As filed with the Securities and Exchange Commission on January 8, 2003
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HECLA MINING COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 8741 82-0126240
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
6500 N. MINERAL DRIVE, SUITE 200
COEUR d'ALENE, IDAHO 83815-9408
(208) 769-4100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JOHN GALBAVY
CORPORATE COUNSEL AND ASSISTANT SECRETARY
HECLA MINING COMPANY
6500 N. MINERAL DRIVE, SUITE 200
COEUR D'ALENE, IDAHO 83815-9408
(208) 769-4131
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copy To:
JOHN H. BITNER BRUCE CZACHOR
BELL, BOYD & LLOYD LLC SHEARMAN & STERLING
70 WEST MADISON STREET, SUITE 3300 1080 MARSH ROAD
CHICAGO, ILLINOIS 60602 MENLO PARK, CALIFORNIA 94025-1022
(312) 807-4306 (650) 838-3600
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Approximate date of commencement of proposed sale to the public: >From
time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
=================================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED SHARE(1) PRICE(1) FEE
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COMMON STOCK, PAR VALUE $0.25 PER SHARE, AND ASSOCIATED RIGHTS
TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK(2) 23,000,000 (1) $117,530,000 $ 10,813
=================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act and based upon the average of the
high and low prices of Hecla common stock as reported on the New York
Stock Exchange on January 2, 2003 ($5.11).
(2) Each share of Hecla common stock is accompanied by a series A junior
participating preferred stock purchase right that trades with the Hecla
common stock. The value attributed to those rights, if any, is reflected
in the market price of the Hecla common stock. Prior to the occurrence of
certain events, none of which has occurred as of this date, the rights
will not be exercisable or evidenced separately from the Hecla common
stock.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
The information contained in this prospectus is not complete and may be changed.
The selling stockholders may not sell these securities until the regiatration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is not soliciting an
offer to buy these securities, in any state or jurisdiction where the offer or
sale is not permitted.
PRELIMINARY PROSPECTUS DATED JANUARY 8, 2003 (SUBJECT TO COMPLETION)
PROSPECTUS
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20,000,000 SHARES
HECLA MINING COMPANY
COMMON STOCK
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This is Hecla Mining Company's offering of common stock. Hecla is selling
all of the shares of common stock.
Our common stock is listed on the New York Stock Exchange under the symbol
"HL." On January 6, 2003, the closing price of our common stock as reported on
the New York Stock Exchange was $5.72 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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PER SHARE TOTAL
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Public Offering Price......................... $ $
Underwriting Discount......................... $ $
Proceeds, before expenses, to Hecla........... $ $
The underwriters may also purchase up to an additional 3,000,000 of our
shares at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New
York on or about _____, 2003.
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MERRILL LYNCH & CO.
CIBC WORLD MARKETS CORP.
SALOMON SMITH BARNEY
The date of this Prospectus is ___________________, 2003
You should rely only on the information contained in this prospectus and
any supplement. We have not authorized any other person to provide you with
different or additional information. If anyone provides you with different or
additional information, you should not rely on it. This prospectus is not an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this
prospectus and any supplement is accurate as of its date only. Our business,
financial condition, results of operations, and prospects may have changed since
that date.
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TABLE OF CONTENTS
Page
----
Where You Can Find More Information...............................................................................4
Special Note on Forward-Looking Statements........................................................................4
Prospectus Summary................................................................................................5
This Offering.....................................................................................................6
Summary Financial Data............................................................................................8
Risk Factors......................................................................................................9
Use of Proceeds..................................................................................................17
Price Range of Common Stock and Dividend Policy..................................................................17
Selected Financial Data..........................................................................................18
Supplementary Financial Data.....................................................................................19
Capitalization...................................................................................................21
Dilution.........................................................................................................22
Management's Discussion and Analysis of Financial Condition and Results of Operations............................23
Business ........................................................................................................43
Management.......................................................................................................61
Principal Stockholders...........................................................................................69
Description of Capital Stock.....................................................................................70
Underwriting.....................................................................................................78
Legal Matters....................................................................................................80
Experts ........................................................................................................80
Glossary of Certain Terms........................................................................................81
Index to Consolidated Financial Statements......................................................................F-1
3
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and special reports, proxy statements, and
other information with the Securities and Exchange Commission (SEC). You may
read our filings at the web site maintained by the SEC at http://www.sec.gov.
You may also read and copy our filings at the SEC's public reference rooms at
Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, as well as at the SEC's regional office at 175 W. Jackson Boulevard,
Suite 900, Chicago, Illinois 60604. You may obtain information about the
operation of the SEC public reference room in Washington, D.C. by calling the
SEC at 1-800-SEC-0330. You may obtain a copy of a filing from the SEC at
prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549 or from commercial document retrieval
services.
Our common stock and Series B cumulative convertible preferred stock
(Series B preferred stock) are both listed on the New York Stock Exchange
(NYSE). You can inspect and copy reports, proxy statements and other information
about us at the NYSE's offices at 20 Broad Street, New York, New York 10005.
This prospectus is part of a registration statement on Form S-1 that we
filed with the SEC. The registration statement contains more information about
us and our common stock, including certain exhibits and schedules. You can
obtain a copy of the registration statement from the SEC in the manner described
above.
A glossary of certain terms appears near the end of this prospectus under
"Glossary of Certain Terms."
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements that reflect our
current expectations and projections about our future results, performance,
prospects, and opportunities. We have tried to identify these forward-looking
statements by using words such as "may," "will," "expect," "anticipate,"
"believe," "intend," "plan," "estimate," and similar expressions. These
forward-looking statements are based on information currently available to us
and are subject to a number of risks, uncertainties, and other factors that
could cause our actual results, performance, prospects, or opportunities to
differ materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties, and other factors include, but are not
limited to:
o metals prices and price volatility;
o amount of metals production;
o costs of production;
o remediation, reclamation, and environmental costs;
o regulatory matters;
o the results or settlements of pending litigation;
o cash flow;
o revenue calculations;
o the nature and availability of financing; and
o project development risks.
4
See "Risk Factors" for a description of these factors. Other matters,
including unanticipated events and conditions, also may cause our actual future
results to differ materially from these forward-looking statements. We cannot
assure you that our expectations will prove to be correct. In addition, all
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements mentioned above. You should not place undue reliance on
these forward-looking statements. All of these forward-looking statements are
based on our expectations as of the date of this prospectus. Except as required
by federal securities laws, we do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
PROSPECTUS SUMMARY
This summary highlights material information discussed in more detail
elsewhere in this prospectus. You are strongly urged to review the entire
prospectus before investing in our common stock.
HECLA MINING COMPANY
History and Development
Hecla Mining Company, established in 1891, is principally engaged in the
exploration, development and mining of precious and nonferrous metals, including
gold, silver, lead and zinc.
During the first nine months of 2002, we produced 187,028 ounces of gold
at an average total cash cost of $130 per ounce and 6.4 million ounces of silver
at an average total cash cost of $2.22 per ounce. We reduced our average total
cash cost per ounce of silver by 36% and our average total cash cost per ounce
of gold from $134 when compared to the same nine month period during 2001. We
believe we are one of the world's low cost producers in the precious metals
mining industry. As of December 31, 2001, we had proven and probable reserves of
808,773 ounces of gold and 46.2 million ounces of silver.
Current Operations
Our principal producing metals properties include:
o the San Sebastian silver mine, located in the State of Durango,
Mexico, an underground mine and exploration project in which
operations commenced in May 2001, had 8.6 million ounces of proven
and probable silver reserves and more than 91,000 ounces of proven
and probable gold reserves as of December 31, 2001. During the first
nine months of 2002, the San Sebastian mine produced nearly 2.5
million ounces of silver and 30,000 ounces of gold at an average
total cash cost of $1.29 per ounce of silver;
o the La Camorra gold mine, located in the State of Bolivar, Venezuela
had 418,050 ounces of proven and probable gold reserves as of
December 31, 2001. During the first nine months of 2002, the La
Camorra mine produced nearly 134,000 ounces of gold at an average
total cash cost of $130 per ounce;
o the Greens Creek silver mine, located near Juneau, Alaska, a large
polymetallic mine in which we own a 29.73% interest, through a
joint-venture arrangement with Kennecott Greens Creek Mining Company
(KGCMC), the manager of the mine, and Kennecott Juneau Mining
Company (KJMC), both wholly owned subsidiaries of Kennecott
Corporation. Our share of Greens Creek had over 37.6 million ounces
of silver and over 299,000 ounces of gold in proven and probable
reserves as of December 31, 2001. During the first nine months of
2002, the Greens Creek mine produced more than 2.5 million ounces of
silver and 23,000 ounces of gold for Hecla's account at an average
total cash cost of $1.76 per ounce of silver.
o the Lucky Friday silver mine, located near Mullan, Idaho, produced
over 1.4 million ounces of silver during the first nine months of
2002 at an average total cash cost of $4.65 per ounce.
We have a 50% joint venture agreement in a gold property near Carlin
Trend, Nevada. The interest requires the completion of a multi-stage exploration
and development program leading to commercial production. In addition,
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we were awarded the 1,795 hectare Block B land position exploration and mining
lease near El Callao in the Venezuelan State of Bolivar.
Strategy for Growth
Our strategy is to focus our efforts and resources on expanding our
precious metal reserves through exploration efforts, primarily on properties we
currently own. Our near-term exploration plan consists of exploring for
additional reserves at, or in the vicinity of, our San Sebastian mine in Mexico,
the La Camorra mine in Venezuela and the Greens Creek mine in Alaska.
Our strategy regarding reserve replacement is to concentrate our efforts
on:
o existing operations where infrastructure already exists;
o other properties presently being developed; and
o advanced-stage exploration properties that have been identified as
having potential for additional discoveries principally in the
United States, Mexico and Venezuela.
Exploration expenditures for the three years ended December 31, 2001, 2000
and 1999, were approximately $2.2 million, $6.3 million and $5.5 million,
respectively. We currently estimate that exploration expenditures for the year
ended December 31, 2002 were in the range of $5.5 million to $6.5 million. We
intend to focus on low-cost properties that yield high returns and we
continuously evaluate opportunities to acquire additional properties, although
we currently have no contract, arrangement or understanding with respect to any
material acquisitions.
Operating Strengths
LOW COST PRODUCER - We believe we are one of the world's low cost producers in
the precious metals mining industry and the lowest cost silver producer.
HIGH QUALITY ASSET BASE - We believe we are an operator of low cost, high
quality, low-capital, geographically diversified, high-rate-of-return mines and
projects in both silver and gold.
FOCUS ON DEVELOPING OUR PROPERTIES - We believe our existing operations and
development properties present significant opportunity for future development
and reserve replacement. We are actively exploring a total of 14 properties
throughout the United States, Mexico and Venezuela with advanced drilling
exploration on a total of 7 properties.
UNDERGROUND MINE EXPERTISE - We believe we have earned the reputation as one of
the world's best narrow-vein, hard rock, underground mining companies, based on
our expertise developed during more than a century of operating underground
mines and maintained by our strong corporate culture of operating excellence.
STRONG MANAGEMENT TEAM - Our senior management team has a total of 147 years of
operating and exploration experience in the mining industry. Management's
significant experience has been instrumental in our historical growth and
provides a solid base upon which to expand our operations.
We are a Delaware corporation, with principal executive offices located at
6500 N. Mineral Drive, Suite 200, Coeur d'Alene, Idaho 83815-9408, and the
telephone number is (208) 769-4100. Our web site address is
www.hecla-mining.com. Information contained in the web site is not incorporated
by reference into this prospectus, and you should not consider information
contained in the web site as part of this prospectus. See "Where you can find
more information."
THIS OFFERING
SECURITIES OFFERED FOR SALE BY THE COMPANY........................ 20,000,000 shares of common stock, $0.25 par value per
share, each accompanied by series A junior participating
preferred stock purchase rights pursuant to our rights
agreement.
6
VOTING RIGHTS..................................................... Each share of common stock is entitled to one vote per share
on all matters submitted to a vote of stockholders (except
for the election of two directors by holders of preferred
stock in the case of preferred dividend arrearages, which
arrearages currently exist).
USE OF PROCEEDS................................................... We plan to use the net proceeds of the sale of the common
stock to fund future exploration and development, working
capital requirements, capital expenditures and for other
general corporate purposes. See "Use of Proceeds."
DIVIDENDS......................................................... We have not declared or paid any cash dividends for several
years and we have no present intention of paying dividends
in the foreseeable future (and our preferred dividend
arrearages currently restrict us from paying any cash
dividends on our common stock).
STOCK EXCHANGE.................................................... Our common stock is listed on the New York Stock Exchange
under the symbol "HL." Application has been made to list
the common stock offered hereby on the New York Stock
Exchange.
7
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
The following table sets forth selected historical consolidated financial
data for us for each of the years ended December 31, 1997 through 2001, and is
derived from our audited financial statements. The following table also sets
forth selected historical consolidated financial data for the three months ended
September 30, 2001 and 2002, and the nine months ended September 30, 2001 and
2002, and is derived from our unaudited consolidated financial statements. The
data set forth below should be read in conjunction with, and is qualified in its
entirety by reference to, our financial statements, beginning on page F-1 of
this prospectus.
Three Months Nine Months
Ended September 30, Ended September 30, Years Ended December 31,
------------------- ------------------- -----------------------------------------------------
2002 2001 2002 2001 2001 2000 1999(1) 1998 1997
---- ---- ---- ---- ---- ---- ----- ---- ----
(unaudited)
Sales of products $ 27,790 $ 22,501 $ 79,836 $ 63,479 $ 85,247 $ 75,850 $ 73,703 $ 75,108 $ 89,486
Income (loss) from
continuing
operations $ 2,073 $ (2,037) $ 8,100 $ (6,935) $ (9,582) $(84,847) $(43,391) $ (4,674) $ (3,741)
Income (loss) from
discontinued
operations(2) $ (540) $ (419) $ (1,326) $ 12,459 $ 11,922 $ 1,529 $ 4,786 $ 4,374 $ 3,258
Net income (loss) $ 1,533 $ (2,456) $ 6,774 $ 5,524 $ 2,340 $(83,965) $(39,990) $ (300) $ (483)
Preferred stock
dividends(3) $(18,568) $ (2,013) $(22,593) $ (6,038) $ (8,050) $ (8,050) $ (8,050) $ (8,050) $ (8,050)
Loss applicable
to common
shareholders(4) $(17,035) $ (4,469) $(15,819) $ (514) $ (5,710) $(92,015) $(48,040) $ (8,350) $ (8,533)
Loss from continuing
operations per common
share $ (0.19) $ (0.06) $ (0.18) $ (0.19) $ (0.25) $ (1.39) $ (0.83) $ (0.23) $ (0.22)
Basic and diluted
loss per
common share $ (0.20) $ (0.06) $ (0.20) $ (0.01) $ (0.08) $ (1.38) $ (0.77) $ (0.15) $ (0.16)
Total assets(5) $154,983 $159,780 $154,983 $159,780 $153,116 $194,836 $268,357 $ 252,062 $250,668
Noncurrent portion of
debt(5) $ 7,376 $ 13,774 $ 7,376 $ 13,774 $ 11,948 $ 10,041 $ 55,095 $ 42,923 $ 22,136
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(1) On January 1, 1999, we changed our method of accounting for start-up costs
in accordance with Statement of Position 98-5 (SOP 98-5)"Reporting on the
Costs of Start-up Activities." The impact of this change in accounting
principle related to unamortized start-up costs associated with our
29.7331% interest in the Greens Creek Mine and resulted in a $1.4 million
cumulative effect of this charge in accounting principle for the year
ended December 31, 1999.
(2) In November 2000, our board of directors decided to sell
Kentucky-Tennessee Clay Company, K-T Feldspar Corporation, K-T Clay de
Mexico and certain other minor inactive minerals companies which
represented the major remaining portion of our industrial minerals
segment. Accordingly, the industrial minerals segment has been recorded as
a discontinued operation as of and for each of the periods ended presented
above. As of September 30, 2002 and 2001, and as of December 31, 2001 and
2000, only, the balance sheets have been reclassified to reflect the net
assets of the industrial minerals segment as a discontinued operation.
(3) As of September 30, 2002, we have not declared or paid $5.9 million of
Series B preferred stock dividends. However, since the dividends are
cumulative, they continue to be reported in determining the income (loss)
applicable to common stockholders, but are excluded in the amount reported
as cash dividends paid per preferred share. We completed an offer to
acquire all of our currently outstanding Series B preferred stock in
exchange for newly issued shares of our common stock on July 25, 2002. A
total of 1,546,598 shares or 67.2%, of the total number of Series B
preferred shares outstanding were validly tendered and exchanged into
10,826,186 shares of our common stock. During the third quarter of 2002,
we incurred a non-cash dividend of approximately $17.6 million related to
the completed exchange offering. The $17.6 million dividend represents the
difference between the value of the common stock issued in the exchange
offer and the value of the shares that were issuable under the stated
conversion terms of the Series B preferred stock. The non-cash dividend
had no impact on our total shareholders' equity as the offset was an
increase in common stock and surplus. As a result of the completed
exchange offering, the total of cumulative preferred dividends is
anticipated to be $23.4 million for the year ending December 31, 2002. In
2003, the $8.0 million annual cumulative preferred dividends that have
historically been included in income (loss) applicable to common
shareholders will be reduced to approximately $2.6 million. The completed
exchange offering also eliminated $10.9 million of previously undeclared
and unpaid preferred stock dividends.
(4) After recognizing a $1.3 million loss from discontinued operations and
$22.6 million in preferred stock dividends, our loss applicable to common
stockholders for the nine months ended September 30, 2002 was
approximately $15.8 million, compared to a loss of $0.5
8
million in the same period in 2001, after recognizing $12.5 million in
income from discontinued operations, due to a gain of $12.7 million on the
sale of the majority of our industrial minerals assets and $6.0 million in
preferred stock dividends.
(5) Total assets and noncurrent portion of debt at September 30, 2002 on an
"as adjusted" basis to reflect the effects of the estimated net proceeds
from the offering assuming 20 million shares of common stock are sold at
$5.72 per share are $262.0 million and $7.4 million, respectively.
RISK FACTORS
You should carefully consider the risks and uncertainties described below,
and all of the other information included in this prospectus, before you decide
whether to purchase shares of our common stock. Any of the following risks could
materially adversely affect our business, financial condition, or operating
results and could negatively impact the value of our common stock. A glossary of
certain terms appears near the end of this prospectus under "Glossary of Certain
Terms."
OUR CURRENT AND FUTURE CASH POSITION MAY NOT PROVIDE US WITH SUFFICIENT
LIQUIDITY.
We had cash and cash equivalents at September 30, 2002 of approximately
$17.8 million. We believe cash requirements over the next twelve months will be
funded through a combination of current cash, future cash flows from operations,
amounts available under existing loan agreements, proceeds from potential asset
sales, and/or future debt or equity security issuances. Our ability to raise
capital is highly dependent upon the commercial viability of our projects and
the associated prices of the metals we produce. Because of the significant
impact that changes in the prices of silver, gold, lead and zinc have on our
financial condition, declines in these metals prices may negatively impact
short-term liquidity and our ability to raise additional funding for long-term
projects. In the event that cash balances decline to a level that cannot support
our operations, our management will defer certain planned capital expenditures
and exploration expenditures as needed to conserve cash. If our plans are not
successful, operations and liquidity may be adversely affected.
ALTHOUGH OUR OPERATIONS WERE PROFITABLE IN 2001 AND THE FIRST NINE MONTHS OF
2002, WE DID INCUR A TOTAL OF $178.5 MILLION OF LOSS APPLICABLE TO COMMON
SHAREHOLDERS SINCE 1997 AND THERE CAN BE NO ASSURANCE THAT OUR OPERATIONS WILL
REMAIN PROFITABLE.
Our net income improved in 2001 and in the first nine months of 2002 as a
result, in large part, of increased gold production, lower silver and gold
production costs, lower interest expense, a gain on the sale of our subsidiary,
Kentucky-Tennessee Clay Company and, recently, increased gold prices. Prior to
2001, we incurred net losses from operations for each of the prior ten years.
Many of the factors affecting our operating results are beyond our control,
including expectations with respect to the rate of inflation, the relative
strength of the United States dollar and certain other currencies, interest
rates, global or regional political or economic crises, global or regional
demand, speculation, and sales by central banks and other holders and producers
of gold and silver in response to these factors, and we cannot foresee whether
our operations will continue to generate sufficient revenue for us to be
profitable. While silver and gold prices improved in the first nine months of
2002 over average prices in 2001, there can be no assurance such prices will
continue at or above such levels.
OUR PREFERRED STOCK HAS A LIQUIDATION PREFERENCE OF $50 PER SHARE, OR $37.7
MILLION, PLUS DIVIDENDS IN ARREARS OF APPROXIMATELY $6.6 MILLION.
This means that if we were liquidated as of January 2, 2003, holders of
our Series B preferred stock would be entitled to receive approximately $44.3
million from any liquidation proceeds before holders of our common stock would
be entitled to receive any proceeds.
WE ARE CURRENTLY INVOLVED IN ONGOING LITIGATION WHICH MAY ADVERSELY AFFECT US.
There are several ongoing lawsuits in which we are involved. If any of
these cases results in a substantial monetary judgment against us or is resolved
on unfavorable terms, our results of operations, financial condition and cash
flows could be materially adversely affected. For example, we may ultimately
incur environmental remediation costs substantially in excess of the amounts we
have accrued and the plaintiffs in environmental proceedings may be awarded
substantial damages (which costs and damages we may not be able to recover from
our insurers). See "Business - Legal Proceedings."
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OUR EARNINGS MAY BE AFFECTED BY METALS PRICE VOLATILITY.
The majority of our revenues is derived from the sale of silver, gold,
lead and zinc and, as a result, our earnings are directly related to the prices
of these metals. Silver, gold, lead and zinc prices fluctuate widely and are
affected by numerous factors including:
o expectations for inflation;
o speculative activities;
o relative exchange rate of the U.S. dollar;
o global and regional demand and production;
o political and economic conditions; and
o production costs in major producing regions.
These factors are beyond our control and are impossible for us to predict.
If the market prices for these metals fall below our costs to produce them for a
sustained period of time, we will experience additional losses and may have to
discontinue development or mining at one or more of our properties.
In the past, we have used limited hedging techniques to reduce our
exposure to price volatility, but we may not be able to do so in the future. See
"--Our hedging activities could expose us to losses."
The following table sets forth the average daily closing prices of the
following metals for 1980, 1985, 1990, 1995, 1997 and each year thereafter
through 2002.
1980 1985 1990 1995 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gold(1) $612.56 $317.26 $383.46 $384.16 $331.10 $294.16 $278.77 $279.03 $271.00 $309.97
(per oz.)
Silver(2) 20.63 6.14 4.82 5.19 4.90 5.53 5.25 5.00 4.39 4.63
(per oz.)
Lead(3) 0.41 0.18 0.37 0.29 0.28 0.24 0.23 0.21 0.22 0.21
(per lb.)
Zinc(4) 0.34 0.36 0.69 0.47 0.60 0.46 0.49 0.51 0.40 0.35
(per lb.)
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(1) London Final
(2) Handy & Harman
(3) London Metals Exchange -- Cash
(4) London Metals Exchange -- Special High Grade - Cash
On January 2, 2003, the closing prices for gold, silver, lead and zinc
were $343.80 per ounce, $4.80 per ounce, $0.19 per ounce and $0.34 per ounce.
THE VOLATILITY OF METALS PRICES MAY ADVERSELY AFFECT OUR DEVELOPMENT AND
EXPLORATION EFFORTS.
Our ability to produce silver and gold in the future is dependent upon our
exploration efforts, and our ability to develop new ore reserves. If prices for
these metals decline, it may not be economically feasible for us to continue our
development of a project or to continue commercial production at some of our
properties.
10
OUR DEVELOPMENT OF NEW ORE BODIES MAY COST MORE AND PROVIDE LESS RETURN THAN WE
ESTIMATED.
Our ability to sustain or increase our current level of production of
metals partly depends on our ability to develop new ore bodies and/or expand
existing mining operations. Before we can begin a development project, we must
first determine whether it is economically feasible to do so. This determination
is based on estimates of several factors, including:
o reserves;
o expected recovery rates of metals from the ore;
o facility and equipment costs;
o capital and operating costs of a development project;
o future metals prices;
o comparable facility and equipment costs; and
o anticipated climate conditions.
Development projects may have no operating history upon which to base
these estimates, and these estimates are based in large part on our
interpretation of geological data, a limited number of drill holes, and other
sampling techniques. As a result, actual cash operating costs and returns from a
development project may differ substantially from our estimates as a result of
which it may not be economically feasible to continue with a development
project.
OUR ORE RESERVE ESTIMATES MAY BE IMPRECISE.
Our ore reserve figures and costs are primarily estimates and are not
guarantees that we will recover the indicated quantities of these metals.
Reserves are estimates made by our technical personnel and no assurance can be
given that the estimate of the amount of metal or the indicated level of
recovery of these metals will be realized. Reserve estimation is an interpretive
process based upon available data. Our reserve estimates for properties that
have not yet started may change based on actual production experience. Further,
reserves are valued based on estimates of costs and metals prices. The economic
value of ore reserves may be adversely affected by:
o declines in the market price of the various metals we mine;
o increased production or capital costs; or
o reduced recovery rates.
Short-term operating factors relating to our ore reserves, such as the
need to sequentially develop ore bodies and the processing of new or different
ore grades, may adversely affect our profitability. We use forward sales
contracts and other hedging techniques to partially offset the effects of a drop
in the market prices of the metals we mine. However, if the price of metals that
we produce declines substantially below the levels used to calculate reserves
for an extended period, we could experience:
o delays in new project development;
o increased net losses;
o reduced cash flow;
11
o reductions in reserves; and
o possible write-down of asset values.
OUR AVAILABLE CASH AND CASH FLOWS MAY BE INADEQUATE TO FUND EXPANSION PROJECTS.
Based upon our estimate of metals prices and metals production for 2002,
we currently believe that our cash on hand, operating cash flows, amounts
available under current credit facilities, proceeds from potential asset sales,
and/or future debt or equity security issuances will be adequate to fund our:
o anticipated minimum capital expenditure requirements;
o idle property expenditures;
o debt service; and
o exploration expenditures.
Cash flows from operations, however, could be significantly impacted if
the market price of silver, gold, lead and zinc fluctuate. In the event that
cash balances decline to a level that cannot support our operations, our
management will defer certain planned capital and exploration expenditures as
needed to conserve cash for operations. If our plans are not successful,
operations and liquidity may be adversely affected.
OUR MINERAL EXPLORATION EFFORTS MAY NOT BE SUCCESSFUL.
We must continually replace ore reserves depleted by production. Our
ability to expand or replace depleted ore reserves depends on the success of our
exploration program. Mineral exploration, particularly for silver and gold, is
highly speculative. It involves many risks and is often nonproductive. Even if
we find a valuable deposit of minerals, it may be several years before
production is possible. During that time, it may become economically unfeasible
to produce those minerals. Establishing ore reserves requires us to make
substantial capital expenditures and, in the case of new properties, to
construct mining and processing facilities. As a result of these costs and
uncertainties, we may not be able to expand or replace our existing ore reserves
as they are depleted by current production.
OUR JOINT DEVELOPMENT AND OPERATING ARRANGEMENTS MAY NOT BE SUCCESSFUL.
We often enter into joint venture arrangements in order to share the risks
and costs of developing and operating properties. For instance, our Greens Creek
mine is operated through a joint venture arrangement. In a typical joint venture
arrangement, we own a percentage of the assets in the joint venture. Under the
agreement governing the joint venture relationship, each party is entitled to
indemnification from each other party and is only liable for the liabilities of
the joint venture in proportion to its interest in the joint venture. However,
if a party fails to perform its obligations under the joint venture agreement,
we could incur losses in excess of our pro-rata share of the joint venture. In
the event any party so defaults, the joint venture agreement provides certain
rights and remedies to the remaining participants, including the right to sell
the defaulting party's percentage interest and use the proceeds to satisfy the
defaulting party's obligations. We currently believe that our joint venture
partners will meet their obligations.
WE FACE STRONG COMPETITION FROM OTHER MINING COMPANIES FOR THE ACQUISITION OF
NEW PROPERTIES.
Mines have limited lives and as a result, we continually seek to replace
and expand our reserves through the acquisition of new properties. In addition,
there is a limited supply of desirable mineral lands available in the United
States and other areas where we would consider conducting exploration and/or
production activities. Because we face strong competition for new properties
from other mining companies, some of whom have greater financial resources than
we do, we may be unable to acquire attractive new mining properties on terms
that we consider acceptable.
12
THE TITLES TO SOME OF OUR PROPERTIES MAY BE DEFECTIVE.
Unpatented mining claims constitute a significant portion of our
undeveloped property holdings. The validity of these unpatented mining claims is
often uncertain and may be contested. In accordance with mining industry
practice, we do not generally obtain title opinions until we decide to develop a
property. Therefore, while we have attempted to acquire satisfactory title to
our undeveloped properties, some titles may be defective.
In Mexico a claim has been made, in one court, as to the validity of the
ownership of the Velardena mill and, in another court, the validity of a lien
that predates acquisition of the mill by our subsidiary. There is no assurance
that we will win this litigation. Losing the litigation could result in an
interruption of production or even the loss of the mill.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS AND HAZARDS ASSOCIATED WITH
THE MINING INDUSTRY.
Our business is subject to a number of risks and hazards including:
o environmental hazards;
o political and country risks;
o industrial accidents;
o labor disputes;
o unusual or unexpected geologic formations;
o cave-ins;
o explosive rock failures; and
o flooding and periodic interruptions due to inclement or hazardous
weather conditions.
Such risks could result in:
o damage to or destruction of mineral properties or producing
facilities;
o personal injury;
o environmental damage;
o delays in mining;
o monetary losses; and
o legal liability.
For some of these risks, we maintain insurance to protect against these
losses at levels consistent with our historical experience and industry
practice. However, we may not be able to maintain this insurance, particularly
if there is a significant increase in the cost of premiums. Insurance against
environmental risks is generally either unavailable or too expensive for us and
other companies in our industry, and, therefore, we do not maintain
environmental insurance. To the extent we are subject to environmental
liabilities, we would have to pay for these liabilities. Moreover, in the event
that we are unable to fully pay for the cost of remedying an environmental
problem, we might be required to suspend operations or enter into other interim
compliance measures.
13
OUR FOREIGN OPERATIONS, INCLUDING OUR OPERATIONS IN VENEZUELA, ARE SUBJECT TO
ADDITIONAL INHERENT RISKS.
We currently conduct mining operations in Mexico and Venezuela and have
exploration projects in Mexico and South America. We anticipate that we will
continue to conduct significant international operations in the future. Because
we conduct operations internationally, we are subject to political and economic
risks such as:
o the effects of local political and economic developments;
o exchange controls;
o currency fluctuations; and
o taxation and laws or policies of foreign countries and the United
States affecting trade, investment and taxation.
Consequently, our exploration, development and production activities
outside of the United States may be substantially affected by factors beyond our
control, any of which could materially adversely affect our financial position
or results of operations.
Venezuela, the site of our La Camorra mine, is currently experiencing
political unrest in the form of marches and demands that the current president
hold a referendum to determine whether to remove him from office. The political
unrest in Venezuela has led to a shut down of much of the country's economy and
a significant reduction of imports into the country. Although we continue to
operate our La Camorra mine and exploration projects without significant impact
from the current political unrest, the continued limitation on fuel supplies and
other imports could require us to either curtail or halt our mining operations
and exploration activities.
OUR OPERATIONS ARE SUBJECT TO CURRENCY FLUCTUATIONS.
Currency fluctuations may affect the cash flow which we will realize from
our operations since our products are sold in world markets in United States
dollars. Although we have hedging programs in place to reduce certain risks
associated with foreign exchange exposure, there can be no assurance that such
hedging strategies will be successful or that foreign exchange fluctuations will
not materially adversely affect our financial performance and results of
operations.
WE ARE REQUIRED TO OBTAIN GOVERNMENTAL PERMITS IN ORDER TO CONDUCT MINING
OPERATIONS.
In the ordinary course of business, mining companies are required to seek
governmental permits for expansion of existing operations or for the
commencement of new operations. Obtaining the necessary governmental permits is
a complex and time-consuming process involving numerous jurisdictions and often
involving public hearings and costly undertakings on our part. The duration and
success of our efforts to obtain permits are contingent upon many variables not
within our control. Obtaining environmental protection permits, including the
approval of reclamation plans, may increase costs and cause delays depending on
the nature of the activity to be permitted and the interpretation of applicable
requirements implemented by the permitting authority. There can be no assurance
that all necessary permits will be obtained and, if obtained, that the costs
involved will not exceed those that we previously estimated. It is possible that
the costs and delays associated with the compliance with such standards and
regulations could become such that we would not proceed with the development or
operation of a mine or mines.
WE FACE SUBSTANTIAL GOVERNMENTAL REGULATION AND ENVIRONMENTAL RISKS.
Our business is subject to extensive federal, state and local laws and
regulations governing development, production, labor standards, occupational
health, waste disposal, use of toxic substances, environmental regulations, mine
safety and other matters. We have been, and are currently involved in lawsuits
in which we have been accused of violating environmental laws, and we may be
subject to similar lawsuits in the future. See "Business - Legal
14
Proceedings." New legislation and regulations may be adopted at any time that
results in additional operating expense, capital expenditures or restrictions
and delays in the mining, production or development of our properties.
We maintain reserves for costs associated with mine closure, reclamation
of land and other environmental matters. At September 30, 2002, our reserves for
these matters totaled $50.7 million. We anticipate that we will make
expenditures relating to these reserves over the next five to ten years. Future
expenditures related to closure, reclamation and environmental expenditures are
difficult to estimate due to:
o the early stage of our investigation;
o the uncertainties relating to the costs and remediation methods that
will be required in specific situations;
o the possible participation of other potentially responsible parties;
and
o changing environmental laws, regulations and interpretations.
It is possible that, as new information becomes available, changes to our
estimates of future closure, reclamation and environmental contingencies could
materially adversely affect our future operating results.
Various laws and permits require that financial assurances be in place for
certain environmental and reclamation obligations and other potential
liabilities. We currently have in place such financial assurances in the form of
surety bonds. As of September 30, 2002, we also had set aside as restricted
investments approximately $6.4 million as collateral for these bonds. The amount
of the financial assurances and the amount required to be set aside by us as
collateral for these financial assurances are dependent upon a number of
factors, including our financial condition, reclamation cost estimates,
development of new projects, and the total dollar value of financial assurances
in place. There can be no assurance that we will be able to maintain or add to
our current level of financial assurances.
YOU MAY NOT BE ABLE TO SELL THE COMMON STOCK WHEN YOU WANT AND, IF YOU DO, YOU
MAY NOT BE ABLE TO RECEIVE THE PRICE YOU WANT.
Although our common stock has been actively traded on the New York Stock
Exchange (NYSE), we cannot assure you that an active trading market for the
common stock will continue or, if it does, at what prices the common stock may
trade.
OUR HEDGING ACTIVITIES COULD EXPOSE US TO LOSSES.
From time to time, we engage in hedging activities, such as forward sales
contracts and commodity put and call option contracts, to minimize the effect of
declines in metals prices on our operating results. While these hedging
activities may protect us against low metals prices, they may also limit the
price we can receive on hedged products. As a result, we may be prevented from
realizing possible revenues in the event that the market price of a metal
exceeds the price stated in a forward sale or call option contract. We are also
subject to posting margin if the margin free limit of $10.0 million in the
aggregate for all our contracts is exceeded. As of September 30, 2002, our
forward contract position had a negative value of $5.0 million. In addition, we
may experience losses if a counterparty fails to purchase under a contract when
the contract price exceeds the spot price of a commodity.
OUR BUSINESS DEPENDS ON GOOD RELATIONS WITH OUR EMPLOYEES.
Certain of our employees are represented by unions. At September 30, 2002,
there were 63 hourly employees at the Lucky Friday mine. The United Steelworkers
of America is the bargaining agent for the Lucky Friday hourly employees. The
current labor agreement expires on June 16, 2003. At September 30, 2002, there
were 103 hourly and 40 salaried employees at the San Sebastian mine. The
National Mine and Mill Workers Union represents process plant hourly workers at
San Sebastian. Under labor law, wage adjustments are negotiated annually and
other contract terms every two years. The contract at San Sebastian is due for
negotiation of wages in
15
July 2003 and for wages and other terms in July 2004. At September 30, 2002,
there were 349 hourly and 42 salaried employees at our La Camorra Gold mine,
most of whom are represented by the Mine Workers Union. The contract with
respect to La Camorra will expire in March 2004. We anticipate that we will be
able to negotiate a satisfactory contract with each union, but there can be no
assurance that this can be done without a disruption to production.
OUR STOCKHOLDER RIGHTS PLAN AND PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
OUR BY-LAWS, AND DELAWARE LAW COULD DELAY OR DETER TENDER OFFERS OR TAKEOVER
ATTEMPTS THAT MAY OFFER YOU A PREMIUM FOR YOUR COMMON STOCK.
Our stockholder rights plan and provisions in our certificate of
incorporation, our by-laws, and Delaware law could make it more difficult for a
third party to acquire control of us, even if that transaction would be
beneficial to you. These impediments include:
o the rights issued in connection with the stockholder rights plan
that will substantially dilute the ownership of any person or group
that acquires 15% or more of our outstanding common stock unless the
rights are first redeemed by our board of directors, in its
discretion. Furthermore, our board of directors may amend the terms
of these rights, in its discretion, including an amendment to lower
the acquisition threshold to any amount greater than 10% of the
outstanding common stock;
o the classification of our board of directors into three classes
serving staggered three-year terms;
o the ability of our board of directors to issue shares of preferred
stock with rights as it deems appropriate without stockholder
approval;
o a requirement that special meetings of our board of directors may be
called only by our chief executive officer or a majority of our
board of directors;
o a requirement that special meetings of stockholders may only be
called pursuant to a resolution approved by a majority of our entire
board of directors;
o a prohibition against action by written consent of our stockholders;
o a requirement that our board members may only be removed for cause
and by an affirmative vote of at least 80% of the outstanding voting
stock;
o a requirement that our stockholders comply with advance-notice
provisions to bring director nominations or other matters before
meetings of our stockholders;
o a prohibition against certain business combinations with an acquirer
of 15% or more of our common stock for three years after such
acquisition unless the stock acquisition or the business combination
is approved by our board prior to the acquisition of the 15%
interest, or after such acquisition our board and the holders of
two-thirds of the other common stock approve the business
combination; and
o a requirement that prohibits us from entering into some business
combinations with interested stockholders without the affirmative
vote of the holders of at least 80% of the voting power of the then
outstanding shares of voting stock.
The existence of the stockholder rights plan and these provisions may
deprive you of an opportunity to sell your stock at a premium over prevailing
prices. The potential inability of our stockholders to obtain a control premium
could adversely affect the market price for our common stock. For a description
of our stockholder rights plan, see "Description of Common Stock -- Rights."
16
WE ARE DEPENDENT ON KEY PERSONNEL.
We are currently dependent upon the ability and experience of our
executive officers and there can be no assurance that we will be able to retain
all of such officers. The loss of one or more of the officers could have a
material adverse effect on our operations. On December 18, 2002, Arthur Brown
announced that he would retire as Chief Executive Officer effective in May 2003.
Subject to formal Board approval, we expect that he will be succeeded by
Phillips Baker, currently our President. Mr. Brown will remain as Chairman of
the Board. We also compete with other companies both within and outside the
mining industry in connection with the recruiting and retention of qualified
employees knowledgeable in mining operations.
USE OF PROCEEDS
The net proceeds from the sale of the common stock, after deducting
expenses, including the Underwriters' commission, are estimated to be $ ____. If
the Underwriters' over allotment option is exercised in full, such estimated net
proceeds will be $ ____. We intend to use the net proceeds to fund future
exploration and development, working capital requirements, capital expenditures
and for other general corporate purposes. Pending such applications, the net
proceeds will be invested in short-term money market instruments. Although we
regularly review acquisition opportunities, no contract, arrangement or
understanding currently exists regarding any material acquisition.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange under the symbol
"HL." As of December 31, 2002, we had 8,584 common stockholders of record.
Quarterly high and low stock prices, based on the New York Stock Exchange
composite transactions, are shown below:
Fiscal Year Quarter High ($) Low ($)
----------- ------- -------- -------
2002 First 1.99 0.90
Second 5.90 1.90
Third 5.20 2.20
Fourth 5.45 2.96
2001 First 1.00 0.50
Second 1.70 0.66
Third 1.26 0.78
Fourth 1.27 0.77
2000 First 2.00 1.25
Second 1.50 1.00
Third 1.13 0.75
Fourth 0.94 0.50
On January 6, 2003, the closing price of our common stock as reported on
the New York Stock Exchange was $5.72 per share.
We have not declared or paid any cash dividends on our capital stock or
other securities for several years and do not anticipate paying any cash
dividends in the foreseeable future. We are currently restricted from paying
dividends on our common stock or repurchasing common stock until such time as we
have paid the cumulative dividends on our Series B preferred stock. In addition,
we have entered into loan documents that constrain our ability to pay dividends
on our common stock or repurchase our common stock.
17
SELECTED FINANCIAL DATA
(in thousands, except shares, per share data and shareholder/employee data)
The following table sets forth selected historical consolidated financial
data for us for each of the years ended December 31, 1997 through 2001, and is
derived from our audited financial statements. The following table also sets
forth selected historical consolidated financial data for the three months ended
September 30, 2001 and 2002, and the nine months ended September 30, 2001 and
2002, and is derived from our unaudited consolidated financial statements. The
data set forth below should be read in conjunction with, and is qualified in its
entirety by reference to our financial statements, beginning on page F-1 of this
prospectus.
