<PAGE>
IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-K/A IS BEING FILED
IN PAPER PURSUANT TO TEMPORARY HARDSHIP EXEMPTION.
FORM 1O-K/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year ended: December 31, 1996
----------------------------------------------------
Commission file number 0-16740
-------------------------------------------------------
NORTH LILY MINING COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0159350
- -------------------------------- ------------------------------------
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
210 - 1800 Glenarm Place, Denver, Colorado 80202
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 294-0427
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.10 par value None
- ------------------------------------ -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
N/A
------------------------------------
(Title of class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No_______
-------
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21,1997: $1,017,321
------------
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
-----
PART I
------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
-------
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
-------
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.
At December 31, 1996, North Lily had the following subsidiaries and affiliates:
-3-
<PAGE>
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 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.
-4-
<PAGE>
600), the Foreign Investment Statute. Both laws guarantee access by foreign
investors to the Official Foreign Exchange Market in order to repatriate capital
and profits. The following is a brief summary of the significant aspects of
these laws.
CHAPTER XIV
1. The minimum investment amount is U.S. $10,000. Each remittance or investment
must be separately registered and approved by the Central Bank of Chile.
2. The investment may enter the country and be valued in freely convertible
foreign currency or in credits.
3. The capital invested may be repatriated after 36 months from the date of
entrance into the country. Profits arising from the investment may be
exported at any time.
4. The general tax regime described in Government Regulations below is
applicable.
5. In order to repatriate invested capital and/or profits from the investment,
the petitioner must deposit the equivalent in local currency at a Chilean
bank and must obtain the prior approval of the Central Bank. An affidavit
must be sworn attesting that the local currency used originates exclusively
from the business to which the original investment was made or from the sale
or liquidation of the original investment. Corresponding taxes must have
previously been paid.
D.L. 600
1. The minimum investment amount is U.S. $25,000. After the approval of the
Foreign Investment Committee, a contract is entered into between the investor
and the State of Chile. Thereafter remittances or investments may be made
under the contract and each individual remittance need not be registered.
2. The investment may enter the country and be valued in:
- freely convertible foreign currency,
- tangible assets,
- credits,
- capitalization of foreign loans and debts, or
- capitalization of profits qualifying for remittance aboard.
3. The capital invested may be repatriated after 12 months have elapsed from the
date of entrance into the country. Profits arising from the investment may
be remitted any time.
4. Foreign investors have the right to elect to be subject to taxation at a
fixed overall income tax rate of 42% on taxable income for a 10 year term
which may be extended up to 20 years for projects in excess of U.S.
$50,000,000 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.
-5-
<PAGE>
To date all of the Company's investment in Chile has been made via D.L. 600.
GOVERNMENT REGULATIONS
- ----------------------
The Company's mining, processing and exploration activities are subject to
various laws governing the protection of the environment, prospecting,
development, production, exports, taxes, labour standards, occupational health,
waste disposal, toxic substances, mine safety and other matters. Mining
operations and exploration activities are also subject to substantial regulation
under these laws by governmental agencies.
Failure to comply with applicable laws and regulations may result in orders
being issued that may cause operations to cease or be curtailed or may require
installation of additional equipment. Violators may be required to compensate
those suffering loss or damage by reason of violations and may be fined if
convicted of an offense under such legislation.
The Company believes it is in compliance with all material laws and regulations
applicable to it or its operations. Additional legislation or amendments may be
proposed from time to time that might affect the Company's business.
The Company is unable to predict in advance which proposals may be enacted or
their effective dates. Such changes could, however, require increased capital
or operating expenditures or both, and could prevent or delay certain operations
by the Company.
Outlined below are some of the more significant aspects of governmental controls
and regulations which materially affect the Company.
In the United States the Company is subject to federal and state income taxes,
state and local franchise taxes, personal property taxes and state severance
taxes. State severance taxes vary between the states and within a single state.
The amount of the tax, based on a percentage of the value of the mineral being
extracted, may vary from mineral to mineral. Operations are subject to taxation
by each locality in which mineral properties are owned or business is done.
Because many state and local tax laws are not uniform, the Company runs a risk
of double taxation on portions of its income by various jurisdictions. This may
adversely effect earnings, if any.
In Chile the Company is subject to income taxes on earnings, if any. A "first
category" tax rate of 15% is applied on taxable income.
Amounts distributed from Chile to non-residents are subject to an additional tax
of 35%, against which the "first category" corporate tax may be credited. The
current combined effect of these taxes on distributed income for non-residents
is an effective tax rate of 35%. There are no taxes on the value of the mineral
being extracted. There are also some minor municipal taxes.
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.
-6-
<PAGE>
U.S. mine operators must comply with the Federal Mine Safety and Health Act,
which is enforced by the Mine Safety and Health Administration ("MSHA"), an
agency within the Department of Labour. All mines, both underground and surface,
are subject to inspections by MSHA. The Occupational Safety and Health
Administration also has jurisdiction over safety and health standards not
covered by the Federal Mine Safety and Health Act, although there are areas
where the authority of both administrative agencies overlap.
With respect to operations in the United States, the Montana Department of Lands
administers the Montana Metal Mine Reclamation Act and the Montana Environmental
Policy Act, the purposes of which are to protect the usefulness, productivity
and scenic values of the State's lands and waters and to reclaim to beneficial
use the lands used for metal mining. The Montana Department of Health and
Environmental Sciences administers and enforces air, water and waste regulations
through various bureaus existing under that Department, such as the Montana Air
Quality Act and the Montana Water Quality Act. The Water Rights Bureau under the
Montana Department of Natural Resources and Conservation, reviews existing and
proposed surface and ground water rights and uses.
Existing laws and regulations with respect to the reclamation of mining
operations are in place and may necessitate substantial planning and bonding
requirements.
The Company may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed
exploration for, or production of, minerals may have upon the environment.
It may be anticipated that future legislation will significantly emphasize the
protection of the environment, and that as a consequence, the activities of the
Company may be more closely regulated to further the cause of environmental
protection. Such legislation, as well as future interpretation of existing
laws, may require substantial increases in equipment and operating costs to the
Company and delays, interruptions, or a termination of operations, the extent of
which cannot now be predicted.
CHILE
With respect to operations in Chile, the government administers and enforces
mining laws and regulations. These laws and regulations are principally
administered by Servicio Nacional de Geologia y Minas ("Sernageomin").
