UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-6202-2
Nord Resources Corporation
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(Exact name of registrant as specified in its charter)
Delaware 85-0212139
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8150 Washington Village Drive, Dayton Ohio 45458
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 433-6307
Not Applicable
--------------------------------------------------
Former name, former address and former fiscal
year, if changed since last report
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
--- ---
Common shares outstanding as of May 10, 1996: 18,998,408
NORD RESOURCES CORPORATION
AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Financial Statements:
Balance Sheets - March 31,
1996 and December 31, 1995 1
Statements of Operations - Quarters ended
March 31, 1996 and 1995 2
Statements of Cash Flows -
Quarters ended March 31, 1996 and 1995 3
Notes to Condensed Financial Statements 4-10
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11-14
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 15
ITEM 2-5. Inapplicable 15
ITEM 6. Exhibits and Reports on Form 8-K 15
NORD RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(In Thousands)
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
---- ----
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,259 $ 6,054
Restricted Cash - SRL 2,431
Accounts Receivable 6,778 5,541
Accounts Receivable - related party 11 9
Inventories - at lower of cost (first-in, first-out) or market:
Finished and Semi-Finished 1,385 1,271
Supplies 1,634 1,725
----------- -----------
3,019 2,996
Prepaid Expenses 925 459
----------- -----------
TOTAL CURRENT ASSETS 12,992 17,490
RESTRICTED CASH AND INVESTMENTS 2,603 2,607
INVESTMENTS IN AND ADVANCES TO AFFILIATES 8,372 8,338
INVESTMENT IN SRL 64,319 63,517
PROPERTY, PLANT AND EQUIPMENT, net 33,593 34,374
OTHER ASSETS 9,668 9,584
----------- -----------
$ 131,547 $ 135,910
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 3,267 $ 2,705
Accounts Payable - related party 3,814 4,065
Accrued Expenses 1,923 2,132
Obligations to Lenders - SRL 21,471 23,458
Obligations in Default 2,863 2,991
Current Maturities of Long-Term Debt 190 190
----------- -----------
TOTAL CURRENT LIABILITIES 33,528 35,541
LONG-TERM DEBT 1,520 1,520
OTHER LONG-TERM LIABILITIES 7,105 6,863
MINORITY INTEREST 2,548 3,023
STOCKHOLDERS' EQUITY:
Common Stock 158 158
Additional Paid-in Capital 58,137 58,137
Retained Earnings 28,716 30,833
Cumulative Foreign Currency
Translation Adjustment 282 282
Minimum Pension Liability (447) (447)
----------- -----------
86,846 88,963
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$ 131,547 $ 135,910
----------- -----------
----------- -----------
See notes to condensed financial statements
1
NORD RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
QUARTERS ENDED
MARCH 31
--------------------------
1996 1995
---- ----
REVENUES:
Sales $ 8,388 $ 10,277
Other Revenues 225 9
----------- -----------
TOTAL REVENUES 8,613 10,286
OPERATING COSTS AND EXPENSES:
Cost of Sales 9,059 10,017
Selling, General & Administrative Expenses 2,301 2,709
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 11,360 12,726
----------- -----------
(LOSS) FROM OPERATIONS (2,747) (2,440)
OTHER INCOME (EXPENSE)
Interest Income 146 132
Interest Expense (145) (147)
Provision for Impairment of Investment in Rutile Segment (3,000)
Litigation Recoveries 150
Equity in Net Earnings (Loss) of Affiliate 4 (209)
Minority Interest 475 359
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 630 (2,865)
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NET (LOSS) $ (2,117) $ (5,305)
----------- -----------
----------- -----------
NET (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE $ (.13) $ (.33)
----------- -----------
----------- -----------
AVERAGE SHARES 15,838 15,838
----------- -----------
----------- -----------
See notes to condensed financial statements
2
NORD RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF
CASH FLOWS
(In Thousands)
QUARTERS ENDED
MARCH 31
------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $ (2,117) $ (5,305)
Adjustments to reconcile net (loss) to
net cash provided by operating activities:
Changes in Assets and Liabilities (1,384) 2,663
Minority Interest (475) (359)
Depreciation, depletion and amortization 926 916
Provision for Impairment - Investment in SRL 3,000
Equity in Net (Earnings) loss of affiliate (4) 209
-------- --------
Net Cash Provided By (Used In) Operating Activities (3,054) 1,124
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (218)
Additions to Other Assets (228) (274)
Increase in Investments in and Advances to Affiliates (30) (3)
Increase in Investment in SRL (359)
-------- --------
Net Cash (Used In) Investing Activities (617) (495)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Indebtedness (128) (142)
Restricted Cash and Investments 4 31
-------- --------
Net Cash (Used In) Financing Activities (124) (111)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,795) 518
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 6,054 8,946
-------- --------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 2,259 $ 9,464
-------- --------
-------- --------
See notes to condensed financial statements
3