Three Months Nine Months
Ended September 30, Ended September 30, Years Ended December 31,
------------------- ------------------- -----------------------------------------------------
2002 2001 2002 2001 2001 2000 1999(1) 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
Sales of products $ 27,790 $ 22,501 $ 79,836 $ 63,479 $ 85,247 $ 75,850 $ 73,703 $ 75,108 $ 89,486
Income (loss) from
continuing
operations $ 2,073 $ (2,037) $ 8,100 $ (6,935) $ (9,582) $(84,847) $(43,391) $ (4,674) $ (3,741)
Income (loss) from
discontinued
operations(2) $ (540) $ (419) $ (1,326) $ 12,459 $ 11,922 $ 1,529 $ 4,786 $ 4,374 $ 3,258
Net income (loss) $ 1,533 $ (2,456) $ 6,774 $ 5,524 $ 2,340 $(83,965) $(39,990) $ (300) $ (483)
Preferred stock
dividends(3) $(18,568) $ (2,013) $(22,593) $ (6,038) $ (8,050) $ (8,050) $ (8,050) $ (8,050) $ (8,050)
Loss applicable to
common
shareholders(4) $(17,035) $ (4,469) $(15,819) $ (514) $ (5,710) $(92,015) $(48,040) $ (8,350) $ (8,533)
Loss from continuing
operations per
common share $ (0.19) $ (0.06) $ (0.18) $ (0.19) $ (0.25) $ (1.39) $ (0.83) $ (0.23) $ (0.22)
Basic and diluted
loss per common
share $ (0.20) $ (0.06) $ (0.20) $ (0.01) $ (0.08) $ (1.38) $ (0.77) $ (0.15) $ (0.16)
Total assets(5) $154,983 $159,780 $154,983 $159,780 $153,116 $194,836 $268,357 $ 252,062 $250,668
Noncurrent portion
of debt(5) $ 7,376 $13,774 $ 7,376 $ 13,774 $11,948 $ 10,041 $ 55,095 $ 42,923 $ 22,136
Cash dividends paid
per common share $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Cash dividends paid
per preferred
share(4) $ -- $ -- $ -- $ -- $ -- $ 1.75 $ 3.50 $ 3.50 $ 3.50
Common shares
issued(5) 86,088,512 73,049,761 86,088,512 73,049,761 73,068,796 66,859,752 66,844,575 55,166,728 55,156,324
Shareholders of
record 8,673 9,014 8,673 9,014 8,926 9,273 9,714 10,162 10,636
Employees 700 783 700 783 701 1,195 1,277 1,184 1,202
----------
(1) On January 1, 1999, we changed our method of accounting for start-up costs
in accordance with Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities." The impact of this change in accounting principle
related to unamortized start-up costs associated with our 29.7331%
interest in the Greens Creek Mine and resulted in a $1.4 million charge
for the year ended December 31, 1999.
(2) In November 2000, our board of directors decided to sell
Kentucky-Tennessee Clay Company, K-T Feldspar Corporation, K-T Clay de
Mexico and certain other minor inactive minerals companies, which
represented the major remaining portion of our industrial minerals
segment. Accordingly, the industrial minerals segment has been recorded as
a discontinued operation as of and for each of the periods ended presented
above. As of September 30, 2002 and 2001, and as of December 31, 2001 and
2000, only, the balance sheets have been reclassified to reflect the net
assets of the industrial minerals segment as a discontinued operation.
(3) As of September 30, 2002, we have not declared or paid $5.9 million of
Series B preferred stock dividends. However, since the dividends are
cumulative, they continue to be reported in determining the income (loss)
applicable to common stockholders, but are excluded in the amount reported
as cash dividends paid per preferred share. We completed an offer to
acquire all of our currently
18
outstanding Series B preferred stock in exchange for newly issued shares
of our common stock on July 25, 2002. A total of 1,546,598 shares, or
67.2%, of the total number of Series B preferred shares outstanding were
validly tendered and exchanged into 10,826,186 shares of our common stock.
During the third quarter of 2002, we incurred a non-cash dividend of
approximately $17.6 million related to the completed exchange offering.
The $17.6 million dividend represents the difference between the value of
the common stock issued in the exchange offer and the value of the shares
that were issuable under the stated conversion terms of the Series B
preferred stock. The non-cash dividend had no impact on our total
shareholders' equity as the offset was an increase in common stock and
surplus. As a result of the completed exchange offering, the total of
cumulative preferred dividends is anticipated to be $23.4 million for the
year ending December 31, 2002. In 2003, the $8.0 million annual cumulative
preferred dividends that have historically been included in income (loss)
applicable to common shareholders will be reduced to approximately $2.6
million. The completed exchange offering also eliminated $10.9 million of
previously undeclared and unpaid preferred stock dividends.
(4) After recognizing a $1.3 million loss from discontinued operations and
$22.6 million in preferred stock dividends, our loss applicable to common
stockholders for the nine months ended September 30, 2002 was
approximately $15.8 million, compared to a loss of $0.5 million in the
same period in 2001, after recognizing $12.5 million in income from
discontinued operations, due to a gain of $12.7 million on the sale of the
majority of our industrial minerals assets and $6.0 million in preferred
stock dividends.
(5) Total assets, noncurrent portion of debt and common shares issued at
September 30, 2002 on an "as adjusted" basis to reflect the effects of the
estimated net proceeds from the offering assuming 20 million shares of
common stock are sold at $5.72 per share are $262.0 million, $7.4 million
and 106,088,512, respectively.
SUPPLEMENTARY FINANCIAL DATA
(in thousands, except share data)
The following table sets forth supplementary financial data for us for the
first, second and third quarters of 2002 and each quarter of the years ended
December 31, 2000 through 2001, derived from unaudited consolidated financial
statements. The data set forth below should be read in conjunction with, and is
qualified in its entirety by reference to our financial statements, beginning on
page F-1 of this prospectus.
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total
--------------------------- ------- ------- ------- ------- -----
Sales of products(1) $ 23,383 $ 28,663 $ 27,790 -- $ 79,836
Gross profit(1) $ 3,734 $ 7,857 $ 6,414 -- $ 18,005
Net income $ 486 $ 4,755 $ 1,533 -- $ 6,774
Preferred stock dividends $ (2,012) $ (2,013) $ (18,568) -- $ (22,593)
Income (loss) applicable to
common shareholders $ (1,526) $ 2,742 $ (17,035) -- $ (15,819)
Basic and diluted income
(loss) per common share $ (0.02) $ 0.04 $ (0.20) -- $ (.20)
2001
---------------------------
Sales of products(1) $ 16,417 $ 24,561 $ 22,501 $ 21,768 $ 85,247
Gross profit(1) $ 852 $ 2,358 $ 270 $ 1,239 $ 4,719
Net income (loss) $ 9,535 $ (1,555) $ (2,456) $ (3,184) $ 2,340
Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050)
Income (loss) applicable to
common shareholders $ 7,523 $ (3,568) $ (4,469) $ (5,196) $ (5,710)
Basic and diluted income
(loss) per common share $ 0.11 $ (0.06) $ (0.06) $ (0.07) $ (0.08)
2000
---------------------------
Sales of products(1) $ 17,628 $ 21,005 $ 20,044 $ 17,173 $ 75,850
Gross loss(1) $ (1,145) $ (1,252) $ (82) $ (2,850) $ (5,329)
Net loss $ (7,319) $ (16,712) $ (3,622) $ (56,312) $ (83,965)
Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050)
Loss applicable to
common shareholders $ (9,331) $ (18,725) $ (5,635) $ (58,324) $ (92,015)
Basic and diluted loss
19
per common share $ (0.14) $ (0.28) $ (0.08) $ (0.87) $ (1.38)
----------
(1) In November 2000, we decided to sell our industrial minerals operations.
As such, the industrial minerals segment is accounted for as a
discontinued operation, and the above amounts reflect the accounting
treatment of the industrial minerals segment as a discontinued operation.
20
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of September 30, 2002:
o on an actual basis; and
o on an as adjusted basis to give effect to the sale of 20 million
shares of common stock at an assumed initial public offering price
of $5.72 per share, after deducting the estimated underwriting
discount and commissions and offering expenses payable by us.
This table should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements, notes thereto and other financial information included elsewhere in
this prospectus.
AS OF SEPTEMBER 30, 2002
--------------------------------------
ACTUAL AS ADJUSTED
------ -----------
(Dollars in thousands,
except per share data)
Cash and cash equivalents.............................. $ 17,795 $ 124,831
============ ===========
Long term debt (including current amount portion) 13,792 13,792
Stockholders' equity:
Preferred stock, $0.25 par value; actual and as
adjusted - 5,000,000 shares authorized, 753,402
shares issued and outstanding.................... 188 188
Common stock, $0.25 par value; actual and as
adjusted - 200,000,000 shares authorized,
86,080,238 shares issued and outstanding, net of
treasury stock (actual) 106,080,238 shares
issued and outstanding, net of treasury stock,
(as adjusted)(1)................................. 21,522 26,522
Capital surplus.................................. 403,823 505,859
Accumulated deficit.............................. (357,409) (357,409)
Accumulated other comprehensive income (loss).... (24) (24)
Less stock held by grantor trust................. (132) (132)
Less stock held as unearned compensation......... (6) (6)
Less treasury stock, at cost (118) (118)
------------- ----------
Total stockholders' equity....................... 67,844 174,880
------------- ----------
Total capitalization............................. $ 81,636 $ 188,672
============= ==========
-----------------
(1) Excludes 2,817,335 shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $3.97
per share and 2,000,000 shares of common stock issuable upon exercise of
outstanding warrants at an exercise price of $3.73 per share. An
additional 2,203,581 shares of common stock are reserved for issuance
under the Company's stock option plans.
21
DILUTION
Our net tangible book value at September 30, 2002 was approximately $31.4
million, or approximately $0.36 per share. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities and
less preferred stock, divided by the number of shares of common stock
outstanding before giving effect to the sale of the shares of our common stock
in the offering. See "Capitalization." After giving effect to the sale of the 20
million shares of common stock in the offering, assuming a public offering price
of $____ per share, less the estimated underwriting discount and commissions and
other expenses of the offering, our net tangible book value as of September 30,
2002 would have been $____ per share. This represents an immediate increase in
net tangible book value per share of $____ to existing stockholders and
immediate dilution in net tangible book value of $____ per share to new
investors purchasing our common stock in the offering at the public offering
price. The following table illustrates the per share dilution without over
allotment options:
Assumed initial public offering price per share $
Net tangible book value per share as of September 30, 2002 $ 0.36
--------
Increase per share attributable to new investors
--------
Net tangible book value per share after the offering
---------
Dilution per share to new investors $
=========
Dilution per share to new investors is determined by subtracting net
tangible book value per share after the offering from the public offering price
per share paid by a new investor. If any shares are issued in connection with
outstanding options or the underwriters' over-allotment options, you will
experience further dilution.
If the underwriters' over allotment option is exercised in full, the
following will occur:
o the percentage of shares of common stock held by existing stockholders
will decrease to approximately ____% of the total number of shares of our
common stock outstanding after the offering, and
o the number of shares held by new investors will be increased to ____ or
approximately ____% of the total number of shares of our common stock
outstanding after the offering.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
We are involved in the exploration, development, mining and processing of
silver, gold, lead and zinc. Our silver and gold segment revenues and our
profitability are strongly influenced by world prices of silver, gold, lead and
zinc, which fluctuate widely and are affected by numerous factors beyond our
control, including inflation and worldwide forces of supply and demand for
precious and base metals. The aggregate effect of these factors is not possible
to accurately predict. During 2000, in furtherance of our determination to focus
our operations on silver and gold mining and to raise cash to reduce debt and
provide working capital, our board of directors made the decision to sell our
industrial minerals segment. The sale of our industrial minerals assets has
allowed our management to focus on our precious metals operations and
exploration for new precious metals properties and reserves as well as providing
us with a portion of the working capital for these activities. On March 27,
2001, we completed a sale of the Kentucky-Tennessee Clay Company, K-T Feldspar
Corporation, K-T Clay de Mexico and certain other minor inactive industrial
minerals companies (collectively the K-T Group). On March 4, 2002, we completed
a sale of the pet operations of the Colorado Aggregate division (CAC) of MWCA,
one of our wholly owned subsidiaries. We continue to pursue a sale of the
remaining assets of MWCA, although there can be no assurance that a sale will be
completed. As a result of our decision in November 2000 to sell the businesses
comprising our industrial minerals segment, it is accounted for as a
discontinued operation.
PRODUCTION
During the quarter and nine months ended September 30, 2002, we produced
approximately 65,000 and 187,000 ounces of gold compared to approximately 52,000
and 138,000 ounces in the quarter and nine months ended September 30, 2001. The
increases in gold production are principally due to increased mill throughput at
the La Camorra Mine and increased production levels at the San Sebastian Mine
where production commenced in May 2001. The following table displays the actual
gold production (in thousands of ounces) by operation for the three months ended
September 30, 2002 and 2001, actual gold production for the nine months ended
September 30, 2002 and 2001, projected gold production for the year ending
December 31, 2002, and actual gold production for the year ended December 31,
2001:
Actual Actual
Three Months Ended Nine Months Ended Projected Actual
September 30, September 30, September 30, September 30, Dec. 31, Dec. 31,
Operation 2002 2001 2002 2001 2002 2001
--------- ---------------------- -------------------- ---- ----
La Camorra 48 40 134 108 167 152
Greens Creek(1) 7 6 23 20 31 26
San Sebastian(2) 10 5 30 10 41 16
Other -- 1 -- -- -- 1
--- --- --- --- --- ---
Totals 65 52 187 138 239 195
== == === === === ===
----------
(1) Reflects our portion.
(2) Production commenced in May 2001 at the San Sebastian mine.
23
In the quarter and nine months ended September 30, 2002, we produced
approximately 2.1 and 6.4 million ounces of silver compared to approximately 1.8
and 5.9 million ounces in the quarter and nine months ended September 30, 2001.
The increases in silver production are principally due to increased production
levels at the San Sebastian Mine where production commenced in May 2001,
partially offset by a decrease in production at the Lucky Friday Mine where
production levels were reduced in October 2001. The following table displays the
actual silver production (in thousands of ounces) by operation for the three
months ended September 30, 2002 and 2001, actual silver production for the nine
months ended September 30, 2002 and 2001, projected silver production for the
year ending December 31, 2002, and actual silver production for the year ended
December 31, 2001:
Actual Actual
Three Months Ended Nine Months Ended Projected Actual
September 30, September 30, September 30, September 30, Dec. 31, Dec. 31,
Operation 2002 2001 2002 2001 2002 2001
--------- ---------------------- -------------------- ---- ----
Lucky Friday 429 766 1,436 2,856 2,004 3,224
Greens Creek 827 768 2,515 2,494 3,244 3,260
San Sebastian 823 265 2,472 547 3,389 950
----- ----- ----- ----- ----- -----
Totals 2,079 1,799 6,423 5,897 8,637 7,434
===== ===== ===== ===== ===== =====
During 2001, we produced approximately 195,000 ounces of gold compared to
approximately 146,000 ounces in 2000. The following table displays the actual
gold production (in thousands of ounces) by operation for the years ended
December 31, 2001, 2000 and 1999:
Actual Actual Actual
Dec. 31, Dec. 31, Dec. 31,
Operation 2001 2000 1999
--------- ---- ---- ----
La Camorra(1) 152 93 17
Greens Creek(2) 26 25 24
San Sebastian(3) 16 -- --
Rosebud(2)(4) -- 24 56
Other sources(2)(5) 1 4 13
--- --- ---
Totals 195 146 110
=== === ===
----------
(1) Production commenced under our ownership in October 1999 at the La Camorra
mine.
(2) Reflects our portion.
(3) Production commenced in May 2001 at the San Sebastian mine.
(4) The Rosebud mine completed operations in the third quarter of 2000.
(5) Includes production from La Choya and other sources.
In 2001, we produced approximately 7.4 million ounces of silver compared
to approximately 8.0 million ounces in 2000. The following table displays the
actual silver production (in thousands of ounces) by operation for the years
ended December 31, 2001, 2000 and 1999:
Actual Actual Actual
Dec. 31, Dec. 31, Dec. 31,
Operation 2001 2000 1999
--------- ---- ---- ----
Lucky Friday 3,224 5,012 4,441
Greens Creek 3,260 2,754 3,051
San Sebastian 950 -- --
Other sources -- 233 125
----- ----- -----
Totals 7,434 7,999 7,617
===== ===== =====
In 2000, we shipped approximately 1,078,000 tons of product from the K-T
Group, which included ball clay, kaolin and feldspar, as well as approximately
61,000 tons of specialty aggregates from CAC and 130,000 cubic yards of
landscape material from the Mountain West Products division (MWP) of MWCA. In
2001, we shipped
24
approximately 261,000 tons from the industrial minerals group, including 20,000
tons from CAC. On March 27, 2001, we completed a sale of the K-T Group for $62.5
million subject to customary post-closing adjustments. We recorded a gain on the
sale of the K-T Group of $12.7 million. The proceeds were used to repay a term
loan facility of $55.0 million and to repay amounts outstanding under a $2.0
million revolving bank agreement. The remaining net proceeds were available for
general corporate purposes. On March 4, 2002, we completed a sale of the pet
operations of CAC for approximately $1.6 million in cash. We continue to pursue
a sale of the remaining assets of MWCA, although there can be no assurance that
a sale will be completed. During 2000, we sold substantially all of the assets
of MWP and the landscape operations of CAC.
On April 30, 2001, our wholly owned subsidiary, Minera Hecla, S.A. de C.V.
(Minera Hecla) acquired a processing mill at Velardena, Mexico, to process ore
to be mined from the San Sebastian project on the Saladillo mining concessions
located near Durango, Mexico. The purchase price of $7.4 million was financed by
a credit facility between Minera Hecla and the lender. The credit facility is
nonrecourse to us. Ore mined from the San Sebastian project is trucked
approximately 120 kilometers to the processing mill. The mill has a rated
capacity of 500 tonnes per day and produces a silver/gold precipitate which is
sold to a precious metals refiner. Milling operations commenced in early May
2001 and production from San Sebastian during 2001 was approximately 1.0 million
ounces of silver and 16,000 ounces of gold.
On July 17, 2001, we announced that we would reduce operations at our
Lucky Friday silver mine, effective October 2001, due to continued low silver
and lead prices. Production totaled approximately 3.2 million ounces of silver
in 2001, and will be reduced to approximately 2.0 million ounces in 2002.
Production can be increased if and when silver and lead prices increase. Primary
development at the mine will be suspended and mining will take place in only
currently developed areas. We estimate that with minimal additional development
the mine can sustain the lower production levels through 2004. We currently
anticipate that reduced operations will continue as long as the cost of
operating is less than the cost of care and maintenance.
RESULTS OF OPERATIONS
In this section, we refer to a number of our properties by name. You can
find additional information on these properties under "Business."
THREE MONTHS AND NINE MONTHS ENDING SEPTEMBER 30, 2002 COMPARED TO THE SAME
PERIOD IN 2001
We recorded net income, before preferred stock dividends, of approximately
$6.8 million ($0.09 per common share) and $5.5 million ($0.08 per common share)
in the first nine months of 2002 and 2001, respectively. Before preferred stock
dividends, we recorded net income of approximately $1.5 million ($0.02 per
common share) in the third quarter of 2002 compared to a net loss of
approximately $2.5 million ($0.03 per common share) in the third quarter of
2001. Net income increased during the first nine months of 2002 as compared to
the 2001 period principally due to a 36% increase in gold production, a 9%
increase in silver production, reduced operating costs and increased gold and
silver prices, partially offset by a gain of $12.7 million from the sale of the
majority of our industrial minerals segment in March 2001. Net income increased
during the third quarter ended September 30, 2002 as compared to the same period
in 2001 principally due to a 26% increase in gold production, a 16% increase in
silver production, reduced operating costs and increased gold and silver prices.
On March 27, 2001, we completed a sale of the Kentucky-Tennessee Clay
Company, Kentucky-Tennessee Feldspar Corporation, Kentucky-Tennessee Clay de
Mexico and certain other minor inactive industrial minerals companies
(collectively the K-T Group) and recorded a gain of $12.7 million in the first
nine months of 2001. On March 4, 2002, we completed a sale of the pet operations
of Colorado Aggregate division (CAC) of MWCA, our wholly owned subsidiary for
$1.6 million in cash. The sale of the pet operations did not result in a gain or
loss. We continue to pursue a sale of the remaining assets of MWCA, although
there can be no assurance that a sale will be completed.
Our net income for each of the nine months ended September 30, 2002 and
2001, includes a loss from discontinued operations of approximately $1.3 million
($0.02 per common share) in the first nine months of 2002 and income of
approximately $12.5 million ($0.18 per common share) in the same period in 2001.
The income from discontinued operations in 2001 is principally due to a gain of
$12.7 million recognized on the sale of the majority
25
of our industrial minerals segment in March 2001. We recorded a loss from
discontinued operations of approximately $0.5 million and $0.4 million in the
third quarters of 2002 and 2001, respectively.
We recorded losses applicable to common shareholders of approximately
$15.8 million ($0.20 per common share) and $0.5 million ($0.01 per common share)
in the first nine months of 2002 and 2001, respectively, and approximately $17.0
million ($0.20 per common share) and $4.5 million ($0.06 per common share) in
the third quarters of 2002 and 2001, respectively. Included in these losses
applicable to common shareholders were preferred stock dividends of $22.6
million and $6.0 million for the first nine months of 2002 and 2001,
respectively, and $18.6 million and $2.0 million in the third quarters of 2002
and 2001, respectively. The 2002 dividends include a noncash dividend of
approximately $17.6 million related to a completed preferred stock exchange
offering described below.
We completed an offer to acquire all of our currently outstanding Series B
preferred stock in exchange for newly issued shares of our common stock on July
25, 2002. A total of 1,546,598 shares, or 67.2%, of the total number of Series B
preferred shares were validly tendered and exchanged, into 10,826,186 shares of
our common stock. During the third quarter of 2002, we incurred a non-cash
dividend of approximately $17.6 million related to the completed exchange
offering. The $17.6 million dividend represents the difference between the value
of the common stock issued in the exchange offer and the value of the shares
that were issuable under the stated conversion terms of the Series B preferred
stock. The non-cash dividend had no impact on our total shareholders' equity as
the offset was an increase in common stock and surplus. As a result of the
completed exchange offering, the total of cumulative preferred dividends is
anticipated to be $23.4 million for the year ending December 31, 2002. In 2003,
the $8.0 million annual cumulative preferred dividends that have historically
been included in income (loss) applicable to common shareholders will be reduced
to approximately $2.6 million. The completed exchange offering also eliminated
$10.9 million of previously undeclared and unpaid preferred stock dividends.
The following table compares the average metal prices for the three months
and nine months ended September 30, 2002 with the comparable 2001 period:
Three Months Ended
September 30,
Metal 2002 2001 $ Change % Change
------------------------- ---------- ---------- ---------- -----------
Gold-Realized ($/oz.) $ 305 $ 283 $ 22 8%
Gold-London Final ($/oz.) $ 314 $ 274 $ 40 15%
Silver-Handy & Harman ($/oz.) $ 4.70 $ 4.28 $ 0.42 10%
Lead-LME Cash ($/pound) $ 0.195 $ 0.213 $ (0.018) (8)%
Zinc-LME Cash ($/pound) $ 0.347 $ 0.375 $ (0.028) (7)%
Nine Months Ended
September 30,
Metal 2002 2001 $ Change % Change
------------------------- ---------- ---------- ---------- -----------
Gold-Realized ($/oz.) $ 302 $ 280 $ 22 8%
Gold-London Final ($/oz.) $ 306 $ 269 $ 37 14%
Silver-Handy & Harman ($/oz.) $ 4.65 $ 4.41 $ 0.24 5%
Lead-LME Cash ($/pound) $ 0.208 $ 0.215 $ (0.007) (3)%
Zinc-LME Cash ($/pound) $ 0.354 $ 0.420 $ (0.066) (16)%
GOLD OPERATIONS
Sales of product increased by $3.2 million and cost of sales and other
direct production costs as a percentage of sales from products decreased to
35.5% during the third quarter of 2002 from 48.4% in the third quarter of 2001.
Sales of product increased by $8.4 million and cost of sales and other direct
production costs as a percentage of sales from products decreased to 38.4% in
the first nine months of 2002 from 48.4% in the first nine months of 2001. The
improvement to sales, as well as to cost of sales and other direct production
costs as a percentage of sales, for the quarter and nine-month period are
primarily due to increased mine equipment
26
availability and improvements to the crushing, milling and adsorption
capacities, allowing for increases in tons milled and gold ounces produced. Also
contributing to the improvements were increases in the average market price of
gold, which increased 15% and 14%, respectively, in the third quarter and nine
months ended September 30, 2002, as compared to the same periods in 2001.
During the first nine months of 2002, La Camorra has produced
approximately 134,000 ounces of gold at a total cash cost of $130 per gold
ounce, a 24% increase in gold production when compared to approximately 108,000
ounces at a total cash cost of $134 per gold ounce during the first nine months
of 2001. Gold production at La Camorra is projected at approximately 167,000
ounces for the year ending December 31, 2002.
SILVER OPERATIONS
For the quarter and nine months ended September 30, 2002, our silver
operations reported a loss from operations of $0.1 million and income of $2.6
million, respectively, compared to losses from operations of $3.0 million and
$5.3 million, respectively, for the quarter and nine months ended September 30,
2001. Sales of products increased by $2.1 million and cost of sales and other
direct production costs as a percentage of sales from products decreased to
75.7% in the third quarter of 2002 from 100.0% in the third quarter of 2001.
Sales of products increased by $8.0 million and costs of sales and other direct
production costs as a percentage of sales from products decreased to 70.2% in
the first nine months of 2002 from 89.7% in the first nine months of 2001.
The consolidated improvements in the silver segment primarily are a result
of reducing production from the higher cost Lucky Friday mine, increasing
production from the lower cost San Sebastian mine and lower costs at the Greens
Creek mine. Our silver production totaled 2.1 million and 6.4 million ounces,
respectively, for the quarter and nine months ended September 30, 2002, as
compared to 1.8 million and 5.9 million silver ounces, respectively, in the same
periods in 2001. The average total cash cost decreased 41% and 36%,
respectively, during the third quarter and nine months ended September 30, 2002,
when compared to the same periods during 2001.
For the quarter and nine months ended September 30, 2002, the San
Sebastian mine, located in the State of Durango, Mexico, reported sales of $5.5
million and $17.6 million, compared to $2.1 million and $4.5 million in the same
periods of 2001, as a result of the commencement of operations in May 2001.
During the first nine months of 2002, San Sebastian has produced approximately
2.5 million ounces of silver at a low total cash cost of $1.29 per silver ounce.
Silver and gold production at San Sebastian are estimated to be approximately
3.3 million ounces and 41,000 ounces, respectively, for the year ending December
31, 2002.
The Greens Creek mine, a 29.73%-owned joint-venture arrangement with
Kennecott Greens Creek Mining Company located on Admiralty Island, near Juneau,
Alaska, reported sales of $6.5 million and $18.2 million for the quarter and
nine months ended September 30, 2002, as compared to $5.9 million and $16.3
million during the same periods in 2001, primarily due to higher tonnage
throughput resulting in higher concentrate tons produced and better recoveries
in the gravity circuit, leading to improved lead/silver/gold distributions.
Greens Creek's silver production remained approximately the same at 2.5 million
ounces for the first nine months of 2002 and 2001, and production of gold ounces
and lead and zinc tons increased by approximately 18%, 12% and 15%,
respectively. The total cash cost per silver ounce decreased from $2.24 in the
first nine months of 2001 to $1.76 in the first nine months of 2002. For the
year ending December 31, 2002, production is forecasted to total approximately
3.2 million silver ounces, 30,000 ounces of gold and 8,100 and 29,600 tons of
lead and zinc, respectively.
The Lucky Friday mine, located in northern Idaho and a producing mine for
us since 1958, reported sales of approximately $2.0 million and $6.9 million for
the quarter and nine months ended September 30, 2002, as compared to $3.9
million and $13.9 million during the same periods in 2001 a reflection of the
reduction to approximately 30% of historical production beginning October 2001,
a decision made based on the decline of silver and lead prices.
We estimate with minimal additional development the mine can sustain the
lower production levels through 2004 and will continue as long as the cost of
operating is less than putting the property on care and maintenance. For the
third quarters of 2002 and 2001, the total cash cost per silver ounce was $5.50
and $5.59, respectively. The total cash cost per silver ounce decreased from
$4.95 in the first nine months of 2001 to $4.65 in the first nine months of
2002. During the third quarter and the first nine months of 2002, approximately
$0.2 million and $0.6
27
million, respectively, of costs were classified as care-and-maintenance costs
and excluded from the determination of the costs per ounce at Lucky Friday.
Including the care-and-maintenance costs, the total cash cost per ounce was
$5.96 for the third quarter and $5.08 for the nine months ended September 30,
2002. For the year ending December 31, 2002, production is forecasted to total
approximately 2.0 million silver ounces and 9,000 tons of lead, as compared with
total actual production for the year ended December 31, 2001, of 3.2 million
silver ounces and 21,000 tons of lead, respectively.
CORPORATE MATTERS
Interest expense decreased $1.9 million, or 58%, in the first nine months
of 2002, compared to the first nine months of 2001, primarily the result of
repayment of a $55.0 million term loan facility in March 2001. Interest expense
decreased $0.2 million in the third quarter 2002 as compared to the third
quarter of 2001.
Miscellaneous expense decreased $0.7 million (44%) in the nine months
ending September 30, 2002, compared to the same period in 2001, primarily due to
a foreign exchange gain ($1.2 million) in 2002 due to the devaluation of the
Venezuelan Bolivar, offset by accruals for tax offset bonuses on employee stock
option plans ($0.4 million) and legal, consulting and accounting expenses
regarding our preferred stock tender offer and various other corporate matters.
Miscellaneous expense increased $0.3 million (41%), in the third quarter 2002 as
compared to the same period in 2001 primarily due to a foreign exchange loss
associated with the continued fluctuation of the Venezuelan Bolivar ($0.6
million) in 2002, partially offset by a quarter-on-quarter positive foreign
exchange variance in Mexico ($0.2 million).
Our provision for closed operations and environmental matters increased
$0.3 million (120%) during the third quarter of 2002, compared with the third
quarter of 2001, primarily due to a provision for future reclamation and other
closure costs at various closed properties. Our provision for closed operations
and environmental matters decreased $0.5 million (37%) in the first nine months
of 2002, compared to the same period in 2001, primarily due to decreased
expenditures relating to the Coeur d'Alene Basin litigation ($0.8 million),
partly offset by the above mentioned adjustment for future reclamation and other
closure costs ($0.3 million).
Interest and other income decreased $1.1 million (74%) and $1.1 million
(42%), in the quarter and nine months ending September 30, 2002, compared to the
same periods in 2001, primarily due to decreased pension income ($0.5 million
and $1.4 million, respectively) and gains recognized on the sale of assets
during 2001 ($0.4 million and $0.4 million, respectively). Mark to market
adjustments on our outstanding gold lease rate swap were lower during the third
quarter of 2002 ($0.2 million), as compared to the third quarter of 2001,
although for the nine months ended September 30, 2002, we reported an overall
positive mark to market adjustment of $0.6 million when compared to the nine
months ended September 30, 2001.
Exploration expense increased $0.8 million (176%) and $1.2 million (71%),
in the quarter and nine months ended September 30, 2002, compared to the same
periods in 2001, primarily due to increased exploration expenditures in
Venezuela ($0.3 million and $1.0 million, respectively) and Mexico ($0.5 million
and $0.2 million, respectively).
YEAR 2001 COMPARED TO YEAR 2000
We recorded a loss from continuing operations, before preferred stock
dividends, of approximately $9.6 million, or $0.14 per share, in 2001 compared
to a loss from continuing operations, before an extraordinary charge and
preferred stock dividends, of approximately $84.8 million, or $1.27 per share,
in 2000. After recognizing $11.9 million in income from discontinued operations
and $8.1 million (which has not been declared or paid) in dividends to holders
of our Series B preferred stock, our loss applicable to common stockholders for
2001 was approximately $5.7 million, or $0.08 per share, compared to a loss of
$92.0 million, or $1.38 per share, in 2000 after recognition of $1.5 million in
income from discontinued operations, a $0.6 million extraordinary charge for the
write-off of debt issuance costs related to extinguished debt, and $8.1 million
(only $4.0 million of which was declared or paid) in dividends to holders of our
Series B preferred stock. Although we did not declare the dividends for the year
2001 and the third and fourth quarters of 2000, because these dividends are
cumulative, the effect of the undeclared dividends are reflected in the loss
applicable to common stockholders.
28
During 2000, adjustments to the carrying value of mining properties
totaled $40.2 million, including an adjustment of $31.2 million to reduce the
carrying value of the Lucky Friday mine property, plant and equipment.
Additionally during 2000, we recorded adjustments of $4.4 million for
properties, plants and equipment and supply inventory at the Rosebud mine and
$4.7 million for previously capitalized development costs at the Noche Buena
gold property. During 2001, there were no adjustments to the carrying value of
mining properties.
Our provision for closed operations and environmental matters decreased
$18.7 million from $20.0 million in 2000 to $1.3 million in 2001. The reduction
resulted principally from a decrease at the Grouse Creek mine and the Bunker
Hill Superfund site of $17.8 million, primarily due to 2000 environmental and
reclamation accruals for future environmental and reclamation expenditures.
Sales of products increased by approximately $9.4 million, or 12%, from
$75.8 million in 2000 to $85.2 million in 2001, primarily due to:
o increased sales of $9.9 million from gold operations principally as
a result of increased production at the La Camorra mine ($16.6
million), partly offset by the completion of mining activity at the
Rosebud mine ($6.6 million) in the third quarter of 2000, and
o decreased sales totaling approximately $0.5 million from silver
operations primarily due to lower zinc and silver prices, lower
production at the Lucky Friday mine ($7.4 million) and decreased
hedging activities ($0.9 million) in the 2001 period. These factors
are partly offset by increased sales at the San Sebastian mine, due
to the commencement of operations in May 2001 ($7.8 million).
The following table compares the average metal prices for the years ended
December 31, 2001 and 2000:
Metal 2001 2000 $ Change % Change
------------------------- ---------- ---------- ---------- -----------
Gold-Realized ($/oz.) $ 280 $ 284 $ (4) (1)%
Gold-London Final ($/oz.) 272 279 (7) (3)
Silver-Handy & Harman ($/oz.) 4.36 5.00 (0.64) (13)
Led-LME Cash ($/pound) 0.216 0.206 0.010 5
Zinc-LME Cash ($/pound) 0.402 0.512 (0.110) (21)
Cost of sales and other direct production costs decreased approximately
$3.0 million, or 5%, from $63.1 million in 2000 to $60.1 million in 2001,
primarily due to:
o decreased cost of sales at the Rosebud mine ($7.5 million) due to
the completion of mining activity in the third quarter of 2000,
o decreased cost of sales at the Lucky Friday mine ($5.3 million)
resulting from decreased production of silver and lead,
o increased cost of sales at the San Sebastian mine ($6.2 million) due
to the commencement of operations in May 2001, and
o increased cost of sales from the La Camorra and Greens Creek mines
($3.0 million and $1.1 million) due to increased production.
Cost of sales and other direct production costs as a percentage of sales
decreased from 83.2% in 2000 to 70.4% in 2001. The change was due to increased
margins from gold operations resulting from increased production, increased gold
ore grade and better efficiencies at the La Camorra mine, decreased production
and sales at the
29
Rosebud mine due to the completion of mining activity in 2000, partly offset by
lower hedging revenues and lower margins from the silver segment due to lower
silver and zinc prices.
Depreciation, depletion and amortization increased $2.4 million, or 13%,
from $18.1 million in 2000 to $20.5 million in 2001, principally due to:
o increased depreciation from the La Camorra mine due to increased
production ($4.7 million),
o increased depreciation at the San Sebastian mine ($1.0 million), due
to the commencement of operations in May 2001,
o decreased depreciation at the Lucky Friday mine ($1.6 million), due
to the write-down of assets in December 2000, and
o decreased depreciation at the Rosebud mine ($2.0 million), due to
the completion of mining activity in the third quarter of 2000.
Exploration expense decreased $4.2 million, or 66%, from $6.3 million in
2000 to $2.1 million in 2001. This decrease is principally due to reduced
exploration activity in Mexico ($1.4 million), decreased expenditures at the
Rosebud mine ($1.3 million), due to completion of operations in the third
quarter of 2000, and decreased expenditures at La Camorra and in other South
American countries ($0.8 million).
Interest expense decreased $4.2 million in 2001 as compared to 2000,
primarily the result of the repayment of the $55.0 million term loan facility in
March 2001 and decreased loan fees during 2001 as compared to the 2000 period.
Interest and other income decreased $1.1 million from $4.6 million in 2000
to $3.5 million in 2001, principally a result of the gains recognized during
2000 on the sale of assets and lower interest income in 2001.
Miscellaneous expense increased $1.1 million from $1.8 million in 2000 to
$3.0 million in 2001, primarily due to a pension curtailment adjustment related
to the Lucky Friday Pension Plan associated with the cut back in operations at
the mine.
We recorded income from discontinued operations of approximately $11.9
million, or $0.17 per share, in 2001 compared to income of approximately $1.5
million, or $0.02 per share, in 2000. On March 27, 2001, we completed a sale of
the K-T Group for $62.5 million, subject to customary post-closing adjustments,
and recorded a gain of $12.7 million on the sale in 2001. Other factors
contributing to the change include:
o decreased sales of approximately $53.4 million, a direct result of
the sale of the K-T Group ($47.8 million), as well as decreased
shipments at the MWCA group ($5.6 million) due to the sale of MWP in
March 2000 and the landscape operation of CAC in June 2000,
o decreased cost of sales of $47.0 million, directly due to the lower
sales at the K-T Group and the partial sale of MWCA during 2000,
o decreased depreciation, depletion and amortization of $2.9 million,
due to the sale of the K-T Group and the partial sale of MWCA in
2000,
o a loss of $1.0 million on the sale of MWP in 2000, and
o legal fees during 2001 associated with litigation concerning the
failed sale for the K-T Group in January 2001 ($0.8 million).
An extraordinary charge of $0.6 million was recorded in 2000 to write off
previously unamortized debt issuance costs associated with the extinguishment of
debt.
30
Cash operating, total cash and total production cost per gold ounce
decreased from $208, $211 and $275 in 2000 to $133, $133 and $200 in 2001,
respectively. The decreases in cost per gold ounce were primarily attributable
to increased gold production at the La Camorra mine, as well as the completion
of mining activity in the third quarter of 2000 at the Rosebud mine.
Cash operating, total cash and total production cost per silver ounce
decreased from $4.02, $4.02 and $5.49 in 2000 to $3.55, $3.57 and $5.09 in 2001,
respectively. The decreases in the cost per silver ounce were due primarily to
the addition of the low-cost San Sebastian mine, which commenced operations in
May 2001, and the positive impacts of Greens Creek's increased silver production
during 2001, resulting from a higher silver grade and increased tons mined. The
total cost per ounce was also positively impacted by decreased per ounce
depreciation at the Lucky Friday mine due to the write-down of the majority of
property, plant and equipment in the fourth quarter of 2000. During the fourth
quarter of 2001, approximately $0.4 million of costs were classified as
care-and-maintenance costs and included in the determination of the costs per
ounce at Lucky Friday. Excluding the $0.4 million in costs, the cash operating,
total cash and total production costs per ounce total $3.49, $3.52 and $5.04,
respectively, for 2001.
YEAR 2000 COMPARED TO YEAR 1999
We recorded a loss from continuing operations, before an extraordinary
charge and preferred stock dividends, of approximately $84.8 million, or $1.27
per share, in 2000 compared to a loss from continuing operations, before a
cumulative effect of change in accounting principle and preferred stock
dividends, of approximately $43.4 million, or $0.70 per share, in 1999. After
recognizing $1.5 million in income from discontinued operations, a $0.6 million
extraordinary charge for the write-off of debt issuance costs related to
extinguished debt, and $8.1 million (only $4.0 million of which has been
declared and paid) in dividends to holders of our Series B preferred stock, our
loss applicable to common shareholders for 2000 was approximately $92.0 million,
or $1.38 per share, compared to a loss of $48.0 million, or $0.77 per share, in
1999 after recognition of $4.8 million in income from discontinued operations, a
$1.4 million charge to write off unamortized start-up costs associated with the
Greens Creek mine, and $8.1 million in dividends to holders of our Series B
preferred stock. Although we did not declare the dividend for the third and
fourth quarters of 2000, because these dividends are cumulative, the effect of
the undeclared dividends is reflected in the loss applicable to common
shareholders.
Adjustments to the carrying value of mining properties increased $40.0
million to $40.2 million in 2000 compared with an asset write-down totaling $0.2
million during 1999. In the fourth quarter of 2000, we recorded an adjustment of
$31.2 million to reduce the carrying value of the Lucky Friday mine property,
plant and equipment in accordance with Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adjustment was necessitated by
continuing low silver and lead prices, combined with further declines in silver
and lead prices during the fourth quarter of 2000. For the first nine months of
2000, silver averaged $5.08 per ounce and lead averaged $0.203 per pound. During
the fourth quarter of 2000, silver decreased to an average of $4.75 per ounce
and ended the year at $4.59 per ounce. Lead averaged $0.214 per pound during the
fourth quarter and ended the year at $0.214 per pound. We continue to evaluate
all available alternatives for developing the next level of the Gold Hunter
expansion area in the current metals price environment. Additionally, during the
second quarter of 2000, we recorded adjustments of $4.4 million for properties,
plants and equipment and supply inventory at the Rosebud mine, and $4.7 million
for previously capitalized deferred development costs at the Noche Buena gold
property. The $4.4 million adjustment at the Rosebud mine was necessitated due
to the closure of the Rosebud mine previously announced by us and Newmont, our
joint-venture partner. The Rosebud mine completed mining activity in July 2000
and milling activities in August 2000. At the Noche Buena property, we suspended
activities in 1999 due to the low price for gold. Based upon the continuation of
the lower gold price, an adjustment to the carrying value of the Noche Buena
property was recorded in the second quarter of 2000.
Sales of products increased by approximately $2.1 million, or 2.9%, from
$73.7 million in 1999 to $75.8 million in 2000, primarily due to:
o increased sales of $8.0 million from gold operations principally as
a result of the acquisition of the La Camorra mine in June 1999,
partly offset by the completion of mining and milling activities at
the Rosebud mine in August 2000, and
31
o decreased sales totaling approximately $5.8 million from silver
operations primarily due to lower lead and silver prices, partly
offset by an increased zinc price and increased production of
silver, lead and zinc.