No bonding requirements or environmental impact statements are required in
Chile. However, the current government in Chile has indicated that additional
regulations or laws may be introduced which emphasize the protection of the
environment. As a consequence, the activities of the Company may be more
closely regulated to further the cause of environmental protection. Such
legislation, as well as future interpretation of existing laws, may require
substantial 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.
-7-
<PAGE>
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.
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.
-8-
<PAGE>
(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.
"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.
-9-
<PAGE>
<TABLE>
PROPERTY PORTFOLIO
------------------
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.
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.
-10-
<PAGE>
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).
Hectares - Net
--------------
394 San Jose Lease
5,686 Other properties
-----
6,080
=====
Mineralization:
- ---------------
To date the Company has calculated a mineable tonnage of 3.5 million metric
tonnes of copper ore contained in the San Jose and San Martin pits at an
estimated soluble copper grade of 1.1%. The estimated stripping ratio to mine
this tonnage would be 2.3 to 1.
Description of Property Agreements:
- -----------------------------------
(1) San Jose Lease:
---------------
The San Jose Lease covers an area of 394 hectares and hosts all, or
substantially all, of the current proven reserves. There are two known
areas of copper mineralization on this property called the San Jose pit and
the San Martin pit. To date all production has been from properties held
under this lease. During 1994 Phoenix renegotiated its lease on the
property (the "Operating Lease"). The Operating Lease has a term of 30
years and requires a payment of 5% of the copper produced with a minimum
payment of 16 tonnes of copper per month. Under the terms of the Operating
Lease the obligation to make the minimum lease payments has been waived
until August 1995 and in return a payment of $200,000 was made. This
$200,000 payment represented an advance payment against which future lease
payments could be offset. Since August 1995 the minimum lease payments have
been partially met through application of this advance payment. The minimum
lease payment is a cost which is funded by Yuma pursuant to the Tuina
agreements. In addition Phoenix has agreed to make certain bank payments
while the Operating Lease is in effect. The payments required of Phoenix
are shown below:
1997 $ 291,000
1998 $ 278,000
1999 $2,285,000
Included in the 1999 payments is a lump sum payment of approximately
$2,196,000. This amount is payable only if Phoenix is producing from the
leased claims.
Phoenix has also agreed to pay the property owner $8,000 per month, for the
lease of certain equipment. This agreement will allow the Company to
continue using the equipment after the lease on the mineral properties has
expired. This obligation to pay $8,000 per month will only commence when
the Operating Lease is terminated or when it expires.
-11-
<PAGE>
(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
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
-12-
<PAGE>
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 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.
-13-
<PAGE>
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.
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.
-14-
<PAGE>
Mineralization:
- ---------------
There are no known gold reserves on the San Simon Property at this time.
Description of Property Agreement:
- ----------------------------------
Pursuant to the terms of a property concession agreement entered into on behalf
of the Companies, the Companies are required to make total payments of $300,000
to the vendor over a three year period. 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.
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
-15-
<PAGE>
vacation pay owing as significantly higher. Final settlement with Mr. Holcomb
was reached in June, 1996, in which the Company agreed to pay an initial payment
of $15,000 and has agreed to pay a final payment of $80,000. The cost of this
settlement is being paid on a 50:50 basis by the Company and Mahogany. During
1996, the initial payment of $15,000 was made and the Company has accrued
$40,000 for its share of the settlement. Should Mahogany not honor its
commitment to pay its share of this settlement agreement, the Company will be
obliged to pay the full settlement amount.
On June 23, 1993, Jack M. Scanlon and Carolyn M. Scanlon; Dr. Richard Urwiller
and Roberta Urwiller, Dr. William Inkret, Jr., M.D., individually and Dr.
William Inkret, Jr., M.D., P.C., a corporation and profit sharing trust; Dr.
Richard Granberg and Mary Granberg, on behalf of themselves and all other person
similarly situated, filed an action in the United States District Court for the
District of Montana, Butte Division, against Magellan Resources Inc., a
corporation; Mahogany International Inc. (sic), a corporation, former
subsidiaries of North Lily Mining Company, a corporation, their former parent
corporation; Ruen Drilling, a corporation, Longyear Company, a corporation; and
other unknown John Doe persons and corporations. The plaintiffs allege, that,
as a result of exploration activity in the Southern Cross area of Montana, local
ground water supplies have been contaminated and reduced. No specific stated
claim for damages have been made at this time. Despite studies prepared
privately and by the Department of State Lands (Montana) in 1992 which found no
evidence of earlier claims, the Plaintiffs continue to seek alternative legal
approaches against the defendants. Initial discovery proceedings have been
completed. The Company believes the claims are without merit and have
instructed its legal counsel to file for a summary judgment for dismissal. 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
---------------------------------------------------
On November 22, 1996, the Company held its annual meeting of shareholders. The
following matters were voted upon at the meeting:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Matter Votes For Votes Against Votes Abstained
<S> <C> <C> <C>
Election of Directors/(1)/
Stephen E. Flechner 19,675,900 762,139
Theodore E. Loud 19,612,932 825,107
John R. Twohig 19,420,952 1,017,087
W. Gene Webb 19,491,498 946,541
Proposal for Reverse Stock Split 17,037,587 1,831,756 190,802
Proposal to Acquire Tamarine Ventures/(2)/ 9,177,945 1,216,100 367,103
Proposal to Adopt 1996 Stock Option Plan 7,971,555 2,055,632 517,627
Proposal to Adopt 1996 Restricted Stock Plan 8,069,131 1,908,359 567,324
Proposal to Authorize Preferred Stock/(3)/ 8,044,764 2,047,294 452,756
- ------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) All of the directors were elected. On November 23, 1996, Mr. Twohig
submitted his resignation.
(2) Although this proposal received the requisite shareholder approval, the
Board of Directors determined to abandon the acquisition.
(3) The shareholders did not approve this proposal by the requisite affirmative
vote of a majority of the outstanding shares.
All of the matters set forth above were approved by the shareholders, except for
the proposal to authorize preferred stock.
-16-
<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)
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
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
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
-18-
<PAGE>
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 $675,449 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 $167,098 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
Gray 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 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.
-19-
<PAGE>
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 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.
-20-
<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.
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.
-21-
<PAGE>
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 $211,621 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 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.
-22-
<PAGE>
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.
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
--------------------------------------------------
-23-
<PAGE>
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.
