<PAGE>
FORM 1O-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year ended: December 31, 1995
--------------------------------------------------
Commission file number 0-16740
------------------------------------------------------
NORTH LILY MINING COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0159350
- ------------------------------ ------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
210 - 1800 Glenarm Place, Denver, Colorado 80202
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 294-0427
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.10 par value None
--------------------------- -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
N/A
---------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No
------- -------
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21, 1996: $4,370,328
-----------
Number of shares outstanding of registrant's common stock, $.10 par value, as of
March 21, 1996: 28,057,403
----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K[ ].
The Company's Proxy Statement for the 1996 Annual Meeting of Shareholders is
incorporated by reference in Part III, Items 10, 11, 12 and 13.
Exhibit index on consecutive page 28 Page 1 of 30 pages
<PAGE>
INDEX
-----
PART I
------
Page
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
-------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
--------
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
-------
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 28
<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.
On April 12, 1995, the Company and Mahogany concluded an agreement on the
restructuring of the ownership interests of the Tuina project. In settlement of
the Company's outstanding debt to Mahogany of $797,481, the Company has reduced
its effective interest in the Tuina project from 50% to 41%. The agreement also
contains provisions in which the Company may be required to further reduce its
interest in the Tuina project and, in certain circumstances, recapture the
interest relinquished. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for further discussion.
On November 17, 1995, the Company executed an Agreement and Plan of Share
Exchange (the "Agreement") with Tamarine Ventures Ltd., a company incorporated
under the laws of British Columbia, Canada ("Tamarine"). The Agreement provides
for the issuance, at closing, of one post-reverse stock split share of Common
Stock of the Company in exchange for each four common shares of Tamarine,
thereby making Tamarine a wholly-owned subsidiary of the Company (the "Share
Exchange"). At the closing of the Share Exchange, the Company would issue
2,000,000 post-reverse split shares of its Common Stock to the shareholders of
Tamarine.
The Agreement contemplates that Tamarine will acquire other businesses and/or
companies using shares of the Company's Common Stock and asset based financing.
On November 24, 1995, Tamarine executed a Business Sale
-3-
<PAGE>
Agreement with Atlay Cat Sales and Services Pty. Ltd. of Queensland, Australia,
to acquire its business, known as Cougar Catamarans. Cougar Catamarans
manufactures and sells boats ranging in size from 7.5 to 35 meters, which
include passenger ferries, pleasure boats, scenic tour boats, fishing boats,
dive boats, and patrol boats. Sales are made to countries in the Pacific Rim:
Japan, Hong Kong, China, Singapore, New Zealand, the United States, Papua New
Guinea, Tahid, Noumea, and the Maldives. The purchase price is $2,500,000 plus
the value at closing of inventory and work in process.
Closing of the Share Exchange is subject to a number of conditions including
regulatory acceptance, approval by the shareholders of the Company and
satisfactory results of due diligence investigations conducted by the Company
and Tamarine.
At December 31, 1995, North Lily had the following subsidiaries and affiliates:
Minera Northern Resources S.A. ("Northern"), a Chilean limited liability
company, 100% (active).
Tenhard Resources, Inc., a Montana corporation, 100% (inactive).
Compania Minera Phoenix S.A., ("Phoenix") (formerly Compania Minera San
Martin S.A.), a Chilean limited liability company, 41% owned by Northern
(active).
Minera San Lorenzo Limitada ("San Lorenzo"), a Chilean limited liability
company, 50% owned by Northern (inactive).
North Lily and its subsidiaries are collectively referred to as "the Company".
Throughout this report, unless otherwise specified, all dollar amounts refer to
U.S. dollars.
From time to time management has written off certain costs associated with
various properties when it has become apparent that such costs would not be
recoverable. Management believes that the financial statements included herein
reflect capitalized costs (under Mineral Properties) that can be recovered and
that no further write-downs are necessary at this time.
The Company has a number of mineral properties in three countries; the United
States, Chile and Bolivia. The Company has interests in one project in the
United States and, as at December 31, 1995, a 41% equity interest in a copper
project in Chile and a 46% interest in an exploration gold property in Bolivia.
Historically, the Company's principal mineral target has been gold.
North Lily's common shares traded on the over-the-counter market for
approximately 60 years and, beginning in May of 1985, were included in the
National Association of Securities Dealers, Inc. system (NASDAQ Symbol: NLMC).
Financial Information About Industry Segments
- ---------------------------------------------
The Company and its subsidiaries are primarily engaged in the gold and copper
business. (See Note 16 of Notes to Consolidated Financial Statements).
Sales and Marketing
- -------------------
Gold, silver and copper can be readily sold on numerous markets throughout the
world and it is not difficult to ascertain the market price for such metals at
any particular time.
-4-
<PAGE>
The Company's 50% owned Silver City mine produced gold and silver ore which was
processed at Handy & Harman refineries, and then sold to precious metal traders
on a competitive basis. The Silver City mine ceased mining operations in
February, 1993. Residual gold leaching continued during 1993 and the
reclamation process was implemented in 1994.
The Company's 41% owned Tuina mine produced copper precipitate which was
transported from Chile, South America and sold in the United States to a metal
trader on a competitive basis. The number of companies willing to purchase
copper precipitates is limited. The Company had an agreement with Metals
Concentrates International Inc. ("MCII") to purchase its copper precipitate for
1993. Operations at the Tuina mine were suspended in 1993 due to high
transport, refining and treatment charges and reduced copper prices. As a
result, the agreement with MCII was terminated. The Company does not plan to
resume production of copper precipitates and has determined the most effective
production process for the Tuina property is a solvent extraction/electrowinning
process ("SX/EW"). An SX/EW production process would allow the Company to
manufacture cathode copper at the mine site with significantly reduced operating
costs. In addition cathode copper is more readily marketable and the marketing
costs for this product are also significantly lower. In order for the Company
to produce copper utilizing the SX/EW process, an SX/EW plant is required to be
constructed at the mine site.
Foreign Investment in Chile
- ---------------------------
Any investment in Chile in excess of U.S. $10,000 must enter the country through
the Official Foreign Exchange Market, either under Chapter XIV of the Compendium
of Foreign Exchange regulations of the Central Bank or under Decree Law 600
(D.L. 600), the Foreign Investment Statute. Both laws guarantee access by
foreign investors to the Official Foreign Exchange Market in order to repatriate
capital and profits. The following is a brief summary of the significant
aspects of these laws.
Chapter XIV
1. The minimum investment amount is U.S. $10,000. Each remittance or investment
must be separately registered and approved by the Central Bank of Chile.
2. The investment may enter the country and be valued in freely convertible
foreign currency or in credits.
3. The capital invested may be repatriated after 36 months from the date of
entrance into the country. Profits arising from the investment may be
exported at any time.
4. The general tax regime described in Government Regulations below is
applicable.
5. In order to repatriate invested capital and/or profits from the investment,
the petitioner must deposit the equivalent in local currency at a Chilean
bank and must obtain the prior approval of the Central Bank. An affidavit
must be sworn attesting that the local currency used originates exclusively
from the business to which the original investment was made or from the sale
or liquidation of the original investment. Corresponding taxes must have
previously been paid.
D.L. 600
1. The minimum investment amount is U.S. $25,000. After the approval of the
Foreign Investment Committee, a contract is entered into between the investor
and the State of Chile. Thereafter remittances or investments may be made
under the contract and each individual remittance need not be registered.
-5-
<PAGE>
2. The investment may enter the country and be valued in:
- freely convertible foreign currency,
- tangible assets,
- credits,
- capitalization of foreign loans and debts, or
- capitalization of profits qualifying for remittance aboard.
3. The capital invested may be repatriated after 12 months have elapsed from the
date of entrance into the country. Profits arising from the investment may
be remitted any time.
4. Foreign investors have the right to elect to be subject to taxation at a
fixed overall income tax rate of 42% on taxable income for a 10 year term
which may be extended up to 20 years for projects in excess of U.S.
$50,000,000 in the manufacturing and extractive industries. Out of the
overall rate 15% First Category Tax is payable annually on accrued taxable
income. An additional tax of 27% is payable on dividends or distributed
profits.
The investor may waive this right and become subject to the general taxation
regime described below in Government Regulations.
5. In order to repatriate capital contributions and/or profits, the petitioner
must deposit the equivalent in local currency at a Chilean bank and obtain
the prior approval of the Central Bank. An affidavit must be sworn attesting
that the local currency used originates exclusively from the business to
which the original investment was made or from the sale or liquidation of the
original investment. Corresponding taxes must have previously been paid.
To date all of the Company's investment in Chile has been made via D.L. 600.
Government Regulations
- ----------------------
The Company's mining, processing and exploration activities are subject to
various laws governing the protection of the environment, prospecting,
development, production, exports, taxes, labour standards, occupational health,
waste disposal, toxic substances, mine safety and other matters. Mining
operations and exploration activities are also subject to substantial regulation
under these laws by governmental agencies.
Failure to comply with applicable laws and regulations may result in orders
being issued that may cause operations to cease or be curtailed or may require
installation of additional equipment. Violators may be required to compensate
those suffering loss or damage by reason of violations and may be fined if
convicted of an offense under such legislation.
The Company believes it is in compliance with all material laws and regulations
applicable to it or its operations. Additional legislation or amendments may be
proposed from time to time that might affect the Company's business.
The Company is unable to predict in advance which proposals may be enacted or
their effective dates. Such changes could, however, require increased capital
or operating expenditures or both, and could prevent or delay certain operations
by the Company.
Outlined below are some of the more significant aspects of governmental controls
and regulations which materially affect the Company.
-6-
<PAGE>
In the United States the Company is subject to federal and state income taxes,
state and local franchise taxes, personal property taxes and state severance
taxes. State severance taxes vary between the states and within a single state.
The amount of the tax, based on a percentage of the value of the mineral being
extracted, may vary from mineral to mineral. Operations are subject to taxation
by each locality in which mineral properties are owned or business is done.
Because many state and local tax laws are not uniform, the Company runs a risk
of double taxation on portions of its income by various jurisdictions. This may
adversely effect earnings, if any.
In Chile the Company is subject to income taxes on earnings, if any. A "first
category" tax rate of 15% is applied on taxable income.
Amounts distributed from Chile to non-residents are subject to an additional tax
of 35%, against which the "first category" corporate tax may be credited. The
current combined effect of these taxes on distributed income for non-residents
is an effective tax rate of 35%. There are no taxes on the value of the mineral
being extracted. There are also some minor municipal taxes.
Environmental Regulations
- -------------------------
UNITED STATES
Legislation and implementing regulations adopted or proposed by the United
States Environmental Protection Agency, the Bureau of Land Management ("BLM")
and comparable agencies in various states directly and indirectly affect the
mining industry in the United States. These laws and regulations address
potential contamination of air, soil and water from mining operations. In
particular, legislation such as the Federal Water Pollution Control Act, the
Comprehensive Environmental Response and the Compensation and Liability Act
impose effluent standards, new source performance standards, air quality and
emission standards, waste disposal requirements and other requirements with
respect to present, and in some cases past mining and mineral processing,
including gold mining.
U.S. mine operators must comply with the Federal Mine Safety and Health Act,
which is enforced by the Mine Safety and Health Administration ("MSHA"), an
agency within the Department of Labour. All mines, both underground and surface,
are subject to inspections by MSHA. The Occupational Safety and Health
Administration also has jurisdiction over safety and health standards not
covered by the Federal Mine Safety and Health Act, although there are areas
where the authority of both administrative agencies overlap.
With respect to operations in the United States, the Montana Department of Lands
administers the Montana Metal Mine Reclamation Act and the Montana Environmental
Policy Act, the purposes of which are to protect the usefulness, productivity
and scenic values of the State's lands and waters and to reclaim to beneficial
use the lands used for metal mining. The Montana Department of Health and
Environmental Sciences administers and enforces air, water and waste regulations
through various bureaus existing under that Department, such as the Montana Air
Quality Act and the Montana Water Quality Act. The Water Rights Bureau under the
Montana Department of Natural Resources and Conservation, reviews existing and
proposed surface and ground water rights and uses.
Existing laws and regulations with respect to the reclamation of mining
operations are in place and may necessitate substantial planning and bonding
requirements.
The Company may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed
exploration for, or production of, minerals may have upon the environment.
-7-
<PAGE>
It may be anticipated that future legislation will significantly emphasize the
protection of the environment, and that as a consequence, the activities of the
Company may be more closely regulated to further the cause of environmental
protection. Such legislation, as well as future interpretation of existing
laws, may require substantial increases in equipment and operating costs to the
Company and delays, interruptions, or a termination of operations, the extent of
which cannot now be predicted.
CHILE
With respect to operations in Chile, the government administers and enforces
mining laws and regulations. These laws and regulations are principally
administered by Servicio Nacional de Geologia y Minas ("Sernageomin").
No bonding requirements or environmental impact statements are required in
Chile. However, the current government in Chile has indicated that additional
regulations or laws may be introduced which emphasize the protection of the
environment. As a consequence, the activities of the Company may be more
closely regulated to further the cause of environmental protection. Such
legislation, as well as future interpretation of existing laws, may require
substantial increases in equipment and operating costs to the Company and
delays, interruptions, or a termination of operations, the extent of which
cannot now be predicted.
Employees and Facilities
- ------------------------
As of March 31, 1996, the Company has three employees in the U.S. through its
joint projects, two in Chile through its joint Tuina project, and the following
company officers: Stephen E. Flechner, President and Chief Executive Officer;
W. Gene Webb, Executive Vice-President and Corporate Secretary; John R. Twohig,
Vice-President of Corporate Development; and Nick DeMare, Treasurer.
North Lily's office in Denver, Colorado is leased.
The office of the Company's wholly owned Chilean subsidiary, which is leased, is
located at Napoleon 3200 Suite 707, Las Condes - Santiago, Chile.
Item 2. PROPERTIES
----------
The Company has acquired and maintained its mining claims in a manner that is
consistent with common industry practice and believes that title to all its
material properties and mineral interests is satisfactory.
UNITED STATES
All of the Company's properties in the United States consist of unpatented and
patented mining claims, and are owned by the Company or its subsidiaries or
leased from third parties.
Unpatented mining claims are located upon public land pursuant to procedures
established by the General Mining Law of 1872 and related laws of the various
states. Requirements for the location of a valid mining claim on public land
depend on the type of claim being located and the relevant state law, but
generally include discovery of valuable minerals, erecting a monument and
posting on it a location notice, marking the boundaries of the claim, and
filing a certificate of location with the county in which the claim is located
and with the BLM. If the statutes and regulations for the location of a mining
claim are complied with, the locator obtains a valid possessory right to the
claim and the right to mine, remove and sell the contained minerals.
-8-
<PAGE>
To maintain an otherwise valid claim, a claimant must also annually perform a
specified amount of work, or pay rental fees directly to the BLM, and make
certain additional filings with the county and the BLM. Failure to perform
such work or make the required filings in a timely manner may render the
mining claim void or voidable.
Because mining claims are self-initiated and self-maintained, they possess
some unique vulnerabilities not associated with other types of property
interests. It is impossible to ascertain the validity of unpatented mining
claims from public real estate records alone, and therefore, it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the federal government or by
claimants of conflicting rights to the ground, the claimant has the burden of
proving the present economic feasibility of mining minerals located within the
claim as well as the steps taken to perfect the claim's location. Thus, it is
conceivable that during times of falling metals prices, claims which were
valid when located could become invalid if challenged.
The patent procedure permits claimants to purchase from the federal government
fee title to claims upon demonstrating that the mineral deposit on the claims
can be mined at a profit and by satisfying other procedural requirements.
Patented mining claims are similar to other fee real property interests.
Significant portions of the Company's United States properties consist of
patented mining claims on which the Company's relevant local counsels have
given their opinion that the Company, or the entity through which the Company
holds rights to mine the property, has good title.
CHILE
In Chile the State is the owner of all mineral and fossil substances
regardless of the surface ownership, but mining concessions may be obtained
for the purpose of exploring or exploiting the underlying property in
accordance with a jurisdictional process regulated by the Mining Code.
The acquisition of title to new exploration mining concessions is a detailed
jurisdictional process which can be divided into three stages:
(1) The recording of the application for an exploration mining concession
("Pedimento") covering the desired ground before the Court and Mining
Register of the relevant county ("Comuna") where the ground is located and
its publication in the official Gazette. All persons (except certain
government officials, some of their relatives and other similar persons)
may prospect on any land not cultivated or enclosed.
(2) The request for a Court judgment formally constituting and granting the
concession ("Sentencia") during which process a judge checks the procedure
and the payment of certain fees, and representatives of the National
Geological and Mining Service check the technical aspects of the title to
the ground.
(3) The issuance by the court of the constituting "Sentencia" whereby a two-
year exploration mining concession is granted from the date of the
"Sentencia". This "Sentencia" then has to be published in extract in the
official Gazette and recorded in the corresponding Mining Register within
a certain period of time.
Prior to its expiration the owner of an exploration mining concession may
conduct all kinds of exploration activities, may apply for an exploitation
mining concession ("Pertenencia") to the corresponding judge (which also
requires
-9-
<PAGE>
a jurisdictional process), and may request easements or facilities from
neighbour concessions or from surface land owners, as necessary. Prior to
expiration of exploration mining concessions, a single extension for a further
two years can be applied for, however, in order to obtain such extension, the
area of the concession must be reduced by 50%. An alternative to extension is
to obtain one or more exploitation mining concessions (or Pertenencia) over
the same ground.
In order to obtain an exploitation mining concession (which permits
commencement of production from a mineral property) it is necessary to go
through a process which is similar in its structure to that for obtaining an
exploration mining concession but requires a longer time period. An
application ("Manifestacion") for the concession must initially be recorded
and, following certain additional procedures, a request for a formative survey
of the concession ("Mensura") is made. Following the survey (location on the
ground of the boundaries of the concession) and certain additional procedures,
including opportunities for third parties to put forward opposition to the
survey of the concession, a formative judgment ("Sentencia") is issued and the
exploitation mining concession is formally granted. All exploitation mining
concessions are granted for an indefinite period.
"Pedimento", as well as exploration mining concessions and exploitation mining
concessions ("Concessions") are transferable and irrevocable but only
Concessions can be mortgaged. Both are regulated by the same civil law rules
that regulate real estate and fixed assets, save that they are not subject to
attachments.
Chilean mining law recognizes a preference to a Concession owner and not to
the land surface owner because the State is interested in the development of
mining resources. However, in the case of houses and their immediately
surrounding lands, or lands where vineyards and fruit trees are planted, only
the owner may grant the permission to a Concession holder to obtain easements
and surface rights.
The owner of a Concession, commencing as of the date of the request of the
Sentencia, has to pay a yearly licence fee to the State in order to maintain
its property over the same. Lack of payment may cause loss of ownership
through auction by the State, although the licence fee can be paid up to the
day of auction to prevent any loss. License fees are significantly higher for
exploitation mining concessions than for exploration mining concessions.
EXPLORATION BUDGET - 1996
The following table lists the properties in which the Company has an interest,
and the 1996 exploration budget for each property. In approving the 1996
budgets for mineral properties, the Company considers a number of factors, among
them are: total capital resources available to the Company, joint venture
participation, terms of joint venture agreement (if applicable), estimated
length of time before the property could be placed into production and activity
in the immediate area, evaluation of preliminary geological data, anticipated
costs and geologic location.
Property Portfolio
------------------
<TABLE>
<CAPTION>
Approximate
Property Interest Held 1996
Size by the Company Exploration
Property Name State Location (Acres) as of 12/31/95 Budget
- --------------- ------------------------ ------------- ------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
San Simon Beni Bolivia 13,087 46% $120,000 /(2)/
Silver City Utah United States 20 50% -
Tintic Utah United States 6,000 5% NSR/(1)/ 150,000 /(3)/
Tintic Utah United States 4,440 100% -
Tuina Region II Chile 15,013 41% -
---------
TOTAL $270,000
=========
</TABLE>
-10-
<PAGE>
(1) NSR - Net Smelter Return
(2) Minimum work commitment to be incurred on the property, of which the
Company's portion is $60,000.
(3) Minimum expenditure commitment to be incurred by lessee of property
Due to the Company's current financial situation it does not plan to conduct any
significant exploration activities in 1996. Activities will be limited to
making required property payments to maintain the Company's interest, unless a
joint venture or acquisition and related financing is accomplished.
During 1995 the Company assessed the capitalized costs of its mineral properties
in the United States and Chile. In the opinion of management it was appropriate
to write-off the remaining $71,397 carrying value and reverse an accrual of
$23,000 for the Nine Mile Property, for a net charge of $48,397 as abandonment
of mineral properties.
RESERVES
Minerals
- --------
The proven and probable ore reserves stated in this report are geologic reserves
that reflect drill-based estimates of the quantities and grades of mineralized
material at the Company's mines which the Company believes can be recovered and
sold at prices in excess of the cash cost of production.
The estimates are based largely on current costs and on the projected prices and
demand for the minerals based upon factors relevant to each mine. Ore reserves
are based on calculations of geologic reserves provided to the Company by the
operator. The Company has reviewed but has not independently confirmed those
calculations.
Ore reserves are reported as general indicators of minimum mine life. Changes
in reserves represent general indicators of the results of efforts to develop
additional reserves as existing reserves are depleted through production.
Grades of ore fed to process may be different from stated reserve grades because
of variation in grades in areas mined from time to time, mining dilution and
other factors. Recovered grades reflect variations in the characteristics and
payable content of ore fed to process and the success of efforts to improve
processing efficiencies.
Reserves should not be interpreted as assurances of mine life or of the
profitability of current or future operations.
MINERAL PROPERTIES
The Company has acquired rights to various mineral properties in Chile, Bolivia
and the States of Montana and Utah. The following is a description of certain of
the Company's mineral properties.
