<PAGE>
FORM 1O-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year ended: December 31, 1996
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Commission file number 0-16740
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NORTH LILY MINING COMPANY
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(Exact name of registrant as specified in its charter)
Utah 87-0159350
- ------------------------------------------- --------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
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
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(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
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Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21,1997:$1,017,321
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Number of shares outstanding of registrant's common stock, $.10 par value, as of
March 21, 1997: 2,992,122
---------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K[ ].
Exhibit index on consecutive page 33 Page 1 of 35 pages
<PAGE>
INDEX
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PART I
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III
--------
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 30
Item 13. Certain Relationships and Related Transactions 31
PART IV
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Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 33
</TABLE>
<PAGE>
PART 1
Item 1. BUSINESS
--------
General and Historical Background
- ---------------------------------
North Lily Mining Company ("North Lily") was incorporated in Utah in 1916 and
was a subsidiary of Anaconda Company from 1925 until 1949. During this period,
the Company produced gold, silver, lead, zinc and copper from the North Lily
Mine in the Tintic Mining District, Utah. From 1949 to 1987, the Company was
primarily engaged in the acquisition, exploration, and development of mining
properties. From 1988 to 1991, a Company subsidiary, International Mahogany
Corp. ("Mahogany"), a Canadian publicly-traded mining company listed on the
Toronto Stock Exchange, jointly with International Corona (Mahogany had a 70%
working interest), placed the Jolu Mine in Northern Saskatchewan, Canada, into
production and produced approximately 204,000 ounces of gold. In 1991, the
Company and Mahogany acquired the Tuina copper property in Chile, South America.
Since 1991, the Company and Mahogany have jointly been developing the Tuina
copper project. The Company and Mahogany have also operated a small heap leach
tailing recovery operation in Utah which has produced approximately 33,000
ounces of gold and gold equivalent since 1988, and is now in the reclamation
stage.
By way of a letter agreement dated August 6, 1993, North Lily sold to Baja Gold,
Inc. ("Baja"), a Canadian publicly-traded precious metals exploration and
development company listed on the Toronto and Vancouver Stock Exchanges, North
Lily's equity investment in Mahogany, consisting of 4,114,958 Class B
subordinate voting shares and 150,000 Class A common shares of Mahogany (in
aggregate representing an approximate 25% equity and 60% voting interest).
Consideration received from Baja included: cash of $500,000; a note issued by
Baja in the amount of $500,000, which was sold at face value on December 22,
1993 to reduce amounts owing to Mahogany; and 650,000 common shares of Baja,
valued, for financial statement purposes, at $680,000, based on the August 6,
1993 closing stock market price of Baja.
On April 12, 1995, the Company and Mahogany concluded an agreement on the
restructuring of the ownership interests of the Tuina project. In settlement of
the Company's outstanding debt to Mahogany of $797,481, the Company has reduced
its effective interest in the Tuina project from 50% to 41%. The agreement also
contains provisions in which the Company may be required to further reduce its
interest in the Tuina project and, in certain circumstances, recapture the
interest relinquished. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for further discussion.
On November 17, 1995, the Company executed an Agreement and Plan of Share
Exchange (the "Agreement") with Tamarine Ventures Ltd. ("Tamarine"), a company
incorporated under the laws of British Columbia, Canada. The Agreement provided
for the issuance, at closing, of one post-reverse stock split share of Common
Stock of the Company in exchange for each four common shares of Tamarine,
thereby making Tamarine a wholly-owned subsidiary of the Company (the "Share
Exchange"). At the closing of the Share Exchange, the Company would issue
2,000,000 post-reverse split shares of its Common Stock to the shareholders of
Tamarine. On November 22, 1996, the Company terminated the Agreement and
abandoned its plan to acquire Tamarine.
Effective December 8, 1996, the Company implemented a one-for-ten reverse split
on the outstanding shares of Common Stock. All of the per share amounts have
been restated to reflect this reverse stock split.
-3-
<PAGE>
At December 31, 1996, North Lily had the following subsidiaries and affiliates:
Minera Northern Resources S.A. ("Northern"), a Chilean limited liability
company, 100% (inactive).
Tenhard Resources, Inc., a Montana corporation, 100% (inactive).
Compania Minera Phoenix S.A., ("Phoenix") (formerly Compania Minera San
Martin S.A.), a Chilean limited liability company, 41% owned by Northern
(active).
Minera San Lorenzo Limitada ("San Lorenzo"), a Chilean limited liability
company, 50% owned by Northern (inactive).
North Lily and its subsidiaries are collectively referred to as "the Company".
Throughout this report, unless otherwise specified, all dollar amounts refer to
U.S. dollars.
From time to time management has written off certain costs associated with
various properties when it has become apparent that such costs would not be
recoverable. Management believes that the financial statements included herein
reflect capitalized costs (under Mineral Properties) that can be recovered and
that no further write-downs are necessary at this time.
The Company has a number of mineral properties in three countries; the United
States, Chile and Bolivia. The Company has interests in one project in the
United States and, as at December 31, 1996, a 41% equity interest in a copper
project in Chile and a 46% interest in an exploration gold property in Bolivia.
Historically, the Company's principal mineral target has been gold.
North Lily's common shares traded on the over-the-counter market for
approximately 60 years and, beginning in May of 1985, were included in the
National Association of Securities Dealers, Inc. system (NASDAQ Symbol: NLMC).
Financial Information About Industry Segments
- ---------------------------------------------
The Company and its subsidiaries are primarily engaged in the gold and copper
business. (See Note 14 of Notes to Consolidated Financial Statements).
Sales and Marketing
- -------------------
Gold, silver and copper can be readily sold on numerous markets throughout the
world and it is not difficult to ascertain the market price for such metals at
any particular time.
The Company's 50% owned Silver City mine produced gold and silver ore which was
processed at Handy & Harman refineries, and then sold to precious metal traders
on a competitive basis. The Silver City mine ceased mining operations in
February, 1993. Residual gold leaching continued during 1993 and the
reclamation process was implemented in 1994.
The Company's 41% owned Tuina mine produced copper precipitate which was
transported from Chile, South America and sold in the United States to a metal
trader on a competitive basis. The number of companies willing to purchase
copper precipitates is limited. The Company does not plan to resume production
of copper precipitates and has determined the most effective production process
for the Tuina property is a solvent extraction/electrowinning process ("SX/EW").
An SX/EW production process would allow the Company to manufacture cathode
copper at the
-4-
<PAGE>
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.
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.
-5-
<PAGE>
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.
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.
-6-
<PAGE>
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.
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").
-7-
<PAGE>
No bonding requirements or environmental impact statements are required in
Chile. However, the current government in Chile has indicated that additional
regulations or laws may be introduced which emphasize the protection of the
environment. As a consequence, the activities of the Company may be more
closely regulated to further the cause of environmental protection. Such
legislation, as well as future interpretation of existing laws, may require
substantial increases in equipment and operating costs to the Company and
delays, interruptions, or a termination of operations, the extent of which
cannot now be predicted.
Employees and Facilities
- ------------------------
As of March 31, 1997, the Company has three employees in the U.S. through its
joint projects, and the following company officers: Stephen E. Flechner,
President and Chief Executive Officer; W. Gene Webb, Executive Vice-President
and Corporate Secretary; and Nick DeMare, Treasurer.
North Lily's office in Denver, Colorado is leased.
Item 2. PROPERTIES
----------
The Company has acquired and maintained its mining claims in a manner that is
consistent with common industry practice and believes that title to all its
material properties and mineral interests is satisfactory.
UNITED STATES
All of the Company's properties in the United States consist of unpatented and
patented mining claims, and are owned by the Company or its subsidiaries or
leased from third parties.
Unpatented mining claims are located upon public land pursuant to procedures
established by the General Mining Law of 1872 and related laws of the various
states. Requirements for the location of a valid mining claim on public land
depend on the type of claim being located and the relevant state law, but
generally include discovery of valuable minerals, erecting a monument and
posting on it a location notice, marking the boundaries of the claim, and
filing a certificate of location with the county in which the claim is located
and with the BLM. If the statutes and regulations for the location of a mining
claim are complied with, the locator obtains a valid possessory right to the
claim and the right to mine, remove and sell the contained minerals. To
maintain an otherwise valid claim, a claimant must also annually perform a
specified amount of work, or pay rental fees directly to the BLM, and make
certain additional filings with the county and the BLM. Failure to perform
such work or make the required filings in a timely manner may render the
mining claim void or voidable.