NORD RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1996 AND 1995
1. FINANCIAL STATEMENTS
The balance sheet at December 31, 1995 is condensed financial information
taken from the financial statements, which are audited, but the independent
auditors report included a disclaimer of opinion for an uncertainty
relating to the ability of the Company to continue as a going concern. The
interim financial statements are unaudited. In the opinion of management,
all adjustments, which consist of normal recurring adjustments, except for
the $3 million provision recorded at March 31, 1995 for impairment in the
Company's investment in SRL, necessary to present fairly the financial
position and results of operations for the interim periods presented have
been made. The results shown for the first quarter of 1996 are not
necessarily indicative of the results that may be expected for the entire
year.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of," which requires
review for impairment of long-lived assets whenever changes in
circumstances indicate that the carrying amount of the asset may
not be recoverable. The adoption of SFAS No. 121 has had no effect
on the financial statements at March 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation," which is effective for the Company beginning January
1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue
to apply APB Opinion No. 25, which recognizes compensation cost based on
the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based compensation awards
to employees and will disclose the required pro forma effect on net income
and earnings per share in its year end financial statement.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1995 annual report
to shareholders.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Nord
Resources Corporation, its majority-owned subsidiaries and its 50% interest
in a rutile mining operation ("SRL") (collectively the "Company"). All
significant intercompany transactions and balances are eliminated.
4
SRL as used in these financial statements includes Sierra Rutile Holdings,
Sierra Rutile Limited (the mining operation) and other subsidiaries of the
Company and Sierra Rutile Holdings that are economically dependent on the
mining operation. As a result of the situation described in Note 3, the
Company's 50% investment in SRL is carried at the cost basis of accounting
in the consolidated balance sheets.
Investments in 20% to 40%-owned affiliates and joint ventures and in
affiliates or joint ventures in which the Company's investment may
temporarily be in excess of 40% are carried using the equity method.
On an interim basis, all costs subject to recurring year-end adjustments
have been estimated and allocated ratably to the quarters. Income taxes,
if necessary, have been provided based on the estimated tax rate for the
respective years after excluding infrequently occurring items whose
specific tax effect is reported during the same interim period as the
related transaction.
The accompanying condensed financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
financial statements do not contain any adjustments that might be necessary
should the Company be unable to continue as a going concern.
Certain reclassifications have been made to the March 31, 1995 financial
statements to conform to the classifications used in 1996. These
reclassifications had no effect on results of operations or stockholders'
equity as previously reported.
3. INVESTMENT IN SRL
In January 1995, the Company's 50% owned rutile mining operation in Sierra
Leone was attacked by non-government forces. As a result, SRL was forced
to suspend mining operations and subsequently terminated all nonessential
personnel. The resumption of operations is dependent upon many factors
including existence of adequate security for SRL's employees and the
availability of adequate financing to pay for the cost of resuming
operations. Cost of resuming operations includes repair or replacement of
assets which have incurred damage and deterioration during the period of
suspension of operations and costs to reestablish and train a workforce,
replenish supplies and restore and recommission facilities. Until SRL
personnel can perform a detailed assessment of the condition of SRL's
assets, it is not possible to accurately estimate these costs. In
addition, SRL will likely continue to require funds to satisfy its
obligations incurred while mining is suspended. There is no certainty that
adequate financing would be available to fund the above noted costs,
although management of the Company, SRL and the other 50% owner of SRL are
engaged in discussions with potential financing
5
sources. As a result of the above, management of SRL cannot estimate when
operations will resume at the Sierra Leone mine.
Prior to December 31, 1994, the Company proportionately consolidated its
share in each of the assets, liabilities and operations of SRL. As of
December 31, 1994, the Company adopted the cost basis of accounting for its
investment in SRL because the mine was no longer controlled by SRL. The
Company's investment includes original cost plus undistributed earnings
through December 31, 1994 plus SRL obligations to lenders, payment of which
is guaranteed by the Company, less any related restricted cash.