TUINA PROJECT
Ownership:
- ----------
The Tuina properties are held by Phoenix, a Chilean company that is owned 41% by
the Company and 59% by Mahogany at December 31, 1995. During 1995, the Company,
Mahogany and Yuma Gold Mines Limited ("Yuma") entered into a number of
agreements which may result in Yuma acquiring Mahogany's interest in the Tuina
properties. Yuma may also increase its ownership in the Tuina property by a
further 15%. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-11-
<PAGE>
Description of Property:
- ------------------------
The property is located approximately 60 kilometers (37 miles) east of Calama,
in Region II in the Country of Chile and consists of a total of 6,080 hectares
(15,013 acres).
Hectares - Net
--------------
394 San Jose Lease
5,686 Other properties
-----
6,080
=====
Mineralization:
- ---------------
To date the Company has calculated a mineable tonnage of 3.5 million metric
tonnes of copper ore contained in the San Jose and San Martin pits at an
estimated soluble copper grade of 1.1%. The estimated stripping ratio to mine
this tonnage would be 2.3 to 1.
Description of Property Agreements:
- -----------------------------------
(1) San Jose Lease:
---------------
The San Jose Lease covers an area of 394 hectares and hosts all, or
substantially all, of the current proven reserves. There are two known areas
of copper mineralization on this property called the San Jose pit and the
San Martin pit. To date all production has been from properties held under
this lease. During 1994 Phoenix renegotiated its lease on the property (the
"Operating Lease"). The Operating Lease has a term of 30 years and requires
a payment of 5% of the copper produced with a minimum payment of 16 tonnes
of copper per month. Under the terms of the Operating Lease the obligation
to make the minimum lease payments has been waived until August 1995 and in
return a payment of $200,000 was made. This $200,000 payment represented an
advance payment against which future lease payments could be offset. Since
August 1995 the minimum lease payments have been partially met through
application of this advance payment. The minimum lease payment is a cost
which is funded by Yuma pursuant to the Tuina agreements. In addition
Phoenix has agreed to make certain bank payments while the Operating Lease
is in effect. The payments required of Phoenix are shown below:
<TABLE>
<S> <C>
1996 $ 305,000
1997 $ 291,000
1998 $ 278,000
1999 $2,285,000
</TABLE>
Included in the 1999 payments is a lump sum payment of approximately
$2,196,000. This amount is payable only if Phoenix is producing from the
leased claims.
Phoenix has also agreed to pay the property owner $8,000 per month, for the
lease of certain equipment. This agreement will allow the Company to
continue using the equipment after the lease on the mineral properties has
expired. This obligation to pay $8,000 per month will only commence when the
Operating Lease is terminated or when it expires.
(2) Other Properties:
-----------------
The Company has the exploration rights for an additional 5,686 hectares
which are not subject to any underlying royalties or agreements. The Company
is in the process of transforming these exploration rights to exploitation
rights. There are two known areas of copper mineralization on this property
called Inca and Milagro.
-12-
<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.
A reverse circulation drill program was completed in 1994. The drill program
has confirmed a probable (geological) reserve of approximately 1.772 million
tonnes grading 1.7% total copper (1.1% soluble) at the San Jose pit, and a
probable (geological) reserve of 2.075 million tonnes grading 1.3% total copper
(1.2% soluble) at the San Martin pit. At both prospects sulfide mineralization
was encountered below the oxide zone.
1995 Activities:
- ----------------
During 1995, Yuma commissioned UM Engineering ("UM") to prepare an independent
bankable feasibility study on the economics of a solvent extraction /
electrowinning ("SX/EW") plant for the Tuina Project. UM delivered its report
in July, 1995 (the "UM Report"). The UM Report concluded that, based on current
reserves of approximately 38,000 tons of recoverable copper, a 6,000 ton per
year plant could generate a rate of return of 26% and achieve payout in
approximately four years. In addition, the economics of the SX/EW plant could
be improved by: conducting a mining survey to increase proven reserves;
obtaining other ore sources from surrounding properties; and/or decreasing the
capital investment by using second hand equipment or subcontracting parts of the
operation.
1996 Planned Activities:
- ------------------------
Activities on the Tuina Project have been curtailed pending completion of Yuma's
proposed acquisition of Mahogany's 59% interest in Phoenix. Yuma is currently
funding ongoing costs relating to the Tuina Project. It is expected that once
this transaction closes Yuma will proceed with bringing the Tuina copper project
into production. Yuma, Mahogany and Company management are reviewing and
assessing alternatives to further improve the economics of the Tuina Project.
TINTIC PROPERTIES
Ownership:
- ----------
The properties are held 100% by the Company.
-13-
<PAGE>
Description of Property:
- ------------------------
The property is located in the Tintic Mining District, Utah and Juab Counties in
the State of Utah, approximately 80 miles south of Salt Lake City. The property
comprises (1) surface and mineral rights on approximately 8,115 acres of
patented lode mining claims and other patented land owned in fee simple; (2)
2,200 acres of patented land with agricultural and mineral rights; (3) city lots
in Eureka, Utah, covering 21 acres; (4) 104 acres of unpatented mining claims;
and (5) 20 acres without mineral rights. In addition, the Company owns 28 acres
of patented lode mining claims and two unpatented lode mining claims in the
Tintic Mining District, Juab County, Utah.
Mineralization:
- ---------------
There are currently no gold reserves identified on the properties, however deep
exploration targets are renewing the interest of several companies.
Description of Property Agreements:
- -----------------------------------
The Company owns the Tintic properties outright and has no obligations for
underlying payments other than annual fees to the State of Utah.
On January 23, 1987, the Company entered into a ten-year mining lease with
Centurion Mines Corporation, a non-affiliated mining company, covering
approximately 6,000 acres. The lease, which specifically excludes the mine
dumps and tailings, Silver City mill, and existing grazing leases, requires a
production royalty equal to a 5% NSR. During 1991 North Lily renegotiated its
mining lease. The lessee is required to make advance royalty payments of
$27,500 in 1992, $27,500 in 1993, $27,500 in 1994 and $75,000 thereafter
(payments to 1996 have been received). The lessee is also required to fulfil a
work commitment with respect to the leased premises at a minimum cost to lessee
of $50,000 in 1992, $50,000 in 1993 and $150,000 during each succeeding year.
Prior Activities:
- -----------------
To date the lessee has made all lease payments and has fulfilled all work
commitments on exploration and development in the Tintic Mining District since
negotiating the lease agreement.
Planned 1996 Activities:
- ------------------------
The property remains subject to a lease agreement with Centurion Mines
Corporation who are operators of the property. Centurion Mines Corporation have
advised the Company that they will be spending at least $150,000 in exploration
work on the property in order to fulfil their work commitments.
SILVER CITY JOINT VENTURE
Ownership:
- ----------
The joint venture property is owned 50% by North Lily and 50% by Mahogany.
Description of Property:
- ------------------------
The joint venture property is located in Juab County, approximately 80 miles
south of Salt Lake City, Utah and consists of approximately 20 acres.
Mineralization:
- ---------------
The Silver City Joint Venture was a project designed to extract gold and silver
from a previous mine's tailings using a heap leach process. The project is now
undergoing reclamation work, while considering leaching opportunities, and it is
not known if the project will produce any further gold or gold equivalent.
-14-
<PAGE>
Description of Property Agreement:
- ----------------------------------
Pursuant to an agreement dated July 21, 1987, the Company conveyed a 50%
undivided beneficial interest, in the joint property, to Magellan Resources Inc.
("Magellan"), a wholly-owned subsidiary of Mahogany. To earn its 50% interest
Magellan funded the initial $300,000 development expenditures of the joint
venture.
Prior Activities:
- -----------------
All necessary environmental and building permits were obtained for the heap
leach facility in early 1988. Construction of the facility and pad was completed
by June 1988 at a total capitalized cost of approximately $1,700,000. The joint
venture was considered to be in a pre-production status until October 1, 1988.
The excess of revenues from costs from June 1988 through September 1988 were
netted against capitalized costs, which reduced capitalized costs by $500,267.
Silver City produced gold and silver through heap leaching with cyanide. The
gold and silver is recovered through zinc precipitation. A gold/silver ore is
produced at the plant and then sold to a refinery. To date Silver City has
processed only the mineral tailings dumps from the nearby area.
<TABLE>
<CAPTION>
Production ounces 1995 1994 1993
- ----------------------------------- ---- ---- ----
<S> <C> <C> <C>
Gold equivalent -0- -0- 737
Silver conversion rate N/A N/A 90:1
</TABLE>
During 1994 the Company proceeded with the closure and reclamation of the Silver
City heap leach facility. The Company sold non-essential equipment and leased
and commenced use of carbon columns to recover precious metals and base metals
in the pregnant solution for income and reclamation purposes.
Planned 1996 Activities:
- ------------------------
The remaining reclamation costs have been budgeted for $440,000 of which
$220,000 is the Company's share. Approximately $165,000 in state reclamation
bonds have been jointly posted. After reclamation work is completed, to the
satisfaction of regulatory authorities, the reclamation bonds are to be
returned. Funding of reclamation work in 1996 remains a substantial burden to
the Company.
SAN SIMON PROPERTY
Ownership:
- ----------
On April 1, 1995, the Company and Akiko Gold Resources Ltd. ("Akiko"), entered
into a letter of agreement (the "San Simon Agreement") with Robert S. Friberg
and Marcelo Claure Z. (jointly "Friberg/Claure") whereby Friberg/Claure agreed
to acquire mineral properties located in the San Simon region of Bolivia on
behalf of Akiko and the Company (collectively the "Companies"). Friberg/Claure
will retain an 8% carried interest, with the Companies funding all costs and
obligations on a 50/50 basis. To date Friberg/Claure have acquired four
concessions (the "San Simon Property") from a third party. Friberg/Claure are
to transfer the San Simon Property to a Bolivian subsidiary to be established by
the Company. The Companies do not anticipate any further properties to be
acquired under the San Simon Agreement. Through December 31, 1995, the Company
has paid $40,338 to Friberg/Claure relating to costs incurred pursuant to the
San Simon Agreement and property payments made on the San Simon Property.
Description of Property:
- ------------------------
The San Simon Property consists of four concessions, known as "Pedro Ricardo I"
and "Pedro Ricardo II", "Machetero I" and "Machetero II" and is located in
northeastern Bolivia, adjacent to the Brazilian border within the Amazon Basin,
in the area of San Simon, Canton Mategua, Province of Itenez, State of Beni and
consists of approximately 5,300 hectares.
-15-
<PAGE>
Mineralization:
- ---------------
There are no known gold reserves on the San Simon Property at this time.
Description of Property Agreement:
- ----------------------------------
Pursuant to the terms of a property concession agreement entered into on behalf
of the Companies, the Companies are required to make total payments of $300,000
to the vendor over a three year period. The Companies have paid $25,000 to date
and are required to pay: $10,000 on March 31, 1996 (paid) and $10,000 on April
30, 1996; $40,000 on November 12, 1996; $40,000 on May 12, 1997; $50,000 on
November 12, 1997 and $125,000 on May 12, 1998. The San Simon Property is also
subject to a 5% net profits interest ("NPI") in favour of the vendor. The
Companies may purchase a 2% NPI at any time during the exploration phase upon
payent of $1,700,000. The Companies would then also hold a right of first
refusal on a 2% NPI of the remaining 3% NPI. The term of the agreement is for
twenty years and the Companies can terminate the agreement without penalty on 30
days notice.
Pursuant to the San Simon Agreement, the Companies have also agreed to a yearly
work commitment of $30,000 per quarter. In addition, the Companies may be
obligated to pay Friberg/Claure the following amounts: $10,000, in cash or
common stock of the Companies, upon the first transfer of a property to a
Bolivian subsidiary, to be established by the Companies; $20,000, in cash or
common stock of the Companies, when a total of $200,000 has been spent on the
properties acquired pursuant to the San Simon Agreement; $50,000 upon completion
of a feasibility study on any properties acquired pursuant to the San Simon
Agreement.
Prior Activities:
- -----------------
The Companies are not aware of any prior work on the San Simon Property.
However, the region was worked on as early as 1688 and recently sporadic
production has taken place from gold-rich zones adjacent to the San Simon
Property by a number of local miners. It is estimated that they are removing
approximately two kilograms of gold per day by using crude mining methods.
1995 Activities:
- ----------------
Minimal work was performed on the San Simon Property in 1995.
Planned 1996 Activities:
- ------------------------
The Companies are seeking a joint venture partner to help exploit the San Simon
Property and have had discussion with several major mining companies. If the
Companies are unable to conclude any arrangements the Companies will commence
work on the San Simon Property pursuant to the terms of its agreements.
MONTANA PROPERTIES
The Company holds various interests in a number of properties in the State of
Montana. There are no obligations for underlying payments other than annual
state fees to the State of Montana. The Company has not conducted any
exploration work in 1995 on these properties. Costs relating to these
properties were mostly written off in prior years. As at Decenber 31, 1995 the
Company is carrying these properties at $8,395.
Item 3. LEGAL PROCEEDINGS
-----------------
On March 10, 1994, Frank B. Hammond, John Pappas, and Dallas Schaff,
individually and on behalf of themselves and all others similarly situated as a
class, filed an action in the United States District Court for the District of
South Carolina, Greenville Division, against North Lily Mining Company,
International Mahogany Corp. and a number of other parties consisting primarily
of former directors and officers. The Plaintiffs alleged that the August 6,
1993
-16-
<PAGE>
transaction involving the disposition of International Mahogany Corp. was
wrongful. On October 27, 1994, the United States District Court in Greenville,
South Carolina, dismissed the lawsuit (the "South Carolina Action").
On July 11, 1994, the Company and William E. Grafham filed a complaint in the
United States District Court for the District of Colorado against Clarence
Taylor, Dorothy Frank, The Bottom Line, Inc., Taylor Frank & Associates, Inc.,
John W. Brown III, and Century Capital Corp. of South Carolina. The complaint
alleged that in connection with the South Carolina Action, the defendants
solicited $250 from each shareholder of the Company and in connection with such
solicitation, the defendants published false and defamatory information
concerning the Company and Mr. Grafham. In March 1995, a judgment was entered
against the defendents in the amount of $1,000,000. Subsequent thereto, the
defendents (1) consented to the entry of a permanent injunction enjoining them
from making and/or publishing false and defamatory statements concerning the
Company, Mr. Grafham, the South Carolina Action, and this lawsuit and (2) agreed
that they will not bring any action against Mr. Grafham or the Company that is
identical to or similar in nature to the South Carolina Action. In exchange for
this agreement, Mr. Grafham and the Company agreed not to pursue their claims
for additional monetary damages. The Company considered that it was unlikely to
realize on the judgment entered against the defendents.
In August 1994, George Holcomb filed a complaint against the Company in the
Superior Court for the County of Maricopa, Arizona. Mr. Holcomb seeks vacation
pay which was not paid to him when his employment with the Company terminated,
together with interest thereon, treble damages, costs, and attorney fees.
During November, 1994, the Company paid $20,834 to Mr. Holcomb, representing the
Company's calculation of vacation pay owed. Mr. Holcomb, however, had
calculated the vacation pay owing as significantly higher. The Company disputes
Mr. Holcomb's computation. The Company also disputes any award for treble
damages. Mr. Holcomb's motion for summary judgment regarding the applicability
of the statute which would award treble damages was denied on April 3, 1995. A
trial date of April 30, 1996 has been scheduled.
During 1992, a dispute developed over a Chilean mining contractor's billings to
the Company's affiliate in Chile, Compania Minera Phoenix SA ("Phoenix").
Subsequently, Phoenix and the mining contractor agreed to settle the dispute
through arbitration and an agreement was reached with the mining contractor in
February 1994. In settlement of all claims, Phoenix agreed to pay the mining
contractor $180,000. To date payments of $120,000 have been made and the final
instalment of $60,000 has not been paid as the Contractor has subsequently gone
bankrupt.
On June 23, 1993, Jack M. Scanlon and Carolyn M. Scanlon; Dr. Richard Urwiller
and Roberta Urwiller, Dr. William Inkret, Jr., M.D., individually and Dr.
William Inkret, Jr., M.D., P.C., a corporation and profit sharing trust; Dr.
Richard Granberg and Mary Granberg, on behalf of themselves and all other person
similarly situated, filed an action in the United States District Court for the
District of Montana, Butte Division, against Magellan Resources Inc., a
corporation; Mahogany International Inc. (sic), a corporation, former
subsidiaries of North Lily Mining Company, a corporation, their former parent
corporation; Ruen Drilling, a corporation, Longyear Company, a corporation; and
other unknown John Doe persons and corporations. The plaintiffs allege, that,
as a result of exploration activity in the Southern Cross area of Montana, local
ground water supplies have been contaminated and reduced. No specific stated
claim for damages have been made at this time. Despite studies prepared
privately and by the Department of State Lands (Montana) in 1992 which found no
evidence of earlier claims, the Plaintiffs continue to seek alternative legal
approaches against the defendants. Initial discovery proceedings have been
completed. The Company believes the claims are without merit and have
instructed its legal counsel to file for a summary judgment for dismissal.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
-17-
<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>
1995 High Low
---- ----- -----
<S> <C> <C>
First quarter $0.19 $0.12
Second quarter $0.25 $0.12
Third quarter $0.22 $0.12
Fourth quarter $0.16 $0.06
1994 High Low
---- ----- -----
First quarter $0.53 $0.38
Second quarter $0.34 $0.19
Third quarter $0.38 $0.12
Fourth quarter $0.25 $0.09
</TABLE>
On March 21, 1996, the high bid price of the common stock was $0.125 per share.
The above bid quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
As of March 21, 1996, there were 10,494 shareholders of record of North Lily's
common stock.
North Lily has not paid or declared any cash dividends and does not anticipate
paying dividends for the foreseeable future. It is expected that any net income
will be retained by North Lily for the development of its business.
-18-
<PAGE>
Item 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------------- ---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues - - $ 1,409,836 $ 3,194,916 $ 13,134,403
Loss from continuing operations
before extraordinary items $ (995,782) $ (2,071,147) $(6,286,733) $(4,697,928) $(11,929,642)
Loss before extraordinary items $ (995,782) $ (2,071,147) $(6,271,619) $(5,210,307) $(11,934,592)
Net loss $ (612,062) $ (2,071,147) $(6,271,619) $(5,210,307) $(11,934,592)
Loss per share from continuing
operations before extraordinary items $ (0.04) $ (0.09) $ (0.27) $ (0.25) $ (0.63)
Loss per share before extraordinary items $ (0.04) $ (0.09) $ (0.27) $ (0.25) $ (0.63)
Net loss per share $ (0.03) $ (0.09) $ (0.27) $ (0.28) $ (0.63)
Total assets from continuing
operations $ 4,313,967 $ 5,105,048 $ 6,354,791 $21,049,824 $ 27,975,190
Total assets $ 4,313,967 $ 5,105,048 $ 6,354,791 $22,467,197 $ 31,739,931
Non-current liabilities $385,000/(2)/ $1,168,223/(3)/ - - -
Book value per share/(1)/ $ 0.12 $ 0.13 $ 0.22 $ 0.23 $ 0.58
Cash dividends declared - - - - -
</TABLE>
/(1)/ Based on the outstanding number of shares less treasury stock.
/(2)/ Comprises of $165,000 of unpaid 1994 salaries and $220,000 unpaid 1995
salaries to officers.
/(3)/ Includes $354,250 of indebtedness to be settled by the issuance of Company
stock, at an ascribed price of $0.30 per share, and $165,000 of unpaid
salaries to officers of the Company in which the officers have the option
to accept common shares of the Company, at an ascribed price of $0.30 per
share.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Corporate Profile and History
North Lily was incorporated in Utah in 1916 and was a subsidiary of Anaconda
Company from 1925 until 1949. During this period, the Company produced gold,
silver, lead, zinc and copper from the North Lily Mine in the Tintic Mining
District, Utah. From 1949 to 1987, the Company was primarily engaged in the
acquisition, exploration, and development of mining properties. From 1988 to
1990, a Company subsidiary, International Mahogany Corp. ("Mahogany"), a
Canadian publicly-traded mining company listed on the Toronto Stock Exchange,
jointly with International Corona (Mahogany had a 70% working interest), placed
the Jolu Mine in Northern Saskatchewan, Canada, into production and produced
approximately 204,000 ounces of gold. In 1991, the Company and Mahogany acquired
the Tuina copper property in Chile, South America. Since 1991, the Company and
Mahogany have jointly been developing the Tuina copper project. The Company has
also operated a small heap leach tailing recovery operation in Utah ("Silver
City") which has produced approximately 33,000 ounces of gold and gold
equivalent since 1988. Silver City is currently in the process of site
reclamation work.
-19-
<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 $797,481, as at March 28, 1995, the Company
reduced its ownership interest in Compania Minera Phoenix S.A. ("Phoenix") from
50% to 41%. The Company also agreed to terms by which the Company's remaining
interest in the Tuina Project will be impacted. Subsequently, Mahogany agreed
to sell its 59% interest in Phoenix to Yuma Gold Mines Limited ("Yuma"). The
sale to Yuma was extended on several occasions and the terms subsequently
revised (the "Mahogany-Yuma Agreement").
By previous agreements entered into April 18, 1995 and August 22, 1995, on
December 4, 1995 Yuma entered into a revised agreement with the Company. In
summary, the Company's remaining interest in Phoenix will, subject to receipt of
regulatory approvals and completion of the Mahogany-Yuma Agreement, be impacted
as follows:
i) Yuma will receive an additional 5% interest in Phoenix in exchange for
funded costs and the delivery of an independent bankable feasibility
study in respect of the Tuina Project;
ii) the Company would be required to sell a further 10% interest in Phoenix
to Yuma for an initial payment of $145,000, less deductions for
operating costs and the costs of securing the water rights for the Tuina
Project. In addition, Yuma is required to make two further payments to
the Company, due upon commencement of Tuina commercial production and
one year thereafter. These payments are to be calculated in relation to
the initial capital costs of the Tuina Project, from a high of $609,000
where the initial capital costs are less than $14,000,000 with
graduating payments decreasing as capital costs increase, and may be
made, at Yuma's election, in cash or shares of Yuma; and
iii) all participants will be responsible for contributing their share of
funding following completion and delivery of the Feasibility Study. The
failure of any participant to contribute its share of funding will
result in a dilution of that participant's interest in accordance with a
dilution formula. Once a participant's interest has been diluted to 10%,
then the ownership interest will convert to a 10% net profits interest.