Because mining claims are self-initiated and self-maintained, they possess
some unique vulnerabilities not associated with other types of property
interests. It is impossible to ascertain the validity of unpatented mining
claims from public real estate records alone, and therefore, it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the federal government or by
claimants of conflicting rights to the ground, the claimant has the burden of
proving the present economic feasibility of mining minerals located within the
claim as well as the steps taken to perfect the claim's location. Thus, it is
conceivable that during times of falling metals prices, claims which were
valid when located could become invalid if challenged.
-8-
<PAGE>
The patent procedure permits claimants to purchase from the federal government
fee title to claims upon demonstrating that the mineral deposit on the claims
can be mined at a profit and by satisfying other procedural requirements.
Patented mining claims are similar to other fee real property interests.
Significant portions of the Company's United States properties consist of
patented mining claims on which the Company's relevant local counsels have
given their opinion that the Company, or the entity through which the Company
holds rights to mine the property, has good title.
CHILE
In Chile the State is the owner of all mineral and fossil substances
regardless of the surface ownership, but mining concessions may be obtained
for the purpose of exploring or exploiting the underlying property in
accordance with a jurisdictional process regulated by the Mining Code.
The acquisition of title to new exploration mining concessions is a detailed
jurisdictional process which can be divided into three stages:
(1) The recording of the application for an exploration mining concession
("Pedimento") covering the desired ground before the Court and Mining
Register of the relevant county ("Comuna") where the ground is located and
its publication in the official Gazette. All persons (except certain
government officials, some of their relatives and other similar persons)
may prospect on any land not cultivated or enclosed.
(2) The request for a Court judgment formally constituting and granting the
concession ("Sentencia") during which process a judge checks the procedure
and the payment of certain fees, and representatives of the National
Geological and Mining Service check the technical aspects of the title to
the ground.
(3) The issuance by the court of the constituting "Sentencia" whereby a two-
year exploration mining concession is granted from the date of the
"Sentencia". This "Sentencia" then has to be published in extract in the
official Gazette and recorded in the corresponding Mining Register within
a certain period of time.
Prior to its expiration the owner of an exploration mining concession may
conduct all kinds of exploration activities, may apply for an exploitation
mining concession ("Pertenencia") to the corresponding judge (which also
requires a jurisdictional process), and may request easements or facilities
from neighbour concessions or from surface land owners, as necessary. Prior
to expiration of exploration mining concessions, a single extension for a
further two years can be applied for, however, in order to obtain such
extension, the area of the concession must be reduced by 50%. An alternative
to extension is to obtain one or more exploitation mining concessions (or
Pertenencia) over the same ground.
In order to obtain an exploitation mining concession (which permits
commencement of production from a mineral property) it is necessary to go
through a process which is similar in its structure to that for obtaining an
exploration mining concession but requires a longer time period. An
application ("Manifestacion") for the concession must initially be recorded
and, following certain additional procedures, a request for a formative survey
of the concession ("Mensura") is made. Following the survey (location on the
ground of the boundaries of the concession) and certain additional procedures,
including opportunities for third parties to put forward opposition to the
survey of the concession, a formative judgment ("Sentencia") is issued and the
exploitation mining concession is formally granted. All exploitation mining
concessions are granted for an indefinite period.
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<PAGE>
"Pedimento", as well as exploration mining concessions and exploitation mining
concessions ("Concessions") are transferable and irrevocable but only
Concessions can be mortgaged. Both are regulated by the same civil law rules
that regulate real estate and fixed assets, save that they are not subject to
attachments.
Chilean mining law recognizes a preference to a Concession owner and not to
the land surface owner because the State is interested in the development of
mining resources. However, in the case of houses and their immediately
surrounding lands, or lands where vineyards and fruit trees are planted, only
the owner may grant the permission to a Concession holder to obtain easements
and surface rights.
The owner of a Concession, commencing as of the date of the request of the
Sentencia, has to pay a yearly licence fee to the State in order to maintain
its property over the same. Lack of payment may cause loss of ownership
through auction by the State, although the licence fee can be paid up to the
day of auction to prevent any loss. License fees are significantly higher for
exploitation mining concessions than for exploration mining concessions.
EXPLORATION BUDGET - 1997
The following table lists the properties in which the Company has an interest,
and the 1997 exploration budget for each property. In approving the 1997
budgets for mineral properties, the Company considers a number of factors, among
them are: total capital resources available to the Company, joint venture
participation, terms of joint venture agreement (if applicable), estimated
length of time before the property could be placed into production and activity
in the immediate area, evaluation of preliminary geological data, anticipated
costs and geologic location.
<TABLE>
<CAPTION>
Property Portfolio
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Approximate Interest Held 1997
Property Size by the Company Exploration
Property Name State Location (Acres) as of 12/31/96 Budget
- ------------- ----- -------- -------------- --------------- -------------
<S> <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 4%NSR/(1)/ 150,000/(3)/
Tintic Utah United States 4,114 100% -
Tuina Region II Chile 15,013 41% -
--------
TOTAL $270,000
========
</TABLE>
(1) NSR - Net Smelter Return
(2) Minimum work commitment to be incurred on the property, of which the
Company's portion is $60,000.
(3) Minimum expenditure commitment to be incurred by lessee of property
Due to the Company's current financial situation it does not plan to conduct any
significant exploration activities in 1997. Activities will be limited to
making required property payments to maintain the Company's interest, unless a
joint venture or acquisition and related financing is accomplished.
During 1996 the Company assessed the capitalized costs of its mineral properties
in the United States and Chile. In the opinion of management no write-downs of
carrying values were required.
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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, 1996. During 1995, the Company,
Mahogany and Yuma Gold Mines Limited ("Yuma") entered into a number of
agreements which may result in Yuma acquiring Mahogany's interest in the Tuina
properties. Yuma may also increase its ownership in the Tuina property by a
further 15%. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Description of Property:
- ------------------------
The property is located approximately 60 kilometers (37 miles) east of Calama,
in Region II in the Country of Chile and consists of a total of 6,080 hectares
(15,013 acres).
<TABLE>
<CAPTION>
Hectares - Net
--------------
<S> <C>
394 San Jose Lease
5,686 Other properties
-----
6,080
=====
</TABLE>
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.
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<PAGE>
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>
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.
Prior Activities:
- -----------------
Since its acquisition in June 1991, the Company has expanded the camp facilities
to accommodate 120 persons and completed a detailed mine plan for the production
of copper precipitate. In December 1991 the first section of the leach pad was
completed.
In 1991 and 1992 the Company carried out several drill programs on the
properties.
The Company started mining operations in the first quarter of 1992, producing
copper precipitates. Mining stopped later in 1992 due to a dispute with the
mining contractor. The mining contractor was able to obtain a temporary embargo
during 1992 preventing the Company from achieving its planned levels of
production. The embargo was removed during the fourth quarter of 1992 and new
contracts were signed with a replacement contractor to provide services for
crushing, transportation, drilling and blasting.
Due to high transportation and refining and treatment charges and reductions in
the price of copper, the Tuina Mine was experiencing negative cash flow
throughout 1993. As a result of these factors, the Company and Mahogany
-12-
<PAGE>
suspended production of copper precipitates and put the mine on a care and
maintenance program. Employment of a significant portion of the mine's
workforce was terminated and the mine office in Calama was closed during 1993.
The last shipment of copper precipitates was made in July 1993.
A reverse circulation drill program was completed in 1994. The drill program
has confirmed a probable (geological) reserve of approximately 1.772 million
tonnes grading 1.7% total copper (1.1% soluble) at the San Jose pit, and a
probable (geological) reserve of 2.075 million tonnes grading 1.3% total copper
(1.2% soluble) at the San Martin pit. At both prospects sulfide mineralization
was encountered below the oxide zone.
1997 Planned Activities:
- ------------------------
Activities on the Tuina Project are currently curtailed pending the results of a
revised feasibility study for a 12,000 ton per day SX/EW plant proposed by Yuma.