During the quarter ended March 31, 1996 the Company contributed $359,000 as
its 50% share of funding for SRL's cash needs, primarily to satisfy vendor
payments and the limited ongoing operational needs of SRL.
Summarized financial data for the Company's 50% share of SRL's operations
are as follows:
QUARTERS ENDED
MARCH 31,
----------------------
1996 1995
------- -------
(IN THOUSANDS)
Revenues $ 481 $1,474
Less Costs and Expenses:
Cost of Sales 36 1,632
Selling, General and Administrative 493 1,202
Costs Related to Mine Shutdown 2,169
Provision for Impairment 3,000
Other Expense 486 307
Income Tax Expense 6 58
------- -------
Net Income (Loss) $ (540) $(6,894)
------- -------
------- -------
Included in revenues for 1996 is $409,000 received in an insurance
settlement from claims made for costs related to the evacuation of the SRL
operations in Sierra Leone. Based on current assessments of SRL's assets,
an impairment reserve of $3,000,000 was recorded in the first quarter of
1995 as the Company's 50% share of damage to assets. The Company will
likely record an additional impairment reserve when a more extensive damage
assessment can be performed. Although SRL will likely incur costs to
restart the operations, the amount of an additional impairment and costs to
restart the operations, cannot be estimated currently. If adequate
security in and around SRL's operations is not attainable or the estimated
costs of resuming SRL's operations in Sierra Leone are prohibitive, the
Company may have to record an impairment reserve against a portion or
possibly all of its
6
investment in SRL.
4. MINORITY INTEREST
The minority investor in Norplex, Inc. ("Norplex"), which owns 100% of NKC,
has an option to purchase an additional 31% interest in Norplex from the
Company at a price which increases from $31,000,000 during 1996 to
$36,000,000 through June 30, 1997, after which it expires if unexercised.
Under this option, the price received by the Company would be reduced by an
amount, determined at exercise date, equal to the cumulative amount of
temporary tax differences of Norplex plus operating losses used by the
Company multiplied by Norplex's marginal tax rate and the percentage of
Norplex owned by the investor after exercise. This amount is estimated to
be $5,900,000 at December 31, 1995, if the investor had exercised the 31%
option at that date. Transactions with the minority investor in Norplex
include raw material purchases of $2,714,000 and $3,536,000 during the
quarters ended March 31, 1996 and 1995, respectively.
5. INDEBTEDNESS
As a result of the suspension of its mining operations resulting from civil
disturbances in January 1995, SRL is not in compliance with certain
financial and operational covenants under its financing agreements. The
lenders have agreed to forebear from accelerating the maturities of the
loans or enforcing their rights against any collateral until January 1,
1997 to allow SRL time to determine the damage to the mining operations,
assess the political situation in Sierra Leone and develop and present a
plan for refinancing, rehabilitating and reopening the mining operation.
The forebearance agreement would terminate if there is a material change in
circumstances, including if certain actions are taken by the Company's
lessors as a result of current covenant violations under the leasing
agreements. As of March 31, 1996 and December 31, 1995, amounts due the
lenders by SRL have been classified in the balance sheet as a current
liability.
The financing agreements contain restrictive covenants relating to SRL
including requirements to maintain minimum current and debt coverage ratios
and a limit on indebtedness compared to net worth and a limit on the amount
of dividends. Additional covenants under these agreements include
restrictions on change of control of SRL and limitations on additional
indebtedness at SRL.
Separately, as part of the forebearance, and as security for its guarantee,
the Company has pledged proceeds it may receive from claims made under a
political risk insurance policy issued by an agency of the United States
government. The
7
Company will be able to retain the first $2.7 million of the proceeds. Any
additional proceeds will be held in trust and funds shall be released from
the trust when the Company's 50% share of the deferred principal payments
have been made and no events of default exist under the financing
agreements.
6. LEASES
NKC entered into lease agreements under which $21.7 million of equipment
has been provided to NKC. Payments under the leases are guaranteed by the
Company. Under the terms of the guaranty, the Company is required to
maintain minimum levels of (1) tangible net worth compared to total
liabilities and (2) cash flow relative to current maturities of long-term
debt. The lease agreements also place restrictions on the amount of cash
which NKC may transfer to the Company and limit repayment of advances
previously made by the Company to NKC in the event of a covenant violation.
