<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-19182
Nord Pacific Limited
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Brunswick Not Applicable
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 Wellington Row
St. John, New Brunswick E2L 4S3
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (506) 633-3800
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares of Common Stock outstanding as of November 13, 1998 was
12,960,803.
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NORD PACIFIC LIMITED
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Financial Statements:
Balance Sheets - September 30, 1998
and December 31, 1997 3-4
Statements of Operations - Three and nine
months ended September 30, 1998 and 1997 5
Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11-14
PART II. OTHER INFORMATION:
ITEM 1-5. Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NORD PACIFIC LIMITED
BALANCE SHEETS
ASSETS
(Unaudited)
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 201 $ 3,351
Accounts receivable:
Trade 1,720 1,313
Affiliates 198 53
Subscribed shares receivable -- 2,700
Other 39 90
------- --------
1,957 4,156
Inventories:
Copper 139 137
Supplies 159 204
------- --------
298 341
Premium on copper contracts 26 760
Prepaid expenses 87 137
------- --------
113 897
------- --------
TOTAL CURRENT ASSETS 2,569 8,745
DEFERRED COSTS ASSOCIATED WITH ORE UNDER
LEACH, net of accumulated amortization
of $15,001 in 1998 and $11,518 in 1997 8,917 8,970
PROPERTY, PLANT AND EQUIPMENT -
at cost less accumulated depreciation
of $6,555 in 1998 and $5,488 in 1997 3,653 4,737
DEFERRED EXPLORATION AND DEVELOPMENT
COSTS: Girilambone, net of accumulated
amortization of $2,620 in 1998 and
$1,883 in 1997 4,403 4,335
Other projects 17,794 13,492
OTHER ASSETS 79 118
------- --------
$37,415 $40,397
------- --------
------- --------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
NORD PACIFIC LIMITED
BALANCE SHEETS (Continued)
LIABILITIES AND
SHAREHOLDERS' EQUITY
(Unaudited)
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable:
Trade $ 1,397 $ 975
Affiliates 383 168
------- -------
1,780 1,143
Accrued expenses 512 1,484
Income taxes payable -- 1,200
Payable on copper contracts 26 760
Forward currency exchange contracts 1,446 2,099
Current maturities of long-term debt 368 2,548
Obligation under purchase agreement -- 650
------- -------
2,352 8,741
------- -------
TOTAL CURRENT LIABILITIES 4,132 9,884
LONG-TERM LIABILITIES:
Foreign currency exchange contracts 1,594 --
Long-term debt 1,111 313
Deferred income tax liability 4,840 4,840
Retirement benefits 124 104
------- -------
7,669 5,257
SHAREHOLDERS' EQUITY:
Common stock 647 618
Common stock subscribed -- 2,677
Additional paid-in capital 46,728 44,022
Accumulated deficit (22,559) (22,859)
Foreign currency translation adjustment 798 798
------- -------
TOTAL SHAREHOLDERS' EQUITY 25,614 25,256
------- -------
$37,415 $40,397
------- -------
------- -------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
NORD PACIFIC LIMITED
STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands of U.S. Dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
SALES $3,802 $4,401 $10,447 $12,526
COSTS AND EXPENSES:
Cost of sales 2,616 2,307 7,721 6,540
Abandoned projects -- (93) 95 303
General and administrative 670 815 2,109 2,938
------ ------ ------- -------
TOTAL COSTS AND EXPENSES 3,286 3,029 9,925 9,781
------ ------ ------- -------
OPERATING EARNINGS 516 1,372 522 2,745
------ ------ ------- -------
OTHER INCOME (EXPENSE):
Interest and other income 75 131 209 198
Interest and debt issuance costs (70) (115) (190) (439)
Loss on forward currency exchange
contracts (350) (474) (1,180) (1,053)
Gain (loss) on copper contracts -- (101) -- 281
Foreign currency transaction
gain (loss) (1) 124 (261) 212
------ ------ ------- -------
TOTAL OTHER INCOME (EXPENSE) (346) (435) (1,422) (801)
------ ------ ------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES 170 937 (900) 1,944
INCOME TAX BENEFIT (EXPENSE) 1,200 (500) 1,200 (1,900)
------ ------ ------- -------
NET EARNINGS $1,370 $ 437 $300 $ 44
------ ------ ------- -------
------ ------ ------- -------
BASIC EARNINGS PER SHARE $.11 $.04 $.02 $--
------ ------ ------- -------
------ ------ ------- -------
DILUTED EARNINGS PER SHARE $.09 $.03 $.02 $--
------ ------ ------- -------
------ ------ ------- -------
BASIC WEIGHTED AVERAGE COMMON
SHARES (In thousands) 12,961 12,418 12,908 10,844
------ ------ ------- -------
------ ------ ------- -------
DILUTED WEIGHTED AVERAGE
COMMON SHARES (In thousands) 14,605 13,822 14,552 11,706
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