The water rights have been secured and Yuma now has to either elect to close the
Mahogany - Yuma Agreement, subject to regulatory approval, or terminate the
agreement. If Yuma elects to terminate the agreement, Mahogany and the Company
would not owe Yuma any funds for past expenditures incurred by Yuma. If Yuma
elects to purchase the 10% interest then the Company would be required to pursue
a joint operating agreement with Yuma, pursuant to which it would pay one-third
of the expenditures expended by Yuma on the cost of securing the water rights
and 26% of all other costs incurred. These costs would be deducted from
payments due from Yuma for the 10% interest to be purchased by Yuma from the
Company. Yuma is currently conducting drilling on the property and on
completion of this drilling, Bateman has been engaged to perform a bankable
feasibility study.
TINTIC PROPERTIES
Ownership:
- ----------
The properties are held 100% by the Company.
Description of Property:
- ------------------------
The property is located in the Tintic Mining District, Utah and Juab Counties in
the State of Utah, approximately 80 miles south of Salt Lake City. The property
comprises (1) surface and mineral rights on approximately 7,741 acres of
patented lode mining claims and other patented land owned in fee simple; (2)
2,200 acres of patented land with agricultural and mineral rights; (3) city lots
in Eureka, Utah, covering 21 acres; (4) 104 acres of unpatented mining claims;
and (5) 20 acres without mineral rights. In addition, the Company owns 28 acres
of patented lode mining claims and two unpatented lode mining claims in the
Tintic Mining District, Juab County, Utah.
Mineralization:
- ---------------
There are currently no gold reserves identified on the properties, however deep
exploration targets are renewing the interest of several companies.
Description of Property Agreements:
- -----------------------------------
The Company owns the Tintic properties outright and has no obligations for
underlying payments other than annual fees to the State of Utah.
On January 23, 1987, as extended on April 7, 1997, the Company entered into a
mining lease with Centurion Mines Corporation ("Centurion"), a non-affiliated
mining company, covering approximately 3,000 acres. The lease, which
specifically excludes the mine dumps and tailings, Silver City mill, and
existing grazing leases, shall continue until January 23, 2003. Thereafter, the
lease shall continue as long as production from the leased premises, or
production from adjoining Centurion lands within one thousand feet of the
boundary of any portion of the leased premises, is
-13-
<PAGE>
being conducted by Centurion on a continuing basis. Centurion is required to pay
advance royalties of $75,000 annually (payments to 1997 have been received) and
a production royalty equal to 4% NSR. The Company will also receive a production
royalty equal to a 2% NSR from Centurion on any production within one thousand
feet of the leased premises. Centurion is still required to fulfil a work
commitment with respect to the leased premises at a minimum cost of $150,000
each year through the term of the lease.
On November 22, 1996, the Company sold approximately 374 acres of its holdings
in the Tintic Mining District to the Tintic Utah Metals L.L.C. for $65,000.
These acres are still subject to the Centurion mining lease and the Company
retains the lease rentals, less property taxes, and a 4% NSR.
Prior Activities:
- -----------------
To date the lessee has made all lease payments and has fulfilled all work
commitments on exploration and development in the Tintic Mining District since
negotiating the lease agreement.
Planned 1997 Activities:
- ------------------------
Approximately 3,000 acres remain subject to a lease agreement with Centurion who
are operators of the property. Centurion have advised the Company that they
will be spending at least $150,000 in exploration work on the property in order
to fulfil their work commitments.
The other approximately 8,000 acres have a future potential real estate value as
commuter suburbs, new business communities and rural retreats occur in the
corridor developing south from Salt Lake City towards this area. The Company
has contacted various real estate development companies to develop this acreage.
The Company will continue to pursue this opportunity during 1997.
SILVER CITY JOINT VENTURE
Ownership:
- ----------
The joint venture property is owned 50% by North Lily and 50% by Mahogany.
Description of Property:
- ------------------------
The joint venture property is located in Juab County, approximately 80 miles
south of Salt Lake City, Utah and consists of approximately 20 acres.
Mineralization:
- ---------------
The Silver City Joint Venture was a project designed to extract gold and silver
from a previous mine's tailings using a heap leach process. The project is now
undergoing reclamation work, while considering leaching opportunities, and it is
not known if the project will produce any further gold or gold equivalent.
Description of Property Agreement:
- ----------------------------------
Pursuant to an agreement dated July 21, 1987, the Company conveyed a 50%
undivided beneficial interest, in the joint property, to Magellan Resources Inc.
("Magellan"), a wholly-owned subsidiary of Mahogany. To earn its 50% interest
Magellan funded the initial $300,000 development expenditures of the joint
venture.
Prior Activities:
- -----------------
All necessary environmental and building permits were obtained for the heap
leach facility in early 1988. Construction of the facility and pad was completed
by June 1988 at a total capitalized cost of approximately $1,700,000. The joint
venture was considered to be in a pre-production status until October 1, 1988.
The excess of revenues from costs from June 1988 through September 1988 were
netted against capitalized costs, which reduced capitalized costs by $500,267.
-14-
<PAGE>
Silver City produced gold and silver through heap leaching with cyanide. The
gold and silver is recovered through zinc precipitation. A gold/silver ore is
produced at the plant and then sold to a refinery. To date Silver City has
processed only the mineral tailings dumps from the nearby area.
During 1994 the Company proceeded with the closure and reclamation of the Silver
City heap leach facility. The Company sold non-essential equipment and leased
and commenced use of carbon columns to recover precious metals and base metals
in the pregnant solution for income and reclamation purposes.
Planned 1997 Activities
- -----------------------
The remaining reclamation costs have been budgeted for $385,000 of which
$192,500 is the Company's share. Approximately $174,000 in state reclamation
bonds have been jointly posted. After reclamation work is completed, to the
satisfaction of regulatory authorities, the reclamation bonds are to be
returned. Funding of reclamation work in 1997 remains a substantial burden to
the Company.
SAN SIMON PROPERTY
Ownership:
- ----------
On April 1, 1995, the Company and Akiko Gold Resources Ltd. ("Akiko"), entered
into a letter of agreement (the "San Simon Agreement") with Robert S. Friberg
and Marcelo Claure Z. (jointly "Friberg/Claure") whereby Friberg/Claure agreed
to acquire mineral properties located in the San Simon region of Bolivia on
behalf of Akiko and the Company (collectively the "Companies"). Friberg/Claure
will retain an 8% carried interest, with the Companies funding all costs and
obligations on a 50/50 basis. To date Friberg/Claure have acquired four
concessions (the "San Simon Property") from a third party. Friberg/Claure are
to transfer the San Simon Property to a Bolivian subsidiary to be established by
the Company. The Companies do not anticipate any further properties to be
acquired under the San Simon Agreement. Through December 31, 1996, the Company
has paid $171,825 to Friberg/Claure relating to costs incurred pursuant to the
San Simon Agreement and property payments made on the San Simon Property.
Description of Property:
- ------------------------
The San Simon Property consists of four concessions, known as "Pedro Ricardo I"
and "Pedro Ricardo II", "Machetero I" and "Machetero II" and is located in
northeastern Bolivia, adjacent to the Brazilian border within the Amazon Basin,
in the area of San Simon, Canton Mategua, Province of Itenez, State of Beni and
consists of approximately 5,300 hectares.
Mineralization:
- ---------------
There are no known gold reserves on the San Simon Property at this time.
Description of Property Agreement:
- ----------------------------------
Pursuant to the terms of a property concession agreement entered into on behalf
of the Companies, the Companies are required to make total payments of $300,000
to the vendor over a three year period. Through December 31, 1996, the
Companies have paid $85,000 and are required to pay: $40,000 on May 12, 1997;
$50,000 on November 12, 1997 and $125,000 on May 12, 1998. The San Simon
Property is also subject to a 5% net profits interest ("NPI") in favour of the
vendor. The Companies may purchase a 2% NPI at any time during the exploration
phase upon payent of $1,700,000. The Companies would then also hold a right of
first refusal on a 2% NPI of the remaining 3% NPI. The term of the agreement is
for twenty years and the Companies can terminate the agreement without penalty
on 30 days notice.