-24-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth the names and agest 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 COMPANY BUSINESS EXPERIENCE
<S> <C> <C> <C>
Stephen E. Flechner 53 President and Chief May 1994 to present - President of the Company;
Executive Officer and Director 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 President, May 1994 to present - officer and director of the
Corporate Secretary and Company; September 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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-25-
<PAGE>
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 $100,000 in the Company's fiscal year ended
December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------------------
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION COMPEN AWARD(S) SARS PAYOUTS ($) COMPEN
YEAR SALARY BONUS SATION ($) ($) (#) SATION ($)
- ------------------------------------------------------------------------------------------------------------------------------
<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, Executive 1996 $120,000/1/ -0- -0- -0- -0- -0- -0-
Vice President and 1995 $110,000/1/ -0- -0- -0- -0- -0- -0-
Corporate Secretary 1994 $82,500/2/ -0- -0- -0- 85,000 -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------
William E. Grafham, former 1996 -0- -0- -0- -0- -0- -0- -0-
Chairman of the Board, 1995 -0- -0- -0- -0- -0- -0- -0-
President and Chief 1994 -0- -0- -0- -0- 12,000 -0- -0-
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."
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
-26-
<PAGE>
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.
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
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY
YEAR END (#) OPTIONS/SARS AT FISCAL
YEAR END ($)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NAME SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) VALUE 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 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
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS (2)
<S> <C> <C>
Philadep & Co 458,842 15.34%
1900 Market Street
2nd Floor
Philadelphia, PA 19103
Stephen E. Flechner 88,000 (3) 2.86%
W. Gene Webb 85,000 (3) 2.76%
Theodore E. Loud 7,000 0.23%
Nick DeMare 5,730 (4) 0.19%
All officers and directors as a group (4 persons) 185,730 (5) 5.86%
- ---------------
</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.
(6) 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.
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:
-29-
<PAGE>
<TABLE>
<CAPTION>
Indebtedness to be Settled Ascribed Price Number of
Creditor 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 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 1995, the Company and Akiko Gold Resources Ltd. ("Akiko"), a company with
a director in common, entered into a letter agreement to acquire mineral
properties located in the San Simon region of Bolivia. The Company has a 46%
interest in the property and is responsible for 50% of the project's funding
requirements. As at December 31, 1996, accounts payable include $66,534 for
costs paid on the Bolivia property by Akiko on behalf of the Company. See Item
2. Properties.
-30-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
A) The following documents are filed as part of this report:
1. Financial Statements:
Report of Independent Accountants, (April 5, 1997)
Report of Independent Accountants, (April 17, 1996)
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:
All schedules have been omitted.
All other schedules have been omitted because they are not required, are
inapplicable, or the information is otherwise included in the financial
statements or notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
Consecutive
Regulation Form lO-K
10-K Number Exhibit Page No.
----------- ------- ---------
<C> <S> <C>
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.
(3) Incorporated by reference to the Exhibits to North Lily's Form 10-K for the
fiscal year ended December 31, 1991.
-31-
<PAGE>
(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.
-32-
<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
-33-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
NORTH LILY MINING COMPANY:
Denver, Colorado
We have audited the accompanying consolidated balance sheet of North Lily Mining
Company and Subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Lily Mining
Company and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a working capital deficiency
at December 31, 1996, losses from continuing operations for the year ended
December 31, 1996, and no operating cash flow to meet ongoing obligations. In
addition, there are certain potential liabilities which may have an adverse
effect on the Company (see Note 14). These factors raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Should the Company be unable to realize on its
assets and discharge its liabilities in the normal course of business, the net
realizable value of its assets may be materially less than the amounts recorded
on the balance sheet.
/s/ Wheeler Wasoff
WHEELER WASOFF, P.C.
Denver, Colorado
April 5, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
NORTH LILY MINING COMPANY:
Denver, Colorado
We have audited the accompanying consolidated balance sheet of North Lily Mining
Company and Subsidiaries as of December 31, 1995 and the related consolidated
statements of operations, shareholders' equity and cash flows for the two years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Lily Mining
Company and Subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995 in accordance with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a working capital deficiency
at December 31, 1995, losses from continuing operations for each of the two
years ended December 31, 1995, and no operating cash flow to meet ongoing
obligations. In addition there are certain potential liabilities which may have
an adverse effect on the Company (see Note 14). These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Should the Company be unable to
realize on its assets and discharge its liabilities in the normal course of
business, the net realizable value of its assets may be materially less than the
amounts recorded on the balance sheet.
/s/ Coopers & Lybrand
COOPERS & LYBRAND L.L.P.
San Francisco, California
April 17, 1996
F-2
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
--------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 67,026 $ 122,515
Marketable securities 39,655 448,800
Accounts receivable 37,985 44,687
Note receivable 108,000 -
Inventory - 43,207
------------ ------------
Total Current Assets 252,666 659,209
Advances - 35,000
Plant and equipment, net 57,162 278,111
Mineral properties, net 3,200,401 3,121,943
Other assets 112,032 107,457
------------ ------------
Total Assets $ 3,622,261 $ 4,201,720
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 279,928 $ 381,326
Accrued and other liabilities 55,000 38,000
Reclamation liabilities 192,500 220,001
Notes payable - 308,788
------------ ------------
Total Current Liabilities 527,428 948,115
Due to officers 625,000 385,000
------------ ------------
Total Liabilities 1,152,428 1,333,115
------------ ------------
Commitments and contingencies and going concern (Notes 1 and 14)
Shareholders' Equity:
Common stock, $0.10 par value; authorized 30,000,000 shares;
issued and outstanding 2,992,122 and 2,594,667 shares
as at December 31, 1996 and 1995, respectively 299,212 259,466
Additional paid-in capital 51,663,759 51,264,750
Accumulated deficit (49,501,408) (48,835,939)
Treasury stock, at cost, 14,483 shares as at December 31, 1995 - (17,395)