NORD PACIFIC LIMITED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 300 $ 44
Changes in assets and liabilities 2,096 (365)
Depreciation and amortization 5,389 3,483
------- -------
Net cash provided by operating activities 7,785 3,162
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (64) (385)
Deferred exploration and development costs (5,811) (3,363)
Deferred costs associated with ore under leach (3,430) (3,100)
------- -------
Net cash used in investing activities (9,305) (6,848)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock offering proceeds -- 12,300
Cost associated with issuance
of common stock (5) (1,332)
Addition to long-term debt -- 3,071
Debt repayments (1,383) (4,073)
Net borrowings from Nord Resources Corporation -- 259
Stock option activity -- 183
------- -------
Net cash provided by (used in) financing activities (1,388) 10,408
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (242) 54
------- -------
(DECREASE) IN CASH AND CASH EQUIVALENTS (3,150) 6,776
CASH AND CASH EQUIVALENTS - beginning of period 3,351 439
------- -------
CASH AND CASH EQUIVALENTS - end of period $ 201 $ 7,215
------- -------
------- -------
CASH PAID FOR INTEREST $ 190 $ 421
------- -------
------- -------
NON-CASH TRANSACTIONS:
Purchase of derivative financial instruments $ -- $448
------- -------
------- -------
Conversion of advances due Nord Resources
Corporation into Common Stock $ -- $ 1,748
------- -------
------- -------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
NORD PACIFIC LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
A. FINANCIAL STATEMENTS OF NORD PACIFIC LIMITED (THE "COMPANY")
These interim consolidated financial statements are unaudited. In the opinion
of management, all adjustments, which consist of normal recurring accruals,
necessary to present fairly the financial position and results of operations for
the interim periods presented have been made. The results shown for the three
and nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the entire year.
In June 1998 the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
standards for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not yet determined the effect of SFAS No.
133 on its financial statements.
The Accounting Standards Executive Committee ("AcSEC") of the AICPA has issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities" effective for financial statements for fiscal years beginning after
December 31, 1998. SOP 98-5 requires that the costs of start-up activities,
including organization costs, be expensed as incurred. The Company has not yet
determined the effect of SOP 98-5 on its financial statements.
The Company has adopted SFAS No. 129, "Disclosure of Information about Capital
Structure", which was effective for financial statements for periods ending
after December 15, 1997 and established standards for disclosing information
about an entity's capital structure. The adoption of SFAS No. 129 had no
significant effect on the Company's disclosures about its capital structure.
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
was effective for financial statements for periods beginning after December 15,
1997 and established standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The adoption of SFAS No. 130 has not had
a material impact on the Company's financial statement presentation or related
disclosures.
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which was effective for fiscal years
beginning after December 15, 1997 and established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
operates in one business segment and the Company's adoption of SFAS No. 131 has
not had a material impact on its financial statement presentation or related
disclosures.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report
7
<PAGE>
on Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made in the 1997 financial statements to
conform to the classification used in 1998. These reclassifications had no
effect on results of operations or shareholders' equity as previously reported.
B. TAXATION
The provision for income taxes for the three and nine months ended September 30,
1997 represents estimated taxes due on the profitable operations of the
Girilambone Copper Property in Australia. The effective tax rate differs from
the statutory tax rate primarily because losses in other countries cannot be
used to offset taxable earnings in Australia. The income tax benefit for the
three and nine months ended September 30, 1998 represents the benefit for losses
incurred in Australia and the adjustment of income taxes provided in prior
periods.
