<PAGE>
IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-K/A IS BEING FILED
IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION.
FORM 1O-K/A
Amendment No. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year ended: December 31, 1994
----------------------------------------------------
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 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 24, 1995: $4,361,010
------------
Number of shares outstanding of registrant's common stock, $.10 par value, as of
March 24, 1995: 23,276,012
------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K[ ].
Exhibit index on consecutive page 34 Page 1 of 36 pages
<PAGE>
INDEX
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PART I
------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
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
<CAPTION>
PART II
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<S> <C> <C>
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 27
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 27
<CAPTION>
PART III
--------
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 32
Item 13. Certain Relationships and Related Transactions 33
<CAPTION>
PART IV
-------
<S> <C> <C>
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 34
</TABLE>
<PAGE>
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.
At December 31, 1994, North Lily had the following subsidiaries and affiliates:
Ashdown Gold Mines, Inc., a Nevada Corporation, 100% (inactive).
CRI - Montana Division, a Georgia corporation, 100% (inactive).
Cumberland Mining Corporation, a Georgia corporation, 100% (inactive).
Hayward Mining Corporation, a Colorado corporation, 100% (inactive).
Minera Northern Resources S.A. ("Northern"), a Chilean limited liability
company, 100% (active).
Tenhard Resources, Inc., a Montana corporation, 100% (inactive).
Defender Mining and Milling Corporation, a Utah corporation, 86.10%
(inactive).
Middle Swansea Mining Company, a Utah corporation, 86.01% (inactive).
Compania Minera Phoenix S.A., ("Phoenix") (formerly Compania Minera San
Martin S.A.), a Chilean limited liability company, 50% owned by Northern
(active).
Minera San Lorenzo Limitada ("San Lorenzo"), a Chilean limited liability
company, 50% owned by Northern (inactive).
-3-
<PAGE>
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 two countries; the United
States and Chile. The Company has interests in various gold projects in the
United States and, as at December 31, 1994, a 50% equity interest in a copper
project in Chile. Historically, the Company's principal mineral target has been
gold.
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 $683,979, 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.
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, silver 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.
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. There are numerous refineries to which the Company's
ore can be sold, and consequently, the loss of this outlet would not affect the
Company. 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 50% 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
-4-
<PAGE>
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.
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
-5-
<PAGE>
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.
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.
-6-
<PAGE>
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.
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
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<PAGE>
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, 1995, the Company has 3 employees in the U.S. through its joint
projects, approximately 8 in Chile through its joint Tuina project, and the
following company officers: William C. Bleimeister, Chairman; Stephen E.
Flechner, President and Chief Executive Officer; W. Gene Webb, Executive Vice-
President and Corporate Secretary; Nick DeMare, Treasurer; and Christine
Reynolds, Assistant Corporate Secretary.
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. 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.
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<PAGE>
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 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.
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"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 - 1995
The following table lists the properties in which the Company has an interest,
and the 1995 exploration budget for each property. In approving the 1995
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
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<TABLE>
<CAPTION>
Approximate
Property Interest Held 1995
Size by the Company Exploration
Property Name State Location (Acres) as of 12/31/94 Budget
- ------------- ----- -------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Nine Mile Montana United States 1,265 100% -
Santa Andrea Region VII Chile 2,225 50% -
Silver City Utah United States 20 50% -
Tintic Utah United States 6,000 5% NSR/(1)/ $ 150,000/(2)/
Tintic Utah United States 4,440 100% -
Tuina Region II Chile 15,130 50% -/(3)/
---------
TOTAL $ 150,000
=========
</TABLE>
(1) NSR - Net Smelter Return
(2) To be incurred by lessee of property
(3) Subsequent to December 31, 1994, the Company negotiated an agreement to
restructure its interest in Tuina. In addition, an independent bankable
feasibility study is to be completed and delivered by June 30, 1995.
Due to the Company's current financial situation it does not plan to conduct any
exploration activities in 1995. 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 1994 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 recognize a provision for diminution in vlaue of $300,000 for the Nine Mile
property. In addition the Company re-evaluated its continued involvement in the
Ashdown property joint venture. It was concluded that, at the current price of
gold, and its limited known reserves development of the property was
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<PAGE>
uneconomic because of estimated high operating costs, significant monthly
holding costs, and the heavy royalty and net profits payments associated with
the lease. As a result the Ashdown property joint venture agreement was
terminated and capitalized costs of $197,850 were written off.
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 and the
States of Montana, Nevada 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 was owned
equally (50:50) by the Company and Mahogany at December 31, 1994. Subsequent to
December 31, 1994, the Company and Mahogany agreed to restructure the ownership
interest of Phoenix. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Description of Property:
- ------------------------
The property is located approximately 60 kilometers (37 miles) east of Calama,
in Region II in the Country of Chile and consists of a total of 6,125 hectares
(15,124 acres).
Hectares - Net
--------------
394 San Jose Lease
45 Santa Rosa Joint Venture
5,686 Other properties
-----
6,125
=====
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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. In addition
Phoenix has agreed to make certain bank payments while the Operating Lease
is in effect. The payments required of Phoenix for the next 5 years are
shown below:
<TABLE>
<S> <C>
1995 $ 292,000
1996 $ 280,000
1997 $ 267,000
1998 $ 255,000
1999 $2,301,000
</TABLE>
Included in the 1999 payments is a lump sum payment of approximately
$2,219,000. 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) Santa Rosa Joint Venture:
-------------------------
In 1992, the Company and Mahogany entered into an agreement to form a joint
venture with the owner of the Santa Rosa copper properties. Under this
agreement, the Company and Mahogany are to prepare and deliver a
feasibility study and incur up to $250,000 for an exploration and
development drilling program in order to earn a 51% interest in the
properties. At current prices the other 49% owner would receive the
equivalent of about a 3% royalty. To date the feasibility study has not
been prepared and the required exploration work has not been completed. The
owner of the Santa Rosa property has granted a number of extensions for
completion of this work program, the most recent of which expires June 30,
1995. If the work is not completed by June 30, 1995 the agreement will
expire unless a further extension is received.
There is one known area of copper mineralization on this property called
the Santa Rosa pit.
(3) 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-
<PAGE>
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.
1994 Activities
- ---------------
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.
In addition, results from an initial drill program at the Santa Rosa prospect
has confirmed that the mineralization recognized on surface extends to depth.
A second drilling program was commenced at the Santa Rosa prospect to further
develop this area. Although management is encouraged by the results of the
drilling program, the Company is not yet in a position to revise its reserve
estimates.
1995 Planned Activities:
- ------------------------
The Company and its joint venture partner, Mahogany, have been engaged in
ongoing discussions with equipment manufacturers and other interested parties to
obtain project financing for the development of the SX/EW plant at Tuina. Other
alternatives under discussion included the Company reducing its ownership
interest in Tuina in settlement of its outstanding debt to Mahogany. On April
12, 1995, the Company and Mahogany concluded an agreement on the restructuring
of the ownership interests of the Tuina Project. The restructuring will enable
the Tuina Project to be advanced. An independent bankable feasibility study is
expected to be completed by June 30, 1995. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
TINTIC PROPERTIES
Ownership:
- ----------
The properties are held 100% by the Company.
Description of Property:
- ------------------------
The property is located in the Tintic Mining District, Utah and Juab Counties in
the State of Utah, approximately 80 miles south of Salt Lake City. The property
comprises (1) surface and mineral rights on approximately 8,115 acres of
patented lode mining claims and other patented land owned in fee simple; (2)
2,200 acres of patented land with
-13-
<PAGE>
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, Defender Mining and Milling Co. owns 28 acres of
patented lode mining claims and Middle Swansea Mining Company owns 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 1995 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 1995 Activities:
- ------------------------
The Company is seeking information from the lessee as to their planned 1995
program, exploration results and prior records.
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.
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.
-14-
<PAGE>
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.
<TABLE>
<CAPTION>
Production ounces 1994 1993 1992
----------------- ---- ---- ----
<S> <C> <C> <C>
Gold equivalent -0- 737 6,579
Silver conversion rate N/A 90:1 90:1
</TABLE>
1994 Activities:
- ----------------
During the year the Company proceeded with the closure and reclamation of the
Silver City heap leach facility. The Company has sold non-essential equipment
and has leased and commenced use of carbon columns to recover precious metals
and base metals in the pregnant solution for income and reclamation purposes.
Planned 1995 Activities:
- ------------------------
The remaining reclamation costs have been budgeted for $300,000 of which
$150,000 is the Company's share. Approximately $162,000 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 1995 remains a substantial burden to
the Company.
NINE MILE PROPERTY
Ownership:
- ----------
The property is held 100% by the Company, subject however to resolution of a
legal dispute with the lessor of the property.
Description of Property:
- ------------------------
The property is located approximately 50 miles northwest of Missoula, Montana
and comprises approximately 1,265 acres.
Mineralization:
- ---------------
The property hosts a north-west to south-east treading fault controlled vein
system between 9 and 35 feet thick which extends over 10,000 feet. The Company
estimates, from work completed to date, the property contains a probable 150,000
ounces and a possible 100,000 ounces of gold. There are no proven gold
reserves.
Description of Property Agreement:
- ----------------------------------
The Company agreed to lease a 100% interest in this property by making payments
of $33,000 in 1994, $75,000 annually during 1995 to 1997, and $78,000 annually
during 1998 to 2009, and incurring a total of $1,235,000 in exploration costs.
In 1992 the Company ceased exploration work and in 1993 discontinued making
lease payments until a dispute was settled over logging rights to the property
between the underlying land owner and a third party. This dispute threatened
clear title to the property and effectively precluded the Company from
conducting any work on the property. Although
-15-
<PAGE>
the legal dispute regarding logging rights appeared to be settled in 1994, the
third party commenced an appeal process, continuing the property dispute. The
Company reviewed its participation in the property in light of the continued
property dispute and has informed the lessor that it will not consider further
exploration of the property while the property is in dispute, but is reserving
its equitable rights to resume as leasee of the property when title is resolved.
The lessor of the property disputes the Company's rights under the lease. For
1994, the Company has decided to record a provision for diminution in value of
$300,000 for Nine Mile. The carrying value of the property has been written
down to $71,397 being the estimated value of the surrounding mining claims
directly held by the Company.
Prior Activities:
- -----------------
In 1990, the Company drilled 24 holes totalling 5,829 feet and completed 4,100
feet of trenching. This work exposed roughly 4,300 feet of gold mineralization
following both low and high angle structures. Five higher grade targets areas
have been identified and partially drill tested.
1994 Activities:
- ----------------
No significant exploration activity occurred during 1994.