Since April 13, 1995, Yuma has assumed all indebtedness of Phoenix, provided
funding for the preparation of the feasibility study, the costs of securing the
water rights for the Tuina Project and the ongoing costs of Phoenix. These
costs are partially recoverable by Yuma (the "Yuma Payments") from the Company
from the proceeds to be received from the sale of the 10% interest in Phoenix,
as noted in item (ii) above. Closing of the Mahogany-Yuma Agreement is subject
to regulatory approval, securing the water rights for the Tuina Project by April
30, 1996 (the "Water Rights Approval Date"), and the completion by Yuma of a
financing of at least U.S. $1,500,000 within 30 days of the Water Rights
Approval Date.
If the Water Rights Approval Date does not occur as contemplated, Yuma may elect
to terminate the Mahogany-Yuma Agreement and in such circumstances, the Company
must reimburse Yuma for the Yuma Payments. The reimbursement would be payable
by the Company from proceeds from the subsequent sale of its interest in the
Tuina Project, or commercial production commences on the Tuina Project. If the
Water Rights Approval Date occurs by May 31, 1996, and Yuma is unable to close
the Yuma Purchase Agreement and Mahogany agrees to an extension of the closing,
then Yuma shall lose the rights to reimbursement of the Yuma Payments.
The Company and Mahogany have an agreement in principle to conduct the
activities of the Tuina Project on a joint venture basis. The Company expects
to enter into a definitive joint venture and operating agreement with Yuma after
closing of the Mahogany-Yuma Agreement.
-20-
<PAGE>
The restructuring completed with Mahogany allows the Company to retain a
substantial interest in the Tuina Project while eliminating the most significant
debt of the Company.
Disposition of International Mahogany Corp.
By way of a letter agreement ("Letter Agreement") dated August 6, 1993, the
Company agreed to sell its equity investment in Mahogany, which comprised an
approximate 25% equity and 60% voting interest in Mahogany. Consideration
received from the sale included: cash of $500,000; a non-interest bearing note
in the amount of $500,000 ("Baja Note"); and 650,000 common shares of Baja Gold,
Inc. ("Baja"), a Canadian publicly-traded precious metals exploration and
development company listed on the Toronto Stock Exchange, and valued, for
financial statement purposes, at $680,000, based on the August 6, 1993 closing
stock market price of Baja.
As a result of the Company selling its equity interest in Mahogany, Mahogany's
financial results were no longer consolidated with those of the Company after
the sale of Mahogany on August 6, 1993.
In addition, under the terms of the Letter Agreement, Mr. Anton R. Hendriksz and
Mr. Thomas L. Crom, previous Chairman of the Board and President of the Company,
respectively, agreed to terminate their existing employment agreements and to
provide consulting services to Mahogany and the Company for a 24-month period in
consideration for certain future cash payments. The termination and consulting
payments were to be shared equally by Mahogany and the Company. During 1993,
the Company incurred charges of $212,500 as its share of the termination and
consulting payments. As at December 31, 1994, $156,250 remained unpaid. During
1995, the Company issued 275,000 shares, at an ascribed value of $0.30 per
share, in settlement of the $156,250 due to the former officers, recording a
gain of $73,750 on settlement.
Results of Operations
The Company incurred a loss of $612,062 ($0.03 per share) for the year ended
December 31, 1995, compared to losses of $2,071,147 ($0.09 per share) for 1994
and $6,271,619 ($0.27 per share) for 1993. There were no revenue, no depletion
and depreciation charges and no cost of sales for 1995 or 1994. The lack of
revenue, depletion and depreciation charges and cost of sales during 1995 and
1994 were due to the continuation of reclamation work at the Silver City Joint
Venture and the decision to suspend operations at the Tuina copper property in
Chile during 1993. The Company, for the year ended 1993, had revenue of
$1,409,836, depletion and depreciation costs of $504,415 and cost of sales of
$2,490,296.
On August 6, 1993, the Company sold its equity investment in Mahogany. The
results of Mahogany's operations are no longer included with those of the
Company's after its sale. There was a significant reduction in revenue in 1993,
compared to prior years, due to the winding-down of operations at the Silver
City Joint Venture and the decision to suspend operations at the Tuina mine.
During 1993 the Silver City operation produced 737 ounces of gold and gold
equivalent at Silver City which was sold at an average price of $318 per ounce.
Prior to suspending operations at Tuina, 2.0 million pounds of copper
precipitate was produced and sold at an average price of $0.58 per pound of
precipitates during 1993. The Company does not anticipate any revenue during
1996 from its current properties.
During 1993, the Company incurred costs of $517,303 at the Silver City property
site. These costs included costs to produce the gold and gold equivalents for
the year as well as site reclamation costs. At the Tuina property, the Company
incurred costs of $1,972,993 to produce 2.0 million pounds of copper
precipitate.
General and administrative costs for 1995 was $842,547 compared to $862,735 in
1994 and $1,721,390 in 1993. During 1995 there was a reduction in the Company's
share of general and administrative costs relating to the Tuina Project,
-21-
<PAGE>
primarily due to Yuma's funding of these costs; however, the reduced costs were
mainly offset by increased head office costs. As a result of the Company
selling its equity investment in Mahogany in 1993, general and administrative
costs for 1994 were reduced from prior years. With the change of Company
management in August 1993, new Company management took certain steps to reduce
ongoing Company general and administrative costs. Employment of head office
staff in San Francisco was terminated. The Company's head office space in San
Francisco was vacated and employment of staff in Santiago, Chile was reduced.
The above measures, including the agreement with respect to the departure of the
Company's previous Chairman and President, resulted in an aggregate charge to
Company earnings in 1993 of $512,933 and is reflected as restructuring costs for
in 1993.
The Company maintains a small exploration department which has assumed the
responsibility of reviewing and maintaining all Company properties. Costs for
maintaining the Company's title and rights to resource properties are also
included in exploration and property holding costs. During 1995, the Company
spent $60,390 on exploration and property holding costs compared with $432,425
in 1994 and $430,089 in 1993.
During 1995, the Company recorded a gain of $359,470 from the disposition of its
mineral properties. Of this amount $309,970 arose from the exchange of a 9%
ownership interest in Phoenix in settlement of $797,481 due to Mahogany. The
gain has been recorded as an extraordinary item.
During 1995, Company management reviewed the carrying values of its remaining
mineral properties and determined to write off the remaining $71,397 carrying
value and reverse an accrual of $23,000 for anticipated property costs of its
Nine Mile property, resulting in a net write off of $48,397. During 1994,
Company management decided to terminate the Ashdown joint venture agreement. As
a result of this decision, a write-down of $197,850 was charged against earnings
in 1994. During 1993, properties with book values of $52,912 were abandoned,
with a corresponding charge to earnings. In addition, in 1994 the Company
recognized a $300,000 provision for diminution in value of the Nine Mile
property. No provision was recognized in 1993.
As a result of steadily declining cash balances and general reduction in
interest rates for funds on deposit, the Company has earned substantially lower
amounts of interest since 1993. Unless the Company sells for cash one of its
resource properties, the Company is not expected to earn any significant amounts
of interest in future years.
Although the Company has experienced a decline in its cash balances since 1993,
the Company has not relied on debt financing of any significance. Accordingly,
the Company has not incurred any large interest charges for the years ended 1995
to 1993.
During 1995, the Company realized $92,628 of gains from the sale of marketable
securities, proceeds from which have been utilized to meet the Company's
liquidity requirements. For the year ended 1994, the Company disposed of
marketable securities with a book value of $495,309 for proceeds of $665,803,
realizing a gain of $170,494. For the year ended 1993, the Company disposed of
marketable securities with a book value of $939,521 for proceeds of $927,639
realizing a loss of $11,882.
During 1995, the Company received $25,000 from the partial sale of the Company's
mill equipment in Montana. The proceeds were credited towards the remaining
scrap value. During 1994, the Company wrote-down the mill and equipment to its
scrap value of $28,103, charging earnings by $371,897. During 1993, Company
management wrote down the value of this mill equipment by $482,338.
On May 6, 1993, the Company sold all its shares in a subsidiary, Dragon Mining
Corp., realizing a gain of $729,547 on the sale.
-22-
<PAGE>
On August 6, 1993, the Company agreed to sell its 25% equity-owned subsidiary,
Mahogany. Consideration received included cash of $500,000, a note for $500,000
and 650,000 common shares of Baja, valued at $680,000. The Company recognized a
loss of $2,928,595 in 1993 on the sale of Mahogany.
During 1993, the Company's former subsidiary, Mahogany, decided to dispose of
its oil and gas interests. Generally accepted accounting principles required
that the Company's oil and gas interests be reported separately as discontinued
operations in the Consolidated Statements of Operations. Effective June 3,
1993, Mahogany Minerals U.S. Inc., which held substantially all of the oil and
gas interests, was sold for $1,200,000 resulting in a loss of $144,778. During
1993, prior to its disposal, the oil and gas operations generated earnings of
$205,234. As a result the Company recorded, net of minority interest, total
earnings of $15,114 related to discontinued operations.
Liquidity and Capital Resources
For the past three years the Company has experienced substantial losses and has
continually sold non-essential Company assets to fund ongoing operations and
property commitments and development. Management, in its efforts to ensure
maximum fund availability, has reduced Company operating costs substantially and
has deferred payment of fees for their services. The Company believes it holds
properties with development potential. In order for the Company to develop its
properties or property interests, the Company requires funds to pay Company
overheads, pay property commitment costs and fund property development work.
Resource property development is both costly and time consuming. Development of
a property to a position of generating cash flow from underlying mineral sales
is normally measured in years, and there is no guarantee of the property's
ultimate financial success.
The Company requires funds for its future operations. Funding is traditionally
provided to corporations by way of funds from ongoing company operations, funds
from the issuance of company debt instruments, funds from company equity issues
and funds from the sale of Company assets.
With the suspension of operations at the Tuina mine, and continuing reclamation
work at Silver City, the Company does not have operations from which funds from
ongoing Company operations can be accumulated. With the Company's present asset
base, the Company is not able to generate funds from operations within the next
two years at a minimum, except to the extent that: (a) Tuina may be brought into
successful production in conjunction with the restructuring of the Tuina
Project; and (b) a new project and financing may be acquired with Company stock.
Throughout 1993, 1994 and a portion of 1995, the Company did not generate
sufficient funds to meet its proportionate share of costs and obligations on its
joint property activities with Mahogany, its ongoing property cost commitments
and its ongoing corporate expenses. During 1993, 1994 and 1995, a significant
portion of the Company's capital resources was funded by advances from Mahogany.
Approximately $1,215,000 and $358,258 was advanced to the Company by Mahogany
during 1993 and 1994 respectively, and a further $163,546 was advanced during
1995. In December 1993, Mahogany stated that it was reluctant to fund any
further Company capital requirements and in March 1994, demanded repayment of
amounts due. On April 12, 1995, the Company and Mahogany agreed to the
restructuring of the Tuina ownership to settle the Company's outstanding debt to
Mahogany. See Restructuring of Tuina Ownership.
During 1993, in response to its increasing financial pressures, the Company sold
its equity interest in Mahogany, receiving: cash of $500,000, which was utilized
to reduce some of the Company's liabilities and fund the Company's joint
operation costs; a promissory note in the amount of $500,000 issued by Baja,
which was subsequently sold to Mahogany at face value in order to reduce the
Company's obligation to Mahogany and 650,000 common shares of Baja. During
1994, the Company sold 400,000 common shares of Baja for net proceeds of
$553,314. A further $112,489 net proceeds were raised from the sale of other
marketable securities. Sale proceeds were used to reduce Company liabilities
and help fund Company property cost commitments. During 1995, the Company sold
a further 10,000 common shares of
-23-
<PAGE>
Baja and other marketable securities for net proceeds of $153,649. The proceeds
were used to reduce company liabilities.
During 1994, pursuant to the issuance of promissory notes, the Company borrowed
a total of $201,337 ($283,820 Cdn.) from Baja, secured by 150,000 common shares
of Baja. The notes bear interest at 7% per annum. These funds were used to
meet a portion of the Tuina operating costs. During 1995, the Company was
advanced $74,532 (Cdn. $100,000) from a private corporation related to a
director of the Company. The Company subsequently issued a promissory note and
borrowed $97,167 (Cdn. $130,000) from a third party, secured by 90,000 common
shares of Baja. The promissory note bears interest at 8% per annum. The funds
from the promissory note were used to repay the advance from the related party
and reduce Company liabilities. Subsequent to December 31, 1995, the Company
sold 210,000 common shares of Baja for net proceeds of $338,576 (Cdn. $465,000).
Substantially all of the funds were then used to retire all of the promissory
notes and outstanding accrued interest, totalling $335,625.
In order to improve the Company's liquidity position during 1995 the Company
issued 1,455,835 shares, at an ascribed price of $0.30 per share, in settlement
of $510,500 of recorded indebtedness to former Company officers and related
companies, recording an extraordinary gain of $73,750. Current officers of the
Company have also agreed to defer repayment of indebtedness of $385,000,
comprising of $165,000 of unpaid 1994 salaries ("1994 Compensation") and
$220,000 of unpaid 1995 salaries ("1995 Compensation"), until January 2, 1997.
The 1994 Compensation will be settled with cash, if available, or the issuance
of shares of the Company, at an ascribed price of $0.30 per share. The officers
have agreed to receive only a 75% portion of the 1995 Compensation in cash and
the remaining 25% portion as deferred compensation. The cash portion will be
paid only upon the Company completing a financing and the deferred compensation
will be paid only in the event that the Company generates operating cash flow or
completes a major financing. The deferred compensation may be either settled
with cash or the issuance of the Company's common stock, at a predetermined
price per share, at the officer's election.
The Company has reviewed its asset base and has identified those assets that are
considered to be non-essential for the Company's future growth, including small
Company properties in Montana with little, if any, resource potential. In order
for the Company to meet its current operating obligations and property
commitments, the Company is required to sell all non-essential Company assets.
Company management is, therefore, reviewing all other resource properties, and
may be required to sell certain of them that do not meet its investment
criteria. Although the Company has received expressions of interest in some of
its resource properties, it is not currently negotiating with any third party
for the sale of any of its resource properties.
At December 31, 1995 the Company had a working capital deficiency of $486,629, a
decrease of $4,253 from its working capital deficiency of $490,882 at December
31, 1994.
The Company reports a use of funds of $742,073 from operating activities for the
year ended December 31, 1995. This compares to a use of funds of $895,353 and
$2,816,949 for 1994 and 1993, respectively.
During the year ended December 31, 1995, the Company generated cash of $389,637
from its investing activities. The Company received $153,649 from the net sale
of its marketable securities, $62,822 and $93,403 from the sale of mineral
properties and equipment, respectively and $91,987 in net property payments.
During 1994, the Company was provided cash of $334,642 from investment
activities. The Company received net proceeds of $665,803 from the sale of its
marketable securities. The Company used $300,017 in the exploration of its
mineral properties. An additional $31,144 was used to purchase equipment.
During 1993, the Company was provided cash of $1,587,023 from investment
activities. The Company received cash of $500,000 from the sale of its interest
in Mahogany, $927,639 from the net sale of marketable securities and
investments, $400,000 from the sale of its oil and gas operations and $199,178
in property payments and foreign tax recoveries. The Company used $46,249 to
acquire equipment, $300,091 to acquire marketable
-24-
<PAGE>
securities and at the time of disposition of Mahogany, Mahogany had cash of
$93,439 which was no longer reflected in the consolidated results of the
Company.
For the year ended December 31, 1995, the Company was provided funds of $435,997
from financing activities compared to $559,595 provided in 1994 and $195,146
provided in 1993. In 1995, the Company issued $200,000 common stock pursuant to
a private placement of 1,000,000 shares, received further advances of $163,546
from Mahogany and increased its promissory notes by $107,451. The Company
advanced $35,000 in contemplation of its acquisition of Tamarine Ventures Ltd.
In 1994, financing activities comprised of $358,258 in net advances by Mahogany
and the issuance of $201,337 in promissory notes to Baja. For the year ended
December 31, 1993, subsequent to the sale of Mahogany, the Company received
funds of $195,146 in advances from Mahogany.
The Company conducts its current mining and exploration activities in the United
States, Chile and Bolivia. As a result, the Company is subject to certain
risks, including expropriation, political instability, varying degrees of
inflation and other uncertainties.
Future Operations
In order to meet its obligations for operations and property agreement
commitments, the Company is required to sell its non-essential assets.
Remaining marketable securities will be sold and properties with little or no
potential will be disposed. If the Company does not have the financial ability
to develop a project on its own, future development may be done in conjunction
with other parties.
Company management is currently reviewing all resource properties with the view
to identifying those properties that provide the most potential for future
growth of the Company. Resource properties that do not meet management's
investment criteria may be disposed. The Company owns various patented mineral
claims. The Company is reviewing its current ownership of its various patent
mining claims as to their real estate value both in the Tintic District, Utah
and the Boulder Mountains in Montana. Both of these areas are located in
expanding resort developments and in the Boulder Mountain area the real estate
value is approaching $200 - $300 an acre. The Tintic properties are located on
the west side of Utah Lake and this area has significant potential for resort
development as the east side of Utah Lake is fully developed.
The Tuina Project will remain suspended pending completion of the Mahogany-Yuma
Agreement. It is expected that once this transaction closes Yuma will proceed
with bringing the Tuina Project into production with the construction of an
SX/EW plant facility. The Company is responsible for contributing its share of
funding, of which any failure will result in a dilution of the Company's
interest.
In addition, Company management is aggressively seeking joint ventures and/or
acquisitions and mergers and related financing to acquire gold and other natural
resource properties that fit the Company's criteria. These criteria are
technical/economic likelihood of success, sufficiently advanced exploration or
development status, and proximity of cash flow, if possible. Management will
review projects in North and South America, Africa and Asia for attractive gold
and other natural resource properties.
Proposed Share Exchange with Tamarine Ventures Ltd.
On November 17, 1995, the Company executed an Agreement and Plan of Share
Exchange (the "Agreement") with Tamarine Ventures Ltd., a company incorporated
under the laws of British Columbia, Canada ("Tamarine"). The Agreement provides
for the issuance, at closing, of one post-reverse stock split share of Common
Stock of the Company in exchange for each four common shares of Tamarine,
thereby making Tamarine a wholly-owned subsidiary of the
-25-
<PAGE>
Company (the "Share Exchange"). At the closing of the Share Exchange, the
Company would issue 2,000,000 post-reverse split shares of its Common Stock to
the shareholders of Tamarine. Closing of the Share Exchange is subject to a
number of conditions including regulatory acceptance, approval by the
shareholders of the Company and satisfactory results of due diligence
investigations conducted by the Company and Tamarine.
The Agreement contemplates that Tamarine will acquire other businesses and/or
companies using shares of the Company's Common Stock and asset based financing.
On November 24, 1995, Tamarine executed a Business Sale Agreement with Atlay Cat
Sales and Services Pty. Ltd. of Queensland, Australia, to acquire its business,
known as Cougar Catamarans. Cougar Catamarans manufactures and sells boats
ranging in size from 7.5 to 35 meters, which include passenger ferries, pleasure
boats, scenic tour boats, fishing boats, dive boats, and patrol boats. Sales
are made to countries in the Pacific Rim: Japan, Hong Kong, China, Singapore,
New Zealand, the United States, Papua New Guinea, Tahid, Noumea, and the
Maldives. The purchase price is $2,500,000 plus the value at closing of
inventory and work in process. Of the purchase price, $500,000 is to be made in
shares of the Company's Common Stock.
The Company is acquiring Tamarine in order to achieve near term operating cash
flow, long term growth and access to opportunities in South East Asia. Tamarine
management has expertise and relationships in the fast ferry industry and in the
emerging economies of South East Asia. Entrance into the new industry of light
weight aluminum fast ferries (for passengers and also for cargo) positions the
Company in an expanding multi-billion dollar infrastructure industry with focus
on the burgeoning economies of South East Asia, which are also producing major
new mineral discoveries for the mining industry.
Impact of SFAS No. 109
Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes". SFAS No. 109 requires a change from the deferred method to the
liability method of accounting for income taxes. Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this new standard, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Under the deferred method, deferred
taxes were recognized using the tax rate applicable to the year of the
calculation and were not adjusted for subsequent changes in tax rates. The
adoption of SFAS No. 109 did not have any impact on the consolidated financial
statements.
Impact of Inflation
North Lily will be affected by inflation because market value of its potential
products (gold and silver) tends to fluctuate with inflation. Other major costs
should not increase at a rate in excess of inflation.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The unaudited consolidated financial statements are filed under this Item
beginning on page F-1 and the financial statements schedules required under
Regulation S-X are filed pursuant to Item 14 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------
Not applicable.
-26-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information as to Directors for Item 10 is incorporated by reference to the
material appearing under the caption "Election of Directors" in North Lily's
Proxy Statement.
For information as to Executive Officers, see Part I. The executive officers of
the registrant are listed below:
Executive Officers of the Registrant
------------------------------------
<TABLE>
<CAPTION>
Executive Officer
Name Age Since Position with the Registrant
- --------------------------- --- ------------ --------------------------------
<S> <C> <C> <C>
Stephen E. Flechner 53 1994 President and Chief Executive
Officer and Director
W. Gene Webb 57 1994 Executive Vice-President,
Corporate Secretary and Director
John R. Twohig 43 1996 Vice-President, Corporate
Development
Nick DeMare 41 1994 Principal Financial and
Accounting Officer and Treasurer
</TABLE>
No family relationships exist between the executive officers of the registrant.
No arrangements or understandings exist between any executive officer and any
other person appointed by which the executive officer was elected or appointed.