C. GIRILAMBONE
The Company is a 40% joint venturer in the Girilambone Copper Property and a 50%
joint venturer in the Girilambone North Copper Property (collectively
"Girilambone") in Australia. All costs incurred during mine development have
been capitalized and are being amortized using the units of production method
over the estimated reserves. Following is summarized combined balance sheet
information for Girilambone:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In Thousands of U.S. Dollars)
<S> <C> <C>
Current assets $ 2,784 $ 1,638
Deferred costs associated with ore under leach, net 18,571 19,934
Property, plant and equipment, net 8,168 10,541
Deferred exploration and development costs, net 20,336 16,602
------- -------
Total assets 49,859 48,715
Current liabilities 3,923 2,230
------- -------
Partners' equity $45,936 $46,485
------- -------
------- -------
Company's share of equity $16,499 $18,846
Less: Eliminations (415) (1,587)
------- -------
Net assets recorded by the Company $16,084 $17,259
------- -------
------- -------
</TABLE>
8
<PAGE>
Debt incurred related to Girilambone is the separate responsibility of each
venturer and is not included in the joint ventures' financial statements.
Copper production is distributed to each venturer based on its respective
ownership interest. Sale of copper is the responsibility of each venturer.
Cost and expense information related to the operations of the mine is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- -------
(In Thousands of U.S. Dollars)
<S> <C> <C> <C> <C>
Cost of copper sales $6,294 $5,686 $18,596 $16,041
General and administrative expenses $ 79 $ 116 $ 265 $ 359
</TABLE>
D. INDEBTEDNESS
The Company has a financing agreement (the "Agreement") with an Australian
commercial bank (the "Bank") which is secured by the Company's Girilambone
assets. During the quarter ended September 30, 1998, the Company and the Bank
amended this Agreement to provide for a total facility limit of up to $3,600,000
through the first quarter of 1999. This limit decreases to $$3,400,000 on
September 30, 1999, $2,400,000 on December 31, 1999, $1,100,000 on March 31,
2000 and must be repaid in full by June 30, 2000. The amount due under the
Agreement bears interest at Singapore Interbank Offered Rates ("SIBOR") plus
1-1/2 %. Principal payments are made quarterly at the greater of 50% of
available cash flow or the amount required to reduce the loan balance to the
facility limit. The Agreement also provides a $4,000,000 margin free facility
to cover the Company's exposure under its foreign currency exchange contracts
with the Bank.
During the period this loan is outstanding, the Company is required to maintain
a cash reserve account with the Bank. Pending the completion of the
documentation of the amendment to the Agreement, the Bank has allowed the
Company to use the proceeds in this cash reserve account for general corporate
purposes. All cash proceeds generated from Girilambone operations are required
to be deposited with the Bank and must be used to pay any project costs, bank
fees, interest, principal and reserve account funding before any cash is
available to the Company. As collateral for the loan, the Bank holds a security
interest in the Australian assets of the Company including the Company's share
of assets of and production from Girilambone. The loan balance at September 30,
1998 was $1,479,000.
E. FINANCIAL INSTRUMENTS
The Company utilizes certain financial instruments, primarily put option
contracts and forward currency exchange contracts. These financial instruments
are utilized to reduce the risk associated with the volatility of commodity
prices and fluctuations in foreign currency exchange rates, particularly the
Australian dollar. The Company does not hold or issue financial instruments for
trading purposes.
COPPER AGREEMENTS
In November 1996, the Company purchased put options at a cost of $.08 per pound
of copper for 4.0 million pounds of copper maturing ratably each month from
January through March 1998. In April 1997, the Company purchased put options at
a cost of $.05 per pound of copper for an additional 11.9 million pounds of
copper maturing ratably each month from April through December 1998. This
hedging program is intended to mitigate
9
<PAGE>
the effect of price changes on substantially all of the Company's expected
copper sales through December 31, 1998 and guarantees that the Company will
receive a minimum gross price of $.90 per pound. The premiums are payable
upon the expiration of each contract.
Sales for the three and nine months ended September 30, 1998 include gains of
$513,000 and $969,000 respectively and sales for the same periods ended
September 30, 1997 include losses of $29,000 and $556,000 respectively, realized
in settlement of copper hedging contracts.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Company has entered into forward exchange contracts to protect against
Australian currency fluctuations related to payment of a portion of the expected
operating costs of Girilambone. Realized and unrealized gains and losses on
these contracts are included in the results of operations. Outstanding
contracts at September 30, 1998 total $11,600,000 and mature in monthly
installments of $800,000 at an average exchange rate of A$1.00 = US$0.8078.
The Company is exposed to copper price fluctuations and currency risks in the
event of nonperformance by the counterparties to the various agreements
described above. The Company anticipates, however, that the counterparties will
be able to fully satisfy their obligations under the agreements. The Company
does not obtain collateral or other security to support financial instruments
subject to credit risk.
