-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KxT/UJOJECuJJbnZ/KKVUwTxTQcn41cswmnmjkAMCmtaMGF62cF/hglv5hYOGF9o XwGaueCENRxjEa6fADnS3w== 0000041304-97-000029.txt : 19970815 0000041304-97-000029.hdr.sgml : 19970815 ACCESSION NUMBER: 0000041304-97-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL OAK MINES INC CENTRAL INDEX KEY: 0000041304 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 980160821 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04350 FILM NUMBER: 97663791 BUSINESS ADDRESS: STREET 1: 5501 LAKEVIEW DR CITY: KIRKLAND STATE: WA ZIP: 98033 BUSINESS PHONE: 4258228992 MAIL ADDRESS: STREET 1: 5501 LAKEVIEW DR CITY: KIRKLAND STATE: WA ZIP: 98033 10-Q 1 =============================================================================== 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 June 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission File Number 1-4350 ROYAL OAK MINES INC. - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) ONTARIO, CANADA 98-0160821 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) c/o Royal Oak Mines (USA) Inc. 5501 Lakeview Drive Kirkland, Washington U.S.A. 98033 ------------------------------- ------------------------------ (Address of principal executive (Postal/Zip Code) offices) (425) 822-8992 ------------------------------ Registrant's telephone number, including area code 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No _ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common shares outstanding as of July 31, 1997 was 140,835,079. This includes 1,924,816 shares which are owned by a wholly owned subsidiary of the Company and may not be voted, and are not considered outstanding for accounting matters, including earnings per share calculations. ================================================================================ INDEX Page PART I - FINANCIAL INFORMATION........................................ 3 Item 1. Consolidated Financial Statements of Royal Oak Mines Inc. and Subsidiaries (All statements are unaudited except for the December 31, 1996 Consolidated Balance Sheet, which has been audited.) Consolidated Balance Sheets - June 30, 1997 and December 31, 1996........................................ 4 Consolidated Statements of Income - Three and Six Months Ended June 30, 1997 and 1996.................................. 5 Consolidated Statements of Cash Flow - Three and Six Months Ended June 30, 1997 and 1996............................ 6 Notes to Consolidated Financial Statements (unaudited)...... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 13 PART II - OTHER INFORMATION........................................... 17 Item 2. Submission of Matters to a Vote of Security Holders......... 17 Item 6. Exhibits and Reports on Form 8-K............................ 17 Signatures............................................................ 19 In this Report, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars. PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements All tabular amounts are in thousands of Canadian dollars, except as indicated. (see Notes 1 and 7). Consolidated Balance Sheets (unaudited - Cdn$ 000's) June 30 December 31 1997 1996 (audited) ========== =========== ASSETS Current Assets Cash and cash equivalents $ 72,254 $197,766 Marketable securities 590 590 Receivables 66,344 17,492 Inventories 51,485 61,844 Prepaid expenses 8,362 7,729 -------- -------- Total Current Assets 199,035 285,421 Property, Plant and Equipment, net 493,558 482,733 Long-Term Investments 61,414 44,255 Deferred Charges and Other Assets 9,869 9,221 -------- -------- TOTAL ASSETS $763,876 $821,630 ======== ======== LIABILITIES Current Liabilities Accounts payable $ 25,263 $ 21,094 Accrued payroll costs 3,102 3,514 Accrued reclamation costs 2,010 -- Deferred revenue and capital leases 8,893 13,508 Income and other taxes payable 4,816 3,894 Senior subordinated notes interest payable 9,831 10,180 Other current liabilities 16,376 20,383 -------- -------- Total Current Liabilities 70,291 72,573 Deferred Revenue and Other Liabilities 38,597 35,205 Deferred Reclamation Costs 20,988 17,622 Senior Subordinated Notes 241,728 239,680 Deferred Income Taxes 843 5,064 Minority Interest in Subsidiary Companies 89 120 -------- -------- TOTAL LIABILITIES 372,536 370,264 -------- -------- SHAREHOLDERS' EQUITY Capital Stock Common stock Authorized - unlimited Outstanding - 138,910,263 (Dec. 31, 1996 - 138,845,263) 378,989 378,813 Retained Earnings 12,351 72,553 -------- -------- TOTAL SHAREHOLDERS' EQUITY 391,340 451,366 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $763,876 $821,630 ======== ======== The accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Statements of Income (unaudited - Cdn$ 000's except per share amounts) Three months ended Six months ended June 30 June 30 ------------------ ------------------- 1997 1996 1997 1996 ========= ======== ======== ======== REVENUE $ 58,979 $ 54,797 $106,463 $105,846 -------- -------- -------- -------- EXPENSES Operating 51,006 39,310 94,058 81,339 Royalties and marketing 447 846 871 1,408 Administrative and corporate 3,544 2,694 6,196 4,843 Depreciation and amortization 6,158 5,954 11,950 11,030 Reclamation 1,246 177 2,376 336 Exploration and other 1,319 1,449 2,666 2,409 Provision for loss on currency and commodity contracts 7,357 (209) 9,875 (976) -------- -------- -------- -------- Total operating expenses 71,077 50,221 127,992 100,389 -------- -------- -------- -------- OPERATING INCOME (LOSS) (12,098) 4,576 (21,529) 5,457 OTHER INCOME (EXPENSE) Interest and other income, net 547 1,121 2,499 2,503 Interest expense (69) (64) (187) (103) Senior subordinated notes interest (6,503) -- (12,847) -- Senior subordinated notes interest capitalized 5,544 -- 9,964 -- Foreign currency translation on senior subordinated notes 490 -- (2,048) -- Write-down of mine assets (39,700) -- (39,700) -- -------- -------- -------- -------- NET INCOME (LOSS) BEFORE UNDERNOTED (51,789) 5,633 (63,848) 7,857 Income and mining taxes - current (313) (368) (639) (723) Income and mining taxes - deferred -- (1,466) 4,221 (2,006) Minority interest (5) 3 31 30 Equity in income of associated companies 18 (53) 33 (53) -------- -------- -------- -------- NET INCOME (LOSS) (52,089) 3,749 (60,202) 5,105 RETAINED EARNINGS - BEGINNING OF PERIOD 64,440 79,894 72,553 78,538 -------- -------- -------- -------- RETAINED EARNINGS - END OF PERIOD $ 12,351 $ 83,643 $ 12,351 $ 83,643 ======== ======== ======== ======== EARNINGS (LOSS) PER SHARE $ (0.38) $ 0.03 $ (0.43) $ 0.04 ======== ======== ======== ======== Weighted average number of common shares outstanding (000's) 138,884 138,196 138,864 135,006 ======== ======== ======== ======== The accompanying notes are an integral part of the Consolidated Financial Statements.