-15-
<PAGE>
Pursuant to the San Simon Agreement, the Companies have also agreed to a yearly
work commitment of $30,000 per quarter. In addition, the Companies may be
obligated to pay Friberg/Claure the following amounts: $10,000, in cash or
common stock of the Companies, upon the first transfer of a property to a
Bolivian subsidiary, to be established by the Companies; $20,000, in cash or
common stock of the Companies, when a total of $200,000 has been spent on the
properties acquired pursuant to the San Simon Agreement; $50,000 upon completion
of a feasibility study on any properties acquired pursuant to the San Simon
Agreement.
Prior Activities:
- -----------------
The Companies are not aware of any prior work on the San Simon Property.
However, the region was worked on as early as 1688 and recently sporadic
production has taken place from gold-rich zones adjacent to the San Simon
Property by a number of local miners. It is estimated that they are removing
approximately two kilograms of gold per day by using crude mining methods.
The 1996 field program consisted of soil geochem and stream concentrate sampling
conducted by the Company and Barrick. Geologists from Activation Laboratories
(ACT) completed two soil geochem lines on the north-south arm of the Machetero I
claim. These samples were sent to the ACT lab for enzyme leach testing. The
results of stream concentrate samples detected three highly anomalous samples on
the Machetero I claim block.
Planned 1997 Activities:
- ------------------------
The Companies are actively seeking a joint venture partner to help exploit the
San Simon property. Several companies are currently reviewing the data. In
addition, the Companies plan to do further field work this summar which will
include stream concentrate sampling and geochem and rock sampling and mapping to
delineate drill targets.
MONTANA PROPERTIES
The Company holds various interests in a number of properties in the State of
Montana. There are no obligations for underlying payments other than annual
state fees to the State of Montana. The Company has not conducted any
exploration work in 1996 on these properties. During 1996 the Company sold its
Grey Eagle property for proceeds of $215,292, of which $107,292 has been
received. Costs relating to this and other properties were mostly written off
in prior years.
Item 3. LEGAL PROCEEDINGS
-----------------
In August 1994, George Holcomb filed a complaint against the Company in the
Superior Court for the County of Maricopa, Arizona. Mr. Holcomb seeks vacation
pay which was not paid to him when his employment with the Company terminated,
together with interest thereon, treble damages, costs, and attorney fees.
During November, 1994, the Company paid $20,834 to Mr. Holcomb, representing the
Company's calculation of vacation pay owed. Mr. Holcomb, however, had
calculated the vacation pay owing as significantly higher. Final settlement
with Mr. Holcomb was reached in June, 1996, in which the Company paid $7,500 and
has agreed to pay a further $40,000.
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
-16-
<PAGE>
other unknown John Doe persons and corporations. The plaintiffs allege, that,
as a result of exploration activity in the Southern Cross area of Montana, local
ground water supplies have been contaminated and reduced. No specific stated
claim for damages have been made at this time. Despite studies prepared
privately and by the Department of State Lands (Montana) in 1992 which found no
evidence of earlier claims, the Plaintiffs continue to seek alternative legal
approaches against the defendants. Initial discovery proceedings have been
completed. The Company believes the claims are without merit and have
instructed its legal counsel to file for a summary judgment for dismissal. The
Company and other third parties filed a Summary Judgement for the dismissal of
this lawsuit and has received favorable disposition thereof, awaiting execution
by the federal court.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
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>
1996 High Low
---- ---- ---
<S> <C> <C>
First quarter $1.87 $0.62
Second quarter $3.12 $0.62
Third quarter $2.81 $0.93
Fourth quarter $1.56 $0.38
1995 High Low
---- ---- ---
First quarter $2.50 $1.25
Second quarter $2.96 $1.25
Third quarter $2.50 $1.25
Fourth quarter $1.87 $0.62
</TABLE>
On March 21, 1997, the high bid price of the common stock was $0.34 per share.
The above bid quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
As of April 9, 1997, there were 10,211 shareholders of record of North Lily's
common stock.
North Lily has not paid or declared any cash dividends and does not anticipate
paying dividends for the foreseeable future. It is expected that any net income
will be retained by North Lily for the development of its business.
Item 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues - - - $ 1,409,836 $ 3,194,916
Loss from continuing operations
before extraordinary item $ (662,557) $ (995,782) $(2,071,147) $(6,286,733) $(4,697,928)
Loss before extraordinary item $ (662,557) $ (995,782) $(2,071,147) $(6,271,619) $(5,210,307)
Net Loss $ (662,557) $ (922,032) $(2,071,147) $(6,271,619) $(5,210,307)
Loss per share from continuing
operations before extraordinary item $ (0.23) $ (0.43) $ (0.89) $ (2.70) $ (2.53)
Loss per share before extraordinary item $ (0.23) $ (0.43) $ (0.89) $ (2.69) $ (2.80)
Net loss per share $ (0.23) $ (0.39) $ (0.89) $ (2.69) $ (2.80)
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets from continuing operations $3,622,261 $4,201,720 $ 5,105,048 $ 6,354,791 $21,049,824
Total assets $3,622,261 $4,201,720 $ 5,105,048 $ 6,354,791 $22,467,197
Non-current liabilities $ 625,000 $ 385,000 $ 1,168,223 - -
Book value per share/(1)/ $ 0.83 $ 1.11 $ 1.27 $ 2.16 $ 2.26
Cash dividends declared - - - - -
</TABLE>
/(1)/ Based on the outstanding number of shares less treasury stock.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Corporate Profile and History
North Lily was incorporated in Utah in 1916 and was a subsidiary of Anaconda
Company from 1925 until 1949. During this period, the Company produced gold,
silver, lead, zinc and copper from the North Lily Mine in the Tintic Mining
District, Utah. From 1949 to 1987, the Company was primarily engaged in the
acquisition, exploration, and development of mining properties. From 1988 to
1990, a Company subsidiary, International Mahogany Corp. ("Mahogany"), a
Canadian publicly-traded mining company listed on the Toronto Stock Exchange,
jointly with International Corona (Mahogany had a 70% working interest), placed
the Jolu Mine in Northern Saskatchewan, Canada, into production and produced
approximately 204,000 ounces of gold. In 1991, the Company and Mahogany acquired
the Tuina copper property in Chile, South America. Since 1991, the Company and
Mahogany have jointly been developing the Tuina copper project. The Company has
also operated a small heap leach tailing recovery operation in Utah ("Silver
City") which has produced approximately 33,000 ounces of gold and gold
equivalent since 1988. Silver City is currently in the process of site
reclamation work.
Restructuring of Tuina Ownership
Effective April 12, 1995, the Company and Mahogany agreed to a restructuring of
the ownership interest of the Tuina Project. In settlement of the Company's
outstanding debt to Mahogany of $797,481, as at March 28, 1995, the Company
reduced its ownership interest in Compania Minera Phoenix S.A. ("Phoenix") from
50% to 41%. The Company also agreed to terms by which the Company's remaining
interest in the Tuina Project will be impacted. Subsequently, Mahogany agreed
to sell its 59% interest in Phoenix to Yuma Gold Mines Limited ("Yuma"). The
sale to Yuma was extended on several occasions and the terms subsequently
revised (the "Mahogany-Yuma Agreement").
By previous agreements entered into in 1995, on May 3, 1996 Yuma entered into a
revised agreement with the Company. In summary, the Company's remaining
interest in Phoenix will, subject to receipt of regulatory approvals and
completion of the Mahogany-Yuma Agreement, be impacted as follows:
i) Yuma will receive an additional 5% interest in Phoenix in exchange for
funded costs and the delivery of an independent bankable feasibility
study in respect of the Tuina Project;
ii) the Company would be required to sell a further 10% interest in Phoenix
to Yuma for an initial payment of $145,000, less deductions for
operating costs and the costs of securing the water rights for the Tuina
Project. In addition, Yuma is required to make two further payments to
the Company, due upon
-19-
<PAGE>
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. The water rights have been secured and Yuma now
has to either elect to close the Mahogany - Yuma Agreement, subject to
regulatory approval, or terminate the agreement. If Yuma elects to terminate
the agreement, Mahogany and the Company would not owe Yuma any funds for past
expenditures incurred by Yuma. If Yuma elects to purchase the 10% interest then
the Company would be required to repay one-third of the expenditures expended by
Yuma on the cost of securing the water rights and 26% of all other costs
incurred. These costs would be deducted from the payments due from Yuma for the
10% interest to be purchased by Yuma from the Company.