Item 11. EXECUTIVE COMPENSATION
----------------------
Information for Item 11 is incorporated by reference to the material appearing
under the captions "Election of Directors" and "Executive Compensation" in North
Lily's Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information for Item 12 is incorporated by reference to the material appearing
under the captions "Voting Securities", "Shareholdings of Management" and
"Shareholdings of Certain Persons," in North Lily's Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information for Item 13 is incorporated by reference to the material appearing
under the caption "Transactions with Management" in North Lily's Proxy
Statement.
-27-
<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 __, 1996)
Consolidated Balance Sheets, (December 31, 1995 and 1994)
Consolidated Statements of Operations, (December 31, 1995, 1994 and 1993)
Consolidated Statements of Shareholders' Equity, (December 31, 1995, 1994
and 1993)
Consolidated Statements of Cash Flows, (December 31, 1995, 1994 and 1993)
Notes to Consolidated Financial Statements
2. Financial Statements Schedules:
Schedule VIII - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, are
inapplicable, or the information is otherwise included in the financial
statements or notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
Consecutive
Regulation Form lO-K
10-K Number Exhibit Page No.
- ------------ ------------------------------------------- --------
<C> <S> <C>
2.1 Agreement and Plan of Share Exchange
with Tamarine Ventures Ltd. N/A
3.1 Articles of Incorporation, as amended (1) N/A
3.2 Bylaws (2) N/A
10.1 Tuina Agreement (3) N/A
10.2 Employment Agreement (3) N/A
10.3 Amended Stock Option Agreement (3) N/A
10.4 Letter Agreement dated August 6, 1993 (4) N/A
10.5 Baja Gold Inc., Loan Documents (5)
10.6 W. Gene Webb Employment Agreement
10.7 Stephen E. Flechner Employment Agreement
27.0 Financial Data Schedule
</TABLE>
-28-
<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.
(5) Incorporated by reference to the Exhibits to North Lily's Form 10-K/A for
the fiscal year ended December 31, 1994.
-29-
<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 11, 1996 By: /s/Stephen E. Flechner
-------------------------
Stephen E. Flechner
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
April 11, 1996 By: /s/Stephen E. Flechner
----------------------------------------
Stephen E. Flechner
Chief Executive Officer, President and
Director
April 11, 1996 By: /s/W. Gene Webb
----------------------------------------
W. Gene Webb
Executive Vice-President, Corporate
Secretary and Director
April 11, 1996 By: /s/Nick DeMare
----------------------------------------
Nick DeMare
Principal Financial and
Accounting Officer and Treasurer
April 11, 1996 By: /s/Theodore E. Loud
----------------------------------------
Theodore E. Loud
Director
April 11, 1996 By: /s/John R. Twohig
----------------------------------------
John R. Twohig
Vice-President Corporate Development
and Director
April 11, 1996 By: /s/Nigel Horsley
----------------------------------------
Nigel Horsley
Director
-30-
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF SHARE EXCHANGE
This Agreement and Plan of Share Exchange is made this 17th day of
November, 1995, by and among NORTH LILY MINING COMPANY, a Utah corporation
("NLMC"), TAMARINE VENTURES LTD., a company incorporated under the laws of the
Province of British Columbia ("TVL"), and the persons identified on the
signature page hereof (together, the "Sellers"), each a shareholder of TVL, and
provides for a process by which the TVL will become a wholly-owned subsidiary of
NLMC.
WHEREAS, NLMC is a mining company resident in the State of Colorado whose
Common Stock is listed for trading on NASDAQ; and
WHEREAS, TVL has expertise in the marine and technology transfer industries
and has various pending corporate opportunities including, but not limited to,
the following: an option to acquire 100% interest of a workboat manufacturing
company in Cornwall, Great Britain; an option to acquire a manufacturer of
catamarans in Queensland, Australia; and a letter of intent to acquire a marine
and mining engineering company and manufacturer of catamarans in Queensland,
Australia; and
WHEREAS, NLMC desires to acquire, on the terms and subject to the
conditions and in the manner reflected below, the outstanding shares of capital
stock of TVL; and
WHEREAS, TVL believes that it is desirable and in the best interests of TVL
that its business be combined with that of NLMC, and desires that the
acquisition proposal of NLMC be made available to the shareholders of TVL; and
WHEREAS, NLMC is proceeding with the contemplated transaction in reliance
upon such support documentation agreements and representations provided and
contemplated in this Agreement; and
WHEREAS, NLMC and TVL hereby agree to provide the complete schedules as
described herein on or before November 27, 1995;
NOW, THEREFORE, the parties to this Agreement and Plan of Share Exchange do
hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the terms identified below in this Article I
shall have the meanings indicated, unless a different and common meaning of the
term is clearly indicated by the context, and variants and derivatives of the
following terms shall have correlative meanings. To the extent that certain of
the definitions set forth below suggest, indicate, or express agreements between
or among parties to this Agreement, or contain representations or warranties or
covenants of a party, the parties agree to the same by execution of this
Agreement. The parties to this Agreement agree
<PAGE>
that agreements, representations, warranties, and covenants expressed in any
part or provision of this Agreement shall for all purposes of this Agreement be
treated in the same manner as other such agreements, representations,
warranties, and covenants contained elsewhere in this Agreement, and the Article
or Section of this Agreement within which such an agreement, representation,
warranty, or covenant appears shall have no separate meaning or effect on the
same.
1.1 Accumulated Funding Deficiency. An "accumulated funding deficiency,"
as defined in ERISA Section 302(a)(2) or the last two sentences of Section
412(a)(2) of the Code, or, in either case, successor provisions to such
provisions adopted by amendments to ERISA or the Code, as the case may be, and
including, in each case, other provisions of ERISA or the Code or such other
law, modifying, amending, interpreting, or otherwise affecting the application
of such provisions, either in general or as applied to the nature or
circumstances of a particular Entity that is a party to, or is affected by or in
involved in the Share Exchange and with respect to which Entity the use of the
term in this Agreement, or in the particular location in this Agreement, is
relevant.
1.2 Affiliate. When used with respect to a person, an "affiliate" of that
person is a person Controlling, Controlled by, or under common Control with that
person.
1.3 Agreement. This Agreement and Plan of Share Exchange including all of
its schedules and exhibits and all other documents specifically referred to in
this Agreement that have been or are to be delivered by a party to this
Agreement to another such party in connection with the Share Exchange or this
Agreement, and including all duly adopted amendments, modifications, and
supplements to or of this Agreement and such schedules, exhibits, and other
documents.
1.4 Audited Financial Statements. The balance sheet, income statement,
statement of stockholders' equity, and statement of cash flows or, in each
instance, equivalent statements as commonly provided to shareholders, as at
December 31, 1994 and for the three years then ended, in the case of NLMC, and
as at July 31, 1995 and for the period then ended, in the case of TVL, in each
instance as reported on by Auditors.
1.5 Auditors. With respect to NLMC, Coopers & Lybrand, and with respect
to TVL, Casson & Shpak, Chartered Accountants, in each instance, independent
certified public accountants currently being retained for the purpose of
auditing financial statements of that party. With respect to any report
hereafter issued by Auditors, the term shall mean that firm of independent
certified public accountants of national reputation that the Entity in question
reasonably selects to serve as its auditors.
1.6 Balance Sheet. The most recent balance sheet included in the Audited
Financial Statements or Unaudited Financial Statements, as the case may be.
1.7 Closing. The completion of the Share Exchange, to take place as
described in Article II.
2
<PAGE>
1.8 Code. The Internal Revenue Code of 1986, as amended and in effect at
the time of execution of the Agreement.
1.9 Consideration. A total of 2,000,000 Post-Reverse Split shares of
Common Stock of NLMC.
1.10 Control. Generally, the power to direct the management or affairs of
an Entity.
1.11 Disclosure Document. The document delivered by NLMC to TVL and by
TVL to NLMC containing certain disclosures as described in Article IV hereof.
1.12 Entity. A corporation, partnership, sole proprietorship, joint
venture, or other form of organization formed for the conduct of a business
whether active or passive.
1.13 ERISA. The Employee Retirement Income Security Act of 1974, as
amended and in effect at the time of execution of this Agreement.
1.14 GAAP. Generally Accepted Accounting Principles, as in effect on the
date of any statement, report, or determination that purports to be, or is
required to be, prepared or made in accordance with GAAP. GAAP shall mean U.S.
GAAP for NLMC, Canadian GAAP for TVL, and Australian GAAP for NQEA and Cougar.
All references herein to financial statements prepared in accordance with GAAP
shall mean in accordance with GAAP consistently applied throughout the periods
to which reference is made.
1.15 Inventories. The stock of raw materials, work-in-process, and
finished goods, including but not limited to finished goods purchased for
resale, held by NLMC or TVL, as the case may be, for manufacturing, assembly,
processing, finishing, sale, or resale to others (including other Subsidiaries
or divisions), from time to time in the ordinary course of business in the form
in which such inventories then are held or after manufacturing, assembling,
finishing, processing, incorporating with other goods or items, refining, or the
like.
1.16 Liabilities. At any point in time the obligations of a person or
Entity, whether known or unknown, contingent or absolute, recorded on its books
or not, arising or resulting in any way from facts, events, agreements,
obligations, or occurrences that existed or transpired at a prior point in time.
1.17 Local Counsel. Special counsel retained by either Counsel to NLMC or
Counsel to TVL, as the case may be, to advise as to certain matters of state law
or local law in states or localities in which Counsel to NLMC, or Counsel to
TVL, as the case may be, desires such Local Counsel. In all instances, due care
shall be exercised in the selection of Local Counsel.
1.18 Multiemployer Plan. A "multiemployer plan," as defined in ERISA
Section 3(37) or Section 414(f) of the Code, or, in either case, successor
provisions to such provisions adopted by
3
<PAGE>
amendments to ERISA or the Code, as the case may be, and including, in each
case, other provisions of ERISA, of the Code, or of other law, and regulations
adopted under ERISA or the Code or such other law, modifying, amending,
interpreting, or otherwise affecting the application of such provisions, either
in general or as applied to the nature or circumstances of a particular Entity
that is a party to, or is affected by or is involved in the Share Exchange, and
with respect to which Entity the use of the term in this Agreement, or in the
particular location in this Agreement, is relevant.
1.19 NLMC. North Lily Mining Company, a Utah corporation, which, under
the terms of this Agreement, is acquiring all of the outstanding capital stock
of TVL.
1.20 Pension Plan. A "pension plan" or "employee pension benefit plan,"
as defined in Section 3(2) of ERISA or successor provisions to such provision
adopted by amendments to ERISA and including other provisions of ERISA or of
other law, and regulations adopted under ERISA or such other law, modifying,
amending, interpreting, or otherwise affecting the application of such
provision, either in general or as applied to the nature or circumstances of a
particular Entity that is a party to, or is affected by or is involved in the
Share Exchange and with respect to which Entity the use of the term in this
Agreement, or in the particular location in this Agreement, is relevant.
1.21 Plan Termination. A termination of a Pension Plan, whether partial
or complete, within the meaning of Title IV of ERISA.
1.22 Post-Reverse Split. Subsequent to the proposed 1-for-10 reverse
stock split of NLMC.
1.23 Prohibited Transaction. A "prohibited transaction," as defined in
Section 406 of ERISA or Section 4975(c) of the Code, or, in either case,
successor provisions to such provisions adopted by amendments to ERISA or the
Code, as the case may be, and including, in each case, other provisions of
ERISA, of the Code or of other law, and regulations adopted under ERISA or the
Code or such other law, modifying, amending, interpreting, or otherwise
affecting the application of such provisions, either in general or as applied to
the nature or circumstances of a particular Entity that is a party to, or is
affected by or is involved in the Share Exchange and with respect to which
Entity the use of the term in this Agreement, or in the particular location in
this Agreement, is relevant.
1.24 Proprietary Right. Trade secrets, copyrights, patents, trademarks,
service marks, customer lists, and all similar types of intangible property
developed, created, or owned by NLMC or TVL, or used by NLMC or TVL in
connection with its business, whether or not the same are entitled to legal
protection.
1.25 Receivable. Accounts receivable, notes receivable, and other
obligations appearing as assets on the books of NLMC or TVL, and customarily
reflected as assets in balance sheets of entities prepared in accordance with
GAAP, indicating moneys owed to the entity.
4
<PAGE>
1.26 Reportable Event. A "reportable event," as defined in Section
4043(b) of ERISA or successor provisions to such provision adopted by amendments
to ERISA, and including other provisions of ERISA or of other law, and
regulations adopted under ERISA or such other law, modifying, amending,
interpreting, or otherwise affecting the application of such provision, either
in general or as applied to the nature or circumstances of a particular Entity
that is a party to, or is affected by or is involved in the Share Exchange and
with respect to which Entity the use of the term in this Agreement, or in the
particular location in this Agreement, is relevant.
1.27 Sellers. The shareholders of TVL who are, pursuant to this
Agreement, agreeing to sell their common shares of TVL to NLMC, as identified on
the signature page hereto.
1.28 Share Exchange. The exchange of common shares of TVL by NLMC from
the Sellers for shares of NLMC Common Stock, as provided in Article II of this
Agreement.
1.29 Subsequent Transactions. The completion of the acquisition of Atlay
Cats Sales & Service Pty. Limited, doing business as Cougar Catamarans
("Cougar") and the acquisition of NQEA Australia Pty. Ltd. ("NQEA"), to take
place as described in Article III.
1.30 Subsidiary. With respect to any Entity, another Entity of which
fifty percent (50%) or more of the effective voting power, or the effective
power to elect a majority of the board of directors or similar governing body,
or fifty percent (50%) or more of the true equity interest, is owned by such
first Entity, directly or indirectly.
1.31 TVL. Tamarine Ventures Ltd., a company incorporated under the laws
of the Province of British Columbia, which will, pursuant to the various
transactions described in this Agreement, become a wholly-owned subsidiary of
NLMC. TVL shall include Tamarine Ventures Ltd. And each of its Subsidiaries,
both separately and together as a consolidated whole, unless and except to the
extent expressly indicated otherwise.
1.32 Unaudited Financial Statements. The balance sheet, income statement,
statement of stockholders' equity, and statement of cash flows or, in each
instance, equivalent statements as commonly provided to shareholders, as at
September 30, 1995 and for the nine months then ended, in the case of NLMC, and
as at _______, 19__ and for the ___ months then ended, in the case of TVL, in
each instance prepared in accordance with GAAP.
1.33 Welfare Plan. A "welfare plan" or an "employee welfare benefit
plan," as defined in Section 3(1) of ERISA or successor provisions to such
provision adopted by amendments to ERISA and including other provisions of ERISA
or of other law, and regulations adopted under ERISA or such other law,
modifying, amending, interpreting, or otherwise affecting the application of
such provision, either in general or as applied to the nature or circumstances
of a particular Entity that is a party to, or is affected by or is involved in
the Share Exchange and with respect to which Entity the use of the term in this
Agreement, or in the particular location in this Agreement, is relevant.
5
<PAGE>
ARTICLE II
SHARE EXCHANGE
2.1 Share Exchange. On the Closing Date, and at the Closing Time, subject
in all instances to each of the terms, conditions, provisions, and limitations
contained in this Agreement, the Sellers shall sell, transfer, convey, and
assign to NLMC, free and clear of any and all liens and charges, and NLMC shall
acquire from the Sellers, their common shares without par value, of TVL, as
identified in Schedule 2.1 hereto, comprising, as to each such Seller, his, her,
or its entire ownership of equity securities of TVL, in exchange for the
Consideration, as described herein, payable for each common share of TVL held by
the Sellers.
2.2 Consideration. Each of the Sellers shall be entitled to receive, on
and subject to each of the terms, conditions, and provisions of this Agreement,
one (1) Post-Reverse Split share of Common Stock of NLMC for each two (2) common
shares of TVL owned by the Seller.
2.3 Stock Legends. Certificates representing shares of Common Stock of
NLMC shall bear a legend restricting transfer of the shares of the Common Stock
represented by such stock certificate in substantially the form set forth below:
"The Shares represented by this certificate have been offered and sold in
an "offshore transaction" in reliance upon Regulation S as promulgated by
the Securities and Exchange Commission. Accordingly, the shares
represented by this certificate have not been registered under the
Securities Act of 1933 (the "Act") and may not be offered for sale, sold,
or otherwise transferred in the United States or to a "U.S. Person" (as
defined under Regulation S) except pursuant to an effective registration
statement under the Act, or pursuant to an exemption from registration
under the Act, the availability of which is to be established to the
satisfaction of the Company."
2.4 Closing. The Closing hereunder shall take place at the offices of
NLMC in Denver, Colorado or at such other place as NLMC and TVL may agree upon,
on the Closing Date.
2.5 Parties to the Agreement. By executing this Agreement, each of the
Sellers agrees to be bound by it and by any amendment, modification, or change
in or to it or any of its provisions that is accepted by Sellers holding a
majority of all of the shares of Common Stock of TVL held by all of the Sellers
in the aggregate; provided, however, that no such amendment, modification, or
change shall treat any shareholder who does not consent thereto less favorably
than it treats any shareholder who does consent thereto.
2.6 Management of NLMC. Upon the Closing hereunder, the board of
directors of NLMC shall be comprised of Stephen E. Flechner, W. Gene Webb,
William C. Bleimeister, John R. Twohig, John B. Holland, and Nigel Horsley. The
officers shall be as follows: Stephen E. Flechner, Chairman; John W. Twohig,
President; W. Gene Webb, Secretary; and Nigel Horsley, Executive Vice President.
6
<PAGE>
ARTICLE III
SUBSEQUENT TRANSACTIONS
3.1 Cougar Acquisition. Pursuant to the terms of the [name of document],
TVL has agreed to acquire the business and assets of Atlay Sales and Services
Pty. Ltd. and Cougar Catamarans Ltd. ("Cougar"), incorporated in the State of
Queensland, Australia. It is anticipated that this acquisition will be
completed by NLMC issuing such number of Post-Reverse Split shares of NLMC
Common Stock that will upon closing of trading at the closing date equal
US$250,000 and by the company resulting from the Share Exchange (the "Merged
Company") remitting cash in the amount of US$2,250,000, in four quarterly
payments.
3.2 NQEA Acquisition. Pursuant to the terms of an anticipated Share
Purchase Agreement, TVL has agreed to acquire NQEA Australia Pty. Ltd., a
company incorporated in the State of Queensland, Australia. It is anticipated
that this acquisition will be accomplished by NLMC and/or TV remitting cash
payment in the amount of $200,000 (Australian) upon signing the Share Purchase
Agreement and a further $800,000 (Australian) within 30 days, and the balance of
$24,000,000 (Australian) upon closing 120 days after signing.
3.3 Additional Consideration. Upon achieving $4.7 million (Australian) in
net profits after tax within the Merged Company group for distribution as
required by the Board of Directors of the NASDAQ-listed Merged Company, the
Sellers shall be entitled to receive, on and subject to each of the terms,
conditions, and provisions of this Agreement, a total of 2,000,000 Post-Reverse
Split shares of Common Stock of NLMC. Each of the Sellers shall be entitled to
receive, on and subject to each of the terms, conditions, and provisions of this
Agreement, one (1) Post-Reverse Split share of Common Stock of NLMC for each two
(2) common shares of TVL formerly owned by the Seller. The shares so issued
shall have the same restrictive legend set forth in Section 2.3 hereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The following representations and warranties are hereby made (i) by NLMC to
the Sellers with respect to NLMC and (ii) by TVL to NLMC with respect to TVL:
4.1 Organization and Qualification. It is, and each of its Subsidiaries
is, a corporation duly organized, validly existing, and in good standing under
the laws of its respective jurisdiction of incorporation and each has the
requisite corporate power and authority to carry on its business as it is now
being conducted. Each of it and its Subsidiaries is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned or leased by it, or the nature of its
activities, is such that qualification as a foreign corporation in that
jurisdiction is required by law.
7
<PAGE>
4.2 Capitalization.
(1) NLMC. The authorized capital stock of NLMC consists of 30,000,000
shares of common stock, $.10 par value. There is no other capital
stock authorized for issuance. As of the date of NLMC's Unaudited
Balance Sheet, 23,551,012 shares of common stock were validly issued
and outstanding, fully paid, and nonassessable, no shares were
reserved for issuance, nor were there outstanding any options,
warrants, convertible instruments, or other rights, agreements, or
commitments to acquired common stock of NLMC, except as fully and
completely described on Schedule 4.2(1) hereto. Since the date of
NLMC's Unaudited Balance Sheet, no shares of NLMC's capital stock, or
options, warrants, or other rights, agreements, or commitments
(contingent or otherwise) obligating NLMC or any of its Subsidiaries
to issue shares of capital stock, have been executed or issued.
(2) TVL. The authorized capital stock of TVL consists of 100,000,000
common shares, without par value. There is no other capital stock
authorized for issuance. As of the date of TVL's Unaudited Balance
Sheet, 11,500,000 common shares were validly issued and outstanding,
fully paid, and nonassessable, no shares were reserved for issuance,
nor were there outstanding any options, warrants, convertible
instruments, or other rights, agreements, or commitments to acquired
common stock of TVL, except as fully and completely described on
Schedule 4.2(2) hereto. Since the date of TVL's Unaudited Balance
Sheet, no shares of TVL's capital stock, or options, warrants, or
other rights, agreements, or commitments (contingent or otherwise)
obligating TVL or any of its Subsidiaries to issue shares of capital
stock, have been executed or issued.
4.3 Authority Relative to this Agreement. This Agreement has been duly
and validly executed and delivered by it and constitutes a valid and binding
agreement of it and is enforceable in accordance with its terms. It has all
requisite corporate power and authority to enter into this Agreement and to
carry out the Share Exchange contemplated hereby, and its doing so has been duly
and sufficiently authorized, subject only to shareholder approval and
governmental regulatory approvals as and to the extent specifically set forth
elsewhere in this Agreement.