Marketable securities valuation adjustment 8,270 197,723
------------ ------------
Total Shareholders' Equity 2,469,833 2,868,605
------------ ------------
Total Liabilities and Shareholders' Equity $ 3,622,261 $ 4,201,720
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Operating expenses:
General and administrative $ 675,449 $ 842,547 $ 862,735
Exploration and property carrying costs 3,527 60,390 432,425
Abandonment of mineral properties - 48,397 197,850
Provision for diminution in value of mineral properties - - 300,000
---------- ---------- -----------
Operating loss (678,976) (951,334) (1,793,010)
Other income (expenses):
Interest income 10,053 3,310 1,275
Interest expense (10,589) (17,242) -
Net realized gain on sale of marketable securities 118,883 92,628 170,494
Gain on disposition of mineral properties 206,897 49,500 -
Write-off of note receivable (176,751) - -
Write-down of mill and mining equipment - - (371,897)
Other, net (132,074) (172,644) (78,009)
---------- ---------- -----------
Loss before extraordinary item (662,557) (995,782) (2,071,147)
Extraordinary item - gain on settlement
of amounts due to former officers - 73,750 -
---------- ---------- -----------
Net Loss $ (662,557) $ (922,032) $(2,071,147)
========== ========== ===========
Net loss per common share:
Loss before extraordinary item $(0.23) $(0.43) $(0.89)
========== ========== ===========
Net loss $(0.23) $(0.39) $(0.89)
========== ========== ===========
Weighted average common shares outstanding 2,848,047 2,342,584 2,327,601
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------
<TABLE>
<CAPTION>
Marketable
Common Stock Additional Securities
---------------------- Paid-In Accumulated Treasury Valuation
Shares Amount Capital Deficit Stock Adjustment Total
--------- -------- ----------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 2,342,084 $234,208 $50,653,258 $(45,842,760) $(17,395) $ - $ 5,027,311
Net loss, year ended
December 31, 1994 - - - (2,071,147) - - (2,071,147)
--------- -------- ----------- ------------ -------- -------- -----------
Balance, December 31, 1994 2,342,084 234,208 50,653,258 (47,913,907) (17,395) - 2,956,164
Net loss, year ended
December 31, 1995 - - - (922,032) - - (922,032)
Common stock issued for
services rendered 7,000 700 13,300 - - - 14,000
Common stock issued on
settlement of debt 145,583 14,558 422,192 - - - 436,750
Company stock issued by
private placement 100,000 10,000 190,000 - - - 200,000
Share issue costs - - (14,000) - - - (14,000)
Marketable securities
valuation adjustment - - - - - 197,723 197,723
--------- -------- ----------- ------------ -------- -------- -----------
Balance, December 31, 1995 2,594,667 259,466 51,264,750 (48,835,939) (17,395) 197,723 2,868,605
Net loss, year ended
December 31, 1996 - - - (662,557) - - (662,557)
Common stock issued for
services rendered 55,000 5,500 79,500 - - - 85,000
Common stock issued by
private placement 341,073 34,108 351,409 (2,912) 17,395 - 400,000
Share issue costs - - (31,762) - - - (31,762)
Marketable securities
valuation adjustment - - - - - (189,453) (189,453)
Adjustment for fractional
shares issued 1,382 138 (138) - - - -
--------- -------- ----------- ------------ -------- -------- -----------
Balance, December 31, 1996 2,992,122 $299,212 $51,663,759 $(49,501,408) $ - $ 8,270 $ 2,469,833
========= ======== =========== ============ ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
_____________
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(662,557) $(922,032) $(2,071,147)
--------- --------- -----------
Adjustments to reconcile net loss to net cash provided
from (used for) operating activities:
Depletion and depreciation 3,946 49,562 129,734
Provision for diminution in value of mineral properties - - 300,000
Abandonment of mineral properties - 48,397 197,850
Net realized gain on sale of marketable securities and investments (118,883) (92,628) (170,494)
Gain on disposition of mineral properties (206,897) (49,500) -
Write-off of advances 176,751 - -
Write-down of mill and mining equipment - - 371,897
Indebtedness to be settled with shares - - 354,250
Decrease (increase) in accounts and note receivable (101,298) 4,514 12,995
Decrease in inventory 43,207 58,543 49,994
Decrease (increase) in other assets (4,575) (1,432) 22,009
Increase (decrease) in accounts payable (101,398) (21,629) 128,879
Increase (decrease) in accrued and other liabilities 17,000 (30,000) (288,439)
Increase (decrease) in reclamation liabilities (27,501) 67,882 (97,881)
Increase in due to officers 240,000 220,000 165,000
Other items 185,107 (73,750) -
--------- --------- -----------
Total adjustments 105,459 179,959 1,175,794
--------- --------- -----------
Net cash used for operating activities (557,098) (742,073) (895,353)
--------- --------- -----------
Cash flows from investing activities:
Acquisition and exploration of mineral properties,
net of option payments and foreign taxes received (64,957) 91,987 (300,017)
Acquisition of equipment - - (31,144)
Proceeds received on sale of equipment 5,000 93,403 -
Proceeds from sale of marketable securities and investments 241,408 153,649 665,803
Purchase of marketable securities and investments - (12,224) -
Proceeds from sale of mineral properties 280,292 62,822 -
Advances (141,751) (35,000) -
--------- --------- -----------
Net cash provided from investing activities 319,992 354,637 334,642
--------- --------- -----------
Cash flows from financing activities:
Notes payable (211,621) 107,451 201,337
Advances from International Mahogany Corp. - 163,546 358,258
Proceeds from issuance of common stock, net of offering costs 393,238 200,000 -
--------- --------- -----------
Net cash provided from financing activities 181,617 470,997 559,595
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents (55,489) 83,561 (1,116)
Cash and cash equivalents, beginning of year 122,515 38,954 40,070
--------- --------- -----------
Cash and cash equivalents, end of year $ 67,026 $ 122,515 $ 38,954
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for:
Interest $ 17,708 $ - $ 2,611
========= ========= ===========
Income taxes $ - $ - $ -
========= ========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (see Note 15)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
1. GOING CONCERN:
During 1996, 1995, and 1994 the Company incurred net losses of $662,557,
$922,032 and $2,071,147, respectively and at December 31, 1996 has a
working capital deficiency of $274,762. During 1996 and 1995 the Company
used cash in operating activities of $557,098 and $742,073, respectively.
During 1993 the Company ceased operations at its Silver City mine and
suspended mining operations at its Tuina mine (Note 8). As a result the
Company has no operating cash flow to meet ongoing obligations over the
past three years. The Company has continually been selling non-essential
Company assets to fund ongoing operations and property commitments over
the past three years. The Company requires financing to fund its future
operations and will attempt to meet its ongoing liabilities as they fall
due through the sale of marketable securities or mineral properties.
There can be no assurance that the Company will be able to raise the
necessary financing to continue in operations or meet its liabilities as
they fall due or be successful in resolving its contingent liabilities
(Note 14). Should the Company be unable to realize on its assets and
discharge its liabilities in the normal course of business, the Company
may not be able to remain in operations and the net realizable value of
its assets may be materially less than the amounts recorded on the
consolidated balance sheets.