Planned 1995 Activities:
- ------------------------
Due to the dispute the Company has no plans to make any further property
payments or conduct further exploration work. The lessor has asserted that the
Company is in default of the agreement and has requested that the Company make
all past due property payments and initiate an exploration program. The Company
will not make any payments or incur further expenditures until the dispute is
resolved. In addition the Company is assessing its alternatives to recover
costs and expenses which were incurred by the Company in defending its interests
in the dispute.
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 William E. Grafham; Baja Gold,
Inc.; Dirk M. Lever; Thomas L. Crom; Anton R. Hendriksz; Nick DeMare; North Lily
Mining Company; International Mahogany Corp.; and John Does, being a designation
for directors and officers of North Lily who are presently unknown to the
Plaintiffs. The Plaintiffs alleged that the August 6, 1993 transaction
involving the disposition of International Mahogany Corp. (as more fully
described in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations) was wrongful. Plaintiffs sought injunctive relief
and rescission of the transaction, as well as actual and punitive damages and
costs of the action. 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. The Company and Mr. Grafham sought
entry of a preliminary and permanent injunction enjoining the defendants from
soliciting moneys through the use of false and defamatory statements concerning
them.
In March 1995, a judgment was entered against Clarence Taylor, The Bottom Line,
Inc., and Taylor Frank & Associates, Inc. in the amount of $1,000,000. In
addition, these three defendants and Dorothy Frank (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
-16-
<PAGE>
Action. In exchange for this agreement, Mr. Grafham and the Company agreed not
to pursue their claims for additional monetary damages.
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. However, the Company disputes Mr.
Holcomb's computation, which is based on a higher rate of pay. 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 October 17, 1995 has been
scheduled.
During 1992, as a result of a dispute over a Chilean mining contractor's
billings, the mining contractor obtained a court issued embargo preventing
copper precipitate produced by the Company's 50%-owned affiliate, Phoenix, at
the Tuina mine in Chile from being shipped for smelting. Subsequently, Phoenix
and the mining contractor agreed to settle the dispute through arbitration, and
the precipitate was released from the embargo. The Company and its joint-
venture partner, Mahogany, with the advice of their Chilean counsel, believed it
was in their best interest to settle directly with the mining contractor rather
than await arbitration. An agreement was reached with the mining contractor in
February 1994. In settlement of all claims, Phoenix has agreed to pay the
mining contractor $180,000 and pay arbitrator fees estimated at $20,000. An
initial settlement payment of $80,000 was paid on signing of the settlement
agreement, $40,000 six months thereafter (paid) and the final instalment of
$60,000 is due 12 months thereafter.
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 now
commenced. The Company believes the claims are without merit and will continue
to defend itself vigorously.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
-17-
<PAGE>
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:
<TABLE>
<CAPTION>
1994 High Low
---- ---- ---
<S> <C> <C>
First quarter $0.53 $0.38
Second quarter $0.34 $0.19
Third quarter $0.38 $0.12
Fourth quarter $0.25 $0.09
<CAPTION>
1993 High Low
---- ---- ---
<S> <C> <C>
First quarter $0.75 $0.47
Second quarter $0.81 $0.44
Third quarter $0.81 $0.44
Fourth quarter $0.56 $0.38
</TABLE>
On March 24, 1995, the high bid price of the common stock was $0.1875 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 24, 1995, there were 10,795 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-
<PAGE>
Item 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues - $ 1,409,836 $ 3,194,916 $ 13,134,403 $ 22,632,573
Loss from continuing operations
before extraordinary item $(2,071,147) $(6,286,733) $(4,697,928) $(11,929,642) $(12,458,833)
Loss before
extraordinary item $(2,071,147) $(6,271,619) $(5,210,307) $(11,934,592) $(12,458,833)
Net loss $(2,071,147) $(6,271,619) $(5,210,307) $(11,934,592) $(12,458,833)
Loss per share from continuing
operations before extraordinary
item $(0.09) $(0.27) $(0.25) $(0.63) $(0.64)
Loss per share
before extraordinary item $(0.09) $(0.27) $(0.28) $(0.63) $(0.64)
Net loss per share $(0.09) $(0.27) $(0.28) $(0.63) $(0.64)
Total assets from continuing
operations $5,105,048 $6,354,791 $21,049,824 $27,975,190 $47,577,604
Total assets $5,105,048 $6,354,791 $22,467,197 $31,739,931 $50,203,854
Non-current liabilities $1,168,223/(2)/ - - - -
Book value per share/(1)/ $0.13 $0.22 $0.23 $0.58 $1.17
Cash dividends declared - - - - -
</TABLE>
/(1)/ Based on the outstanding number of shares less treasury stock.
/(2)/ Includes $345,250 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-
<PAGE>
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. To date, the
Company has only paid half of its share of termination payments ($56,250 of
$112,500) and has not paid any consulting amounts. The Company, however, has
included all unpaid and future amounts, totalling $156,250, as Company
liabilities.
In December 1993, the Company sold the Baja Note to Mahogany at face value,
receiving as consideration a reduction of $500,000 of amounts due by the Company
to Mahogany. During the year ended December 31, 1994, the Company sold, through
the facilities of the Toronto Stock Exchange, 400,000 common shares of Baja for
net proceeds of $553,314, recognizing a gain of $134,853 from the sales. At
December 31, 1994, the Company owned 250,000 common shares of Baja, which had an
estimated market value of $437,500 based on the then closing market price.
Results of Operations
The Company incurred a loss of $2,071,147 ($0.09 per share) for the year ended
December 31, 1994, compared to losses of $6,271,619 ($0.27 per share) for 1993
and $5,210,307 ($0.28 per share) for 1992. There was no revenue, no depletion
and depreciation charges and no cost of sales for 1994. The lack of revenue,
depletion and depreciation charges and cost of sales during 1994 is due to the
commencement 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 does not anticipate any revenue over the next year from
current properties. The Company, for the years ended 1993 and 1992, had revenue
of $1,409,836 and $3,194,916, depletion and depreciation costs of $504,415 and
$891,524 and cost of sales of $2,490,296 and $4,450,271.
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. The significant reduction in revenue in 1993 is due
to the winding-down of operations at the Silver City Joint Venture and the
decision to suspend operations at the Tuina mine. During 1992, the Company
initiated operations at the Tuina copper mine in Chile, however, during that
year, operations were curtailed due to an embargo preventing Company copper
precipitate produced at the Tuina mine from being shipped for smelting. 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, compared
with 6,579 ounces sold at an average price of $346 per ounce during 1992. 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 compared with 2.3 million pounds sold at an average price of $0.39 per
pound of precipitates for 1992. The Company does not anticipate any revenue
during 1995 from its current properties.
-20-
<PAGE>
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. During 1992, due to much higher, levels of production activity, the
Company incurred costs of $3,357,223 to operate and produce at Silver City and
$1,093,048 for Tuina.
Depletion and depreciation costs for 1993 are lower when compared to 1992.
Depreciation of certain mill mining equipment and depletion of resource
properties is based on the utilization of underlying ores at the mine sites.
With reduced levels of production, depletion and depreciation based on
production is reduced accordingly.
As a result of the Company selling its equity investment in Mahogany, general
and administrative costs have been reduced from prior years. General and
administrative costs for 1994, which includes half the general and
administrative costs incurred by the office in Chile, was $862,735, compared to
$1,721,390 in 1993 and $2,460,910 in 1992. 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 1994, the Company
spent $432,425 on exploration and property holding costs compared with $430,089
in 1993 and $249,390 in 1992.
During 1994, Company management reviewed the carrying values of its mineral
properties and decided to terminate the Ashdown joint venture agreement. As a
result of this decision, a write-down of $197,850 has been charged against
earnings in 1994. During the years ended 1993 and 1992, properties with book
values of $52,912 and $469,492 respectively, were abandoned, with a
corresponding charge to earnings for the year. In addition, in 1994 the Company
recognized a $300,000 provision for diminution in value of its Nine Mile
property. No provision was recognized in 1993. For the year ended 1992, previous
Company management determined certain properties held by the Company should be
provided for a diminution in value. Accordingly, a provision of $700,000 was
charged to earnings in 1992.
During 1992, as a result of a dispute over a Chilean mining contractor's
billings, the mining contractor obtained a court issued embargo preventing
copper precipitate produced by the Company's 50%-owned affiliate, Phoenix, at
the Tuina mine in Chile from being shipped for smelting. In 1993, Phoenix and
the mining contractor agreed to settle the dispute through arbitration, and the
precipitate was released from the embargo. The Company incurred costs of
$258,178 in 1992 associated with the embargo. During February 1994, the Company
and its joint-venture partner, Mahogany, settled their dispute with a former
mining contractor. The Company's portion of the settlement and associated fees
was $100,000. This amount was included as part of other expenses 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 1992. 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 1992,
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 1994
to 1992.
-21-
<PAGE>
During the year ended 1994, the Company realized gains from the sale of
marketable securities of $170,494. Gains on the sale of marketable securities in
1994 primarily reflect the sale of common shares of Baja, proceeds from which
have been utilized to meet the Company's liquidity requirements. 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. For the year
ended 1992, the Company disposed of marketable securities with a book value of
$2,381,520 for proceeds of $1,793,341, realizing a loss of $588,179.
During 1994, after unsuccessfully trying to locate a buyer for Company mill
equipment in Montana, the Company has written-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 $664,515.
During 1992 the Company and its joint venture partner, International Corona,
sold mining equipment from the Jolu mine. The Company's share of the gain on the
sale of the equipment was $482,338 for the year.
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.
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 based on the August 6,
1993 closing stock market price of Baja. The Company recognized a loss of
$2,928,595 in 1993 on the sale of Mahogany.
During 1992, the Company sold 525,000 shares of Mahogany for proceeds of
$342,469, recognizing a loss of $281,221 on the sale.
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. ("Mahogany U.S."), 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, the oil and gas operations generated earnings of
$205,234, compared to a loss of $2,049,515 in 1992. The increase in earnings in
1993 from 1992 is due primarily to the Company's decision to abandon oil and gas
properties with a book value of $1,601,950 during 1992.
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 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
-22-
<PAGE>
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 a third party and/or financing, and;
(b) a new project and financing may be acquired with Company stock.
Due to the nature and risks of the mining industry, traditionally, debt
financing is normally only available on a project basis. In the opinion of
management, Company properties, with the possible exception of Tuina, have not
advanced sufficiently, from a technical standpoint, to be eligible for typical
mining project debt financing. The Company, in conjunction with Mahogany, is
seeking project financing for further development of the Tuina project. Any
financing raised for the development of the Tuina project would only be
available for the specific project and would not be available to the Company for
its own purposes.