F. NORD RESOURCES CORPORATION
Nord Resources Corporation ("Resources") owns approximately 28.5% of the
outstanding common stock of the Company. In 1997, Resources provided certain
services to the Company under a management agreement. Resources was reimbursed
for all direct expenses and its overhead associated with the operations of the
Company at approximately $7,000 per month as per the management agreement.
Management believes that the costs that would have been incurred had the Company
obtained such services on a stand-alone basis would have approximated the
amounts paid to Resources. In December 1997, Resources closed its office in
Dayton, Ohio and moved its administrative functions to Albuquerque, New Mexico.
The Company currently shares office space, administrative personnel and other
related expenses with Resources on a 50/50 basis. The balance due to Resources
under this cost sharing arrangement totaled $312,000 at September 30, 1998.
G. DIFFERENCE BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
The condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP"). Under U.S. GAAP, SFAS No. 123 requires options issued to non-employees
to be accounted for at their estimated fair value with a corresponding expense
recorded in the financial statements. Canadian GAAP has no similar requirement.
As a result, under Canadian GAAP, earnings before income taxes and net earnings
would be increased for the nine months ended September 30, 1998 and 1997, by
$62,000 and $80,000 respectively, and general and administrative expense would
be reduced by the same amount.
H. CONTINUANCE INTO CANADA.
On June 25, 1998 the Company's shareholders approved the discontinuance of the
Company in Bermuda and the continuance in the Province of New Brunswick, Canada.
The Continuance was effective September 30, 1998.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995. The
statements contained in this report which are not historical fact are "forward
looking statements" that involve various important risks, uncertainties and
other factors which could cause the Company's actual results for 1998 and beyond
to differ materially from those expressed in such forward looking statements.
These factors include, without limitation, the risks and factors set forth below
as well as other risks previously disclosed in the Company's securities filings.
RESULTS OF OPERATIONS
Nord Pacific Limited (the "Company") recorded net earnings of $300,000 for the
nine months ended September 30, 1998 compared to net earnings of $44,000 for the
same period in 1997. Operating earnings for the nine months ended September 30,
1998 totaled $522,000 compared to $2,745,000 for the comparable period in 1997.
The Company's share of copper sold for the nine months ended September 30, 1998
totaled 12,079,000 pounds compared to 11,794,000 for the same period in 1997, an
increase of 285,000 pounds. For the nine months ended September 30, 1998,
before taking into account the Company's hedging activities, the Company
received $.78 per pound of copper sold compared to $1.09 per pound received for
the comparable period in 1997. The copper hedging programs established by the
Company resulted in an increase in sales of $969,000 for the nine months ended
September 30, 1998 compared to a decrease in sales of $556,000 for the same
period in 1997. Including the impact of the copper hedging programs, the
Company realized a net average selling price per pound of $.86 for the first
nine months of 1998 compared to $1.06 for the same period in 1997.
Cost of sales per pound of copper was $.64 for the nine months ended September
30, 1998 as compared to $.55 per pound for the same period in 1997. Cost of
sales as a percentage of sales increased to 74% as compared to 52% for the same
period in 1997 due primarily to lower sales revenues due to the drop in copper
prices and to increased depletion, depreciation and amortization.
The Company incurred costs totaling $95,000 associated with general exploration
and abandoned properties for the nine months ended September 30, 1998 compared
to costs totaling $303,000 for the same period in 1997.
General and administrative costs ("G & A") decreased $829,000 to $2,109,000 for
the nine months ended September 30, 1998 compared to $2,938,000 for the nine
months ended September 30, 1997. Salaries and related payroll tax and benefit
costs were reduced due to the closing of the Dayton office, as were rent and
utilities. Reductions in professional fees and public relations costs also
contributed to the decrease in G & A costs.
Interest and other income increased for the nine months ended September 30, 1998
compared to the same period in 1997 due to additional funds available for
investment in early 1998. Interest expense and amortization of debt issuance
costs decreased for the nine months ended September 30, 1998 compared to the
same period in 1997 due to smaller debt balances outstanding in 1998 as a result
of debt paydowns in 1997 and 1998. Fluctuations in gains and losses in the
foreign currency exchange contracts and in foreign currency transactions are
primarily a result of changes in the relative strength of the Australian dollar
("A$") compared to the U.S. dollar ("US$"). Due to the strong US$, the company
recorded a $1,180,000 loss on forward currency exchange contracts for the first
nine months of 1998 compared to a loss of $1,053,000 for the same period in 1997
and a loss of $261,000 on foreign currency transactions for the nine months
ended September 30, 1998 compared to a gain of $212,000 for the same period in
1997. The Company recorded a gain of $281,000 for the nine months ended
September 30, 1997 on marking its copper swap and call option contracts to
market. The Company had no copper swap or call option contracts outstanding in
1998.