See also Note 4.
2. NATURE OF OPERATIONS:
The Company is engaged in mineral activities, including exploration,
extraction, processing and reclamation. The Company's principal assets
are its copper mine, located in Chile, and its mineral properties,
located in Bolivia and the United States.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of North Lily
Mining Company, a Utah corporation, and all of its subsidiaries (the
"Company"). All significant intercompany transactions, accounts, and
investments have been eliminated. See also Note 4.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Significant estimates have been made by management
with respect to the recoverability of the Company's investment in mineral
properties and the liability for reclamation costs. Actual results could
differ from those estimated.
CASH EQUIVALENTS:
The Company defines cash equivalents as all short-term, highly liquid
investments with original maturity dates less than 90 days. As at
December 31, 1996, there were no cash equivalents.
F-7
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MARKETABLE SECURITIES:
Marketable equity securities are classified as available for sale and are
carried at fair value, as determined by quoted published market prices.
Unrealized losses and gains on available for sale securities are included
as a separate component of shareholders' equity. Net realized gains and
losses on security transactions are determined on the specific
identification cost basis and are included in the determination of loss
for the year. See Note 6.
INVENTORY:
Finished products are recorded at the lower of first-in, first-out cost
or market. In-process heap leach ore, which principally includes
unleached ore placed on heap leach pads, is valued at the lower of moving
average production cost or net realizable value. Costs are removed from
inventory on a first-in, first-out basis. Major mining and milling
supplies are stated at the lower of first-in, first-out cost or market.
PLANT AND EQUIPMENT:
Plant and equipment is carried at cost net of write-downs. Mill and
equipment are depreciated using the straight-line method over their
estimated useful lives of 5 to 15 years or the units-of-production method
based on estimated tons of ore reserves if the equipment is located at a
producing property with a shorter economic life. Mining equipment is
being depreciated using the straight-line method over their estimated
useful lives of 3 to 15 years or the units-of-production method based on
estimated tons of ore reserves if the equipment is located at a producing
property with a shorter economic life. Office equipment and fixtures are
being depreciated using the straight-line method over their estimated
useful lives of 3 to 10 years. When such assets are sold or otherwise
disposed of, the costs and accumulated depreciation are removed from the
accounts, and any resulting gains or losses are charged to operations.
Carrying values of plant and equipment are reviewed on a regular basis
and, when necessary, are written down to their estimated recoverable
amount.
Substantially all mining plant and equipment is available for sale as of
December 31, 1996. Accordingly, proceeds from the sale of mining plant
and equipment is charged against the carrying cost, which approximates
salvage value, until such time as the carrying cost is reduced to zero,
at which time, gain on sale will be recognized.
MINERAL PROPERTIES:
Direct costs related to the acquisition, exploration and development of
mineral properties held or controlled by the Company are deferred on an
individual property basis until viability of a property is determined.
General exploration costs are expensed as incurred. Management of the
Company periodically reviews the recoverability of the capitalized
mineral properties and mining equipment. Management's calculation of
proven and probable reserves is based on engineering and geological
estimates and financial estimates including mineral prices and operating
costs. The Company depreciates its assets and accrues for reclamation on
a units of production basis at each mine site over proven and probable
reserves. Changes in the geological and engineering interpretation of
the Company's ore bodies, mineral price and operating costs may change
the Company's estimate of proven and probable reserves. It is reasonably
possible that the Company's estimate of proven and probable reserves will
change in the near term resulting in additional charges for depreciation
F-8
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
and reclamation in future reporting periods. When it is determined that
a project or property will be abandoned or its carrying value has been
impaired, a provision is made for any expected loss on the project or
property. Proceeds from the sale of mineral properties are charged
against the carrying value of the properties, on an individual property
basis, until such time as the carrying value of the individual properties
is reduced to zero, at which time, gain on disposition is recognized.
Investments in joint ventures are proportionately consolidated.
IMPAIRMENT OF LONG-LIVED ASSETS:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard ("SFAS") 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" which requires
that long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has determined
that no impairment loss for 1996 need to be recognized for applicable
assets of continuing operations.
FOREIGN CURRENCY TRANSLATION:
Results of operations for foreign subsidiaries, whose functional currency
is other than the U.S. dollar, are translated using the average exchange
rates during the period, while assets and liabilities are translated into
U.S. dollars using current rates. Resulting translation adjustments are
recorded in currency translation adjustments in shareholders' equity.
For foreign subsidiaries whose functional currency is the U.S. dollar,
currency gains and losses resulting from translation and transactions are
determined using a combination of current and historical rates and are
included in the results of operations.
RECLAMATION COSTS:
All of the Company's operations are subject to reclamation, site
restoration and closure requirements. Post-closure reclamation, site
restoration costs and closure costs for each producing mine are charged
to operations over the expected life of the mine using the units of
production method. Current expenditures relating to ongoing
environmental and reclamation programs are expensed as incurred. The
Company calculates its estimate of the ultimate reclamation liability
based on current laws and regulations and the expected future costs to be
incurred in reclaiming, restoring and closing its operating mine sites.
It is reasonably possible that the Company's estimate of its ultimate
reclamation liability will increase in the near term due to possible
changes in laws and regulations and changes in cost estimates.
INCOME TAXES:
The Company has adopted the provisions of SFAS 109, "Accounting for
Income Taxes". SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, the deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
F-9
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_________
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SHARE BASED COMPENSATION:
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. This new standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument.
This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue
to measure compensation using the intrinsic value approach under
Accounting Principles Board ("APB") Opinion No. 25. The Company has
elected to utilize APB No. 25 for measurement; and will, pursuant to SFAS
No. 123, disclose supplementally the pro forma effects on net income and
earnings per share of using the new measurement criteria.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents,
investments in marketable securities and receivables. The Company places
its short-term cash investments with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any
one financial institution. Generally, these investments mature within 90
days and therefore are subject to minimal risk.
LOSS PER COMMON SHARE:
Loss per common share is calculated using the weighted average number of
shares outstanding during the year. Loss per common share computations
for each of the three years presented do not include the effect of
outstanding stock options, as their effect is antidilutive.
4. DISPOSITION OF INTERESTS IN COMPANIA MINERA PHOENIX S.A.
Effective April 12, 1995, the Company and International Mahogany Corp.
("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%. During 1995, 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").