Throughout 1993 and a portion of 1994, 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, a significant portion of the Company's
capital resources was funded by advances from Mahogany. Approximately $1,215,000
was advanced to the Company by Mahogany during 1993, and a further $358,258 has
been advanced during 1994. An outstanding balance of $648,973 to Mahogany is due
at December 31, 1994. In December 1993, Mahogany stated it was reluctant to fund
any further Company capital requirements and in March 1994, demanded repayment
of amounts due. The Company and Mahogany have been engaged in ongoing
discussions with equipment manufacturers and other third parties to obtain
financing for the development of the SX/EW plant at Tuina. Effective April 12,
1995 the Company and Mahogany agreed to a restructuring of the ownership
interest of the Tuina project. 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 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 and are due on or before August
31, 1995. These funds were used to meet a portion of the Tuina operating costs.
On October 27, 1994, the court dismissed the South Carolina Action. On July 11,
1994, the Company and Mr. William E. Grafham commenced a defamation suit against
the Plaintiffs. The complaint alleged that in connection with the South Carolina
Action, solicited monies from shareholders of the Company and in connection with
such solicitation, the defendants published false and defamatory information
concerning the Company and Mr. Grafham. The Company and Mr. Grafham sought an
injunction enjoining the defendants from soliciting monies through the use of
false and defamatory statements concerning them. In March 1995, a judgment was
entered against Clarence Taylor, The Bottom Line, Inc., and Taylor Frank &
Associates, Inc. in the amount of $1,000,000. In addition, these three
defendants and Dorothy Frank (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 monetary damages. Management hopes the
resolution of this defamation suit will put an end to the false rumours about
the Company so that it can move forward to obtain financing for meritorious
Company projects and to participate in new opportunities in and beyond North
America. The South Carolina Action made it impossible for Company management to
secure equity financing on agreeable terms. In addition, a former Company
officer, a related company and certain creditors have agreed to accept shares of
the Company, at an ascribed price of
-23-
<PAGE>
$0.30 per share, in exchange for settlement of debts totalling $354,250. Current
officers of the Company have also agreed to defer repayment of indebtedness of
$165,000 until January 2, 1996, at which time the indebtedness may be either
settled with cash, if available, or the issuance of shares of the Company, at an
ascribed price of $0.30 per share. Some outstanding Company debts may be settled
with the further issuance of Company shares, on agreeable terms. If achieved,
the effect of such actions will be an improved Company liquidity position.
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, and
marketable securities with an estimated market value of $537,217, including the
remaining 250,000 Baja common shares held. 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, 1994 the Company had a working capital deficiency of $490,882,
an increase of $219,332 from its working capital deficiency of $271,550 at
December 31, 1993. The Company suspended copper production at Tuina in 1993 and
does not expect to resume operations within the next year.
The Company reports a use of funds of $895,353 from operating activities for the
year ended December 31, 1994. This compares to a use of funds of $2,816,949 and
$3,520,995 for 1993 and 1992, respectively.
During the year ended December 31, 1994, the Company was provided cash of
$334,642 from investment activities. The Company received net proceeds of
$665,803 from the sale of its marketable securities. The Company used $300,017
in the exploration of its mineral properties. An additional $31,144 was used to
purchase equipment.
For the year ended December 31, 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
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 1992, the Company used funds of $1,265,800
for investing activities, which comprised of proceeds from the net sale of
marketable securities and investments of $1,793,341, the sale by the Company of
subsidiary stock of $342,469, the Company utilizing $213,005 to acquire a
subsidiary's stock, proceeds from the net sale of mining equipment of $589,183
and the investing of $3,050,869 in mineral properties.
For the year ended December 31, 1994, the Company was provided funds of $559,595
from financing activities compared to $195,146 provided in 1993 and $1,346,715
provided in 1992. 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. For the year ended
December 31, 1992, the Company was provided $1,346,715 from financing activities
through the issuance of subsidiary stock for $1,097,875, the sale by a
subsidiary of Company stock of $196,340 and $52,500 proceeds from the sale of
notes receivable.
The Company conducts its current mining and exploration activities in the United
States and Chile. As a result, the Company is subject to certain risks,
including expropriation, political instability, varying degrees of inflation and
other uncertainties.
-24-
<PAGE>
New Management Team
On May 16, 1994, the Company announced the installation of a new management
team. Mr. Stephen E. Flechner became the Company's President and Chief Executive
Officer. In addition, the new management team includes Mr. William C.
Bleimeister as Company Chairman, Mr. Raymond E. Irwin as Vice-President,
Exploration, and Mr. W. Gene Webb as Executive Vice-President. Messrs. Flechner,
Bleimeister and Webb have become Company Directors, duly elected by the board,
in accordance with the applicable laws of the State of Utah.
Mr. Flechner was formerly with Gold Fields Mining Corporation as Vice-President,
General Counsel and Secretary. Gold Fields Mining Corporation was the gold
exploration and mining U.S. subsidiary of Consolidated Gold Fields U.K.,
subsequently acquired by Hanson PLC. Consolidated Gold Fields also formerly
owned 49% of Newmont Mining Corp., one of the world's largest gold mining
companies. Since mid-1993, Mr. Flechner has served as President of Akiko Gold
Resources Ltd., a publicly-traded Canadian company.
Mr. Bleimeister led the successful development of Gold Fields Mining Corporation
from 1981 to 1993 in the capacities of Vice-President, Operations, President &
CEO, and Chairman; while Mr. Irwin worked with Mr. Flechner as Regional
Exploration Manager at Gold Fields Mining Corporation. Mr. Webb served as Chief
Financial Officer and Executive Vice-President of Western Gold Fields, a
publicly-traded company that successfully developed the Hog Ranch Gold Mine in
Nevada. Mr. Webb is and has been an officer and director of several other
publicly traded and private companies.
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 Company, in conjunction with Mahogany, is reviewing the results of a
development drilling program conducted at Tuina in March, 1994, designed to
upgrade and expand the project's proven copper reserves. Data from the drill
program will be utilized to assist in developing a mine plan that will include
construction of an SX/EW plant at the mine site. The completion of the
restructuring of the ownership interests in the Tuina Project has extinguished
the Company's indebtedness to Mahogany and will allow the Tuina Project to move
forward. A bankable feasibility study is expected to be completed by June 30,
1995.
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.
-25-
<PAGE>
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 $683,979 as at March 28, 1995, the Company has
reduced its ownership interest in Phoenix from 50% to 41%. In an effort to
advance the Tuina project Mahogany and the Company have initiated discussions
with a number of prospective participants and have agreed to the terms by which
the Company's remaining interest in the Tuina project will be impacted. In
summary the Company has agreed that, in consideration for funding of the costs
for the completion and delivery of an independent bankable feasibility study by
June 30, 1995 and cost maintenance of the Tuina project until then, the Company
will reduce its interest in the Tuina project by an additional 5% to 36%.
The Company will be responsible to contribute its share of funding following
completion and delivery of the feasibility study. The failure of any party to
contribute its share of funding will result in that party's interest being
diluted in accordance with a dilution formula. Once a participant's interest has
been diluted to 10% then the ownership interest will automatically convert to a
10% net profits interest.
It is expected that in order to attract an appropriate participant for the Tuina
project, significant majority control of the Project, along with operatorship,
will have to pass to a new participant. The Company has therefore agreed that it
may be required to sell an additional 10% interest in the Tuina project for
$750,000 to the new participant. The purchase price would be paid in cash,
shares, and convertible debentures. In such event, the Company's interest in the
Tuina project could ultimately be reduced to 26% (but the Company retains the
option to increase its ownership interest to 55% in consideration of repayment
of the forgiven debt, and funding its share of the costs of the feasibility
study and interim project costs if current third party transaction expectations
are not consummated).
This restructuring allows the Company to retain a substantial interest in the
Tuina project while eliminating the most significant debt of the Company. If
current third party transaction expectations are consummated, the restructuring
would also result in the Company receiving additional funding in order to deal
with its ongoing obligations.
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.
-26-
<PAGE>
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.
-27-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth the names and ages of all directors and executive
officers of the Company as of the date of this report, indicating all positions
and offices with the Company held by each such person:
<TABLE>
<CAPTION>
Name Age Position with the Business Experience
Registrant
<S> <C> <C> <C>
William C. Bleimeister 68 Chairman of the Board May 1994 to present,
of Directors Chairman of the
Company; 1981 to
1994; served as
officer of Gold
Fields Mining Corp.;
namely as Consultant
from July 1993 to
1994; Chairman from
June 1991 to June
1993; President & CEO
from January 1990 to
May 1991 and
Vice-President,
Operations from
August 1981 to
December 1989.
Stephen E. Flechner 52 President and Chief President, May 1994
Executive Officer to present;
and Director Vice-President,
General Counsel &
Secretary, Gold
Fields Mining,
Denver, 1979 - 1993;
President, Akiko Gold
Resources Ltd., April
1993 to present.
W. Gene Webb 56 Executive May 14, 1994 to
Vice-President, present, officer /
Corporate Secretary director of the
and Director Company; September
1989 to March 1994,
President, director
of Canadian
Industrial Minerals
Corp.; May 1989 to
present, officer /
director of Tellis
Gold Mining Company;
March 1990 to June
1994, President /
director of Jerez
Investment Corp.;
September 1978 to
present, President /
director, Ferret
Exploration Company,
Inc.
Ray Irwin 44 Vice-President, Vice-President,
Exploration Exploration, May 1993
to present;
Independent
Consultant, October
1992 to April 1993;
Regional Exploration
Manager, Reynolds
Metals Exploration
Inc., June 1989 to
September 1992;
Regional Exploration
Manager, Gold Fields
Mining Corporation,
Reno, March 1985 to
March 1989.
Nick DeMare 40 Principal Financial Chartered Accountant.
and Accounting President of Chase
Officer and Treasurer Management Ltd. since
May 1991. From
February 1986 to
April 1991,
Vice-President and
Chief Financial
Officer of Ingot
Management Ltd. Mr.
DeMare is currently a
director and/or
officer of a number
of publicly-traded
Canadian companies.
Christine Reynolds 46 Assistant Corporate 1993 to present,
Secretary President of Golden
Sheaf Management
Limited; 1988 to
1993, Executive
Assistant of Les
Enterprises de
Richard Atkinson;
1994 to present,
director of Corriente
Resources Inc.
</TABLE>
No family relationships exist between the executive officers and directors of
the registrant. No arrangements or understandings exist between any director
and any other person appointed by which the director was elected or
-28-
<PAGE>
appointed. No arrangements or understandings exist between any executive officer
and any other person appointed by which the executive officer was elected or
appointed.
During the fiscal year ended December 31, 1994, the following persons who were
officers, directors, and/or beneficial owners of more than ten percent of the
Common Stock failed to file on a timely basis Forms 3, 4, and/or 5 with the
Securities and Exchange Commission:
W. Gene Webb - A Form 3 due May 26, 1994 was filed May 31, 1994
Raymond E. Irwin - A Form 3 due May 27, 1994 was filed June 9, 1994
William E. Grafham - A Form 4 for October 1994, reporting the granting of stock
options, was not filed. The granting of the stock options (and the subsequent
termination of the Options in December 1994) was reported in a Form 5 which was
timely filed.