The Company and Mahogany have an agreement in principle to conduct the
activities of the Tuina Project on a joint venture basis. The Company expects
to enter into a definitive joint venture and operating agreement with Yuma after
closing of the Mahogany-Yuma Agreement.
Results of Operations
The Company incurred a loss of $662,557 ($0.23 per share) for the year ended
December 31, 1996, compared to losses of $922,032 ($0.39 per share) for 1995 and
$2,071,147 ($0.89 per share) for 1994. Due to the continuation of reclamation
work at the Silver City Joint Venture and the decision to suspend operations at
the Tuina copper property in Chile during 1993, there were no revenue or cost of
sales for 1996, 1995 or 1994.
General and administrative costs for 1996 was $648,980 compared to $842,547 in
1995 and $862,735 in 1994. During 1996, the Company continued to reduce general
and administrative costs, due to reduced corporate activities and the
elimination of the Company's share of general and administrative costs relating
to the Tuina Project, due to Yuma's funding of these costs. As a result general
and administrative costs in 1996 were $193,567 lower than 1995 levels. During
1995, there was a reduction in the Company's share of general and administrative
costs relating to the Tuina Project, primarily due to Yuma's funding of these
costs, effective May, 1995; however, these reduced costs were mainly offset by
increased head office costs. As a result general and administrative costs in
1995 were only $20,188 lower than 1994.
During 1996, the Company spent $3,527 on general exploration and property
holding costs compared with $60,390 in 1995 and $432,425 in 1994. The decrease
in exploration and property holding costs in 1996 is attributable to Yuma's
funding of Tuina Project costs throughout 1996 and the Company's financial
condition.
During 1996, the Company recorded a gain of $206,897 from the disposition of its
Grey Eagle property, located in Montana. During 1995, the Company recorded a
gain of $49,500 from the disposition of certain of its mineral properties. The
Company also settled its indebtedness to Mahogany by reducing its ownership
interest in Phoenix
-20-
<PAGE>
from 50% to 41%. The disposition of the 9% interest in Phoenix has resulted in
the elimination of the Company's indebtedness to Mahogany and a reduction of the
Tuina asset by $797,481. No dispositions of mineral properties were conducted in
1994.
During 1996, Company management reviewed the carrying values of its remaining
mineral properties and determined that no write-downs were required. In 1995,
the Company wrote off the remaining $71,397 carrying value and reversed an
accrual of $23,000 for anticipated property costs of its Nine Mile property,
resulting in a net write off of $48,397. During 1994, Company management
decided to terminate the Ashdown joint venture agreement. As a result of this
decision, a write-down of $197,850 was charged against earnings in 1994. In
addition, in 1994 the Company recognized a $300,000 provision for diminution in
value of the Nine Mile property.
During 1996 and 1995, the Company realized $118,883 and $92,628 of gains from
the sale of marketable securities, proceeds from which have been utilized to
meet the Company's liquidity requirements. For the year ended 1994, the Company
disposed of marketable securities with a book value of $495,309 for proceeds of
$665,803, realizing a gain of $170,494.
During 1996, the Company wrote down mill and mining equipment by $27,000.
During 1995, the Company received $25,000 from the partial sale of the Company's
mill equipment in Montana. The proceeds were credited towards the remaining
scrap value. During 1994, the Company wrote-down the mill and equipment to its
scrap value of $28,103, charging earnings by $371,897.
In contemplation of a proposed acquisition of Tamarine Ventures Ltd.
("Tamarine"), the Company advanced a total of $176,751 to Tamarine. On November
22, 1996, the Company abandoned its plan to acquire Tamarine. To date the
Company has been unsuccessful in having the advances repaid and accordingly,
wrote off the advances in 1996.
Liquidity and Capital Resources
For the past three years the Company has experienced substantial losses and has
continually sold non-essential Company assets to fund ongoing operations and
property commitments and development. Management, in its efforts to ensure
maximum fund availability, has reduced Company operating costs substantially and
has deferred payment of fees for their services. The Company believes it holds
properties with development potential. In order for the Company to develop its
properties or property interests, the Company requires funds to pay Company
overheads, pay property commitment costs and fund property development work.
Resource property development is both costly and time consuming. Development of
a property to a position of generating cash flow from underlying mineral sales
is normally measured in years, and there is no guarantee of the property's
ultimate financial success.
The Company requires funds for its future operations. Funding is traditionally
provided to corporations by way of funds from ongoing company operations, funds
from the issuance of company debt instruments, funds from company equity issues
and funds from the sale of Company assets.
With the suspension of operations at the Tuina mine, and continuing reclamation
work at Silver City, the Company does not have operations from which funds from
ongoing Company operations can be accumulated. With the Company's present asset
base, the Company is not able to generate funds from operations within the next
two years at a minimum, except to the extent that: (a) Tuina may be brought into
successful production in conjunction with the restructuring of the Tuina
Project; and (b) a new project and financing may be acquired with Company stock.
-21-
<PAGE>
Throughout 1993, 1994 and a portion of 1995, the Company did not generate
sufficient funds to meet its proportionate share of costs and obligations on its
joint property activities with Mahogany, its ongoing property cost commitments
and its ongoing corporate expenses. During 1993, 1994 and 1995, a significant
portion of the Company's capital resources was funded by advances from Mahogany.
Approximately $1,215,000 and $358,258 was advanced to the Company by Mahogany
during 1993 and 1994 respectively, and a further $163,546 was advanced during
1995. In December 1993, Mahogany stated that it was reluctant to fund any
further Company capital requirements and in March 1994, demanded repayment of
amounts due. On April 12, 1995, the Company and Mahogany agreed to the
restructuring of the Tuina ownership to settle the Company's outstanding debt to
Mahogany. See Restructuring of Tuina Ownership.
During 1993, in response to its increasing financial pressures, the Company sold
its equity interest in Mahogany, receiving: cash of $500,000, which was utilized
to reduce some of the Company's liabilities and fund the Company's joint
operation costs; a promissory note in the amount of $500,000 issued by Baja,
which was subsequently sold to Mahogany at face value in order to reduce the
Company's obligation to Mahogany and 650,000 common shares of Baja. During
1994, the Company sold 400,000 common shares of Baja for net proceeds of
$553,314. A further $112,489 net proceeds were raised from the sale of other
marketable securities. Sale proceeds were used to reduce Company liabilities
and help fund Company property cost commitments. During 1995, the Company sold
a further 10,000 common shares of Baja and other marketable securities for net
proceeds of $153,649. The proceeds were used to reduce company liabilities.
During 1994, pursuant to the issuance of promissory notes, the Company borrowed
a total of $201,337 from Baja. These funds were used to meet a portion of the
Tuina operating costs. During 1995, the Company was advanced $74,532 from a
private corporation related to a director of the Company. The Company
subsequently issued a promissory note and borrowed $97,167 from a third party.
The funds from the promissory note were used to repay the advance from the
related party and reduce Company liabilities. During 1996, the Company sold
150,000 common shares of Baja for net cash proceeds of $241,408. The funds
received were then used to retire the promissory note and outstanding accrued
interest owing to Baja, totalling $211,623. In addition, in 1996 the Company
exchanged 50,000 common shares of Baja in settlement of the promissory note and
outstanding accrued interest, totalling $97,167, owing to the third party.
In order to improve the Company's liquidity position during 1995 the Company
issued 145,583 shares in settlement of $510,500 of recorded indebtedness to
former Company officers and related companies, recording an extraordinary gain
of $73,750. Current officers of the Company have also agreed to defer repayment
of indebtedness of $625,000, comprising $165,000 of unpaid 1994 salaries ("1994
Compensation") $220,000 of unpaid 1995 salaries ("1995 Compensation"), and
$240,000 of unpaid 1996 salaries until January 2, 1998 ("1996 Compensation").
The 1994 Compensation will be settled with cash, if available, or the issuance
of shares of the Company, at an ascribed price of $3.00 per share. The 1995
Compensation and 1996 Compensation may, at the option of the officer, be settled
through the issuance of the Company's common stock, at a price of $0.65 per
share.