4.4 Absence of Breach; No Consents. The execution, delivery, and
performance of this Agreement, and the performance by it of its obligations
hereunder, do not, except as disclosed in Schedule 4.4, (1) conflict with or
result in a breach of any of the provisions of its Articles of Incorporation or
Bylaws or of any of its Subsidiaries; (2) contravene any law, ordinance, rule,
or regulation of any State or Commonwealth or political subdivision of either or
of the United States or of any applicable foreign jurisdiction, or contravene
any order, writ, judgment, injunction, decree, determination, or award of any
court or other authority having jurisdiction, or cause the suspension or
revocation of any authorization, consent, approval, or license, presently in
effect, which affects or binds, it or any of its Subsidiaries or any of its or
their material properties, except in any such case where such contravention will
not have a material adverse effect on its or its Subsidiaries' business,
8
<PAGE>
condition (financial or otherwise), operations, or prospects, taken as a whole,
and will not have a material adverse effect on the validity of this Agreement or
on the validity of the consummation of the Share Exchange; (3) conflict with or
result in a material breach of or default under any material indenture or loan
or credit agreement or any other material agreement or instrument to which it or
any of its Subsidiaries is a party or by which it or they or any of its or their
material properties may be affected or bound; (4) other than consents disclosed
in its Disclosure Document, require the authorization, consent, approval, or
license of any third party; or (5) constitute grounds for the loss or suspension
of any permits, licenses, or other authorizations used in its business.
4.5 Brokers. No broker, finder, or investment banker is entitled to any
brokerage, finder's, or other fee or commission in connection with this
Agreement or the Share Exchange or any related transaction based upon any
agreements, written or oral, made by or on behalf of it or any of its
Subsidiaries. It does not have any obligation to pay finder's or broker's fees
or commissions in connection with the exercise of options to renew or extend
real estate leases to which it is a party.
4.6 Absence of Material Differences from Disclosure Document. Except as
specifically disclosed in its Disclosure Document:
(1) No Undisclosed Liabilities. Neither it nor any of its Subsidiaries has
any Liabilities which are not adequately reflected or reserved against
on the face of its Unaudited Balance Sheet, except Liabilities
incurred since the date of its Unaudited Balance Sheet in the ordinary
course of business and consistent with past practice. Without limiting
the foregoing, (a) there are no unpaid leasehold improvements at any
of its facilities or locations for which it is or will be responsible,
and (b) there are no deferred rents due to lessors at or with respect
to any of such facilities or locations, and (c) its Disclosure
Document sets forth, as a part thereof, each of its Liabilities in an
amount in excess of $_____ and the aggregate amount of Liabilities to
each person to whom such aggregate exceeds $_____.
(2) No Material Adverse Change. Since the date of its Unaudited Balance
Sheet, other than as contemplated or caused by this Agreement, there
has not been (a) any material adverse change in its business,
condition (financial or otherwise), operations, or prospects; (b) any
damage, destruction, or loss, whether covered by insurance or not,
having a material adverse effect on its business, condition (financial
or otherwise), operations, or prospects; (c) any entry into or
termination of any material commitment, contract, agreement, or
transaction (including without limitation, any material borrowing or
capital expenditure or sale or other disposition of any material asset
or assets) by it, other than this Agreement and agreements executed in
the ordinary course of business; (d) any redemption, repurchase, or
other acquisition for value of its capital stock by it, or any
issuance of the capital stock of it or any of its Subsidiaries or of
securities convertible into or rights to acquire any such capital
stock or any dividend or distribution declared, set aside or paid on
its capital stock; (e) any transfer by it of, or right granted by it
under, any material lease,
9
<PAGE>
license, agreement, patent, trademark, trade name, or copyright; (f)
any sale or other disposition of any asset of it or of any of its
Subsidiaries, or any mortgage, pledge, or imposition of any lien or
other encumbrance on any asset of it or of any of its Subsidiaries,
other than in the ordinary course of business, or any agreement
relating to any of the foregoing; or (g) any default or breach by it
or any of its Subsidiaries in any material respect under any contract,
license, or permit. Since the date of its Unaudited Balance Sheet, it
and its Subsidiaries have conducted their businesses only in the
ordinary and usual course, and, without limiting the foregoing, no
changes have been made in (a) executive compensation levels; (b) the
manner in which other employees of it and its Subsidiaries are
compensated; (c) supplemental benefits provided to any such executives
or other employees; or (d) inventory levels in relation to sales
levels, except, in any such case, in the ordinary course of business
and, in any event, without material adverse effect on its business,
condition (financial or otherwise), operations, or prospects.
(3) Taxes. It and its Subsidiaries have properly filed or caused to be
filed all federal, state, local, and foreign income and other tax
returns, reports, and declarations that are required by applicable law
to be filed by them, and have paid, or made full and adequate
provision for the payment of, all federal, state, local, and foreign
income and other taxes properly for the periods covered by such
returns, reports, and declarations, except such taxes, if any, as are
adequately reserved against in its Unaudited Balance Sheet.
(4) Litigation. (a) No material investigation or review by any
governmental entity with respect to it or any of its Subsidiaries is
pending or, to the best of its knowledge, threatened (other than
inspections and reviews customarily made of businesses such as its
business), nor has any governmental entity indicated to it an
intention to conduct the same; and (b) there is no action, suit, or
proceeding pending or, to the best of its knowledge, threatened
against or affecting it or its Subsidiaries at law or in equity, or
before any federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality. Its
Disclosure Document includes a brief description of each litigation
matter included therein, except claims (including punitive damage
claims, if any) for amounts of less than $150,000.
(5) Employees. There are, except as disclosed in its Disclosure Document,
no collective bargaining, bonus, profit sharing, compensation, or
other plans, agreements, trusts, funds, or arrangements maintained by
it or any of its Subsidiaries for the benefit of their directors,
officers, or employees, and there are no employment, consulting,
severance, or indemnification arrangements, agreements, or
understandings between it or any of its Subsidiaries, on the one hand,
and any current or former directors, officers, or other employees (or
Affiliates thereof) of it or any of its Subsidiaries, on the other
hand. Its Disclosure Document identifies each person whose income from
it in the fiscal year ended on the date of its Audited Balance Sheet
exceeded, or
10
<PAGE>
whose income from it in the fiscal year begun immediately thereafter
is at a rate exceeding, $____ per annum, and describes each
contractual arrangement for the employment or compensation of each
such person. It is not, and following the Closing will not be, bound
by any express or implied contract or agreement to employ, directly or
as a consultant or otherwise, any person for any specific period of
time or until any specific age except as specified in agreements in
writing identified in its Disclosure Document or executed pursuant to
the provisions hereof, if any.
(6) Compliance with Laws. Each of it and its Subsidiaries is in
substantial compliance with all, and has received no notice of any
violation of any, laws or regulations applicable to its operations,
including, without limitation, the use of premises occupied by it, or
with respect to which compliance is a condition of engaging in any
aspect of the business of it and its Subsidiaries and each has all
permits, licenses, zoning rights, and other governmental
authorizations necessary to conduct its business as presently
conducted.
(7) Ownership of Assets. Each of it and its Subsidiaries has, except as
disclosed in its Disclosure Document, good, marketable, and insurable
title, or valid, effective, and continuing leasehold rights in the
case of leased property, to all real property (as to which, in the
case of owned property, such title is fee simple) and all personal
property owned or leased by it or used by it in the conduct of its
business in such a manner as to create the appearance or reasonable
expectation that the same is owned or leased by it, free and clear of
all liens, claims, encumbrances, and charges, except liens for taxes
not yet due and minor imperfections of title and encumbrances, if any,
which singly and in the aggregate, are not substantial in amount and
do not materially detract from the value of the property subject
thereto or materially impair the use thereof. It does not know of any
potential action by any party, governmental or other, and no
proceedings with respect thereto have been instituted of which it has
notice, that would materially affect its ability to use and to utilize
each of such assets in its business or in the business of its
Subsidiaries. It has received no notices from any mortgagee regarding
properties leased by it. Its Disclosure Document contains a detailed
listing of all assets that consist of (a) accounts receivable as
provided in clause (13) below; (b) miscellaneous current assets in
excess of $_____; (c) prepaid expenses in excess of $_____; (d) real
property; and (e) gross aggregate additions for each of the past four
years by location of (i) buildings and improvements, (ii) furniture
and fixtures, (iii) leasehold improvements, and (iv) automobiles and
trucks.
(8) Proprietary Rights. It and its Subsidiaries among them possess full
ownership of, or adequate and enforceable long-term licenses or other
rights to use (without payment), all Proprietary Rights owned by or
registered in the name of it or any of its Subsidiaries or used in the
business of it or any of its Subsidiaries; it has not received any
notice of conflict which asserts the rights of others with respect
thereto; and each
11
<PAGE>
of it and its Subsidiaries has in all material respects performed all of the
obligations required to be performed by it, and is not in default in any
material respect, under any agreement relating to any Proprietary Right.
(9) Subsidiaries. All of its Subsidiaries (if any), direct or indirect,
are identified in its Disclosure Document, it has no other Subsidiaries, and
neither it nor any of its Subsidiaries described in its Disclosure Document is a
partner of or joint venturer with any other person or Entity except as therein
described. All of the issued and outstanding shares of capital stock of each
Subsidiary are owned of record and beneficially by it or another Subsidiary of
it, are validly issued, fully paid and nonassessable and are owned free and
clear of all liens, charges, claims, pledges, security interests, equities,
encumbrances, reservations, or contractual restrictions on transfer of any
nature whatsoever; and no Subsidiary has outstanding any securities, warrants,
options, or other rights convertible into or exchangeable or exercisable for any
shares of its capital stock, and there are no contracts, commitments,
understandings, arrangements, or restrictions by which any Subsidiary is bound
to issue shares of its capital stock.
(10) Trade Names. Its Disclosure Document identifies each trade name,
fictitious business name, or other similar name under which it has conducted any
part of the its business or in which it has utilized any of its assets during
the ten (10) years preceding the date of this Agreement.
(11) Employee Benefit Plans. Except as disclosed in its Disclosure
Document:
(a) Neither it nor any of its Subsidiaries maintains or contributes to
any Pension Plan or any Welfare Plan, nor is it or any of its
Subsidiaries presently, nor has it been within the last six years,
a participating employer in any Multiemployer Plan.
(b) All Pension Plans and Welfare Plans of it or its Subsidiaries have
been administered in substantial compliance with their terms,
ERISA, and, where applicable, the Code. The IRS has issued a
favorable determination letter with respect to the qualification
of each such Pension Plan and the exemption of any corresponding
trust. A copy of the most recent determination letter for each
Pension Plan has been furnished to the other party, and nothing
has occurred since the date of any such determination letter that
could cause the relevant Pension Plan or trust to lose such
qualification or exemption.
(c) With respect to each Pension Plan and each Welfare Plan: (i) there
is no fact, including, without limitation, any Reportable Event,
that exists that would constitute grounds for termination of such
Plan or for the appointment by the appropriate United States
District Court of a trustee to administer such plan,
12
<PAGE>
in each case as contemplated by ERISA; (ii) neither it nor any
Subsidiary nor any fiduciary, trustee, or administrator of any
Pension Plan or Welfare Plan, has engaged in a Prohibited
Transaction that could subject it or any Subsidiary to any
material tax or any material penalty imposed by ERISA or the Code;
and (iii) there is no material Accumulated Funding Deficiency with
respect to any Pension Plan, whether or not waived.
(d) There has been no Plan Termination that has occurred during the
five-year period ending on the date hereof.
(e) Neither it nor any Subsidiary has any knowledge of any material
liability being incurred under Title IV of ERISA by it or any
Subsidiary with respect to any Pension Plan maintained by a trade
or business (whether or not incorporated) which is under common
control with, or part of a controlled group of corporations with,
it, within the meaning of Sections 414(b) or (c) of the Code.
(f) No Welfare Plan is funded with a trust or other funding vehicle,
other than insurance policies.
(12) Facilities. Its facilities are (as to physical plant and structure)
structurally sound and none of its facilities, nor any of the vehicles
or other equipment used by it in connection with its business, has any
material defects and all of them are in all material respects in good
operating condition and repair, and are adequate for the uses to which
they are being put; none of such its facilities, vehicles, or other
equipment is in need of maintenance or repairs except for ordinary,
routine maintenance and repairs which are not material in nature or
cost. It is not in breach, violation, or default of any lease with
respect to or as a result of which the other party (whether lessor,
lessee, sublessor or sublessee) thereto has the right to terminate the
same, and it has not received notice of any claim or assertion that it
is or may be in any
such breach, violation, or default.
(13) Accounts Receivable. All of its accounts receivable, whether or not
reflected in its Audited and Unaudited Balance Sheets, represent
transactions in the ordinary course of business, and are current and
collectible net of any reserves shown on such Balance Sheets (which
reserves are adequate and were calculated consistent with past
practice). Its Disclosure Document specifically identifies (a) the
aging of Receivables, (b) each Receivable in excess of $____, (c) each
Receivable in an amount in excess of $____ that is more than ninety
(90) days past due, and (d) each Receivable from a person or Entity
from whom the aggregate of such Receivables exceeds $_____.
13
<PAGE>
(14) Inventories. All of its Inventories, whether or not reflected in its
Audited and Unaudited Balance Sheets, are of a quality and quantity
usable and salable in the ordinary course of business, except for
obsolete items and items of below standard quality, all of which, in
the aggregate, are immaterial in amount. Items included in such
Inventories are carried on its books, and are valued on its Audited
and Unaudited Balance Sheets, at the lower of cost or market and, in
any event, at not greater than their net realizable value, on a item-
by-item basis, after appropriate deduction for costs of completion,
marketing costs, transportation expense, and allocation of overhead.
(15) Contracts. Except as identified in its Disclosure Document, it has no
contracts, agreements, or understanding, whether express or implied,
written or verbal, provided, however, that it may have, and its
Disclosure Document need not identify, any such contracts, agreements,
or understanding that fall into one of the following categories: (a)
those that are terminable on notice of less than thirty-two (32) days
and do not involve payments or obligations of more than $____ in any
period or (b) those that involve aggregate payments or obligations
remaining unpaid as of the date of the Agreement of less than $____.
Its Disclosure Document shall, however, identify the aggregate amount
of payment obligations remaining unpaid as of the date of the
Agreement of all contracts exempt from disclosure by (b) above. Its
Disclosure Document includes a brief summary of each such contract,
agreement, or understanding identified therein. Without in any respect
limiting the foregoing, its Disclosure Document contains a description
of all leases of properties by it, including all amendments,
supplements, extensions, and modifications thereof, identifying, inter
alia, the date each such document was executed and its effective
period. It is not a party to any executory contract to sell or
transfer any part of any of its leasehold interests. True and accurate
copies of all leases, and of all amendment, supplements, extensions,
and modifications thereof, have heretofore been delivered to the other
party by it.
(16) Accounts Payable. The accounts payable reflected on its Audited
Balance Sheet do, and those reflected in the most recent balance sheet
included in the Unaudited Financial Statements do, and those reflected
on its books at the time of the Closing will, reflect all amounts owed
by it in respect of trade accounts due and other Payable, and its
actual Liability in respect of such obligations was not, and will not
be, on any of such dates, in excess of the amounts so reflected on the
Balance Sheets, or its books, as the case may be.
(17) Labor Matters. Except as set forth in its Disclosure Document, there
are not activities or controversies, including, without limitation,
any labor organizing activities, election petitions or proceedings,
proceedings preparatory thereto, unfair labor practice complaints,
labor strikes, disputes, slowdowns, or work stoppages,
14
<PAGE>
pending or, to the best of its knowledge, threatened, between it or any
of its Subsidiaries and any of its or their employees.
(18) Insurance. It and its Subsidiaries have insurance policies in full
force and effect which provide for coverages which are usual and
customary in the business of it and its Subsidiaries as to amount and
scope, and are adequate to protect it against any reasonably
foreseeable risk of loss, including business interruption. Its
Disclosure Document identifies each of its insurance policies,
indicating the carrier, amount of coverage, annual premium, risks
covered, placing broker or agent, and other relevant information as to
each. It has not, within the past three (3) years, received any notice
of cancellation of any insurance agreement.
(19) Title to and Utilization of Real Properties. Except as disclosed in
its Disclosure Document, it owns fee, simple, insured title to all
real property identified herein or in any document referred to herein
as owned by it, and has the unbridled right to use the same, and is
not aware of any claim, notice, or threat to the effect that its right
to own and use such property is subject in any way to any challenge,
claim, assertion of rights, proceedings toward condemnation, or
confiscation, in whole or in part, or is otherwise subject to
challenge. Each parcel of real property owned or leased by it is free
of any and all hazardous wastes, toxic substances, or other types of
contamination or matters of environmental concern, and it and its
Subsidiaries are not subject to any Liability resulting from or
related to any such wastes, substances, contaminants, or matters of
environmental concern in connection with any such property. It has, in
conjunction with acquiring ownership of, or any leasehold interest in,
any parcel of real property, (a) caused an audit and examination to be
made as to the existence of any hazardous wastes, toxic substances, or
other types of contamination or matters of environmental concern
affecting each such property, which examination indicated that such
property was free of any such wastes, substances, contaminants, or
other matters of environmental concern, and it has delivered a copy of
the report of such audit and examination to the other party; and (b)
obtained an appropriate policy of title insurance insuring the
interest of it or its Subsidiaries (as the case may be) in such
property, which insurance policy was not subject to any exceptions not
reasonably acceptable in the ordinary course of business, and a copy
of which has been delivered to the other party.
4.7 Full Disclosure. The documents, certificates, and other writings
furnished or to be furnished by or on behalf of it to the other party pursuant
to the provisions of this Agreement, taken together in the aggregate, do not and
will not contain any untrue statement of a material fact, or omit to state any
material fact, or omit to state any material fact necessary to make the
statements made, in the light of the circumstances under which they are made,
not misleading.
4.8 Actions Since Balance Sheet. Except as set forth on its Disclosure
Document, since the date of its Unaudited Balance Sheet, it has taken no actions
that would be prohibited under the
15
<PAGE>
provisions of this Agreement (without the prior consent of the other party)
after the date of this Agreement.
ARTICLE V
SPECIFIC REPRESENTATIONS AND WARRANTIES OF NLMC
NLMC hereby represents and warrants to the Sellers:
5.1 Disclosure. NLMC has heretofore delivered to NLMC and to the Sellers
each of the following:
(1) Annual report of NLMC on Form 10-K as filed with the Securities and
Exchange Commission (the "Securities and Exchange Commission") for
NLMC's fiscal year ended December 31, 1994; and
(2) Quarterly reports of NLMC on Form 10-Q as filed with the SEC for each
of the first three fiscal quarters of 1995, and all other reports of
NLMC filed with the SEC, to the extent that such reports have been
filed with the SEC after the filing of Form 10-K referred to in (1)
above and prior to the execution hereof.
Each of such documents, at the time it was prepared, and all of such
documents taken together, did not and do not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. All of the financial statements contained in the
foregoing documents were prepared from the books and records of NLMC. The
Audited Financial Statements were prepared in accordance with GAAP, and fairly
and accurately reflect the financial position and condition of NLMC as at the
dates and for the periods indicated. The Unaudited Financial Statements were
prepared in a manner not inconsistent with the basis of presentation used in the
Audited Financial Statements, and fairly present the financial position and
condition of NLMC as at and for the periods indicated, subject to normal year-
end adjustments, none of which will be material.
5.2 Status of NLMC. NLMC is an issuer which has a class of securities
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of
1934 and has filed all the material required to be filed pursuant to Section
13(a) or 15(d) of that Act for a period of at least 12 months immediately
preceding this proposed Share Exchange made in reliance upon Regulation S.
5.3 No Directed Selling Efforts. NLMC represents and warrants that no
directed selling efforts (as that term is defined Rule 901 of Regulation S
promulgated under the Act) are being or will be made in the United States by the
NLMC, an Affiliate, or any person acting on his behalf.
16
<PAGE>
ARTICLE VI
SPECIFIC REPRESENTATIONS AND WARRANTIES OF TVL
TVL represents and warrants to NLMC as follows:
6.1 Financial Statements. TVL has heretofore delivered to NLMC the
following:
(1) The Audited Financial Statements of TVL;
(2) The Unaudited Financial Statements of TVL;
(3) Audited Financial Statements of NQEA;
(4) Unaudited Financial Statements of Cougar; and
(5) Projections, pertaining to the acquisition of Port Isaac, Cougar,
and NQEA.
All of the historical financial statements contained in such documents
were prepared from the books and records of TVL. The Audited Financial
Statements were prepared in accordance with GAAP, and fairly and accurately
reflect the financial position and condition of TVL as at the dates and for the
periods indicated. Without limiting the foregoing, at the date of TVL's Audited
Balance Sheets, TVL owned each of the assets included in preparation of TVL's
Audited and Unaudited Balance Sheet, and the valuation of such assets in TVL's
Audited Balance Sheet is not more than their fair saleable value (on an item by
item basis) at that date; and TVL had no Liabilities other than those included
in TVL's Audited Balance Sheet, nor any Liabilities in amounts in excess of the
amounts included for them in TVL's Audited Balance Sheet. The Unaudited
Financial Statements included in the documents described above in this Section
were prepared in a manner consistent with the basis of presentation used in the
Audited Financial Statements, and fairly present the financial position and
condition of TVL as at and for the periods indicated, subject to normal year-
end adjustments, none of which will be material. The Projections reasonably
reflect the results of operations that TVL expects it will achieve absent
extraordinary events or unusual conditions of which it is not presently on
notice. From the date hereof through the Closing Date, TVL will continue to
prepare financial statements on the same basis that it has done so in the past,
will promptly deliver the same to NLMC, and agrees that from and after such
delivery the foregoing representations will be applicable to each financial
statement so prepared and delivered.