Dirk M. Lever - A Form 4 for October 1994, reporting the granting of stock
options, was not filed. The granting of the stock options (and the subsequent
termination of the options in December 1994) was reported in a Form 5 which was
timely filed.
Item 11. EXECUTIVE COMPENSATION
----------------------
(1) Summary Compensation Table
--------------------------
Shown below is information concerning the annual and long-term compensation for
services of those persons who were, during the fiscal year ended December 31,
1994, (i) the Chief Executive Officer and (ii) those officers receiving over
$100,000 in total compensation.
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Compensa- Award(s) Options/ Payouts ($) Compen-
Position Year Salary ($) Bonus ($) tion ($) ($) SARs (#) sation ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen E. 1994 82,500/(1)/ -0- -0- -0- 850,000 -0- -0-
Flechner, ------------------------------------------------------------------------------------------------------
President and 1993 -0- -0- -0- -0- -0- -0- -0-
Chief Executive ------------------------------------------------------------------------------------------------------
Officer/(2)/ 1992 -0- -0- -0- -0- -0- -0- -0-
- --------------------------------------------------------------------------------------------------------------------------
W. Gene Webb, 1994 82,500/(1)/ -0- -0- -0- 850,000 -0- -0-
Executive Vice- ------------------------------------------------------------------------------------------------------
President and 1993 -0- -0- -0- -0- -0- -0- -0-
Corporate ------------------------------------------------------------------------------------------------------
Secretary 1992 -0- -0- -0- -0- -0- -0- -0-
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Compensa- Award(s) Options/ Payouts ($) Compen-
Position Year Salary ($) Bonus ($) tion ($) ($) SARs (#) sation ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. 1994 -0- -0- -0- -0- 120,000 -0- -0-
Grafham,
former ------------------------------------------------------------------------------------------------------
Chairman of 1993 -0- -0- -0- -0- -0- -0- -0-
the Board,
President and ------------------------------------------------------------------------------------------------------
Chief Executive 1992 -0- -0- -0- -0- -0- -0- -0-
Officer/(2)//(3)/
- --------------------------------------------------------------------------------------------------------------------------
Anton R. 1994 -0- -0- -0- -0- -0- -0- -0-
Hendriksz, ------------------------------------------------------------------------------------------------------
former 1993 $132,505 -0- -0- -0- -0- -0- $62,500
Chairman of ------------------------------------------------------------------------------------------------------
the Board 1992 $130,000 -0- -0- -0- -0- -0- -0-
- --------------------------------------------------------------------------------------------------------------------------
Thomas L. 1994 -0- -0- -0- -0- -0- -0- -0-
Crom, former ------------------------------------------------------------------------------------------------------
President, 1993 $89,772 -0- -0- -0- -0- -0- $50,000
Chief Executive ------------------------------------------------------------------------------------------------------
Officer & 1992 $123,887 -0- -0- -0- -0- -0- -0-
Treasurer/(3)/
- --------------------------------------------------------------------------------------------------------------------------
George A. 1994 -0- -0- -0- -0- -0- -0- $20,834/(4)/
Holcomb, ------------------------------------------------------------------------------------------------------
former Vice 1993 $126,250 -0- -0- -0- -0- -0- -0-
President of ------------------------------------------------------------------------------------------------------
Operations 1992 $160,000 -0- -0- -0- -0- -0- -0-
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unpaid as at December 31, 1994. Messrs. Flechner and Webb have each agreed
to defer payment until January 2, 1996, at which time they may elect to
receive cash, if available, or the issuance of shares of the Company, at an
ascribed price of $0.30 per share, in settlement of their unpaid salaries.
See also Item 13. Certain Relationships and Related Transactions.
(2) Mr. Grafham resigned as an officer of the Company as of May 17, 1994. On
that date, Mr. Flechner became the Chief Executive Officer of the Company.
(3) Mr. Crom resigned as of October 25, 1993. On that date, Mr. Grafham became
the Chief Executive Officer of the Company. See also Item 13, Certain
Relationships and Related Transactions.
(4) Vacation pay paid to Mr. Holcomb. See also Item 3. Legal Proceedings.
Stock Options
- -------------
The Company adopted an Incentive Stock Option Plan (the "Plan") under which a
total of 2,500,000 shares were available for grant to provide incentive
compensation to officers and key employees of the Company.
The Plan was administered by the Board of Directors. Options could be granted
for up to 10 years at not less than the fair market value at the time of grant
except that the term could not exceed five years and the price had to be 110% of
fair market value for any person who at the time of grant holds more than 10% of
the total voting power of the
-30-
<PAGE>
Company. Unless otherwise specified by the Board of Directors, options were
exercisable as they vested at a rate of 2.77% per month, and terminated ten
years after the date of grant. The Plan expired October 31, 1994.
Options may be exercised by payment of the option price (i) in cash, (ii) by
tender of shares of common stock of the Company and which have a fair market
value equal to the option price, or (iii) by such other consideration as the
Board of Directors may approve at the time the option is granted.
In December 1990, the Board of Directors approved an amendment to the Plan
increasing the number of shares available from 1,000,000 shares to 2,500,000,
and the Board granted options for an additional 1,070,000 shares out of the
increased number of shares. This amendment was approved by the shareholders in
1991.
At December 31, 1994, options to purchase 2,255,000 shares at $0.20 were
outstanding under the Plan.
(2) Option/Stock Appreciation Right ("SAR") Grants in Last Fiscal Year
------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
% of Total
Options/SARs Options/SARs Expiration Grant
Granted (#) Granted to or Expiration Date Date
Name Employees in Base Price Present
Fiscal Year ($/Sh) Value $
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stephen E. Flechner 850,000 34.27% $0.20 May 17, 2004 $0.20
- -----------------------------------------------------------------------------------------------------------
W. Gene Webb 850,000 34.27% $0.20 May 17, 2004 $0.20
- -----------------------------------------------------------------------------------------------------------
William E. Grafham 120,000 4.84% $0.20 October 31, 2004 $0.20
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(3) Aggregated Option/SAR Exercises in Last Fiscal Year and Financial Year-End
--------------------------------------------------------------------------
Option/SAR Values
-----------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised In-The-Money Options/SARs
Shares Acquired Options/SARs at FY-End (#) at FY-End ($)
Name on Exercise (#) Value Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen E. Flechner Nil Nil 850,000/Nil Nil/Nil
- ------------------------------------------------------------------------------------------------------------------
W. Gene Webb Nil Nil 850,000/Nil Nil/Nil
- ------------------------------------------------------------------------------------------------------------------
William E. Grafham Nil Nil Nil/(1)//Nil Nil/Nil
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Cancelled in December, 1994 due to resignation as director.
(4) Long-Term Incentive Plan
------------------------
There have been no long-term plans granted during the Company's most recently
completed financial year.
(5) Compensation of Directors
-------------------------
There are no arrangements pursuant to which directors of the Company are
compensated in their capacities as such.
(6) Employment Contracts and Termination of Employment and Change-in-Control
------------------------------------------------------------------------
Arrangements
------------
Other than as described in the Summary Compensation Table and Item 13, Certain
Relationships and Related Transactions, the Company has no plans or arrangements
in respect of remuneration received or that may be received
-31-
<PAGE>
by named executive officers in the Company's most recently completed financial
year or current financial year in view of compensating such officers in the
event of termination of employment (as a result of resignation, retirement,
change of control, etc.) or a change in responsibilities following a change of
control, where the value of such compensation exceeds $100,000 per named
executive officer.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information, as of March 25, 1994, with respect
to the beneficial ownership of the Company's Common Stock by each person known
by the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, by each of the Company's officers and directors, and
by the officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Name of Beneficial Owner Amount and Nature of Percent of Class (2)
Beneficial Ownership (1)
<S> <C> <C>
Stephen E. Flechner 860,000 (3) 3.57%
W. Gene Webb 850,000 (3) 3.52%
Raymond E. Irwin 200,000 (4) 0.85%
William C. Bleimeister 100,000 (5) 0.43%
Nick DeMare 57,300 (6) 0.25%
Christine Reynolds 25,000 (7) 0.11%
All officers and directors 2,092,300 (8) 8.25%
as a group (6 persons)
</TABLE>
(1) Information with respect to beneficial ownership is based upon information
furnished by each shareholder or contained in filings made with the
Securities and Exchange Commission. Unless otherwise indicated, the
beneficial owner has sole voting and investment power with respect to the
shares shown.
(2) Based on 23,272,460 shares outstanding. Where the persons listed on this
table have the right to obtain additional shares of Common Stock within 60
days from March 25, 1995, these additional shares are deemed to be
outstanding for the purpose of computing the percentage of class owned by
such persons, but are not deemed to be outstanding for the purpose of
computing the percentage of any other person.
(3) Includes 850,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(4) Includes 200,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(5) Includes 100,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(6) Includes 50,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(7) Includes 25,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(8) Includes 2,075,000 shares of Common Stock issuable upon exercise of
presently exercisable options.
The Company is not aware of any arrangements, including any pledge by any person
of securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
-32-
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During 1994, the Company was charged management, consulting, and office
administration fees of $183,786 by private companies owned or controlled by
William E. Grafham, a former officer and director of the Company. In addition,
during 1994 the companies made disbursements on behalf of the Company. As at
December 31, 1994, $265,000, which includes an outstanding balance of $82,167 as
at December 31, 1993, remained unpaid.
During 1994, the Company was charged management, consulting, and office
administration fees of CDN$91,488 by private companies owned by Nick DeMare, an
officer of the Company. As at December 31, 1994, CDN$95,860, including amounts
unpaid from December 31, 1993 remained unpaid.
In order to reduce its cash requirements during 1994, the Company negotiated
with a former director, a related company and creditors to settle $354,250 of
indebtedness and unpaid amounts through the issuance of common stock at an
ascribed price of $0.30 per share to the following parties:
<TABLE>
<CAPTION>
Indebtedness to be Ascribed Price Number
Creditor Settled by Shares Per Share of Shares
- -------- ------------------ -------------- ---------
<S> <C> <C> <C>
W. G. Ltd./(1)/ $265,000 $0.30 883,334
DNG Capital Corp./(2)/ $ 50,000 $0.30 166,667
Others $ 39,250 $0.30 130,833
-------- ---------
$354,250 1,180,834
======== =========
</TABLE>
(1) A private company owned by William E. Grafham.
(2) A private company owned by Nick DeMare.
Issuance of the common stock is expected to be completed in 1995.
In addition, Messrs. Stephen E. Flechner and W. Gene Webb have agreed to defer
payment of their unpaid salaries, totalling $165,000, until January 2, 1996, at
which time they may elect to receive cash, if available, or the issuance of
shares of the Company, at an ascribed price of $0.30 per share.