The Company has reviewed its asset base and has identified those assets that are
considered to be non-essential for the Company's future growth, including small
Company properties in Montana with little, if any, resource potential. In order
for the Company to meet its current operating obligations and property
commitments, the Company is required to sell all non-essential Company assets.
Company management is, therefore, reviewing all other resource properties, and
may be required to sell certain of them that do not meet its investment
criteria. Although the Company has received expressions of interest in some of
its resource properties, it is not currently negotiating with any third party
for the sale of any of its resource properties.
-22-
<PAGE>
At December 31, 1996 the Company had a working capital deficiency of $274,762, a
decrease of $14,144 from its working capital deficiency of $288,906 at December
31, 1995.
The Company reports a use of funds of $557,098 from operating activities for the
year ended December 31, 1996. This compares to a use of funds of $742,073 and
$895,353 for 1995 and 1994, respectively.
During the year ended December 31, 1996, the Company generated cash of $319,992
from its investing activities. The Company received $241,408 from the sale of
marketable securities, $280,292 from the disposition of certain mineral
properties and $5,000 from the sale of equipment. The Company used $64,957 in
the exploration of its mineral properties and advanced $141,751 to Tamarine.
During 1995, the Company generated cash of $354,637 from its investing
activities. The Company received $153,649 from the net sale of its marketable
securities, $62,822 and $93,403 from the sale of mineral properties and
equipment, respectively and $91,987 in net property payments. The Company used
$35,000 to advance funds to Tamarine in 1995. During 1994, the Company was
provided cash of $334,642 from investment activities. The Company received net
proceeds of $665,803 from the sale of its marketable securities. The Company
used $300,017 in the exploration of its mineral properties. An additional
$31,144 was used to purchase equipment.
For the year ended December 31, 1996, the Company was provided funds of $181,617
from financing activities compared to $470,997 provided in 1995 and $559,595
provided in 1994. In 1996, the Company issued $393,238 in common stock pursuant
to a private placement and for services rendered and repaid the $211,623 in
promissory notes. In 1995, the Company issued $200,000 common stock pursuant to
a private placement of 100,000 shares, received further advances of $163,546
from Mahogany and increased its promissory notes by $107,451. In 1994,
financing activities comprised of $358,258 in net advances by Mahogany and the
issuance of $201,337 in promissory notes to Baja.
The Company conducts its current mining and exploration activities in the United
States, Chile and Bolivia. As a result, the Company is subject to certain
risks, including expropriation, political instability, varying degrees of
inflation and other uncertainties.
Future Operations
In order to meet its obligations for operations and property agreement
commitments, the Company is required to sell its non-essential assets and sell
shares of its Common Stock. Remaining marketable securities will be sold and
properties with little or no potential will be disposed. If the Company does
not have the financial ability to develop a project on its own, future
development may be done in conjunction with other parties.
Company management is currently reviewing all resource properties with the view
to identifying those properties that provide the most potential for future
growth of the Company. Resource properties that do not meet management's
investment criteria may be disposed. The Company owns various patented mineral
claims. The Company is reviewing its current ownership of its various patent
mining claims as to their real estate value both in the Tintic District, Utah
and the Boulder Mountains in Montana. Both of these areas are located in
expanding resort developments and in the Boulder Mountain area the real estate
value is approaching $200 - $300 an acre. The Tintic properties are located on
the west side of Utah Lake and this area has significant potential for resort
development as the east side of Utah Lake is fully developed.
The Tuina Project will remain suspended pending completion of the Mahogany-Yuma
Agreement. It is expected that once this transaction closes Yuma will proceed
with bringing the Tuina Project into production with the
-23-
<PAGE>
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 provided
for the issuance, at closing, of one post-reverse stock split share of Common
Stock of the Company in exchange for each four common shares of Tamarine,
thereby making Tamarine a wholly-owned subsidiary of the Company (the "Share
Exchange"). At the closing of the Share Exchange, the Company would issue
2,000,000 post-reverse split shares of its Common Stock to the shareholders of
Tamarine. Closing of the Share Exchange was subject to a number of conditions
precedent, including regulatory acceptance, approval by the shareholders of the
Company and satisfactory results of due diligence investigations conducted by
the Company. On November 22, 1996, the Company terminated the Agreement and
abandoned its plan to acquire Tamarine.
In contemplation of the acquisition of Tamarine, the Company advanced $176,751
to Tamarine. To date the Company has been unsuccessful in having the advances
repaid. Accordingly, the Company has fully provided for the advances to
Tamarine. The Company will continue to pursue collection of the advances.
Impact of SFAS No. 115
Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities", SFAS No. 115 required the
Company to account for its marketable securities at market value. Unrealized
gains and losses on securities classified as "available for sale" are included
as a separate component of shareholders' equity as a marketable securities
valuation adjustment. Previously, marketable securities were carried at the
lower of their aggregate cost or market value and the unrealized losses net of
unrealized gains were included in the determination of loss for the year.
Impact of SFAS No. 109
Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes". SFAS No. 109 requires a change from the deferred method to the
liability method of accounting for income taxes. Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this new standard, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Under the deferred method, deferred
taxes were recognized using the tax rate applicable to the year of the
calculation and were not adjusted for subsequent changes in tax rates. The
adoption of SFAS No. 109 did not have any impact on the consolidated financial
statements.
-24-
<PAGE>
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
--------------------------------------------------
On March 27, 1997, the Company engaged Wheeler Wasoff, P.C. to audit its
financial statements for the fiscal year ended December 31, 1996. During the
Company's two most recent fiscal years and the subsequent interim period
preceding the engagement of this firm, the Company did not consult this firm
regarding any of the matters identified in Item 304(a)(2) of Regulation S-K.
The engagement of Wheeler Wasoff, P.C. coincided with the announcement by
Coopers & Lybrand L.L.P. of its resignation on March 27, 1997.
Coopers & Lybrand L.L.P. audited the Company's financial statements for each of
the years ended December 31, 1994 and 1995. The report on such financial
statements contained an explanatory paragraph regarding the Company's ability to
continue as a going concern. The decision to change auditors was approved by
the board of directors. During the Company's two most recent fiscal years and
the subsequent period preceding the engagement of Wheeler Wasoff, P.C., there
were no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of that
firm, would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
-25-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth the names and ages of all directors and
executive officers of the Company as of the date of this report, indicating all
positions and offices with the Company held by each such person:
<TABLE>
<CAPTION>
Name Age Position with the Business Experience
Company
<S> <C> <C> <C>
Stephen E. Flechner 53 President and Chief May 1994 to present -
Executive Officer President of the
and Director Company; 1979 to 1993 -
Vice President, General
Counsel & Secretary, Gold
Fields Mining Corp.,
Denver, Colorado; April
1993 to present -President
of Akiko Gold Resources
Ltd., Vancouver, British
Columbia
W. Gene Webb 57 Executive Vice May 1994 to present -
President, officer and director of
Corporate the Company; September
Secretary and 1989 to March 1994 -
Director President and director
of Canadian Industrial
Minerals Corp., Denver,
Colorado; May 1989 to
present - officer and
director of Tellis Gold
Mining Company, Vancouver,
British Columbia; March
1990 to June 1994 -
President and director of
Jerez Investment Corp.,
Denver, Colorado; September
1978 to present - President
and director of Ferret
Exploration Company, Inc.,
Denver, Colorado
Nick DeMare 42 Treasurer Chartered Accountant. May
1991 to present -President,
Chase Management Ltd.,
Vancouver, British
Columbia; February 1986 to
April 1991 - Vice President
and Chief Financial
Officer, Ingot Management
Ltd., Vancouver, British
Columbia. Mr. DeMare is a
director and/or officer of
several publicly-traded
Canadian companies.
Theodore E. Loud 60 Director 1986 to present -President
of TEL Advisors Inc. of
Virginia, Charlottesville,
Virginia, a registered
investment adviser and
corporate financial
consulting company
</TABLE>
Except as otherwise indicated below, no organization by which any officer or
director previously has been employed is an affiliate, parent, or subsidiary of
the Company. The directors of the Company are elected to serve until the next
annual shareholders' meeting or until their respective successors are elected
and qualify. Officers of the Company hold office until the meeting of the Board
of Directors immediately following the next annual shareholders' meeting or
until removal by the Board of Directors. Interim replacements for resigning
directors and officers are appointed by the Board of Directors.