6.2 Acquisition of Port Isaac - Offshore 105 and Offshore 125. It
has performed fully the asset purchase agreement with Rod Baker, the proprietor
of an unincorporated business known as Port Isaac Workboats ("Port Isaac"),
thereby acquiring limited manufacturing, marketing, and distribution rights to
two products produced by Port Isaac (with the exception of such rights as
applicable within the European Union; related rights and interests to trade and
brand names, registered and unregistered trademarks, design, and other
intellectual property of Port Isaac; and certain molds, templates, drawings, and
related materials, all pertaining to the "Offshore 105" and
17
<PAGE>
"Offshore 125". All of the purchased assets have been duly and properly
transferred to TVL or one of its Subsidiaries.
6.3 Acquisition of Port Isaac - Offshore 25 and Offshore Dory. It
has executed an option agreement with Rod Baker (the "Port Isaac Option
Agreement"), pursuant to which TVL was granted an option to acquire physical
infrastructure of Port Isaac, consisting of the manufacturing shop, offices,
store room, entries, a launching trailer, office fixtures, and other pieces of
equipment and furnishings; molds, drawings, and templates for the "Offshore 25"
and "Offshore Dory"; and marketing rights within the European Union. The Option
Agreement has not been cancelled or terminated and TVL retains all rights and
privileges granted therein.
6.4 Acquisition of Cougar. It has executed a Letter of Intent from
Cougar (the "Cougar Letter of Intent"), pursuant to which TVL was granted a non-
exclusive option to acquire the business and assets of Cougar. The Cougar Letter
of Intent has not been cancelled or terminated, TVL has not taken any actions
that would result in the breach of the Cougar Letter of Intent, and TVL retains
all rights and privileges granted therein.
6.5 Acquisition of NQEA. It has executed a non-exclusive Letter of
Intent to conclude a Share Purchase Agreement with owners of NQEA Australia Pty.
Ltd. (the "NQEA Letter of Intent"), pursuant to which TVL will be granted the
right to acquire all of the issued and outstanding capital stock of NQEA. The
NQEA Letter of Intent has not been cancelled or terminated, TVL has not taken
any actions that would result in the breach of the NQEA Letter of Intent, and
TVL retains all rights and privileges granted therein.
ARTICLE VII
MUTUAL COVENANTS
7.1 Affirmative Covenants. From the date hereof through the Closing
Date, NLMC and TVL covenant and agree with each other that each will take every
action reasonably required of it in order to satisfy the conditions to closing
set forth in this Agreement and otherwise to ensure the prompt and expedient
consummation of the Share Exchange and the Subsequent Transactions substantially
as contemplated hereby, and will exert all reasonable efforts to cause the Share
Exchange and Subsequent Transactions promptly to be consummated, provided in all
instances that the representations and warranties of the other parties in this
Agreement are and remain true and accurate and that the covenants and agreements
of the other parties in this Agreement are honored and that the conditions to
its obligations set forth in this Agreement are satisfied or appear capable of
being satisfied. Specifically, NLMC and TVL covenant and agree with each other
that each will complete all exhibits and schedules referenced in this Agreement
no later than 15 days from the execution of this Agreement.
7.2 Access and Information. NLMC and TVL shall each afford to the
other and to the other's accountants, counsel, and other representatives
reasonable access during normal business hours throughout the period prior to
the Closing, and thereafter through the completion or
18
<PAGE>
abandonment of the Subsequent Transactions, to all of its and its Subsidiaries'
properties, books, contracts, commitments, records (including, but not limited
to, tax returns), and personnel and, during such period, NLMC and TVL shall each
promptly furnish to the other (1) all written communications to its directors or
to its shareholders generally, (2) internal monthly financial statements when
and as available, and (3) all other information concerning its or any of its
Subsidiaries' business, properties, and personnel as the other may reasonably
request, but no investigation pursuant to this Section 7.2 shall affect any
representations or warranties made herein, or the conditions to the obligations
of NLMC or TVL to consummate the Share Exchange contained in this Agreement. In
the event of the termination of this Agreement, NLMC and TVL will, and will
cause its representatives to, deliver to the other or destroy all documents,
work papers, and other material, and all copies thereof, obtained by it or on
its behalf from the other party (or any Subsidiary) as a result of this
Agreement or in connection herewith, whether so obtained before or after the
execution hereof, and will hold in confidence all confidential information that
has been designated as such by the other party in writing or by appropriate and
obvious notation, and will not use any such confidential information except in
connection with the Share Exchange or the Subsequent Transactions, until such
time as such information is otherwise publicly available. NLMC and TVL and their
respective representatives shall assert their rights hereunder in such manner as
to minimize interference with the business of NLMC and TVL.
7.3 Expenses. Whether or not the Share Exchange is consummated, all
costs and expenses incurred by each party in connection with this Agreement and
the transactions contemplated hereby shall be paid by the respective party
except as otherwise provided (directly or indirectly) herein.
7.4 Publicity. Prior to the Closing, any written news release by
NLMC or TVL pertaining to this Agreement or the Share Exchange shall be
submitted to the other for review and approval prior to release, and shall be
released only in a form approved by the other party; provided, however, that (1)
such approval shall not be unreasonably withheld, and (2) such review and
approval shall not be required of releases if prior review and approval would
prevent the timely and accurate dissemination of such press release as required
to comply, in the judgment of counsel, with any applicable law, rule, or policy.
7.5 Updating of Exhibits and Disclosure Documents. NLMC and TVL
covenant and agree with each other that each shall notify the other and the
Sellers of any changes, additions, or events which may cause any change in or
addition to any Schedules or Exhibits delivered by it under this Agreement,
promptly after the occurrence of the same and at the Closing by the delivery of
updates of all Schedules and Exhibits. No notification made pursuant to this
Section shall be deemed to cure any breach of any representation or warranty
made in this Agreement unless the other party specifically agrees thereto in
writing, nor shall any such notification be considered to constitute or give
rise to a waiver by the other party of any condition set forth in this
Agreement.
7.6 Employment Contracts. Pending the Closing, and effective upon
the consummation of the Share Exchange, NLMC and TVL covenant and agree and that
each will exert its best efforts
19
<PAGE>
to execute __ -year employment contracts with each of the persons identified on
Schedule 7.6(A) at an annual salary equal to that set forth for such individual
in such Schedule, in the form of Exhibit 7.6(A); such contracts shall provide
that NLMC or TVL, as the case may be, may terminate them at any time for cause,
or without cause may terminate them upon payment to the other party thereto of
an amount equal to ______. NLMC or TVL, as the case may be, will also execute a
noncompetition agreement with each of the individuals specified in Exhibit
7.6(B), the form of which will be substantially as in Exhibit 7.6(B) and will
preclude such persons from engaging in business competitive with that of NLMC or
TVL, as the case may be, directly or indirectly, alone or in collaboration with
others, except with the written consent of NLMC or TVL, as the case may be, or
as a shareholder of less than one percent (1%) of the common stock of a publicly
held company engaged in one or more of such businesses.
7.7 Conduct of Business Pending the Share Exchange. NLMC and TVL
covenant and agree with each other that, prior to the consummation of the Share
Exchange and the Subsequent Transactions, or the termination of this Agreement
pursuant to its terms, or the abandonment of the Subsequent Transactions, unless
the other shall otherwise consent in writing, which consent shall not be
unreasonably withheld or delayed, and except as otherwise contemplated by this
Agreement or disclosed in its Disclosure Document, NLMC and TVL will each comply
with each of the following:
(1) Its business and the business of its Subsidiaries shall be
conducted only in the ordinary and usual course, it shall use
reasonable efforts and shall cause each of its Subsidiaries to
use reasonable efforts to keep intact its and their business
organizations and good will, keep available the services of their
respective officers and employees and maintain good relationships
with suppliers, lenders, creditors, distributors, employees,
customers, and others having business or financial relationships
with them, and it shall immediately notify the other party of any
event or occurrence or emergency material to, and not in the
ordinary and usual course of business of, it or any of its
Subsidiaries;
(2) It shall not (a) amend its Articles of Incorporation or Bylaws or
(b) split, combine, or reclassify any of its outstanding
securities, or declare, set aside, or pay any dividend or other
distribution on, or make or agree or commit to make any exchange
for or redemption of any such securities payable in cash, stock,
or property, except that NLMC shall be permitted to amend its
Articles of Incorporation to authorize 5,000,000 shares of
Preferred Stock and to effect a 1-for-10 reverse split of its
issued and outstanding shares of Common Stock;
(3) Neither it nor any of its Subsidiaries shall (a) issue or agree
to issue any additional shares of, or rights of any kind to
acquire any shares of, its capital stock of any class, or (b)
enter into any contract, agreement, commitment, or arrangement
with respect to any of the foregoing;
20
<PAGE>
(4) Neither it nor any of its Subsidiaries shall create, incur, or
assume any long-term or short-term indebtedness for money
borrowed or make any capital expenditures or commitment for
capital expenditures, except in the ordinary course of business
and consistent with past practice;
(5) Neither it nor any of its Subsidiaries shall (a) adopt, enter
into, or amend any bonus, profit sharing, compensation, stock
option, warrant, pension, retirement, deferred compensation,
employment, severance, termination, or other employee benefit
plan, agreement, trust fund, or arrangement for the benefit or
welfare of any officer, director, or employee; or (b) agree to
any material (in relation to historical compensation) increase in
the compensation payable or to become payable to, or any increase
in the contractual term of employment of, any officer, director,
or employee except, with respect to employees who are not
officers or directors, in the ordinary course of business in
accordance with past practice, except that NLMC shall be
permitted to adopt a 1995 Stock Option Plan and 1995 Restricted
Stock Plan;
(6) Neither it nor any of its Subsidiaries shall sell, lease,
mortgage, encumber, or otherwise dispose of or grant any interest
in any of its assets or properties except for sales,
encumbrances, and other dispositions or grants in the ordinary
course of business and consistent with past practice, and, except
for liens for taxes not yet due or liens or encumbrances that are
not material in amount or effect and do not impair the use of the
property, or as specifically provided for or permitted in this
Agreement;
(7) Neither it nor any of its Subsidiaries shall enter into, or
terminate, any material contract, agreement, commitment, or
understanding;
(8) Neither it nor any of its Subsidiaries shall enter into any
agreement, commitment, or understanding, whether in writing or
otherwise, with respect to any of the matters referred to in
paragraphs (1) through (7) above;
(9) It will not hold any meetings of its board of directors, or any
committee thereof, or of its shareholders, without inviting a
representative selected by the other party to attend the same
(although NLMC or TVL, as the case may be, may request that such
representative absent himself or herself during that portion of
any such meeting that pertains to issues arising under this
Agreement);
(10) It will continue properly and promptly to file when due all
federal, state, local, foreign, and other tax returns, reports,
and declarations required to be filed by it, and will pay, or
make full and adequate provision for the payment of, all taxes
and governmental charges due from or payable by it;
(11) It will comply with all laws and regulations applicable to it and
its operations;
21
<PAGE>
(12) It will maintain in full force and effect insurance coverage of a
type and amount customary in its business, but not less than that
presently in effect.
7.8 Name Change. NLMC and TVL shall agree to a new name for NLMC
which is mutually acceptable.
ARTICLE VIII
COVENANTS OF TVL
8.1 No Solicitation. TVL and its respective Subsidiaries and those
acting on behalf of any of them will not, and TVL will use its best efforts to
cause its officers, employees, agent, and representatives (including any
investment banker) not, directly or indirectly, to solicit, encourage, or
initiate any discussions with, or negotiate or otherwise deal with, or provide
any information to, any person or Entity other than NLMC and its officers,
employees, and agents, concerning any merger, sale of substantial assets, or
similar transaction involving TVL or any Subsidiary or division of TVL, or any
sale of any of its capital stock or of the capital stock or assets of any
Subsidiary or division of TVL. TVL will notify NLMC immediately upon receipt of
any inquiry, offer, or proposal relating to any of the foregoing. None of the
foregoing shall prohibit providing information to others in a manner in keeping
with the ordinary conduct of TVL's business, or providing information to
government authorities.
8.2 Performance of Acquisition Agreements. TVL will exert its best
efforts to perform fully the Port Isaac Option Agreement, the Cougar Letter of
Intent, and the NQEA Letter of Intent, as well as any definitive agreements
contemplated by such letters of intent, and further will not knowingly take any
actions that would cause a breach of such agreements.
8.3 Access to Due Diligence Findings. TVL shall permit NLMC and its
accountants, counsel, and other representatives full and complete access to all
of TVL's findings with respect to due diligence investigations on Cougar and
NQEA. Further, NLMC shall be permitted to participate in conducting the due
diligence investigations to the extent such participation is feasible.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of NLMC. The obligation of NLMC to
effect the Share Exchange shall be subject to the fulfillment at or prior to the
Closing of the following conditions, unless NLMC shall waive such fulfillment:
(1) This Agreement and the transactions contemplated hereby and the
1-for-10 reverse stock split shall have received all approvals,
consents, authorizations, and waivers from NLMC's shareholders
and from governmental and other regulatory agencies and other
third parties (including lenders, holders of debt securities, and
lessors) required to consummate the Share Exchange;
22
<PAGE>
(2) There shall not be in effect a preliminary or permanent
injunction or other order by any federal or state court which
prohibits the consummation of the Share Exchange;
(3) TVL and the Sellers shall have performed in all material respects
each of their agreements and obligations contained in this
Agreement and required to be performed on or prior to the Closing
and shall have complied with all material requirements, rules,
and regulations of all regulatory authorities having jurisdiction
relating to the Share Exchange;
(4) No material adverse change shall, in the reasonable judgment of
NLMC, have taken place in the business, condition (financial or
otherwise), operations, or prospects of TVL since the date of
TVL's Unaudited Balance Sheet other than those, if any, that
result from the changes permitted by, and transactions
contemplated by, this Agreement;
(5) The representations and warranties of TVL set forth in this
Agreement shall be true in all material respects as of the date
of this Agreement and, except in such respects as, in the
reasonable judgment of NLMC, do not materially and adversely
affect the business, condition (financial or otherwise),
operations, or prospects of TVL, as of the Closing Time as if
made as of such time;
(6) NLMC shall have received from TVL an officer's certificate,
executed by the Chief Executive Officer and the Chief Financial
Officer of TVL (in their capacities as such) dated the Closing
Date, as to the satisfaction of the conditions in paragraphs (3),
(4), and (5) above;
(7) NLMC shall have received, on and as of the Closing Date, an
opinion of Counsel to TVL, substantially as to the matters set
forth in Sections 4.1, 4.2, 4.3, 4.4 (to the best of the
knowledge of such counsel as to parts (2), (3), (4), and (5)),
and 4.6 (4 through 11, 14, 16, and 18) (to the best of the
knowledge of such counsel) of this Agreement, all subject to
customary limitations reasonably acceptable to Counsel to NLMC,
and which may be based on opinions of Local Counsel to the extent
such Counsel is not admitted to practice in a jurisdiction
relevant to such opinion, provided such opinion of Local Counsel
is delivered to NLMC; a customary comfort letter from TVL's
Auditors; and such other closing documents and instruments as
NLMC shall reasonably request, in each case reasonably
satisfactory in form and substance to NLMC and its counsel;
(8) TVL shall have reduced its issued and outstanding common shares
to 8,000,000;
(9) There shall appear no material impediment to the due and timely
completion of the Subsequent Transactions;
23
<PAGE>
(10) TVL shall have consummated the Port Isaac Option Agreement;
(11) An agreement to acquire Cougar's business and assets shall be in
full force and effect and TVL shall have exerted its best efforts
to acquire NQEA; and
(12) NLMC shall be satisfied with the due diligence investigations on
Cougar and NQEA.
9.2 Conditions to Obligation of the Sellers. The obligation of the
Sellers to effect the Share Exchange shall be subject to the fulfillment at or
prior to the Closing of the following conditions, unless the Sellers shall, by a
majority in interest of them as permitted under this Agreement, waive such
fulfillment:
(1) This Agreement and the Share Exchange shall have received all
approvals, consents, authorizations, and waivers from
governmental and other regulatory agencies and other third
parties (including lenders, holders of debt securities, and
lessors) required by law to consummate the Share Exchange;
(2) There shall not be in effect a preliminary or permanent
injunction or other order by any federal or state authority which
prohibits the consummation of the Share Exchange;
(3) NLMC shall have performed in all material respects its agreements
and obligations contained in this Agreement required to be
performed on or prior to the Closing;
(4) The representations and warranties of NLMC set forth in this
Agreement shall be true in all material respects as of the date
of this Agreement and, except in such respects as do not
materially and adversely affect the business of NLMC and its
Subsidiaries, taken as a whole, as of the Closing Date as if made
as of such time; and
(5) The Sellers shall have received from NLMC an officers'
certificate, executed by the Chief Financial Officer and the
Chief Executive Officer of NLMC (in their capacities as such),
dated the Closing Date, as to the satisfaction of the conditions
of paragraphs (3) and (4) above (to the best of their knowledge
where appropriate);
(6) The Sellers shall have received, on and as of the Closing Date,
an opinion of Counsel to NLMC, substantially as to the matters
set forth in Sections 4.1, 4.2, 4.3, 4.4 (to the best of the
knowledge of such counsel as to parts (2), (3), (4), and (5)),
and 4.6 (4 through 11, 14, 16, and 18) (to the best of the
knowledge of such counsel) of this Agreement, all subject to
customary limitations, reasonably satisfactory in form and
substance to TVL, and its counsel, and which may be based on
opinions of Local Counsel to the extent such Counsel is not
admitted to practice in a jurisdiction relevant to such opinion,
provided such opinion of Local Counsel is delivered to TVL, and
such other closing documents and instruments as TVL shall
reasonably
24
<PAGE>
request, in each case reasonably satisfactory in form and
substance to TVL and its counsel; and
(7) There shall appear no material impediment to the due and timely
completion of the Subsequent Transactions.
ARTICLE X
SECURITIES AND SECURITY HOLDERS
10.1 Sellers' Ownership Representations. Each of the Sellers
represents and warrants to NLMC, severally and not jointly, that (1) he, she, or
it owns the common shares of TVL set forth opposite his, her, or its name on the
signature pages of this Agreement, to be sold to NLMC at the Closing pursuant to
the terms of this Agreement, free and clear of any and all liens, claims,
encumbrances, and rights of others; and (2) he, she, or its is fully and freely
authorized and entitled to sell, transfer, and convey free and clear title to
the same to NLMC, without any further approval or authorization being required.
10.2 Investment Representation. Each of the Sellers, severally and
not jointly, represents and confirms to NLMC:
(1) He, she, or it is aware of the following restrictions on the
shares of NLMC received as Consideration and as Additional
Consideration pursuant to Section 3.3 hereof (the "Shares"):
(a) The Shares have not been registered under the United States
Securities Act of 1933 (the "Act") or any applicable state
securities laws.
(b) For the 40-day period following the issuance of the certificate
evidencing the Shares, unless the Shares are registered under the
Act, or an exemption from the registration requirements of the
Act is available, the Shares may not be offered or sold in the
United States or to any of the following (hereinafter referred to
as a "U.S. Person"):
(i) any natural person resident in the United States;
(ii) any partnership or corporation organized or incorporated
under the laws of the United States;
(iii) any estate of which any executor or administrator is a
U.S. Person;
(iv) any trust of which any trustee is a U.S. person;
(v) any agency or branch of a foreign entity located in the
United States;
25
<PAGE>
(vi) any non-discretionary account or similar account (other
than an estate or trust) held by a dealer or other
fiduciary for the benefit or account of a U.S. Person;
(vii) any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary
organized, incorporated, or (if an individual) resident in
the United States; and
(viii) any partnership or corporation if: (A) organized or
incorporated under the laws of any foreign jurisdiction;
and (B) formed by a U.S. Person principally for the
purpose of investing in securities not registered under
the Act, unless it is organized or incorporated, and
owned, by accredited investors (as defined in United
States Securities and Exchange Commission Rule 501(a)
under the Act) who are not natural persons, estates, or
trusts.
(2) This transaction has not taken place within the United States.
The offer and sale as between the Sellers and NLMC has been made
in an "offshore transaction," as that term in defined in Rule
902(i). Each Seller is acquiring the Shares for Seller's own
account and not for or on behalf of any other person. This
transaction is not part of a plan or scheme to evade the
registration provisions of the Act. There is no prearranged
agreement to resell the Shares in the United States.
(3) Seller is not a citizen of the United States or a U.S. Person, as
defined in subsection (1)(b) above of this Section 10.2. Seller
was not formed for the purposes of engaging in this transaction.
(4) The Shares shall not be sold to any citizen of the United States
or to a U.S. Person, as defined in subsection (1)(b) above of
this Section 10.2, until the 41st day following the issuance of
the certificate evidencing the Shares.
ARTICLE XI
TERMINATION, AMENDMENT, WAIVER
11.1 Termination. This Agreement and the Share Exchange may be
terminated at any time prior to the Closing, and either or both of the
Subsequent Transactions may thereafter be terminated or abandoned after the
Closing under this Agreement:
(1) By mutual consent of NLMC and a majority in interest of the
Sellers prior to the Closing;
(2) By mutual consent of NLMC and TVL after the Closing; or
26
<PAGE>
(3) By either NLMC or the Sellers, upon written notice to the other,
if the conditions to the obligations of such canceling party or
parties to consummate the Share Exchange, in the case of NLMC,
as provided in Section 9.1, or, in the case of Sellers, as
provided in Section 9.2, were not, or cannot reasonably be,
satisfied on or before ______, 1996, unless the failure of
condition is the result of the material breach of this Agreement
by the party seeking to terminate.
11.2 Amendment. This Agreement may be amended by the Sellers and
NLMC by action taken at any time, but no such amendment shall affect the
obligations of TVL without its consent, and the Sellers shall act, as elsewhere
in this Agreement provided, by a majority in interest of them.
11.3 Waiver. At any time prior to the Closing Date, NLMC, by action
taken by its board of directors, and the Sellers, by action taken by a majority
in interest of them, may (1) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (2) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, or (3) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
11.4 Relief. In the event of liability on the part of the Sellers to
NLMC in accordance with the provisions of this Agreement prior to the Closing
hereunder, the parties recognize and acknowledge that monetary measures of
damages will not reasonably be calculable inasmuch as the acquisition of TVL and
its proposed acquisitions are difficult, if not impossible, to value, and that
specific performance and injunctive relief should therefore be available to
NLMC.