11
<PAGE>
The results of operations for the nine months ended September 30, 1997 included
a $1,900,000 provision for income taxes in Australia due to the profitable
operations of the Girilambone Copper Property. Due to losses at this property
and to adjustments related to income taxes provided in prior periods, the
Company recorded a $1,200,000 income tax benefit for the nine months ended
September 30, 1998.
The Company recorded net earnings of $1,370,000 for the three months ended
September 30, 1998 compared to net earnings of $437,000 for the same period in
1997. Operating earnings for the three months ended September 30, 1998 totaled
$516,000 compared to operating earnings of $1,372,000 for the comparable period
in 1997. The Company's share of copper sold for the three months ended
September 30, 1998 totaled 4,328,000 pounds compared to 4,282,000 for the same
period in 1997. For the three months ended September 30, 1998, before taking
into account the Company's copper hedging activities, the Company received $.76
per pound of copper sold compared to $1.03 per pound received for the comparable
period in 1997. The copper hedging programs established by the Company resulted
in an increase in sales of $513,000 for the three months ended September 30,
1998 compared to a decrease in sales of $29,000 for the same period in 1997.
Including the impact of the copper hedging programs, the Company realized a net
average selling price per pound of $.88 for the three months ended September 30,
1998 compared to $1.06 for the same period in 1997.
Cost of sales per pound of copper was $.60 for the three months ended September
30, 1998 as compared to $.54 per pound for the same period in 1997 and cost of
sales as a percentage of sales increased to 69% as compared to 52% for the same
period in 1997 due primarily to lower sales revenues due to the drop in copper
prices and to increased depletion, depreciation and amortization.
The Company recovered costs totaling $93,000 associated with abandoned
properties for the three months ended September 30, 1997. There were no such
recoveries for the three months ended September 30, 1998.
G & A decreased $145,000 to $670,000 for the three months ended September 30,
1998 compared to $815,000 for the three months ended September 30, 1997.
Salaries and related payroll tax and benefit costs were reduced due to the
closing of the Dayton office, as were rent and utilities. Reduction in
professional fees and public relations costs also contributed to the decrease in
G & A costs.
Interest and other income decreased for the three months ended September 30,
1998 compared to the same period in 1997 due to additional funds available for
investment in 1997. Interest expense and amortization of debt issuance costs
decreased for the three months ended September 30, 1998 compared to the same
period in 1997 due to smaller debt balances outstanding in 1998 as a result of
debt paydowns in 1997 and 1998. Fluctuations in gains and losses in the foreign
currency exchange contracts and in foreign currency transactions are primarily a
result of changes in the relative strength of the Australian dollar ("A$")
compared to the U.S. dollar ("US$"). Due to the strong US$, the Company
recorded a loss of $350,000 on forward currency exchange contracts for the three
months ended September 30, 1998 compared to a loss of $474,000 for the same
period in 1997and a loss of $1,000 on foreign currency transactions for the
three months ended September 30, 1998 compared to a gain of $124,000 for the
same period in 1997. The Company recorded a loss of $101,000 for the three
months ended September 30, 1997 on marking its copper swap and call option
contracts to market. The Company had no copper swap or call option contracts
outstanding in 1998.
The results of operations for the three months ended September 30, 1997 included
a $500,000 provision for income taxes in Australia due to the profitable
operations of the Girilambone Copper Property. Due to losses at this property
and to adjustments related to income taxes provided in prior periods, the
Company recorded a $1,200,000 income tax benefit for the three months ended
September 30, 1998.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash at September 30, 1998 was $201,000 compared to $3,351,000 at December 31,
1997. Cash of $7,785,000 was provided during the nine months ended September
30, 1998 by the Company's operating activities compared to $3,162,000 for the
same period in 1997. During the nine months ended September 30, 1998, the
Company expended cash to fund exploration and development activities totaling
$5,811,000 compared to $3,363,000 for the same period in 1997 of which $805,000
related to properties near Girilambone, $705,000 related to the Tabar gold
project, $3,988,000 related to the Ramu project, with the remaining $313,000
expended for other projects. The Company expended $3,430,000 for its share of
deferred costs associated with ore under leach at Girilambone for the nine
months ended September 30, 1998 compared to $3,100,000 in 1997. During 1997,
the Company borrowed $3,071,000 from two lenders. The Company made principal
payments totaling $1,383,000 during the nine months ended September 30, 1998
under various financing agreements compared to $4,073,000 in 1997.