The following table compares the average metals prices for 2000 with 1999:
Metal 2000 1999 $ Change % Change
------------------------- ---------- ---------- ---------- -----------
Gold-Realized ($/oz.) $ 284 $ 286 $ (2) (1)%
Gold-London Final ($/oz.) 279 279 -- --
Silver-Handy & Harman ($/oz.) 5.00 5.25 (0.25) (5)
Led-LME Cash ($/pound) 0.206 0.228 (0.022) (10)
Zinc-LME Cash ($/pound) 0.512 0.488 0.024 5
Cost of sales and other direct production costs increased approximately
$8.7 million, or 16%, from $54.4 million in 1999 to $63.1 million in 2000,
primarily due to:
o increased cost of sales from gold operations of $6.4 million due to
the acquisition of the La Camorra mine in June 1999, partly offset
by lower cost of sales at the Rosebud mine and the La Choya mine,
both as a result of the completion of mining activities, and
o increased cost of sales from silver operations of $2.2 million
resulting from increased production of silver, lead and zinc at the
Lucky Friday and Greens Creek mines.
Cost of sales and other direct production costs as a percentage of sales
increased from 73.9% in 1999 to 83.2% in 2000. The increase was principally a
result of decreased margins in both the silver and gold segments. In the gold
segment, decreased gold production and higher unit cash costs at the Rosebud
mine negatively impacted the gross margin. In the silver segment, lower hedging
revenues combined with lower average lead and silver prices led to the reduced
margins.
Depreciation, depletion and amortization decreased $0.6 million, or 3%,
from $18.7 million in 1999 to $18.1 million in 2000, principally due to:
o decreased depreciation at the Rosebud mine of $3.5 million due to
completion of mining in July 2000 and milling in August 2000,
o decreased depreciation at the La Choya mine of $1.2 million, due to
completion of gold production in 1999 as a result of the completion
of mining activity in December 1998,
o decreased depreciation at the Lucky Friday mine of $0.2 million, and
o increased depreciation at the La Camorra mine of $4.3 million as a
result of a full year's production in 2000 as compared to three
months of production in 1999.
Exploration expense increased $0.8 million, or 14%, from $5.5 million in
1999 to $6.3 million in 2000. This increase is principally due to increased
expenditures at the Saladillo property in Mexico of $0.8 million, increased
exploration at the La Camorra mine of $0.6 million and increased expenditures at
the Rosebud mine of $0.4 million. These increases were partly offset by
decreased expenditures at the Cacique property of $0.4 million and other
properties, principally in Mexico, of $0.6 million.
Our provision for closed operations and environmental matters decreased
$10.1 million from $30.1 million in 1999 to $20.0 million in 2000. The decrease
resulted principally from the 1999 environmental and reclamation expense
totaling $27.3 million for future environmental and reclamation expenditures at
the Grouse Creek mine and
32
the Bunker Hill Superfund site, which decreased to $12.2 million at Grouse
Creek, $5.6 million at the Bunker Hill Superfund site and $2.2 million at
various other properties in 2000.
Interest expense increased $3.5 million in 2000 as compared to 1999,
primarily the result of increased average borrowings including the $11.0 million
of the La Camorra project financing put in place in June 1999, $3.0 million of
subordinated debt that was outstanding for three additional months in 2000 and
the $55.0 million term loan facility put in place in March 2000, replacing a
prior revolving $55.0 million credit facility that was in place in 1999. Higher
average interest rates and increased loan fees also contributed to the increase
in interest expense as compared to 1999.
We recorded income from discontinued operations of approximately $1.5
million, or $0.02 per share, in 2000 compared to income of approximately $4.8
million, or $0.08 per share, in 1999. The decrease in 2000 compared to 1999 is
primarily due to:
o decreased sales totaling approximately $14.8 million, principally
the result of decreased shipments at the MWCA group of $16.9 million
after the sale of the Mountain West Products division of MWCA on
March 15, 2000, and the sale of the landscape operations of CAC on
June 5, 2000. The decreases from MWCA were partly offset by
increased sales of $2.1 million from the K-T Clay Group,
o a loss of $1.0 million on the sale of the Mountain West Products
division of MWCA in 2000,
o decreased cost of sales of $7.9 million, principally due to the
partial sale of MWCA, partly offset by increased costs at the K-T
Clay Group resulting from increased sales and increased energy
costs, and
o 1999 adjustments of $4.4 million made to the carrying value of MWCA.
An extraordinary charge of $0.6 million was recorded in 2000 to write off
previously unamortized debt issuance costs associated with the extinguishment of
our previous $55.0 million revolving credit facility.
A cumulative effect of change in accounting principle totaled $1.4 million
in 1999, due to the write off of unamortized start-up costs relating to our
29.73% ownership interest in the Greens Creek mine. The adjustment was the
result of the required application of Statement of Position No. 98-5, "Reporting
on the Costs of Start-up Activities."
Cash operating and total cash cost per gold ounce increased from $195 and
$205 in 1999 to $208 and $211 in 2000, respectively. The increases in the cash
operating and total cash cost per gold ounce were primarily attributable to
higher costs per ounce at the Rosebud mine associated with mining of lower-grade
ore in 2000. Total production costs per gold ounce decreased from $298 per ounce
in 1999 to $275 per ounce in 2000. The decrease in the total production costs
per gold ounce was principally due to production from the lower-cost La Camorra
mine in 2000 and due to the write-down of the carrying value of the Rosebud mine
in the second quarter of 2000, which eliminated the depreciation, depletion and
amortization component of the total production cost per ounce at Rosebud in the
third quarter of 2000.
Cash operating, total cash and total production cost per silver ounce
increased from $3.72, $3.72 and $5.25 in 1999 to $4.02, $4.02 and $5.49 in 2000,
respectively. The increases in the cost per silver ounce were due primarily to
lower average lead prices which negatively impacted by-product credits partly
offset by increased production and a favorable zinc price.
FINANCIAL CONDITION AND LIQUIDITY
Our financial condition improved during the third quarter, with a current
ratio of 1.5 to 1 at September 30, 2002, compared to 1 to 1 at December 31,
2001, and 1.4 to 1 at June 30, 2002, and cash and cash equivalents of $17.8
million, an increase of approximately $10.2 million from December 31, 2001. We
believe cash requirements over the next twelve months will be funded through a
combination of current cash, future cash flows from
33
operations, amounts available under existing loan agreements proceeds from
potential asset sales, and/or future debt or equity security issuances.
Our ability to raise capital is highly dependent upon the commercial
viability of our projects and the associated prices of metals we produce.
Because of the significant impact that changes in the prices of silver, gold,
lead and zinc have on our financial condition, declines in these metals prices
may negatively impact short-term liquidity and our ability to raise additional
funding for long-term projects. There can be no assurance that we will be
successful in generating adequate funding for planned capital expenditures,
environmental remediation and reclamation expenditures and for exploration
expenditures in the future.
OPERATING ACTIVITIES
Operating activities provided approximately $14.6 million of cash during
the first nine months of 2002, primarily from cash provided by La Camorra, San
Sebastian and Greens Creek. Significant uses of cash included changes in
accounts and notes receivable ($3.7 million), cash required for reclamation
activities and other noncurrent liabilities ($3.5 million), changes in
inventories ($3.2 million), changes in accounts payable, payroll and other
accrued expenses ($0.8 million) and changes in other current and noncurrent
assets ($0.6 million). Principal noncash elements included charges for
depreciation, depletion and amortization of $17.7 million, an increase in the
provision for reclamation and closure costs ($1.4 million) and a change in the
net assets of discontinued operations ($0.9 million).
Operating activities provided approximately $8.0 million of cash during
2001. Significant sources of cash included cash provided by La Camorra, reduced
accounts and notes receivable ($4.5 million) and increased accrued payroll and
related benefits ($3.1 million). Significant uses of cash included cash required
for reclamation activities and other noncurrent liabilities ($7.8 million).
Principal non cash charges included charges for depreciation, depletion and
amortization of $20.7 million, partly offset by a $12.7 million gain on the sale
of the K-T Group.
INVESTING ACTIVITIES
Investing activities required $1.8 million of cash during the first nine
months of 2002. The major use of cash was additions to properties, plants and
equipment ($9.1 million), primarily at the La Camorra ($4.5 million), Greens
Creek ($2.3 million) and San Sebastian ($1.7 million) mines, as well as the
initial payment in September for the Block B exploration and mining lease in
Venezuela ($0.5 million). We currently estimate that capital expenditures during
the fourth quarter of 2002 were in the range of $3.0 million to $3.6 million,
principally for expenditures at the above mentioned locations. In 2003, we
estimate that our capital expenditures will be in the range of $12.0 million to
$19.0 million. The lower end of the range of capital expenditures in 2003
represents sustaining capital at our existing operations. The upper end of the
estimate includes other possible capital projects, including commencement of a
project to construct a shaft at the La Camorra mine in Venezuela, and other
possible development activities. There can be no assurance that our estimated
capital expenditures for 2003 will be in the range we have projected.
The cash used for additions to properties, plants and equipment is
partially offset by proceeds received on the sale of the corporate headquarters
building, which was completed on April 8, 2002, located in Coeur d'Alene, Idaho
($5.6 million), as well as the sale of the pet operations of CAC during the
first quarter of 2002 for $1.6 million in cash.
Investing activities provided $42.5 million of cash during 2001. The most
significant source of cash was from the sale of the K-T Group ($59.8 million),
representing an initial purchase price of $62.5 million less expenses and post
closing adjustments, partly offset by additions to properties, plants and
equipment totaling $17.9 million, principally at the San Sebastian mine to
acquire the Velardena mill ($7.7 million), at the Greens Creek mine ($5.3
million) and at the La Camorra mine ($4.7 million).
34
FINANCING ACTIVITIES
During the first nine months of 2002, financing activities used
approximately $2.6 million in cash, primarily for the repayment of debt ($8.5
million). The repayment of debt was partly offset by borrowings of $3.3 million
and proceeds of $2.6 million for common stock issued for outstanding warrants
and employee stock options exercised.
As of September 30, 2002, we had outstanding debt of $13.8 million,
including $6.4 million due over the next twelve months. The outstanding debt
included project financing facilities for the La Camorra mine in Venezuela ($5.0
million) and the Velardena mill at the San Sebastian mine in Mexico ($5.8
million), as well as a $3.0 million subordinated loan.
During 2001, approximately $44.4 million of cash was used by financing
activities. The major use of cash was repayment of debt of $66.2 million,
including our $55.0 million term loan facility. This use was partly offset by
borrowings of $15.9 million, including $7.4 million at Minera Hecla to finance
the Velardena mill purchase. In addition, we received net proceeds of
approximately $5.5 million in a private placement of 5.7 million common shares
to our pension plans.
As of December 31, 2001, we had outstanding debt of $19.0 million,
including $7.0 million due to be repaid in the next 12 months. The outstanding
debt included project financing facilities for the La Camorra mine in Venezuela
($6.5 million) and the San Sebastian mill in Mexico ($6.7 million), a $3.0
million subordinated loan and $2.8 million outstanding under a $3.0 million
revolving credit facility.
ENVIRONMENTAL
In August 2001, we entered into an agreement in principle with the United
States and the State of Idaho to settle the governments' claims for natural
resource damages and clean-up costs related to the historic mining practices in
the Coeur d'Alene Basin in northern Idaho. Due to a number of changes that have
occurred since the signing of the Agreement in Principle, including improvements
in the environmental conditions at Grouse Creek and lower estimated clean-up
costs in the Coeur d'Alene Basin as well as our improved financial condition,
the terms of the multiple properties settlement approach set forth in the
Agreement in Principle no longer appears favorable to us. Therefore, the United
States, the State of Idaho and we agreed to discontinue utilizing the Agreement
in Principle as a settlement vehicle. However, we anticipate further settlement
negotiations with the United States and the State of Idaho to limit our
environmental clean-up liabilities for historic mining practices in the Coeur
d'Alene Basin.
Due to a number of uncertainties related to this matter, including the
outcome of pending litigation and the result of any settlement negotiations, we
do not have the ability to estimate what, if any, liability exists related to
the Coeur d'Alene Basin at this time. It is reasonably possible our ability to
estimate what, if any, obligation relating to the Coeur d'Alene Basin may change
in the near or long term depending on a number of factors. In addition, an
adverse ruling against us for liability and damages in this matter could have a
material adverse effect on us.
Reserves for closure costs, reclamation and environmental matters totaled
$50.7 million at September 30, 2002. We anticipate that expenditures relating to
these reserves will be made over the next five to ten years. Although we believe
the reserve is adequate based on current estimates of aggregate costs, we
periodically reassess our environmental and reclamation obligations as new
information is developed. Depending on the results of the reassessment, it is
reasonably possible that our estimate of our obligations may change in the near
or long term.
We currently estimate that expenditures for environmental remediation and
reclamation during the fourth quarter of 2002 were in the range of $1.7 million
to $2.2 million, principally for water management activities at the Grouse Creek
property and the yard remediation program at the Bunker Hill Superfund site.
EXPLORATION
We currently estimate that exploration expenditures incurred during the
fourth quarter of 2002 were in the range of $2.5 million to $3.5 million,
principally for continued drilling in Venezuela on the Main vein down-dip
35
extension, the Betzy vein West Flank, at Canaima and on the Block B concessions,
and in Mexico on the Francine and Don Sergio veins. Other exploration activities
anticipated include an exploration drift to the Gallagher fault block at Greens
Creek and continued permitting activities at the Hollister Development Block in
Nevada. See "The Company - Exploration."
OTHER
On June 13, 2002, we announced our intent to offer to holders of our
Series B preferred stock to exchange each of their preferred shares for seven
shares of our common stock until July 25, 2002. We offered the holders of the
preferred stock the opportunity to exchange their shares at a higher rate (7
shares of common for each preferred share) in order to limit the impact of the
dividend arrearages and to eliminate the liquidation preferences for retired
preferred. The dividend arrearages have the effect of preventing us from paying
any dividends on common stock and entitle the holders of preferred stock to
elect two directors to our board of directors. The arrearages may hinder our
ability to raise capital or negotiate third-party mergers and acquisitions, and
may adversely affect the market value of our common and preferred stock. In
addition, we believed that the prospect of not receiving future dividends might
be untenable to our preferred holders and that they should have the opportunity
to exchange their shares for a more actively traded security. A total of
1,546,598 shares, or 67.2%, of the total number of preferred shares outstanding
(2.3 million) were validly tendered and exchanged into 10,826,186 shares of our
common stock.
In the third quarter of 2002, we incurred a non-cash dividend of
approximately $17.6 million related to the completed exchange offering. The
$17.6 million dividend represents the difference between the value of the common
stock issued in the exchange offer and the value of the shares that were
issuable under the stated conversion terms of the preferred stock. The non-cash
dividend had no impact on our total shareholders' equity as the offset was an
increase in common stock and surplus. As a result of the completed exchange
offering, the total of cumulative preferred dividends is anticipated to be $23.4
million for the year ending December 31, 2002. Beginning in 2003, the $8.0
million annual cumulative preferred dividends that have historically been
included in income (loss) applicable to common shareholders will be reduced to
approximately $2.6 million. The completed exchange offering also eliminated
$10.9 million of previously undeclared and unpaid preferred stock dividends.
Holders of the preferred shares are entitled to receive cumulative cash
dividends at the annual rate of $3.50 per share payable quarterly, when and if
declared by the board of directors and have voting rights related to certain
amendments to our Articles of Incorporation. As of January 31, 2002, we had not
declared and paid the equivalent of six quarterly dividends, entitling holders
of the preferred shares to elect two directors at our annual shareholders'
meeting. On May 10, 2002, holders of the preferred shares, voting as a class,
elected two additional directors.
David Christensen, one of our two directors elected by holders of Series B
preferred stock, resigned from our board of directors in October 2002. He joined
Credit Suisse First Boston as a research analyst after he joined our board and
advised us that he wished to avoid any appearance of conflict of interest as a
result of his new position. In order to fill the resulting vacancy, the
remaining director elected by the holders of Series B preferred stock will name
a new director. It is currently anticipated that the new director will be named
by February 2003.
For information on hedged positions and derivative instruments, see
"Quantitative and Qualitative Disclosure About Market Risk."
We are subject to legal proceedings and claims that have not been finally
adjudicated. The ultimate disposition of these matters and various other pending
legal actions and claims is not presently determinable. However, an adverse
determination in certain of these matters may have a material adverse effect on
the financial position of us and our subsidiaries. (See "Business -Legal
Proceedings").
CONCLUSION
We believe our cash requirements over the next twelve months will be
funded through a combination of current cash, future cash flows from operations,
amounts available under existing loan agreements, proceeds from potential asset
sales and/or future public or private equity or debt financings. We continually
evaluate opportunities to increase our reserves, including exploration and
development of our existing properties as well as acquisitions of
36
additional properties. These activities may require additional funding.
Additional sources of funding may include public or private equity or debt
financings, capital and operating leases and other financing arrangements. Our
ability to raise capital is highly dependent upon the commercial viability of
our projects and the associated prices of the metals we produce. Because of the
significant impact that changes in the prices of silver, gold, lead and zinc
have on our financial condition, declines in these metals prices may negatively
impact short-term liquidity and our ability to raise additional funding for
long-term projects. In the event that cash balances decline to a level that
cannot support our operations, our management will defer certain planned capital
expenditures and exploration expenditures as needed to conserve cash for
operations. There can be no assurance that we will be successful in generating
adequate funding for planned capital expenditures, environmental remediation and
reclamation expenditures and for exploration expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 was amended in June 2000 with the
issuance of SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS 133, which we adopted effective January 1, 2001,
requires that derivatives be recognized as assets or liabilities and be measured
at fair value. Gains or losses resulting from changes in the fair value of
derivatives in each period are to be accounted for either in current earnings or
other comprehensive income (loss) depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in the fair value or cash flows of the hedging
instruments and the hedged items.
At September 30, 2002, our hedging contracts, used to reduce exposure to
precious metal prices, consisted of forward sales contracts and a gold lease
rate swap. We intend to physically deliver metal in accordance with the terms of
certain of the forward sales contracts. As such, we have accounted for these
contracts as normal sales in accordance with SFAS 138 and as a result, these
contracts are not required to be accounted for as derivatives under SFAS 133.
Certain other forward contracts where delivery is not certain have been
designated as cash flow hedges, and the changes in fair value of these cash flow
hedges are recorded in other comprehensive income until the contract is closed
out. We recorded a cumulative effect of a change in accounting principle in
other comprehensive income of approximately $0.1 million loss related to the
gold lease rate swap upon adoption of SFAS 133 on January 1, 2001. This amount
is being amortized over the physical settlement of ounces subject to the gold
lease rate swap. During the next twelve months, approximately $40,000 is
expected to be amortized to the income statement. (See "Risk Factors - Our
hedging activities could expose us to losses").
In April 1998, Statement of Position 98-5 (SOP 98-5), "Reporting on the
Costs of Start-up Activities" was issued. SOP 98-5 provides guidance on the
financial reporting of start-up costs and organizational costs. It requires
costs of start-up activities and organizational costs to be expensed as
incurred, as well as the recognition of a cumulative effect of a change in
accounting principle for retroactive application of the standard. We adopted SOP
98-5 as required on January 1, 1999. The impact of this change in accounting
principle related to unamortized start-up costs associated with our 29.73%
ownership interest in the Greens Creek mine. The $1.4 million cumulative effect
of this change in accounting principle is included in the consolidated statement
of operations for the year ended December 31, 1999. Due to the availability of
net operating losses, there was no tax effect associated with the change.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" which
supersedes APB Opinion No. 16 "Business Combinations" and FASB Statement No. 38
"Accounting for Preacquisition Contingencies of Purchased Enterprises." The
provisions of this statement require that all business combinations be accounted
for using "purchase accounting" and it disallows the use of "pooling of
interests" as previously allowed under APB Opinion No. 16 and FASB Statement No.
38. This statement is effective for all business combinations subsequent to June
30, 2001. The adoption of this statement did not have a material effect on our
financial statements.
Also in June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17 "Intangible Assets." The
provisions of this statement changes the unit of account for goodwill and takes
a very different approach to how goodwill and other intangible assets are
accounted for
37
subsequent to their initial recognition. Because goodwill and some intangible
assets will no longer be amortized, the reported amounts of goodwill and
intangible assets, as well as total assets, will not decrease at the same time
and in the same manner as under previous standards. This statement is effective
for all fiscal years beginning subsequent to December 15, 2001. The adoption of
this statement did not have a material effect on our financial statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations," which amends SFAS No. 19, and establishes a uniform
methodology for accounting for estimated reclamation and abandonment costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The statement is required to be adopted by
January 1, 2003, at which time we will record the estimated present value of
reclamation liabilities and increase the carrying value of related assets.
Subsequently, reclamation costs will be allocated to expense over the life of
the related assets and will be adjusted for changes resulting from the passage
of time and changes to either the timing or amount of the original present value
estimate underlying the obligation. Currently we are in the process of
quantifying the effect the adoption of this statement will have on our
consolidated financial statements.
The FASB also issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business. It also amends APB No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The provisions of this Statement generally are to be
applied prospectively. The adoption of this statement did not have a material
effect on our financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (11 SFAS No. 145"). SFAS No. 145 updates, clarifies and simplifies
existing accounting pronouncements, by rescinding SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Accounting Principles Board Opinion No. 30 will now be
used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The provisions of SFAS No. 145 that amend SFAS No. 13 are effective for
transactions occurring after May 15, 2002 with all other provisions of SFAS No.
145 being required to be adopted by us in our consolidated financial statements
for the first quarter of fiscal 2003. Our management currently believes that the
adoption of SFAS No. 145 will not have a material impact on our consolidated
financial statements.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Our management currently believes that the adoption of
SFAS No. 146 will not have a material impact on our consolidated financial
statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." SFAS No. 147 removes the special distinction of financial
institution acquisitions from the scope of both SFAS No. 72 and FASB
Interpretation
38
No. 9. The former method of recognizing any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable assets as a
unidentifiable intangible asset no longer applies to acquisitions of financials
institutions or branches of financial institutions. These acquisitions will be
accounted for in accordance with FASB Statements Nos. 141 and 142, which will
require the recording of goodwill that is not amortized, but rather tested for
impairment. Further this Statement amends SFAS No. 144, to include in its scope
long-term customer relationships such as depositor and borrower relationship
intangible assets and credit cardholder intangible assets. The adoption of SFAS
No. 147 will not have any impact on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make a wide variety of
estimates and assumptions that affect (i) the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and (ii) the reported amounts of revenues and
expenses during the reporting periods covered by the financial statements. Our
management routinely makes judgments and estimates about the effect of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the future resolution of the uncertainties increases, these judgments
become even more subjective and complex. We have identified certain accounting
policies that are most important to the portrayal of our current financial
condition and results of operations. Our significant accounting policies are
disclosed in Note 1 of Notes to Consolidated Financial Statements beginning on
page F-1 of this prospectus.
REVENUE RECOGNITION
Sales of metals products sold directly to smelters are recorded when title
and risk of loss transfer to the smelter at current spot metals prices. We must
estimate the price at which our metals will be sold in reporting our
profitability and cash flow. Recorded values are adjusted monthly until final
settlement at month-end metals prices. Sales of metal in products tolled, rather
than sold to smelters, are recorded at contractual amounts when title and risk
of loss transfer to the buyer.
Changes in the market price of metals significantly affect our revenues,
profitability and cash flow. Metals prices can and often do fluctuate widely and
are affected by numerous factors beyond our control, such as political and
economic conditions, demand, forward selling by producers, expectations for
inflation, central bank sales, the relative exchange rate of the U.S. dollar,
purchases and lending, investor sentiment, and global mine production levels.
The aggregate effect of these factors is impossible to predict. Because a
significant portion of our revenues is derived from the sale of silver, gold,
lead and zinc, our earnings are directly related to the prices of these metals.
If the market price for these metals falls below our total production costs, we
will experience losses on such sales.
PROVEN AND PROBABLE ORE RESERVES
On a periodic basis, management reviews the reserves that reflect
estimates of the quantities and grades of mineralized material at our mines
which management believes can be recovered and sold at prices in excess of the
total cost associated with extracting and processing the ore. Management's
calculations of proven and probable ore reserves are based on in-house
engineering and geological estimates using current operating costs, metals
prices and demand for our products.
Reserves estimates will change as existing reserves are depleted through
production, as well as changes in estimates caused by changing production cost
and/or metals prices. Changes in reserves may also reflect that grades of ore
fed to process may be different from stated reserve grades because of variation
in grades in areas mined, mining dilution and other factors. Reserves estimated
for properties that have not yet commenced production may require revision based
on actual production experience.
Declines in the market price of metals, as well as increased production or
capital costs or reduced recovery rates, may render ore reserves uneconomic to
exploit unless the utilization of forward sales contracts or other hedging
techniques is sufficient to offset such effects. If our realized price for the
metals we produce, including hedging benefits, were to decline substantially
below the levels set for calculation of reserves for an extended
39
period, there could be material delays in the development of new projects,
increased net losses, reduced cash flow, restatements or reductions in reserves
and asset write-downs in the applicable accounting periods. Reserves should not
be interpreted as assurances of mine life or of the profitability of current or
future operations. No assurance can be given that the estimate of the amount of
metal or the indicated level of recovery of these metals will be realized.
DEPRECIATION AND DEPLETION
Depreciation is based on the estimated useful lives of the assets and is
computed using straight-line and unit-of-production methods. Depletion is
computed using the unit-of-production method. The units-of-production method is
based on proven and probable ore reserves. As discussed above, our estimates of
proven and probable ore reserves may change, possibly in the near term,
resulting in changes to depreciation, depletion, amortization and reclamation
accrual rates in future reporting periods.
IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews the net carrying value of all facilities, including
idle facilities, on a periodic basis. We estimate the net realizable value of
each property based on the estimated undiscounted future cash flows that will be
generated from operations at each property, the estimated salvage value of the
surface plant and equipment and the value associated with property interests.
These estimates of undiscounted future cash flows are dependent upon the
estimates of metal to be recovered from proven and probable ore reserves (see
discussion above), future production cost estimates and future metals price
estimates over the estimated remaining mine life. If undiscounted cash flows are
less than the carrying value of a property, an impairment loss is recognized
based upon the estimated expected future cash flows from the property discounted
at an interest rate commensurate with the risk involved.
Management's estimates of metals prices, recoverable proven and probable
ore reserves, and operating, capital and reclamation costs are subject to risks
and uncertainties of change affecting the recoverability of our investment in
various projects. Although management believes it has made a reasonable estimate
of these factors based on current conditions and information, it is reasonably
possible that changes could occur in the near term which could adversely affect
management's estimate of net cash flows expected to be generated from our
operating properties and the need for asset impairment write-downs.
ENVIRONMENTAL MATTERS
When it is probable that such costs will be incurred and they are
reasonably estimable, we accrue costs associated with environmental remediation
obligations at the most likely estimate. Accruals for estimated losses from
environmental remediation obligations generally are recognized no later than
completion of the remedial feasibility study for such facility and are charged
to provision for closed operations and environmental matters. We periodically
review our accrued liabilities for such remediation costs as evidence becomes
available indicating that our remediation liability has potentially changed.
Costs of future expenditures for environmental remediation are not discounted to
their present value unless subject to a contractually obligated fixed payment
schedule. Such costs are based on management's current estimate of amounts that
are expected to be incurred when the remediation work is performed within
current laws and regulations. Recoveries of environmental remediation costs from
other parties are recorded as assets when their receipt is deemed probable.
Future closure, reclamation and environment-related expenditures are
difficult to estimate in many circumstances due to the early stages of
investigation, uncertainties associated with defining the nature and extent of
environmental contamination, the uncertainties relating to specific reclamation
and remediation methods and costs, application and changing of environmental
laws, regulations and interpretations by regulatory authorities and the possible
participation of other potentially responsible parties. Reserves for closure
costs, reclamation and environmental matters totaled $50.7 million at September
30, 2002. We anticipate that expenditures relating to these reserves will be
made over the next five to ten years. It is reasonably possible that the
ultimate cost of remediation could change in the future and that changes to
these estimates could have a material effect on future operating results as new
information becomes known.
40
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion summarizes the financial instruments and
derivative instruments we held at September 30, 2002, none of which are held for
trading purposes. Such instruments are sensitive to changes in interest rates
and commodity prices. We believe there has not been a material change in our
market risk since the end of our last fiscal year. In the normal course of
business, we also face risks that are either nonfinancial or nonquantifiable
(See "Risk Factors - Our hedging activities could expose us to losses").
INTEREST-RATE RISK MANAGEMENT
At September 30, 2002, our debt was subject to changes in market interest
rates and was sensitive to those changes. We currently have no derivative
instruments to offset the risk of interest rate changes. We may choose to use
derivative instruments, such as interest rate swaps, to manage the risk
associated with interest rate changes.
The following table presents principal cash flows for debt outstanding at
September 30, 2002, by maturity date and the related average interest rate. The
variable rates are estimated based on implied forward rates in the yield curve
at the reporting date.
(in thousands)
2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---------- ----- ----------
Subordinated debt $ -- $ 2,000 $ 1,000 $ -- $ -- $ 3,000 $ 3,000
Average interest rate 5.6% 5.8% 7.1%
Project financing debt $ 1,500 $ 3,000 $ 500 $ -- $ -- $ 5,000 $ 5,000
Average interest rate 4.1% 4.3% 5.6%
Project financing debt $ 338 $ 2,278 $ 832 $ 1,366 $ 960 $ 5,774 $ 5,774
Average interest rate 13% 13% 13% 13% 13%
COMMODITY-PRICE RISK MANAGEMENT
We use commodity forward sales commitments, commodity swap contracts and
commodity put and call option contracts to manage our exposure to fluctuation in
the prices of certain metals which we produce. Contract positions are designed
to ensure that we will receive a defined minimum price for certain quantities of
our production. We use these instruments to reduce risk by offsetting market
exposures. We are exposed to certain losses, generally the amount by which the
contract price exceeds the spot price of a commodity, in the event of
nonperformance by the counter parties to these agreements. The instruments we
hold are not leveraged and are held for purposes other than trading. We intend
to physically deliver metals in accordance with the terms of the forward sales
contracts. As such, we have elected to designate the contracts as normal sales
in accordance with SFAS 138 and as a result, these contracts are not required to
be accounted for as derivatives under SFAS 133.
The following table provides information about our forward sales contracts
at September 30, 2002. The table presents the notional amount in ounces, the
average forward sales price and the total-dollar contract amount expected by the
maturity dates, which occur between December 31, 2002, and December 31, 2004. As
of September 30, 2002, the mark to market value of the contracts was a loss of
$5.0 million. We are subject to a margin free limit of $10.0 million in the
aggregate for all contracts. At September 30, 2002, the London Final gold price
was $323.70.
Expected Expected Expected Estimated
Maturity Maturity Maturity Fair
2002 2003 2004 Value
---- ---- ---- -----
Forward contracts:
Gold sales (ounces) 15,056 59,802 48,928
Future price (per ounce) $ 288 $ 288 $ 288
Contract amount (in $000's) $ 4,340 $ 17,238 $ 14,103 $ (4,998)
Estimated percentage of annual production
41
committed to contracts 30% 28% 25%
In addition to the above contracts, we have a quarterly Gold Lease Rate
Swap at a fixed rate of 1.5% on 108,730 ounces of the above gold forward
contracts. The ounces covered under the swap are adjusted each quarter, in
accordance with the expiration of the gold forward contracts. At September 30,
2002, the fair value of the Gold Lease Rate Swap was approximately $364,000,
which represents the amount the counterparty would have to pay us if the
contract was terminated.
42
BUSINESS
GENERAL
We are principally engaged in the exploration, development and mining of
precious and nonferrous metals, including silver, gold, lead and zinc, with an
emphasis on silver and gold. We own or have interests in a number of precious
and nonferrous metals properties. A glossary of certain terms appears near the
end of this prospectus under "Glossary of Certain Terms."
The following maps indicates the positions of our operations:
[map showing the location of our operations in Idaho,
Mexico, Alaska and Venezuela]
The following table presents certain information regarding our metal
mining properties, including the relative percentage each contributed to our
2001 sales:
Name of Date Ownership Percentage of
Property Acquired Interest 2001 Sales
-------- -------- -------- ----------
Greens Creek 1988 29.73% 23.9%
San Sebastian 1999 100.0% 9.1%
Lucky Friday(1) 1958 100.0% 18.4%
La Camorra 1999 100.0% 48.6%
----------
(1) In July 2001, we announced that we would reduce operations at the
Lucky Friday mine due to low silver and lead prices. Commencing in
October 2001, production at the mine was reduced to approximately
30% of full production. We estimate that with minimal additional
development the mine can sustain the lower production levels through
2004.
Sales of metal concentrates and metal products are made principally to
custom smelters and metals traders. The percentage of sales contributed by each
class of product is reflected in the following table:
Years
Product 2001 2000 1999
------- ---- ---- ----
Silver, lead and zinc 42.5% 55.3% 64.8%
Gold 57.5% 44.7% 35.2%
Our sales to significant metals customers, including both the Metals-Gold
and Metals-Silver segments, as a percentage of total sales from the Metals-Gold
and Metals-Silver segments, were as follows for the year ended December 31,
2001:
Customer Percentage of Our Sales
-------- -----------------------
Standard Bank 25.2%
Cominco 16.3%
Penoles 14.1%
HSBC 13.8%
Mitsubishi 11.2%
For information with respect to export sales, refer to Notes 2 and 11 of
Notes to Consolidated Financial Statements forming part of our audited
Consolidated Financial Statements for the year ended December 31, 2001.
Certain production and other information is presented below for or at the
years ended December 31, 1999, 2000 and 2001, respectively. For similar
information for or at the three and nine month periods ended September 30, 2001
and 2002, respectively, see "Management's Discussion And Analysis Of Financial
Condition And Results of Operations."
43
The table below summarizes our production and average cash operating cost,
average total cash cost and average total production cost per ounce for silver
and gold, as well as average metals prices for each period indicated:
Years
-----
2001 2000 1999
---- ---- ----
Gold (ounces)(1) 194,742 146,038 110,110
Silver (ounces)(2) 7,434,290 7,998,677 7,617,362
Lead (tons)(2) 28,378 39,430 35,195
Zinc (tons)(2) 23,664 25,054 23,299
Average cost per ounce of gold produced:
Cash operating cost $ 133 $ 208 $ 195
Total cash cost $ 133 $ 211 $ 205
Total production cost $ 200 $ 275 $ 298
Average cost per ounce of silver produced:
Cash operating cost(3) $ 3.55 $ 4.02 $ 3.72
Total cash cost(3) $ 3.57 $ 4.02 $ 3.72
Total production cost(3) $ 5.09 $ 5.49 $ 5.25
Industrial minerals
(tons shipped)(4) 260,716 1,268,579 1,192,281
Average metals prices:
Gold - Realized ($/oz.) $ 280 $ 284 $ 286
Gold - London Final ($/oz.) $ 272 $ 279 $ 279
Silver - Handy & Harman ($/oz.) $ 4.36 $ 5.00 $ 5.25
Lead - LME Cash ($/pound) $ 0.216 $ 0.206 $ 0.228
Zinc - LME Cash ($/pound) $ 0.402 $ 0.512 $ 0.488
----------
(1) The increase in gold production from 2000 to 2001 was principally due to
increased production at the La Camorra mine of 59,455 ounces, due to an
average higher gold grade and an 18% increase in tons processed during
2001, and production at the San Sebastian mine, due to the commencement of
operations in May 2001. These increases were partly offset by decreased
production of 23,926 ounces at the Rosebud mine, due to completion of
operations during the third quarter 2000. The increase in gold production
from 1999 to 2000 was principally due to increased production at the La
Camorra mine of 75,508 ounces due to operating a full year in 2000 as
compared to three months in 1999. This increase was partly offset by
decreased production of 32,403 ounces at the Rosebud mine, where mining
operations were completed in August 2000, and at the La Choya mine, where
mining activities were completed in December 1998 and gold production was
essentially completed in 1999.
(2) The decrease in silver, lead and zinc production from 2000 to 2001 was
principally due to decreased tons mined at Lucky Friday, resulting from
the curtailment of operations during 2001, partly offset by an increase in
tons mined at the Greens Creek mine and at the San Sebastian mine, where
operations commenced in May 2001. The increase in silver, lead and zinc
production from 1999 to 2000 was principally due to increased tons mined
and increased silver grade from the Lucky Friday expansion area in 2000.
(3) During the fourth quarter of 2001, approximately $0.4 million of costs at
the Lucky Friday mine were classified as care-and-maintenance costs and
included in the determination of the cost per ounce at Lucky Friday.
Excluding the $0.4 million in costs, the cash operating, total cash and
total production costs per ounce total $3.49, $3.52 and $5.04,
respectively, for 2001.
(4) The decrease in the industrial minerals tons from 2000 to 2001 is
principally due to the sale of the K-T Group on March 27, 2001.
SILVER PROPERTIES
GREENS CREEK MINE - ADMIRALTY ISLAND, ALASKA
At September 30, 2002, we held a 29.73% interest in the Greens Creek mine,
located on Admiralty Island, near Juneau, Alaska, through a joint-venture
arrangement with Kennecott Greens Creek Mining Company (KGCMC), the manager of
the mine, and Kennecott Juneau Mining Company (KJMC), both wholly owned
44
subsidiaries of Kennecott Minerals. The Greens Creek mine is a polymetallic
deposit containing silver, zinc, gold and lead.
Greens Creek lies within the Admiralty Island National Monument, an
environmentally sensitive area. The Greens Creek property includes 17 patented
lode claims and one patented millsite claim, in addition to property leased from
the U.S. Forest Service. Greens Creek also has title to mineral rights on 7,500
acres of federal land adjacent to the mine properties. The entire project is
accessed and served by 13 miles of road and consists of the mine, an ore
concentrating mill, a tailings impoundment area, a ship-loading facility, camp
facilities and a ferry dock.
Currently, Greens Creek is mining approximately 2,000 tons per day
underground from the 200 South, the Southwest and West ore zones. Ore from the
underground trackless mine is milled at the mine site. The mill produces
gold/silver dore and lead, zinc and bulk concentrates. The dore is marketed to a
precious metal refiner and the three concentrate products are predominantly sold
to a number of major smelters worldwide. Concentrates are shipped from a marine
terminal located on Admiralty Island about nine miles from the mine site. The
Greens Creek mine uses electrical power provided by diesel-powered generators
located on-site.
Pursuant to a 1996 land exchange agreement, the joint venture transferred
private property equal to a value of $1.0 million to the U.S. Forest Service and
received access to approximately 7,500 acres of land with potential mining
resources surrounding the existing mine. Production from new ore discoveries on
the exchange lands will be subject to the federal royalties included in the land
exchange agreement. The federal royalties are based on a defined calculation
that is similar to the calculation of net smelter return and are equal to 0.75%
or 3% of the calculated amount depending on the value of the ore extracted. The
royalty is 3% if the average value of the ore during a year is greater than $120
per ton of ore, and 0.75% if the value is $120 per ton or less. The benchmark of
$120 per ton is escalated annually by the Gross Domestic Product until the year
2016.
The employees at the Greens Creek mine are employees of Kennecott Greens
Creek Mining Company and are not represented by a bargaining agent. At September
30, 2002, our interest in the net book value of the Greens Creek mine property
and its associated plant and equipment was $ 58.1 million.
The Greens Creek deposit consists of zinc, lead, and iron sulfides and
copper-silver sulfides and sulfosalts with substantial contained gold and silver
values. The deposit has a vein-like to blanket-like form of variable thickness.
The ore is thought to have been laid down by an "exhalative" process (i.e.,
volcanic-related rifts or vents deposited base and precious metals onto an ocean
floor). Subsequently, the mineralization was folded and faulted by multiple
generations of tectonic events.
45
Kennecott Greens Creek Mining Company's geology and engineering staff
computes the estimated ore reserves for the Greens Creek mine with technical
support from Rio Tinto Zinc. AMEC E&C Services (f/k/a Mineral Resources
Development, Inc.) prepared four reports for us in 1998 and 1999 and, in doing
so, assisted in the preparation of or reviewed the resource models from which
the mine ultimately developed its reserve estimates. We review geologic
interpretation and reserve methodology, but the reserve compilation is not
independently confirmed by us in its entirety. Information with respect to our
29.73% share of production, average cost per ounce of silver produced and Proven
and Probable ore reserves is set forth in the following table.
Years (reflects 29.73% interest)
--------------------------------
Production 2001 2000 1999
---------- ---- ---- ----
Ore milled (tons) 195,646 184,178 171,946
Silver (ounces) 3,259,915 2,754,067 3,050,849
Gold (ounces) 26,041 24,882 23,802
Zinc (tons) 20,875 21,947 20,373
Lead (tons) 7,394 7,484 7,582
Average Cost per Ounce of Silver Produced
-----------------------------------------
Cash operating costs $ 2.41 $ 2.20 $ 1.99
Total cash costs $ 2.41 $ 2.20 $ 1.99
Total production costs $ 4.79 $ 4.87 $ 4.37
Proven and Probable
Ore Reserves(1,2,3,4) 12/31/01 12/31/00 12/31/99
------------ -------- -------- --------
Total tons 2,256,663 2,977,198 2,977,960
Silver (ounces per ton) 16.7 15.7 16.2
Gold (ounces per ton) 0.13 0.13 0.14
Zinc (percent) 11.6 11.9 11.9
Lead (percent) 4.6 4.4 4.5
Contained silver (ounces) 37,627,765 46,663,068 48,324,528
Contained gold (ounces) 299,456 396,891 403,552
Contained zinc (tons) 262,455 353,698 354,657
Contained lead (tons) 103,220 131,515 133,194
------------------
(1) For Proven and Probable ore reserve assumptions and
definitions, see Glossary of Certain Terms.
(2) Ore reserves represent in-place material, diluted and adjusted
for expected mining recovery. Mill recoveries of ore reserve
grades are expected to be 74% for silver, 64% for gold, 81%
for zinc and 69% for lead.