The Company's ability to comply with the above covenants has been adversely
impacted by the suspension of SRL's operations and the Company is not in
compliance with the cash flow covenant at March 31, 1996. Although the
lessors have not waived or modified the covenant the Company is engaged in
ongoing discussions with the lessors and has received an indication that
certain of the lessors may be willing to waive the covenant violations and
amend or modify the covenant. The lessors have the ability to require
liquidated damages ($13.9 million at March 31, 1996 including the $3.3
million noted below) and could also elect to retain ownership of the leased
equipment. The Company cannot predict that the lessors would agree to any
modifications on terms which would be acceptable to the Company nor their
willingness to continue to refrain from taking any action to enforce their
rights under the lease agreement in the event that a waiver or modification
of the covenant was not obtained.
Certain of the leases have been considered capital leases under generally
accepted accounting principles and, accordingly, an asset has been
recognized by NKC, along with corresponding indebtedness. At March 31,
1996 the net book value of equipment leased under these capital leases was
$2.4 million, while $2.9 million of indebtedness was outstanding. As a
result of the lease covenant violation at March 31, 1996, the indebtedness
outstanding under the capital leases has been classified as an Obligation
in Default and a current liability in the Condensed Balance Sheet at March
31, 1996. The liquidated damages associated with these capital leases was
$3.3 million at March 31, 1996.
If the lessors request payment of liquidated damages, the Company does not
presently have the financial resources available to pay the entire amount
of the liquidated damages. Consequently, the Company would have to seek
additional funds, if available, from as yet undetermined sources, which may
or may not be available to the Company on conditions acceptable to the
Company. If the lessors
8
terminate the leases and take possession of the equipment, such an event
would have a material adverse effect on NKC's ability to operate its
business.
7. NET (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net (loss) per common share and common equivalent share is computed by
dividing net (loss) by the weighted average number of common shares
outstanding during the period adjusted for the dilutive effect of common
share equivalents when applicable.
8. EQUITY IN NET EARNINGS (LOSS) OF AFFILIATE
The Company has a 35% interest in Nord Pacific Limited at March 31, 1996.
Summary financial data for the operations of Nord Pacific Limited for the
periods are as follows:
QUARTERS ENDED MARCH 31
-----------------------
1996 1995
---- ----
(IN THOUSANDS)
Sales $ 3,210 $ 3,048
Less costs and expenses (3,102) (2,732)
Foreign currency transaction gain (loss) (43) (350)
Forward currency exchange contracts
gain (loss) 384 (798)
Copper contracts gain (loss) (301)
Other income 65 142
Provision for taxes (300)
--------- ---------
Net (loss) $ (87) $ (690)
--------- ---------
--------- ---------
The Company's share of the net (loss) for the quarters ended March 31, 1996
and 1995 was $(31,000) and $(243,000), respectively.
9. LITIGATION
The Company has reached settlements with all defendants in SRL's action
against those allegedly responsible for certain allegedly improper and
fraudulent transactions against SRL which occurred prior to 1991. The
financial statements of the Company for the quarter ended March 31, 1996
include a final payment of
9
$150,000 in other income in connection with these settlements.
10. SUBSEQUENT EVENT
On April 15, 1996 the Company entered into a Stock Purchase and Sale
Agreement with a private investor to whom the Company sold 3,160,000 shares
of Common Stock for $7,900,000, or $2.50 per share. Also on April 15, 1996
the Company entered into a loan agreement with the same investor whereby
$2,100,000 was loaned to the Company. The loan bears interest at 7% and
principal and interest are due and payable on April 15, 1997. The loan
will be converted into 840,000 shares of the Company's Common Stock subject
to approval of the transaction by the Company's shareholders at the June
1996 annual meeting and listing of the shares by the New York Stock
Exchange.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased from $6.1 million at December 31, 1995 to $2.3 million at March
31, 1996. The Company's operating activities used $3.1 million in cash during
the first quarter of 1996. Cash of $228,000 was used for additions to other
assets and $359,000 was advanced to SRL during the first quarter of 1996. The
Company's cash flow from operating activities for the first quarter of 1996
benefitted from the receipt of $150,000 as payment relating to the settlement of
litigation.
The Company anticipates that its domestic (non-SRL) operations will require cash
to fund its activities during 1996. Operations at NKC are projected to improve
so that during the second half of 1996 NKC could generate cash to repay a
portion of the advances previously made by the Company. However, repayment of
such advances would be prohibited under the NKC lease agreements in the event
that covenant violations continue. This improvement in cash flow of the kaolin
segment is expected to result from increasing levels of sales of its Norplex-
Registered Trademark- line of products, the amount and timing of which cannot be
projected with any certainty. The Company also expects to be required to fund
SRL's operating cash needs as further described below.