During 1993, Anton R. Hendriksz and Thomas L. Crom, then Chairman of the Board
and President of North Lily, respectively, agreed to terminate their existing
employment agreements with the Company and to provide consulting services to
Mahogany and the Company for a 24-month period in consideration for cash
payments of $125,000 and $100,000, respectively, and quarterly cash payments of
$12,500 each over a 24-month period. The termination and consulting payments
were to be shared equally by Mahogany and the Company. Subsequent to an initial
payment in 1993 of $31,250 to Mr. Hendriksz and $25,000 to Mr. Crom (being the
Company's share of one-half of their termination payments), the Company and
Mahogany have not made further payments to Messrs. Hendriksz and Crom. However,
the Company has included $156,250 (being the Company's share of the termination
and consulting obligations) as due to former officers and directors.
The Agreement also outlined that Company stock purchase options held by Messrs.
Hendriksz and Crom would, subject to regulatory approval, be extended for a two-
year period and that the exercise price would be adjusted to then current market
levels and be allowed to be granted to Canadian companies owned by Messrs.
Hendriksz and Crom. These stock purchase options have not been amended. The
matters with respect to Messrs. Hendriksz and Crom are currently under review.
-33-
<PAGE>
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 13, 1995)
Consolidated Balance Sheets, (December 31, 1994 and 1993)
Consolidated Statements of Operations, (December 31, 1994, 1993 and 1992)
Consolidated Statements of Shareholders' Equity, (December 31, 1994, 1993
and 1992)
Consolidated Statements of Cash Flows, (December 31, 1994, 1993 and 1992)
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:
<TABLE>
<CAPTION>
Consecutive
Regulation Form lO-K
10-K Number Exhibit Page No.
----------- ------- --------
<S> <C> <C>
3.1 Articles of Incorporation, as amended(1) N/A
3.2 Bylaws (2) N/A
10.1 Letter agreement between Kap and North Lily (3) N/A
10.2 Tuina Agreement (3) N/A
10.3 Employment Agreement (3) N/A
10.4 Amended Stock Option Agreement (3) N/A
10.5 Letter Agreement dated August 6, 1993 (4)
10.6 Baja Gold Inc., Loan Documents
</TABLE>
-34-
<PAGE>
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.
B) During the quarter ended December 31, 1994, the registrant filed a report on
Form 8-K dated October 27, 1994, announcing under Item 5. Other Events the
dismissal of litigation against the registrant and corporate development
plans. No financial statements were required to be filed with the report.
-35-
<PAGE>
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 13, 1995 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 13, 1995 By: /s/ Stephen E. Flechner
---------------------------------
Stephen E. Flechner
Chief Executive Officer and President
April 13, 1995 By: /s/ W. Gene Webb
---------------------------------
W. Gene Webb
Executive Vice-President and
Corporate Secretary
April 13, 1995 By: /s/ Nick DeMare
---------------------------------
Nick DeMare
Principal Financial and
Accounting Officer and Treasurer
April 13, 1995 By: /s/
---------------------------------
William C. Bleimeister
Director
-36-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
North Lily Mining Company:
We have audited the consolidated financial statements and the financial
statement schedules of North Lily Mining Company and Subsidiaries listed in Item
14(a) of this Form 1O-K. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of North Lily Mining
Company and Subsidiaries as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
These financial statements have been prepared on the assumption that the Company
will be able to carry on as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has a working capital deficiency
at December 31, 1994, losses from continuing operations for each of the three
years ended December 31, 1994, and no operating cash flow to meet ongoing
obligations. In addition there are certain potential liabilities which may have
an adverse effect on the Company (see note 14). These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Should the Company be unable to
realize on its assets and discharge its liabilities in the normal course of
business, the net realizable value of its assets may be materially less than the
amounts recorded on the balance sheet.
COOPERS & LYBRAND L.L.P.
Oakland, California
April 13, 1995
F-1
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, December 31, 1994 and 1993
---------------
<TABLE>
<CAPTION>
ASSETS 1994 1993
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,954 $ 40,070
Marketable securities 299,874 795,183
Trade and other receivables 49,201 62,196
Inventory 101,750 151,744
Other current assets - 6,737
---------- ----------
Total current assets 489,779 1,055,930
Plant and equipment, net 461,185 904,171
Mineral properties, net 4,048,059 4,273,393
Other assets 106,025 121,297
---------- ----------
Total assets $5,105,048 $6,354,791
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 402,955 $ 274,076
Accrued and other liabilities 68,000 356,439
Reclamation liabilities 152,119 250,000
Due to former officers and directors 156,250 156,250
Due to International Mahogany Corp. - 290,715
Notes payable to Baja Gold, Inc. 201,337 -
---------- ----------
Total current liabilities 980,661 1,327,480
Due to International Mahogany Corp. 648,973 -
Indebtedness to be settled with shares 354,250 -
Due to officers 165,000 -
---------- ----------
Total liabilities 2,148,884 1,327,480
---------- ----------
Commitments and contingencies and going concern (Notes 1 and 14)
Subsequent event (Note 17)
Shareholders' equity:
Common stock, $0.10 par value; authorized 30,000,000 shares;
issued 23,420,842 shares as of December 31, 1994 and 1993 2,342,084 2,342,084
Additional paid-in capital 48,545,382 48,545,382
Accumulated deficit (47,913,907) (45,842,760)
Treasury stock, at cost, 144,830 shares
as of December 31, 1994 and 1993 (17,395) (17,395)
---------- ----------
Total shareholders' equity 2,956,164 5,027,311
---------- ----------
Total liabilities and shareholders' equity $5,105,048 $6,354,791
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1994, 1993 and 1992
_______________
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Sales revenue $ - $ 1,409,836 $ 3,194,916
Cost of sales - 2,490,296 4,450,271
Depletion and depreciation - 504,415 891,524
----------- ----------- -----------
Gross loss - (1,584,875) (2,146,879)
Operating expenses:
General and administrative expenses 862,735 1,721,390 2,460,910
Exploration and property carrying
costs 432,425 430,089 249,390
Abandonment of mineral properties 197,850 52,912 469,492
Provision for diminution in value
of mineral properties 300,000 - 700,000
Shipment embargo costs - - 258,178
----------- ----------- -----------
Operating loss (1,793,010) (3,789,266) (6,284,849)
Other income (expense):
Interest income 1,275 48,895 112,072
Interest expense - (36,233) (56,061)
Net realized gain (loss) on sale of
marketable securities 170,494 (11,882) (588,179)
Unrealized loss on marketable
securities - - (135,824)
Gain on sale of equipment - - 482,338
Writedown of mill equipment (371,897) (664,515) -
Gain on sale of Dragon Mining Corp. - 729,547 -
Loss on sale of International
Mahogany Corp. - (2,928,595) -
Realized loss on sale of
subsidiary's stock - - (281,221)
Restructuring costs - (512,933) -
Other, net (78,009) 275,626 282,701
----------- ----------- -----------
Loss from continuing operations,
before inority interest in loss
of subsidiaries (2,071,147) (6,889,356) (6,469,023)
Minority interest in loss of
subsidiaries - 602,623 1,771,095
----------- ----------- -----------
Loss from continuing operations (2,071,147) (6,286,733) (4,697,928)
Earnings (loss) from discontinued
operations - 15,114 (512,379)
----------- ----------- -----------
Net loss $(2,071,147) $(6,271,619) $(5,210,307)
=========== =========== ===========
Net loss per common share:
Loss from continuing operations $ (0.09) $ (0.27) $ (0.25)
=========== =========== ===========
Net loss $ (0.09) $ (0.27) $ (0.28)
=========== =========== ===========
Weighted average common shares
outstanding 23,276,012 23,312,343 18,603,597
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1994, 1993 and 1992
_______________
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock
------------ ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991 21,248,642 2,124,864 47,885,244 (34,360,834) (17,380)
Net loss year ended
December 31, 1992 - - - (5,210,307) -
Common stock issued for
cash 2,140,000 214,000 883,875 - -
Company stock sold by
subsidiary - - - - -
Cancellation of notes
receivable (153,800) (15,380) (307,437) - -
Sale of notes receivable - - - - -
Accumulated foreign
currency translation
adjustment - - - - -
---------- ---------- ----------- ------------ --------
Balance, December 31, 1992 23,234,842 2,323,484 48,461,682 (39,571,141) (17,380)
Net loss year ended
December 31, 1993 - - - (6,271,619) -
Common stock issued for
services 186,000 18,600 83,700 - -
Common stock repurchased - - - - (15)
Company stock sold by
subsidiary - - - - -
Accumulated foreign
currency translation
adjustment - - - - -
---------- ---------- ----------- ------------ --------
Balance, December 31, 1993 23,420,842 2,342,084 48,545,382 (45,842,760) (17,395)
Net loss year ended
December 31, 1994 - - - (2,071,147) -
---------- ---------- ----------- ------------ --------
Balance, December 31, 1994 23,420,842 $2,342,084 $48,545,382 $(47,913,907) $(17,395)
========== ========== =========== ============ ========
<CAPTION>
Accumulated
Company Notes Foreign
Stock Receivable Currency
Held by from Translation
Subsidiaries Shareholders Adjustment Total
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 (5,435,817) (408,319) 869,375 10,657,133
Net loss year ended
December 31, 1992 - - - (5,210,307)
Common stock issued for
cash - - - 1,097,875
Company stock sold by
subsidiary 196,340 - - 196,340
Cancellation of notes
receivable - 322,817 - -
Sale of notes receivable - 85,502 - 85,502
Accumulated foreign
currency translation
adjustment - - (1,616,854) (1,616,854)
------------ ------------ ----------- -----------
Balance, December 31, 1992 (5,239,477) - (747,479) 5,209,689
Net loss year ended
December 31, 1993 - - - (6,271,619)
Common stock issued for
services - - - 102,300
Common stock repurchased - - - (15)
Company stock sold by
subsidiary 5,239,477 - - 5,239,477
Accumulated foreign
currency translation
adjustment - - 747,479 747,479
------------ ------------ ----------- -----------
Balance, December 31, 1993 - - - 5,027,311
Net loss year ended
December 31, 1994 - - - (2,071,147)
------------ ------------ ----------- -----------
Balance, December 31, 1994 $ - $ - $ - $ 2,956,164
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
_____________________
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,071,147) $(6,271,619) $(5,210,307)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depletion and depreciation 129,734 504,415 891,524
Provision for diminution in value of mineral properties 300,000 - 700,000
Abandonment of mineral properties 197,850 52,912 469,492
Minority interest in loss of subsidiaries - (557,281) (3,308,231)
Net realized loss (gain) on sale of marketable securities and investments (170,494) 11,882 588,179
Realized loss on sale of subsidiary's stock - - 281,221
Gain on foreign currency transaction - (534,727) (271,432)
Unrealized loss on valuation of marketable securities and investments - - 135,824
Gain on sale of equipment - - (482,338)
Writedown of mill equipment 371,897 664,515 -
Gain on sale of Dragon Mining Corp. - (729,547) -
Loss on sale of International Mahogany Corp. - 2,928,595 -
Issuance of common stock for services rendered - 102,300 -
Indebtedness to be settled with shares 354,250 - -
Realized loss on sale of notes receivable - - 33,002
Decrease in notes receivable - - 239,042
Decrease (increase) in trade and other receivables 12,995 (38,914) 60,850
Decrease in inventory 49,994 73,315 834,710
