 in the third
quarter of 1996 as its share of income from an affiliate compared to $617,000
for the third quarter of 1995. The aforementioned decreases in general and
administrative expenses also affected the comparison of the third quarter of
1996 to the same period in 1995.
An analysis of the changes in revenues, cost of sales and operating earnings
(before interest and income taxes) for the kaolin segment ("NKC") is contained
below.
Revenues decreased to $26.4 million in the three quarters ended September 30,
1996 compared to $29.0 million during the same period of 1995. Revenues for the
quarter ended September 30, 1996 were $9.4 million compared to $8.8 million
during the same period in 1995. Revenues and tons sold for the Company's
Norplex-Registered Trademark- and conventional products increased in the third
quarter of 1996 compared to the same period of 1995 but the revenues and tons
sold for all the Company's products decreased for the three quarters ended
September 30, 1996 compared to 1995. NKC has been affected by weak demand for
its products which began in the fourth quarter of 1995. The paper industry,
which comprises the market for NKC's products, has been particularly stagnant
with lesser demand for paper products resulting in mill down time and a weaker
demand for NKC's products. Although the demand for Norplex-Registered
Trademark- products has been affected by these economic conditions, the number
of Norplex-Registered Trademark- customers remains constant and the trialing
activity of the Norplex-Registered Trademark- products is continuing.
Cost of sales as a percentage of sales was 106% and 105% for the first three
quarters and third quarter of 1996, respectively, compared to 100% and 104% for
the same periods in 1995. This increase in 1996 is due primarily to the
aforementioned decrease in sales revenue and also increases in the cost of
certain raw materials and production costs.
The 1996 periods benefitted from reductions in selling, general and
administrative expenses due to cost cutting measures, although as a result of
the increases in cost of sales as a percent of sales, an operating loss of $5.1
million and $1.7 million was incurred during the first three quarters and third
quarter of 1996, respectively, compared to $4.3 million and $1.6 million during
the same periods of 1995.
NKC has incurred operating losses beginning in 1989 due primarily to costs
associated with development and market introduction of its Norplex-Registered
Trademark- products and a longer than anticipated new product introduction
period. As a result of the above circumstances, NKC had not been able to
generate sufficient sales volume at adequate prices to recover its
15
<PAGE>
fixed and variable costs of production during this period. This situation
improved during 1994 compared to prior years and the sales volume and prices of
Norplex-Registered Trademark- products had reached levels sufficient to recover
the fixed and variable production costs and to begin to fund the selling,
general and administrative costs of NKC. However, during 1995 and continuing
into 1996, lower sales volumes of NKC's products and higher cost of production
resulted in increased operating losses. Weak demand for NKC's products is a
direct result of high inventories and sluggish demand in the paper industry.
The Company expects the aforementioned weak market for NKC's products to
continue for the remainder of 1996. NKC is attempting to increase sales volume
of Norcal until such time as the volume of Norplex-Registered Trademark-
products is at a level to generate adequate operating earnings. However, until
the level of Norplex-Registered Trademark- and Norcal-Registered Trademark-
sales volume and prices improve, NKC will continue to experience operating
losses. The Company cannot precisely estimate when or if adequate sales levels
of Norplex-Registered Trademark- products will be achieved or the level of
operating losses which will be incurred during the future periods. However, NKC
continues to anticipate additional conversions of customers to the
Norplex-Registered Trademark- products and future testing and conversion at a
number of different customer locations which, if successful, would likely
benefit future operating results.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Form 10-K for the fiscal year ended December
31, 1995 for a discussion of certain litigation, which has been settled,
involving the Company's 50% owned subsidiary, Sierra Rutile Limited.
ITEMS 2 - 5.
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
The Financial Data Schedule is filed herewith as part of this report on
Form 10-Q.
17
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORD RESOURCES CORPORATION
(Registrant)
/s/ Terence H. Lang
---------------------------------
Terence H. Lang
Senior Vice President - Finance
(Principal Financial Officer and
Authorized Officer)
DATE: November 14, 1996
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORD
RESOURCES CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,874
<SECURITIES> 6,820
<RECEIVABLES> 6,546
<ALLOWANCES> 0
<INVENTORY> 3,282
<CURRENT-ASSETS> 20,198
<PP&E> 64,666
<DEPRECIATION> 32,240
<TOTAL-ASSETS> 140,528
<CURRENT-LIABILITIES> 37,643
<BONDS> 1,330
0
0
<COMMON> 198
<OTHER-SE> 92,248
<TOTAL-LIABILITY-AND-EQUITY> 140,528
<SALES> 26,199
<TOTAL-REVENUES> 26,586
<CGS> 27,855
<TOTAL-COSTS> 34,788
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 525
<INCOME-PRETAX> (6,428)
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<NET-INCOME> (6,428)
<EPS-PRIMARY> (.35)
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