On April 15, 1996 the Company entered into a Stock Purchase and Sale Agreement
with a private investor to whom the Company sold 3,160,000 shares of Common
Stock for $7,900,000, or $2.50 per share. Also on April 15, 1996 the Company
entered into a loan agreement with the same investor whereby $2,100,000 was
loaned to the Company. The loan bears interest at 7% and principal and interest
are due and payable on April 15, 1997. The loan will be converted into 840,000
shares of the Company's Common Stock subject to approval of the transaction by
the Company's shareholders at the June 1996 annual meeting and listing of the
shares by the New York Stock Exchange.
The Company expects that the $10 million received from this stock sale and loan
would provide sufficient cash for the Company's working capital needs throughout
1996 to allow NKC to continue to establish a market for its Norplex products and
to fund its share of the ongoing costs of maintaining SRL until a plan is
commenced for resuming its operations. However, SRL's cash needs relating to a
refurbishing of capital equipment and a restart of operations is likely to cause
the Company to seek additional sources of funds during 1996. These sources
could include proceeds from claims filed under the Company's political risk
insurance policies (currently limited to $2.7 million available to the Company
under the bank financing agreements) or obtaining external funding at SRL to
reduce demands on the Company's cash balances. However, the Company cannot
determine if any financing sources would be available at terms acceptable to the
Company and SRL. Unless the
11
Company is successful in obtaining additional funding, its cash reserves may be
inadequate for it to fund the costs for SRL to resume its operations or to
satisfy any demands for payment from the NKC's lessors or from SRL's lenders as
described below.
The Company has filed an initial claim for damage due to political violence at
SRL under one of its political risk insurance policies. Additional claims are
likely to be filed as more information becomes available as to damage at the SRL
mine and the cost to repair equipment. The Company is not able to estimate the
amount or timing of payments which may be received from claims under this
policy. The Company has pledged any proceeds in excess of $2.7 million it may
receive under this policy as security under the bank financing agreements.
As a result of the suspension of its mining operations resulting from civil
disturbances in January 1995, SRL is not in compliance with certain financial
and operational covenants under its financing agreements. The lenders have
agreed to forebear from accelerating the maturities of the loans or enforcing
their rights against any collateral until January 1, 1997 to allow SRL time to
determine the damage to the mining operations, assess the political situation in
Sierra Leone and develop a plan for refinancing, rehabilitating and reopening
the mining operation. The forebearance agreement would terminate if there is a
material change in circumstances, including if certain actions are taken by
NKC's lessors as a result of current covenant violations under the leasing
agreements. As of March 31, 1996 and December 31, 1995, amounts due the lenders
by SRL have been classified in the balance sheet as a current liability.
Due to the lengthy suspension of its production, SRL has been and will continue
to be relying on funds from the Company and its other 50% owner to sustain
operations. In addition, SRL will need to seek funds through additional bank
financing or from other undetermined sources when a decision is made to resume
operations in Sierra Leone. SRL is unable to determine the amount of funds
which will be required for this purpose or if adequate funds would be available
from undetermined sources on conditions acceptable to SRL and the Company.
Payments under lease agreements at NKC are guaranteed by the Company. The
guarantee requires the Company to maintain minimum levels of tangible net worth
compared to total liabilities and of cash flow relative to current maturities of
long-term debt. The lease agreements also place restrictions on the amount of
cash which NKC may transfer to its owners and limitations on the repayment of
advances previously made by the Company to NKC in the event of a covenant
violation. At March 31, 1996, the Company was in violation of the cash flow
covenant and has requested a waiver of the covenant from the NKC lessors.
Although the Company has not received a waiver of the covenant the Company is
engaged in ongoing discussions with the lessors and has received an indication
that certain of the lessors may be willing to waive the covenant violations and
amend or modify the covenant. The lessors have the ability to require
liquidated damages ($13.9 million at March 31, 1996) and could also elect to
retain ownership of the leased equipment. The Company cannot predict whether or
not lessors would agree to any
12
modifications on terms which would be acceptable to the Company or their
willingness to continue to refrain from taking any action to enforce their
rights under the lease agreement in the event that a waiver or modification of
the covenant was not obtained.