Consolidated Statements of Cash Flow (unaudited - Cdn$ 000's) Three months ended Six months ended June 30 June 30 ------------------ ------------------ 1997 1996 1997 1996 ======== ======== ======== ======== CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Consolidated net income (loss) for the period $ (52,089) $ 3,749 $(60,202) $ 5,105 Items not affecting cash: Depreciation and amortization 6,158 5,954 11,950 11,030 Reclamation 1,246 177 2,376 336 Deferred income tax -- 1,466 (4,221) 2,006 Provision for loss on currency and commodity contracts 7,357 (209) 9,875 (976) Foreign currency translation on senior subordinated notes (490) -- 2,048 -- Deferred charges and other 223 51 91 169 Write-down of mine assets 39,700 -- 39,700 -- -------- -------- -------- -------- CASH FLOW 2,105 11,188 1,617 17,670 Net change in other operating items (7,713) 8,113 (73,476) (2,035) -------- -------- -------- -------- Net cash provided by (used in) operating activities (5,608) 19,301 (71,859) 15,635 -------- -------- -------- -------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Issue of common shares 65 359 177 114,359 Capital lease payable (249) 1,019 (527) 939 Deferred credits and other (18) (25) (18) 1,485 -------- -------- ------- -------- Net cash provided by (used in) financing activities (202) 1,353 (368) 116,783 -------- -------- ------- -------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Investment in Kemess capital assets through purchase of companies -- -- -- (201,976) (Increase)decrease in long-term investments (17,846) -- (17,846) 26,882 Investment in capital assets through purchase of Consolidated Professor Mines Limited -- (2,592) -- (15,844) Investment in other capital assets, net (15,426) (12,788) (30,736) (32,216) Investment in exploration and non-producing properties, net (2,377) (3,626) (4,068) (5,692) Change in other assets (48) (3,027) (635) (6,270) -------- -------- -------- -------- Net cash used in investing activities (35,697) (22,033) (53,285) (235,116) -------- -------- -------- -------- INCREASE (DECREASE) IN CASH AND MARKETABLE SECURITIES DURING PERIOD (41,507) (1,379) (125,512) (102,698) CASH AND MARKETABLE SECURITIES AT BEGINNING OF PERIOD 114,351 41,062 198,356 142,381 -------- -------- -------- -------- CASH AND MARKETABLE SECURITIES AT END OF PERIOD $ 72,844 $ 39,683 $ 72,844 $ 39,683 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 69 $ 47 $ 13,386 $ 86 Income taxes $ 25 $ 175 $ 65 $ 530 Cash consists of cash and short-term investments. The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (tabular amounts in thousands of Canadian dollars unless otherwise stated) 1. Interim Financial Statements Accounting Policies The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which, in the case of Royal Oak Mines Inc. (the "Company"), differ in certain material respects from United States generally accepted accounting principles ("U.S. GAAP"), as described in Note 7. Also, such statements do not include all of the disclosures required by generally accepted accounting principles for annual statements. In the opinion of management all adjustments considered necessary for fair presentation have been included in these statements. Operating results for the three and six months ended June 30, 1997, are not necessarily indicative of the results that may be expected for the full year ending December 31, 1997. For further information, see the Company's Consolidated Financial Statements, including the accounting policies and notes thereto, included in the Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 1996. The calculations of net earnings per share are based upon the weighted average number of common shares of the Company outstanding during each period (except as set forth in Note 11(b)). When outstanding convertible instruments materially dilute earnings per share, fully diluted earnings per share are disclosed. 2. Presentation Certain amounts for 1996 have been reclassified to conform with the current year's presentation. 3. Interest and Other Income, Net Three months ended Six months ended June 30 June 30 ------------------ ---------------- 1997 1996 1997 1996 --------- ------- ------- ------- Interest income $ 1,241 $ 336 $ 3,218 $ 1,360 Gain on sale of securities -- 2,285 -- 2,731 Other, net (694) (1,500) (719) (1,588) --------- ------- ------- ------- Interest and other income, net $ 547 $1,121 $ 2,499 $ 2,503 ========= ======= ======= =======
4. Inventories June 30 December 31 1997 1996 -------- ----------- Bullion in process $18,614 $25,687 Stores and operating supplies 32,871 36,157 ------- ------- Inventories $51,485 $61,844 ======= =======
5. Net Change in Other Operating Items Three months ended Six months ended June 30 June 30 -------------------- ------------------- 1997 1996 1997 1996 --------- --------- -------- -------- Cash provided by (used in): Receivables $(16,086) $ (96) $(49,452) $ (366) Inventories 10,680 1,733 (10,441) (26,693) Prepaid expenses 4,449 (2,059) (1,833) (2,904) Accounts payable, accrued payroll and other current liabilities (10,091) (10,815) (7,817) 2,431 Deferred revenue (1,661) 19,112 (2,845) 25,097 Income taxes payable 338 238 922 400 Long-term reclamation reclassified to current period 4,658 -- (2,010) -- -------- -------- -------- -------- Net change in other operating items $ (7,713) $ 8,113 $(73,476) $ (2,035) ======== ======== ======== ========
6. Reclamation and Environmental Remediation The Company's current and proposed mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect its employees, the general public and the environment and believes its operations are in compliance with all applicable laws and regulations, in all material respects. The Company believes it has complied, and expects in the future to comply, with such laws and regulations, including making all required expenditures. Where estimated reclamation and closure costs are reasonably determinable, the Company has recorded a provision for environmental liabilities, using the unit- of-production method, based on management's estimate of these costs. Such estimates are subject to adjustment based on changes in laws and regulations and as new information becomes available. 7. Reconciliation to United States Generally Accepted Accounting Principles Reconciliation of net income in accordance with Canadian GAAP to net income in accordance with U.S. GAAP is as follows: Three months ended Six months ended June 30 June 30 ------------------ ------------------ 1997 1996 1997 1996 -------- ------- -------- ------- Net income in accordance with Canadian GAAP $(52,089) $ 3,749 $(60,202) $ 5,105 Adjustments: Depreciation and amortization 3,133 (1,517) 2,355 (2,233) Income taxes -- 531 -- 782 -------- ------- -------- ------- Net income in accordance with U.S. GAAP $(48,956) $ 2,763 $(57,847) $ 3,654 ======== ======= ======= ======= Earnings (loss) per share in accordance with U.S. GAAP $ (0.35) $ 0.02 $ (0.42) $ 0.03 ======== ======= ======== =======
The effects on the balance sheets of the Company at June 30, prepared in accordance with U.S. GAAP, are: June 30 ------------------ 1997 1996 -------- -------- Increase (decrease): Property, plant and equipment $ 7,077 $ 66,877 Prepaid expenses (pension asset) $ (552) $ (359) Long-term investment in equity securities $(17,701) -- Deferred income taxes $ 19,377 $ 80,122 Provision for unrealized loss on long-term investments (contra- equity account) $(17,701) -- Retained earnings $(12,852) $(13,604)