11.5 Option. Each of the undersigned Sellers, severally, hereby
grants to NLMC the right, upon twenty-four (24) hours' written notice delivered
to such Seller at the address set forth for such purpose on Schedule 11.5
hereto, at any time until seventy-two (72) hours after termination of this
Agreement, to purchase from him, her, or it the number of shares of stock of TVL
owned by such Seller as specified on Schedule 11.5 hereto, against delivery to
such Seller of an amount equal to the Consideration per share payable hereunder,
times the number of such shares of stock with respect to which such option is
being exercised. Each Seller, with respect to such shares identified on
Schedule 11.5 (1) agrees not to sell, transfer, pledge, hypothecate, or
otherwise transfer such shares, or enter into any agreement to do the same,
prior to the date of expiration of the option herein granted, and (2) grants to
NLMC, for so long as the option herein granted shall remain in effect, the sole
and exclusive right and power to vote the shares with respect to which the
option is granted, with power and right of substitution, and in all respects
appoints NLMC, with power of substitution, as the proxy and attorney-in-fact of
such Seller to vote such shares in the place of Seller and with respect to any
such vote the power to execute any and all documents and instruments in respect
thereof in all respects with all right, power, and authority that the Seller
himself, herself, or itself could exercise. The Seller agrees to provide any
and all documents, evidences of authority, resolutions, et cetera, necessary to
enable NLMC to exercise the power and authority herein granted. NLMC agrees not
to exercise any power herein granted in any manner inconsistent with the
27
<PAGE>
operation of TVL in the future in the same manner that it has been operated in
the past, with the same directors, except that NLMC shall vote such shares in
favor of the Share Exchange unless there shall have been proposed a similar or
comparable transaction of greater value to the shareholders of TVL, in which
event, NLMC shall vote such shares as it may determine in its discretion.
11.6 Resignation of Officers and Directors. Upon the execution of
this Agreement, NLMC has elected John R. Twohig to the office of Vice President
- - Corporate Development. NLMC has further increased its board of directors to
five members and appointed John R. Twohig and Nigel Horsley to fill the
vacancies created by such increase. Messrs. Twohig and Nigel shall agree to
resign from all officer and director positions of NLMC if the Share Exchange
shall not be consummated.
ARTICLE XII
GENERAL PROVISIONS
12.1 Arbitration. In the event that there shall be a dispute arising
out of or relating to this Agreement, the Share Exchange, any document referred
to herein or centrally related to the subject matter hereof, or the subject
matter of any of the same, the parties agree that such dispute shall be
submitted to binding arbitration in _______, under the auspices of, and pursuant
to the rules of, the American Arbitration Association as then in effect, or such
other procedures as the parties may agree to at the time, before a tribunal of
three arbitrators, one of which shall be selected by each of the parties to the
dispute and the third of which shall be selected by the two arbitrators so
selected. Any award issued as a result of such arbitration shall be final and
binding between the parties, and shall be enforceable by any court having
jurisdiction over the party against whom enforcement is sought.
12.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice given at least five (5) days prior thereto):
If to NLMC:
North Lily Mining Company
1800 Glenarm Place, Suite 210
Denver, Colorado 80202
Attention: Stephen E. Flechner
with a copy to:
Fay M. Matsukage, Esq.
4582 S. Ulster Street Parkway, Suite 201
Denver, Colorado 80237
28
<PAGE>
If to TVL, the Sellers, any of them, or any Affiliate of any of them:
Tamarine Ventures Ltd.
Suite 709, 700 West Pender Street
Vancouver, British Columbia
Canada V6C 1G8
Attention: John R. Twohig
with a copy to:
_____________________
_____________________
_____________________
12.3 Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
12.4 Survival of Representations, Warranties, Etc. The
representations, warranties, covenants, and agreements of the parties contained
hereto shall survive the Closing and any investigation of the other party made
prior thereto.
12.5 De Minimis Claims. No party shall bring any action against the
other party hereto with respect to the subject matter hereof unless the
aggregate amount of all claims so brought in relation to the subject matter of
this Agreement exceeds $50,000; provided, however, that the foregoing shall not
prevent or preclude actions seeking injunctive or other equitable forms of
relief.
12.6 Miscellaneous. This Agreement (1) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, between the parties, with respect to the subject matter
hereof, except as specifically provided otherwise or referred to herein, so that
no such external or separate agreements relating to the subject matter of this
Agreement shall have any effect or be binding, unless the same is referred to
specifically in this Agreement or is executed by the parties after the date
hereof; (2) is not intended to confer upon any other person (other than
shareholders of TVL) any rights or remedies hereunder; (3) shall not be assigned
by operation of law or otherwise except for assignment of all or any part of the
rights of NLMC hereunder, which may be freely assigned by NLMC so long as the
obligations of NLMC under this Agreement remain obligations of, or their
performance is guaranteed by, NLMC; and (4) shall be governed in all respects,
including validity, interpretation, and effect, by the internal laws of the
State of Colorado, without regard to the principles of conflict of laws thereof.
This Agreement may be executed in two or more counterparts which together shall
constitute a single agreement.
29
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
signed on the date first written above by their respective officers thereunder
duly authorized.
"NLMC"
NORTH LILY MINING COMPANY
By:/s/ Stephen E. Flechner
-------------------------------------------
Stephen E. Flechner, President
"TVL"
TAMARINE VENTURES LTD.
By:/s/ John R. Twohig
-------------------------------------------
John R. Twohig, President
"Sellers"
<PAGE>
Exhibit 10.6
NORTH LILY MINING COMPANY
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, effective this 10th day of April, 1996, is
by and between NORTH LILY MINING COMPANY, a Utah corporation (the "Company") and
W. Gene Webb ("Employee")and supercedes any and all other Employment Agreements.
WHEREAS, Employee has been employed by the Company and has developed
considerable familiarity with and expertise in mining operations; and
WHEREAS, Employee is expected to continue to make a major contribution
to the profitability, growth, and financial strength of the Company; and
WHEREAS, the Company considers the continued services of Employee to
be in the best interest of the Company and its shareholders and desires to
assure the continued services of Employee on behalf of the Company on an
objective and impartial basis and without distraction or conflict of interest in
the event of an attempt to obtain control of the Company; and
WHEREAS, in accordance with the preceding paragraph, it is the desire
of the Company that it provide the maximum possible benefit to Employee under
tax and other applicable laws in the event of Employee's termination due to a
change in control; and
WHEREAS, Employee is willing to remain in the employ of the Company
upon the understanding that the Company will provide income security upon the
terms and subject to the conditions contained herein if Employee's employment is
terminated voluntarily for good reason or involuntarily by the Company without
good reason; and
WHEREAS, Employee and the Company desire to provide for Employee's
employment by the Company upon the terms and conditions set forth in this
Employment Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter contained, the parties hereby agree as follows:
<PAGE>
1. Employment. The Company hereby agrees to employ Employee and
Employee hereby agrees to serve the Company as Director and Executive Vice
President or in any other position consistent with Employee's status, to which
he may hereafter be elected or appointed during the Employment Term (as
hereinafter defined).
2. Employment Term. Employee's employment hereunder shall be for a
term of five years commencing on April 10, 1996 unless earlier terminated
pursuant to Sections 4, 5, and 13 of this Employment Agreement (the "Employment
Term").
3. Responsibilities. During the Employment Term, Employee shall
render such services to the Company and its affiliates as are reasonably
required by the Board of Directors of the Company and as may be required by
virtue of the office(s) and positions held by Employee.
4. Incapacity. If during the Employment Term, Employee is prevented
from performing duties or fulfilling responsibilities by reason of any
incapacity or disability for a continuous period of six months, then the
Company, in its sole and absolute discretion, may consider such incapacity or
disability to be permanent and may, upon 90 days' written notice to Employee,
terminate Employee's employment hereunder, but Employee shall continue to be
eligible to receive any benefits to which he may be entitled under the terms of
the Company's long-term disability plan for its employees. In the event of such
disability, the Company shall pay Employee full compensation under Section 6
hereof until such termination.
5. Death. The Employment Term, unless terminated earlier, shall
automatically terminate on the last day of the month in which the death of
Employee occurs.
6. Compensation. Compensation for all services rendered pursuant to
this Employment Agreement, the Company agrees to pay Employee a gross salary
equal to at least $120,000 per year (the "Salary"), plus benefits, which shall
include health and disability insurance, keyman life insurance and retirement
plan. The Company will also make available to the Employee an annual cash
bonus, Employee can elect to receive up to 50% of his annual cash bonus in
common stock. The Company will provide equity grants which shall include an
incentive and non-qualified stock option plan and a
2
<PAGE>
restricted share option plan. The Compensation Package is subject to Annual
Review in amounts to be agreed upon by the Company and the Employee.
7. Expenses. (a) During the Employment Term, the Company shall allow
Employee reasonable travel, business entertainment, and other business expenses
incurred in the performance of his duties hereunder, subject to the rules and
regulations adopted by the Company for the handling of such business expenses.
The Company will reimburse Employee for all such expenses upon presentation by
him, from time to time, of an itemized account of such expenses.
(b) To the extent permitted by the Company's articles of incorporation
and applicable corporate law, the Company will reimburse Employee or his estate
for all reasonable and necessary legal expenses and costs incurred by him or his
estate in the defense of any and all cases, claims, or controversies arising out
of any representations, omissions, acts, or failures to act, as the case may be,
by Employee made in his capacity as promoter, agent, employee, officer, or
director of the Company, whether or not such representations, omissions, act, or
failures to act were authorized by the Company. The Company's duty under this
paragraph shall commence on the date of this Agreement and shall continue
forever without regard to whether Employee is employed by the Company. The
Company shall reimburse Employee or his estate for such legal expenses and costs
within 30 days of receipt of written evidence of such legal expenses.
8. Other Benefits. During the Employment Term, the Company shall
provide Employee with the same insurance and other benefits that the Company
makes available to other similarly situated employees.
9. Best Efforts. During the Employment Term, Employee shall devote
full time and best efforts to the performance of all responsibilities to the
Company and its affiliates and to further the businesses and interests of the
Company and its affiliates.
10. Conflicts of Interest. The Company acknowledges that Employee has
extensive experience and numerous contacts in the mining business. To reduce
the potential for conflicts of interest which may arise between Employee and the
Company, Employee shall afford the Company, with respect to opportunities which
may come to
3
<PAGE>
his attention involving mineral properties, the right of first refusal to
undertake such opportunities on the same terms and conditions as shall be bona
fide offered by third parties. In addition, should Employee propose to become
involved in other mining activities or businesses, he shall disclose to the
Board of Directors of the Company, prior to entering into any such transac tions
the terms and conditions of any such proposed transactions.
11. Confidentiality Covenant. Employee agrees while employed by the
Company and thereafter for a period of two years not, directly or indirectly, to
disclose or use to the detriment of the Company or any of its affiliates (the
term "affiliates" as used in this Employment Agreement is understood to mean
subsidiaries, and parent and brother/sister corporations of the Company and any
other entities over which the Company has at least 50% control) or for the
benefit of any other person or firm any confidential informa tion or trade
secrets which are not readily available in the public domain of the Company or
any of its affiliates. Employee shall not, while employed by the Company or
thereafter for a period of two years, directly or indirectly, induce, advise,
recommend to, or participate in any effort to induce, any officer or employee of
the Company or any of its affiliates. Furthermore, Employee shall deliver
promptly to the Company upon termination of employment, or at any time the
Company may so request, all memoranda, notes, records, reports, manuals,
drawings, blueprints, formulas, and other documents (and all copies thereof)
relating to the business of the Company or any of its affiliates and all
property associated therewith, then possessed or under the control of Employee.
12. Remedies for Breach. Employee acknowledges that the legal remedies for
breach of the covenants contained in Sections 10 or 11 are inadequate, and
therefore agrees that, in addition to any or all other remedies available to the
Company and its affiliates in the event of a breach or a threatened breach of
any covenant contained in Sections 10 or 11, the Company or any of its affili
ates may:
(a) Obtain preliminary and permanent injunctions against any and all
such actions, and
(b) Seek to recover from Employee monetary damages to the Company or
its affiliates arising from such breach or threatened breach and all costs and
expenses (including attorneys' fees)
4
<PAGE>
incurred by the Company or any of its affiliates in enforcement of such
covenants.
13. Grounds for Termination of Employment. In the event that Employee:
(a) commits any material breach of the Employment Agreement or
substantially fails to perform duties hereunder, and such breach or failure to
perform results in, or is a material factor contributing to, a significant
adverse change in the business of the Company or any of its affiliates, their
businesses or reputations (other than by reason of his death or disability);
(b) commits any dishonest, unethical, fraudulent, or felonious act in
respect to duties either to the Company or any of its affiliates;
(c) commits any willful malfeasance or gross negligence (in the
discharge of duties to the Company or any of its affiliates) having a material
adverse effect on the Company or any of its affiliates, their businesses, or
reputations; or
(d) fails to perform duties to the Company or any of its affiliates
without cause or explanation;
then the Company shall give written notice to Employee specifying the default
and stating that if such default is not cured to the satisfaction of the Board
of Directors of the Company within five business days, employment will be
terminated. The Employment Term shall terminate automatically five business
days after the date notice is given if the default has not been cured to the
satisfac tion of the Company.
14. Effect of Termination of the Employment Term. Upon the termination of
Employee's employment pursuant to Section 13 hereof, the parties' obligations
hereunder, except as set forth in Sections 7(b) and 11 hereof, shall terminate;
provided, however, that rights and remedies accruing prior to such termination
or arising out of the breach of this Employment Agreement shall survive. In the
event of a material, unexcused breach by the Company of its obligations
hereunder which breach has not been cured within a reasonable time period (which
shall not be less than 15 business days) after Employee has given written notice
to the Board of
5
<PAGE>
Directors of the Company specifying such breach in detail and demanding cure,
the parties' obligations hereunder, except as set forth in Sections 7(b) and 11
hereof, shall terminate; provided, however, that rights and remedies accruing
prior to such terminat ion or arising out of the breach of this Employment
Agreement shall survive.
15. Termination Benefits. The Company agrees to pay to Employee the
Termination Benefits specified herein if
(a) control of the Company is acquired (as defined in Section 16(a)
hereof) and
(b) within three years after the acquisition of control occurs (i) the
Company terminates the employment of Employee for any reason other than the
causes specified in Section 13 hereof, death, Employee's attainment of age 65,
or total and permanent disability, or (ii) Employee voluntarily terminates
employment for good reason (as defined in Section 16(b) hereof).
If Employee is entitled to Termination Benefits pursuant to this
Section 15, the Company agrees to pay to Employee as termina tion compensation
in a lump-sum payment within five business days of the termination of Employee's
employment an amount to be computed by multiplying (i) Employee's average annual
cash compensation payable by the Company which was included in the gross income
of Employee for the most recent three calendar years (or for such shorter period
that Employee has been employed by the Company) ending coincident with or
immediately before the date on which control of the Company is acquired (or such
portion of such period during which Employee was an employee of the Company), by
(ii) 300%. (iii) The Company shall pay all health and disability insurance for
a period of 18 months or until the employee is able to secure another policy
equal to existing policy and pay any and all keyman life insurance in full and
assign the policy to employee, (iv) The Company shall pay for the exercise of
any and all outstanding stock options held by the employee and any cash bonuses
due to the employee. For purposes of this Agreement, employment and compensation
paid by any direct or indirect subsidiary of the Company will be deemed to be
employment and
6
<PAGE>
compensation paid by the Company. If Employee has not been employed for at
least three full years by the Company, cash compensation paid within the last
three years for less than a full year shall be used in the foregoing computation
on an annualized basis.
16. Definitions.
(a) As used in this Agreement, the "acquisition of control" means
(i) attaining ownership of 25% or more of the shares of voting stock
of the Company by any person or group (other than a person or group
including Employee or with whom or which Employee is affiliated), or
(ii) the occurrence of a "change of control" required to be described
under the proxy disclosure rules of the Securi ties and Exchange Commission.
(b) As used in this Agreement, the term "good reason" means, without
Employee's written consent,
(i) a change in status, position, or responsibilities which, in
Employee's reasonable judgment, does not represent a promotion from existing
status, position, or responsibili ties as in effect immediately prior to the
change in control; the assignment of any duties or responsibilities which,
in Employee's reasonable judgment, are inconsistent with such status,
position, or responsibilities; or any removal from or failure to reappoint
or re-elect Employee to any of such positions, except in connection with the
termination for total and permanent disability, death, or the causes
specified in Section 13 hereof, or by him other than for good reason;
(ii) a reduction by the Company in Employee's base salary as in effect
on the date hereof or as the same may be in creased from time to time during
the term of this Agreement or the Company's failure to increase (within
twelve months of Employee's last increase in base salary) Employee's base
salary after a change in control in an amount which at least equals, on a
percentage basis, the average percentage increase
7
<PAGE>
in base salary for all executive and senior officers of the Company effected
in the preceding twelve months;
(iii) the relocation of the Company's principal executive offices to a
location outside the San Bruno/San Francisco metropolitan area or the
relocation of Employee by the Company to any place other than the location
at which Employee performed duties prior to a change in control, except for
required travel on the Company's business to an extent substantially
consistent with business travel obligations at the time of a change in
control;
(iv) the failure of the Company to continue in effect any incentive,
bonus, or other compensation plan in which Employee participates, including
but not limited to the Company's stock option and restricted stock plans,
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan), evidenced by Employee's written consent, has been made
with respect to such plan in connection with the change in control, or the
failure by the Company to continue Employee's participation therein, or any
action by the Company which would directly or indirectly materially reduce
participation therein;
(v) the failure by the Company to continue to provide Employee with
benefits substantially similar to those enjoyed or entitled under any of the
Company's pension, profit sharing, life insurance, medical, dental, health
and accident, or disability plans at the time of a change in control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive Employee of any material
fringe benefit enjoyed or entitled to at the time of the change in control,
or the failure by the Company to provide the number of paid vacation and
sick leave days to which Employee is entitled on the basis of years of
service with the Company in accordance with the Company's normal vacation
policy in effect on the date hereof;
(vi) the failure of the Company to obtain a satisfactory agreement
from any successor or assign of the Company to assume and agree to perform
this Agreement;
8
<PAGE>
(vii) any purported termination of Employee's employment which is not
effected pursuant to Section 19 hereof; and for purposes of this Agreement,
no such purported termination shall be effective; or
(viii) any request by the Company that Employee partici pate in an
unlawful act or take any action constituting a breach of Employee's
professional standard of conduct.
Notwithstanding anything in this Section 16(b) to the contrary, Employee's right
to terminate the employment pursuant to this Section 16(b) shall not be affected
by incapacity due to physical or mental illness.
17. Enforcement of Agreement. The Company is aware that upon the
occurrence of a change in control the Board of Directors or a shareholder of the
Company may then cause or attempt to cause the Company to refuse to comply with
its obligations under this Agreement, or may cause or attempt to cause the
Company to institute, or may institute litigation seeking to have this Agreement
declared unenforceable, or may take or attempt to take other action to deny
Employee the benefits intended under this Agreement. In these circumstances,
the purpose of this Agreement could be frustrated. It is the intent of the
Company that Employee not be required to incur the expenses associated with the
enforce ment of any rights under this Agreement by litigation or other legal
action, nor be bound to negotiate any settlement of any rights hereunder,
because the cost and expense of such legal action or settlement would
substantially detract from the benefits intended to be extended to Employee
hereunder. Accordingly, if following a change in control it should appear to
Employee that the Company has failed to comply with any of its obligations under
this Agreement or in the event that the Company or any other person takes any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other legal action designed to deny, diminish or to recover from
Employee the benefits entitled to be provided to Employee hereunder, and that
Employee has complied with all obligations under this Agreement, the Company
irrevocably authorizes Employee from time to time to retain counsel of
Employee's choice, at the expense of the Company as provided in this Section 17,
to represent Employee in connection with the initiation or defense of any
litigation or other legal action, whether such action is by or against the
Company or any director,
9
<PAGE>
officer, shareholder, or other person affiliated with the Company, in any
jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to Employee entering into an attorney-client relationship with such
counsel, and in that connection the Company and Employee agree that a
confidential relationship shall exist between Employee and such counsel. The
reasonable fees and expenses of counsel selected from time to time by Employee
as hereinabove provided shall be paid or reimbursed to Employee by the Company
on a regular, periodic basis upon presenta tion by Employee of a statement or
statements prepared by such counsel in accordance with its customary practices,
up to a maximum aggregate amount of $500,000. Any legal expenses incurred by
the Company by reason of any dispute between the parties as to enforceability of
or the terms contained in this Agreement, notwithstanding the outcome of any
such dispute, shall be the sole responsibility of the Company, and the Company
shall not take any action to seek reimbursement from Employee for such expenses.
18. Severance Pay; No Duty to Mitigate. The amounts payable to Employee
under this Agreement shall not be treated as damages but as severance
compensation to which Employee is entitled by reason of termination of
employment in the circumstances contem plated by this Agreement. The Company
shall not be entitled to set off against the amounts payable to Employee of any
amounts earned by Employee in other employment after termination of employment
with the Company, or any amounts which might have been earned by Employee in
other employment had other such employment been sought.
19. Notice of Termination. Any purported termination by the Company or by
Employee shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 27 hereof. For purposes of this
Agreement, a "Notice of Termina tion" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of this employment under the provision so indicated. For
purposes of this Agreement, no such purported termination shall be effective
without such Notice of Termination.