(3) The changes in reserves in 2001 versus 2000 were due to
production, downward revisions of reserves due to lower
assumed metals prices and reassessment of reserves based on
new drilling and a new mine plan for the Central West orebody.
Proven and probable reserves at the Greens Creek mine are
based on average drill spacing of 50 to 100 feet. Cut off
grade assumptions vary by orebody and are developed based on
reserve prices, anticipated mill recoveries and smelter
payables, and cash operating costs. Cutoff grades range from
$70 per short ton net smelter return to $100 per short ton net
smelter return.
(4) The changes in reserves in 2000 versus 1999 were due to
production and a property-wide reassessment of the ore zones.
KGCMC made new estimates of reserves based on drill programs
for the West and Southwest ore zones. All ore reserves were
retabulated based on a new net smelter return model. The
decrease in silver ounces in 2000 versus 1999 is primarily
attributable to a downward revision in estimated silver grade
in the Southwest zone.
SAN SEBASTIAN MINE - DURANGO, MEXICO
The San Sebastian mine is located in the State of Durango, Mexico, and
100% owned by us through Minera Hecla. The mine is 56 miles northeast of the
city of Durango on concessions acquired through our acquisition of Monarch
Resources Investments Limited in 1999. The processing plant is located near
Velardena, Durango,
46
Mexico, and was acquired in April 2001. Concession holdings cover over 100
square miles including the mine site and multiple outlying active exploration
areas.
Ore production during 2001 consisted of surface mining and bulk sampling
from four vein systems and underground mine development of the Francine vein.
Underground development started in May 2001, and surface mining ceased during
the fourth quarter of 2001. Limited underground ore production from development
started in September and increased gradually as stopes were developed during the
remainder of 2001. Underground mining production reached full production
(approximately 450 short tons per day) during the second quarter of 2002. The
current mine plan for the Francine vein produces ore through 2004 and into the
first quarter of 2005. Exploration is active on the Francine vein and other
nearby vein systems to expand ore reserves.
San Sebastian is a high-grade silver mine with significant gold credits.
Several epithermal veins exist within the San Sebastian Valley and in the mine
area. Known veins include the Francine vein, Profesor vein, Middle vein and
North vein systems. These veins are hosted within a series of shales with
interbedded fine-grained sandstones interpreted to belong to the Cretaceous
Caracol Formation.
Our Cerro Pedernalillo exploration project, located about six kilometers
from the Francine vein, has discovered three veins covering more than 1.5
kilometers in length. Our Cerro Pedernalillo drilling project has intersected
significant ore values, with approximately 20% of the drill intercepts in the
Don Serigo Vein above mine cut off grade over a two meter horizontal width.
The Francine vein strikes NW and dips SW and is located on the
southwestern limb of a doubly plunging anticline. The Francine vein ranges in
true thickness from more than 4.0 meters to less than 0.5 meters and consists of
several episodes of banded quartz, silica-healed breccias and minor amounts of
calcite. The vein is oxidized to a depth of approximately 100 vertical meters
and the wall rocks contain an alteration halo of less than 2 meters next to the
vein. Mineralization within the oxidized portion of the vein contains limonite,
hematite, silver halides and various copper carbonates. Higher-grade gold and
silver mineralization is associated with disseminated hematite and limonite
after pyrite and chalcopyrite, copper carbonates including malachite and azurite
and hydrous copper silicates including chrysocolla. Native gold occurs
associated with hematite and limonite. Mineralization in the sulfide portion of
the Francine vein contains pyrite, chalcopyrite, sphalerite, galena, native
silver, argentite and trace amounts of aguilarite.
Mining is currently performed by a mining contractor. Access to the
underground workings is through a ramp from the surface connecting one or more
levels, excavated at a -15% grade. Ore is mined by cut-and-fill stoping. Ore is
extracted from the stopes using rubber-tired equipment and hauled to the surface
in trucks. Subeconomic material is used to backfill and stabilize mined-out
stopes. Electric power is purchased from Comision Federal de Electridad (federal
electric company). Water is supplied from mine dewatering or hauled from a local
reservoir.
Ore is hauled in trucks by a contractor to the processing plant.
The process plant is a conventional leach / counter-current decantation /
Merrill Crowe precipitation circuit. The ore is crushed in a two-staged crushing
plant consisting of a primary jaw, a secondary cone crusher and a double-deck
vibrating screen. The grinding circuit includes a primary ball mill and cyclone
classifiers. The ground ore is thickened followed by agitated leaching and four
stages of counter-current decantation to wash solubilized silver and gold from
the pulp. The solution bearing silver and gold is then clarified, deaerated and
zinc dust added to precipitate silver and gold which is recovered in plate and
frame filters. Precipitate is dried and then shipped to a third-party refiner.
Commencing in the fourth quarter of 2002, approximately one-half of the
precipitate has been refined into dore and is shipped to a third party refiner.
The plant was constructed in 1994 and is capable of processing
approximately 550 short tons per day. Site infrastructure includes a water
supply system, maintenance shop, warehouse, laboratory and various offices.
Electric power is purchased from Comision Federal de Electridad (federal
electric company).
47
At September 30, 2002, the net book value of the San Sebastian mine
property and its associated plant and equipment was $8.7 million.
Minera Hecla operates the San Sebastian mine under valid permits. The
application for extension of the processing plant operating permit that expired
in October 2001 was made in a timely manner and is in process. No problems are
anticipated with this permit renewal. As of September 30, 2002, reclamation and
closure accruals of $0.9 million have been established.
For a description of a legal claim relating to our Velardena mill, see
"--Legal Proceedings."
At September 30, 2002, there were 103 hourly and 40 salaried employees at
the San Sebastian mine and Velardena mill. The National Mine and Mill Workers
Union represents process plant hourly workers at San Sebastian. Under labor law,
wage adjustments are negotiated annually and other contract terms every two
years. The contract is due for negotiation of wages in July 2003 and for wages
and other terms in July 2004.
Information with respect to the San Sebastian mine's production, average
cost per ounce of silver produced and Proven and Probable ore reserves are set
forth in the table below:
Year
----
Production 2001
---------- ----
Ore milled (tons) 69,779
Silver (ounces) 950,002
Gold (ounces) 15,983
Average Cost per Ounce
of Silver Produced
Cash operating costs $ 1.64
Total cash costs $ 1.81
Total production costs $ 2.89
Proven and Probable
Ore Reserves(1,2,3) 12/31/01
Total tons 304,222
Silver (ounces per ton) 28.20
Gold (ounces per ton) 0.30
Contained silver (ounces) 8,579,060
Contained gold (ounces) 91,267
----------------
(1) For Proven and Probable ore reserve assumptions and
definitions, see Glossary of Certain Terms.
(2) Ore reserves represent in-place material, diluted and
adjusted for expected mining recovery. Mill recoveries
of ore reserve grades are expected to be 90% for silver
and 92% for gold.
(3) Proven and probable reserves at the San Sebastian mine
are based on drill spacing of 35 meters. Cut off grade
assumptions are developed based on a gold price of $280
and a silver price of $4.50, anticipated mill
recoveries, royalties and cash operating costs. Cutoff
grades at San Sebastian are $34 per tonne net production
value.
LUCKY FRIDAY MINE - IDAHO
We own 100% of the Lucky Friday mine, a deep underground silver and lead
mine located in northern Idaho, which we have been operating since 1958.
48
The principal ore-bearing structure at the Lucky Friday mine through 1997
was the Lucky Friday Vein, a fissure vein typical of many in the Coeur d'Alene
Mining District. The orebody is located in the Revett Formation which is known
to provide excellent host rocks for a number of orebodies in the Coeur d'Alene
District. The Lucky Friday Vein strikes northeasterly and dips steeply to the
south with an average width of six to seven feet. Its principal ore minerals are
galena and tetrahedrite with minor amounts of sphalerite and chalcopyrite. The
ore occurs as a single continuous orebody in and along the Lucky Friday Vein.
The major part of the orebody has extended from the 1,200-foot level to and
below the 6,020-foot level.
During 1991, we discovered several mineralized structures containing some
high-grade silver ores in an area known as the Gold Hunter property about 5,000
feet northwest of the then existing Lucky Friday workings.
We control the Gold Hunter property under a long-term operating agreement
which entitles us, as operator, to a 81.48% interest in the net profits from
operations from the Gold Hunter properties. We will be obligated to pay a
royalty after we have recouped our costs to explore and develop the properties.
As of September 30, 2002, unrecouped costs totaled approximately $32.3 million.
The principal mining method at the Lucky Friday mine is ramp access, cut
and fill. This method utilizes rubber-tired equipment to access the veins
through ramps developed outside of the orebody. Once a cut is taken along the
strike of the vein, it is backfilled with cemented tailings and the next cut is
accessed, either above or below, from the ramp system.
The ore produced from the mine is processed in a 1,100-ton-per-day
conventional flotation mill. In 2001, ore was processed at a rate of
approximately 855 tons per day at the Lucky Friday mine site. The flotation
process produces both a silver-lead concentrate and a zinc concentrate. During
2001, mill recovery totaled approximately 94% silver, 93% lead and 67% zinc.
In the fourth quarter of 2000, due to continuing low silver and lead
prices, our management and board of directors deferred the decision to approve
additional capital expenditures, which are needed to develop the next area of
the mine, and recorded an adjustment of $31.2 million to reduce the carrying
value of the Lucky Friday mine plant, property and equipment. In 2001, due to
low metals prices, we made the decision to reduce the level of mining activity
at the Lucky Friday mine to approximately 30% of full production. We estimate
that with minimal additional development the mine can sustain the lower
production levels through 2004. We currently anticipate that reduced operations
will continue until prices recover as long as the cost of operating is less than
putting the property on care and maintenance.
Ultimate reclamation activities contemplated include stabilization of
tailings ponds and waste rock areas. There were no final reclamation activities
performed in 2001.
Historically, the Lucky Friday silver-lead concentrate has been shipped
primarily to the ASARCO, Inc., smelter in East Helena, Montana. With the
increased production starting in 1998 from the Gold Hunter orebody, the
silver-lead concentrates have been shipped to several different smelters in
Canada, the United States, Mexico and Europe. On February 2, 2001, ASARCO's East
Helena smelter informed Lucky Friday it was closing down and that ASARCO would
no longer accept shipments. Lucky Friday concentrate that was scheduled for East
Helena was diverted to the remaining three smelters with no adverse impact to
the Lucky Friday operation. Currently, the Lucky Friday silver-lead concentrate
production is being shipped to Cominco's smelter in Trail, British Columbia,
Canada.
The Lucky Friday zinc concentrates are shipped to Cominco's smelter in
Trail, British Columbia, Canada.
49
Information with respect to the Lucky Friday mine's production, average
cost per ounce of silver produced and Proven and Probable ore reserves for the
past three years is set forth in the table below:
Years
-----
Production 2001 2000 1999
---------- ---- ---- ----
Ore milled (tons) 239,330 321,719 309,953
Silver (ounces) 3,224,373 5,011,507 4,441,250
Gold (ounces) 415 537 655
Lead (tons) 20,984 31,946 27,613
Zinc (tons) 2,789 3,107 2,926
Average cost per ounce of silver produced:
------------------------------------------
Cash operating cost(1) $ 5.27 $ 5.02 $ 4.90
Total cash costs(1) $ 5.27 $ 5.02 $ 4.90
Total production costs(1) $ 6.05 $ 5.83 $ 5.85
Proven and Probable
Ore Reserves(2,3,4,5) 12/31/01 12/31/00 12/31/99
------------ -------- --------- --------
Total tons 0 1,322,270 1,669,450
Silver (ounces per ton) 0 16.7 15.1
Lead (percent) 0 10.7 9.6
Zinc (percent) 0 1.4 1.6
Contained silver (ounces) 0 22,089,451 25,179,141
Contained lead (tons) 0 141,380 160,693
Contained zinc (tons) 0 18,546 26,895
-----------------------
(1) During the fourth quarter of 2001, approximately $0.4 million of
costs were classified as care-and-maintenance costs and included in
the determination of the cost per ounce at Lucky Friday. Excluding
the $0.4 million in costs, the cash operating, total cash and total
production costs per ounce total $5.14, $5.14 and $5.92,
respectively, for 2001.
(2) For Proven and Probable ore reserve assumptions and definitions, see
Glossary of Certain Terms.
(3) Reserves are in-place material that incorporate estimates of the
amount of waste which must be mined along with the ore and expected
mining recovery. Mill recovery is expected to be 93% for silver, 90%
for lead and 45% for zinc for the in-place reserves stated above.
(4) Ore reserve grades increased and tonnage decreased in 2000 compared
to 1999 due to a 4.38% increase in cash cutoff grade in 2000, and
due to an assessment of results from diamond drilling performed in
2000. Proven and probable reserves and mineralized material at the
Lucky Friday mine are based on drill spacing of 100 to 150 feet for
the Gold Hunter ore body and projections of chip sample information
for the Lucky Friday vein. Cut off grade assumptions are developed
based on reserve prices, anticipated mill recoveries, and cash
operating costs and vary by orebody. Cutoff grades range from $44.90
per ton net smelter return to $53.43 per short ton net smelter
return.
(5) At the time of this filing, we determined that the Lucky Friday
mineralized material for 2001 does not meet all the criteria
established for disclosure of reserves by the Securities and
Exchange Commission's Industry Guide 7. As of December 31, 2001, the
estimated mineralized material included 1,205,180 tons with 14.2
ounces per ton silver, 9.4% lead and 1.6% zinc. As noted above, we
currently anticipate that reduced operations will continue at the
Lucky Friday Mine with minimal development through 2004 as long as
the cost of operating is less than the cost of putting the property
on care and maintenance.
The net book value of the Lucky Friday mine property and its associated
plant and equipment was approximately $1.2 million as of September 30, 2002. At
September 30, 2002, there were 84 employees at the Lucky Friday mine. The United
Steelworkers of America is the bargaining agent for the Lucky Friday hourly
employees. The current labor agreement expires on June 16, 2003. Avista
Corporation supplies electrical power to the Lucky Friday mine.
For a description of a legal claim involving Lucky Friday mine, see
"--Legal Proceedings."
50
GOLD PROPERTIES
LA CAMORRA MINE - BOLIVAR, VENEZUELA
The La Camorra mine is located in the eastern Venezuelan State of Bolivar,
approximately 120 miles southeast of Puerto Ordaz. It is 100% owned by us
through a Venezuelan subsidiary, Minera Hecla Venezolana, C.A., and has been a
producing mine for us since October 1999. We acquired the La Camorra mine in
June 1999 with the acquisition of Monarch Resources Investments Limited
(Monarch).
See "Risk Factors - Our foreign operations, including our operations in
Venezuela, are subject to additional inherent risks" for a discussion of the
political situation in Venezuela and its potential impact on our Venezuelan
operations.
At the time of acquisition, the tailings impoundment was at capacity.
Processing operations were suspended during the third quarter of 1999 to allow
additional tailings capacity to be constructed. During this period, mine
development was accelerated and remedial maintenance was carried out on the mine
and process plant equipment. Production under our control commenced on October
1, 1999.
La Camorra is a high-grade underground gold mine that exploits two
shear-zone hosted quartz veins. It lies in the Botanamo greenstone belt of the
Precambrian Guayana Shield and is hosted by the Caballape Group of
volcaniclastics. The formations most likely date from Archean to Proterozoic age
and consist primarily of intermediate volcanics with subordinate metasediments.
Within the La Camorra concession, the gold mineralization is associated with the
near vertical Main and Betzy quartz veins occurring in a west-northwest,
east-southeast shear zone within medium- to coarse-grained pyroclastics.
Gold occurs both as free particles in quartz and attached to or included
in pyrite. Locally, gold is also seen on chloritic partings.
In 1998, a core drilling program was initiated by Monarch to test the
depth extension of the ore zones below the 400-meter level. We believe the
results of that program, and subsequent drill programs we have carried out,
confirm that ore-grade mineralization extends to depths below the levels to
which the current mine reserves have been delineated.
In addition, we control nine other exploration concessions near the La
Camorra mine encompassing 8,000 hectares.
Access to the underground workings is through a ramp from the surface
connecting one or more levels, excavated at a -15% grade. Ore is mined primarily
by longhole stoping. Ore is extracted from the stopes using rubber-tired
equipment and hauled to the surface in mine haulage trucks. Subeconomic material
is used to backfill and stabilize mined-out stopes. The mine is currently
producing over 500 tons of ore per day.
The process plant uses a conventional carbon-in-leach process. The ore is
crushed with a three-stage system consisting of a primary jaw crusher with
secondary and tertiary cone crusher with a multi deck vibrating screen. The
grinding circuit includes a primary and a secondary ball mill. The ground ore is
mixed with a cyanide solution and clarified, followed by countercurrent
carbon-in-leach gold adsorption. The carbon is then stripped and the gold
recovered and poured into gold bars for shipment to a refiner. Mill recovery
averages over 95%.
The plant was constructed in 1994 and is capable of processing
approximately 600 tons per day. Site infrastructure includes a water supply
system, maintenance shop, warehouse, living quarters, a dining facility,
administration building and a National Guard post. We also share a housing
facility located near the town of El Callao with units for approximately 50
families. Mine electric power is purchased from Eleoriente (a state-owned
electric company). Diesel-powered electric generators are available on-site for
operation of critical equipment during power outages. At September 30, 2002, the
net book value of the La Camorra mine property and its associated plant and
equipment was $21.2 million.
51
Our reclamation plan has been approved by the Ministry of Environment and
Natural Resources. Planned activities include regrading and revegetation of
disturbed areas. A reclamation and closure accrual of $1.2 million had been
established as of September 30, 2002.
At September 30, 2002 , there were 349 hourly and 42 salaried employees at
our La Camorra Gold Mine, most of whom are represented by the Mine Workers
Union. The contract with respect to La Camorra will expire in March 2004.
Information with respect to the La Camorra mine's production, average
costs per ounce of gold produced and Proven and Probable ore reserves is set
forth in the table below. SRK Consulting provided independent third party review
of these reserve estimates in 1999.
Year
----
Production 2001 2000 1999
---------- ---- ---- ----
Ore processed (tons)(1) 163,139 138,216 39,048
Gold (ounces)(1) 152,303 92,848 17,340
Average Cost per Ounce
of Gold Produced
----------------
Cash operating costs $ 133 $ 188 $ 208
Total cash costs $ 133 $ 188 $ 208
Total production costs $ 200 $ 246 $ 260
Proven and Probable
Ore Reserves(2,3,4) 12/31/01 12/31/00 12/31/99
-------------------- -------- -------- --------
Total tons 482,238 591,464 577,003
Gold (ounces per ton) 0.867 0.634 0.544
Contained gold (ounces) 418,050 375,200 313,616
-------------------
(1) Production data for 1999 only include three months of
operations since the recommencement of the mine in
October 1999.
(2) For Proven and Probable ore reserve assumptions,
including assumed metals prices, see Glossary of Certain
Terms.
(3) The decrease in tons of Proven and Probable ore reserves
in 2001 compared to 2000 is due to mining, offset by: 1)
conversion of mineralization to reserves based on new
development and drilling; and 2) addition of newly
delimited mineralization from development and drilling
to reserve. Ore grade and contained metal improvements
in reserve are attributable to a change in reserve
methodology in 2001 compared to 2000 based on very
favorable mill/model reconciliation and operations
experience with the orebodies. Proven and probable
reserves at the La Camorra mine are based on drill
spacing of 30 to 50 meters and closely spaced chip
sample information. Cut off grade assumptions are
developed based on reserve prices, anticipated mill
recoveries, and cash operating costs. The cutoff grade
at La Camorra is 8 grams per tonne.
(4) The increase in tons of Proven and Probable ore reserves
in 2000 compared to 1999 is attributable to: a)
increasing the mining width of the Betzy vein in 2000 to
2.0 meters from 1.4 meters; b) new in-house reserve
estimates for both the Betzy and Main veins using
information from 103 new drill holes and mine production
samples; and c) reclassification of some mineralization
to reserves, offset by mining. Our experience of 18
months mining the La Camorra veins indicated an increase
in grade in the reserve estimate for 2000 compared to
1999, attributable both to higher production sample
grades and higher realized mill grades than previously
encountered. Ore reserves represent in-situ material,
diluted and adjusted for expected mining recovery. Mill
recoveries are expected to be 95%. Ore reserves are
estimated in-house using geostatistical methods based on
drill holes, underground mine sampling and operations
experience.
52
NONOPERATING PROPERTIES
ROSEBUD MINE - NEVADA
The Rosebud gold mine, in which we have a 50% interest, is located in the
Rosebud Mining District, in Pershing County, Nevada. The Rosebud property
consists of a 100% interest in three patented lode-mining claims and 125
unpatented lode-mining claims. The Rosebud mine may be reached from Winnemucca,
Nevada, by travelling west a distance of approximately 58 miles on an
all-weather gravel road.
In June 2000, we announced, together with Newmont Gold Company, who holds
the remaining 50% interest in the mine, the planned closure of the Rosebud mine
when it was recognized that production would cease during the third quarter.
Mining activity was completed in July 2000, and milling activity was completed
in August 2000. In connection with the planned closure, we recorded an
adjustment to the carrying value of our interest in the Rosebud property, plant,
and equipment of $4.4 million in the second quarter of 2000.
The Rosebud property has been reclaimed per the closure agreement with the
Nevada Department of Environmental Protection. The property will be monitored
for the next three to five years, after which it will completely revert to the
Bureau of Land Management.
REPUBLIC MINE - WASHINGTON
We own the Republic gold mine located in the Republic Mining District near
Republic, Washington. In February 1995, we completed operations at the Republic
mine and have been conducting reclamation work in connection with the mine and
mill closure. In August 1995, we entered into an agreement with Newmont to
explore and develop the Golden Eagle deposit on the Republic mine property. Echo
Bay acquired Newmont's interest in 2000 and has been conducting a limited
exploration program on the project.
At September 30, 2002, the accrued reclamation and closure costs balance
totaled $2.5 million, although it is possible that the estimate may change in
the future due to the assumptions and estimates inherent in the accrual.
Reclamation and closure efforts continued during the remainder of 2002.
The remaining net book value of the Republic mine property and its
associated plant and equipment was approximately $0.6 million as of September
30, 2002.
GROUSE CREEK MINE - IDAHO
The Grouse Creek gold mine is located in central Idaho, 27 miles southwest
of the town of Challis in the Yankee Fork Mining District. Mining at Grouse
Creek began in late 1994 and ended in April 1997 due to higher-than-expected
operating costs and less-than-expected operating margins primarily because the
ore occurred in thinner, less continuous structures than had been originally
interpreted.
We recorded a write-down of the mine's carrying value totaling $97.0
million in 1995. We recorded further adjustments in 1996 for future severance,
holding, reclamation and closure costs totaling $22.5 million, and adjustments
to the carrying value of property, plant and equipment, and inventories totaling
$5.3 million.
Following completion of mining in the Sunbeam pit in April 1997, we placed
the Grouse Creek mine on a care-and-maintenance status. During the
care-and-maintenance period, reclamation had been undertaken to prevent
degradation of the property. During 1997, the milling facilities were mothballed
and earthwork completed to contain and control surface waters. In 1998, an
engineered cap was constructed on the waste rock storage facility and
modifications were made to the water treatment facility. In 1999 and 2000,
activities included further work on the waste rock storage facility cover and
continued work controlling surface waters.
We increased the reclamation accrual by $23.0 million in 1999 due to
anticipated changes to the closure plan, including increased dewatering
requirements and other expenditures. The changes to the reclamation plan at
53
Grouse Creek were necessitated principally by the need to dewater the tailings
impoundment rather than reclaim it as a wetland as originally planned.
In May 2000, we notified state and federal agencies that the Grouse Creek
property would proceed to a permanent suspension of operations. We signed an
agreement with the state of Idaho and a voluntary administrative order on
consent with the U.S. Forest Service and U.S. Environmental Protection Agency in
which we agreed to dewater the tailings impoundment, complete a water balance
report and monitoring plan for the site and complete certain studies necessary
for closure of the tailings impoundment. A work plan for final reclamation and
closure of the tailings impoundment is to be submitted by us no later than one
year prior to estimated completion of the tailings impoundment dewatering.
We increased the reclamation accrual by $10.2 million in 2000 based upon
updated cost estimates in accordance with Statement of Position 96-1
"Environmental Remediation Liabilities," due to the requirements of the
administrative order on consent. During 2001, our activities focused on further
containment of surface and subsurface water along with development of a
dewatering plan for the tailings impoundment. The reclamation and closure cost
accrual for the Grouse Creek mine totaled $28.2 million as of September 30,
2002, although it is possible that the estimate may change in the future due to
the assumptions and estimates inherent in the accrual.
EXPLORATION
We conduct exploration activities from our headquarters in Coeur d'Alene,
Idaho. We own or control patented and unpatented mining claims, fee land,
mineral concessions and state and private leases in the United States, Mexico,
Venezuela and other South American countries. Our strategy regarding reserve
replacement is to concentrate our efforts on: (1) existing operations where an
infrastructure already exists; (2) other properties presently being developed;
and (3) advanced-stage exploration properties that have been identified as
having potential for additional discoveries principally in the United States,
Mexico and Venezuela. We are currently concentrating our exploration activities
at the Greens Creek silver mine, in which we maintain a 29.73% interest, the La
Camorra gold mine and the San Sebastian silver mine.
VENEZUELA
In March 2002, we were informed by CVG-Minerven (a Venezuelan
government-owned gold mining company) that we had been awarded the Block B
exploration and mining lease near El Callao in the Venezuelan State of Bolivar.
Block B is 1,795 hectare land position in the historic El Callao gold district
that includes the historic Chile, Laguna and Panama mines which produced over
1.5 million ounces of gold between 1921 and 1946. Pursuant to our agreement with
CVG-Minerven, we paid CVG-Minerven $500,000 on September 6, 2002. In March 2003,
an additional payment of $1.25 million will be required, with a final payment of
$1.0 million due in September 2003. We will also pay CVG-Minervan a royalty of
2% to 3% (depending on the price of gold) on all of our production from Block B.
NEVADA
On August 2, 2002, through our wholly owned subsidiary Hecla Ventures
Corporation, we entered into an earn-in agreement with Rodeo Creek Gold, Inc., a
wholly owned subsidiary of Great Basin Gold Ltd. ("Great Basin"), to acquire a
50% interest in an area of Great Basin's Ivanhoe high grade gold property, which
is referred to as the Hollister Development Block and is located on the Carlin
Trend in Nevada. An "earn-in" agreement is an agreement under which a party must
take certain actions in order to "earn" an interest in an entity. In order to
receive the interest, we are required to complete a multi-stage exploration and
development program leading to commercial production. We may also choose to make
certain payments in lieu of completing all stages of exploration and
development. In either instance, we estimate the cost to be $21.8 million. We
intend to fund the earn-in activities with existing cash and cash equivalents,
future cash flow from operations and amounts available under existing credit
agreements. We believe that the dollar value of our 50% interest in the
Hollister Development Block is approximately equivalent to the $21.8 million
that we currently estimate we will need to spend in order to obtain our
interest.
54
Pursuant to the Earn-In Agreement, we have agreed to issue to Great Basin
and Great Basin has agreed to issue to us, a series of warrants to purchase
common stock exercisable within two years at prevailing market prices at the
time of their issuance. At execution of the agreement, we issued a warrant to
purchase 2.0 million shares of our common stock to Great Basin and Great Basin
issued warrants to purchase 1.0 million shares of its common stock to us. The
warrant to purchase our common stock is exercisable on or before August 1, 2004
at $3.73 per share. The beneficial owner of the warrant to purchase our common
stock is Great Basin. The agreement obligates us to issue a warrant to purchase
an additional 1.0 million shares of our common stock to Great Basin when we
decide to commence certain development activities, and an additional warrant to
purchase 1.0 million shares of our common stock following completion of such
activities. Great Basin will issue warrants to purchase 500,000 shares of its
common stock to us immediately upon receipt of the second and third warrants to
purchase our stock. We have entered into a registration rights agreement with
Great Basin that requires us to use reasonable efforts to cause the shares
underlying the respective warrants to be registered within four months of the
date the warrants are issued. In addition to the foregoing, we will pay to Great
Basin from our share of commercial production a sliding scale royalty that is
dependent on the cash operating profit per ounce of gold equivalent production.
Mineral exploration, particularly for silver and gold, is highly
speculative in nature, involves many risks and frequently is nonproductive.
There can be no assurance that our mineral exploration efforts will be
successful. Once mineralization is discovered, it may take a number of years
from the initial phases of drilling until production is possible, during which
time the economic feasibility of production may change. Substantial expenditures
are required to establish ore reserves through drilling, to determine
metallurgical processes to extract the metals from the ore and, in the case of
new properties, to construct mining and processing facilities. As a result of
these uncertainties, no assurance can be given that our exploration programs
will result in the expansion or replacement of existing ore reserves that are
being depleted by current production.
Properties are continually being added to or dropped from our inventory as
a result of exploration and acquisition activities. Exploration expenditures for
the three years ended December 31, 2001, 2000 and 1999, were approximately $2.2
million, $6.3 million and $5.5 million, respectively. We currently estimate that
exploration expenditures for the year ended December 31, 2002 were in the range
of $5.5 million to $6.5 million, principally for continued drilling in Venezuela
on the Main vein down-dip extension, the Betzy vein West Flank, at Canaima and
on the Block B concessions, and in Mexico on the Francine and Don Sergio veins.
Other exploration activities anticipated include an exploration drift to the
Gallagher fault block at Greens Creek and continued permitting activities at the
Hollister Development Block in Nevada.
REGULATION OF MINING ACTIVITY
Our U.S. mining operations are subject to inspection and regulation by the
Mine Safety and Health Administration of the Department of Labor (MSHA) under
provisions of the Federal Mine Safety and Health Act of 1977. MSHA directives
have had no material adverse impact on our results of operations or financial
condition and we believe that we are substantially in compliance with the
regulations promulgated by MSHA.
All of our exploration, development and production activities in the
United States, Mexico and South America are subject to regulation by
governmental agencies under one or more of the various environmental laws. These
laws address emissions to the air, discharges to water, management of wastes,
management of hazardous substances, protection of natural resources, protection
of antiquities and reclamation of lands which are disturbed. We believe that we
are in substantial compliance with applicable environmental regulations. Many of
the regulations also require permits to be obtained for our activities. These
permits normally are subject to public review processes resulting in public
approval of the activity. While these laws and regulations govern how we conduct
many aspects of our business, our management does not believe that they have a
material adverse effect on our results of operations or financial condition at
this time. Our projects are evaluated considering the cost and impact of
environmental regulation on the proposed activity. New laws and regulations are
evaluated as they develop to determine the impact on, and changes necessary to,
our operations. It is possible that future changes in these laws or regulations
could have a significant impact on some portion of our business, causing those
activities to be economically reevaluated at that time. We believe that adequate
provision has been made for disposal of mine waste and mill tailings at all of
our operating and nonoperating properties in a manner that complies with current
federal and state environmental requirements.
55
Environmental laws and regulations may also have an indirect impact on us,
such as increased cost for electricity. Charges by smelters to which we sell our
metallic concentrates and products have substantially increased over the past
several years because of requirements that smelters meet revised environmental
quality standards. We have no control over the smelters' operations or their
compliance with environmental laws and regulations. If the smelting capacity
available to us was significantly reduced because of environmental requirements
or otherwise, it is possible that our silver operations could be adversely
affected.
Our U.S. operations are also subject to regulations under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA or Superfund), which regulates and establishes liability for the
release of hazardous substances, and the Endangered Species Act (ESA), which
identifies endangered species of plants and animals and regulates activities to
protect these species and their habitats. See "Risk Factors - We face
substantial government regulation and environmental risks."
LEGISLATION
From time to time, the U.S. Congress considers proposed amendments to the
General Mining Law of 1872, as amended, which governs mining claims and related
activities on federal lands. Legislation previously introduced in Congress would
have changed the current patent procedures, imposed certain royalties on
production and enacted new reclamation, environmental controls and restoration
requirements with respect to mining activities on federal lands. There was no
significant activity with respect to mining law reform in Congress in 2001 and
the first nine months of 2002, but the extent of any such changes is not known
and the potential impact on us as a result of congressional action is difficult
to predict. Although a majority of our existing mining operations occur on
private or patented property, changes to the General Mining Law, if adopted,
could adversely affect our ability to economically develop mineral resources on
federal lands.
EMPLOYEES
As of September 30, 2002, we employed 700 people, including people
employed with our subsidiaries, 394 of which were covered by labor agreements.
PROPERTIES
Our principal mineral properties are described above. We also have
interests in a number of other mineral properties in the United States, Mexico
and South America. Although some of such properties are known or believed to
contain significant quantities of mineralization, they are not considered
material to our operations at the present time. Encouraging results from further
exploration or increases in the market prices of certain metals could, in the
future, make such properties considerably more valuable to our business taken as
a whole.
Our general corporate office is located in Coeur d'Alene, Idaho. We closed
a transaction selling the corporate office building on April 8, 2002, but we
have leased a portion of the building following the sale for continued use as
our general corporate offices. We believe that our existing facilities are
sufficient for our intended purposes.
LEGAL PROCEEDINGS
BUNKER HILL SUPERFUND SITE
In 1994, we, as a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA),
entered into a consent decree with the Environmental Protection Agency (EPA) and
the state of Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located in Kellogg, Idaho. The 1994 Consent Decree
(the "1994 Decree") settled our response-cost liability under CERCLA at the
Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and Refining
Company which was also a party to the 1994 Decree, filed for Chapter 11
bankruptcy and in January 2001, the Federal District Court approved a new
Consent Decree between Sunshine, the U.S. Government and the Coeur d'Alene
Indian Tribe which settled Sunshine's environmental liabilities in the Coeur
d'Alene Basin lawsuits
56
described below and released Sunshine from further obligations under the 1994
Decree. In response to a request by us and ASARCO Incorporated, the United
States Federal District Court in Idaho, having jurisdiction over the 1994 Decree
issued an Order in September 2001 that the 1994 Decree should be modified in
light of a significant change in factual circumstances not reasonably
anticipated by the mining companies at the time they signed the 1994 Decree. In
its Order, the Court reserved the final ruling on the appropriate modification
to the 1994 Decree until after the issuance of the Record of Decision on the
Basin-Wide Remedial Investigation/Feasibility Study. The EPA issued the Record
of Decision ("ROD") on the Basin in September 2002, proposing a $359 million
Basin clean up plan to be implemented over 30 years. The ROD also establishes a
review process at the end of the 30-year period to determine if further
remediation would be appropriate. Based on the 2001 Order issued by the Court,
we intend to seek relief from the work program under the 1994 Decree within the
Bunker Hill site. In addition, we and ASARCO have negotiated a reduced 2002 work
program with the EPA and the State of Idaho pending the outcome of the dispute
resolution over the 1994 Decree. As of September 30, 2002, we have estimated and
accrued a liability for remedial activity costs at the Bunker Hill site of $8.9
million. These estimated expenditures are anticipated to be made over the next
three to five years. Although we believe the accrual is adequate based upon our
current estimates of aggregate costs, it is reasonably possible that our
estimate of our obligations may change in the near or long term.
COEUR d'ALENE RIVER BASIN ENVIRONMENTAL CLAIMS
COEUR d'ALENE INDIAN TRIBE CLAIMS
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against us and a number of other mining
companies asserting claims for damages to natural resources downstream from the
Bunker Hill site over which the Tribe alleges some ownership or control. The
Tribe's natural resource damage litigation has been consolidated with the United
States' litigation described below.
U.S. GOVERNMENT CLAIMS
In March 1996, the United States filed a lawsuit in Idaho Federal District
Court against certain mining companies that conducted historic mining operations
in the Silver Valley of northern Idaho, including us. The lawsuit asserts claims
under CERCLA and the Clean Water Act and seeks recovery for alleged damages to
or loss of natural resources located in the Coeur d'Alene River Basin in
northern Idaho for which the United States asserts to be the trustee under
CERCLA. The lawsuit asserts that the defendants' historic mining activity
resulted in releases of hazardous substances and damaged natural resources
within the Basin. The suit also seeks declaratory relief that we and other
defendants are jointly and severally liable for response costs under CERCLA for
historic mining impacts in the Basin outside the Bunker Hill site. We have
asserted a number of defenses to the United States' claims.
In May 1998, the EPA announced that it had commenced a Remedial
Investigation/Feasibility Study under CERCLA for the entire Basin, including
Lake Coeur d'Alene, in support of its response cost claims asserted in its March
1996 lawsuit. In October 2001, the EPA issued its proposed clean-up plan for the
Basin. The EPA issued the Record of Decision on the Basin in September 2002,
proposing a $359 million Basin clean up plan to be implemented over 30 years.
The ROD also establishes a review process at the end of the 30-year period to
determine if further remediation would be appropriate.
The first phase of the trial commenced on the consolidated Coeur d'Alene
Indian Tribe's and the Federal District Court cases on January 22, 2001, and was
concluded on July 30, 2001. In the first phase of the trial, the Court has been
asked to determine the extent of liability, if any, of the defendants for the
plaintiffs' CERCLA claims. The Court has also been asked to determine the
liability of the United States for its historic involvement in the Basin. No
decision on the issues before the Court in the first phase of the litigation has
been issued. If liability is determined in the first phase, a second trial is
anticipated to be scheduled during 2003 to address damages and remedy selection.
Two of the defendant mining companies, Coeur d'Alene Mines Corporation and
Sunshine Mining and Refining Company, settled their liabilities under the
litigation during the first quarter of 2001. We and ASARCO are the only
defendants remaining in the litigation.
During 2000 and into 2001, we were involved in settlement negotiations
with representatives of the U.S. government and the Coeur d'Alene Indian Tribe.
We also participated with certain of the other defendants in the
57
litigation in a state of Idaho led settlement effort. On August 16, 2001, we
entered into an Agreement in Principle with the United States and the State of
Idaho to settle the governments' claims for natural resource damages and
clean-up costs related to the historic mining practices in the Coeur d'Alene
Basin in northern Idaho. Since August 2001, we and EPA have continued to
negotiate a final consent decree based upon the terms set forth in the Agreement
in Principle. Due to a number of changes that have occurred since the signing of
the Agreement in Principle, including improvements in the environmental
conditions at Grouse Creek and lower estimated clean-up costs in the Coeur
d'Alene Basin as well as our improved financial condition, the terms of the
multiple properties settlement approach set forth in the Agreement in Principle
no longer appears favorable to us. Therefore, the United States, the State of
Idaho and we have agreed to discontinue utilizing the Agreement in Principle as
a settlement vehicle. However, we anticipate further settlement negotiations
with the United States and the State of Idaho to limit our environmental
clean-up liabilities for historic mining practices in the Coeur d'Alene Basin.
Due to a number of uncertainties related to this matter, including the outcome
of pending litigation and the result of any settlement negotiations, we do not
have the ability to estimate what, if any, liability exists related to the Coeur
d'Alene Basin at this time.
It is reasonably possible that our ability to estimate what, if any,
obligation relating to the Coeur d'Alene Basin may change in the near or long
term depending on a number of factors. In addition, an adverse ruling against us
for liability and damages in this matter could have a material adverse effect on
us.
PRIVATE CLASS ACTION LITIGATION
On or about January 7, 2002, a class action complaint was filed in this
matter in the Idaho District Court, County of Kootenai, against several
corporate defendants, including us. We were served with the Complaint on January
29, 2002. The Complaint seeks certification of three plaintiff classes of Coeur
d'Alene Basin residents and current and former property owners to pursue three
types of relief: various medical monitoring programs, real property remediation
and restoration programs, and damages for diminution in property value, plus
other damages and costs. We believe the Complaint is subject to challenge on a
number of bases and intend to vigorously defend this litigation. On April 23,
2002, we filed a motion with the Court to dismiss the claims for relief relating
to the medical monitoring programs and the remediation and restoration programs.
At a hearing before the Idaho District Court on our and other defendants'
motions held October 16, 2002, the Judge struck the complaint filed by the
plaintiffs in January 2002 and instructed the plaintiffs they have until
approximately mid-February, 2003 to re-file the complaint limiting the relief
requested by the plaintiffs to wholly private damages they may have incurred
from their claims of trespass and nuisance. The Court dismissed the medical
monitoring claim as a separate cause of action and stated that any requested
remedy that encroached upon the EPA's clean up in the Silver Valley would be
precluded by the pending Federal Court case.
INSURANCE COVERAGE LITIGATION
In 1991, we initiated litigation in the Idaho District Court, County of
Kootenai, against a number of insurance companies that provided comprehensive
general liability insurance coverage to us and our predecessors. We believe the
insurance companies have a duty to defend and indemnify us under their policies
of insurance for all liabilities and claims asserted against us by the EPA and
the tribe under CERCLA related to the Bunker Hill site and the Basin in northern
Idaho. In 1992, the Idaho State District Court ruled that the primary insurance
companies had a duty to defend us in the Tribe's lawsuit. During 1995 and 1996,
we entered into settlement agreements with a number of the insurance carriers
named in the litigation. We have received a total of approximately $7.2 million
under the terms of the settlement agreements. Thirty percent of these
settlements were paid to the EPA to reimburse the U.S. government for past costs
under the Bunker Hill site Consent Decree. Litigation is still pending against
one insurer with trial suspended until the underlying environmental claims
against us are resolved or settled. The remaining insurer in the litigation,
along with a second insurer not named in the litigation, is providing us with a
partial defense in all Basin environmental litigation. As of September 30, 2002,
we have not reduced our accrual for reclamation and closure costs to reflect the
receipt of any potential insurance proceeds.
OTHER CLAIMS
In 1997, our then subsidiary, Kentucky-Tennessee Clay Company (K-T Clay),
terminated shipments (comprising approximately 1% of annual ball clay
production) sold to animal feed producers, when the Food and
58
Drug Administration determined trace elements of dioxin were present in poultry.
Dioxin is inherently present in ball clays generally. On September 22, 1999,
Riceland Foods (the primary purchaser of ball clay from K-T Clay used in animal
feed) commenced litigation against K-T Clay in State Court in Arkansas to
recover its losses and its insurance company's payments to downstream users of
its animal feed. The complaint alleged negligence, strict liability and breach
of implied warranties and seeks damages in excess of $7.0 million. Legal counsel
retained by the insurance company for K-T Clay had the case removed to Federal
District Court in Arkansas. In July 2000, a second complaint was filed against
K-T Clay and us in Arkansas State Court by Townsends, Inc., another purchaser of
animal feed containing ball clay sold by K-T Clay. A third complaint was filed
in the Federal District Court in Arkansas on August 31, 2000, by Archer Daniels
Midland Company, a successor in interest to Quincy Soybean Company, a third
purchaser of ball clay sold by K-T Clay and used in the animal feed industry.