Decrease in other assets 22,009 144,668 55,896
Increase (decrease) in accounts payable 128,879 405,405 (62,359)
Increase (decrease) in accrued and other liabilities (288,439) 101,644 199,020
Increase (decrease) in reclamation liabilities (97,881) 171,411 35,752
Increase in due to former officers - 156,250 50,000
Increase in due to officers 165,000 - -
Decrease in taxes payable - (2,173) (713,955)
Discontinued operations - - 1,953,115
----------- ----------- -----------
Total adjustments 1,175,794 3,454,670 1,689,312
----------- ----------- -----------
Net cash used in operating activities (895,353) (2,816,949) (3,520,995)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition and exploration of mineral properties,
net of option payments and foreign taxes received (300,017) 199,178 (3,050,869)
Acquisition of equipment (31,144) (46,249) (342,977)
Proceeds received on disposal of equipment - - 589,183
Proceeds from sale of marketable securities and investments 665,803 927,639 1,793,341
Purchase of marketable securities and investments - (300,091) (383,942)
Purchase of subsidiary's stock - - (213,005)
Proceeds from sale of Company's investment in subsidiary's stock - 500,000 342,469
Less: Cash disposed on sale of subsidiary - (93,439) -
Proceeds from sale of discontinued operations - 400,000 -
Purchase of treasury stock - (15) -
----------- ----------- -----------
Net cash provided by (used in) investing activities 334,642 1,587,023 (1,265,800)
----------- ----------- -----------
Cash flows from financing activities:
Notes payable to Baja Gold, Inc. 201,337 - -
Advances from International Mahogany Corp. 358,258 195,146 -
Proceeds from issuance of common stock - - 1,097,875
Proceeds from subsidiary's sale of Company's stock - - 196,340
Proceeds from sale of notes receivable - - 52,500
----------- ----------- -----------
Net cash provided by financing activities 559,595 195,146 1,346,715
----------- ----------- -----------
Effect of exchange rate changes on cash - - (134,961)
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,116) (1,034,780) (3,575,041)
Cash and cash equivalents at beginning of year 40,070 1,074,850 4,649,891
----------- ----------- -----------
Cash and cash equivalents at end of year $ 38,954 $ 40,070 $ 1,074,850
=========== =========== ===========
Supplemental Disclosure of Cash Flows Information
Cash paid during the year for:
Interest $ 2,611 $ 36,233 $ 56,061
=========== =========== ===========
Income taxes $ - $ - $ -
=========== =========== ===========
Supplemental Schedule of Non-cash Investing and Financing Activities (see Note 15)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
1. Going Concern:
During 1994, 1993, and 1992 the Company incurred net losses of $2,071,147,
$6,271,619 and $5,210,307, respectively and at December 31, 1994 has a
working capital deficiency of $490,882. During 1994 and 1993 the Company
used cash in operating activities of $895,353 and $2,816,949, respectively.
During 1993 the Company ceased operations at its Silver City mine and
suspended mining operations at its Tuina mine (note 7). As a result the
Company has no operating cash flow to meet ongoing obligations. The Company
has continually been selling non-essential Company assets to fund ongoing
operations and property commitments over the past three years. The Company
requires funds for its future operations and will attempt to meet its ongoing
liabilities as they fall due through the sale of marketable securities or
mineral properties. There can be no assurance that the Company will be able
to raise funds or be successful in resolving its contingent liabilities, in
which case the Company may be unable to meet its obligations. Should the
Company be unable to realize on its assets and discharge its liabilities in
the normal course of business, the net realizable value of its assets may be
materially less than the amounts recorded on the balance sheet.
See also Note 17.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of North Lily
Mining Company, a Utah corporation, and all of its subsidiaries (the
"Company"). The Company's significant subsidiary is Minera Northern
Resources, S.A. ("Minera") (a 100% owned Chilean corporation). All
significant intercompany transactions, accounts, and investments have been
eliminated. See also Note 4.
Cash Equivalents:
The Company defines cash equivalents as all short-term highly liquid
investments with original maturity dates less than 90 days.
Marketable Securities:
Current marketable equity securities are carried at the lower of their
aggregate cost or market value. Net realized gains and losses on security
transactions are determined on the specific identification cost basis.
Unrealized losses net of unrealized gains are included in the determination
of net loss.
F-6
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
2. Summary of Significant Accounting Policies, continued:
Inventory:
Finished products are recorded at the lower of first-in, first-out cost or
market. In-process heap leach ore, which principally includes unleached ore
placed on heap leach pads, is valued at the lower of moving average
production cost or net realizable value. Costs are removed from inventory on
a first-in, first-out basis. Major mining and milling supplies are stated at
the lower of first-in, first-out cost or market.
Plant and Equipment:
Plant and equipment is carried at cost net of write-downs. Mill and
equipment are depreciated using the straight-line method over their estimated
useful lives of 5 to 15 years or the units-of-production method based on
estimated tons of ore reserves if the equipment is located at a producing
property with a shorter economic life. Mining equipment is being depreciated
using the straight-line method over their estimated useful lives of 3 to 15
years or the units-of-production method based on estimated tons of ore
reserves if the equipment is located at a producing property with a shorter
economic life. Office equipment and fixtures are being depreciated using the
straight-line method over their estimated useful lives of 3 to 10 years.
When such assets are sold or otherwise disposed of the costs and accumulated
depreciation are removed from the accounts, and any resulting gains or losses
are charged to operations. Carrying values of plant and equipment are
reviewed on a regular basis and, when necessary, are written down to their
estimated recoverable amount.
Mineral Properties:
Direct costs related to the acquisition, exploration and development of
mineral properties held or controlled by the Company are deferred on an
individual property basis until viability of a property is determined.
General exploration costs are expensed as incurred. When a property is
placed in commercial production, such deferred costs are depleted using the
units-of-production method. Management of the Company periodically reviews
the recoverability of the capitalized mineral properties and mining
equipment. Management takes into consideration various information
including, but not limited to, historical production records from previous
mine operations, results of exploration activities conducted to date,
estimated future metal prices, and reports and opinions of outside
geologists, mine engineers and consultants. When it is determined that a
project or property will be abandoned or its carrying value has been
impaired, a provision is made for any expected loss on the project or
property.
Investments in unincorporated joint ventures to explore and develop mineral
properties are recorded using the cost method. Unincorporated joint ventures
that have entered the production stage are proportionately consolidated.
Foreign Currency Translation:
Results of operations for foreign subsidiaries, whose functional currency is
other than the U.S. dollar, are translated using the average exchange rates
during the period, while assets and liabilities are translated into U.S.
dollars using current rates. Resulting translation adjustments are recorded
in currency translation adjustments in shareholders' equity. For foreign
subsidiaries, whose functional currency is the U.S. dollar, currency gains
and losses resulting from translation and transactions are determined using a
combination of current and historical rates and are included in the results
of operations.
F-7
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
2. Summary of Significant Accounting Policies, continued:
Revenue from Gold and Silver Bullion/Copper Precipitate Sales:
Revenue from gold and silver bullion sales is recorded at the time of
shipment to the refiner if sold within a normal trading cycle. The price of
each shipment is based generally on the closing London bullion price on the
date of shipment or at the price negotiated under forward sales contracts.
Subsequent adjustments for actual sales prices and for quantity variances
based on refiner weights and assays are recorded when determined.
Revenue from copper precipitate sales is recognized at the point of
transferring the copper precipitate to the buyer's warehouse in Antofagasta,
Chile. The value of each shipment is based on the average New York Commodity
Exchange (Comex) High Grade first position price for the month of shipment.
Subsequent adjustments for actual sales prices and for quantity variances
based on refiner weights and assays are recorded when determined.
Reclamation Costs:
Post-closure reclamation and site restoration costs are estimated based upon
environmental and regulatory requirements and accrued over the life of the
mine using the units-of-production method. Current expenditures relating to
ongoing environmental and reclamation programs are expensed as incurred.
Income Taxes:
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 standard, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. The
adoption of SFAS No. 109 did not have any impact on the consolidated
financial statements.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, investments in
marketable securities and receivables. The Company places its short-term
cash investments with high credit quality financial institutions and, by
policy, limits the amount of credit exposure to any one financial
institution. Generally, these investments mature within 90 days and
therefore are subject to minimal risk. The Company sells products on credit
and generally does not require collateral.
Loss Per Common Share:
Loss per common share is calculated using the weighted average number of
shares outstanding during the year. Loss per common share computations for
each of the three years presented do not include the effect of outstanding
stock options, as their effect is antidilutive.
F-8
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
3. Discontinued Operations:
Effective June 3, 1993, the Company's former subsidiary, International
Mahogany Corp. ("Mahogany"), sold its wholly owned subsidiary, Mahogany
Minerals U.S. Inc. ("Mahogany U.S."), for $1,200,000. Mahogany U.S. held
substantially all of Mahogany's oil and gas interests. The sale of Mahogany
U.S. resulted in a loss of $144,778 in 1993.
The results of the oil and gas interests for 1993 and 1992 have been reported
separately as discontinued operations in the Consolidated Statements of
Operations. Summarized results of the oil and gas operations are as follows:
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
Revenues $ 522,717 $ 1,113,756
--------- -----------
Production costs 76,566 132,494
Depletion and amortization 169,118 418,811
Other expenses 56,214 103,004
Other items 15,585 2,508,962
--------- -----------
317,483 3,163,271
--------- -----------
Earnings (loss) from discontinued
operations before loss on sale of Mahogany U.S. 205,234 (2,049,515)
Loss on sale of Mahogany U.S. (144,778) -
--------- -----------
Earnings (loss) from discontinued operations 60,456 (2,049,515)
Minority interest relating to discontinued
operations (45,342) 1,537,136
--------- -----------
Total earnings (loss) related to discontinued
operations $ 15,114 $ (512,379)
========= ===========
</TABLE>
4. Disposition of Subsidiary Companies:
a) International Mahogany Corp.