-26-
<PAGE>
Compliance with Section 16(a) of the Exchange Act
During the fiscal year ended December 31, 1996, there were no known failures to
file on a timely basis Forms 3, 4, and/or 5 with the Securities and Exchange
Commission as required by Section 16(a) of the Securities Exchange Act of 1934.
Item 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth in summary form the compensation received during
each of the Company's last three completed fiscal years by the Chief Executive
Officer of the Company and by each other executive officer of the Company whose
total salary and bonus exceeded $100,000 in the Company's fiscal year ended
December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------------
Other Annual Restricted Options/ All Other
Name and Principal Compensation Stock Award(s) SARs LTIP Compensation
Position Year Salary Bonus ($) ($) (#) Payouts ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen E. Flechner, 1996 $120,000/1/ -0- -0- -0- -0- -0- -0-
President and Chief 1995 $110,000/1/ -0- -0- -0- -0- -0- -0-
Executive Officer/2/ 1994 $82,500/2/ -0- -0- -0- 85,000 -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------------
W. Gene Webb, 1996 $120,000/1/ -0- -0- -0- -0- -0- -0-
Executive Vice 1995 $110,000/1/ -0- -0- -0- -0- -0- -0-
President and 1994 $82,500/2/ -0- -0- -0- 85,000 -0- -0-
Corporate Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
William E. Grafham, 1996 -0- -0- -0- -0- -0- -0- -0-
former Chairman of the 1995 -0- -0- -0- -0- -0- -0- -0-
Board, President and 1994 -0- -0- -0- -0- 12,000 -0- -0-
Chief Executive
Officer/3,4/
- -----------------
</TABLE>
(1) Unpaid as at December 31, 1996. In addition, Messrs. Flechner and Webb have
each agreed to defer a portion of their salaries. See "Certain
Transactions" below.
(2) Unpaid as at December 31, 1994. Messrs. Flechner and Webb have each agreed
to accept shares of Common Stock of the Company in settlement of these
unpaid salaries. See also"Certain Transactions" below.
(3) Mr. Grafham resigned as an officer of the Company as of May 17, 1994. On
that date, Mr. Flechner became the Chief Executive Officer of the Company.
(4) Mr. Grafham became the Chief Executive Officer of the Company as of October
25, 1993.
Employment agreements with the Company's executive officers are described below
in "Employment Agreements."
-27-
<PAGE>
The Company does not pay non-officer directors for their services as such nor
does it pay any director's fees for attendance at meetings. Directors are
reimbursed for any expenses incurred by them in their performance as directors.
Stock Option Plans
The Company adopted an Incentive Stock Option Plan (the "1984 Plan") in 1984
under which a total of 250,000 shares were available for grant to provide
incentive compensation to officers and key employees of the Company. The 1984
Plan was administered by the Board of Directors. Options could be granted for
up to 10 years at not less than the fair market value at the time of grant
except that the term could not exceed five years and the price had to be 110% of
fair market value for any person who at the time of grant held more than 10% of
the total voting power of the Company. Unless otherwise specified by the Board
of Directors, options were exercisable as they vested at a rate of 2.77% per
month, and terminated ten years after the date of grant. The 1984 Plan expired
October 31, 1994.
At December 31, 1996, options to purchase 187,250 shares at $2.03 were
outstanding under the 1984 Plan.
On November 22, 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") reserving an aggregate of 275,000 shares of the Company's Common Stock
(the "Available Shares") for issuance pursuant to the exercise of stock options
("Options") which may be granted to employees, officers, and directors of the
Company and consultants to the Company. The 1996 Plan provides for annual
adjustment in the number of Available Shares, commencing December 31, 1996, to a
number equal to 10% of the number of shares outstanding on December 31 of the
preceding year or 275,000 shares, whichever is greater.
The 1996 Plan provides that disinterested directors will receive automatic
options grants to purchase 10,000 shares of the Company's Common Stock upon
their initial appointment or election as directors, and on the date of each
subsequent annual shareholders' meeting, which vest in 33-1/3% installments
commencing on the first anniversary of the grant date. Grants to employee
directors and officer/directors can be either Non-Qualified Stock Options or
Incentive Stock Options, to the extent that they do not exceed the Incentive
Stock Option exercise limitations, and the portion of an option to an employee
director or officer/director that exceeds the dollar limitations of Code Section
422 will be treated as a Non-Qualified Stock Option. All options granted to
disinterested directors will be Non-Qualified Options.
The option price of any Incentive Stock Option may be not less than 100% of the
Fair Market Value per share on the date of grant of the option; provided,
however, that any Incentive Stock Option granted under the 1996 Plan to a person
owning more than ten percent of the total combined voting power of the Common
Stock will have an option price of not less than 110% of the Fair Market Value
per share on the date of grant of the Incentive Stock Option. Each Non-
Qualified Stock Option granted under the 1996 Plan will be at a price no less
than 85% of the Fair Market Value per share on the date of grant thereof, except
that the automatic stock option grants to disinterested directors will be at a
price equal to the Fair Market Value per share on the date of grant. "Fair
Market Value" per share as of a particular date is defined in the 1996 Plan as
the last sale price of the Company's Common Stock as reported on a national
securities exchange or on the NASDAQ System or, if none, the average of the
closing bid and asked prices of the Company's Common Stock as reported by NASDAQ
or, if such quotations are unavailable, the value determined by the Compensation
Committee in its discretion in good faith.
The exercise period of options granted under the 1996 Plan may not exceed ten
years from the date of grant thereof. Incentive Stock Options granted to a
person owning more than ten percent of the total combined voting power of the
Common Stock of the Company will be for no more than five years.
-28-
<PAGE>
Unless otherwise specified in an optionee's agreement, options granted under the
1996 Plan to officers, officer/directors, disinterested directors who are not on
the Compensation Committee, and employees will become vested with the optionee
under the following schedule: 50% upon the first anniversary of the option grant
and 12.5% upon each of the four three-month periods following the first
anniversary.
There were no individual grants of stock options or freestanding stock
appreciation rights made during the fiscal year ended December 31, 1996.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-money
Options/SARs Options/SARs
at Fiscal at Fiscal
Year End (#) Year End ($)
- --------------------------------------------------------------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) unexercisable unexercisable
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen E. Flechner -0- -0- 85,000/0 0/0
W. Gene Webb -0- -0- 85,000/0 0/0
- --------------------------------------------------------------------------------
</TABLE>
On November 22, 1996, the Company also adopted the 1996 Restricted Stock Plan
(the "Stock Plan") reserving an aggregate of 275,000 shares (the "Available
Shares") of the Company's Common Stock for issuance to employees, officers, and
directors of the Company and consultants to the Company. The Stock Plan
provides for annual adjustment in the number of Available Shares, commencing
December 31, 1996, to a number equal to 10% of the number of shares outstanding
on December 31 of the preceding year or 275,000 shares, whichever is greater.
Shares issued under this Stock Plan are "restricted" in the sense that they are
subject to repurchase by the Company at cost during the vesting period. Unless
otherwise specified in a participant's agreement, shares issued under the Stock
Plan to officers, officer/directors, disinterested directors who are not on the
Committee, and employees will become vested with the participant under the
following schedule: 50% upon the first anniversary of the date of issuance and
12.5% upon each of the four three-month periods following the first anniversary.
The Stock Plan provides that disinterested directors will receive automatic
issuances of 10,000 shares of the Company's Common Stock upon their initial
appointment or election as directors, and on the date of each subsequent annual
shareholders' meeting, which vest in 33-1/3% installments commencing on the
first anniversary of the issue date.
The Company has no other long-term incentive plans.
There are no arrangements pursuant to which directors of the Company are
compensated in their capacities as such.