Statement of Financial Accounting Standards No. 109 requires that a deferred tax liability be recognized for differences between the assigned values and the tax bases of the assets and liabilities recognized in a business combination involving a purchase of stock. Canadian GAAP does not require similar recognition. Accordingly, during the six months ended June 30, 1997, a difference between U.S. GAAP and Canadian GAAP arose for the deferred tax liabilities associated with the excess of the assigned values and the tax bases of assets acquired in the acquisition of Geddes Resources Limited and Consolidated Professor Mines Limited. The effect of these differences is to increase property, plant and equipment and deferred income taxes by $21.0 million as of June 30, 1997. Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities, requires that marketable securities be put into one of two categories: trading securities (securities which are bought and held principally for the purpose of selling them in the near term) or available-for-sale securities (investments not classified as trading securities). SFAS 115 requires that unrealized gains and losses on available-for-sale securities should be excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. Canadian GAAP requires no recognition or reporting of unrealized losses unless the loss is considered permanent. 8. Acquisition of Geddes Resources Limited, El Condor Resources Ltd. and St. Philips Resources Inc. On January 11, 1996, the Company acquired all of the outstanding shares of Geddes Resources Limited ("Geddes"), El Condor Resources Ltd. ("El Condor") and St. Philips Resources Inc. ("St. Philips") not already owned by the Company pursuant to an arrangement (the "Plan of Arrangement") on the following terms: Geddes: 0.30 shares of the Company for each share of Geddes. El Condor: 0.95 shares of the Company plus $2.00 cash for each share of El Condor. St. Philips: $3.40 cash for each share of St. Philips. As a result of these transactions, the Company issued 19,011,883 common shares of the Company and paid approximately $56 million in cash pursuant to the Plan of Arrangement. The January 11, 1996 closing price on The Toronto Stock Exchange for the Company's common shares was $6.00. This price was used to value the common shares of the Company issued under the Plan of Arrangement. At the time of acquisition, St. Philips, with its wholly owned subsidiary, and El Condor jointly owned the Kemess South property. El Condor owned 100% of the Kemess North property. The following table outlines the details of the purchase price and its allocation to the assets and liabilities acquired: El St. Geddes Condor Philips Total -------- -------- -------- -------- Purchase price: Cash paid, including open market purchases $ 3,220 $ 34,222 $ 38,562 $ 76,004 Issue of common shares 37,650 76,421 -- 114,071 -------- -------- -------- -------- 40,870 110,643 38,562 190,075 Initial carrying value of Geddes 9,192 -- -- 9,192 Transaction and other costs 2,290 680 679 3,649 -------- -------- -------- -------- 52,352 111,323 39,241 202,916 Cash and cash equivalents acquired from companies (561) (1) (378) (940) -------- -------- -------- -------- Total $ 51,791 $111,322 $ 38,863 $201,976 ======== ======== ======== ======== Allocated to: Property, plant and equipment $ 52,101 $112,087 $ 39,015 $203,203 Other assets 31 151 9 191 Total liabilities (341) (916) (161) (1,418) -------- -------- -------- -------- Total $ 51,791 $111,322 $ 38,863 $201,976 ======== ======== ======== ========
9. Acquisition of Consolidated Professor Mines Limited On February 5, 1996, the Company made a public offer to purchase all of the outstanding common shares of Consolidated Professor Mines Limited ("Consolidated Professor"), consisting of approximately 20 million common shares, at a cash price of $0.80 per share. By June 30, 1996, the Company had purchased all shares tendered and acquired all remaining shares in accordance with compulsory acquisition procedures, for a total purchase price of $16.3 million. The purchase price, net of cash acquired on the acquisition of $0.3 million, has been assigned as follows: Capital assets $15.9 million Miscellaneous net assets 0.1 million ----- Purchase price, net of cash acquired $16.0 million ===== 10. Credit Line The Company has a $28 million unsecured, revolving line of credit with a major Canadian bank. This line will be used as necessary to finance working capital for current operations. At June 30, 1997, the Company had drawn $2.3 million in the form of letters of credit. 11. Capital Stock (a) Changes in capital Number of shares Amount ----------- -------- Balance, December 31, 1995 121,043,530 $270,811 Issued to acquire Geddes and El Condor (See note 8) 19,011,883 114,071 Issued for share purchase options 87,833 288 ----------- -------- Balance, June 30, 1996 issued and outstanding 140,143,246 385,170 Company shares held by Witteck Development Inc. (see note 11(b)) (1,924,816) (8,854) ----------- -------- Balance, June 30, 1996 for financial reporting purposes 138,218,430 $376,316 =========== ======== Balance, December 31, 1996 140,770,079 $387,667 Issued for share purchase options 65,000 176 ----------- -------- Balance, June 30, 1997 issued and outstanding 140,835,079 387,843 Company shares held by Witteck Development Inc. (see note 11(b)) (1,924,816) (8,854) ----------- -------- Balance, June 30, 1997 for financial reporting purposes 138,910,263 $378,989 =========== ========
(b) Company shares held by Witteck Development Inc. During 1995, the Board of Directors and the shareholders approved the acquisition of all of the shares of Witteck Development Inc. ("Witteck") whose sole asset is an investment in the Company of 1,924,816 common shares of the Company. This investment has been recorded as a reduction of capital stock on the balance sheet. Consequently, the common shares of the Company that are held by Witteck may not be voted and have been excluded from the determination of earnings per share information. 12. Long-Term Debt On August 12, 1996, the Company completed the sale of US$175 million principal amount of 11% Senior Subordinated Notes due 2006 (the "Notes"). The Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and to certain other accredited institutional buyers. On October 9, 1996, an exchange offer was made to exchange the Notes for Series B 11% Senior Subordinated Notes due 2006 (the "Series B Notes"), pursuant to a Registration Statement on Form S-4 filed under the Securities Act of 1933, as amended. This exchange offer expired on November 5, 1996, and all US$175 million principal amount of Notes were exchanged for Series B Notes. The Series B Notes are unsecured senior subordinated obligations of the Company and, as such, will be subordinated in right of payment to all existing and future senior indebtedness of the Company. The Series B Notes are guaranteed by Kemess Mines Inc., a wholly owned subsidiary of the Company. The Series B Notes and interest payments are denominated in U.S. dollars. 13. Write-down of Mine Assets On May 29, 1997 the Company announced, as a result of the current weak gold price and the diminishing ore reserves at the Colomac Mine in the Northwest Territories, it would make a provision to write-down the Colomac assets in the quarter ending June 30, 1997. The pre-tax provision is $39.7 million. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. REVENUE Revenue from the sale of gold for the three months ended June 30, 1997 increased $4.2 million or 8% to $59.0 million, from $54.8 million in the same period of 1996. Increased revenues during the three month period ended June 30, 1997 as compared to the same period of 1996, were primarily attributed to a 15% or 13,398 ounce increase in gold production. However, it should be noted that increased revenues associated with increased production volumes in the second quarter of 1997 were offset by declines in realized gold prices. Average realized gold prices decreased 8% or US $33 per ounce from the average realized gold price of US $439 per ounce reported for the second quarter 1996. Revenue from the sale of gold for the six month period ended June 30, 1997 increased $0.7 million or 1% to $106.5 million from revenues of $105.8 million reported for the same period in 1996. Increased revenues were mainly attributed to increased gold production of 10,282 ounces. These increases were however, offset by lower realized gold prices. The average realized gold price for the six month period ended June 30, 1997 was US $405 per ounce as compared to the average realized gold price of US $431 per ounce for the same period in 1996. Second Quarter Production Profiles (equivalent ounces of gold): 3 Months Ended 3 Months Ended Division June 30, 1997 June 30, 1996 Increase Northwest Territories Giant 22,981 18,388 4,593 Colomac 32,387 31,753 634 Ontario 26,307 24,780 1,527 Newfoundland 23,170 16,526 6,644 Total equivalent ounces 104,845 91,447 13,398