The Townsends and Archer Daniels lawsuits allege damages totaling approximately
$300,000 and $1.4 million, respectively. These complaints contain similar
allegations to the Riceland Foods' case and legal counsel retained by the
insurance carrier is defending K-T Clay and us in these lawsuits. We believe
that these claims comprise substantially all the potential claims related to
this matter. In January 2001, we were dismissed from the only lawsuit in which
we had been named as a defendant. In March 2001, prior to trial, K-T Clay
settled the Riceland Foods litigation against K-T Clay through settlement
payment substantially funded by K-T Clay's insurance carrier. K-T Clay
contributed $230,000 toward the Riceland Foods settlement. In August 2001, the
Federal District Court dismissed the Archer Daniels litigation; however, a
similar lawsuit based upon implied warranty was refiled by Archer Daniels
against K-T Clay on October 24, 2001, in Arkansas Federal Court. The defense of
the Townsends lawsuit is being covered by insurance. We believe that K-T Clay's
insurance coverage is available to cover the remaining claims. On March 27,
2001, we sold our interest in K-T Clay. However, we agreed to indemnify the
purchaser of K-T Clay from all liability resulting from these dioxin claims and
litigation to the extent not covered by insurance. In July 2002, K-T Clay,
through its insurance carrier, negotiated settlements of both remaining
lawsuits. The settlement payments will be funded 100% by K-T Clay's insurance
carrier. Based on the settlement agreements, the respective courts dismissed
both lawsuits.
On November 17, 2000, we entered into an agreement with Zemex U.S.
Corporation guaranteed by its parent, Zemex Corporation of Toronto, Canada, to
sell the stock of K-T Clay and K-T Mexico, which included the ball clay and
kaolin operations, for a price of $68.0 million. On January 18, 2001, Zemex U.S.
Corporation failed to close on the transaction, and on January 22, 2001, we
brought suit in the United States District Court for the Northern District of
Illinois, Eastern Division, against the parent, Zemex Corporation, under its
guarantee for its subsidiary's failure to close on the purchase and meet its
obligations under the November 2000 agreement. Discovery has been completed and
the Court indicated the matter may be tried in late January or early February
2003. At September 30, 2002, we have not recorded any potential gain from the
resolution of this litigation and have recorded the associated costs to expense
as incurred.
In March 2002, Independence Lead Mines Company ("Independence"), the
holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the
Lucky Friday mine, notified us of certain alleged defaults by us under the 1968
Lease Agreement between the unit owners (Independence and us under the terms of
the 1968 DIA Unitization Agreement) as lessors and defaults by us as lessee and
operator of the properties. We are a net 81.48% interest holder under these
Agreements. Independence alleges that we violated the "prudent operator
obligations" implied under the lease by undertaking the Gold Hunter project and
violated certain other provisions of the Agreement with respect to milling
equipment and calculating net profits and losses. Under the Lease Agreement, we
have the exclusive right to manage, control and operate the DIA properties, and
our decisions with respect to the character of work are final. On June 17, 2002,
Independence filed a lawsuit in Idaho State District Court seeking termination
of the Lease Agreement and requesting unspecified damages. We believe that we
have fully complied with all obligations of the 1968 Lease Agreement and will be
able to successfully defend our right to operate the property under the Lease
Agreement. See "Risk Factors-The titles to some of our properties may be
defective."
In Mexico, our subsidiary, Minera Hecla S.A. de C.V., is involved in
litigation concerning a lien on certain major components of the Velardena mill
that predated the sale of the mill to Minera Hecla. The amount of the lien is
approximately $2,017,000 plus accrued interest of approximately $124,000. There
is currently pending an appeal in Mexico of the $2,017,000 judgment which
underlies the lien. In a suit (Gaitan v. El Juez de Terreon) before a federal
court in Terreon, Mexico, a claim was made in September 2001 by the lien holder
as to the validity of the sale of the Velardena mill to Minera Hecla. The
decision in that suit and a subsequent appeal upheld the validity of the sale to
Minera Hecla. In another action brought by Minera Hecla in September 2001 before
a federal court in
59
Durango, Mexico (Minera Hecla v. El Juez ce Cuidad de Mexico Civil) Minera Hecla
challenged the validity of the lien as to Minera Hecla as purchaser of the mill.
The decision in that suit and a subsequent appeal upheld the validity of the
lien on the equipment as to Minera Hecla as purchaser. As a result of this
proceeding, the lien holder has the right to take possession of the equipment at
a time that has not yet been determined by the Mexico court system. Minera Hecla
is evaluating whether to proceed with additional legal or other actions to
preclude enforcement of the lien, including the possibility of removing the lien
by paying judgment and interest to the lien holder. IIG Capital LLC, the lender
of funds used to acquire the mill, agreed to indemnify us for all obligations or
losses relating to these liens or claims. Minera Hecla has demanded that IIG
Capital resolve this matter prior to the lien holder's taking possession of
equipment essential to operation of the mill. Enforcement of the lien could
result in an interruption of mill operation and production at the San Sebastian
mine.
We are subject to other legal proceedings and claims not disclosed above
which have arisen in the ordinary course of our business and have not been
finally adjudicated. Although there can be no assurance as to the ultimate
disposition of these other matters, it is the opinion of our management that the
outcome of these other matters will not have a material adverse effect on our
financial condition.
60
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information with respect to our directors and executive officers as of
December 31, 2002 is set forth as follows:
Age Position
--- --------
Phillips S. Baker, Jr.(1) 43 President, Chief Operating Officer and Chief Financial Officer
Arthur Brown(1,6,9) 62 Chairman of the Board and Chief Executive Officer
Michael H. Callahan(9) 39 Vice President - Corporate Development
Ronald W. Clayton 44 Vice President - U.S. Operations
Thomas F. Fudge, Jr. 47 Vice President - Operations
Vicki J. Veltkamp 46 Vice President - Investor and Public Relations
Lewis E. Walde 35 Vice President - Controller and Treasurer
John E. Clute(1,4,5) 68 Director
Joe Coors, Jr.(2,3,5) 60 Director
Ted Crumley(1,2,4,5) 57 Director
Charles L. McAlpine(3,4,5,7) 68 Director
Jorge E. Ordonez C.(2,3,4,7) 63 Director
Dr. Anthony P. Taylor(7)(8) 61 Director
---------------------------
(1) Member of Executive Committee
(2) Member of Finance Committee
(3) Member of Audit Committee
(4) Member of Directors Nominating Committee
(5) Member of Compensation Committee
(6) Member of Retirement Board
(7) Member of Technical Committee
(8) Elected by holders of Series B Preferred Stock
(9) Arthur Brown is Michael H. Callahan's father-in-law
PHILLIPS S. BAKER, JR. has been our President and Chief Operating Officer
since November 2001 and a director since November 2001. Prior to that, Mr. Baker
was our Vice President - Chief Financial Officer from May 2001 to November 2001.
Prior to joining us, Mr. Baker served as Vice President and Chief Financial
Officer of Battle Mountain Gold Company (a gold mining corporation) from March
1998 to January 2001 and Vice President and Chief Financial Officer of Pegasus
Gold Corporation (a gold mining corporation) from January 1994 to January 1998.
ARTHUR BROWN has been Chairman of our board of directors since June 1987
and has served as our Chief Executive Officer since May 1987. Prior to that, Mr.
Brown was our President from May 1986 to November 2001 and our Chief Operating
Officer from May 1986 to May 1987. Mr. Brown also serves as a director for AMCOL
International Corporation (an American industrial minerals company), Idaho
Independent Bank and Tango Minerals Company (a Canadian mining company).
61
On December 18, 2002, Arthur Brown announced that he would retire as Chief
Executive Officer effective in May 2003. Subject to formal Board approval, we
expect that he will be succeeded by Phillips Baker, currently our President. Mr.
Brown will remain as Chairman of the Board.
MICHAEL H. CALLAHAN has been our Vice President - Corporate Development
since February 2002 and President of Minera Hecla Venezolana since 2000. Prior
to that Mr. Callahan was Director of Accounting and Information Services from
1999 to 2000. From 1997 to 1999 Mr. Callahan was the Financial Manager of Silver
Valley Resources. Mr. Callahan was also the Senior Financial Analyst for us from
1994 to 1996.
RONALD W. CLAYTON was appointed Vice President - U.S. Operations on
September 27, 2002. Prior to joining us, Mr. Clayton was Vice President -
Operations for Stillwater Mining Company from July 2000 to May 2002. Mr. Clayton
was also our Vice President - Metals Operations from May 2000 to July 2000. Mr.
Clayton also served as Manager of Operations and General Manager of our Rosebud,
Republic and Lucky Friday mines from 1987 to 2000.
THOMAS F. FUDGE has been our Vice President - Operations since June 2001.
Prior to that, Mr. Fudge was our Manager of Operations from July 2000 to May
2001 and our Lucky Friday Unit Manager from 1995 to 2000.
VICKI J. VELTKAMP has been our Vice President - Investor and Public
Relations since May 2000. Prior to that, Ms. Veltkamp has served in various
administrative functions with us from 1995 to 2000.
LEWIS E. WALDE has been our Vice President - Controller since June 2001
and our Treasurer since February 2002. Prior to that, Mr. Walde was our
Controller from May 2000 to May 2001, our Assistant Controller from January 1999
to April 2000 and held various accounting functions with us from June 1992 to
December 1998.
JOHN E. CLUTE has served as a director since 1981. Mr. Clute has been a
Professor of Law at Gonzaga University School of Law from 2001 to the present.
Prior to that, Mr. Clute was the Dean of Gonzaga University School of Law from
1991 to 2001. Mr. Clute serves as a director of The Jundt Growth Fund, Inc.; the
Jundt Funds, Inc. (Jundt U.S. Emerging Growth Fund, Jundt Opportunity Fund,
Jundt Mid-Cap Growth Fund, Jundt Science & Technology Fund and Jundt Twenty-Five
Fund); American Eagle Funds, Inc. (American Eagle Capital Appreciation Fund,
American Eagle Large-Cap Growth Fund and American Eagle Twenty Fund); and
RealResume, Inc.
JOE COORS, JR. has served as a director since 1990. Mr. Coors was the
Chairman of the Board and Chief Executive Officer of CoorsTek, Inc. (formerly
Coors Ceramics Company) (a ceramic corporation) from 1985 until his retirement
in 2001. Mr. Coors serves as a director of Children's Technology Group and the
Fellowship of Christian Athletes for the state of Colorado. Mr. Coors is the
Retired Chairman of the Air Force Memorial Foundation.
TED CRUMLEY has served as a director since 1995. Mr. Crumley has served as
the Senior Vice President and Chief Financial Officer of Boise (manufacturer of
paper and forest products) from 1994 to the present. Prior to that, Mr. Crumley
was Vice President and Controller of Boise from 1990 to 1994.
CHARLES L. MCALPINE has served as a director since 1989. Concurrently, Mr.
McAlpine served as the President of Arimathaea Resources Inc. (a Canadian gold
exploration company) from 1982 to 1992. Mr. McAlpine serves as a director of
First Tiffany Resource Corporation, Goldstake Explorations Inc. (a Canadian
mining exploration corporation) and Postec Systems Inc.
JORGE E. ORDONEZ C. has served as a director since 1994. Mr. Ordonez has
served as the President and Chief Executive Officer of Ordonez Profesional S.C.
(a business and management consulting corporation specializing in mining) from
1988 to present. Mr. Ordonez is a director of Altos Hornos de Mexico, S.A. de
C.V.; Minera Carbonifera Rio Escondido, S.A. de C.V.; Grupo Acerero del Norte,
S.A. de C.V.; Fischer-Watt Gold Co., Inc. Mr. Ordonez received the Mexican
National Geology Recognition in 1989 and was elected to the Mexican Academy of
Engineering in 1990.
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DR. ANTHONY P. TAYLOR has served as a director since May 2002. Mr. Taylor
has been the President, CEO and Director of Millennium Mining Corporation (a
minerals exploration corporation) since January 2000 and the President of
Oakhill Consultants since October 1996 (a minerals exploration corporation and
geological consulting company). Prior to that, Mr. Taylor was the Vice President
- Exploration of First Point US Minerals (a minerals exploration corporation)
from May 1997 to December 1999 and the President of Great Basin Exploration &
Mining Co., Inc. (a minerals exploration corporation) from June 1990 to January
1996.
VACANCY
David Christensen, one of our two directors elected by holders of Series B
preferred stock, resigned from our board of directors in October 2002. He joined
Credit Suisse First Boston as a research analyst after he joined our board and
advised us that he wished to avoid any appearance of conflict of interest as a
result of his new position. In order to fill the resulting vacancy, the
remaining director elected by the holders of Series B preferred stock will name
a new director. It is currently anticipated that the new director will be named
by February 2003.
DIRECTOR COMPENSATION
We compensate our directors who are not employees for their services as
follows: (i) a retainer fee of $3,000 per calendar quarter; (ii) $2,000 for each
director's meeting attended; and (iii) $1,000 for attending any meeting of any
committee of the board of directors.
In August 1994, we adopted a new Deferred Compensation Plan for directors
which commenced January 1, 1995 (1994 Plan). At the February 2001 quarterly
Directors' meeting, the directors elected to terminate the 1994 Plan effective
April 1, 2001, with payment of the dollar amounts and stock held under the plan
to be paid or distributed out to the participants on a monthly basis over a
24-month period commencing April 15, 2001. If a director retires from or
terminates his employment with us, the director is still entitled to a
distribution of his account and stock held under the plan within a period of 60
days following the date of his termination of employment or retirement.
In March 1995, we adopted the Hecla Mining Company Stock Plan for
Nonemployee Directors (Directors Stock Plan), which became effective following
stockholder approval on May 5, 1995. The maximum number of shares of common
stock that may be issued under the plan is 1,000,000. Annually, each nonemployee
director is credited that number of shares determined by dividing $10,000 by the
average closing price for our common stock on the New York Stock Exchange for
the prior calendar year. The Directors Stock Plan is administered by a committee
consisting of our Chief Executive Officer, Treasurer and Controller, which has
full authority to construe and interpret the Directors Stock Plan, to establish,
amend and rescind rules and regulations relating to the Directors Stock Plan,
and to take all such actions and make all such determinations in connection with
the Directors Stock Plan as it may deem necessary or desirable.
The common stock credited under the Plan will be delivered to a director
on or beginning on the earlier to occur of (i) the death of the director; (ii)
the disability of the director preventing continued service on the board; (iii)
the retirement of the director from service; (iv) a cessation of a director's
service to us for any reason other than (i) through (iii) above; or (v) our
change of control (as defined in the Directors Stock Plan). Subject to certain
restrictions, directors may elect to receive the common stock on such date or in
annual installments thereafter over 5, 10 or 15 years. Upon delivery, a director
will receive the common stock plus dividends or other distributions with respect
to the common stock, plus interest at a rate equal to our cost of funds on all
such distributions other than our common stock.
Our directors who are also employees may participate in the 1995 Stock
Incentive Plan, described under "Executive Compensation."
63
EXECUTIVE COMPENSATION
The following table sets forth information regarding the aggregate
compensation for the fiscal years ended December 31, 1999, 2000 and 2001, paid
or accrued for (i) our Chief Executive Officer, and (ii) our four other most
highly paid executive officers.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation(1) Awards
------------------------------------ ------------
Other Securities
Annual Underlying All Other
Name and Principal Salary Bonus Compensation Options/SARs Compensation
Position Year ($) ($) ($) (#)(2) ($)(3)
------------------------- ---- ----- ----- ----- ------------ ------------
Arthur Brown................... 2001 402,500 144,900(6) -- 200,000 43,776
Chairman & Chief 2000 402,500 49,616 -- 100,000 40,460
Executive Officer 1999 402,500 116,487 -- 160,000 139,205
Michael B. White(5)............ 2001 230,000 82,500(6) -- 75,000 12,528
Vice President, 2000 200,417 22,287 -- 45,000 13,034
General Counsel 1999 187,000 39,486 -- 75,000 13,232
& Secretary
Phillip S. Baker, Jr........... 2001 162,500(4) 99,000(6) -- 60,000 49,609
President & Chief 2000 0 0 -- 0 0
Operating Officer 1999 0 0 -- 0 0
William B. Booth(5)
Vice President - ............ 2001 155,000 58,125(6) -- 60,000 4,889
Environmental & 2000 148,750 19,330 -- 30,000 5,429
Government Affairs 1999 140,000 29,468 -- 50,000 4,625
Thomas F. Fudge, Jr............ 2001 150,000 45,000(6) -- 60,000 3,335
Vice President - 2000 127,300 19,683 -- 7,000 2,522
Operations 1999 108,000 25,360 -- 7,000 3,190
-----------
(1) The annual compensation set forth in the table is based upon salaries of
the Chief Executive Officer and other named executives established in May
of each year for June 1 to May 31. This table reflects compensation paid
to, or earned by, the executive officers during the fiscal year ending
December 31 of each year.
(2) All options granted to the named executives in 2001 were granted under a
vesting schedule described in footnote 1 of "Option Grants in Last Fiscal
Year".
(3) "All Other Compensation" for the last fiscal year includes the following
for Messrs. Brown, White, Baker, Booth and Fudge: (i) matching
contributions under our Executive Deferral Plan of $938, $164, $0, $194
and $0 for each named executive, respectively; (ii) the above market
portion of interest accrued under our Executive Deferral Plan of $36,150,
$8,326, $0, $1,855 and $610 on behalf of each named executive,
respectively; (iii) matching contributions under our Capital Accumulation
Plan of $2,550, $2,550, $141, $2,550 and $2,545 for each named executive,
respectively; (iv) the dollar value benefit of premium payments for term
life insurance coverage of $2,838, $488, $0, $290 and $180 for each named
executive, respectively; (v) personal tax service provided by consultants
at our expense for Mr. Brown, $1,300 and Mr. White, $1,000; and (vi)
consulting fees paid to Mr. Baker during 2001 prior to Mr. Baker joining
us as an executive on May 1, 2001, in the amount of $49,468.
(4) Commencing on December 1, 2001, 25% of Mr. Baker's base salary was
comprised of our restricted common stock issued under the 1995 Stock
Incentive Plan, which is distributed to Mr. Baker in substantially equal
amounts in arrears on a quarterly basis through December 1, 2002. On
February 1, 2002, Mr. Baker received the first such issuance of common
stock, of which 6,345 shares were earned in December 2001. The fair market
value of such stock on the date paid was $7,169.85, based on the $1.13 per
share closing price of our common stock on such date.
64
(5) Messrs. White and Booth each elected to take early retirement under our
Early Retirement Program approved by the board of directors in November
2001. Mr. White retired effective March 1, 2002 and Mr. Booth retired
effective March 16, 2002. Each provides consulting services to us pursuant
to a Consulting Agreement. Mr. White's consulting agreement has a term of
one year, concluding in February 2003 and Mr. Booth's consulting agreement
has a term of two years, concluding in March 2004.
(6) The compensation under "Bonus" includes both a stock and cash component,
as follows: Mr. Brown, 94,753 shares of common stock and $48,252 in cash;
Mr. White, 53,949 shares of common stock and $27,473 in cash; Mr. Baker,
64,738 shares of common stock and $32,967 in cash; Mr. Booth, 38,009
shares of common stock and $19,356 in cash; and Mr. Fudge, 29,426 shares
of common stock and $14,985 in cash. The shares of common stock were
granted under the 1995 Stock Incentive Plan. The fair market value of the
shares on the date of the award was calculated by multiplying the number
of shares by $1.02, the average closing price of our common stock from
July 2001 through December 2001.
The following table sets forth information regarding options we granted to
the executive officers named in the Summary Compensation Table during 2001.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Percent of Annual Rates of Stock
Total Options Price Appreciation
Granted to Exercise for Option Term(2)
Options Employees in or Base Expiration ------------------
Name Granted(1) Fiscal Year Price(2) Date 5% 10%
---- -------- ----------- -------- ---- -- ---
Arthur Brown 200,000 28.65% $1.13 06/07/06 $62,440 $ 137,960
Michael B. White 75,000 10.74% $1.13 06/07/06 $23,415 $ 51,735
William S. Booth 60,000 8.60% $1.13 06/07/06 $18,732 $ 41,388
Phillips S. Baker, Jr. 60,000 8.60% $1.13 06/07/06 $18,732 $ 41,388
Thomas F. Fudge, Jr. 60,000 8.60% $1.13 06/07/06 $18,732 $ 41,388
-----------
(1) There are no tax-offset bonuses accompanying these options. All such
options have vested. All options were granted with an exercise price equal
to the fair market value of the common stock on the date of grant.
(2) The potential realizable value shown in the table represents the maximum
gain if held for the full five-year term at each of the assumed annual
appreciation rates. Gains, if any, are dependent upon the actual
performance of the common stock and the timing of any sale of the common
stock received upon exercising the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table shows information concerning the exercise of stock
options during fiscal year 2001 by each of the named executive officers and the
fiscal year-end value of unexercised options.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SARs at 12/31/01 SARs at 12/31/01*
---------------------------- ----------------------------
Shares Exercisable Unexercisable Exercisable Unexercisable
Acquired on Value ----------- ------------- ----------- -------------
Name Exercise (#) Realized ($) (#) (#) ($) ($)
---- ------------ ------------ --- --- --- ---
Arthur Brown 0 0 568,666 203,334 0 0
Michael B. White 0 0 220,750 95,750 0 0
William B. Booth 0 0 173,500 74,500 0 0
Thomas F. Fudge, Jr. 0 0 50,500 40,000 0 0
Phillips S. Baker, Jr. 0 0 20,000 40,000 0 0
-----------
* This column indicates the aggregate amount, if any, by which the market
value of our common stock on December 31, 2001 exceeded the options'
exercise price, based on the closing per share sale price of our common
stock on December 31, 2001 of $0.94 on the New York Stock Exchange.
65
RETIREMENT PLAN
Our officers participate in the Hecla Mining Company Qualified Retirement
Plan (Retirement Plan), which covers substantially all of our employees, except
for certain hourly employees who are covered by separate plans. Contributions to
the Retirement Plan, and the related expense or income, are based on general
actuarial calculations and, accordingly, no portion of our contributions, and
related expenses or income, is specifically attributable to our officers. We
were not required to make a contribution for 2001. We also have an unfunded
Supplemental Retirement Benefit Plan adopted in November 1985 (Supplemental
Plan) under which the amount of any benefits not payable under the Retirement
Plan by reason of the limitations imposed by the Internal Revenue Code and/or
the Employee Retirement Income Security Act, as amended (Acts), and the loss, if
any, due to a deferral of salary made under our Executive Deferral Plan and/or
our Capital Accumulation Plan will be paid out of our general funds to any
employee who may be adversely affected. Under the Acts, the current maximum
annual pension benefit payable by the plan to any employee is $140,000 subject
to specified adjustments. Upon reaching the normal retirement age of 65, each
participant is eligible to receive annual retirement benefits in monthly
installments for life equal to, for each year of credited service, 1% of final
average annual earnings (defined as the highest average earnings of such
employee for any 36 consecutive calendar months during the final 120 calendar
months of service) up to the applicable covered compensation level (which level
is based on the Social Security maximum taxable wage base) and 1.75% of the
difference, if any, between final average annual earnings and the applicable
covered compensation level. The Retirement Plan and Supplemental Plan define
earnings for purposes of the plans to be "a wage or salary for services of
employees inclusive of any bonus or special pay including gainsharing programs,
contract miners' bonus pay and the equivalent."
The following table shows estimated aggregate annual benefits under the
Retirement Plan and the Supplemental Plan payable upon retirement to a
participant who retires in 2001 at age 65 having the years of service and final
average annual earnings as specified. The table assumes Social Security covered
compensation levels as in effect on January 1, 2001.
FINAL AVERAGE
ANNUAL YEARS OF CREDITED SERVICE
EARNINGS 5 10 15 20 25 30 35
-----------------------------------------------------------------------------------------------------------
$100,000 $ 7,434 $ 14,868 $ 22,301 $ 29,735 $ 37,169 $ 44,603 $ 52,036
125,000 9,621 19,243 28,864 38,485 48,106 57,728 67,349
150,000 11,809 23,618 35,426 47,235 59,044 70,853 82,661
175,000 13,996 27,993 41,989 55,985 69,981 83,978 97,974
200,000 16,184 32,368 48,551 64,735 80,919 97,103 113,286
225,000 18,371 36,743 55,114 73,485 91,856 110,228 128,599
250,000 20,559 41,118 61,676 82,235 102,794 123,353 143,911
275,000 22,746 45,493 68,239 90,985 113,731 136,478 159,224
300,000 24,934 49,868 74,801 99,735 124,669 149,603 174,536
325,000 27,121 54,243 81,364 108,485 135,606 162,728 189,849
350,000 29,309 58,618 87,926 117,235 146,544 175,853 205,161
375,000 31,496 62,993 94,489 125,985 157,481 188,978 220,474
400,000 33,684 67,368 101,051 134,735 168,419 202,103 235,786
425,000 35,871 71,743 107,614 143,485 179,356 215,228 251,099
450,000 38,059 76,118 114,176 152,235 190,294 228,353 266,411
475,000 40,246 80,493 120,739 160,985 201,231 241,478 281,724
500,000 42,434 84,868 127,301 169,735 212,169 254,603 297,036
525,000 44,621 89,243 133,864 178,485 223,106 267,728 312,349
Benefits listed in the pension table are not subject to any deduction for
Social Security or other offset amounts. As of December 31, 2001, the following
executive officers had completed the indicated number of full years of credited
service: A. Brown, 34 years; M. B. White, 21 years; P. S. Baker, less than 1
year; W. B. Booth, 16 years; and T. F. Fudge, 8 years.
66
1995 STOCK INCENTIVE PLAN
Our officers and employees, designated by the committee of the board
designated to administer the plan, who are responsible for or contribute to our
management, growth and profitability are eligible to be granted awards under the
Hecla Mining Company 1995 Stock Incentive Plan (1995 Stock Incentive Plan).
Stock options, including incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock and performance units are
available for grant under the 1995 Stock Incentive Plan by the committee in its
discretion. The 1995 Stock Incentive Plan authorizes the issuance of up to
6,000,000 shares of our common stock pursuant to the grant or exercise of awards
under the plan. The board committee that administers the 1995 Stock Incentive
Plan has broad authority to fix the terms and conditions of individual
agreements with participants, including the duration of the award and any
vesting requirements.
At the time an award is made under the 1995 Stock Incentive Plan or at any
time thereafter, the committee may grant to the participant receiving such award
the right to receive a cash payment in an amount specified by the committee, to
be paid at such time or times (if ever) as the award results in compensation
income to the participant, for the purpose of assisting the participant to pay
the resulting taxes, all as determined by the committee and on such other terms
and conditions as the committee shall determine.
The 1995 Stock Incentive Plan will terminate 15 years after the effective
date of the plan.
HECLA MINING COMPANY KEY EMPLOYEE DEFERRED COMPENSATION PLAN
On March 13, 2002, our board of directors adopted the Hecla Mining Company
Key Employee Deferred Compensation Plan (Deferral Plan). On July 18, 2002, our
stockholders approved the Deferral Plan.
The Deferral Plan permits our executive officers or key management level
employees who are highly compensated to participate in the Deferral Plan,
subject to approval of the committee. The compensation committee of our board of
directors administers the plan. Each participant may defer eligible compensation
and/or cash incentive compensation into the plan. Distributions under the plan
will be in the form of shares of our common stock, cash or discounted stock
options. 6,000,000 shares of common stock are available for issuance under the
plan or upon exercise of options issued under the Plan. A participant may
receive matching contributions under the Deferral Plan and may receive
additional, discretionary contributions if made by the committee.
Subject to certain limitations, distributions of benefits from
participants' accounts under the Deferral Plan will be made in the form of a
lump sum distribution upon the first to occur of: the participant's disability,
the participant's death, the first day the participant is no longer our
employee, the termination of the Deferral Plan, or a date designated by the
participant on an election form.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT ARRANGEMENT AND OTHER
MANAGEMENT ARRANGEMENTS
We have employment agreements (Agreements) with Messrs. Brown, Baker and
Fudge (Executives).
The Agreements were recommended to the board of directors by the
Compensation Committee and were approved by the board of directors on the basis
of such recommendation. The Agreements, which are substantially identical except
for compensation provisions, provide that each of the Executives shall serve in
such executive position as the board of directors may direct. The Agreements
become effective only if we experience a "Change of Control" (Effective Date).
The term of employment under the Agreements is two years from the Effective
Date. The Agreements have a Change in Control period of three years, and this
period is automatically renewed for an additional year in June of each year
unless we give notice of nonrenewal 60 days prior to the renewal date. Under the
Agreements, a Change of Control is deemed to occur if a person (including a
"group" under Section 13d-3 of the Exchange Act) becomes the beneficial owner of
20% or more of our voting power or if, as the result of a tender offer, merger,
proxy fight or similar transaction, the persons who were previously our
directors cease to constitute a majority of the board. The Agreements are
intended to ensure that, in the event of a Change of Control, each Executive
will continue to receive payments and other benefits equivalent to those he was
receiving at the time of a
67
Change of Control for the duration of the term of the Agreement. The Agreements
also provide, among other things, that should an Executive's employment be
terminated by us or by the Executive for good reason (other than death,
incapacity or misconduct) after the Effective Date of the Agreement, he would
receive from us a lump-sum defined amount generally equivalent to two times the
aggregate of his then annual base salary rate and his average annual bonus for
the three years prior to the Effective Date. The Executives would also be
entitled to lump-sum payments representing the difference in pension and
supplemental retirement benefits to which they would be entitled on (i) the date
of actual termination, and (ii) the end of the two-year employment period under
the Agreements. We would also maintain such Executive's participation in all
benefit plans and programs (or provide equivalent benefits if such continued
participation was not possible under the terms of such plans and programs). An
Executive whose employment has terminated would not be required to seek other
employment in order to receive the defined benefits. The Agreements also provide
that under certain circumstances we will make an additional gross-up payment if
necessary to place the Executive in the same after-tax position as if no excise
tax were imposed by the Internal Revenue Code. Pursuant to the Agreements
between us and each of our named executive officers, if a Change of Control
occurred and the named executive officers were each terminated as of December
31, 2001, the Executives would be entitled to the following estimated cash
payments pursuant to the Agreements: Mr. Brown, $1,095,000; Mr. Baker, $798,000;
and Mr. Fudge, $390,000. These dollar amounts do not include amounts which would
have otherwise been payable to each Executive if the Executive had terminated
employment on the day prior to a Change of Control. Similar employment
agreements with Mr. White and Mr. Booth terminated upon their retirement in
March 2002.
RETENTION AGREEMENTS
In 2001, we entered into Retention Agreements with Messrs. Brown, Baker,
and Fudge. The Retention Agreements were recommended to the board of directors
by the Compensation Committee and were approved by the board of directors on the
basis of such recommendation. The Retention Agreements, which are substantially
identical except for compensation provisions, provide that so long as the
Executive remains as our employee or working for us in some other capacity
satisfactory to us, through June 30, 2002, the Executive would be entitled to a
payment of 22% of the Executive's annual base salary. If the Executive remains
with us through December 31, 2002, the Executive would be entitled to an
additional payment of 44% of the Executive's annual base salary. The Retention
Agreements also provide for a payment of amounts due under the terminated
Executive Deferral Plan, which have not been previously paid pursuant to the
termination of the plan. If not previously distributed under the terminated
Executive Deferral Plan, these payments were made in July 2002 and January 2003.
CONSULTING AGREEMENTS
We entered into consulting agreements with Mr. White and Mr. Booth on
March 1, 2002 and March 16, 2002, respectively. Mr. Booth's agreement will
terminate on March 15, 2004 and Mr. White's agreement will terminate on February
28, 2003. Mr. Booth provides environmental, legislative and other consulting
services as requested by us. Mr. Booth is required to provide consulting
services not to exceed 120 hours per quarter and receives a retainer of three
thousand two hundred thirty dollars per month and reimbursement of reasonable
costs and expenses. Mr. White provides legal and other consulting services as
requested by us and acts as our corporate secretary. Mr. White is required to
provide consulting services not to exceed 240 hours per quarter and receives a
retainer of ten thousand four hundred sixteen dollars per month (increasing to
twelve thousand five hundred dollars in the last two months of the agreement)
and reimbursement of reasonable costs and expenses. While consulting with us,
each consultant agrees to protect our confidential information and not to engage
in any activity which would be adverse to us or our mineral properties or
operating interests. Each agreement is subject to termination by the respective
consultant upon thirty days written notice and by us if the consultant fails to
cure within thirty days any intentional and continued gross malfeasance or
material nonfeasance in the performance of his services.
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PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the number and
percentage of the shares of common and preferred stock beneficially owned by
significant stockholders, each of our directors and executive officers and by
all directors and executive officers as a group, as of December 31, 2002. Except
as otherwise indicated, the directors and officers are located at our address
and have sole voting and investment power with respect to the shares
beneficially owned by them.
Name(1) Title of Class Number of Shares(2) Percent of Class
------- -------------- ------------------- ----------------
Phillips S. Baker, Jr.(1) Common 300,880 *
Arthur Brown(1,4) Common 1,074,529 1.2%
John E. Clute(3) Common 17,683 *
Joe Coors, Jr.(3) Common 17,383 *
Ted Crumley(3) Common 20,922 *
Thomas F. Fudge, Jr.(1,4) Common 139,400 *
Charles L. McAlpine(3) Common 19,883 *
Jorge E. Ordonez C.(3) Common 17,383 *
Dr. Anthony P. Taylor(3) Common 10,383 *
All directors and officers as a group (10 persons)(2) Common 1,618,446 1.9%
Langley Partners, L.P.(5) Series B Preferred 141,300 18.75%
-----------
* Represents less than 1% of our outstanding common stock.
(1) Includes the following number of shares of common stock issuable upon the
exercise by the following individuals of options exercisable at December
31, 2002, or within 60 days thereafter: Mr. Baker, 160,000; Mr. Brown,
801,000; and Mr. Fudge, 137,166.
(2) Includes 1,098,166 shares issuable upon the exercise of options
exercisable at December 31, 2002, or within 60 days thereafter.
(3) Includes the following number of shares credited to each nonemployee
director, all of which are held in trust pursuant to our stock plan for
nonemployee directors: Mr. Clute, 17,383; Mr. Coors, 17,383; Mr. Crumley,
16,922; Mr. McAlpine, 17,383; Mr. Ordonez, 17,383; and Mr. Taylor, 10,383.
Each director disclaims beneficial ownership of all shares held in trust
under the stock plan (see "Executive Compensation - Compensation of
Directors").
(4) Includes 20,145 shares credited to Mr. Brown and 297 shares credited to
Mr. Fudge under our terminated executive deferral plan as of December 31,
2002, all of which are held in trust pursuant to the plan and will be
distributed to Mr. Brown and Mr. Fudge over a 3-month period after
December 1, 2002. Messrs. Brown and Fudge disclaim beneficial ownership of
all shares held in trust under the terminated executive deferral plan.
(5) The address for Langley Partners, L.P. is 535 Madison Avenue, 7th Floor,
New York, NY 10022. Each of Langley Partners, L.P., Langley Management,
LLC, Langley Capital, LLC and Jeffrey Thorp may be deemed to be beneficial
owners of 141,300 shares of Series B preferred stock held of record by
Langley Partners, L.P.
69
DESCRIPTION OF CAPITAL STOCK
The following statements are brief summaries of provisions of our capital
stock. The summaries are qualified in their entirety by reference to the full
text of our certificate of incorporation, as amended (Charter), bylaws, and the
Rights Agreement (as defined below).
COMMON STOCK
We are authorized to issue 200,000,000 shares of common stock, $0.25 par
value per share, of which 86,179,194 shares of common stock were issued and
outstanding as of December 31, 2002.
Subject to the rights of the holders of any outstanding shares of
preferred stock, each share of common stock is entitled to:
o one vote on all matters presented to the stockholders, with no
cumulative voting rights;
o receive such dividends as may be declared by the board of directors
out of funds legally available therefor (we have no present
intention of paying dividends on our common stock in the foreseeable
future);
o in the event of our liquidation or dissolution, share ratably in any
distribution of our assets.
Holders of shares of common stock do not have preemptive rights or other
rights to subscribe for unissued or treasury shares or securities convertible
into such shares, and no redemption or sinking fund provisions are applicable.
All outstanding shares of common stock are fully paid and nonassessable.
All of our currently outstanding shares of common stock are listed on the
New York Stock Exchange under the symbol "HL."
PREFERRED STOCK
Our Charter authorizes us to issue 5,000,000 shares of preferred stock,
par value $0.25 per share. The preferred stock is issuable in series with such
voting rights, if any, designations, powers, preferences and other rights and
such qualifications, limitations and restrictions as may be determined by our
board of directors or a duly authorized committee thereof, without stockholder
approval. The board may fix the number of shares constituting each series and
increase or decrease the number of shares of any series.
As of December 31, 2002, there were 753,402 shares of Series B Cumulative
Convertible Preferred Stock issued and outstanding. In addition, shares of
preferred stock have been designated by us as Series A Junior Participating
Preferred Shares and are reserved for issuance upon the exercise of certain
preferred stock purchase rights associated with each share of outstanding common
stock, as described below. See "Description of Capital Stock -- Rights."
RANKING
The Series B preferred stock ranks senior to our common stock and any
shares of Series A Preferred Shares issued pursuant to the Rights (as defined
below) with respect to payment of dividends and amounts upon liquidation,
dissolution or winding up.
While any shares of Series B preferred stock are outstanding, we may not
authorize the creation or issue of any class or series of stock that ranks
senior to the Series B preferred stock as to dividends or upon liquidation,
dissolution or winding up without the consent of the holders of 66% of the
outstanding shares of Series B preferred stock and any other series of preferred
stock ranking on a parity with the Series B preferred stock as to dividends and
upon liquidation, dissolution or winding up (a "Parity Stock"), voting as a
single class without regard to series. However, we may create additional classes
of Parity or Junior Stock, increase the authorized number of shares of
70
Parity or Junior Stock or issue series of Parity or Junior Stock without the
consent of any holder of Series B preferred stock. See "-- Voting Rights."
DIVIDENDS
Series B preferred stockholders are entitled to receive, when, as and if
declared by the board of directors out of our assets legally available therefor,
cumulative cash dividends at the rate per annum of $3.50 per share of Series B
preferred stock. Dividends on the Series B preferred stock are payable quarterly
in arrears on October 1, January 1, April 1 and July 1 of each year (and, in the
case of any undeclared and unpaid dividends, at such additional times and for
such interim periods, if any, as determined by the board of directors), at such
annual rate. Each such dividend is payable to holders of record as they appear
on our stock records at the close of business on such record dates, which shall
not be more than 60 days or less than 10 days preceding the payment dates
corresponding thereto, as shall be fixed by the board of directors or a duly
authorized committee thereof. Dividends are cumulative from the date of the
original issuance of the Series B preferred stock, whether or not in any
dividend period or periods we have assets legally available for the payment of
such dividends. Accumulations of dividends on shares of Series B preferred stock
do not bear interest. Dividends payable on the Series B preferred stock for any
period greater or less than a full dividend period are computed on the basis of
a 360-day year consisting of twelve 30-day months. Dividends payable on the
Series B preferred stock for each full dividend period are computed by dividing
the annual dividend rate by four.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock unless full cumulative dividends have been paid on the
Series B preferred stock for all prior dividend periods. If cumulative dividends
on the Series B preferred stock for all prior dividend periods have not been
declared or paid in full, then any dividend declared on the Series B preferred
stock for any dividend period and on any Parity Stock will be declared ratably
in proportion to undeclared and unpaid dividends on the Series B preferred stock
and such Parity Stock.
We will not (i) declare, pay or set apart funds for the payment of any
dividend or other distribution with respect to any Junior Stock (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Stock or Parity Stock through a sinking fund or otherwise (except by
conversion into, or exchange for shares of, Junior Stock, and other than a
redemption or purchase or other acquisition of shares of our common stock made
for purposes of our employee incentive or benefit plans), unless all undeclared
and unpaid dividends with respect to the Series B preferred stock and any Parity
Stock at the time such dividends are payable have been paid or funds have been
set apart for payment of such dividends.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
and (ii) the term "Junior Stock" means our common stock, any Series A preferred
shares issued pursuant to the Rights, and any other class of our capital stock
now or hereafter issued and outstanding that ranks junior as to the payment of
dividends or amounts payable upon liquidation, dissolution and winding up to the
Series B preferred stock.
LIQUIDATION PREFERENCE
The Series B preferred stockholders are entitled to receive, in the event
that we are liquidated, dissolved or wound up, whether voluntarily or
involuntarily, $50.00 per share of Series B preferred stock plus an amount per
share of Series B preferred stock equal to all dividends (whether or not earned
or declared) undeclared and unpaid thereon to the date of final distribution to
such holders (the "Liquidation Preference"), and no more.
Until the Series B preferred stockholders have been paid the Liquidation
Preference in full, no payment will be made to any holder of Junior Stock upon
our liquidation, dissolution or winding up. If, upon any liquidation,
dissolution or winding up, our assets, or proceeds thereof, distributable among
the holders of the shares of Series B preferred stock are insufficient to pay in
full the Liquidation Preference and the Liquidation Preference with respect to
any other shares of Parity Stock, then such assets, or the proceeds thereof,
will be distributed among the holders of shares of Series B preferred stock and
any such Parity Stock ratably in accordance with the respective amounts which
would be payable on such shares of Series B preferred stock and any such Parity
Stock if all amounts payable
71
thereof were paid in full. Neither a consolidation, merger or business
combination of us with or into another corporation nor a sale or transfer of all
or substantially all of our assets will be considered a liquidation, dissolution
or winding up, voluntary or involuntary.