During 1993, the Company sold to Baja Gold, Inc. ("Baja") the Company's
equity investment in Mahogany, consisting of 4,114,958 Class B
subordinate voting shares and 150,000 Class A common shares of Mahogany
(collectively the "Mahogany Shares"), representing a 25.2% equity and
60.1% voting control interest. Consideration received from Baja
included: cash of $500,000; a note, bearing interest at 8% per annum,
issued by Baja in the amount of $500,000; and 650,000 common shares of
Baja, having a fair market value of $680,000 at the date of sale of the
Mahogany Shares. See also Notes 13 and 14(c).
As a result of the Company selling its equity interest in Mahogany, the
Company's financial statements include the results of Mahogany's
operations up to the date of disposition. During 1993, the Company
recognized a loss on the sale of Mahogany of $2,928,595.
F-9
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
4. Disposition of Subsidiary Companies, continued:
The disposed net assets of Mahogany, and the computation of the loss on
sale in 1993 are as follows:
<TABLE>
<CAPTION>
Net Assets of Mahogany
-----------------------
<S> <C>
Current assets $ 1,531,804
Long-term assets 12,857,716
Liabilities (1,158,485)
Minority interest (14,964,002)
Company stock held 5,239,477
Accumulated foreign currency translation
adjustment 1,102,085
------------
$ 4,608,595
============
</TABLE>
The net asset value of Mahogany reflects the Company's original
investment in Mahogany which is adjusted by the Company's proportionate
share of Mahogany's operating results (increased for income and decreased
for losses).
<TABLE>
<CAPTION>
Computation of Loss on Sale
---------------------------
<S> <C>
Proceeds on sale $1,680,000
Net assets of Mahogany 4,608,595
----------
$2,928,595
==========
</TABLE>
b) Dragon Mining Corp. ("Dragon")
During 1993, the Company sold all its shares in Dragon to a third party
for consideration of $1. Dragon had no assets; however, there was a
liability, including accrued interest, on account of a note payable to a
former director, of $729,548. As the liabilities of Dragon are no longer
included in the consolidated financial statements of the Company a gain
of $729,547 was recognized in 1993 on the sale.
5. Marketable Securities:
Marketable securities consist of the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
-------- -----------
<S> <C> <C>
Cost $299,874 $ 795,183
======== ==========
Market value $537,217 $1,026,000
======== ==========
</TABLE>
See also Note 9.
F-10
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
6. Plant and Equipment:
Plant and equipment consist of the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994
----------------------------------------------
Accumulated
Cost Depreciation Writedown Net
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Mill and equipment $2,157,481 $1,092,966 $1,036,412 $ 28,103
Mining equipment 713,510 396,467 - 317,043
Office equipment and fixtures 220,898 104,859 - 116,039
---------- ---------- ---------- --------
$3,091,889 $1,594,292 $1,036,412 $461,185
========== ========== ========== ========
<CAPTION>
1993
----------------------------------------------
Accumulated
Cost Depreciation Writedown Net
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Mill and equipment $2,157,481 $1,092,966 $ 664,515 $400,000
Mining equipment 719,376 318,181 - 401,195
Office equipment and fixtures 193,502 90,526 - 102,976
---------- ---------- ---------- --------
$3,070,359 $1,501,673 $ 664,515 $904,171
========== ========== ========== ========
</TABLE>
Included in mill and equipment is an idle mill facility held for sale.
During 1994, the Company wrote down the carrying value of the idle mill
facility by $371,897 (1993 - $664,515) to its estimated net realizable value
of $28,103.
7. Mineral Properties:
The Company's investment in mineral properties at December 31, 1994 and 1993
is as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Mineral properties $6,180,184 $6,078,017
Less: Accumulated depletion 925,125 897,624
Provision for diminution in value 1,207,000 907,000
---------- ----------
$4,048,059 $4,273,393
========== ==========
</TABLE>
F-11
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
7. Mineral Properties, continued:
Below is a breakdown of various Company properties with their respective net
carrying values at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
U.S. PROPERTIES:
----------------
Ashdown $ - $ 138,030
Nine Mile 71,397 371,397
Tintic 1,479,593 1,507,095
Other 21,716 21,716
---------- ----------
1,572,706 2,038,238
CHILEAN PROPERTIES:
-------------------
Tuina 2,475,353 2,235,155
---------- ----------
$4,048,059 $4,273,393
========== ==========
</TABLE>
During 1993 the Company's Silver City mining operation located in Utah ceased
operations and commenced reclamation work. As at December 31, 1994, the
Company has accrued $152,119 (1993 - $250,000) as its share of estimated net
future costs to complete its share of the reclamation work.
The Company also suspended production at its Tuina Mine in Chile during 1993
due to negative cash flows. This operation is not expected to resume
production until 1996 at the earliest, and requires the successful financing
of the construction of a solvent extraction/electrowinning plant to produce
cathode copper.
See also Note 17.
8. Due to International Mahogany Corp.:
The Company and Mahogany jointly hold two resource properties. During 1994
and 1993 Mahogany made advances to the Company to enable the Company to meet
joint operation and other financial obligations. In addition during 1993,
the Company assigned the $500,000 note issued by Baja at face value to
Mahogany to settle $500,000 of amounts due to Mahogany.
The indebtedness is non-interest bearing, unsecured and is without fixed
terms of repayment. During 1994 Mahogany requested repayment of the
indebtedness. The Company is reviewing alternative methods of repayment.
9. Notes Payable to Baja Gold, Inc.
During 1994, the Company issued promissory notes totalling $201,337
(CDN$283,820) to Baja. The promissory notes mature on August 31, 1995 and
bears interest at 7% per annum. The Company has pledged 150,000 shares of
Baja as collateral.
F-12
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
10. Taxes:
Pretax loss from continuing operations consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
United States $(1,517,229) $(4,671,599) $(3,080,744)
Foreign (553,918) (2,217,757) (3,388,279)
----------- ----------- -----------
$(2,071,147) $(6,889,356) $(6,469,023)
=========== =========== ===========
</TABLE>
The components of the foreign pretax loss from continuing operations are as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Mahogany $ - $ (856,576) $(2,742,974)
Minera (553,918) (1,361,181) (645,305)
----------- ----------- -----------
$ (553,918) $(2,217,757) $(3,388,279)
=========== =========== ===========
</TABLE>
The Company no longer has Canadian loss carryforwards due to the disposition
of Mahogany in 1993 (see Note 4(a)).
For U.S. income tax reporting purposes, the Company has net operating loss
carryforwards of approximately $16,900,000 expiring from 1997 to 2009. The
Chilean loss carryforwards are approximately $2,950,000. Approximately
$4,452,000 of the United States losses were acquired in the merger with
Cumberland Gold, and utilization of these net operating losses is restricted
to a maximum of $2,900,000 annually under Internal Revenue Code Section 382.
In addition, the Company has U.S. capital loss carry forwards of
approximately $27,400,000, expiring 1998. The U.S. net operating loss and
the capital loss carryforwards are limited in their availability for use in
any given year. In addition, certain other limitations are placed on the
utilization of the net operating losses generated by the Company's
subsidiaries.
For U.S. income tax reporting purposes, the Company has not recorded deferred
tax assets of approximately $5,746,000 as they are reduced by a valuation
allowance of a like amount in accordance with SFAS No. 109.
11. Stock Option Agreements:
1984 Incentive Stock Option Plan:
During 1984 the shareholders approved an incentive stock option plan (the
"Plan") for officers and key employees that provided for grants of options to
purchase up to 300,000 shares of unregistered common stock. In 1990, the
Board of Directors approved an amendment to the Plan to increase the shares
available for option grants to 2,500,000. The options granted under the Plan
are immediately exercisable at the fair market value of the free trading
common stock on the date of grant or 110% of such value if the optionee owned
more than 10% of the combined voting power of all classes of Company stock as
of the grant date. The options expire a maximum of ten years from the date
of grant.
Additional Stock Options Granted:
During 1987, the Company granted options to an individual, who was a former
director and employee, to purchase 150,000 shares of unregistered common
stock at $1.10 per share, exercisable for a period up to five years. These
options expired unexercised during 1992.
F-13
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
11. Stock Option Agreements, continued:
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Option
Number Price
of Shares Per Share
----------- ---------
$
<S> <C> <C>
Outstanding at December 31, 1990 2,220,000 .75-1.10
Cancelled (395,000) .75
----------
Outstanding at December 31, 1991 1,825,000 .75-1.10
Granted 750,000 .75
Cancelled (12,500) .75
Cancelled (150,000) 1.10
----------
Outstanding at December 31, 1992 2,412,500 .75
Cancelled (2,352,500) .75
----------
Outstanding at December 31, 1993 60,000 .75
Granted 2,480,000 .20
Cancelled (60,000) .75
Cancelled (225,000) .20
----------
2,255,000 .20
==========
Exercisable at December 31, 1993 2,255,000 .20
==========
</TABLE>
By agreement dated August 6, 1993, the Company originally agreed to extend
the period of stock options, for the purchase of 1,400,000 shares, granted
to the former Chairman and President of the Company (the "Options"), to
expire on August 31, 1995. In addition, the exercise price of the Options
was to be adjusted. As at December 31, 1994, the extension and repricing of
the Options are being reviewed.
12. Purchase and Sale of Subsidiary's Stock:
During the year ended December 31, 1993, the Company sold all of its
holdings in the shares of the outstanding common stock of Mahogany and
Dragon. See also Note 4.
During the year ended December 31, 1992:
. The Company acquired 297,300 shares of the outstanding common stock of
Mahogany for $213,005 in cash. The excess of acquired proportional share
of net assets over cost of $173,000 resulting from the step acquisition
was allocated to reduce the carrying value of the mineral properties of
Mahogany which were consolidated by the Company.
. The Company sold 520,500 shares of the outstanding common stock of
Mahogany for $342,469 and realized a loss of $281,221.
The effect of these transactions resulted in decreasing the Company's
ownership interest and voting control interest in Mahogany at December 31,
1992 to 25.2% and 60.1%, respectively.
F-14
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
13. Related Party Transactions:
During the year ended December 31, 1994:
. The Company was charged management, consulting and office administration
fees and salaries of $271,350 by officers and companies under significant
influence of certain current and former officers of the Company. The
companies also made disbursements on behalf of the Company. As at
December 31, 1994, $338,905 remained unpaid. Of this amount $150,000,
$165,000 and $23,905 have been included in indebtedness to be settled
with shares, due to officers and accounts payable, respectively. See
also Note 14(f).
During the year ended December 31, 1993:
. The Company was charged management, consulting and office administration
fees of $106,167 by companies under significant influence of certain
current directors and officers of the Company. As at December 31, 1993,
$82,167 remained unpaid and has been included in accrued and other
liabilities.
. The Company was charged for management, consulting and office
administration fees of $144,139 by companies under significant influence
of former directors and officers of the Company. As at December 31,
1993, $39,000 remained unpaid and has been included in accrued and other
liabilities.