EXPENSES Operating expenses increased 30% or $11.7 million to $51.0 million for the second quarter 1997, from $39.3 in the same period in 1996. This was primarily due to higher levels of production during the second quarter of 1997 as compared to those of the comparable period for 1996. Increased production volumes were attributed to the timing differences in the temporary shutdown of the Hope Brook mill and operational difficulties experienced at the Giant Mine during the second quarter of 1996. The 1997 planned production shutdown at the Hope Brook mill occurred during January and February, while the 1996 temporary mill shutdown occurred during March and April. Giant's operational difficulties during 1996 stemmed from lower productivity in the mine and delays in bringing the higher grade Supercrest deposit to full production. On a cost per ounce basis second quarter 1997 cash costs per ounce of gold increased 11% or US $36 per ounce over the operating cash cost per ounce of US $315 reported for the second quarter 1996. This was reflective of the continued decline in head grades and mill recovery rates at the high cost Hope Brook and Colomac mines, which are now scheduled for closure during the third and fourth quarters of 1997 respectively. It is anticipated that closure of these high cost operations will produce lower operating cash costs for the remainder of 1997. Royalties and marketing expenses for the second quarter of 1997 declined 47% or $0.4 million from the 1996 second quarter amount of $0.8 million. Cost declines were attributed to the expiration of the Hope Brook royalty agreement at the end of 1996. Administrative and corporate expenses increased $0.8 million or 32% over the amount in the second quarter of 1996 of $2.7 million, bringing the second quarter 1997 cost to $3.5 million. Cost increases were mainly attributed to increased manpower to manage the strategic growth of the Company. Depreciation and amortization costs for the second quarter of 1997 of $6.2 million increased $0.2 million or 3% over the amount of $6.0 million reported for the comparable period in 1996. Increased depreciation and amortization costs in the second quarter of 1997 were primarily associated with increased production volumes. Increased depreciation and amortization costs were, however, substantially offset by the elimination of Hope Brook depreciation costs due to the 1996 write-down of the assets to their net realizable value and the impact of additional ore reserves added in late 1996. Reclamation costs increased during the second quarter of 1997 to $1.2 million from $0.2 million in the same period of 1996. The Company applies the unit-of-production method based on estimated total mineral inventory in calculating the charge to income for reclamation. Increases in reclamation costs were mainly attributed to higher mill production volumes at the Colomac Mine and write-downs in Colomac gold ore reserve estimates at the end of 1996. Exploration expenditures are periodically reviewed and assessed as to their future economic value in light of strategic plans, gold price forecasts and potential ore reserves. Those reserves determined to be of little or no future economic value are written-down or written-off to income in that period of determination. Exploration costs for the second quarter of 1997 were determined to be $1.3 million as compared to the amount reported in the same period for 1996 of $1.4 million. Exploration spending will continue to be carefully managed throughout the remainder of 1997 and further contained if gold prices continue to weaken. The gold price used in estimating the company's ore reserves at December 31, 1996 was $527 (US $390) per ounce of gold. The market price for gold is currently below these levels. If the Company determines that ore reserves should be calculated at a significantly lower price than used at December 31, 1996, there would likely be a material reduction in the amount of economic gold reserves and potential gold prospects. Should such a reduction occur, material write-downs of the Company's investment in mining properties and/or increased amortization charges may be required. The Company enters into foreign currency and commodity contracts to minimize exposure to adverse fluctuations in foreign currency exchange rates associated with US dollar gold sales and commodity prices. A loss on hedging activity of $7.4 million was recorded in the second quarter of 1997, as compared to a $0.2 million gain in the same period of 1996. The majority of the loss was related to foreign currency hedges brought about by a continued weakening of the Canadian dollar. The provision for loss recorded for the six months ended June 30, 1997 was $9.9 million as compared to a gain of $1.0 million for the same period in 1996. Interest expense accrued on the Senior Subordinated Notes for the three and six month periods ended June 30, 1997 was $6.5 and $12.8 million, respectively. Interest expense was, however, partially offset by interest income earned on and interest capitalized from, the proceeds of the Senior Subordinated Notes used to invest in marketable securities or expended on long-term construction projects, primarily the Kemess project. The Company's Senior Subordinated Notes are denominated in United States dollars. Generally accepted accounting principles require the translation of these notes at the exchange rate in effect at the balance sheet date. This resulted in the Company recognizing a gain on translation of its Senior Subordinated Notes of $0.5 million for the three month period ended June 30, 1997 and a loss on translation of $2.1 million for the six month period ended June 30, 1997. No gains or losses were recorded during comparable periods of 1996, as the Senior Subordinated Notes were not issued until August of 1996. A write-down provision of $39.7 million was recognized during the three month period ended June 30, 1997. The provision was necessary to write-down Colomac assets to net realizable value. Declining gold prices, high operating costs and diminishing ore reserves at the Colomac Mine contributed to the decision to close the Colomac Mine in October of 1997 and recognize a loss in asset value. Mining and income taxes for the three month period ended June 30, 1997 decreased $1.5 million or 83% as compared to taxes recognized in the same period of 1996. Mining and income taxes for the six month period ended June 30, 1997 decreased $6.3 million or 231% as compared to taxes recognized for the same period in 1996. Decreases in tax expense were a direct result of net losses incurred. No deferred tax assets were recognized during the three month period ended June 30, 1997. Generally accepted accounting principles disallow recognition of deferred tax assets unless ultimate realization of the tax asset is virtually certain. The Company currently holds long-term investments in equity securities of other gold mining companies. Current market values for those securities are below original investment cost by approximately $18 million, due mainly to recent declines in spot gold prices. Generally accepted accounting principles (as referenced in Note 7 to the financial statements) does not require recognition of a provision for loss on long-term investments unless the Company determines the loss in value to be permanent in nature. The Company will continue to monitor spot gold price movements and the market value of all long-term investments for purposes of recognizing a permanent impairment to investments held. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 the Company had cash, cash equivalents and marketable securities of $72.8 million compared to $114.4 million at March 31,1997 and $198.4 million at December 31, 1996. OPERATING ACTIVITIES Net cash used by operating activities for the three month period ended June 30, 1997 was $5.6 million compared to net cash provided by operating activities of $19.3 million in the same period of 1996. Net cash used by operating activities for the six month period ended June 30, 1997 was $ 71.9 million compared to net cash provided by operating activities of $15.6 million for the same period of 1996. Reduced cash flows from operations during 1997 as compared to the same periods of 1996 were primarily attributed to declining gold prices, higher operating costs at the Hope Brook and Colomac Mines, reduced interest income on declining cash balances and increased investments in working capital. The increase in working capital in early 1997 was brought about by the need to supply the Colomac Mine with operating and maintenance supplies over a winter ice road, and the recognition of the receivable from the B.C. Government in conjunction with construction of the Kemess project. The consumption of supplies inventory at the Colomac Mine through the second quarter of 1997 and receipts of cash against receivables (mainly that relating to the B.C. Government) significantly reduced the Company's investment in working capital by the end of the second quarter. This reduction is expected to continue through the balance of 1997. FINANCING ACTIVITIES Net cash used in financing activities for the three month period ended June 30, 1997 was $0.2 million compared to net cash provided of $1.4 million for the same period in 1996. The higher cash provided in the 1996 period was mainly due to limited issues of share capital and capital lease financing which required lease payments during 1997. Net cash used by investing activities for the six month period ended June 30, 1997 was $0.4 million compared to net cash provided of $116.8 million in the same period of 1996. The higher cash provided during 1996 was primarily related to the issuance of share capital of $114.4 million to fund the acquisition of the Kemess property. INVESTING ACTIVITIES Net cash used in investing activities during the three-month period ended June 30, 1997 was $35.7 million compared to $22.0 million for the same period of 1996. The higher cash usage in 1997 reflected the Company's strategic investment in equity securities of other companies. Increased spending on the Kemess project was virtually offset by funding from the B.C. Government. A formal written agreement between the Company and the B.C. Government confirming the B.C. Government's commitment to partially fund the Kemess project was finalized on June 27, 1997. Net cash used for investing activities during the six month period ended June 30, 1997 was $53.3 million compared to net cash used of $235.1 million during the same period in 1996. Higher cash usage during the 1996 period was related to the acquisition of the Kemess property for the aggregate consideration of approximately $202 million and the acquisition of all the shares of Consolidated Professor Mines Limited for the total consideration of approximately $16 million. The Company has recently revised its estimate of the total cost of the Kemess project to approximately $427.0 million from $390.0 million. The principal reasons for the increase are the additional stumpage fees payable to the B.C. Government related to the power line clearing and the additional cost associated with the modification made to the design of both the tailings line and the tailings dam. The Company expects to fund the completion of the project from current cash and securities in treasury, investment and economic assistance from the B.C. Government, from cash expected to be provided from current operations in the next three quarters, as well as from approximately $90 million in permitted debt capacity and equipment lease financing. The Company is currently negotiating an increase in its line of credit. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS With the exception of historical statements, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on numerous variables and assumptions that are inherently uncertain and could cause actual results to be materially more or less favorable than projected, including without limitation general economic and competitive conditions and other factors. Among such factors are those related to volatility in the price of gold, copper and other commodities, changes in interest and foreign exchange rates, government regulation and agency action, competing land claims, the accuracy of estimates of ore reserves and mineral inventory, environmental costs and risks, unanticipated processing, access, transportation of supplies, water availability or other problems, other factors relating to the Company's ability successfully to complete development projects within projected capital budgets or to carry on mining operations within projected operating budgets and the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission, including without limitation the Company's Annual Report on Form 10-K for the year ended December 31, 1996, Part I:, Item 7, Risks and Uncertainties. PART II - OTHER INFORMATION Item 2. Submission of Matters to a Vote of Security Holders. (A) The Company's Annual and Special Meeting of Shareholders was held on May 29, 1997. (C) Four proposals were submitted for shareholder approval, all of which were passed with the following voting results: 1) All seven of the Company's directors were re-elected to serve until the next annual meeting of shareholders, based on the votes as tabulated below: Votes abstained, Votes not voted or Nominee Votes for withheld spoiled --------------------- ---------- ------------------------- Margaret K. Witte 81,408,763 1,182,917 905,291 Ross F. Burns 82,406,518 185,162 905,291 William J.V. Sheridan 82,375,443 216,237 905,291 J. Conrad Lavigne 82,340,085 251,595 905,291 John L. May 82,406,018 185,662 905,291 George W. Oughtred 82,404,243 187,437 905,291 Matthew Gaasenbeek 82,366,565 225,115 905,291
2. The reappointment of Arthur Anderson & Co., Chartered Accountants, as independent auditors and to authorize the directors to fix their remuneration was approved with 74,410,552 votes for, 393,535 votes against, 120,380 votes withheld and 693,687 votes abstaining, not voted or spoiled. 3. The proposal to approve stock options granted to senior officers and directors of the Company was removed from consideration at the meeting. 4. The proposal to approve the Company's 1997 Executive Performance Incentive Plan was approved with 71,805,889 votes for, 5,818,773 votes against and 5,872,809 votes abstaining, not voted or spoiled. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement between Edmund Szol, Arctic Precious Metals, Inc. and Royal Oak Mines Inc. 27. Financial Data Schedule. (b) Reports on Form 8-K. A report on Form 8-K was filed on May 6, 1997, regarding a press release from Royal Oak Mines Inc., announcing the petition from the Tsay Keh Dene Band to stay the Kemess project has been dismissed. A report on Form 8-K was filed on May 15, 1997, regarding a press release from Royal Oak Mines Inc., announcing first quarter 1997 results of operations. A report on Form 8-K was filed on May 23, 1997, regarding a press release from Royal Oak Mines Inc., announcing the appointment of Edmund Szol as Executive Vice President and Chief Operating Officer. A report on Form 8-K was filed on May 29, 1997, regarding a press release from Royal Oak Mines Inc., announcing the write-down of Colomac assets in the second quarter of 1997. A report on Form 8-K was filed on June 27, 1997, regarding a press release from Royal Oak Mines Inc., announcing an injunction against a roadblock set up by the Tsay Keh Dene Band. A report on Form 8-K was filed on June 27, 1997, regarding a press release from Royal Oak Mines Inc., announcing Royal Oak Mines Inc. receiving funds for the Kemess project upon signing a formal agreement with the B.C. Government. SIGNATURES 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. ROYAL OAK MINES INC. Date: August 14, 1997 By /s/ Margaret K. Witte ------------------------ Margaret K. Witte President and Chief Executive Officer Date: August 14, 1997 By /s/ James H. Wood ------------------------ James H. Wood Chief Financial Officer EXHIBIT INDEX Exhibit Method of Filing - ------- ---------------- 10.1 Employment Agreement dated May 22, 1997, between Edmund Szol, Arctic Precious Metals, Inc. and Royal Oak Mines Inc. Filed herewith 27. Financial Data Schedule Filed herewith EX-27 2