On May 3, 1996 the Company and Yuma agreed to revise the terms of the
agreement whereby the Company's remaining interest in Phoenix will be
impacted. In summary, subject to receipt by Mahogany of regulatory
approvals and completion of the Mahogany-Yuma Agreement, the Company's
interest will 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;
F-10
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
4. DISPOSITION OF INTERESTS IN COMPANIA MINERA PHOENIX S.A., CONTINUED:
ii) the Company would be required to sell a further 10% interest in
Phoenix to Yuma for an initial payment of $145,000, less
deductions for operating costs and the costs of securing the
water rights for the Tuina Project. In addition, Yuma is required
to make two further payments to the Company, due upon
commencement of Tuina commercial production and one year
thereafter. These payments are to be calculated in relation to
the initial capital costs of the Tuina Project, from a high of
$609,000 where the initial capital costs are less than
$14,000,000 with graduating payments decreasing as capital costs
increase, and may be made, at Yuma's election, in cash or shares
of Yuma; and
iii) all participants will be responsible for contributing their share
of funding following completion and delivery of the Feasibility
Study. The failure of any participant to contribute its share of
funding will result in a dilution of that participant's interest
in accordance with a dilution formula. Once a participant's
interest has been diluted to 10%, then the ownership interest
will convert to a 10% net profits interest.
Since April 13, 1995, Yuma has provided funding to Phoenix to cover
operations, the preparation of the feasibility study and the costs of
securing the water rights for the Tuina Project. 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 Mahogany-Yuma Agreement, the Company would not owe Yuma any
funds for the Yuma Payments.
The Company and Mahogany have an agreement in principle to conduct the
activities of the Tuina Project on a joint venture basis. The Company
expects to enter into a definitive joint venture and operating agreement
with Yuma after closing of the Mahogany-Yuma Agreement.
5. 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.
F-11
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
_________
6. MARKETABLE SECURITIES:
As at December 31, 1996 and 1995 the Company has classified all
investments in marketable securities as available for sale. The cost,
gross unrealized holding gains, gross unrealized holdings losses, and
fair value of available for sale securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Holdings Holdings Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
At December 31, 1996
Equity Securities $ 31,385 $ 8,270 $ - $ 39,655
======== ======== ======== ========
At December 31, 1995
Equity Securities $251,077 $197,723 $ - $448,800
======== ======== ======== ========
At December 31, 1994
Equity Securities $299,874 $237,343 $ - $537,217
======== ======== ======== ========
</TABLE>
Proceeds from sales and dispositions of marketable securities were
$339,704, $153,649, and $665,803 in 1996, 1995 and 1994, respectively,
and related net realized gains included in income were $118,883, $92,628,
and $170,494 in 1996, 1995 and 1994, respectively. The net change in the
unrealized gain of marketable securities classified as available for sale
included as a component of equity was a decrease of $189,453 and $39,620
for the years ended December 31, 1996 and 1995, respectively, and an
increase of $6,526 for the year ended December 31, 1994.
7. PLANT AND EQUIPMENT:
Plant and equipment consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996
------------------------------------------------
Accumulated
Cost Depreciation Write-down Net
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Mill and equipment $2,132,481 $1,092,966 $1,036,412 $ 3,103
Mining equipment 327,941 262,662 27,000 38,279
Office equipment and fixtures 85,562 69,782 - 15,780
---------- ---------- ---------- --------
$2,545,984 $1,425,410 $1,063,412 $ 57,162
========== ========== ========== ========
1995
------------------------------------------------
Accumulated
Cost Depreciation Write-down Net
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Mill and equipment $2,132,481 $1,092,966 $1,036,412 $ 3,103
Mining equipment 586,478 354,577 - 231,901
Office equipment and fixtures 220,898 177,791 - 43,107
---------- ---------- ---------- --------
$2,939,857 $1,625,334 $1,036,412 $278,111
========== ========== ========== ========
</TABLE>
F-12
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
7. PLANT AND EQUIPMENT, CONTINUED:
Included in mill and equipment is an idle mill facility held for sale.
In 1996 and 1995, respectively, the Company received $5,000 and $25,000
from the sale of various components of the mill.
Depreciation expense was $3,946, $49,562 and $129,734 for 1996, 1995 and
1994, respectively.
8. MINERAL PROPERTIES:
The Company's investment in mineral properties at December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Mineral properties $5,274,661 $5,328,528
Less:Accumulated depletion 867,260 999,585
Provision for diminution
in value 1,207,000 1,207,000
---------- ----------
$3,200,401 $3,121,943
========== ==========
</TABLE>
Below is a breakdown of various Company properties with their respective
net carrying values at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
U.S. PROPERTIES:
---------------
Tintic $1,273,064 $1,404,593
Other - 8,395
---------- ----------
1,273,064 1,412,988
CHILEAN PROPERTY:
----------------
Tuina 1,755,512 1,668,617
BOLIVIAN PROPERTY:
-----------------
San Simon 171,825 40,338
---------- ----------
$3,200,401 $3,121,943
========== ==========
</TABLE>
During 1993 the Company's Silver City mining operation located in Utah
ceased operations and commenced reclamation work. As at December 31,
1996, the Company has accrued $192,500 (1995 - $220,001) as its share of
estimated net future costs to complete its share of the reclamation work.
The Company also suspended production at its Tuina mine in Chile during
1993 due to negative cash flows. This operation is not expected to
resume production until closing of the various reorganization agreements,
completion of a feasibility study and successful financing of the
construction of a solvent extraction/electrowinning plant to produce
cathode copper.
During 1996, the Company received $65,000 from partial sale of Tintic
patent claims. In addition, the Company sold the Gray Eagle property for
total proceeds of $215,292. Of this amount $108,000 is recorded as note
receivable. This balance bears interest at 8.5% per annum. The
principal and interest is repayable in full on August 21, 1997. As at
December 31, 1996, the Company has accrued $3,301 as interest income and
this amount is included in accounts receivable.
See also Note 4.
F-13
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
9. NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Baja Gold, Inc.
Promissory note (Cdn.$283,820), bearing interest at 7% per annum.
150,000 shares of Baja have been pledged as collateral for the
promissory note $ - $211,621
Other
Promissory note (Cdn.$130,000), bearing interest at 8% per annum.
90,000 shares of Baja have been pledged as collateral for the
promissory note - 97,167
------------ --------
$ - $308,788
============ ========
</TABLE>
In 1996, the Company:
i) sold 150,000 shares of Baja Gold, Inc. and the funds received
were used to retire the note payable and outstanding accrued
interest of the Baja Gold, Inc. loan; and
ii) transferred 60,000 shares of Baja Gold, Inc. common stock, valued
at the current market price of $1.64 per share, to retire the
outstanding "other" loan and related accrued interest in the
aggregate amount of $98,296.