RESULTS OF OPERATIONS
The Company incurred a net loss for the quarters ended March 31, 1996 and 1995
of $2.1 million and $5.3 million, respectively. Since the Company has adopted
the cost basis of accounting for its investment in the rutile segment, the
results for 1996 and 1995 do not include any amounts relating to its operations;
however, the Company recorded a $3.0 million impairment against its investment
in the rutile segment in 1995. The kaolin segment reported an increase in
operating loss in 1996 compared to 1995 as a result of a decrease in revenue and
an increase in certain raw material costs in 1996 compared to 1995. The Company
recorded $4,000 as its share of earnings from Nord Pacific for the first quarter
of 1996 compared to a loss of $209,000 for the first quarter of 1995. Interest
expense in the first quarter of 1996 was comparable to 1995. An analysis of the
changes in revenues, cost of sales and operating earnings (before interest and
income taxes) for the kaolin segment ("NKC") is contained below.
Revenues decreased to $8.4 million in the quarter ended March 31, 1996 compared
to $10.3 million during the same period of 1995. Revenues for Norcal-Registered
Trademark- and conventional products for the first quarter of 1996 were $608,000
and $1.9 million compared to revenues of $1.1 million and $2.7 million for those
products in the first quarter of 1995. Norplex-Registered Trademark- revenues
decreased to $5.9 million in 1996 compared to $6.5 million in 1995. NKC has
been affected by weak demand for its products which began in the fourth quarter
of 1995. The paper industry, which comprises the market for NKC's products, has
been particularly stagnant with lesser demand for paper products resulting in
mill down time and a weaker demand for NKC's products. Although the demand for
Norplex-Registered Trademark- products has been affected by these economic
conditions, the number of Norplex-Registered Trademark- customers remains
constant and the trialing activity of the Norplex-Registered Trademark- products
is at a high level.
Cost of sales as a percentage of sales was 108% for the first quarter of 1996
compared to 97% for the same period in 1995, due primarily to the aforementioned
decrease in sales revenue and also increases in the cost of certain raw
materials.
An operating loss of $1.7 million was incurred during the first quarter of 1996
compared to $1.2 million during the same period of 1995. Revenues from all
NKC's products decreased in the first quarter of 1996 compared to 1995, as a
result of weak demand for the Company's products as noted above.
NKC has incurred annual operating losses beginning in 1989 due primarily to the
costs associated with development and market introduction of its Norplex-
Registered Trademark- products and a longer than anticipated new product
introduction period. In addition, in the early 1990's lower
13
demand and prices for certain of its products as a result of the recession
contributed to NKC's operating losses. As a result of the above circumstances,
NKC had not been able to generate sufficient sales volume at adequate prices to
recover its fixed and variable costs of production during this period. This
situation improved during 1994 compared to prior years and the sales volume and
prices of Norplex-Registered Trademark- products had reached levels sufficient
to recover the fixed and variable production costs and to begin to fund the
selling, general and administrative costs of NKC. However, during 1995 and
continuing into the first quarter of 1996, lower sales volumes of Norcal-
Registered Trademark- and conventional products and higher cost of production
caused increased operating losses. The Company expects the aforementioned weak
market for the NKC's products to continue into the second quarter of 1996. NKC
is attempting to recover lost sales volumes in those two product-lines until
such time as the volume of Norplex-Registered Trademark- products are at a level
to generate adequate operating earnings. However, until the level of Norplex-
Registered Trademark- sales volume and prices improve, NKC will likely continue
to experience operating losses. The Company cannot precisely estimate when or
if adequate sales levels of Norplex-Registered Trademark- products will be
achieved or the level of operating losses which will be incurred during the
future periods. However, NKC continues to anticipate additional conversions of
customers to the Norplex-Registered Trademark- products and future testing and
conversion at a number of different customer locations which, if successful,
would likely benefit future operating results.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Form 10-K for the fiscal year ended December
31, 1995 for a discussion of certain litigation, which has been settled,
involving the Company's 50% owned subsidiary, Sierra Rutile Limited.
ITEMS 2-5.
Inapplicable.
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
15
Signature
Pursuant to the requirements 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.
NORD RESOURCES CORPORATION
(Registrant)
/s/ Terence H. Lang
---------------------------------
Terence H. Lang
Senior Vice President - Finance
(Principal Financial Officer and
Authorized Officer)
DATE: May 14, 1996
16