20. Internal Revenue Code. Anything in this Agreement to the contrary
notwithstanding, in the event that the independent
10
<PAGE>
auditors of the Company determine that the payment by the Company to or for the
benefit of Employee, whether paid or payable pursuant to the terms of this
Agreement, would be nondeductible by the Company for federal income tax purposes
because of the Internal Revenue Code, then the amount payable to or for the
benefit of Employee pursuant to this Agreement (the "Agreement Payments") shall
be reduced (but not below zero) to the Reduced Amount. For purposes of this
Section 20, the "Reduced Amount" shall be the amount which maximizes the amount
payable without causing the payment to be nondeductible by the Company.
21. Assignment. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective executors, administrators,
heirs, personal representatives, successors, and assigns, but neither this
Agreement nor any right hereunder may be assigned or transferred by either party
hereto, any beneficiary, or any other person, nor be subject to alienation,
anticipation, sale, pledge, encumbrance, execution, levy, or other legal process
of any kind against Employee, his beneficiary, or any other person.
Notwithstanding the foregoing, the Company will assign this Agreement to any
corporation or other business entity succeeding to substantially all of the
business and assets of the Company by merger, consolidation, sale of assets, or
otherwise and shall obtain the assumption of this Agreement by such successor.
22. Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof. All representations,
promises, and prior or contemporane ous understandings among the parties with
respect to the subject matter hereof are merged into and expressed in this
Agreement, and any and all prior agreements between the parties with respect to
the subject matter hereof are hereby cancelled.
23. Amendment. This Agreement shall not be amended, modified, or
supplemented without the written agreement of the parties at the time of such
amendment, modification, or supplement.
24. Governing Law. This Agreement shall be governed by and subject to the
laws of the state of California.
25. Severability. The invalidity or unenforceability of any particular
provision of this particular Agreement shall not affect the other provisions,
and this Agreement shall be construed in all
11
<PAGE>
respects as if such invalid or unenforceable provision has not been contained
herein.
26. Captions. The captions in this Agreement are for convenience and
identification purposes only, are not an integral part of this Agreement, and
are not to be considered in the interpretation of any part hereof.
27. Notices. Except as specifically set forth in this Agreement, all
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered in person or sent by registered or
certified mail, postage prepaid, addressed to his residence in the case of
Employee, or to its principal office in the case of the Company, or to such
other address as shall be furnished in writing by any party to the others.
28. Waivers. Except as otherwise specifically provided in this Agreement,
no waiver by either party hereto of any breach by the other party hereto of any
condition or provision or condition of this Agreement to be performed by such
other party shall be deemed to be a valid waiver unless such waiver is in
writing or, even if in writing, shall be deemed to be a waiver of a subsequent
breach of such condition or provision or a waiver of a similar or dissimilar
provision or condition at the same or at any prior or subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
"Company"
NORTH LILY MINING COMPANY
By: /s/Stephen E. Flechner
----------------------------
"Employee"
W. Gene Webb
/s/W. Gene Webb
-------------------------------
8:employmt.agt
12
<PAGE>
Exhibit 10.7
NORTH LILY MINING COMPANY
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, effective this 10th day of April, 1996, is
by and between NORTH LILY MINING COMPANY, a Utah corporation (the "Company") and
Stephen E. Flechner ("Employee")and supercedes any and all other Employment
Agreements.
WHEREAS, Employee has been employed by the Company and has developed
considerable familiarity with and expertise in mining operations; and
WHEREAS, Employee is expected to continue to make a major contribution
to the profitability, growth, and financial strength of the Company; and
WHEREAS, the Company considers the continued services of Employee to
be in the best interest of the Company and its shareholders and desires to
assure the continued services of Employee on behalf of the Company on an
objective and impartial basis and without distraction or conflict of interest in
the event of an attempt to obtain control of the Company; and
WHEREAS, in accordance with the preceding paragraph, it is the desire
of the Company that it provide the maximum possible benefit to Employee under
tax and other applicable laws in the event of Employee's termination due to a
change in control; and
WHEREAS, Employee is willing to remain in the employ of the Company
upon the understanding that the Company will provide income security upon the
terms and subject to the conditions contained herein if Employee's employment is
terminated voluntarily for good reason or involuntarily by the Company without
good reason; and
WHEREAS, Employee and the Company desire to provide for Employee's
employment by the Company upon the terms and conditions set forth in this
Employment Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter contained, the parties hereby agree as follows:
<PAGE>
1. Employment. The Company hereby agrees to employ Employee and
Employee hereby agrees to serve the Company as President and C.E.O. or in any
other position consistent with Employee's status, to which he may hereafter be
elected or appointed during the Employment Term (as hereinafter defined).
2. Employment Term. Employee's employment hereunder shall be for a
term of five years commencing on April 10, 1996 unless earlier terminated
pursuant to Sections 4, 5, and 13 of this Employment Agreement (the "Employment
Term").
3. Responsibilities. During the Employment Term, Employee shall
render such services to the Company and its affiliates as are reasonably
required by the Board of Directors of the Company and as may be required by
virtue of the office(s) and positions held by Employee.
4. Incapacity. If during the Employment Term, Employee is prevented
from performing duties or fulfilling responsibilities by reason of any
incapacity or disability for a continuous period of six months, then the
Company, in its sole and absolute discretion, may consider such incapacity or
disability to be permanent and may, upon 90 days' written notice to Employee,
terminate Employee's employment hereunder, but Employee shall continue to be
eligible to receive any benefits to which he may be entitled under the terms of
the Company's long-term disability plan for its employees. In the event of such
disability, the Company shall pay Employee full compensation under Section 6
hereof until such termination.
5. Death. The Employment Term, unless terminated earlier, shall
automatically terminate on the last day of the month in which the death of
Employee occurs.
6. Compensation. Compensation for all services rendered pursuant to
this Employment Agreement, the Company agrees to pay Employee a gross salary
equal to at least $120,000 per year (the "Salary"), plus benefits, which shall
include health and disability insurance, keyman life insurance and retirement
plan. The Company will also make available to the Employee an annual cash
bonus, Employee can elect to receive up to 50% of his annual cash bonus in
common stock. The Company will provide equity grants which shall include an
incentive and non-qualified stock option plan and a restricted share option
plan. The Compensation Package is subject
2
<PAGE>
to Annual Review in amounts to be agreed upon by the Company and the Employee.
7. Expenses. (a) During the Employment Term, the Company shall allow
Employee reasonable travel, business entertainment, and other business expenses
incurred in the performance of his duties hereunder, subject to the rules and
regulations adopted by the Company for the handling of such business expenses.
The Company will reimburse Employee for all such expenses upon presentation by
him, from time to time, of an itemized account of such expenses.
(b) To the extent permitted by the Company's articles of incorporation
and applicable corporate law, the Company will reimburse Employee or his estate
for all reasonable and necessary legal expenses and costs incurred by him or his
estate in the defense of any and all cases, claims, or controversies arising out
of any representations, omissions, acts, or failures to act, as the case may be,
by Employee made in his capacity as promoter, agent, employee, officer, or
director of the Company, whether or not such representations, omissions, act, or
failures to act were authorized by the Company. The Company's duty under this
paragraph shall commence on the date of this Agreement and shall continue
forever without regard to whether Employee is employed by the Company. The
Company shall reimburse Employee or his estate for such legal expenses and costs
within 30 days of receipt of written evidence of such legal expenses.
8. Other Benefits. During the Employment Term, the Company shall
provide Employee with the same insurance and other benefits that the Company
makes available to other similarly situated employees.
9. Best Efforts. During the Employment Term, Employee shall devote
full time and best efforts to the performance of all responsibilities to the
Company and its affiliates and to further the businesses and interests of the
Company and its affiliates.
10. Conflicts of Interest. The Company acknowledges that Employee has
extensive experience and numerous contacts in the mining business. To reduce
the potential for conflicts of interest which may arise between Employee and the
Company, Employee shall afford the Company, with respect to opportunities which
may come to his attention involving mineral properties, the right of first
3
<PAGE>
refusal to undertake such opportunities on the same terms and conditions as
shall be bona fide offered by third parties. In addition, should Employee
propose to become involved in other mining activities or businesses, he shall
disclose to the Board of Directors of the Company, prior to entering into any
such transac tions the terms and conditions of any such proposed transactions.
11. Confidentiality Covenant. Employee agrees while employed by the
Company and thereafter for a period of two years not, directly or indirectly, to
disclose or use to the detriment of the Company or any of its affiliates (the
term "affiliates" as used in this Employment Agreement is understood to mean
subsidiaries, and parent and brother/sister corporations of the Company and any
other entities over which the Company has at least 50% control) or for the
benefit of any other person or firm any confidential informa tion or trade
secrets which are not readily available in the public domain of the Company or
any of its affiliates. Employee shall not, while employed by the Company or
thereafter for a period of two years, directly or indirectly, induce, advise,
recommend to, or participate in any effort to induce, any officer or employee of
the Company or any of its affiliates. Furthermore, Employee shall deliver
promptly to the Company upon termination of employment, or at any time the
Company may so request, all memoranda, notes, records, reports, manuals,
drawings, blueprints, formulas, and other documents (and all copies thereof)
relating to the business of the Company or any of its affiliates and all
property associated therewith, then possessed or under the control of Employee.
12. Remedies for Breach. Employee acknowledges that the legal remedies for
breach of the covenants contained in Sections 10 or 11 are inadequate, and
therefore agrees that, in addition to any or all other remedies available to the
Company and its affiliates in the event of a breach or a threatened breach of
any covenant contained in Sections 10 or 11, the Company or any of its affili
ates may:
(a) Obtain preliminary and permanent injunctions against any and all
such actions, and
(b) Seek to recover from Employee monetary damages to the Company or
its affiliates arising from such breach or threatened breach and all costs and
expenses (including attorneys' fees)
incurred by the Company or any of its affiliates in enforcement of
4
<PAGE>
such covenants.
13. Grounds for Termination of Employment. In the event that Employee:
(a) commits any material breach of the Employment Agreement or
substantially fails to perform duties hereunder, and such breach or failure to
perform results in, or is a material factor contributing to, a significant
adverse change in the business of the Company or any of its affiliates, their
businesses or reputations (other than by reason of his death or disability);
(b) commits any dishonest, unethical, fraudulent, or felonious act in
respect to duties either to the Company or any of its affiliates;
(c) commits any willful malfeasance or gross negligence (in the
discharge of duties to the Company or any of its affiliates) having a material
adverse effect on the Company or any of its affiliates, their businesses, or
reputations; or
(d) fails to perform duties to the Company or any of its affiliates
without cause or explanation;
then the Company shall give written notice to Employee specifying the default
and stating that if such default is not cured to the satisfaction of the Board
of Directors of the Company within five business days, employment will be
terminated. The Employment Term shall terminate automatically five business
days after the date notice is given if the default has not been cured to the
satisfac tion of the Company.
14. Effect of Termination of the Employment Term. Upon the termination of
Employee's employment pursuant to Section 13 hereof, the parties' obligations
hereunder, except as set forth in Sections 7(b) and 11 hereof, shall terminate;
provided, however, that rights and remedies accruing prior to such termination
or arising out of the breach of this Employment Agreement shall survive. In the
event of a material, unexcused breach by the Company of its obligations
hereunder which breach has not been cured within a reasonable time period (which
shall not be less than 15 business days) after Employee has given written notice
to the Board of Directors of the Company specifying such breach in detail and
5
<PAGE>
demanding cure, the parties' obligations hereunder, except as set forth in
Sections 7(b) and 11 hereof, shall terminate; provided, however, that rights and
remedies accruing prior to such terminat ion or arising out of the breach of
this Employment Agreement shall survive.
15. Termination Benefits. The Company agrees to pay to Employee the
Termination Benefits specified herein if
(a) control of the Company is acquired (as defined in Section 16(a)
hereof) and
(b) within three years after the acquisition of control occurs (i) the
Company terminates the employment of Employee for any reason other than the
causes specified in Section 13 hereof, death, Employee's attainment of age 65,
or total and permanent disability, or (ii) Employee voluntarily terminates
employment for good reason (as defined in Section 16(b) hereof).
If Employee is entitled to Termination Benefits pursuant to this
Section 15, the Company agrees to pay to Employee as termina tion compensation
in a lump-sum payment within five business days of the termination of Employee's
employment an amount to be computed by multiplying (i) Employee's average annual
cash compensation payable by the Company which was included in the gross income
of Employee for the most recent three calendar years (or for such shorter period
that Employee has been employed by the Company) ending coincident with or
immediately before the date on which control of the Company is acquired (or such
portion of such period during which Employee was an employee of the Company), by
(ii) 300%. (iii) The Company shall pay all health and disability insurance for
a period of 18 months or until the employee is able to secure another policy
equal to existing policy and pay any and all keyman life insurance in full and
assign the policy to employee, (iv) The Company shall pay for the exercise of
any and all outstanding stock options held by the employee and any cash bonuses
due to the employee. For purposes of this Agreement, employment and compensation
paid by any direct or indirect subsidiary of the Company will be deemed to be
employment and compensation paid by the Company. If Employee has not been
employed for at least three full years by the Company, cash compensation paid
within the last three years for less than a full year shall be used in the
foregoing computation on an annualized
6
<PAGE>
basis.
16. Definitions.
(a) As used in this Agreement, the "acquisition of control" means
(i) attaining ownership of 25% or more of the shares of voting stock
of the Company by any person or group (other than a person or group
including Employee or with whom or which Employee is affiliated), or
(ii) the occurrence of a "change of control" required to be described
under the proxy disclosure rules of the Securi ties and Exchange
Commission.
(b) As used in this Agreement, the term "good reason" means, without
Employee's written consent,
(i) a change in status, position, or responsibilities which, in
Employee's reasonable judgment, does not represent a promotion from
existing status, position, or responsibili ties as in effect immediately
prior to the change in control; the assignment of any duties or
responsibilities which, in Employee's reasonable judgment, are
inconsistent with such status, position, or responsibilities; or any
removal from or failure to reappoint or re-elect Employee to any of such
positions, except in connection with the termination for total and
permanent disability, death, or the causes specified in Section 13 hereof,
or by him other than for good reason;
(ii) a reduction by the Company in Employee's base salary as in effect
on the date hereof or as the same may be in creased from time to time
during the term of this Agreement or the Company's failure to increase
(within twelve months of Employee's last increase in base salary)
Employee's base salary after a change in control in an amount which at
least equals, on a percentage basis, the average percentage increase in
base salary for all executive and senior officers of the Company effected
in the preceding twelve months;
(iii) the relocation of the Company's principal executive offices to a
location outside the San Bruno/San Francisco
7
<PAGE>
metropolitan area or the relocation of Employee by the Company to any
place other than the location at which Employee performed duties prior to
a change in control, except for required travel on the Company's business
to an extent substantially consistent with business travel obligations at
the time of a change in control;
(iv) the failure of the Company to continue in effect any incentive,
bonus, or other compensation plan in which Employee participates,
including but not limited to the Company's stock option and restricted
stock plans, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan), evidenced by Employee's written consent,
has been made with respect to such plan in connection with the change in
control, or the failure by the Company to continue Employee's
participation therein, or any action by the Company which would directly
or indirectly materially reduce participation therein;
(v) the failure by the Company to continue to provide Employee with
benefits substantially similar to those enjoyed or entitled under any of
the Company's pension, profit sharing, life insurance, medical, dental,
health and accident, or disability plans at the time of a change in
control, the taking of any action by the Company which would directly or
indirectly materially reduce any of such benefits or deprive Employee of
any material fringe benefit enjoyed or entitled to at the time of the
change in control, or the failure by the Company to provide the number of
paid vacation and sick leave days to which Employee is entitled on the
basis of years of service with the Company in accordance with the
Company's normal vacation policy in effect on the date hereof;
(vi) the failure of the Company to obtain a satisfactory agreement
from any successor or assign of the Company to assume and agree to perform
this Agreement;
(vii) any purported termination of Employee's employment which is not
effected pursuant to Section 19 hereof; and for purposes of this
Agreement, no such purported termination shall be effective; or
(viii) any request by the Company that Employee partici-
8
<PAGE>
pate in an unlawful act or take any action constituting a breach of
Employee's professional standard of conduct.
Notwithstanding anything in this Section 16(b) to the contrary, Employee's right
to terminate the employment pursuant to this Section 16(b) shall not be affected
by incapacity due to physical or mental illness.
17. Enforcement of Agreement. The Company is aware that upon the
occurrence of a change in control the Board of Directors or a shareholder of the
Company may then cause or attempt to cause the Company to refuse to comply with
its obligations under this Agreement, or may cause or attempt to cause the
Company to institute, or may institute litigation seeking to have this Agreement
declared unenforceable, or may take or attempt to take other action to deny
Employee the benefits intended under this Agreement. In these circumstances,
the purpose of this Agreement could be frustrated. It is the intent of the
Company that Employee not be required to incur the expenses associated with the
enforce ment of any rights under this Agreement by litigation or other legal
action, nor be bound to negotiate any settlement of any rights hereunder,
because the cost and expense of such legal action or settlement would
substantially detract from the benefits intended to be extended to Employee
hereunder. Accordingly, if following a change in control it should appear to
Employee that the Company has failed to comply with any of its obligations under
this Agreement or in the event that the Company or any other person takes any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other legal action designed to deny, diminish or to recover from
Employee the benefits entitled to be provided to Employee hereunder, and that
Employee has complied with all obligations under this Agreement, the Company
irrevocably authorizes Employee from time to time to retain counsel of
Employee's choice, at the expense of the Company as provided in this Section 17,
to represent Employee in connection with the initiation or defense of any
litigation or other legal action, whether such action is by or against the
Company or any director, officer, shareholder, or other person affiliated with
the Company, in any jurisdiction. Notwithstanding any existing or prior
attorney-client relationship between the Company and such counsel, the Company
irrevocably consents to Employee entering into an attorney-client relationship
with such counsel, and in that connection the Company and Employee agree that a
confidential
9
<PAGE>
relationship shall exist between Employee and such counsel. The reasonable fees
and expenses of counsel selected from time to time by Employee as hereinabove
provided shall be paid or reimbursed to Employee by the Company on a regular,
periodic basis upon presenta tion by Employee of a statement or statements
prepared by such counsel in accordance with its customary practices, up to a
maximum aggregate amount of $500,000. Any legal expenses incurred by the Company
by reason of any dispute between the parties as to enforceability of or the
terms contained in this Agreement, notwithstanding the outcome of any such
dispute, shall be the sole responsibility of the Company, and the Company shall
not take any action to seek reimbursement from Employee for such expenses.
18. Severance Pay; No Duty to Mitigate. The amounts payable to Employee
under this Agreement shall not be treated as damages but as severance
compensation to which Employee is entitled by reason of termination of
employment in the circumstances contem plated by this Agreement. The Company
shall not be entitled to set off against the amounts payable to Employee of any
amounts earned by Employee in other employment after termination of employment
with the Company, or any amounts which might have been earned by Employee in
other employment had other such employment been sought.
19. Notice of Termination. Any purported termination by the Company or by
Employee shall be communicated by written Notice of Termination to the other
party hereto in accordance with Section 27 hereof. For purposes of this
Agreement, a "Notice of Termina tion" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of this employment under the provision so indicated. For
purposes of this Agreement, no such purported termination shall be effective
without such Notice of Termination.
20. Internal Revenue Code. Anything in this Agreement to the contrary
notwithstanding, in the event that the independent auditors of the Company
determine that the payment by the Company to or for the benefit of Employee,
whether paid or payable pursuant to the terms of this Agreement, would be
nondeductible by the Company for federal income tax purposes because of the
Internal Revenue Code, then the amount payable to or for the benefit of
Employee pursuant to this Agreement (the "Agreement Payments")
10
<PAGE>
shall be reduced (but not below zero) to the Reduced Amount. For purposes of
this Section 20, the "Reduced Amount" shall be the amount which maximizes the
amount payable without causing the payment to be nondeductible by the Company.
21. Assignment. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective executors, administrators,
heirs, personal representatives, successors, and assigns, but neither this
Agreement nor any right hereunder may be assigned or transferred by either party
hereto, any beneficiary, or any other person, nor be subject to alienation,
anticipation, sale, pledge, encumbrance, execution, levy, or other legal process
of any kind against Employee, his beneficiary, or any other person.
Notwithstanding the foregoing, the Company will assign this Agreement to any
corporation or other business entity succeeding to substantially all of the
business and assets of the Company by merger, consolidation, sale of assets, or
otherwise and shall obtain the assumption of this Agreement by such successor.
22. Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof. All representations,
promises, and prior or contemporane ous understandings among the parties with
respect to the subject matter hereof are merged into and expressed in this
Agreement, and any and all prior agreements between the parties with respect to
the subject matter hereof are hereby cancelled.
23. Amendment. This Agreement shall not be amended, modified, or
supplemented without the written agreement of the parties at the time of such
amendment, modification, or supplement.
24. Governing Law. This Agreement shall be governed by and subject to the
laws of the state of California.
25. Severability. The invalidity or unenforceability of any particular
provision of this particular Agreement shall not affect the other provisions,
and this Agreement shall be construed in all respects as if such invalid or
unenforceable provision has not been contained herein.
26. Captions. The captions in this Agreement are for convenience and
identification purposes only, are not an integral part of this Agreement, and
are not to be considered in the
11
<PAGE>
interpretation of any part hereof.
27. Notices. Except as specifically set forth in this Agreement, all
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered in person or sent by registered or
certified mail, postage prepaid, addressed to his residence in the case of
Employee, or to its principal office in the case of the Company, or to such
other address as shall be furnished in writing by any party to the others.
28. Waivers. Except as otherwise specifically provided in this Agreement,
no waiver by either party hereto of any breach by the other party hereto of any
condition or provision or condition of this Agreement to be performed by such
other party shall be deemed to be a valid waiver unless such waiver is in
writing or, even if in writing, shall be deemed to be a waiver of a subsequent
breach of such condition or provision or a waiver of a similar or dissimilar
provision or condition at the same or at any prior or subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
"Company"
NORTH LILY MINING COMPANY
By:/s/W. Gene Webb
----------------------------
"Employee"
Stephen E. Flechner
/s/Stephen E. Flechner
-------------------------------
8:employmt.agt
12