10. INCOME TAXES:
Pretax loss from continuing operations consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ------------
<S> <C> <C> <C>
United States $(662,557) $(656,205) $(1,517,229)
Foreign - (265,827) (553,918)
--------- --------- -----------
$(662,557) $(922,032) $(2,071,147)
========= ========= ===========
</TABLE>
For U.S. income tax reporting purposes, the Company has net operating
loss carryforwards of approximately $19,400,000 expiring from 1998 to
2011. The Chilean loss carryforwards are approximately $3,215,000.
Approximately $4,452,000 of the United States losses were acquired in the
merger with Cumberland Gold, and utilization of these net operating
losses is restricted to a maximum of $2,900,000 annually under Internal
Revenue Code Section 382. In addition, the Company has U.S. capital loss
carry-forwards of approximately $25,500,000, expiring 1998. The U.S. net
operating loss and the capital loss carry-forwards are limited in their
availability for use in any given year. In addition, certain other
limitations are placed on the utilization of the net operating losses
generated by the Company's subsidiaries.
F-14
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
10. INCOME TAXES, CONTINUED:
The Company has fully reserved the tax benefits of these operating losses
because the likelihood of realization of the tax benefits cannot be
determined. These carryforwards are subject to review by the Internal
Revenue Service.
The $3,740,000 tax benefit of the loss carryforward has been offset by a
valuation allowance of the same amount. Of the total tax benefit,
$184,000 is attributable to 1996.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes are primarily from using different
methods of reporting depreciation costs, mineral exploration costs,
advanced royalties and reclamation accruals.
11. STOCKHOLDERS' EQUITY:
On December 9, 1996 the Company effected a 1 for 10 reverse stock split.
The accompanying financial statements give retroactive effect to this
reverse stock split for all periods presented.
12. STOCK OPTION AGREEMENTS:
(a) 1984 Incentive Stock Option Plan:
During 1984, the shareholders approved an incentive stock option plan
(the "1984 Plan") for officers and key employees that provided for
grants of options to purchase up to 30,000 shares of unregistered
common stock. In 1990, the Board of Directors approved an amendment
to the 1984 Plan to increase the shares available for option grants
to 250,000. The options granted under the 1984 Plan are immediately
exercisable at the fair market value of the free trading common stock
on the date of grant or 110% of such value if the optionee owned more
than 10% of the combined voting power of all classes of Company stock
as of the grant date. The 1984 Plan expired October 31, 1994. The
options outstanding at December 31, 1996 expire as follows: 170,000 -
May 7, 2004 and 17,250 - October 31, 2004.
A summary of the Company's 1984 stock option activity is as
follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1993 6,000 $7.50
Granted 248,000 $2.03
Cancelled (6,000) $7.50
Cancelled (22,500) $2.03
---------
Outstanding at December 31, 1994 225,500 $2.03
Cancelled (28,250) $2.03
---------
Outstanding at December 31, 1995 197,250 $2.03
Cancelled (10,000) $2.03
---------
Outstanding at December 31, 1996 187,250 $2.03
=========
</TABLE>
F-15
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
12. STOCK OPTION AGREEMENTS, CONTINUED:
(b) 1996 Stock Option Plan:
In 1996, the shareholders approved an incentive stock option plan
(the "1996 Plan") for employees, directors and/or officers of the
Company. The 1996 Plan reserves an aggregate of 275,000 shares (the
"Available Shares") of the Company's Common Stock and provides for
annual adjustments 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 options granted under the Plan will become
vested, 50% upon the first anniversary option grant and 12.5% upon
each of the four three-month periods following the first anniversary.
The purchase price shall be equal to the fair market value of the
stock as of the date of issuance.
No options were granted under the 1996 Plan in 1996.
(c) 1996 Restricted Stock Plan:
In 1996, the shareholders approved a restricted stock plan (the "1996
Restricted Plan") for employees, officers, and directors of the
Company and consultants to the Company. The 1996 Restricted Plan
reserves an aggregate of 275,000 shares (the "Available 1996
Restricted Shares") of the Company's Common Stock. The 1996
Restricted Plan also provides for annual adjustments under the same
terms as the 1996 Plan. Shares under this plan are "restricted" in
the sense that they are subject to repurchase by the Company at cost
during the vesting period. The options granted under this plan will
become vested under the same terms as the 1996 Plan.
13. RELATED PARTY TRANSACTIONS:
(a) During 1996, the Company was charged management, consulting and
office administration fees and salaries of $283,806 by officers and
companies under significant influence of certain directors of the
Company. As at December 31, 1996, $680,358 remained unpaid. Of this
amount $625,000 and $55,358 have been included in due to officers and
accounts payable, respectively.
The Company's Bolivia properties are being acquired pursuant to an
agreement entered into in 1995 with Akiko Gold Resources, Ltd.
("Akiko"), an entity whose president is also president of the
Company. The Company has a 46% interest in the property and is
responsible for 50% of the project's funding requirements. As at
December 31, 1996, accounts payable includes $66,534 for costs paid
on the Bolivia property by Akiko on behalf of the Company.
(b) During 1995, the Company:
i) was charged management, consulting, and office administration
fees and salaries of $272,494 by officers and companies under
significant influence of certain directors of the Company. At
December 31, 1995, $416,079 remained unpaid of which $385,000 and
$31,079 have been included in due to officers and accounts
payable, respectively;
F-16
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
13. RELATED PARTY TRANSACTIONS, CONTINUED:
ii) issued 1,180,835 shares (pre-reverse stock split) of the
Company in settlement of $354,250 of indebtedness. Of the
amount, $315,000 were amounts owing to companies controlled by
current and former officers and directors of the Company; and
iii) was advanced $74,532 (Cdn. $100,000) by a corporation with a
director who is also a director of the Company. The advance was
repaid during the year.
(c) During 1994, the Company was charged management, consulting and
office administration fees and salaries of $271,350 by officers and
companies under significant influence of certain current and former
officers of the Company. The companies also made disbursements on
behalf of the Company. As at December 31, 1994, $338,905 remained
unpaid. Of this amount $150,000, $165,000 and $23,905 have been
included in indebtedness to be settled with shares, due to officers
and accounts payable, respectively.
(d) See also Note 14(d).