Employment Agreements
Effective May 16, 1994, Messrs. Flechner and Webb entered into employment
agreements with the Company. The agreements provide for compensation consisting
of annual salary of $120,000; benefits which shall include health and disability
insurance, key-man life insurance, and retirement plan; an annual cash bonus,
50% of which may be taken in the Company's common stock at the election of
Messrs. Flechner and Webb; and equity grants pursuant to the
-29-
<PAGE>
Company's incentive stock option plan and restricted stock plan. The term of the
employment agreements is five years.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information, as of April 9, 1997, with respect to
the beneficial ownership of the Company's Common Stock by each person known by
the Company to be the beneficial owner of more than five percent (5%) of the
outstanding Common Stock, and by directors, nominees, and officers of the
Company, and by officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
<S> <C> <C>
CEDE & Co. 1,771,849 59.22%
Box 20
Bowling Green Station
New York, NY 10004
Philadep & Co 458,842 15.34%
1900 Market Street
2nd Floor
Philadelphia, PA 19103
Stephen E. Flechner 88,000 (3) 2.94%
W. Gene Webb 85,000 (3) 2.84%
Theodore E. Loud 7,000 0.23%
Nick DeMare 5,730 (4) 0.19%
All officers and directors 185,730 (5) 6.21%
as a group (4 persons)
- ---------------
</TABLE>
(1) Information with respect to beneficial ownership is based upon information
furnished by each shareholder contained in filings made with the Securities
and Exchange Commission. Unless otherwise indicated, the beneficial owner
has sole voting and investment power with respect to the shares shown.
(2) Based on 2,992,122 shares outstanding. Where the persons listed on this
table have the right to obtain additional shares of Common Stock within 60
days from April 9, 1997, these additional shares are deemed to be
outstanding for the purpose of computing the percentage of class owned by
such persons, but are not deemed to be outstanding for the purpose of
computing the percentage of any other person.
(3) Includes 85,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(4) Includes 5,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
(5) Includes 175,000 shares of Common Stock issuable upon exercise of presently
exercisable options.
Changes in Control
No arrangements are known to the Company, including any pledge by any person of
securities of the Company, the operation of which may, at a subsequent date,
result in a further change in control of the Company.
-30-
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During 1994, the Company was charged management, consulting, and office
administration fees of $183,786 by private companies owned or controlled by
William E. Grafham, a former officer and director of the Company. In addition,
during 1994 these companies made disbursements on behalf of the Company. As of
December 31, 1994, $265,000, which included an outstanding balance of $82,167 as
of December 31, 1993, remained unpaid. As indicated in the table below, the
indebtedness of $265,000 was paid in 1995 with the issuance of 88,333 shares of
the Company's Common Stock.
During 1994, 1995, and 1996, the Company was charged management, consulting, and
office administration fees of $65,264 (Cdn.$91,488), $51,194 (Cdn.$70,400), and
$43,806 (Cdn.$59,750), respectively, by private companies owned by Nick DeMare,
an officer of the Company. As indicated in the table below, indebtedness of
$50,000 was paid in 1995 with the issuance of 16,667 shares of the Company's
Common Stock. As of December 31, 1996, $50,213 remained unpaid.
In order to reduce its cash requirements during 1995, the Company negotiated
with certain current and former directors and officers, related companies, and
creditors to settle $354,250 of indebtedness and unpaid amounts through the
issuance of Common Stock at an ascribed price of $3.00 per share to the
following parties:
<TABLE>
<CAPTION>
Indebtedness to be Ascribed Price Number of
Creditor Settled by Shares per Share Shares
<S> <C> <C> <C>
W.G. Ltd./1/ $265,000 $3.00 88,333
DNG Capital Corp./2/ $ 50,000 $3.00 16,667
Others $ 39,250 $3.00 13,083
Total $354,250 118,083
</TABLE>
/1/ A private company owned by William E. Grafham
/2/ A private company owned by Nick DeMare.
All of the shares were issued in 1995.
During 1993, Mr. Anton R. Hendriksz and Mr. Thomas L. Crom, then Chairman of the
Board and President of the Company, respectively, agreed to terminate their
existing employment agreements with the Company and to provide consulting
services to International Mahogany Corp. ("Mahogany") and the Company for a 24-
month period in consideration for cash payments of $125,000 and $100,000,
respectively, and quarterly cash payments of $12,500 each over a 24-month
period. The termination and consulting payments were to be shared equally by
Mahogany and the Company. Subsequent to an initial payment in 1993 of $31,250 to
Mr. Hendriksz and $25,000 to Mr. Crom (being the Company's share of one-half of
their termination payments), the Company and Mahogany did not make further
payments to Messrs. Hendriksz and Crom. Pursuant to a Settlement Agreement dated
June 20, 1995, assignees of Messrs. Hendriksz and Crom agreed to accept 15,000
and 12,500 shares of the Company's Common Stock, respectively, in full
settlement of all claims against the Company.
On August 25, 1995, Turks Ltd., a private company of which W. Gene Webb is a
director, borrowed $74,532 (Cdn.$100,000) and in turn loaned the money to the
Company. The Company pledged 90,000 shares of Baja Gold Inc. stock as collateral
to secure the loan. The loan was due November 30, 1995 and interest was charged
at the rate of 8.875% per annum. Neither Turks Ltd. nor Mr. Webb received any
compensation from this transaction. On October 3, 1995, the Turks, Ltd. loan
principal described above was repaid with proceeds from a loan made to the
-31-
<PAGE>
Company by a non-affiliated third party. The loan was in the amount of $97,167
(Cdn.$130,000), was originally due December 31, 1995, and accrued interest at
the rate of 8% per annum. The Company pledged 90,000 shares of Baja Gold Inc.
Stock as collateral to secure the loan. The loan was extended to January 31,
1996 and paid as of that date.
During 1994, the Company recorded $165,000 as due to officers relating to unpaid
salaries to Messrs. Flechner and Webb. The officers originally agreed not to
demand payment of this amount until January 2, 1996 (extended to January 2,
1998), at which time the indebtedness was to be either settled with cash, if
available, or the issuance of shares of the Company, at an ascribed price of
$3.00 per share. The amount remained outstanding at December 31, 1996. During
1995 and 1996, the Company recorded $210,000 and $220,000, respectively, as due
to the officers as salary compensation. These amounts remained outstanding at
December 31, 1996, and may, at the option of the officer, be settled through the
issuance of the Company's common stock, at a price of $0.65 per share. Messrs.
Flechner and Webb have agreed not to demand payment of amounts owed to them
until January 2, 1998.
During 1994, the Company and Akiko Gold Resources Ltd., a company with a
director in common, entered into a letter agreement to acquire mineral
properties located in the San Simon region of Bolivia. See Item 2. Properties.
-32-
<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, (1997)
Consolidated Balance Sheets, (December 31, 1996 and 1995)
Consolidated Statements of Operations, (December 31, 1996, 1995 and 1994)
Consolidated Statements of Shareholders' Equity, (December 31, 1996, 1995
and 1994)
Consolidated Statements of Cash Flows, (December 31, 1996, 1995 and 1994)
Notes to Consolidated Financial Statements
2. Financial Statements Schedules:
Schedule VIII - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, are
inapplicable, or the information is otherwise included in the financial
statements or notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
Consecutive
Regulation Form lO-K
10-K Number Exhibit Page No.
------------ ------- -----------
<S> <C> <C>
3.1 Articles of Incorporation, as amended(1) N/A
3.2 Bylaws (2) N/A
10.1 Tuina Agreement (3) N/A
10.2 Employment Agreement (3) N/A
10.3 Amended Stock Option Agreement (3) N/A
10.4 Letter Agreement dated August 6, 1993 (4) N/A
10.5 Baja Gold Inc., Loan Documents (5)
10.6 W. Gene Webb Employment Agreement(6)
10.7 Stephen E. Flechner Employment Agreement(6)
27.0 Financial Data Schedule
</TABLE>
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.
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<PAGE>
(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.
(6) Incorporated by reference to the Exhibits to North Lily's Form 10-K for the
fiscal year ended December 31, 1995.
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<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 14, 1997 By: /s/ Stephen E. Flechner
-------------------------
Stephen E. Flechner
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
April 14, 1997 By: /s/ Stephen E. Flechner
-------------------------
Stephen E. Flechner
Chief Executive Officer,
President and Director
April 14, 1997 By: /s/ W. Gene Webb
-------------------------
W. Gene Webb
Executive Vice-President,
Corporate Secretary and Director
April 14, 1997 By: /s/ Nick DeMare
-------------------------
Nick DeMare
Principal Financial
and Accounting Officer and Treasurer
April 14, 1997 By: /s/ Theodore E. Loud
----------------------
Theodore E. Loud
Director
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