REDEMPTION
The Series B preferred stock is redeemable at our option, in whole or in
part, at $50.35 per share if redeemed between July 1, 2002 and June 30, 2003,
and at $50 per share thereafter, plus, in each case, all dividends undeclared
and unpaid on the Series B preferred stock up to the date fixed for redemption,
upon giving notice as provided below.
If fewer than all of the outstanding shares of Series B preferred stock
are to be redeemed, the shares to be redeemed will be determined pro rata or by
lot or in such other manner as prescribed by the board of directors.
At least 30 days, but not more than 60 days, prior to the date fixed for
the redemption of the Series B preferred stock, a written notice will be mailed
to each holder of record of Series B preferred stock to be redeemed, notifying
such holder of our election to redeem such shares, stating the date fixed for
redemption thereof and calling upon such holder to surrender to us on the
redemption date at the place designated in such notice the certificate or
certificates representing the number of shares specified therein. On or after
the redemption date, each holder of Series B preferred stock to be redeemed must
present and surrender his certificate or certificates for such shares to us at
the place designated in such notice and thereupon the redemption price of such
shares will be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate will be canceled. Should fewer than all the shares represented by
any such certificate be redeemed, a new certificate will be issued representing
the unredeemed shares.
From and after the redemption date (unless we default in payment of the
redemption price), all dividends on the shares of Series B preferred stock
designated for redemption in such notice will cease to cumulate and all rights
of the holders thereof as our stockholders, except the right to receive the
redemption price thereof (including all undeclared and unpaid dividends up to
the redemption date), will cease and terminate and such shares will not
thereafter be transferred (except with our consent) on our books, and such
shares shall not be deemed to be outstanding for any purpose whatsoever. On the
redemption date, we must pay any undeclared and unpaid dividends in arrears for
any dividend period ending on or prior to the redemption date. In the case of a
redemption date falling after a dividend payment record date and prior to the
related payment date, the Series B preferred stockholders at the close of
business on such record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date, notwithstanding the
redemption of such shares following such dividend payment record date. Except as
provided in the preceding sentences, no payment or allowance will be made for
undeclared and unpaid dividends on any shares of Series B preferred stock called
for redemption or on the shares of common stock issuable upon such redemption.
At our election, we may, prior to the redemption date, deposit the
redemption price of the shares of Series B preferred stock so called for
redemption in trust for the holders thereof with a bank or trust company, in
which case such notice to holders of the shares of Series B preferred stock to
be redeemed will (i) state the date of such deposit, (ii) specify the office of
such bank or trust company as the place of payment of the redemption price and
(iii) call upon such holders to surrender the certificates representing such
shares at such place on or after the date fixed in such redemption notice (which
may not be later than the redemption date), against payment of the redemption
price (including all undeclared and unpaid dividends up to the redemption date).
Any moneys so deposited which remain unclaimed by the Series B preferred
stockholders at the end of two years after the redemption date will be returned
by such bank or trust company to us.
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time
required by applicable law, the Series B preferred stockholders have no voting
rights and their consent is not required for taking any corporate action. When
and if the Series B preferred stockholders are entitled to vote, each holder
will be entitled to one vote per share.
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Because we had not declared and paid six quarterly dividends on the Series
B preferred stock, the Series B preferred stockholders, voting as a single
class, elected two additional directors to the board at our recent annual
meeting on May 10, 2002. The Series B preferred stockholders will have the right
to elect two directors (never to total more than two) at each subsequent annual
meeting, until such time as all cumulative dividends have been paid in full.
The affirmative vote or consent of the holders of 662/3% of the
outstanding shares of the Series B preferred stock, voting separately as a
class, is required for any amendment of our Charter which alters or changes the
powers, preferences, privileges or rights of the Series B preferred stock so as
to materially adversely affect the holders thereof. The affirmative vote or
consent of the holders of shares representing 662/3% of the outstanding shares
of the Series B preferred stock and any other series of Parity Stock, voting as
a single class without regard to series, is required to authorize the creation
or issue of, or reclassify any of our authorized stock into, or issue or
authorize any obligation or security convertible into or evidencing a right to
purchase, any additional class or series of stock ranking senior to all such
series of Parity Stock. However, we may create additional classes of Parity and
Junior Stock, increase the number of shares of Parity and Junior Stock and issue
additional series of Parity and Junior Stock without the consent of any holder
of Series B preferred stock.
CONVERSION
Each share of Series B preferred stock is convertible, in whole or in part
at the option of the holders thereof, into shares of common stock at a
conversion price of $15.55 per share of common stock (equivalent to a conversion
rate of approximately 3.2154 shares of common stock for each share of Series B
preferred stock), subject to adjustment as described below (the "Conversion
Price"). The right to convert shares of Series B preferred stock called for
redemption will terminate at the close of business on the day preceding a
redemption date (unless we default in payment of the redemption price). For
information as to notices of redemption, see "-- Redemption."
Conversion of shares of Series B preferred stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to us, or in blank to the principal corporate trust office of
American Stock Transfer & Trust Company, our transfer agent.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of Series
B preferred stock shall have been surrendered and notice (and, if applicable,
payment of an amount equal to the dividend payable on such shares) received by
us as aforesaid and the conversion shall be at the Conversion Price in effect at
such time and on such date.
Holders of shares of Series B preferred stock at the close of business on
a dividend payment record date are entitled to receive any declared dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion of such shares following such dividend payment
record date and prior to such dividend payment date. However, shares of Series B
preferred stock surrendered for conversion during the period between the close
of business on any dividend payment record date and the opening of business on
the corresponding dividend payment date (except shares converted after the
issuance of a notice of redemption with respect to a redemption with respect to
a redemption date during such period, which will be entitled to such dividend)
must be accompanied by payment of an amount equal to the dividend payable on
such shares on such dividend payment date. A holder of shares of Series B
preferred stock on a dividend record date who (or whose transferee) tenders any
such shares for conversion into shares of common stock on such dividend payment
date will receive the dividend payable by us on such shares of Series B
preferred stock on such date, and the converting holder need not include payment
of the amount of such dividend upon surrender of shares of Series B preferred
stock for conversion. Except as provided above, we will make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the shares of common stock issued upon such conversion.
Fractional shares of common stock will not be issued upon conversion but,
in lieu thereof, we will pay a cash adjustment based on the current market price
of our common stock on the day prior to the conversion date.
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CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events,
including (i) dividends (and other distributions) payable in common stock on any
class of our capital stock, (ii) the issuance to all holders of common stock of
certain rights or warrants (other than the Rights or any similar rights issued
under any successor stockholders rights plan) entitling them to subscribe for or
purchase common stock or securities which are convertible into common stock,
(iii) subdivisions, combinations and reclassifications of common stock, and (iv)
distributions to all holders of common stock of evidences of indebtedness of
Hecla or assets (including securities, but excluding those dividends, rights,
warrants and distributions referred to above and dividends and distributions
paid in cash out of the profits or surplus of Hecla). In addition to the
foregoing adjustments, we are permitted to make such reductions in the
Conversion Price as we consider to be advisable in order that any event treated
for federal income tax purposes as a dividend of stock or stock rights will not
be taxable to the holders of our common stock.
In case we are a party to any transaction, including, without limitation,
a merger, consolidation or sale of all or substantially all of our assets, as a
result of which shares of common stock will be converted into the right to
receive stock, securities or other property (including cash or any combination
thereof), each share of Series B preferred stock will thereafter be convertible
into the kind and amount of shares of stock and other securities and property
receivable (including cash or any combination thereof) upon the consummation of
such transaction by a holder of that number of shares or fraction thereof of
common stock into which one share of Series B preferred stock is convertible
immediately prior to such transaction (assuming such holder of common stock
failed to exercise any rights of election and received per share the kind and
amount received per share by a plurality of non- electing shares). We may not
become a party to any such transaction unless the terms thereof are consistent
with the foregoing.
No adjustment of the Conversion Price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion Price.
Any adjustments not so required to be made will be carried forward and taken
into account in subsequent adjustments.
RIGHTS
Each share of our common stock is accompanied by a Series A junior
participating preferred stock purchase right (a "Right") that trades with the
share of common stock. Upon the terms and subject to the conditions of our
Rights Agreement dated as of May 10, 1996 (the "Rights Agreement"), a holder of
a Right is entitled to purchase one one-hundredth of a share of Series A
preferred stock at an exercise price of $50, subject to adjustment in several
circumstances, including upon merger. The Rights are currently represented by
the certificates for our common stock and are not transferable apart therefrom.
Transferable rights certificates will be issued at the earlier of (1) the 10th
day after the public announcement that any person or group has acquired
beneficial ownership of 15% or more of our common stock (an "Acquiring Person")
or (ii) the 10th day after a person commences, or announces an intention to
commence, a tender or exchange offer the consummation of which would result in
any person or group becoming an Acquiring Person. The 15% threshold for becoming
an Acquiring Person may be reduced by the board of directors to not less than
10% prior to any such acquisition.
All the outstanding Rights may be redeemed by us for $0.01 per Right prior
to such time that any person or group becomes an Acquiring Person. Under certain
circumstances, the board of directors may decide to exchange each Right (except
Rights held by an Acquiring Person) for one share of common stock. The Rights
will expire on May 19, 2006 unless earlier redeemed.
A Right is presently attached to each issued and outstanding share of
common stock. As long as the Rights are attached to and evidenced by the
certificates representing our common stock, we will continue to issue one Right
with each share of common stock that shall become outstanding.
The Rights have certain antitakeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by the board of directors. The Rights should not interfere with any
merger or other business combination approved by the board of directors since
the Rights may be redeemed by us prior to the consummation of such transactions.
74
The foregoing description of the Rights is qualified in its entirety by
reference to the Rights Agreement, specifying the terms of the Rights, which is
filed as exhibit 4.2 to the registration statement of which this prospectus is a
part.
See "Risk Factors - Our stockholders rights plan and provisions in our
certificate of incorporation, our bylaws, and Delaware law could delay or deter
tender offers or takeover attempts that may offer you a premium for your common
stock."
CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a non-U. S. holder. For purposes of this discussion, you are a "non-U.S.
holder" if you are a beneficial owner of our common stock, and you are not, for
U.S. federal income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation or partnership created or organized in or under the
laws of the United States, or of any political subdivision of the
United States, other than a partnership treated as foreign under
U.S. Treasury regulations;
o an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
o a trust, in general, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more
U.S. persons have authority to control all substantial decisions of
the trust or if the trust has made a valid election to be treated as
a U.S. person under applicable U.S. Treasury regulations.
If you are an individual, you may be treated as a resident of the United
States in any calendar year for U.S. federal income tax purposes, instead of a
nonresident, by, among other ways, being present in the United States for at
least 31 days in that calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year. For purposes of
this calculation, you would count all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Residents are taxed for U.S.
federal income tax purposes as if they were U.S. citizens.
This discussion does not consider:
o U.S. state or local non-U.S. tax consequences;
o all aspects of U.S. federal income and estate taxes or specific
facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including the fact that in the case
of a non-U.S. holder that is a partnership, the U.S. tax
consequences of holding and disposing of our common stock may be
affected by various determinations made at the partner level;
o the tax consequences for the stockholders, partners or beneficiaries
of a non-U.S. holder;
o special tax rules that may apply to particular non-U.S. holders,
such as financial institutions, insurance companies, tax-exempt
organizations, U.S. expatriates, broker-dealers, and traders in
securities; and
o special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," "conversion
transaction," synthetic security" or other integrated investment.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, existing and proposed Treasury regulations and
administrative and judicial interpretations, all as of the date of this
prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes
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that you hold our common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD
CONSULT A TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S.
INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES
OF OUR COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Price Range of Common Stock and Dividend Policy." In
the event, however, that we pay dividends on our common stock, we will have to
withhold a U.S. federal withholding tax at a rate of 30%, or a lower rate under
an applicable income tax treaty, from the gross amount of the dividends paid to
you. You should consult your tax advisors regarding your entitlement to benefits
under a relevant income tax treaty. Generally, in order for us to withhold tax
at a lower treaty rate, you must provide us with a Form W-8BEN certifying your
eligibility for the lower treaty rate.
If you claim the benefit of an applicable income tax treaty rate, you
generally will be required to satisfy applicable certification and other
requirements. However,
o in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to partners and
the partnership will be required to provide certain information;
o in the case of common stock held by a foreign trust, the
certification requirement will generally be applied to the trust or
the beneficial owners of the trust depending on whether the trust is
a "foreign complex trust," "foreign simple trust," or "foreign
grantor trust" as defined the U.S. Treasury regulations; and
o look-through rules, apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
A non-U.S. holder that is a foreign partnership or a foreign trust is
urged to consult its tax advisor regarding its status under these U.S. Treasury
regulations and the certification requirements applicable to it.
If you are eligible for a reduced rate of U.S. federal withholding tax
under an income tax treaty, you may obtain a refund or credit of any excess
amounts withheld by filing an appropriate claim for a refund with the U.S.
Internal Revenue Service.
If the dividend is effectively connected with your conduct of a trade or
business in the United States or, under an income tax treaty, the dividend is
attributable to a permanent establishment maintained by you in the United
States, the dividend will be taxed on a net income basis at the regular
graduated rates and in the manner applicable to U.S. persons and, if you are a
foreign corporation, you may be subject to an additional branch profits tax at a
rate of 30% or a lower rate as may be specified by an applicable income tax
treaty.
GAIN ON DISPOSITION OF COMMON STOCK
You generally will not be subject to U.S. federal income tax on gain
recognized on a disposition of our common stock unless:
o the gain is effectively connected with your conduct of a trade of
business in the United States or, under an income tax treaty, the
gain is attributable to a permanent establishment maintained by you
in the United States, the gain will be taxed on a net income basis
at the regular graduated rates and in the manner applicable to U.S.
persons and, if you are a foreign corporation you may be subject to
an additional branch profits tax at a rate of 30% or a lower rate as
may be specified by an applicable income tax treaty;
o you are an individual who holds our common stock as a capital asset,
are present in the United States for 183 days or more in the taxable
year of the disposition and meet other requirements; in these cases,
the gain will be taxed at a rate of 30%; or
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o we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time during the shorter of
the five-year period ending on the date of disposition or the period
that you held our common stock; in these cases, the gain will be
taxed on a net income basis in the manner described in the first
bullet paragraph above.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. The tax
relating to stock in a "U.S. real property holding corporation" generally will
not apply to a non-U.S. holder whose holdings, direct and indirect, at all times
during the applicable period, constituted 5% or less of our common stock,
provided that our common stock was regularly traded on an established securities
market. We believe that we are not currently a "U.S. real property holding
corporation" for U.S. federal income tax purposes. However, we have been a "U.S.
real property holding corporation" for U.S. federal income tax purposes within
five years before the date of this prospectus. We cannot predict whether we will
become a "U.S. real property holding corporation" in the future.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder (as specially defined for U.S. federal estate tax purposes) at the time
of death will be included in the individual's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax or other treaty provides
otherwise and, therefore, may be subject to U.S. federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Dividends paid to you may be subject to information reporting and U.S.
backup withholding. You will be exempt from such backup withholding tax if you
provide a Form W-8BEN or otherwise meet documentary evidence requirements for
establishing that you are a non-U.S. holder or otherwise establish an exemption.
The gross proceeds from the disposition of our common stock may be subject
to information reporting and backup withholding. If you sell your common stock
outside the U.S. through a non-U.S. office of a non-U.S. broker and the sales
proceeds are paid to you outside the U.S., then the U.S. backup withholding and
information reporting requirements generally (except as provided in the
following sentence) will not apply to that payment. However, U.S. information
reporting, but not backup withholding, will apply to a payment of sales
proceeds, even if that payment is made outside the U.S.; if you sell our common
stock through a non-U.S. office of a broker that:
o is a U.S. person;
o derives 50% or more of its gross income in specific periods from the
conduct of a trade or business in the United States;
o is a "controlled foreign corporation" for U.S. tax purposes; or
o if a foreign partnership, if at any time during its tax year, one or
more of its partners are U.S. persons who in the aggregate hold more
than 50% of the income or capital interests in the partnership, or
the foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its files that you are a
non-U.S. person and various other conditions are met or you otherwise establish
exemption.
If you receive payments of the proceeds of a sale of our common stock to
or through a U.S. office of a broker, the payment is subject to both U.S. backup
withholding and information reporting unless you provide a Form W-8BEN
certifying that you are a non-U.S. person or you otherwise establish an
exemption.
You generally may obtain a refund of any amount withheld under the backup
withholding rules that exceeds your income tax liability by filing a refund
claim with the U.S. Internal Revenue Service.
77
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World Markets
Corp. and Salomon Smith Barney Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement between us and the underwriters, we have agreed to sell to
the underwriters, and each of the underwriters severally and not jointly has
agreed to purchase from us the number of shares of common stock set forth
opposite its name below.
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Merrill Lynch, Pierce, Fenner
& Smith Incorporated.......................................
CIBC World Markets Corp.........................................
----------
Salomon Smith Barney Inc........................................
----------
Total................................................. 20,000,000
==========
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of our common stock being sold pursuant to each such agreement if any of
the shares of common stock being sold pursuant to such agreement are purchased.
In the event of a default by an underwriter, the purchase agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
underwriters may be increased or the purchase agreement may be terminated. The
closing with respect to the sale of shares of common stock to be purchased by
the underwriters are conditioned upon one another.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that underwriters propose to offer the
shares of our common stock to the public at the public offering price set forth
on the cover page of this prospectus, and to dealers at such price less a
concession not in excess of $[ ] per share of common stock. The underwriters may
allow, and such dealers may reallow, a discount not in excess of $[ ] per share
of common stock to other dealers. After the public offering, the public offering
price, concession and discount may be changed.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 3,000,000 shares of our common stock at the public offering price set
forth on the cover of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated to
purchase a number of additional shares of our common stock proportionate to such
underwriter's initial amount reflected in the foregoing table.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment options.
PER SHARE WITHOUT OPTIONS WITH OPTIONS
--------- --------------- ------------
Public offering price....................
Underwriting discount....................
Proceeds, before expenses to Hecla.......
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The expenses of this offering, exclusive of the underwriting discount, are
estimated at $500,000 and are payable by us.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
NO SALES OF SIMILAR SECURITIES
We, and our executive officers and directors have agreed, subject to
certain exceptions, not to directly or indirectly:
o offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or consent to sell, grant any
option, right or warrant for the sale of, lend or otherwise dispose
of or transfer any shares of our common stock or securities
convertible into or exchangeable or exercisable for or repayable
with our common stock, whether now owned or later acquired by the
person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or
file any registration statement under the Securities Act of 1933
relating to any shares of our common stock, or
o enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of
ownership of our common stock whether any such swap or transaction
is to be settled by delivery of our common stock or other
securities, in cash or otherwise.
without the prior written consent of Merrill Lynch on behalf of the
underwriters for a period of 90 days after the date of this prospectus, provided
that we may offer, pledge, sell, contract to sell or otherwise dispose of or
transfer an aggregate of up to 500,000 shares of our common stock during the 90
day period without such consent.
OTHER TERMS
The public offering price will be determined through negotiations between
us and the representatives of the underwriters. The factors to be considered in
determining the public offering price, in addition to prevailing market
conditions, are expected to be price-revenue and discounted price-earnings
ratios, and include the valuation multiples of publicly traded companies that
the representatives believe to be comparable to us, some of our financial
information, the history of, and the prospects for, us and the industry in which
we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, our future revenues and the
present state of our development, the percentage interest of our company being
sold as compared to the valuation for our company and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to ours. There can be no assurance that our common
stock will trade in the public market subsequent to the offering at or above the
public offering price.
Our common stock is listed on the New York Stock Exchange under the symbol
"HL."
The underwriters do not expect sales of our common stock to be made to any
accounts over which they exercise discretionary authority to exceed 5% of the
number of shares being offered hereby.
The underwriters do not intend to confirm sales of the common stock
offered hereby to any accounts over which they exercise discretionary authority.
We have agreed to indemnify the underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of this offering.
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PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase our common stock. As an exception
to these rules, the underwriters may engage in transactions that stabilize the
price of our common stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering contemplated hereby, i.e., if they sell more shares
of our common stock than are set forth on the cover page of this prospectus, the
underwriters may reduce that short position by purchasing our common stock in
the open market. The underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
PENALTY BIDS
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase shares of
our common stock in the open market to reduce their short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages sales of our common stock.
Neither we nor any of the underwriters make any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
Michael B. White, Esq., our Secretary and retired general counsel, will
pass upon the validity of the shares of common stock being offered hereby for
us. Mr. White owned 50,000 shares of our common stock and options to purchase
271,500 shares of our common stock as of December 31, 2002. Mr. White provides
services to us pursuant to a consulting agreement. Bell, Boyd & Lloyd LLC,
Chicago, Illinois, will pass upon certain legal matters in connection with this
offering for us. Shearman & Sterling, Menlo Park, California, will pass upon
certain legal matters in connection with this offering for the underwriters.
EXPERTS
Our financial statements as of and for the year ended December 31, 2001
(excluding Greens Creek Joint Venture) included in this prospectus have been so
included in reliance on the report of BDO Seidman, LLP, certified public
accountants, given on the authority of said firm as experts in auditing and
accounting.
Our financial statements as of December 31, 2000 and for each of the two
years in the period ended December 31, 2000 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants given on the authority of said firm as experts in
auditing and accounting.
The audited financial statements of Greens Creek Joint Venture, not
separately presented in this Registration Statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon
appears herein. Such financial statements, to the extent they have been included
in the financial statements of Hecla Mining Company, have been so included in
reliance on the report of such independent accountants given on the authority of
said firm as experts in auditing and accounting.
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GLOSSARY OF CERTAIN TERMS
You may find the following definitions helpful in your reading of this
prospectus.
o Cash Operating Costs -- Includes all direct and indirect operating
cash costs incurred at each operating mine, excluding royalties and
mine production taxes.
o Dore -- Unrefined gold and silver bullion bars consisting of
approximately 90% precious metals which will be further refined to
almost pure metal.
o Mineralized Material - A mineralized body which has been delineated
by appropriately spaced drilling and/or underground sampling to
support a sufficient tonnage and average grade of metals.
o Ore -- A mixture of valuable minerals and gangue (valueless
minerals) from which at least one of the minerals or metals can be
extracted at a profit.
o Orebody -- A continuous, well-defined mass of material of sufficient
ore content to make extraction economically feasible.
o Proven and Probable Ore Reserves -Reserves that reflect estimates of
the quantities and grades of mineralized material at our mines which
we believe can be recovered and sold at prices in excess of the
total cash cost associated with extracting and processing the ore.
The estimates are based largely on current costs and on prices and
demand for our products. Mineral reserves are stated separately for
each of our mines based upon factors relevant to each mine. Reserves
represent diluted in-place grades and do not reflect losses in the
recovery process. Our estimates of Proven and Probable reserves for
the Lucky Friday mine, the San Sebastian mine and the La Camorra
mine at December 31, 2001 and 2000, are based on gold prices of $300
and $300 per ounce, silver prices of $5.10 and $5.50 per ounce, lead
prices of $0.24 and $0.25 per pound, and zinc prices of $0.48 and
$0.55 per pound, respectively. Proven and Probable ore reserves for
the Lucky Friday, San Sebastian and La Camorra mines are calculated
and reviewed in-house and are subject to periodic audit by others,
although audits are not performed on an annual basis. Proven and
Probable ore reserves for the Greens Creek mine are based on
calculations of reserves provided to us by the operator of Greens
Creek that have been reviewed but not independently confirmed by us.
Kennecott Greens Creek Mining Company's estimates of Proven and
Probable ore reserves for the Greens Creek mine as of December 2001
and 2000 are derived from successive generations of reserve and
feasibility analyses for different areas of the mine each using a
separate assessment of metals prices. The weighted average prices
used were:
December 31, December 31,
2001 2000
---- ----
Gold $ 309.00 $ 295.00
Silver $ 4.92 $ 5.51
Lead $ 0.25 $ 0.25
Zinc $ 0.49 $ 0.55
o Changes in reserves represent general indicators of the results of
efforts to develop additional reserves as existing reserves are
depleted through production. Grades of ore fed to process may be
different from stated reserve grades because of variation in grades
in areas mined from time to time, mining dilution and other factors.
Reserves should not be interpreted as assurances of mine life or of
the profitability of current or future operations. Our proven and
probable ore reserves are sensitive to price changes, although we do
not believe that a 10% increase in estimated reserve prices would
have a significant impact on reported proven and probable reserves.
We also do not believe that a 10% decrease in estimated reserve
prices
81
would have a significant impact on proven and probable ore reserves
at our La Camorra, San Sebastian, and Greens Creek mines.
o Probable Reserves -- Reserves for which quantity and grade and/or
quality are computed from information similar to that used for
Proven reserves, but the sites for inspection, sampling and
measurement are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for Proven
reserves, is high enough to assume continuity between points of
observation.
o Proven Reserves -- Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes;
grade and/or quality are computed from the results of detailed
sampling, and (b) the sites for inspection, sampling and measurement
are spaced so closely and the geologic character is so well-defined
that size, shape, depth and mineral content of reserves are well-
established.
o Reserves -- That part of a mineral deposit which could be
economically and legally extracted or produced at the time of the
reserve determination.
o Stope -- An underground excavation from which ore has been extracted
either above or below mine level.
o Total Cash Costs -- Includes all direct and indirect operating cash
costs incurred at each operating mine.
o Total Production Costs -- Includes total cash costs, as defined,
plus depreciation, depletion, amortization and reclamation accruals
relating to each operating mine.
o Total Production Costs Per Ounce -- Calculated based upon total
production costs, as defined, net of by-product revenues earned from
all metals other than the primary metal produced at each mine,
divided by the total ounces of the primary metal produced.
o Unpatented Mining Claim -- A parcel of property located on federal
lands pursuant to the General Mining Law and the requirements of the
state in which the unpatented claim is located, the paramount title
of which remains with the federal government. The holder of a valid,
unpatented lode- mining claim is granted certain rights including
the right to explore and mine such claim under the General Mining
Law.
82
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements Page
---------------------------- ----
Reports of Independent Certified Public Accountants F-2 to F-4
Consolidated Balance Sheets at December 31, 2001 and 2000 F-5
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 F-7
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999 F-8
Notes to Consolidated Financial Statements F-9 to F-36
Unaudited Quarterly Condensed Financial Statements
--------------------------------------------------
Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 F-37
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Three Months and Nine Months Ended
September 30, 2002 and 2001 F-38
Consolidated Statements of Cash Flows for the
Three Months and Nine Months ended September 30,
2002 and 2001 F-39
Notes to Unaudited Consolidated Financial Statements F-40 to F-49
Financial Statement Schedules*
------------------------------
*Financial statement schedules
have been omitted as not applicable
F-1
Report of Independent Certified Public Accountants
--------------------------------------------------
The Board of Directors and Shareholders of
Hecla Mining Company
We have audited the accompanying consolidated balance sheet of Hecla Mining
Company as of December 31, 2001, and the related statement of operations and
comprehensive loss, cash flows, and changes in shareholders' equity for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of
Greens Creek Joint Venture, a 29.73 percent owned subsidiary, which statements
reflect total assets and revenues constituting 33.7 percent and 26.3 percent,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Greens Creek Joint Venture, is
based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hecla Mining Company at December
31, 2001 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
/s/ BDO Seidman, LLP
February 1, 2002
Spokane, Washington
F-2
Report of Independent Certified Public Accountants
--------------------------------------------------
The Board of Directors and Shareholders of
Hecla Mining Company
In our opinion, the consolidated balance sheet as of December 31, 2000 and the
related consolidated statements of operations and comprehensive loss, changes in
shareholders' equity and of cash flows of each of the two years in the period
ended December 31, 2000 (appearing on pages F-5 through F-36 of this
registration statement) present fairly, in all material respects, the financial
position, results of operations and cash flows of Hecla Mining Company and its
subsidiaries at December 31, 2000 and for each of the two years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis of our opinion.
/s/ PricewaterhouseCoopers LLP
March 28, 2001
San Francisco, California
F-3
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Management Committee of the
Greens Creek Joint Venture:
In our opinion, the balance sheets and the related statements of operations, of
changes in venturers' equity and of cash flows present fairly, in all material
respects, the financial position of the Greens Creek Joint Venture (the
"Venture") at December 31, 2001 and 2000, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Venture's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
January 12, 2002
Salt Lake City, Utah
F-4
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
---------------
December 31,
----------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 7,560 $ 1,373
Accounts and notes receivable 6,648 11,164
Inventories 10,868 11,269
Other current assets 1,426 2,105
Net assets of discontinued operations 2,714 44,057
--------- ---------
Total current assets 29,216 69,968
Investments 69 502
Restricted investments 6,375 6,268
Properties, plants and equipment, net 104,593 108,343
Other noncurrent assets 12,863 9,755
--------- ---------
Total assets $ 153,116 $ 194,836
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 7,938 $ 7,520
Accrued payroll and related benefits 7,832 4,732
Current portion of long-term debt 7,043 59,274
Accrued taxes 787 2,188
Current portion of accrued reclamation and closure costs 6,026 12,060
--------- ---------
Total current liabilities 29,626 85,774
Deferred income taxes 300 300
Long-term debt 11,948 10,041
Accrued reclamation and closure costs 46,455 46,650
Other noncurrent liabilities 6,823 7,326
--------- ---------
Total liabilities 95,152 150,091
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 4, 5, 7 AND 8)
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued and
outstanding - 2,300,000 shares,
liquidation preference, 2001 - $127,075 and 2000 - $119,025 575 575
Common stock, $0.25 par value, authorized 100,000,000 shares;
issued 2001 - 73,068,796 shares, issued 2000 - 66,859,752 shares 18,267 16,715
Capital surplus 404,354 400,236
Accumulated deficit (364,183) (366,523)
Accumulated other comprehensive income (loss) 173 (4,858)
Less stock held by grantor trust; 2001 - 102,114 common shares,
2000 - 139,467 common shares (330) (514)
Less stock held as unearned compensation; issued 2001 - 19,035
common shares (6) --
Less treasury stock, at cost; 2001 - 62,116 common shares,
2000 - 62,114 common shares (886) (886)
--------- ---------
Total shareholders' equity 57,964 44,745
--------- ---------
Total liabilities and shareholders' equity $ 153,116 $ 194,836
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(Dollars and shares in thousands, except per share amounts)
---------------
Year Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Continuing operations:
Sales of products $ 85,247 $ 75,850 $ 73,703
-------- -------- --------
Cost of sales and other direct production costs 60,053 63,088 54,435
Depreciation, depletion and amortization 20,475 18,091 18,662
-------- -------- --------
80,528 81,179 73,097
-------- -------- --------
Gross profit (loss) 4,719 (5,329) 606
-------- -------- --------
Other operating expenses:
General and administrative 7,219 7,303 7,121
Exploration 2,157 6,332 5,540
Depreciation and amortization 265 282 321
Provision for closed operations and environmental matters 1,310 20,029 30,100
Reduction in carrying value of mining properties -- 40,240 175
-------- -------- --------
10,951 74,186 43,257
-------- -------- --------
Loss from operations (6,232) (79,515) (42,651)
-------- -------- --------
Other income (expense):
Interest and other income 3,491 4,609 5,028
Miscellaneous expense (2,954) (1,809) (1,487)
Gain (loss) on investments -- -- (96)
Interest expense:
Interest costs (3,887) (8,119) (4,607)
Less amount capitalized -- -- 19
-------- -------- --------
(3,350) (5,319) (1,143)
-------- -------- --------
Loss from continuing operations before income taxes,
extraordinary charge and cumulative effect of change
in accounting principle (9,582) (84,834) (43,794)
Income tax benefit (provision) -- (13) 403
-------- -------- --------
Loss from continuing operations before extraordinary charge and
cumulative effect of change in accounting principle (9,582) (84,847) (43,391)
Discontinued operations:
Income (loss), net of income tax (743) 2,572 4,786
Gain (loss) on disposal, net of income tax 12,665 (1,043) --
Extraordinary charge, net of income tax -- (647) --
Cumulative effect of change in accounting principle, net of
income tax -- -- (1,385)
-------- -------- --------
Net income (loss) 2,340 (83,965) (39,990)
Preferred stock dividends (8,050) (8,050) (8,050)
-------- -------- --------
Loss applicable to common shareholders (5,710) (92,015) (48,040)
-------- -------- --------
Other comprehensive income (loss), net of income tax:
Cumulative effect of a change in accounting principle (136) -- --
Change in derivative contracts 256 -- --
Unrealized holding gains (losses) on securities (26) 13 13
Reclassification adjustment for losses included in
net income (loss) 39 -- 96
Minimum pension liability adjustment -- -- 289
Change in foreign currency items 4,898 -- --
-------- -------- --------
Other comprehensive income 5,031 13 398
-------- -------- --------
Comprehensive loss applicable to common shareholders $ (679) $(92,002) $(47,642)
======== ======== ========
Basic and diluted income (loss) per common share:
Loss from continuing operations $ (0.25) $ (1.39) $ (0.83)
Income from discontinued operations 0.17 0.02 0.08
Extraordinary charge -- (0.01) --
Cumulative effect of change in accounting principle -- -- (0.02)
-------- -------- --------
Basic and diluted loss per common share $ (0.08) $ (1.38) $ (0.77)
======== ======== ========
Weighted average number of common shares outstanding 69,396 66,791 62,347
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
---------------
Year Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Operating activities:
Net income (loss) $ 2,340 $(83,965) $(39,990)
Noncash elements included in net income (loss):
Depreciation, depletion and amortization 20,740 22,363 23,738
Cumulative effect of change in accounting principle -- -- 1,385
Extraordinary charge -- 647 --
(Gain) loss on sale of discontinued operations (12,665) 1,043 --
Gain on disposition of properties, plants and equipment (338) (1,460) (2,133)
Loss on investments -- -- 96
Reduction in carrying value of mining properties -- 40,240 4,577
Provision for reclamation and closure costs 1,061 17,601 28,614
Change in net assets of discontinued operations 1,234 1,347 --
Change in assets and liabilities:
Accounts and notes receivable 4,516 6,486 (1,691)
Income tax refund receivable -- -- 1,079
Inventories (1,738) (108) (317)
Other current and noncurrent assets (1,435) 100 (1,324)
Accounts payable and accrued expenses 417 (1,266) (4,788)
Accrued payroll and related benefits 3,100 669 1,542
Accrued taxes (1,401) 97 1,597
Accrued reclamation and closure costs and other
noncurrent liabilities (7,793) (9,528) (9,429)
-------- -------- --------
Net cash provided (used) by operating activities 8,038 (5,734) 2,956
-------- -------- --------
Investing activities:
Proceeds from sale of discontinued operations 59,761 9,562 --
Purchase of Monarch Resources Investments Limited, net of
cash acquired -- -- (9,183)
Additions to properties, plants and equipment (17,890) (15,210) (13,467)
Proceeds from disposition of properties, plants and equipment 545 2,671 2,476
Proceeds from the sale of investments -- 283 311
Decrease (increase) in restricted investments (107) (270) 333
Purchase of investments and change in cash surrender
value of life insurance, net 406 1,354 54
Other, net (173) 381 133
-------- -------- --------
Net cash provided (used) by investing activities 42,542 (1,229) (19,343)
-------- -------- --------
Financing activities:
Common stock issued for warrants and stock option plans 428 35 277
Issuance of common stock, net of offering costs 5,462 -- 11,865
Dividends paid on preferred stock -- (6,037) (8,050)
Payments for debt issuance costs -- (1,811) (1,255)
Borrowings against cash surrender value of life insurance -- -- 925
Borrowings on debt 15,909 80,524 54,063
Repayments on debt (66,192) (67,094) (41,199)
-------- -------- --------
Net cash provided (used) by financing activities (44,393) 5,617 16,626
-------- -------- --------
Change in cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents 6,187 (1,346) 239
Cash and cash equivalents at beginning of year 1,373 2,719 2,480
-------- -------- --------
Cash and cash equivalents at end of year $ 7,560 $ 1,373 $ 2,719
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest, net of amount capitalized $ 2,888 $ 8,376 $ 4,377
======== ======== ========
Income tax payments (refunds), net $ (68) $ 54 $ (847)
======== ======== ========
SEE NOTES 10 AND 16 FOR NONCASH INVESTING AND FINANCING ACTIVITIES.
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
Hecla Mining Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999 (Dollars and
shares in thousands, except per share amounts)
---------------
Preferred Stock Common Stock
--------------------- ----------------------- Capital
Shares Amount Shares Amount Surplus
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1998 2,300 $ 575 55,167 $ 13,792 $ 374,017
Net loss
Preferred stock dividends ($3.50 per share)
Stock issued for cash, net of issuance costs 4,739 1,184 10,681
Stock issued under stock option and warrant plans 99 25 232
Stock issued to directors 8 2 18
Stock issued in connection with acquisition
of Monarch Resources Investments Limited 6,700 1,675 14,290
Stock issued and held by grantor trust 132 33 967
Other comprehensive income
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1999 2,300 575 66,845 16,711 400,205
Net loss
Preferred stock dividends ($1.75 per share)
Stock issued to directors 8 2 19
Stock issued and held by grantor trust 7 2 12
Other comprehensive income
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2000 2,300 575 66,860 16,715 400,236
Net income
Stock issued to directors 7 2 5
Stock issued and held by grantor trust 25 6 38
Stock disbursed by grantor trust (204)
Stock issued under stock option and warrant plans 408 102 325
Stock issued for cash, net of issuance costs 5,750 1,437 3,940
Issuance of restricted stock 19 5 14
Amortization of unearned compensation
Other comprehensive income
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2001 2,300 $ 575 73,069 $ 18,267 404,354
========== ========== ========== ========== ==========
[WIDE TABLE CONTINUED FROM ABOVE]
Accumulated Stock
Other Held by
Accumulated Comprehensive Grantor Unearned Treasury
Deficit Income (Loss) Stock Compensation Stock
----------- ------------- ---------- ------------ ----------
Balances, December 31, 1998 $ (230,493) $ (5,269) $ -- $ -- $ (886)
Net loss (39,990)
Preferred stock dividends ($3.50 per share) (8,050)
Stock issued for cash, net of issuance costs
Stock issued under stock option and warrant plans
Stock issued to directors
Stock issued in connection with acquisition of
Monarch Resources Investments Limited
Stock issued and held by grantor trust (500)
Other comprehensive income 398
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1999 (278,533) (4,871) (500) -- (886)
Net loss (83,965)
Preferred stock dividends ($1.75 per share) (4,025)
Stock issued to directors
Stock issued and held by grantor trust (14)
Other comprehensive income 13
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2000 (366,523) (4,858) (514) -- (886)
Net income 2,340
Stock issued to directors
Stock issued and held by grantor trust (20)
Stock disbursed by grantor trust 204
Stock issued under stock option and warrant plans
Stock issued for cash, net of issuance costs
Issuance of restricted stock (19)
Amortization of unearned compensation 13
Other comprehensive income 5,031
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2001 $ (364,183) $ 173 $ (330) $ (6) $ (886)
========== ========== ========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
Hecla Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
---------------
Note 1: Summary of Significant Accounting Policies
A. Basis of Presentation -- The accompanying consolidated financial statements
include the accounts of Hecla Mining Company (Hecla or the Company), its
majority-owned subsidiaries and its proportionate share of the accounts of the
joint ventures in which it participates. All significant intercompany
transactions and accounts are eliminated in consolidation.
Hecla's revenues and profitability are largely dependent on world prices
for gold, silver, lead and zinc, which fluctuate widely and are affected by
numerous factors beyond Hecla's control, including inflation and worldwide
forces of supply and demand. The aggregate effect of these factors is not
possible to accurately predict.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ materially
from those estimates.
Certain consolidated financial statement amounts have been reclassified to
conform to the 2001 presentation. These reclassifications had no effect on
earnings or shareholders' equity as previously reported.
B. Company's Business and Concentrations of Credit Risk -- Hecla is engaged in
mining and mineral processing activities, including exploration, extraction,
processing and reclamation. Hecla's principal products are metals (primarily
gold, silver, lead and zinc). Substantially all of Hecla's operations are
conducted in the United States, Mexico and Venezuela. Sales of metals products
are made principally to domestic and foreign custom smelters and metal traders.
Hecla sells substantially all of its metallic concentrates to smelters
which are subject to extensive regulations including environmental protection
laws. Hecla has no control over the smelters' operations or their compliance
with environmental laws and regulations. If the smelting capacity available to
Hecla was significantly reduced because of environmental requirements or
otherwise, it is possible that Hecla's silver operations could be adversely
affected. Industrial minerals are sold principally to domestic retailers and
wholesalers.
Hecla's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. Hecla places its cash and temporary cash investments with
institutions of high credit-worthiness. At times, such investments may be in
excess of the federal insurance limit. Hecla routinely assesses the financial
strength of its customers and, as a consequence, believes that its trade
accounts receivable credit risk exposure is limited.
At December 31, 2001, the Company had factored accounts receivable without
recourse of $0.5 million. Factored accounts receivable are eliminated from the
balance of accounts receivable when sold.
C. Inventories -- Inventories are stated at the lower of average cost or
estimated net realizable value.
D. Investments -- Marketable equity securities are categorized as available for
sale and carried at quoted market value.
Realized gains and losses on the sale of securities are recognized on a
specific identification basis. Unrealized gains and losses are included as a
component of accumulated other comprehensive loss, net of related deferred
income taxes, unless a permanent impairment in value has occurred, which is then
charged to operations.
F-9
Restricted investments primarily represent investments in money market
funds. These investments are restricted primarily for reclamation funding or
surety bonds.
E. Properties, Plants and Equipment -- Properties, plants and equipment are
stated at the lower of cost or estimated net realizable value. Maintenance,
repairs and renewals are charged to operations. Betterments of a major nature
are capitalized. When assets are retired or sold, the costs and related
allowances for depreciation and amortization are eliminated from the accounts
and any resulting gain or loss is reflected in operations. Idle facilities,
placed on a standby basis, are carried at the lower of net carrying value or
estimated net realizable value.
Management of Hecla reviews the net carrying value of all facilities,
including idle facilities, on a periodic basis. Hecla estimates the net
realizable value of each property based on the estimated undiscounted future
cash flows that will be generated from operations at each property, the
estimated salvage value of the surface plant and equipment and the value
associated with property interests. These estimates of undiscounted future cash
flows are dependent upon estimates of metal to be recovered from proven and
probable ore reserves, future production costs and future metals prices over the
estimated remaining mine life. If undiscounted cash flows are less than the
carrying value of a property, an impairment loss is recognized based upon the
estimated expected future net cash flows from the property discounted at an
interest rate commensurate with the risk involved.