14. COMMITMENTS AND CONTINGENCIES:
(a) The Company has future commitments, and advance royalties payable for
the base terms of certain agreements, assuming no extensions, as
follows:
<TABLE>
<CAPTION>
Tuina Bolivian
Project Property Total
---------- --------- ----------
<S> <C> <C> <C>
1997 $ 121,000 $105,000 $ 226,000
1998 115,000 123,000 238,000
1999 904,000 - 904,000
---------- -------- ----------
$1,140,000 $228,000 $1,368,000
========== ======== ==========
</TABLE>
Rent expense for 1996, 1995 and 1994 was $17,838, $11,928 and
$12,769, respectively.
(b) The Tuina project is subject to a 5% in-kind royalty on gross
production, with a minimum of 16 tons of copper per month commencing
August 1, 1995. Since April 15, 1995, Yuma has provided funding of
all property payments, commitments and advance royalties with respect
to the Tuina Project. See also Note 4.
(c) The Company and other third parties are subject to a multi-count
claim filed with the U.S. District Court in Butte, Montana claiming
that, as a result of exploration activity in the Southern Cross area,
local ground water supplies have been contaminated and reduced.
Despite studies prepared privately and by the Department of State
Lands (Montana) in 1992 which found no evidence of earlier claims,
the plaintiff continues to seek alternative legal approaches against
the defendants. Initial discovery proceedings were completed in 1995.
The Company believes the claims are without merit and will continue
to defend itself vigorously. The Company and other third parties
filed for a Summary Judgement for dismissal of this lawsuit and have
received favorable disposition thereof, awaiting execution by federal
court.
F-17
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
14. COMMITMENTS AND CONTINGENCIES, CONTINUED:
(d) As at December 31, 1996, the Company has recorded $625,000 as due to
officers for unpaid salaries for the period 1994 through 1996. The
officers have agreed not to make demand for repayment until January
3, 1998. The balance due for 1994 of $165,000 is convertible into
shares of the Company's common stock at $3.00 per share. The
aggregate balance due for 1995 and 1996 of $460,000 is convertible,
at the option of the officers, into shares of the Company's common
stock at $0.65 per share.
(e) During 1994, a former officer of the Company filed a complaint
seeking unpaid vacation pay, together with interest thereon, treble
damages, costs and attorney's fees. The Company subsequently paid the
former officer $20,834 representing the Company's calculation of its
share of amounts owed. Final settlement with the former officer was
reached in 1996, in which the Company agreed to pay an initial
payment of $15,000 and has agreed to pay a final payment of $80,000.
The cost of this settlement is being paid on a 50:50 basis by the
Company and Mahogany. During 1996, the initial payment was made and
the Company has accrued an additional $40,000 for its share of the
settlement. Should Mahogany not honor its commitment to pay its share
of this settlement agreement, the Company will be obliged to pay the
full settlement amount.
15. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
At December 31, 1996, 1995, and 1994, non-cash investing and
financing activities are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Exchange of marketable securities on settlement
of note payable and accrued interest $98,296 $ - $ -
Common stock issued for services rendered 60,000 14,000 -
Common stock issued for offering costs 25,000 - -
Common stock issued on settlement of debt - 436,750 -
Exchange of mineral property interest on settlement
of amounts due to Mahogany - 797,481 -
</TABLE>
16. SEGMENT INFORMATION:
The following summary represents geographic information for the Company's
United States, Chilean and Bolivian operations as of and for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
United States Chile Bolivia Total
------------- ---------- ------- ------------
<S> <C> <C> <C> <C>
1996
Net loss $ (662,557) $ - $ - $ (662,557)
Identifiable assets 1,694,924 1,755,512 171,825 3,622,261
1995
Net loss $ (656,205) $ (265,827) $ - $ (922,032)
Identifiable assets 2,201,249 1,960,133 40,338 4,201,720
1994
Net loss $(1,517,229) $ (553,918) $ - $(2,071,147)
Identifiable assets 2,249,173 2,855,875 - 5,105,048
</TABLE>
16. SEGMENT INFORMATION, CONTINUED:
F-18
<PAGE>
NORTH LILY MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
The following summary represents segmented information for the Company's
activities as of and for the years ended December 31, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
Gold
and Silver Copper Total
------------ ---------- ------------
<S> <C> <C> <C>
1996
Net loss $ (662,557) $ $ (662,557)
Identifiable assets 1,866,749 1,755,512 3,622,261
Depletion and depreciation 3,946 - 3,946
Mineral property expenditures, net 64,957 - 64,957
1995
Net loss $ (656,205) $ (265,827) $ (922,032)
Identifiable assets 1,931,617 2,270,103 4,201,720
Depletion and depreciation 4,932 44,630 49,562
Abandonment of mineral properties 48,397 - 48,397
Mineral property recoveries (43,751) (48,236) (91,987)
1994
Net loss $(1,517,229) $ (553,918) $(2,071,147)
Identifiable assets 2,249,173 2,855,875 5,105,048
Depletion and depreciation 41,875 87,858 129,733
Abandonment of and provision for
mineral properties 497,850 - 497,850
Mineral property expenditures 59,819 240,198 300,017
</TABLE>
F-19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 67,026 122,515
<SECURITIES> 39,655 448,800
<RECEIVABLES> 985 44,687
<ALLOWANCES> 0 0
<INVENTORY> 0 43,207
<CURRENT-ASSETS> 252,666 659,209
<PP&E> 5,746,385 6,061,800
<DEPRECIATION> 2,488,822 2,661,746
<TOTAL-ASSETS> 3,622,261 4,201,720
<CURRENT-LIABILITIES> 527,428 948,115
<BONDS> 625,000<F1> 385,000<F1>
0 0
0 0
<COMMON> 299,212 259,466
<OTHER-SE> 51,663,759 51,264,750
<TOTAL-LIABILITY-AND-EQUITY> 3,622,261 4,201,720
<SALES> 0 0
<TOTAL-REVENUES> 335,833 145,438
<CGS> 0 0
<TOTAL-COSTS> 678,976 951,334
<OTHER-EXPENSES> 308,825 172,644
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,053 17,242
<INCOME-PRETAX> (662,557) (995,782)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (622,557) (995,782)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 73,750
<CHANGES> 0 0
<NET-INCOME> (662,557) (922,032)
<EPS-PRIMARY> (0.23) (0.43)
<EPS-DILUTED> (0.23) (0.43)
<FN>
<F1>Due to Officers.
</FN>
</TABLE>