. The Company settled $500,000 of amounts due to Mahogany by way of
assignment of a $500,000 promissory note issued by Baja (the "Baja
Note"). See also Notes 4(a) and 8. The Company recorded interest income
of $11,778 on the Baja Note prior to the assignment. The amount remained
unpaid at December 31, 1993 and was included in other receivables.
. As a result of a change in management, the Company incurred charges of
$212,500 for a severance package negotiated with the Company's former
Chairman and President. In addition, $212,500 was incurred by the
Company's former subsidiary, Mahogany. These amounts have been included
as part of the Company's restructuring costs. Although Mahogany's
portion of the termination charge has been included in the Company's
Consolidated Statements of Operations, its liabilities are no longer
included in the Consolidated Balance Sheets (see Note 4). As at December
31, 1994, $156,250 remained unpaid and has been included in due to former
officers and directors.
During the year ended December 31, 1992:
. The Company paid management, consulting, and office administration fees
of $245,502 to companies under the significant influence of certain
directors of the Company.
. The Company cancelled $322,817 of notes receivable from shareholders. In
return, the Company received 153,800 shares of North Lily common stock
collateralizing these notes. The Company sold $85,502 of notes
receivable from shareholders to an unrelated party for $52,500.
F-15
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
14. Commitments and Contingencies:
(a) The Company has future commitments, and advance royalties payable for the
base terms of certain agreements, assuming no extensions, as follows:
<TABLE>
<CAPTION>
Total
----------
<S> <C>
1995 $ 146,000
1996 140,000
1997 134,000
1998 127,000
1999 1,150,000
----------
$1,697,000
==========
</TABLE>
Rent expense for the years ended December 31, 1994, 1993 and 1992, was
$12,769, $92,873 and $100,249, respectively.
(b) The Tuina copper project is subject to a 5% in-kind royalty on gross
production, with a minimum of 16 tonnes of copper per month commencing
August 1, 1995.
(c) The Company and certain current and former directors and officers of the
Company, amongst others, were named as defendants in a lawsuit filed in
the Federal Court in South Carolina in 1993. The lawsuit was initiated
by three Company shareholders (the "Plaintiffs"). The Plaintiffs alleged
that the disposition of Mahogany, as described in Note 4(a), was
wrongful. The Plaintiffs were seeking injunctive relief and rescission
of the transaction, as well as actual and punitive damages and costs of
the action. In 1994 the court dismissed the lawsuit.
(d) During 1992, a mining contractor formerly employed by the Company's 50%
owned Chilean affiliate initiated a claim for unpaid services and
damages. Final settlement with the former contractor was reached at the
end of 1993, in which the Company paid $100,042 in 1994. As at December
31, 1994, $30,000 remains unpaid by the Company and is included in
accrued and other liabilities.
(e) The Company and other third parties are subject to a multi-count claim
filed with the U.S. District Court in Butte, Montana claiming that, as a
result of exploration activity in the Southern Cross area, local ground
water supplies have been contaminated and reduced. Despite studies
prepared privately and by the Department of State Lands (Montana) in 1992
which found no evidence of earlier claims, the plaintiff continues to
seek alternative legal approaches against the defendants. The Company
believes the claims are without merit and will continue to defend itself
vigorously.
(f) The Company has negotiated with certain of its creditors to settle its
indebtedness through the issuance of common stock of the Company, at an
ascribed price of $0.30 per share. As at December 31, 1994, the amount
totalled $354,250. In addition, at December 31, 1994, the Company has
recorded $165,000 as due to officers. The officers have agreed not to
demand repayment until January 2, 1996, at which time the indebtedness
may be either settled with cash, if available, or the issuance of shares
of the Company, at an ascribed price of $0.30 per share.
(g) During 1994, a former officer of the Company filed a complaint in the
U.S. Superior Court in Maricopa, Arizona seeking unpaid vacation pay,
together with interest thereon, treble damages, costs and attorneys fees.
The Company subsequently paid the former officer $20,834 representing the
Company's calculation of its share of amounts owed. However, the Company
is disputing the former officer's computation of the claim and also
disputes any award for treble damages. A trial date is scheduled in
1995.
F-16
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
15. Supplemental Schedule of Non-cash Investing and Financing Activities:
At December 31, 1994, 1993, and 1992, non-cash investing and financing
activities are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Excess of acquired proportional share of net assets
over cost applied to mineral property $ - $ - $173,000
Exchange of notes receivable from shareholders
for return of common stock - - 322,817
Common stock issued for services rendered - 102,300 -
Baja shares received on sale of Mahogany - 680,000 -
Baja note received on sale of Mahogany - 500,000 -
Exchange of Baja note on settlement of amounts due
to Mahogany - 500,000 -
Note receivable received on sale of discontinued
operations - 800,000 -
</TABLE>
16. Segment Information:
The following summary represents geographic information for the Company's
United States, Canadian, and Chilean operations as of and for the years ended
December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
United States Canada Chile Elimination Total
-------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
1994
Sales revenue $ - $ - $ - $ - $ -
Net loss (1,517,229) - (553,918) - (2,071,147)
Identifiable assets 2,249,173 - 2,855,875 - 5,105,048
1993
Sales revenue $ 261,881 $ - $ 1,147,955 $ - $ 1,409,836
Net loss (4,766,881) (57,036) (1,447,702) - (6,271,619)
Identifiable assets 3,538,807 - 2,815,984 - 6,354,791
1992
Sales revenue $ 2,274,028 $ - $ 920,888 - $ 3,194,916
Net loss (4,245,371) (153,637) (811,299) - (5,210,307)
Identifiable assets 12,839,336 7,991,436 4,032,339 (2,395,914)/(a)/ 22,467,197
</TABLE>
/(a)/ To eliminate intercompany receivables.
F-17
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
16. Segment Information, continued:
The following summary represents segmental information for the Company's
activities as of and for the years ended December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
Gold Discontinued
and Silver Copper Operations Total
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
1994:
Sales revenue $ - $ - $ - $ -
Net loss (1,517,229) (553,918) - (2,071,147)
Identifiable assets 2,249,173 2,855,875 - 5,105,048
Depletion and depreciation 41,875 87,858 - 129,734
Mineral property expenditures 59,819 240,198 - 300,017
1993:
Sales revenue $ 261,881 $ 1,147,955 $ - $ 1,409,836
Net loss (4,884,373) (1,447,702) 60,456 (6,271,619)
Identifiable assets 3,538,807 2,815,984 - 6,354,791
Depletion and depreciation 225,414 279,001 - 504,415
Mineral property recoveries (31,920) (167,258) - (199,178)
1992:
Sales revenue $ 2,274,028 $ 920,888 $ - $ 3,194,916
Net loss (2,349,493) (811,299) (2,049,515) (5,210,307)
Identifiable assets 15,712,213 5,337,611 1,417,373 22,467,197
Depletion and depreciation 744,374 147,150 - 891,524
Mineral property expenditures 85,122 2,965,747 - 3,050,869
</TABLE>
The Company did not generate any revenue during 1994.
The Company's 1993 consolidated revenues for gold and silver were from sales
to one customer and for copper were from sales to one customer. The Company
believes that the loss of any of these customers would have no material
adverse impact on the Company because of the active worldwide market for gold
and silver, copper, and oil and gas.
During 1992, the Company's gold and silver revenues were generated solely
from the Silver City Joint Venture. In February 1993, the Silver City
reserves were exhausted and the facility ceased operations. Residual gold
leaching continued in 1993.
17. Subsequent Event
Subsequent to December 31, 1994, the Company and Mahogany agreed to a
restructuring of the Company's ownership interest of the Tuina Project (the
"Restructuring Agreement"). In settlement of the Company's outstanding debt
of $683,979 to Mahogany (as at March 28, 1995) the Company has reduced its
ownership in the Tuina Project from 50% to 41%. The Restructuring Agreement
also provides for terms by which the Company's remaining interest in the
Tuina Project will be impacted, as follows:
i) the Company's interest in the Tuina Project will be reduced by a
further 5% upon receipt of an independent bankable feasibility study
(the "Feasibility Study") by June 30, 1995. The Feasibility Study will
be funded either by Mahogany or a third party;
F-18
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_______________
17. Subsequent Event, continued:
ii) the Company may be required to sell a further 10% interest in the
Tuina Project for $750,000 to a third party who will fund all project
costs through completion of the Feasibility Study;
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; and
iv) the Company has the option, under certain circumstances, to increase
its ownership interest to 55% in consideration of repayment of the
$683,979 of debt, funding the costs of the Feasibility Study and
project costs through completion of the Feasibility Study.
F-19
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1994, 1993 and 1992
---------------
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged Charged Balance
Beginning to to Other at End
Description of Year Expenses Retirements Deductions of Year
- ----------- ---------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Valuation on marketable securities $ - $ - $ - $ - $ -
========== ========= =========== =========== ===========
Year ended December 31, 1993:
Valuation on marketable securities $1,084,176 $ - $ - $(1,084,176)/(1)/ $ -
========== ========= =========== =========== ===========
Year ended December 31, 1992:
Valuation on marketable securities $1,111,755 $ 135,824 $ - $ (163,403)/(1)/ $ 1,084,176
========== ========= =========== =========== ===========
Valuation on long-term investments $1,873,274 $ - $ - $(1,873,274)/(2)/ $ -
========== ========= =========== =========== ===========
</TABLE>
(1) Includes reversal of provisions on sale of marketable securities.
(2) Includes reversal of provisions on sale of long-term investments and
miscellaneous reclassifications.
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993
<PERIOD-START> JAN-01-1994 JAN-01-1993
<PERIOD-END> DEC-31-1994 DEC-31-1993
<CASH> 38,954 40,070
<SECURITIES> 299,874 795,183
<RECEIVABLES> 49,201 62,196
<ALLOWANCES> 0 0
<INVENTORY> 101,750 151,744
<CURRENT-ASSETS> 489,779 1,055,930
<PP&E> 7,184,686 7,698,158
<DEPRECIATION> 2,519,417 2,399,297
<TOTAL-ASSETS> 5,105,048 6,354,791
<CURRENT-LIABILITIES> 980,661 1,327,480
<BONDS> 1,168,223 0
<COMMON> 2,342,084 2,342,084
0 0
0 0
<OTHER-SE> 614,080 2,685,227
<TOTAL-LIABILITY-AND-EQUITY> 5,105,048 6,354,791
<SALES> 0 1,409,836
<TOTAL-REVENUES> 0 1,409,836
<CGS> 0 2,490,296
<TOTAL-COSTS> 0 2,994,711
<OTHER-EXPENSES> (2,071,147) 4,665,625
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 36,233
<INCOME-PRETAX> (2,071,147) (6,286,733)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,071,147) (6,286,733)
<DISCONTINUED> 0 15,114
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,071,147) (6,271,619)
<EPS-PRIMARY> (0.09) (0.27)
<EPS-DILUTED> (0.09) (0.27)
</TABLE>