Management's estimates of metals prices, recoverable proven and probable
ore reserves, and operating, capital and reclamation costs are subject to risks
and uncertainties of change affecting the recoverability of Hecla's investment
in various projects. Although management has made a reasonable estimate of these
factors based on current conditions and information, it is reasonably possible
that changes could occur in the near term which could adversely affect
management's estimate of net cash flows expected to be generated from its
operating properties and the need for asset impairment write-downs.
Management's calculations of proven and probable ore reserves are based on
engineering and geological estimates including minerals prices and operating
costs. Changes in the geological and engineering interpretation of various
orebodies, minerals prices and operating costs may change Hecla's estimates of
proven and probable ore reserves. It is reasonably possible that certain of
Hecla's estimates of proven and probable ore reserves will change in the near
term resulting in a change to amortization and reclamation accrual rates in
future reporting periods.
Depreciation is based on the estimated useful lives of the assets and is
computed using straight-line and unit-of-production methods. Depletion is
computed using the unit-of-production method.
F. Mine Exploration and Development -- Exploration costs and ongoing development
costs at operating mines are charged to operations as incurred. Major mine
development expenditures are capitalized at operating properties and at new
mining properties not yet producing where proven and probable ore reserves have
been identified.
G. Reclamation of Mining Areas -- All of Hecla's operations are subject to
reclamation and closure requirements. Minimum standards for mine reclamation
have been established by various governmental agencies which affect certain
operations of Hecla. A reserve for mine reclamation costs has been established
for restoring certain abandoned and currently disturbed mining areas based upon
estimates of cost to comply with existing reclamation standards. Mine
reclamation costs for operating properties are accrued using the
unit-of-production method and charged to cost of sales and other direct
production costs. The estimated amount of metals or minerals to be recovered
from a mine site is based on internal and external geological data and is
reviewed by management on a periodic basis. Changes in such estimated amounts
which affect reclamation cost accrual rates are accounted for prospectively from
the date of the change unless they indicate there is a current impairment of an
asset's carrying value and a decision is made to permanently close the property,
in which case they are recognized currently and charged to provision for closed
operations and environmental matters. It is reasonably possible that Hecla's
estimate of its ultimate accrual for reclamation costs will change in the near
term due to possible changes in laws and regulations, and interpretations
thereof, and changes in cost estimates.
H. Remediation of Mining Areas -- Hecla accrues costs associated with
environmental remediation obligations at the most likely estimate when it is
probable that such costs will be incurred and they are reasonably estimable.
Accruals for estimated losses from environmental remediation obligations
generally are recognized no later than completion of the remedial feasibility
study and are charged to provision for closed operations and environmental
F-10
matters. Costs of future expenditures for environmental remediation are not
discounted to their present value unless subject to a contractually obligated
fixed payment schedule. Such costs are based on management's current estimate of
amounts that are expected to be incurred when the remediation work is performed
within current laws and regulations. Recoveries of environmental remediation
costs from other parties are recorded as assets when their receipt is deemed
probable.
It is reasonably possible that, due to uncertainties associated with
defining the nature and extent of environmental contamination, application of
laws and regulations by regulatory authorities and changes in remediation
technology, the ultimate cost of remediation could change in the future. Hecla
periodically reviews its accrued liabilities for such remediation costs as
evidence becomes available indicating that its remediation liability has
potentially changed.
I. Income Taxes -- Hecla records deferred tax liabilities and assets for the
expected future income tax consequences of events that have been recognized in
its financial statements. Deferred tax liabilities and assets are determined
based on the temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the temporary differences are expected to reverse.
J. Basic and Diluted Loss Per Common Share -- Basic earnings per share (EPS) is
calculated by dividing loss applicable to common shareholders by the weighted
average number of common shares outstanding for the year. Diluted EPS reflects
the potential dilution that could occur if potentially dilutive securities were
exercised or converted to common stock. Due to the losses in 2001, 2000 and
1999, potentially dilutive securities were excluded from the calculation of
diluted EPS as they were antidilutive. Therefore, there was no difference in the
calculation of basic and diluted EPS in 2001, 2000 and 1999.
K. Revenue Recognition -- Sales of metal products sold directly to smelters are
recorded when title and risk of loss transfer to the smelter at current spot
metals prices. Recorded values are adjusted monthly until final settlement at
month-end metals prices. Sales of metal in products tolled (rather than sold to
smelters) are recorded at contractual amounts when title and risk of loss
transfer to the buyer. Sales of industrial minerals are recognized as the
minerals are shipped and title transferred.
L. Interest Expense -- Interest costs incurred during the construction of
qualifying assets are capitalized as part of the asset cost.
M. Cash Equivalents -- Hecla considers cash equivalents to consist of highly
liquid investments with a remaining maturity of three months or less when
purchased.
N. Foreign Currency Translation -- Hecla operates in Mexico with its wholly
owned subsidiary, Minera Hecla, S.A. de C.V. (Minera Hecla). Hecla also operates
in Venezuela with its wholly owned subsidiary, Minera Hecla Venezolana, C.A. The
functional currency for Minera Hecla and Minera Hecla Venezolana is the U.S.
dollar. Accordingly, Hecla translates the monetary assets and liabilities of
these subsidiaries at the period-end exchange rate while nonmonetary assets and
liabilities are translated at historical rates. Income and expense accounts are
translated at the average exchange rate for each period. Translation adjustments
and transaction gains and losses are reflected in the net loss for the period.
O. Risk Management Contracts -- Hecla uses derivative financial instruments as
part of an overall risk-management strategy. These instruments are used as a
means of hedging exposure to precious metals prices. Hecla does not hold or
issue derivative financial instruments for speculative trading purposes.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 was amended in June 2000 with the
issuance of SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS 133, which Hecla adopted effective January 1, 2001,
requires that derivatives be recognized as assets or liabilities and be measured
at fair value. Gains or losses resulting from changes in the fair value of
derivatives in each period are to be accounted for either in current earnings or
other comprehensive income
F-11
depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in the
fair value or cash flows of the hedging instruments and the hedged items.
Hecla uses forward sales contracts to hedge its exposure to precious
metals prices. The underlying hedged production is designated at the inception
of the hedge. At January 1, 2001, Hecla's hedging contracts, used to reduce
exposure to precious metals prices, consisted of forward sales contracts and a
gold lease rate swap.
As Hecla intends to physically deliver metals in accordance with the terms
of certain of the forward sales contracts, Hecla has accounted for these
contracts as normal sales in accordance with SFAS 138. As a result, these
contracts are not required to be accounted for as derivatives under SFAS 133. In
regard to the gold lease rate swap, Hecla recorded a cumulative effect of a
change in accounting principle in other comprehensive income of a loss of
approximately $0.1 million upon adoption of SFAS 133 on January 1, 2001.
P. Accounting for Stock Options -- Hecla measures compensation cost for stock
option plans using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Hecla also provides the required disclosures of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
Q. New Accounting Pronouncements -- In April 1998, Statement of Position 98-5
(SOP 98-5), "Reporting on the Costs of Start-up Activities" was issued. SOP 98-5
provides guidance on the financial reporting of start-up costs and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed as incurred, as well as the recognition of a
cumulative effect of a change in accounting principle for retroactive
application of the standard. Hecla adopted SOP 98-5 as required on January 1,
1999. The impact of this change in accounting principle related to unamortized
start-up costs associated with Hecla's 29.73% ownership interest in the Greens
Creek mine. The $1.4 million cumulative effect of this change in accounting
principle is included in the consolidated statement of operations for the year
ended December 31, 1999. Due to the availability of net operating losses, there
was no tax effect associated with the change.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" which
supersedes APB Opinion No. 16 "Business Combinations" and FASB Statement No. 38
"Accounting for Preacquisition Contingencies of Purchased Enterprises." The
provisions of this statement require that all business combinations be accounted
for using "purchase accounting" and it disallows the use of "pooling of
interests" as previously allowed under APB Opinion No. 16 and FASB Statement No.
38. This statement is effective for all business combinations subsequent to June
30, 2001. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
Also in June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17 "Intangible Assets." The
provisions of this statement changes the unit of account for goodwill and takes
a very different approach to how goodwill and other intangible assets are
accounted for subsequent to their initial recognition. Because goodwill and some
intangible assets will no longer be amortized, the reported amounts of goodwill
and intangible assets, as well as total assets, will not decrease at the same
time and in the same manner as under previous standards. This statement is
effective for all fiscal years beginning subsequent to December 15, 2001. The
adoption of this statement is not expected to have a material effect on the
Company's financial statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations," which amends SFAS No. 19. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement required that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The requirements of this
Statement must be implemented for fiscal years beginning after June 15, 2002;
however, early adoption is encouraged. The Company is currently evaluating what
effect the adoption of this standard will have on the Company's financial
statements.
The FASB also issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It
F-12
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business. It also amends APB No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The provisions of this Statement generally are to be
applied prospectively. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
R. Liquidity -- As of December 31, 2001, Hecla had cash and cash equivalents of
$7.6 million and negative working capital of $0.4 million. Hecla believes cash
requirements over the next twelve months will be funded through a combination of
current cash, future cash flows from operations, proceeds from potential asset
sales, and/or future debt or equity security issuances. Hecla's ability to raise
capital is highly dependent upon the commercial viability of its projects and
the associated prices of metals Hecla produces. Because of the significant
impact that changes in the prices of gold, silver, zinc and lead have on Hecla's
financial condition, declines in these metals prices may negatively impact
short-term liquidity and Hecla's ability to raise additional funding for
long-term projects. In the event that cash balances decline to a level that
cannot support the operations of Hecla, management will defer certain planned
capital expenditures and exploration expenditures as needed to conserve cash for
operations. If management's plans are not successful, operations and liquidity
may be adversely affected.
Note 2: Discontinued Operations
On March 27, 2001, Hecla completed a sale of the Kentucky-Tennessee Clay
Company, K-T Feldspar Corporation, K-T Clay de Mexico and certain other minor
inactive industrial minerals companies (collectively the K-T Group) for $62.5
million. Hecla recorded a gain on the sale of the K-T Group of $12.7 million in
2001. The proceeds from the sale were used to repay a term loan facility of
$55.0 million, and to repay amounts outstanding under a $2.0 million revolving
bank agreement. The remaining net proceeds were available for general corporate
purposes.
On March 4, 2002, Hecla completed a sale of the pet operations of the
Colorado Aggregate division (CAC) of MWCA for approximately $1.5 million in
cash. Hecla continues to pursue the sale of the remaining assets of the
industrial minerals segment and has a signed letter of intent to sell the
briquette operations of CAC, although there can be no assurance a sales
transaction will take place. At December 31, 2001, the net assets of CAC were
approximately $2.7 million.
On March 15, 2000, Hecla sold substantially all of the assets of its
Mountain West Products (MWP) division of MWCA for $8.5 million in cash. The sale
of MWP resulted in a loss on disposal of $1.0 million. On June 5, 2000, Hecla
completed a sale of the landscape operations of CAC for $1.1 million in cash.
The sale of the landscape operations did not result in a gain or loss.
During 1999, based upon anticipated sales proceeds for the sale of the
MWCA subsidiary, Hecla determined that certain adjustments were necessary to
properly reflect the estimated net realizable value of MWCA. These adjustments,
totaling $4.4 million, consisted of write-downs of property, plant and equipment
of $3.2 million and a write-down of other noncurrent assets of $1.2 million
during the year ended December 31, 1999.
F-13
The net assets of discontinued operations at December 31, 2001 and 2000,
consist of (in thousands):
2001 2000
---- ----
ASSETS
Cash and cash equivalents $ -- $ 1,750
Accounts and notes receivable -- 9,528
Inventories 2,139 5,035
Other current assets -- 433
Properties, plants and equipment, net 645 32,174
Other noncurrent assets -- 1,126
------ -------
Total assets $2,784 $50,046
====== =======
LIABILITIES
Accounts payable and accrued expenses $ -- $ 4,808
Accrued payroll and related benefits -- 510
Accrued taxes -- 41
Accrued reclamation and closure costs 70 414
Other noncurrent liabilities -- 216
------ -------
Total liabilities 70 5,989
------ -------
Net assets of discontinued operations $2,714 $44,057
====== =======
F-14
A summary of operating results of discontinued operations for the three
years ended December 31 is as follows (in thousands):
2001 2000 1999
-------- -------- --------
Sales of products $ 21,625 $ 75,054 $ 89,911
-------- -------- --------
Cost of sales 20,082 67,114 75,041
Depreciation, depletion and amortization 1,099 3,990 4,755
-------- -------- --------
21,181 71,104 79,796
-------- -------- --------
Gross Profit 444 3,950 10,115
-------- -------- --------
Other operating expenses:
General and administrative 86 355 328
Exploration 174 242 394
Reduction in carrying value of mining properties -- -- 4,402
-------- -------- --------
260 597 5,124
-------- -------- --------
Income from operations 184 3,353 4,991
-------- -------- --------
Other income (expense):
Interest and other income 1 9 35
Miscellaneous expense (923) (516) (94)
Interest expense (5) (59) (28)
-------- -------- --------
(927) (566) (87)
Income (loss) from discontinued operations before
income taxes and gain (loss) on disposal (743) 2,787 4,904
Income tax provision -- (215) (118)
-------- -------- --------
Income (loss) from discontinued operations
before gain (loss) on disposal (743) 2,572 4,786
Gain (loss) on disposal, net of income tax 12,665 (1,043) --
-------- -------- --------
Net income from discontinued operations $ 11,922 $ 1,529 $ 4,786
======== ======== ========
The following is sales information for discontinued operations by
geographic area for the years ended December 31 (in thousands):
2001 2000 1999
---- ---- ----
United States $15,497 $52,293 $69,573
Canada 1,336 4,225 4,533
Mexico 2,950 12,771 11,062
Japan 135 421 488
Taiwan 376 1,275 885
Venezuela 564 1,000 810
Chile 307 463 223
Italy 197 849 876
Other foreign 263 1,757 1,461
------- ------- -------
$21,625 $75,054 $89,911
======= ======= =======
F-15
The following is sales information for discontinued operations by country
of origin for the years ended December 31 (in thousands):
2001 2000 1999
---- ---- ----
United States $19,037 $64,309 $80,940
Mexico 2,588 10,745 8,971
------- ------- -------
$21,625 $75,054 $89,911
======= ======= =======
Hecla's industrial minerals operations lease various facilities and
equipment under noncancelable operating lease arrangements. Rent expense
incurred for these operating leases during the years ended December 31, 2001,
2000 and 1999, was approximately $0.7 million, $3.6 million and $3.5 million,
respectively.
Note 3: Inventories
Inventories consist of the following (in thousands):
December 31,
----------------------
2001 2000
---- ----
Concentrates, bullion, metals in transit
and other products $ 4,211 $ 5,932
Materials and supplies 6,657 5,337
------- -------
$10,868 $11,269
======= =======
At December 31, 2001, Hecla had forward sales commitments through December
31, 2004, for 199,158 ounces of gold at an average price of $288.92 per ounce.
The aforementioned contracts were designated as hedges at December 31, 2001.
Hecla is exposed to certain losses, generally the amount by which the contract
price exceeds the spot price of a commodity, in the event of nonperformance by
the counterparties to these agreements. The London AM gold price at December 31,
2001, was $276.50 per ounce.
Note 4: Properties, Plants and Equipment
The major components of properties, plants and equipment are (in thousands):
December 31,
---------------------
2001 2000
---- ----
Mining properties $ 8,271 $ 8,563
Development costs 111,827 114,054
Plants and equipment 168,210 173,012
Land 925 1,100
-------- --------
289,233 296,729
Less accumulated depreciation,
depletion and amortization 184,640 188,386
-------- --------
Net carrying value $104,593 $108,343
======== ========
During the fourth quarter of 2001, Hecla entered into an agreement to
sell its headquarters building in Coeur d'Alene, Idaho, for $5.6 million in
cash. The sale of the building is expected to close during the second quarter of
2002. In connection with the sale, the Company entered into a lease agreement
with the purchaser to lease a portion of the building, which will be effective
upon closing on the sale of the building. The lease calls for monthly payments
of approximately $38,000 over the next two years, at which time the Company has
an option to reduce the amount of leased space for an additional three years.
The purchaser of the building will also have an
F-16
option to terminate the lease agreement with Hecla during the first two years of
the lease agreement, subject to certain payments to Hecla.
In the fourth quarter of 2000, Hecla recorded an adjustment of $31.2
million to reduce the carrying value of the Lucky Friday silver mine property,
plant and equipment in accordance with Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adjustment at Lucky Friday was
necessitated due to continued low silver and lead prices combined with further
declines in silver and lead prices during the fourth quarter of 2000. On July
17, 2001, Hecla announced that operations at its Lucky Friday silver mine would
be reduced, effective October 2001, due to continued low silver and lead prices.
Additionally, during the second quarter of 2000, Hecla recorded adjustments of
$4.4 million for properties, plants and equipment and supply inventory at the
Rosebud mine, and $4.7 million for previously capitalized deferred development
costs at the Noche Buena gold property. The $4.4 million adjustment at the
Rosebud mine was necessitated due to the planned closure of the Rosebud mine by
Hecla and its joint-venture partner. The Rosebud mine completed mining activity
in July 2000 and milling activities in August 2000. At the Noche Buena property,
Hecla suspended activities in 1999 due to a low price for gold. Based upon the
continuation of the lower gold price, an adjustment to the carrying value of the
Noche Buena property was recorded.
Note 5: Environmental and Reclamation Adjustments
During 2000, Hecla recorded charges of $16.4 million for future
environmental and reclamation expenditures at the Grouse Creek property, the
Bunker Hill Superfund site and other idle properties. During the fourth quarter
of 2000, an Administrative Order on Consent was entered into with the U.S.
Environmental Protection Agency, requiring Hecla to commence dewatering of the
tailings impoundment at Grouse Creek in 2001. Due to the Administrative Order on
Consent, updated cost estimates were determined in accordance with Statement of
Position 96-1, "Environmental Remediation Liabilities." At the Bunker Hill
Superfund site, estimated future costs were increased based upon results of
sampling activities completed through 2000 and current cost estimates to
remediate residential yards and commercial properties.
In 1999, Hecla recorded charges totaling $27.3 million for future
environmental and reclamation expenditures at the Grouse Creek property and the
Bunker Hill Superfund site. The accrual adjustment at Grouse Creek was based
upon anticipated changes to the closure plan developed in 1999, including
increased dewatering requirements and other expenditures. The changes to the
reclamation plan at Grouse Creek were necessitated principally by the need to
dewater the tailings impoundment rather than reclaim it as a wetland as
originally planned. At the Bunker Hill Superfund site, estimated future costs
were increased based upon results of sampling activities completed through 1999
and current cost estimates to remediate residential yards and commercial
properties.
For additional information regarding environmental matters, see Note 8 of
Notes to Consolidated Financial Statements.
Note 6: Income Taxes
Major components of Hecla's income tax provision (benefit) for the years
ended December 31, 2001, 2000 and 1999, relating to continuing operations are as
follows (in thousands):
2001 2000 1999
---- ---- ----
Current:
Federal $ -- $ -- $ --
Foreign -- 13 (403)
------- ------- -------
Income tax provision (benefit) $ -- $ 13 $ (403)
======= ======= =======
For the year ended December 31, 2001, the income tax provision related to
discontinued operations was zero. For the years ended December 31, 2000 and
1999, the income tax provision related to discontinued operations was $215,000
and $118,000, respectively.
F-17
Domestic and foreign components of income (loss) from continuing
operations before income taxes for the years ended December 31, 2001, 2000 and
1999, are as follows (in thousands):
2001 2000 1999
---- ---- ----
Domestic $ (19,822) $ (79,645) $ (38,781)
Foreign 10,240 (5,189) (5,013)
---------- ---------- ----------
Total $ (9,582) $ (84,834) $ (43,794)
========== ========== ==========
The components of the net deferred tax liability were as follows (in
thousands):
December 31,
-------------------------
2001 2000
---- ----
Deferred tax assets:
Accrued reclamation costs $ 18,231 $ 19,945
Investment valuation differences 1,357 2,172
Capital loss carryover -- 603
Postretirement benefits other than pensions 1,437 1,303
Deferred compensation 902 1,493
Accounts receivable -- 456
Foreign net operating losses 7,579 10,420
Federal net operating losses 109,627 105,104
State net operating losses 12,264 13,327
Properties, plants and equipment 2,747 12,049
Tax credit carryforwards 1,989 1,989
Miscellaneous 1,479 1,355
---------- ----------
Total deferred tax assets 157,612 170,216
Valuation allowance (153,214) (167,109)
---------- ----------
Net deferred tax assets 4,398 3,107
---------- ----------
Deferred tax liabilities:
Pension costs (4,398) (3,107)
Other (300) (300)
---------- ----------
Total deferred tax liability (4,698) (3,407)
---------- ----------
Net deferred tax liability $ (300) $ (300)
========== ==========
F-18
Hecla recorded a valuation allowance to reflect the estimated amount of
deferred tax assets which may not be realized principally due to the expiration
of net operating losses and tax credit carryforwards. The changes in the
valuation allowance for the years ended December 31, 2001, 2000 and 1999, are as
follows (in thousands):
2001 2000 1999
--------- --------- ---------
Balance at beginning of year $(167,109) $(139,852) $(115,654)
Increase due to exclusion of net deferred tax
liability associated with discontinued
operations -- (3,266) --
Increase related to nonutilization of net
operating loss carry-forwards and nonrecognition
of deferred tax assets due to uncertainty
of recovery -- (23,991) (24,198)
Decrease related to expiration of foreign net
operating loss carryforwards and an
adjustment to foreign property, plant and
equipment 13,895 -- --
--------- --------- ---------
Balance at end of year $(153,214) $(167,109) $(139,852)
========= ========= =========
The annual tax provision (benefit) is different from the amount which
would be provided by applying the statutory federal income tax rate to Hecla's
pretax income (loss). The reasons for the difference are (in thousands):
2001 2000 1999
----------------- ------------------- -------------------
Computed "statutory"
(benefit)/provision $(3,258) (34)% $(28,844) (34)% $(14,890) (34)%
Nonutilization of net
operating losses and
effect of foreign taxes 3,258 34 28,857 34 14,487 33
------- ----- -------- ----- -------- -----
$ -- --% $ 13 --% $ (403) (1)%
======= ===== ======== ===== ======== =====
As of December 31, 2001, for income tax purposes, Hecla has net operating
loss carryovers of $322.4 million and $241.2 million for regular and alternative
minimum tax purposes, respectively. These operating loss carryovers
substantially expire over the next 15 to 20 years, the majority of which expire
between 2006 and 2021. In addition, Hecla has foreign tax operating losses of
approximately $22.3 million which expire between 2004 and 2011. Approximately
$17.4 million of regular tax loss carryovers are subject to limitations in any
given year due to mergers. Hecla has approximately $0.9 million in alternative
minimum tax credit carryovers eligible to reduce future regular tax liabilities.
F-19
Note 7: Long-Term Debt and Credit Agreement
Long-term debt consists of the following (in thousands):
December 31,
---------------------
2001 2000
-------- --------
Revolving bank debt $ 2,800 $ 1,024
Project financing debt 13,191 10,250
Subordinated bank debt 3,000 3,000
Term loan facility -- 55,000
Other long-term debt -- 41
-------- --------
18,991 69,315
Less current portion (7,043) (59,274)
-------- --------
$ 11,948 $ 10,041
======== ========
Future minimum debt repayments associated with long-term debt as of
December 31, 2001, are as follows (in thousands):
Year ending December 31
-----------------------
2002 $ 7,043
2003 7,283
2004 2,337
2005 1,368
2006 960
-------
Total long-term debt repayments $18,991
=======
Revolving Bank Debt
The Company has a revolving bank agreement which allows borrowings up to
$3.0 million for general corporate purposes. This loan is payable on April 30,
2002, and is collateralized by Hecla's headquarters building in Coeur d'Alene,
Idaho. Hecla has entered into an agreement to sell its headquarters building
during the second quarter of 2002. As of December 31, 2001 and 2000, $2.8
million and $1.0 million was outstanding and classified as current portion of
long-term debt. At December 31, 2001, the interest rate on this loan was 7%.
Project Financing and Subordinated Bank Debt
At December 31, 2001 and 2000, Hecla's wholly owned subsidiary, Hecla
Resources Investments Limited (HRIL) had $6.5 million and $10.25 million
outstanding under a credit agreement used to provide project financing at the La
Camorra mine. The project financing agreement is payable in semiannual payments
through December 31, 2004, and had an interest rate of 4.8% at December 31,
2001.
HRIL must maintain compliance with certain financial and other restrictive
covenants related to the available ore reserves and financial performance of the
La Camorra mine. The Company is required to maintain hedged gold positions
sufficient to cover all dollar loans, operating expenditures, taxes, royalties
and similar fees projected for the project. At December 31, 2001, there were
169,158 ounces of gold sold forward. The forward sales agreement assumes the
ounces of gold committed to forward sales at the end of each quarter thereafter
can be leased at a rate of 1.5% for each following quarter. The Company
maintains a Gold Lease Rate Swap at a fixed rate of 1.5% on the outstanding
notional volume of the flat forward sale, with settlement being made quarterly
with the Company receiving the fixed rate and paying the current floating gold
lease rate.
F-20
In connection with the project financing agreement, Hecla has outstanding
a $3.0 million subordinated loan agreement, repayable in three semiannual
payments beginning June 30, 2003. The entire $3.0 million subordinated loan was
outstanding at December 31, 2001 and 2000. The loan agreement gives the Company
the option to capitalize interest payments by adding them to the principal
amount of the loan. At December 31, 2001, the interest amount added to principal
was approximately $0.5 million. The interest rate on the subordinated debt was
5.9% as of December 31, 2001.
At December 31, 2001, Hecla's wholly owned subsidiary, Minera Hecla, S.A.
de C.V. (Minera Hecla) had $6.7 million outstanding under a project loan used to
acquire a processing mill at Velardena, Mexico, to process ore mined from the
San Sebastian project on the Saladillo mining concessions located near Durango,
Mexico. The credit facility is nonrecourse to Hecla. Under the terms of the
credit facility, Minera Hecla will make monthly payments for principal and
interest over 63 months. The loan is collateralized by the mill at Velardena and
the Saladillo, Saladillo 1 and Saladillo 5 mining concessions and bears interest
at the rate of 13%.
Term Loan Facility
On March 27, 2001, Hecla completed a sales transaction for the K-T Clay
group for $62.5 million which was partially utilized to repay the $55.0 million
term loan facility due on April 10, 2001. At December 31, 2000, $55.0 million
was outstanding and classified as current portion of long-term debt.
Note 8: Commitments and Contingencies
Bunker Hill Superfund Site
In 1994, Hecla, as a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA),
entered into a consent decree with the Environmental Protection Agency (EPA) and
the state of Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located at Kellogg, Idaho. The consent decree settled
Hecla's response-cost liability under CERCLA at the Bunker Hill site. In August
2000, Sunshine Mining and Refining Company which was also a party to the 1994
Consent Decree, filed for Chapter 11 bankruptcy and in January 2001, the Federal
District Court approved a new Consent Decree between Sunshine, the U.S.
Government and the Coeur d'Alene Indian Tribe which settled Sunshine's
environmental liabilities in the Coeur d'Alene Basin lawsuits described below
and released Sunshine from further obligations under the 1994 Consent Decree. In
September 2001, the Idaho Federal District Court held a hearing on the Company's
motion to relieve the Company from some or all of the obligations under the 1994
Consent Decree based on a number of arguments including the impact of changed
circumstances because EPA determined to utilize a broad remedial investigation
feasibility study (RI/FS) CERCLA process to address environmental issues in the
Coeur d'Alene Basin outside the Bunker Hill Site. In a September 30, 2001,
Order, amended October 15, 2001, the Court held that sufficient changed
circumstances had occurred to support modification of the 1994 Consent Decree.
In the Order, as amended, the Court permitted the mining companies to terminate
further work under the 1994 Consent Decree for 2001 except for a few high-risk
yards and stated the Court would make a final decision on the request to modify
the Consent Decree after EPA's Record of Decision (ROD) on the Basin clean-up is
issued. EPA recently issued its proposed plan for the clean-up of the Coeur
d'Alene Basin and a ROD on the clean-up plan is expected to be issued by EPA in
2002. As of December 31, 2001, Hecla has estimated and accrued an allowance for
liability for remedial activity costs at the Bunker Hill site of $9.7 million.
These estimated expenditures are anticipated to be made over the next three to
five years. Although Hecla believes the accrual is adequate based upon current
estimates of aggregate costs, it is reasonably possible that Hecla's estimate of
its obligations may change in the near or longer term.
Coeur d'Alene River Basin Environmental Claims
- Coeur d'Alene Indian Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against Hecla and a number of other
mining companies asserting claims for damages to natural resources
F-21
downstream from the Bunker Hill site over which the tribe alleges some ownership
or control. The Tribe's natural resource damage litigation has been consolidated
with the United States' litigation described below.
- U.S. Government Claims
In March 1996, the United States filed a lawsuit in Idaho Federal District
Court against certain mining companies that conducted historic mining operations
in the Silver Valley of northern Idaho, including Hecla. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks recovery for alleged
damages to or loss of natural resources located in the Coeur d'Alene River Basin
in northern Idaho for which the United States asserts to be the trustee under
CERCLA. The lawsuit asserts that the defendants' historic mining activity
resulted in releases of hazardous substances and damaged natural resources
within the Basin. The suit also seeks declaratory relief that Hecla and other
defendants are jointly and severally liable for response costs under CERCLA for
historic mining impacts in the Basin outside the Bunker Hill site. Hecla has
asserted a number of defenses to the United States' claims.
In May 1998, the EPA announced that it had commenced a RI/FS under CERCLA
for the entire Basin, including Lake Coeur d'Alene, in support of its response
cost claims asserted in its March 1996 lawsuit. In October 2001, the EPA issued
its proposed clean-up plan for the Basin, and EPA's Record of Decision on the
clean-up plan is expected to be issued by EPA in 2002.
The first phase of the trial commenced on the consolidated Coeur d'Alene
Indian Tribe's and the United States' Federal District Court cases on January
22, 2001, and was concluded on July 30, 2001. In the first phase of the trial,
the Court has been asked to determine the extent of liability, if any, of the
defendants for the plaintiffs' CERCLA claims. The Court has also been asked to
determine the liability of the United States for its historic involvement in the
Basin. No decision on the issues before the Court in the first phase of the
litigation has been issued. If liability is determined in the first phase, a
second trial will be scheduled for 2002 or 2003 to address damages and remedy
selection. Two of the defendant mining companies, Coeur d'Alene Mines
Corporation and Sunshine Mining and Refining Company, settled their liabilities
under the litigation during the first quarter of 2001. Hecla and ASARCO are the
only defendants remaining in the litigation.
During 2000 and into 2001, Hecla was involved in settlement negotiations
with representatives of the U.S. government and the Coeur d'Alene Indian Tribe.
The Company also participated with certain of the other defendants in the
litigation in a state of Idaho led settlement effort. On August 16, 2001, the
Company entered into an Agreement in Principle with the United States and the
State of Idaho to settle the governments' claims for natural resource damages
and clean-up costs related to the historic mining practices in the Coeur d'Alene
Basin in northern Idaho. The settlement, if and when finalized in the form of a
Consent Decree, would release the Company from further liability to the
governments for its historic mining practices in the Coeur d'Alene Basin. The
Agreement in Principle caps for a period of ten years the majority of the
clean-up related expenditures the Company is responsible for annually at the
Bunker Hill Superfund Site, the Grouse Creek mine and the Stibnite site in
central Idaho. The Agreement limits these payments to the Government and/or
clean-up obligations at these sites to a fixed annual cap of $5.0 million for
each of the first two years of the Agreement and $6.0 million for each of the
next eight years. Hecla is committed to work and/or make payments of $4.0
million annually for the following 20 years thereafter. In addition, Hecla would
either have to pay or perform clean up obligations amounting to 10% of its
operating cash flow as adjusted for certain exploration expenditures. Hecla
would provide a security interest in assets with a value of $20 million which
will decline over ten years. The Agreement in Principle does not include the
Coeur d'Alene Indian Tribe; however, the Company hopes to be able to include the
Tribe as a party to the settlement under the terms of a final consent decree.
Representatives of the United States, the State of Idaho and the Company
continue to work on terms of a definitive consent decree incorporating the terms
of the Agreement in Principle. However, there are a number of significant issues
which will need to be resolved prior to finalizing the definitive Consent
Decree.
As of December 31, 2001, the Company has accrued $43.6 million related to
the properties covered by the Agreement in Principle. The range of liability for
these sites could be up to $138.0 million on an undiscounted basis over 30 years
plus the percentage of operating cash flow. If, and when, the Agreement in
Principle is finalized in the form of a Consent Decree, if the terms of the
obligation are fixed and determinable, they may be discounted. Hecla has accrued
what management believes is the best estimate of the liability as of December
31, 2001.
F-22
However, it is reasonably possible that Hecla's obligation may change in the
near or long term depending on a number of factors, including finalization and
entry of a Consent Decree. In addition, an adverse ruling against Hecla for
liability and damages in this matter could have a material adverse effect on the
Company.
Private Class Action Litigation
On or about January 7, 2002, a class action complaint was filed in this
matter in the Idaho District Court, County of Kootenai, against several
corporate defendants, including the Company. The Company was served with the
Complaint on January 29, 2002. The Complaint seeks certification of three
plaintiff classes of Coeur d'Alene Basin residents and current and former
property owners to pursue three types of relief: various medical monitoring
programs, a real property remediation and restoration program, and damages for
diminution in property value, plus other damages and costs. The Company believes
the Complaint is subject to challenge on a number of bases and intends to
vigorously defend itself in this litigation.
Insurance Coverage Litigation
In 1991, Hecla initiated litigation in the Idaho District Court, County of
Kootenai, against a number of insurance companies that provided comprehensive
general liability insurance coverage to Hecla and its predecessors. Hecla
believes the insurance companies have a duty to defend and indemnify Hecla under
their policies of insurance for all liabilities and claims asserted against
Hecla by the EPA and the tribe under CERCLA related to the Bunker Hill site and
the Basin in northern Idaho. In 1992, the Idaho State District Court ruled that
the primary insurance companies had a duty to defend Hecla in the Tribe's
lawsuit. During 1995 and 1996, Hecla entered into settlement agreements with a
number of the insurance carriers named in the litigation. Hecla has received a
total of approximately $7.2 million under the terms of the settlement
agreements. Thirty percent of these settlements were paid to the EPA to
reimburse the U.S. government for past costs under the Bunker Hill site consent
decree. Litigation is still pending against one insurer with trial suspended
until the underlying environmental claims against Hecla are resolved or settled.
The remaining insurer in the litigation, along with a second insurer not named
in the litigation, is providing Hecla with a partial defense in all Basin
environmental litigation. As of December 31, 2001, Hecla had not reduced its
accrual for reclamation and closure costs to reflect the receipt of any
potential insurance proceeds.
Other Claims
In 1997, Hecla's subsidiary, Kentucky-Tennessee Clay Company (K-T Clay),
terminated shipments (comprising approximately 1% of annual ball clay
production) sold to animal feed producers, when the Food and Drug Administration
determined trace elements of dioxin were present in poultry. Dioxin is
inherently present in ball clays generally. On September 22, 1999, Riceland
Foods (the primary purchaser of ball clay from K-T Clay used in animal feed)
commenced litigation against K-T Clay in State Court in Arkansas to recover its
losses and its insurance company's payments to downstream users of its animal
feed. The complaint alleged negligence, strict liability and breach of implied
warranties and seeks damages in excess of $7.0 million. Legal counsel retained
by the insurance company for K-T Clay had the case removed to Federal Court in
Arkansas. In July 2000, a second complaint was filed against K-T Clay and Hecla
in Arkansas State Court by Townsends, Inc., another purchaser of animal feed
containing ball clay sold by K-T Clay. A third complaint was filed in the United
States District Court in Arkansas on August 31, 2000, by Archer Daniels Midland
Company, a successor in interest to Quincy Soybean Company, a third purchaser of
ball clay sold by K-T Clay and used in the animal feed industry. The Townsends
and Archer Daniels lawsuits allege damages totaling approximately $300,000 and
$1.4 million, respectively. These complaints contain similar allegations to the
Riceland Foods' case and legal counsel retained by the insurance carrier is
defending K-T Clay and Hecla in these lawsuits. The Company believes that these
claims comprise substantially all the potential claims related to this matter.
In January 2001, Hecla was dismissed from the only lawsuit in which it had been
named as a defendant. In March 2001, prior to trial, K-T Clay settled the
Riceland Foods litigation against K-T Clay through settlement payment
substantially funded by K-T Clay's insurance carrier. K-T Clay contributed
$230,000 toward the Riceland Foods settlement. In August 2001, the Federal
District Court dismissed the Archer Daniels litigation; however, a similar
lawsuit based upon implied warranty was refiled by Archer Daniels against K-T
Clay on October 24, 2001, in Arkansas Federal Court. The defense of the
Townsends lawsuit is being covered by insurance. The Company believes that K-T
Clay's insurance coverage is available to cover the remaining claims. On March
27, 2001, Hecla sold its interest in K-T Clay. However, Hecla agreed to
F-23
indemnify the purchaser of K-T Clay from all liability resulting from these
dioxin claims and litigation to the extent not covered by insurance. Although
the outcome of the remaining litigation or insurance coverage cannot be assured,
Hecla currently believes that there will be no material adverse effect on
Hecla's results of operations, financial condition or cash flows from this
matter.
Hecla is subject to other legal proceedings and claims not disclosed above
which have arisen in the ordinary course of its business and have not been
finally adjudicated. Although there can be no assurance as to the ultimate
disposition of these other matters, it is the opinion of Hecla's management that
the outcome of these other matters will not have a material adverse effect on
the financial condition of Hecla.
Note 9: Employee Benefit Plans
Hecla and certain subsidiaries sponsor defined benefit pension plans
covering substantially all employees. Hecla also provides certain postretirement
benefits, principally health care and life insurance benefits for qualifying
retired employees.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended
December 31, 2001, and a statement of the funded status as of December 31, 2001
and 2000 (in thousands):
Pension Benefits Other Benefits
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 45,994 $ 43,811 $ 2,377 $ 2,418
Service cost 822 1,406 24 24
Interest cost 2,707 2,989 166 169
Plan amendments 2,027 7 -- --
Actuarial (gain) loss (1,678) 405 177 (98)
Divestitures (4,044) -- -- --
Benefits paid (2,298) (2,624) (126) (136)
Settlements (1,934) -- -- --
Curtailments (501) -- -- --
----------- ----------- ----------- -----------
Benefit obligation at end of year 41,095 45,994 2,618 2,377
----------- ----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 67,285 58,721 -- --
Actual return on plan assets (6,497) 11,023 -- --
Divestitures (4,027) -- -- --
Employer contributions 64 165 126 136
Settlements (2,419) -- -- --
Benefits paid (2,298) (2,624) (126) (136)
----------- ----------- ----------- -----------
Fair value of plan assets at end of year 52,108 67,285 -- --
----------- ----------- ----------- -----------
Funded status at end of year 11,014 21,292 (2,618) (2,377)
Unrecognized net actuarial gain (3,333) (15,674) (153) (352)
Unrecognized transition (asset) obligation 35 (455) -- --
Unrecognized prior service cost 2,687 2,756 209 285
----------- ----------- ----------- -----------
Net amount recognized in consolidated
balance sheets $ 10,403 $ 7,919 $ (2,562) $ (2,444)
=========== =========== =========== ===========
F-24
The following table provides the amounts recognized in the consolidated
balance sheets as of December 31, 2001 and 2000 (in thousands):
Pension Benefits Other Benefits
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Prepaid benefit costs $ 12,067 $ 9,524 $ -- $ --
Accrued benefit liability (1,664) (1,940) (2,562) (2,444)
Intangible asset -- 335 -- --
----------- ----------- ----------- -----------
Net amount recognized $ 10,403 $ 7,919 $ (2,562) $ (2,444)
=========== =========== ============ ============
The benefit obligation was calculated by applying the following weighted
average assumptions:
Pension Benefits Other Benefits
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Discount rate 7.00% 7.00% 7.00% 7.00%
Expected rate on plan assets 9.00% 9.00% -- --
Rate of compensation increase 3.00% 3.50% -- --
Net periodic pension cost (income) for the plans consisted of the
following in 2001, 2000 and 1999 (in thousands):
Pension Benefits Other Benefits
----------------------------------- ----------------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- --------- -------- -------- ---------
Service cost $ 822 $ 1,406 $ 1,289 $ 24 $ 24 $ 23
Interest cost 2,707 2,989 2,611 166 169 155
Expected return on plan assets (5,593) (5,192) (4,516) -- -- --
Amortization of transition asset (711) (426) (152) 75 75 --
Amortization of unrecognized prior
service cost 246 315 211 -- -- --
Amortization of unrecognized net
gain from earlier periods (450) (420) (316) (22) (14) (116)
--------- --------- --------- ------- ------- -------
Net periodic pension cost (income) (2,979) (1,328) (873) 243 254 62
Curtailment loss 395 -- -- -- -- --
--------- --------- --------- ------- ------- -------
Net periodic benefit cost (income)
after curtailment $ (2,584) $ (1,328) $ (873) $ 243 $ 254 $ 62
========= ========= ========= ======= ======= =======
During 2001, as part of the sale of the K-T Clay Group, the Company
recognized a $0.5 million pension curtailment gain on the Hecla Mining Company
Pension Plan. This gain was a result of the elimination of salaried employees at
K-T Clay from inclusion in the Hecla Mining Company Pension Plan. Also, as part
of the K-T Clay Group sale, $2.4 million in assets of the Hecla Mining Company
Pension Plan were transferred to the purchaser's pension plan to fund the
liability of plan participants that were employed by the K-T Clay Group at the
time of the sale. In addition, two hourly pension plans for hourly employees of
the K-T Clay Group were transferred in their entirety as part of the sale of the
K-T Clay Group.