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 CANADIAN 6-MOS DEC-31-1997 JUN-30-1997 1.3813 72,254 590 66,344 0 51,485 199,035 573,376 79,818 763,876 70,291 241,728 0 0 378,989 12,351 763,876 106,463 106,463 127,992 127,992 0 0 1,028 (63,784) (3,582) (60,202) 0 0 0 (60,202) (0.43) (0.43)
EX-10 3 Exhibit 10.1 EMPLOYMENT AGREEMENT THIS AGREEMENT made as of the 22nd day of May 1997 BETWEEN: ARCTIC PRECIOUS METALS, INC. 5501 Lakeview Drive Kirkland, Washington 98033 (Fax No. 206-822-3552) (hereinafter called "Arctic") OF THE FIRST PART - and - EDMUND SZOL 4206 E. Lake Sammamish Parkway S.E. Issaquah, WA 98029 (hereinafter called the "Employee") OF THE SECOND PART - and - ROYAL OAK MINES INC. BCE Place, Suite 2500 181 Bay Street Toronto, Ontario M5J 2T7 (Fax No. 416-365-1719) (hereinafter called "Royal Oak") OF THE THIRD PART WHEREAS Arctic and the Employee wish to enter into a written agreement to record the terms and conditions of the Employee's continued employment with Arctic; AND WHEREAS Arctic's parent company, Royal Oak, has agreed to assume certain obligations herein and to guarantee the performance by Arctic of its obligations to the Employee hereunder; NOW THEREFORE, in consideration of the mutual covenants and agreements herein set out, the parties agree as follows: 1. EMPLOYMENT Employee commenced employment with Arctic on February 27, 1995 and hereby accepts continued employment with Arctic from and after May 22, 1997 on the terms and subject to the conditions herein set forth. 2. DUTIES Subject to instructions which may be received from time to time by the Employee from the Chief Executive Officer of Arctic, the Employee is hereafter engaged by Arctic as Executive Vice-President and Chief Operating Officer and in such other executive capacities as may be determined by the Chief Executive Officer of Arctic from time to time; and,in furtherance of his duties, the Employee shall do the following: (a) serve Arctic faithfully; (b) observe all policies of Arctic and perform all services associated with his position to the best of his ability; (c) devote substantially all of his working time and attention to the business of Arctic, except to the extent otherwise permitted by the Chief Executive Officer; (d) carry out all lawful instructions given to him by the Chief Executive Officer; and (e) endeavour to further the best interests of Arctic. The Employee will be based in Kirkland, Washington but may from time to time be called upon and hereby agrees to perform services elsewhere. 3. TERM The term of this Agreement shall commence May 22, 1997 and continue thereafter indefinitely unless earlier terminated in accordance with the provisions of this Agreement. 4. ANNUAL SALARY AND BONUS In consideration for services rendered hereunder, Arctic shall pay to the Employee the following: (a) Salary: Employee's salary shall be US$200,000 per annum. Arctic agrees to review the salary at least every twelve (12)months and may make adjustments, in its discretion, based on changes in market pay rates for jobs similar to the Employee's, cost of living and such other factors as Arctic deems relevant. (b) Bonus: Employee will be eligible for an annual bonus award to a maximum value of 50 percent of the salary unless Arctic, in its discretion, determines to pay a higher maximum value. The amount of the bonus is based on achievement of predetermined annual performance objectives set for the Employee by the Chief Executive Officer of Arctic and communicated to the Employee at the beginning of the year. 5. OTHER BENEFITS In addition to the annual salary and bonus award provided in paragraph 4 of this Agreement, Arctic shall provide the following benefits to the Employee: (a) Fringe Benefits Arctic shall furnish to the Employee at Arctic's expense such insurance (including, without limitation, medical, dental, vision, hospitalization, life and disability insurance), pension, and other benefits as are provided to senior executives by Arctic including participation in the Company's supplementary executive retirement plan and/or split dollar life insurance program. (b) Stock Options The Employee shall be entitled upon execution of this Agreement to receive 65,000 new options to purchase shares of Arctic's parent company, Royal Oak, which options are exercisable following shareholder approval on a one-third (1/3) basis per year commencing on the first anniversary of the date of this Agreement and valid for a term of seven years with the price of those options fixed at US $2.50. The terms of the option shall be stipulated by Royal Oak in a separate Stock Option Agreement to be executed by Royal Oak and the Employee prior to any options being exercised thereunder. The Employee shall also be eligible for future grants of stock options for shares in Royal Oak on terms applicable to other senior officers of Arctic. (c) Business Expenses Arctic agrees to reimburse the Employee quarterly for all ordinary and necessary business expenses incurred by the Employee in the performance of his duties under this Agreement and the Employee shall provide vouchers and statements in respect of all such expenses in a timely manner. (d) Membership Arctic agrees to provide the employee with one reasonably priced business club membership for the purposes of personal and family use and for entertaining. All meals and sundry expenses for personal use will be to the account of the employee, with Arctic responsible for and paying all reasonable expenses incurred by the Employee for the purpose of entertaining clients and business associates. (e) Vacation The Employee shall be entitled to four weeks of paid vacation during each full calendar year in which he is employed by Arctic pursuant to this Agreement, the timing of such vacation being mutually agreed upon between the Employee and Arctic. Vacation entitlement is non-cumulative and must be taken in the year in which it is earned unless otherwise agreed to in writing by the Chief Executive Officer. (f) Demand Loan The Employee will be eligible to borrow from Arctic an aggregate maximum amount of US $90,000.00 interest free for the purpose of financing a home. Repayment of such loan in the amount of US $15,000.00 per year shall be guaranteed by the Employee and security, in the form of a second mortgage on the said home, shall be provided by the Employee to secure repayment of the loan to Arctic. The terms of the loan shall be stipulated by Arctic in a separate written Loan Agreement to be executed by the Employee and Arctic prior to any advances being made thereunder and shall include a requirement for repayment of any amount then outstanding within 120 days of cessation of the Employee's employment hereunder for any reason whatsoever. 