On July 3, 1997 the Company completed the closing of an offering in Canada (the
"Canadian Offering"). The Canadian Offering consisted of the sale of 2,460,000
Units consisting of one common share and one-half of one purchase warrant (the
"Warrant"). Each full Warrant entitled the holder to purchase one of the
Company's common shares at C$9.00. The Warrants expired in July, 1998. The
Company received gross proceeds totaling $12,300,000 (C$16,974,000) and after
payment of commissions and legal fees, received net proceeds totaling
$10,968,000 (C$15,150,000).
The Company is in the exploration phase of all its projects except Girilambone.
Additional efforts on all exploration projects will be required to determine the
extent to which they will be commercially viable and whether the deferred
exploration costs ultimately will be realized. If commercially viable resources
are identified, the Company will have to seek external sources of financing to
fund development of these resources. The Company has negotiated an amendment to
its current debt agreement to provide additional working capital of up to
$2,121,000 through the first quarter of 1999. The Company is also pursuing
other sources of financing including equity financing and project financing.
Due to the current state of the mining industry, there can be no assurance that
the Company will be able to secure such financing. In the event that additional
financing is not obtained, the Company may be required to seek additional
partners or curtail exploration and development activity until such time as the
Company can secure financing.
YEAR 2000 UPDATE
In January 1998, the Company initiated the Year 2000 project to address the
issue of computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000. The project involves
converting to Year 2000 compliant accounting software, testing existing
software, hardware and operational systems and communicating with third-party
customers and external services to ensure that they are taking appropriate
action to remedy their Year 2000 issues.
The Company is in the process of purchasing Year 2000 compliant accounting
software. The Company believes the purchase and installation of this software
will be completed by September 30, 1999. The Company's local area network and
PC hardware and non-accounting software, such as spreadsheets and word
processing, have been tested and, to the best of the Company's knowledge, are
Year 2000 compliant. Other non-information technology systems, such as the
telephone system and other office equipment, are currently being assessed for
Year 2000 readiness. Management expects to have substantially all of the system
and application changes except for the accounting software, completed by January
1999 and expects to complete testing of substantially all systems and
applications by June 30, 1999.
13
<PAGE>
The Company believes that the computer systems and applications it maintains
would not have a material impact on the operations of the Company or it's
revenues in the event that the systems fail to operate in the Year 2000. A
contingency plan to replace any non-compliant systems has been developed. If
the conversion to Year 2000 compliant accounting software is not complete by
December 31, 1999, the Company may be able to use compliant spreadsheet
software until the accounting software is operational. A decision regarding the
contingency plan will be made by June 30, 1999.
The computer systems at the Girilambone copper mine, which provides
substantially all of the Company's revenue, has been reviewed for Year 2000
compliance. Preliminary results appear positive and the final results and
recommendations are expected to be addressed by the end of 1998. The Company
will continue to monitor the operation at Girilambone to ascertain whether it
has attained Year 2000 compliance.
The Company is maintaining communications with material third parties and has
received notification from its building manager, its bank, the NASDAQ and the
Toronto Stock exchanges and other external services indicating their expectation
to be Year 2000 compliant. Further, the Company is preparing surveys for
distribution to its customers, major vendors and other material external service
providers to ascertain their state of Year 2000 readiness. It is anticipated
that these surveys will be completed and distributed on or about December 15,
1998. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations or financial condition.
The estimated total cost of Year 2000 testing and compliance is expected to be
approximately $50,000, which includes costs related to the purchase and
conversion to Year 2000 compliant accounting software. No costs directly related
to the Year 2000 issue have been incurred to date. The costs of the project and
the expected completion dates are based on management's best estimates.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) There were no reports filed under Form 8-K during the quarter ended
September 30, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORD PACIFIC LIMITED
November 13, 1998 By: /s/ Ray W. Jenner
-------------------------------
Ray W. Jenner
Vice President Finance
and Authorized Officer
16
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORD PACIFIC
LIMITED FORM 10-Q FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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