6. TERMINATION AND COMPENSATION AT TERMINATION Notwithstanding anything herein contained to the contrary, this Agreement shall terminate in the following manner and the Employee shall be compensated as indicated: (a) Termination by Arctic for Cause This Agreement and the employment of the Employee may be terminated effective immediately for cause by the giving of written notice of dismissal by Arctic to the Employee. As used herein, "cause" includes, but shall not be limited to, competing with or publicly denigrating the business of Arctic, unauthorized disclosure or use of Confidential Information in breach of paragraph 7 herein, repetition of conduct subject and subsequent to progressive discipline, gross misconduct or gross negligence by the Employee in the performance of his duties hereunder, the commission by the Employee of an act of theft, dishonesty, embezzlement or vandalism against Arctic, its parent Royal Oak or any of their respective related, associated or subsidiary companies, or the conviction of the Employee for any indictable criminal offence or a felony or criminal offence of moral turpitude. If this Agreement is terminated by Arctic for cause, the Employee shall continue to accrue and receive his salary and benefits through to the date of termination indicated in the notice of dismissal only. No additional compensation or payment shall or need be made by Arctic to the Employee. (b) Termination by Arctic Without Cause This Agreement and the employment of the Employee hereunder may be terminated by Arctic effective at any time without cause by giving the Employee at least 24 months' prior written notice of termination. In the event such notice is given, the employment of the Employee shall terminate on the date specified in the said notice. In lieu of notice, Arctic may, in its discretion, terminate the employment of the Employee immediately by making payments to the Employee of all salary and bonus, equal to the salary and bonus received by the Employee with respect to the last completed fiscal year of Arctic prior to such notice and continuing (if possible, and in accordance with applicable statutory provisions, or if not, paying the present value of) all benefits which would have accrued to the benefit of the Employee to the date of termination had the period of notice of termination required by this Agreement been given. The parties hereto acknowledge that this Agreement and the period of notice referred to herein are fair and reasonable in all the circumstances. The Employee hereby acknowledges and agrees that, should Arctic or its parent company, Royal Oak, subsequently take over or otherwise acquire control of additional properties and/or projects which substantially increases the duties and responsibilities of the position of Executive Vice-President and Chief Operating Officer herein assumed, then any reassignment of the Employee by Arctic to the position of Chief Operating Officer of North American Operations or some like position, at a salary and benefits comparable to those held by the Employee prior to any such takeover or acquisition, will not constitute or be deemed to constitute constructive dismissal or termination of the employment of the Employee hereunder. (c) Termination of Change of Control For purposes of this Agreement, "Change in Control" means any one or more of the following: (i) the acquisition by any person or group of related persons or persons acting jointly or in concert of more than 30% of the issued and outstanding common shares of Arctic or its parent company Royal Oak (calculated on a non-diluted basis), whether acquired in a single transaction or a series of transactions, whether or not one or more of those transactions occurred before the date hereof; (ii) the election to the Board of Directors of Arctic or its parent company Royal Oak of persons employed by or representing any one person or group of related persons or persons acting jointly or in concert and constituting 40 percent or more of the Board. Should a Change of Control occur, the Employee's employment with Arctic or any successor corporation shall be hereby guaranteed to age 62 in such senior management or consulting capacity as may be determined by Arctic or its successor corporation at a salary and bonus equal to the salary and bonus received by the Employee with respect to the last completed fiscal year of Arctic, and benefits (on a fully vested basis) comparable to those accorded the Employee prior to such Change of Control. Should the Employee elect to pursue such guaranteed employment to age 62, he hereby agrees to fully and capably perform all duties assigned to him by Arctic or its successor corporation and waives any subsequent right to or claim for constructive dismissal during the course of such employment and compensation on termination after age 62 beyond the minimum required by law. Conversely, should the Employee elect to reject such guarantee of employment to age 62 and to terminate his employment with Arctic or its successor corporation within the period for election specified below, then the Employee shall be entitled to the compensation and benefit package outlined in subparagraph (b) above and shall be further given the right to immediately exercise all approved outstanding options, subject to confirmation of Exchange approval as specified in each Stock Option Agreement. The Employee shall have three (3) months from the date of any Change of Control to make the election whether to pursue or reject the aforesaid guarantee of employment. The parties hereto acknowledge that this Agreement and the compensation packages proposed in lieu of notice in subparagraphs (b) and (c) herein are fair and reasonable in all the circumstances. (d) Termination by the Employee This Agreement and the employment of the Employee hereunder may be terminated by the Employee upon at least three (3) months' prior written notice to Arctic given at any time. If the Employee so terminates this Agreement and his employment hereunder, he shall continue to accrue and will receive his annual salary and benefits (excluding bonus entitlement) through to the date specified in his notice of termination and no more. Upon receipt of such notice, Arctic may, in its discretion, immediately terminate the employment of the Employee by making payment to the Employee of all salary and continuing (if possible, and in accordance with applicable statutory provisions, or if not possible, paying the present value of) all benefits which would have accrued to the benefit of the Employee to the date of termination specified in his notice of termination. (e) Termination by Mutual Agreement This Agreement and the employment of the Employee hereunder may be terminated by mutual agreement in writing of the parties hereto. The Employee shall continue to accrue and receive his annual salary and benefits through to the date of termination settled upon pursuant to such mutual agreement. The fact of termination of the Employee's employment in accordance with subparagraphs (d) and (e) herein and the terms of such termination shall be maintained as confidential by the Employee and shall not be disclosed to anyone other than Employee's legal and financial advisors until the Employee is so authorized by the Chief Executive Officer of Arctic. (f) Termination by Death The Agreement and the employment of the Employee hereunder shall be terminated by the death of the Employee. All compensation to the Employee shall cease at his death. (g) Termination by Permanent Disability For the purpose of this Agreement, "Permanent Disability" means: the Employee is unable to perform any and every duty of his employment, and such disability may reasonably be expected to exceed a period of six months. If the Employee's employment is terminated due to Permanent Disability, the following compensation shall be paid: 1. salary shall stop at the end of the month in which termination occurs; 2. all employee benefits, except Arctic sponsored medical, accidental and life insurance, shall cease with termination. The medical insurance (with premium waiver for accidental and life insurance) shall continue for the Employee and his dependents for two (2) years under the same cost sharing arrangement as between Arctic and its other employees. Accidental and life coverage shall continue for as long as the Employee remains disabled under the disability plan. The Employee will be given the option, consistent with then existing legislation, to convert medical coverage upon cessation thereof to an individual policy; 3. the bonus payable under paragraph 4 (b) of this Agreement will be payable at year end on a pro rata basis based on the period of employment as a percentage of the full year. If the parties cannot mutually agree upon whether the Employee has a Permanent Disability or when the Employee became Permanently Disabled for the purposes of this Agreement, then Arctic and the Employee shall each appoint one doctor of medicine licensed to practice in the State of Washington and the two doctors so appointed shall determine if the Employee has a Permanent Disability and the time at which he became so Permanently Disabled for the purposes of this Agreement. If the two doctors so appointed cannot agree upon whether the Employee is or when the Employee became Permanently Disabled, they shall appoint a third doctor of medicine licensed to practice in the State of Washington and the decision of the majority shall be binding on both parties hereto and shall not be subject to appeal. 7. CONFIDENTIAL INFORMATION AND TRADE SECRETS The Employee acknowledges that he has a fiduciary obligation to Arctic and that, in the course of providing services hereunder, he will be entrusted with confidential information and trade secrets ("Confidential Information") concerning the present and contemplated projects, services and techniques involved and used by Arctic, its parent company Royal Oak and their respective associated, related and subsidiary companies in connection with their respective businesses, the disclosure of any of which to competitors of Arctic, Royal Oak or the general public would be highly detrimental to the best interests of Arctic and not compensable by damages. The Employee further acknowledges that the right to maintain all such Confidential Information as confidential constitutes a proprietary right which Arctic, its parent company Royal Oak and their respective associated, related and subsidiary companies are entitled to protect by way of injunctive relief in addition to other remedies available to each on breach of such confidentiality. The Employee further acknowledges that the restrictions and prohibitions set out herein are reasonable and proper based on the nature of the business of Arctic, its parent company Royal Oak and their respective associated, related and subsidiary companies, which businesses as of the date hereof are to a significant extent carried on in Canada and the United States. Accordingly, the Employee agrees that: (a) he will not, during the term of this Agreement or at any time thereafter, disclose any of such Confidential Information to any person or use any of such Confidential Information for any purpose other than those of Arctic and Royal Oak; and (b) he will not, during the term of this Agreement or at any time thereafter, disclose any information concerning the business of Arctic, its parent company Royal Oak or their respective associated, related and subsidiary companies which could adversely affect the image or reputation of any of them. The Employee agrees that the provisions of this paragraph 7 will, in their entirety, survive termination of this Agreement by any party for any reason and in any manner whatsoever. 8. PERFORMANCE GUARANTEE In consideration of the Employee agreeing to transfer to and continue his employment with Arctic, Royal Oak hereby guarantees to the Employee the full performance by Arctic of each and every obligation hereunder assumed by Arctic and further indemnifies and agrees to hold harmless the Employee from and against any and all loss, damage, injury and expense (including recovery of all legal fees and disbursements) incurred by the Employee as a result of any breach by Arctic of its obligations hereunder or in enforcing and securing to the Employee all of his rights and entitlement hereunder. 9. NOTICES Wherever this Agreement requires or permits any consent, approval, notice, request or demand from any party to another, the consent, approval, notice, request or demand (including, without limitation, telecopied communications) must be in writing to be effective and shall be deemed to have been given on the earlier of receipt or five business days after it is enclosed in any envelope, addressed to the party to be notified at the address first above written (or such other addresses as may be designated by written notice from time to time), properly stamped, sealed and deposited in the mail system, in the case of Arctic, to the attention of the Chief Executive Officer and in the case of Royal Oak to the attention of Mr. W. J. V. Sheridan, Secretary. Any consent, approval, notice, request or demand aforesaid if delivered or telecopied shall be deemed to have been given on the day of such delivery or telecopied transmission. Any such delivery shall be sufficient, if left with any person at the above address of the Employee in the case of the Employee, and with the receptionist at the above addresses of Arctic and Royal Oak in the case of Arctic and Royal Oak respectively. 10. ENTIRE AND BINDING AGREEMENT The provisions contained herein and in any Stock Option Agreement or Loan Agreement created in accordance with paragraphs 5 (b) and (f) herein constitute the entire Agreement between the parties and supersede all previous communications, representations, understandings and agreements, whether oral or written, between the parties with respect to the subject matter hereof. Subject to the provisions hereof, this Agreement shall be binding upon and shall enure to the benefit of the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns. 11. AMENDMENTS No alteration or amendment to this Agreement will take effect unless the same is in writing duly executed by each of the parties in the same manner as this Agreement. 12. WAIVERS One or more consents to or waivers of any breach of the terms or provisions of this Agreement by any party shall not be construed as a consent or waiver of a subsequent breach of the same term or provision, nor shall it be considered a consent to or waiver of any other then existing or subsequent breach of a different term or provision. The consent or waiver by any party to or of any act by any other party requiring such consent or waiver shall be deemed not to waive or render unnecessary consent to or waiver of any subsequent similar act. No custom or practice of any party shall constitute a waiver of any other party's right to insist upon strict compliance with the terms and provisions hereof. 15. SEVERABILITY If any term or provision of this Agreement shall be or shall become illegal or unenforceable, the remaining terms and provisions shall nevertheless be valid, binding, and subsisting. 16. INTERPRETATION For purposes of this Agreement, "person" includes any body corporate, government or any subdivision or department thereof, trust, unincorporated association, joint venture and/or partnership. 17. HEADINGS Headings are for convenience of reference only and shall not affect the interpretation of this Agreement. 18. ASSIGNMENT Neither the rights nor obligations under this Agreement shall be assigned or otherwise disposed of without the prior written consent of the non-assigning party, except that Arctic may assign this Agreement to any successor or related corporation without such consent. 19. APPLICABLE LAW Whether pursuant to court proceedings or otherwise, the rights and obligations of the parties under and pursuant to this Agreement shall be construed under and governed by the laws of the State of Washington and the parties hereby agree to submit to the exclusive jurisdiction of its courts. IN WITNESS WHEREOF this Agreement is executed by the parties as of the date first above written. ARCTIC PRECIOUS METALS, INC. By:/s/ Margaret K. Witte c/s ---------------------------- Margaret K. Witte (authorized signing officer) SIGNED, SEALED AND DELIVERED IN THE PRESENCE OF: /s/ Hien DeYoung /s/ Edmund Szol l/s - --------------------- ----------------------- Hien DeYoung Edmund Szol Witness ROYAL OAK MINES INC By:/s/ Margaret K. Witte l/s --------------------------- Margaret K. Witte (authorized signing officer) -----END PRIVACY-ENHANCED MESSAGE-----