As a result of a reduction in the workforce at the Lucky Friday mine
during 2001, the Company recorded a pension curtailment loss of approximately
$0.9 million associated with the Lucky Friday Hourly Pension Plan.
F-25
Information related to the defined benefit plans of the industrial
minerals segment, which is reported as a discontinued operation as of December
31, 2000, is included in the preceding tables. These plans were transferred as
part of the sale of the K-T Group during 2001. Summarized information with
respect to these plans is as follows (in thousands):
Benefit obligation at December 31, 2000 $4,044
======
Fair value of plan assets at December 31, 2000 $4,027
======
Net prepaid benefit cost at December 31, 2000 $ 163
======
Net periodic pension cost for the year ended December 31, 2000 $ 129
======
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $1,303,000, $1,303,000 and $0, respectively, as of
December 31, 2001, and $2,989,000, $2,417,000 and $665,000, respectively, as of
December 31, 2000.
Hecla has a nonqualified Deferred Compensation Plan which permits eligible
officers, directors and key employees to defer a portion of their compensation.
In November 1998, Hecla amended the plan to permit participants to transfer all
or a portion of their deferred compensation amounts into a Company common stock
account to be held in trust until distribution. As of December 31, 2001 and
2000, a total of 102,114 and 139,467 shares, respectively, of Hecla's common
stock are held in the grantor trust. Shares held in the grantor trust are valued
at fair value at the time of issuance, are recorded in the contra equity account
"Stock held by grantor trust," and are legally outstanding for registration
purposes and dividend payments. The shares held in the grantor trust are
considered outstanding for purposes of calculating loss per share. The deferred
compensation, together with Company matching amounts and accumulated interest,
is distributable in cash after retirement or termination of employment, and at
December 31, 2001 and 2000, amounted to approximately $2.3 and $3.6 million,
respectively. During 2001, the plan was terminated and all amounts will be
distributed during 2002 and 2003.
Hecla has an employees' Capital Accumulation Plan which is available to
all salaried and certain hourly employees after completion of six months of
service. Employees may contribute from 2% to 15% of their compensation to the
plan. Hecla makes a matching contribution of 25% of an employee's contribution
up to, but not exceeding, 6% of the employee's earnings. Hecla's contribution
was approximately $102,000 in 2001, $232,700 in 2000 and $274,000 in 1999.
Hecla has an employee's 401(k) plan which is available to all hourly
employees at Hecla's Lucky Friday mine after completion of six months of
service. Employees may contribute from 2% to 15% of their compensation to the
plan. Hecla makes a matching contribution of 25% of an employee's contribution
up to, but not exceeding, 5% of the employee's earnings. Hecla's contribution
was approximately $40,000 in 2001, $60,000 in 2000 and $50,000 in 1999.
Note 10: Shareholders' Equity
Preferred Stock
Hecla has 2.3 million shares of Series B Cumulative Convertible Preferred
Stock (the Preferred Shares) outstanding. Holders of the Preferred Shares are
entitled to receive cumulative cash dividends at the annual rate of $3.50 per
share payable quarterly, when and if declared by the Board of Directors. As of
January 31, 2002, Hecla has failed to pay the equivalent of six quarterly
dividends of $12.1 million.
The Preferred Shares are convertible, in whole or in part, at the option
of the holders thereof, into shares of common stock at an initial conversion
price of $15.55 per share. The Preferred Shares are redeemable at the option of
Hecla, in whole or in part, at $52.45 per share in July 1996 and thereafter at
prices declining ratably on each July 1 to $50.00 per share on or after July 1,
2003.
F-26
Holders of the Preferred Shares have no voting rights except if Hecla
fails to pay the equivalent of six quarterly dividends. As of January 31, 2002,
Hecla has failed to pay the equivalent of six quarterly dividends totaling $12.1
million. Due to the failure to pay dividends, at the Company's next annual
shareholders' meeting, holders of the Preferred Shares, voting as a class, shall
be entitled to elect two additional directors. The holders of Preferred Shares
also have voting rights related to certain amendments to Hecla's Certificate of
Incorporation.
The Preferred Shares rank senior as to dividends and upon liquidation to
the common stock and any outstanding shares of Series A Preferred Shares. The
Preferred Shares have a liquidation preference of $50.00 per share plus all
undeclared and unpaid dividends. Such preference aggregates total $127,075,000
at December 31, 2001.
Shareholder Rights Plan
In 1996, Hecla adopted a replacement Shareholder Rights Plan. Pursuant to
this plan, holders of common stock received one preferred share purchase right
for each common share held. The rights will be triggered once an Acquiring
Person, as defined in the plan, acquires 15% or more of Hecla's outstanding
common shares. The 15% triggering threshold may be reduced by the Board of
Directors to not less than 10%. When exercisable, the right would, subject to
certain adjustments and alterations, entitle rightholders, other than the
Acquiring Person or group, to purchase common stock of Hecla or the acquiring
company having a market value of twice the $50 exercise price of the right. The
rights are nonvoting, may be redeemed by the Company at any time at a price of
one cent per right, and expire in May 2006. Additional details regarding the
rights are set forth in the Rights Agreement filed with the Securities and
Exchange Commission on May 10, 1996.
Stock Based Plans
At December 31, 2001, executives, key employees and directors had been
granted options to purchase common shares or were credited with common shares
under the stock based plans described below. Hecla has adopted the
disclosure-only provisions of SFAS 123. No compensation expense has been
recognized in 2001, 2000 or 1999 for unexercised options related to the stock
option plans. Had compensation cost for Hecla's stock option plans been
determined based on the fair market value at the grant date for awards in 2001,
2000 and 1999 consistent with the provisions of SFAS 123, Hecla's loss and per
share loss applicable to common shareholders would have been increased to the
pro forma amounts indicated below (in thousands, except per share amounts):
2001 2000 1999
--------- --------- --------
Loss applicable to common shareholders:
As reported $ 5,710 $ 92,015 $ 48,040
Pro forma $ 6,490 $ 92,937 $ 49,060
Loss applicable to common
shareholders per share:
As reported $ 0.08 $ 1.38 $ 0.77
Pro forma $ 0.09 $ 1.39 $ 0.79
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
2001 2000 1999
------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 61.24% 49.03% 50.87%
Risk-free interest rate 4.68% 6.74% 4.79%
Expected life of options 4.3 years 4.1 years 4.1 years
F-27
The weighted average fair value of options granted in 2001, 2000 and 1999
was $0.47, $0.51 and $1.19, respectively.
Hecla adopted a nonstatutory stock option plan in 1987. The plan provides
that options may be granted to certain officers and key employees to purchase
common stock at a price of not less than 50% of the fair market value at the
date of grant. The plan also provides that options may be granted with a
corresponding number of stock appreciation rights and/or tax offset bonuses to
assist the optionee in paying the income tax liability that may exist upon
exercise of the options. All of the outstanding stock options under the 1987
plan were granted at an exercise price equal to the fair market value at the
date of grant and with an associated tax offset bonus. Outstanding options under
the 1987 plan are immediately exercisable for periods up to ten years. During
2001, 2000 and 1999, respectively, 8,000, 23,500 and 58,500 options to acquire
shares expired under the 1987 plan. The ability to grant further options under
the plan expired on February 13, 1997.
In 1995, the shareholders of Hecla approved the 1995 Stock Incentive Plan
which provides for a variety of stock-based grants to Hecla's officers and key
employees. The plan provides for the grant of stock options, stock appreciation
rights, restricted stock and performance units to eligible officers and key
employees of Hecla. The 1995 stock option plan has 3,000,000 shares authorized.
Stock options under the plan are required to be granted at 100% of the market
value of the stock on the date of the grant. The terms of such options shall be
no longer than ten years from the date of grant. During 2001, 2000 and 1999,
respectively, 698,000, 481,000 and 739,500 options to acquire shares were
granted to Hecla's officers and key employees of which 641,000, 385,000 and
630,000, respectively, of these options to acquire shares were granted with
vesting requirements. Under the vesting requirements for 2001, 33% of the
options were available on the date of the grant, with an additional 33%
available on the next anniversary period and 33% available six months after the
first anniversary date. For the options granted during 2001, there is no tax
offset bonus provision. During 2001, 2000 and 1999, respectively, 188,500,
947,500 and 27,000 options to acquire shares expired under the 1995 plan.
In November 2001, 76,142 shares of restricted common stock of the Company
were issued to one officer of the Company as a component of the officer's base
salary for the twelve-month period commencing December 1, 2001. These shares
were issued under the 1995 Stock Incentive Plan. At December 31, 2001, there
were 722,358 shares available for future grant under the 1995 plan.
In 1995, Hecla adopted the Hecla Mining Company Stock Plan for Nonemployee
Directors (the Directors' Stock Plan), which may be terminated by the Board of
Directors at any time. Each nonemployee director is credited with 1,000 shares
of Hecla's common stock on May 30 of each year. Nonemployee directors joining
the Board of Directors after May 30 of any year are credited with a pro-rata
number of shares based upon the date they join the Board. All credited shares
are held in trust for the benefit of each director until delivered to the
director. Delivery of the shares from the trust occurs upon the earliest of (1)
death or disability; (2) retirement; (3) a cessation of the director's service
for any other reason; or (4) a change in control of Hecla. Subject to certain
restrictions, directors may elect to receive delivery of shares on such date or
in annual installments thereafter over 5, 10 or 15 years. The shares of common
stock credited to nonemployee directors pursuant to the Directors' Stock Plan
may not be sold until at least six months following the date they are delivered.
The maximum number of shares of common stock which may be granted pursuant to
the Directors' Stock Plan is 120,000. During 2001, 2000 and 1999, respectively,
7,000, 8,000 and 8,000 shares were credited to the nonemployee directors. During
2001, 2000 and 1999, $7,000, $9,000 and $20,000, respectively, were charged to
operations associated with the Directors' Stock Plan. At December 31, 2001,
there were 68,057 shares available for grant in the future under the plan.
F-28
Transactions concerning stock options pursuant to all of the
above-described stock option plans are summarized as follows:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding, December 31, 1998 1,655,415 $ 6.76
Year ended December 31, 1999
Granted 739,500 $ 2.88
Exercised (1,500) $ 2.88
Expired (85,500) $ 10.14
------------
Outstanding, December 31, 1999 2,307,915 $ 5.39
Year ended December 31, 2000
Granted 481,000 $ 1.31
Exercised -- $ --
Expired (973,415) $ 4.40
------------
Outstanding, December 31, 2000 1,815,500 $ 4.85
Year ended December 31, 2001
Granted 698,000 $ 1.13
Exercised -- $ --
Expired (196,500) $ 2.86
------------
Outstanding, December 31, 2001 2,317,000 $ 3.89
============
The following table displays exercisable stock options and the weighted
average exercise price of the exercisable options as of December 31, 2001, 2000
and 1999:
2001 2000 1999
--------- --------- ---------
Exercisable options 1,701,400 1,322,533 1,302,215
Weighted average exercise price $ 4.62 $ 5.36 $ 6.06
The following table presents information about the stock options
outstanding as of December 31, 2001:
Weighted Average
-----------------------------
Range of Remaining
Shares Exercise Price Exercise Price Life (years)
---------- --------------- -------------- ------------
Exercisable options 421,150 $ 1.13 - $ 1.31 $ 1.20 5
Exercisable options 340,750 $ 2.88 - $ 2.88 $ 2.88 7
Exercisable options 680,000 $ 5.63 - $ 8.00 $ 5.86 6
Exercisable options 259,500 $ 8.63 - $10.50 $ 9.20 3
-----------
Total exercisable options 1,701,400 $ 1.13 - $10.50 $ 4.62 6
Unexercisable options 615,600 $ 1.13 - $ 8.63 $ 1.90 5
-----------
Total all options 2,317,000 $ 1.13 - $10.50 $ 3.89 6
===========
No amounts were charged to operations in connection with the stock option
plans in 2001, 2000 or 1999.
F-29
Common Stock Offerings
On August 28, 2001, Hecla issued 5,749,883 shares of its common stock in a
private placement transaction for the benefit of the Hecla Mining Company
Retirement Plan and the Lucky Friday Pension Plan for approximately $5.5
million. Proceeds from the private placement are available for general corporate
purposes.
In connection with a May 1999 stock offering, Hecla issued 1,603,998
warrants to purchase Hecla common stock. Each warrant entitles the holder to
purchase one share of common stock at an exercise price equal to the lesser of
(i) $3.19, and (ii) 102% of the volume weighted average price on the NYSE for
each trading day during the ten consecutive trading days immediately preceding
the date that notice of exercise is given to Hecla. In 1999, 97,000 warrants
were exercised and Hecla issued 97,000 shares of its common stock. Proceeds of
$0.3 million were realized from the exercise of the warrants. During 2001,
408,000 warrants were exercised and Hecla issued 408,000 shares of its common
stock. Proceeds of $0.4 million were realized from the exercise of the warrants.
At December 31, 2001, 1,098,801 warrants remain outstanding and are exercisable
until May 11, 2002. In February 2002, 668,345 warrants were exercised and Hecla
issued 668,345 shares of its common stock. Proceeds of $0.8 million were
realized from the exercise of the warrants.
Hecla has an existing Registration Statement on Form S-3 which provides
for the issuance of up to $100.0 million of equity and debt securities. As of
December 31, 2001, Hecla has issued $62.2 million of Hecla's common shares and
warrants under the Registration Statement. Due to the current market
capitalization of the Company and the unpaid dividends on the Preferred Stock,
there can be no assurance as to the availability of any financing arrangement
under this Registration Statement.
Note 11: Business Segments
Hecla is organized and managed primarily on the basis of the principal
products being produced from its operating units. One of the operating units has
been aggregated into the Metals-Gold segment, three of the operating units have
been aggregated into the Metals-Silver segment, and one operating unit has been
aggregated as part of the Industrial Minerals segment. During November 2000, the
industrial minerals segment was designated as a discontinued operation. For
further discussion, see "Discontinued Operations" Note 2 to financial
statements. General corporate activities not associated with operating units, as
well as idle properties, are presented as Other.
The tables below present information about reportable segments as of and
for the years ended December 31 (in thousands). Information related to the
statement of operations data relates to continuing operations only. See Note 2
for information related to the industrial minerals segment operations. Balance
sheet data include the industrial minerals segment classified as discontinued
operations as of December 31, 2001 and 2000.
F-30
2001 2000 1999
--------- --------- ---------
Net sales to unaffiliated customers:
Metals-Gold $ 41,452 $ 31,573 $ 23,588
Metals-Silver 43,795 44,277 50,115
--------- --------- ---------
$ 85,247 $ 75,850 $ 73,703
========= ========= =========
Gain (loss) from operations:
Metals-Gold $ 11,525 $ (13,982) $ (6,848)
Metals-Silver (8,640) (37,699) 1,913
Other (9,117) (27,834) (37,716)
--------- --------- ---------
$ (6,232) $ (79,515) $ (42,651)
========= ========= =========
Capital expenditures:
Metals-Gold $ 4,692 $ 4,592 $ 7,788
Metals-Silver 13,183 6,670 3,418
Industrial Minerals -- -- 2,221
Discontinued operations 145 3,921 --
Other 15 27 40
--------- --------- ---------
$ 18,035 $ 15,210 $ 13,467
========= ========= =========
Depreciation, depletion and amortization:
Metals-Gold $ 9,868 $ 7,282 $ 7,706
Metals-Silver 10,607 10,809 10,956
Other 265 282 321
--------- --------- ---------
$ 20,740 $ 18,373 $ 18,983
========= ========= =========
Other significant noncash items:
Metals-Gold $ 354 $ 9,241 $ 240
Metals-Silver 707 31,759 1,911
Industrial Minerals -- -- 4,638
Discontinued operations -- 159 --
Other 44 17,329 27,787
--------- --------- ---------
$ 1,105 $ 58,488 $ 34,576
========= ========= =========
Identifiable assets:
Metals-Gold $ 40,489 $ 42,667 $ 56,018
Metals-Silver 84,845 81,572 121,814
Industrial Minerals -- -- 65,580
Discontinued operations 2,714 44,057 --
Other 25,068 26,540 24,945
--------- --------- ---------
$ 153,116 $ 194,836 $ 268,357
========= ========= =========
F-31
The following is sales information for continuing operations by geographic
area for the years ended December 31 (in thousands):
2001 2000 1999
------- ------- -------
United States $15,895 $25,147 $37,725
Canada 15,951 15,274 14,791
Mexico 12,018 6,193 5,100
United Kingdom 20,771 22,417 8,903
Japan 13,018 3,556 2,268
Other foreign 7,594 3,263 4,916
------- ------- -------
$85,247 $75,850 $73,703
======= ======= =======
The following is sales information for continuing operations by country of
origin for the years ended December 31 (in thousands):
2001 2000 1999
------- ------- -------
United States $36,058 $51,019 $66,246
Venezuela 41,406 24,780 4,248
Mexico 7,783 51 3,209
------- ------- -------
$85,247 $75,850 $73,703
======= ======= =======
The following is properties, plants and equipment information for
continuing operations by geographic area as of December 31 (in thousands):
2001 2000 1999
------- ------- -------
United States $ 69,791 $ 75,073 $148,645
Venezuela 25,677 30,852 31,490
Mexico 9,125 2,418 10,858
Other South America -- -- 33
-------- -------- --------
$104,593 $108,343 $191,026
======== ======== ========
At December 31, 2001 and 2000, properties, plants and equipment by
geographic location of the discontinued operations segment are as follows (in
thousands):
2001 2000
-------- --------
United States $ 645 $ 26,347
Mexico -- 5,801
South America -- 26
-------- --------
$ 645 $ 32,174
======== ========
Sales to significant metals customers, including both the Metals-Gold
and Metals-Silver segments, as a percentage of total sales from the Metals-Gold
and Metals-Silver segments, were as follows for the years ended December 31:
2001 2000 1999
-------- -------- --------
Customer A 25.2% 24.9% 5.8%
Customer B 16.3% 16.3% 12.1%
Customer C 14.1% 8.2% 6.9%
Customer D 13.8% 15.5% 14.5%
Customer E 11.2% --% --%
F-32
Note 12: Fair Value of Financial Instruments
The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data and to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts Hecla could realize in a current market
exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale or
settlement have not been taken into consideration.
The carrying amounts for cash and cash equivalents, accounts and notes
receivable, restricted investments and current liabilities are a reasonable
estimate of their fair values. Fair value for equity securities investments is
determined by quoted market prices as recognized in the financial statements.
Fair value of forward contracts and commodity swap contracts are supplied by
Hecla's counterparties and reflect the difference between the contract prices
and forward prices available on the date of valuation. The fair value of
long-term debt is based on the discounted value of contractual cash flows and at
December 31, 2001 and 2000 approximates fair value. The discount rate is
estimated using the rates currently offered for debt with similar remaining
maturities.
The estimated fair values of other financial instruments are as follows
(in thousands):
December 31,
--------------------------------------------------------------
2001 2000
--------------------------- --------------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------- ----- ------- -----
Financial assets (liabilities):
Gold forward sales contracts $ 256 $ 576 $ -- $ (1,935)
Gold lease rate swap (56) (56) -- (136)
F-33
Note 13: Loss per Common Share
The following table presents a reconciliation of the numerators (net
income (loss)) and denominators (shares) used in the basic and diluted loss per
common share computations. Also shown is the effect that has been given to
declared and undeclared cumulative preferred dividends in arriving at loss
applicable to common shareholders for the years ended December 31, 2001, 2000
and 1999, in computing basic and diluted loss per common share (dollars and
shares in thousands, except per share amounts). For the years ended December 31,
2001 and 2000, $8.1 million and $4.0 million of dividends, respectively, have
not been declared or paid.
2001 2000 1999
--------------------------------- -------------------------------- ---------------------------------
Weighted Weighted Weighted
Net Income Average Per Share Average Per Share Average Per Share
(loss) Shares Amount Net Loss Shares Amount Net Loss Shares Amount
------ ------ ------ -------- ------ ------ -------- ------ ------
Income (loss) before
extraordinary charge and
cumulative effect of
change
in accounting principle $ 2,340 $(83,318) $(38,605)
Extraordinary charge, net
of tax -- (647) --
Cumulative effect of change
in accounting principle,
net of tax -- -- (1,385)
-------- -------- --------
Income (loss) before
preferred stock dividends $ 2,340 $(83,965) $(39,990)
Less: Preferred
stock dividends (8,050) (8,050) (8,050)
-------- -------- --------
Basic loss per common share
Loss applicable
to common
shareholders $ (5,710) 69,396 $ (0.08) $(92,015) 66,791 $ (1.38) $(48,040) 62,347 $ (0.77)
Effect of dilutive
securities(1) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Diluted loss per
common share $ (5,710) 69,396 $ (0.08) $(92,015) 66,791 $ (1.38) $(48,040) 62,347 $ (0.77)
======== ======== ======== ======== ======== ======== ======== ======== ========
(1) Dilutive Securities
As of December 31, 2001, 2000 and 1999, there were 2,317,000, 1,816,000
and 2,308,000 shares available for issue under granted stock options,
respectively. These options were not included in the computation of
diluted loss per common share as a loss was incurred in each of these
years, and their inclusion would be antidilutive. Hecla also has 2.3
million shares of convertible preferred stock outstanding that, if
converted, would be antidilutive, and were therefore excluded from the
determination of diluted loss per share. The calculations also exclude
1,098,801, 1,506,998 and 1,506,998 warrants, respectively, to purchase
common stock, as their exercise would be antidilutive.
Note 14: Other Comprehensive Income (Loss)
Due to the availability of net operating losses and related deferred tax
valuation allowances, there is no tax effect associated with any component of
other comprehensive income (loss). The following table lists the beginning
balance, yearly activity and ending balance of each component of accumulated
other comprehensive income (loss) (in thousands):
F-34
Unrealized Minimum Accumulated
Foreign Gains Change in Pension Other
Currency (Losses) Derivative Liability Comprehensive
Items On Securities Contracts (1) Adjustment Income (Loss)
----------- ------------- ------------- ----------- -------------
Balance December 31, 1998 $ (4,898) $ (82) $ -- $ (289) $ (5,269)
1999 change -- 109 -- 289 398
----------- ---------- ---------- ----------- -----------
Balance December 31, 1999 (4,898) 27 -- -- (4,871)
2000 change -- 13 -- -- 13
----------- ---------- ---------- ----------- -----------
Balance December 31, 2000 (4,898) 40 -- -- (4,858)
2001 change 4,898 (26) 159 -- 5,031
----------- ---------- ---------- ----------- -----------
Balance December 31, 2001 $ -- $ 14 $ 159 $ -- $ 173
=========== ========== ========== =========== ===========
(1) Included in the change in derivative contracts for the year ended December
31, 2001, is a $136,000 loss on the cumulative effect of adopting SFAS
133, $39,000 of realization on gold lease swaps in 2001 and a fair value
gain adjustment on swaps outstanding at December 31, 2001, of $256,000.
Note 15: Investment in Greens Creek Joint Venture
The Company holds a 29.73% interest in the Greens Creek mine through a
joint-venture arrangement. Hecla records its portion of the assets and
liabilities of the Greens Creek mine on the proportionate consolidation method
whereby 29.73% of the assets and liabilities of the Greens Creek mine are
included in the consolidated financial statements of Hecla. The following
summarized balance sheet as of December 31, 2001, and the related summarized
statement of operations for the year ended December 31, 2001, are derived from
the audited financial statements of the Greens Creek Joint Venture. The
financial information below is presented on a 100% basis (in thousands).
Balance Sheet:
Assets:
Current assets $ 18,666
Property, plant and equipment, net 155,028
---------
Total assets $ 173,694
=========
Liabilities and equity:
Liabilities $ 14,813
Equity 158,881
---------
Total liabilities and equity $ 173,694
=========
Summary of Operations:
Revenues $ 75,496
Gross profit $ 17,477
Operating loss $ (3,630)
Net loss $ (3,658)
The Greens Creek mine is operated through a joint-venture arrangement, and
Hecla owns an undivided interest in the assets of the venture. Under the
joint-venture agreement, the joint participants, including Hecla, are entitled
to indemnification from the other participants and are severally liable only for
the liabilities of the participants in proportion to their interest therein. If
a participant defaults on its obligations under the terms of the joint venture,
Hecla could incur losses in excess of its pro-rata share of the joint venture.
In the event any participant so defaults, the agreement provides certain rights
and remedies to the remaining participants. These include the right to force a
dilution of the percentage interest of the defaulting participant and the right
to utilize the proceeds from the sale of the defaulting party's share of
products, or its joint-venture interest in the properties, to satisfy the
obligations of the defaulting participant. Based on the information available to
Hecla, Hecla has no
F-35
reason to believe that its joint-venture participants with respect to Greens
Creek mine will be unable to meet their financial obligations under the terms of
the agreement.
Note 16: Acquisition of Monarch Resources Investments Limited
On June 25, 1999, Hecla acquired from Monarch Resources Limited all of the
outstanding stock of Monarch Resources Investments Limited, or MRIL, a Bermuda
company, as well as two subsidiaries owned by MRIL. MRIL's principal assets
include the La Camorra gold mine, located in Bolivar State in Venezuela, and the
Saladillo silver exploration property located in the Durango region of Mexico.
The acquisition price of $25.0 million consisted of $9.0 million in cash and
6,700,250 Hecla common shares which are subject to certain trading restrictions.
In addition, MRIL's seller, Monarch Resources Limited, will receive a royalty
payment on future production from purchased assets that exceed the resource at
the time of acquisition. Following Hecla's purchase of MRIL, the newly acquired
subsidiary was renamed Hecla Resources Investments Limited (HRIL).
The acquisition of MRIL has been accounted for as a purchase and,
accordingly, Hecla's consolidated financial statements include the financial
position, results of operations and cash flows of MRIL prospectively from June
25, 1999. Approximately $18.7 million of the total purchase price has been
allocated to the mineral properties at La Camorra and is amortized on a
units-of-production basis over the La Camorra mine life.
F-36
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,795 $ 7,560
Accounts and notes receivable 10,354 6,648
Inventories 14,024 10,868
Other current assets 1,754 1,426
Net assets of discontinued operations 375 2,714
--------- ---------
Total current assets 44,302 29,216
Investments 98 69
Restricted investments 6,378 6,375
Properties, plants and equipment, net 91,168 104,593
Other noncurrent assets 13,037 12,863
--------- ---------
Total assets $ 154,983 $ 153,116
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 7,354 $ 7,938
Accrued payroll and related benefits 7,008 7,832
Current portion of long-term debt 6,416 7,043
Accrued taxes 928 787
Accrued reclamation and closure costs 6,911 6,026
--------- ---------
Total current liabilities 28,617 29,626
Deferred income taxes 300 300
Long-term debt 7,376 11,948
Accrued reclamation and closure costs 43,764 46,455
Other noncurrent liabilities 7,082 6,823
--------- ---------
Total liabilities 87,139 95,152
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued 2002 -
753,402 shares and 2001 - 2,300,000 shares;
liquidation preference 2002 - $43,608 and 2001 - $127,075 188 575
Common stock, $0.25 par value, authorized 200,000,000 shares;
issued 2002 - 86,088,512 shares and 2001 - 73,068,796 shares 21,522 18,267
Capital surplus 403,823 404,354
Accumulated deficit (357,409) (364,183)
Accumulated other comprehensive income (loss) (24) 173
Less stock held by grantor trust; 2002 - 40,860 common shares
and 2001 - 102,114 common shares (132) (330)
Less stock held as unearned compensation; 2002 - 19,036 common shares
and 2001 - 19,035 common shares (6) (6)
Less treasury stock, at cost; 2002- 8,274 common shares and
2001 - 62,116 common shares (118) (886)
--------- ---------
Total shareholders' equity 67,844 57,964
--------- ---------
Total liabilities and shareholders' equity $ 154,983 $ 153,116
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-37
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2002
------------- ------------- ------------- -------------
Continuing Operations:
Sales of products $ 27,790 $ 22,501 $ 79,836 $ 63,479
-------- -------- -------- --------
Cost of sales and other direct production costs 15,482 17,064 44,248 45,067
Depreciation, depletion and amortization 5,894 5,167 17,583 14,932
-------- -------- -------- --------
21,376 22,231 61,831 59,999
-------- -------- -------- --------
Gross profit 6,414 270 18,005 3,480
-------- -------- -------- --------
Other operating expenses:
General and administrative 1,493 1,654 5,137 4,976
Exploration 1,257 455 2,987 1,749
Depreciation and amortization 22 67 90 203
Provision for closed operations and environmental matters 510 232 768 1,223
-------- -------- -------- --------
3,282 2,408 8,982 8,151
-------- -------- -------- --------
Income (loss) from operations 3,132 (2,138) 9,023 (4,671)
-------- -------- -------- --------
Other income (expense):
Interest and other income 367 1,425 1,461 2,525
Miscellaneous expense (933) (662) (842) (1,510)
Interest expense (437) (662) (1,374) (3,279)
-------- -------- -------- --------
(1,003) 101 (755) (2,264)
-------- -------- -------- --------
Income (loss) from continuing operations, before income taxes 2,129 (2,037) 8,268 (6,935)
Income tax provision (56) -- (168) --
-------- -------- -------- --------
Income (loss) from continuing operations 2,073 (2,037) 8,100 (6,935)
Discontinued operations:
Loss, net of income tax (540) (352) (1,326) (192)
Gain (loss) on disposal, net of income tax -- (67) -- 12,651
-------- -------- -------- --------
Net income (loss) 1,533 (2,456) 6,774 5,524
Preferred stock dividends (18,568) (2,013) (22,593) (6,038)
-------- -------- -------- --------
Loss applicable to common shareholders (17,035) (4,469) (15,819) (514)
-------- -------- -------- --------
Other comprehensive income (loss), net of income tax:
Cumulative effect of a change in accounting principle -- -- -- (136)
Change in derivative contracts -- (38) (256) (38)
Reclassification adjustment of loss included in net income (loss) 10 10 30 29
Unrealized holding gains (losses) on securities (26) (41) 29 (31)
Change in foreign currency items -- -- -- 4,898
-------- -------- -------- --------
Other comprehensive income (loss) (16) (69) (197) 4,722
-------- -------- -------- --------
Comprehensive income (loss) applicable to common
shareholders $(17,051) $ (4,538) $(16,016) $ 4,208
======== ======== ======== ========
Basic and diluted income (loss) per common share:
Loss from continuing operations after preferred
stock dividends $ (0.19) $ (0.06) $ (0.18) $ (0.19)
Income (loss) from discontinued operations, including gain
(loss) on disposal (0.01) -- (0.02) 0.18
-------- -------- -------- --------
Basic and diluted loss per common share $ (0.20) $ (0.06) $ (0.20) $ (0.01)
======== ======== ======== ========
Weighted average number of common shares outstanding 86,031 70,946 78,294 68,194
======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-38
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
----------------------------
September 30, September 30,
2002 2001
------------- -------------
Operating activities:
Net income $ 6,774 $ 5,524
Noncash elements included in net income:
Depreciation, depletion and amortization 17,673 15,135
Gain on sale of discontinued operations -- (12,651)
Gain on disposition of properties, plants and equipment (299) (327)
Provision for reclamation and closure costs 1,445 766
Change in net assets of discontinued operations 884 1,283
Change in assets and liabilities:
Accounts and notes receivable (3,706) (84)
Inventories (3,156) (194)
Other current and noncurrent assets (594) (1,628)
Accounts payable and accrued expenses (584) 1,794
Accrued payroll and related benefits (385) 818
Accrued taxes 141 313
Accrued reclamation and closure costs and other noncurrent liabilities (3,546) (5,317)
-------- --------
Net cash provided by operating activities 14,647 5,432
-------- --------
Investing activities:
Proceeds from sale of discontinued operations 1,585 59,761
Additions to properties, plants and equipment (9,095) (15,934)
Proceeds from disposition of properties, plants and equipment 5,705 464
Increase in restricted investments (3) (106)
Purchase of investments and change in cash
surrender value of life insurance, net -- 406
Other, net (40) (8)
-------- --------
Net cash provided (used) by investing activities (1,848) 44,583
-------- --------
Financing activities:
Common stock issued for warrants and under stock and stock option plans 2,635 428
Common stock issuance, net of offering costs -- 5,462
Borrowings on long-term debt 3,317 12,309
Repayments on long-term debt (8,516) (61,781)
-------- --------
Net cash used by financing activities (2,564) (43,582)
-------- --------
Net increase in cash and cash equivalents 10,235 6,433
Cash and cash equivalents at beginning of period 7,560 1,373
-------- --------
Cash and cash equivalents at end of period $ 17,795 $ 7,806
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-39
Notes to Consolidated Financial Statements
Note 1. Basis of Preparation of Financial Statements
In the opinion of management, the accompanying unaudited consolidated
balance sheets, consolidated statements of operations and consolidated
statements of cash flows contain all adjustments, consisting only of normal
recurring accruals, necessary to present fairly, in all material respects, the
financial position of Hecla Mining Company (the "Company" or "Hecla"). These
unaudited interim consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
related footnotes as set forth in the Company's annual report filed on Form 10-K
for the year ended December 31, 2001.
Note 2. Discontinued Operations
During 2000, in furtherance of Hecla's determination to focus its
operations on gold and silver mining and to raise cash to retire debt and
provide working capital, Hecla's board of directors made the decision to sell
the industrial minerals segment. On March 5, 2002, Hecla completed the sale of
its pet operations of the Colorado Aggregate Division (CAC) of MWCA for $1.6
million in cash. The sale of the CAC pet division did not result in a gain or
loss. Hecla continues to pursue a sale of the remaining assets of the industrial
minerals segment, although there can be no assurance that a sales transaction
will be completed. At September 30, 2002, the remaining net assets of CAC are
approximately $0.4 million. Hecla recorded a loss from discontinued operations
of approximately $0.5 million in the third quarter of 2002, or $0.01 per common
share, compared to a loss of $0.4 million in the same period in 2001. Hecla
recorded a loss from discontinued operations of approximately $1.3 million in
the first nine months of 2002, or $0.02 per common share, compared to income of
approximately $12.5 million, or $0.18 per common share, in the same period in
2001 due to a $13.0 million gain on the sale of the Kentucky-Tennessee Clay
Company, K-T Feldspar Corporation, K-T Clay de Mexico and certain other minor
inactive industrial minerals companies (collectively the K-T Group) in March
2001.
Note 3. Income Taxes
Hecla's income tax provision for the first nine months of 2002 and 2001
varies from the amount that would have been provided by applying the statutory
rate to the income before income taxes primarily due to the availability of net
operating losses that can be utilized in Mexico and in Venezuela. For the three
months and nine months ended September 30, 2002, Hecla recognized a $56,000 and
$168,000, respectively, provision for foreign income taxes.
Note 4. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2002 2001
---- ----
Concentrates, bullion, metals
in transit and other products $ 6,202 $ 4,211
Materials and supplies 7,822 6,657
-------- --------
$ 14,024 $ 10,868
======== ========
At September 30, 2002, Hecla had forward sales commitments through
December 31, 2004, for 123,786 ounces of gold at an average price of $288.25 per
ounce. Hecla intends to physically deliver metals in accordance with the terms
of the forward sales contracts. As such, Hecla has elected to designate the
contracts as normal sales in accordance with SFAS 138 and as a result, these
contracts are not required to be accounted for as derivatives under SFAS 133.
Hecla is exposed to certain losses, generally the amount by which the contract
price exceeds the spot price of a commodity, in the event of nonperformance by
the counter parties to these agreements. The London Final gold price at
September 30, 2002 was $323.70 per ounce.
F-40
Note 5. Contingencies
Bunker Hill Superfund Site
In 1994, the Company, as a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA), entered into a consent decree with the Environmental Protection Agency
(EPA) and the State of Idaho, concerning environmental remediation obligations
at the Bunker Hill Superfund site located in Kellogg, Idaho. The 1994 Consent
Decree ("1994 Decree") settled Hecla's response-cost liability under CERCLA at
the Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and
Refining Company, which was also a party to the 1994 Decree, filed for Chapter
11 bankruptcy and in January 2001, the Federal District Court approved a new
Consent Decree between Sunshine, the U.S. Government and the Coeur d'Alene
Indian Tribe which settled Sunshine's environmental liabilities in the Coeur
d'Alene Basin lawsuits described below and released Sunshine from further
obligations under the 1994 Decree. In response to a request by Hecla and ASARCO
Incorporated, the United States Federal District Court in Idaho, having
jurisdiction over the 1994 Decree, issued an Order in September 2001 that the
1994 Decree should be modified in light of a significant change in factual
circumstances not reasonably anticipated by the mining companies at the time
they signed the 1994 Decree. In its Order, the Court reserved the final ruling
on the appropriate modification to the 1994 Decree until after the issuance of
the Record of Decision on the Basin-Wide Remedial Investigation/Feasibility
Study. The EPA issued the Record of Decision ("ROD") on the Basin in September
2002, proposing a $359 million Basin clean-up plan to be implemented over 30
years. The ROD also establishes a review process at the end of the 30-year
period to determine if further remediation would be appropriate. Based on the
2001 Order issued by the Court, Hecla intends to seek relief from the work
program under the 1994 Decree within the Bunker Hill site. In addition, the
Company and ASARCO have negotiated a reduced 2002 work program with the EPA and
the State of Idaho pending the outcome of the dispute resolution over the 1994
Decree. As of September 30, 2002, the Company has estimated and accrued a
liability for remedial activity costs at the Bunker Hill site of $8.9 million.
These estimated expenditures are anticipated to be made over the next three to
five years. Although the Company believes the accrual is adequate based upon its
current estimates of aggregate costs, it is reasonably possible that the
estimate of Hecla's obligations may change in the near or long term.
Coeur d'Alene River Basin Environmental Claims
- Coeur d'Alene Indian Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against Hecla and a number of other
mining companies asserting claims for damages to natural resources downstream
from the Bunker Hill site over which the Tribe alleges some ownership or
control. The Tribe's natural resource damage litigation has been consolidated
with the United States' litigation described below.
- U.S. Government Claims
In March 1996, the United States filed a lawsuit in Idaho Federal District
Court against certain mining companies that conducted historic mining operations
in the Silver Valley of northern Idaho, including Hecla. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks recovery for alleged
damages to or loss of natural resources located in the Coeur d'Alene River Basin
in northern Idaho for which the United States asserts to be the trustee under
CERCLA. The lawsuit asserts that the defendants' historic mining activity
resulted in releases of hazardous substances and damaged natural resources
within the Basin. The suit also seeks declaratory relief that the Company and
other defendants are jointly and severally liable for response costs under
CERCLA for historic mining impacts in the Basin outside the Bunker Hill site.
Hecla has asserted a number of defenses to the United States' claims.
In May 1998, the EPA announced that it had commenced a Remedial
Investigation/Feasibility Study under CERCLA for the entire Basin, including
Lake Coeur d'Alene, in support of its response cost claims asserted in its March
1996 lawsuit. In October 2001, the EPA issued its proposed clean-up plan for the
Basin. The EPA issued the Record of Decision on the Basin in September 2002,
proposing a $359 million Basin cleanup plan to be implemented over 30 years. The
ROD also establishes a review process at the end of the 30-year period to
determine if further remediation would be appropriate.
F-41
The first phase of the trial commenced on the consolidated Coeur d'Alene
Indian Tribe's and the Federal District Court cases on January 22, 2001, and was
concluded on July 30, 2001. In the first phase of the trial, the Court has been
asked to determine the extent of liability, if any, of the defendants for the
plaintiffs' CERCLA claims. The Court has also been asked to determine the
liability of the United States for its historic involvement in the Basin. No
decision on the issues before the Court in the first phase of the litigation has
been issued. If liability is determined in the first phase, a second trial is
anticipated to be scheduled during 2003 to address damages and remedy selection.
Two of the defendant mining companies, Coeur d'Alene Mines Corporation and
Sunshine Mining and Refining Company, settled their liabilities under the
litigation during the first quarter of 2001. Hecla and ASARCO are the only
defendants remaining in the litigation.
During 2000 and into 2001, Hecla was involved in settlement negotiations
with representatives of the U.S. Government and the Coeur d'Alene Indian Tribe.
The Company also participated with certain of the other defendants in the
litigation in a State of Idaho led settlement effort. On August 16, 2001, the
Company entered into an Agreement in Principle with the United States and the
State of Idaho to settle the governments' claims for natural resource damages
and clean-up costs related to the historic mining practices in the Coeur d'Alene
Basin in northern Idaho. Since August 2001, the Company and EPA have continued
to negotiate a final consent decree based upon the terms set forth in the
Agreement in Principle. Due to a number of changes that have occurred since the
signing of the Agreement in Principle, including improvements in the
environmental conditions at Grouse Creek and lower estimated clean-up costs in
the Coeur d'Alene Basin as well as the Company's improved financial condition,
the terms of the multiple properties settlement approach set forth in the
Agreement in Principle appear no longer favorable to the Company. Therefore, the
United States, the State of Idaho and the Company have agreed to discontinue
utilizing the Agreement in Principle as a settlement vehicle. However, Hecla
anticipates further settlement negotiations with the United States and the State
of Idaho to limit its environmental clean-up liabilities for historic mining
practices in the Coeur d'Alene Basin. Due to a number of uncertainties related
to this matter, including the outcome of pending litigation and the result of
any settlement negotiations, the Company does not have the ability to estimate
what, if any, liability exists related to the Coeur d'Alene River Basin at this
time. It is reasonably possible the Company's ability to estimate what, if any,
obligation relating to the Coeur d'Alene Basin may change in the near or long
term depending on a number of factors. In addition, an adverse ruling against
the Company for liability and damages in this matter could have a material
adverse effect on Hecla.
Private Class Action Litigation
On or about January 7, 2002, a class action complaint was filed in this
matter in the Idaho District Court, County of Kootenai, against several
corporate defendants, including the Company. The Company was served with the
Complaint on January 29, 2002. The Complaint seeks certification of three
plaintiff classes of Coeur d'Alene Basin residents and current and former
property owners to pursue three types of relief: various medical monitoring
programs, a real property remediation and restoration programs, and damages for
diminution in property value, plus other damages and costs. The Company believes
the Complaint is subject to challenge on a number of bases and intends to
vigorously defend itself in this litigation. On April 23, 2002, the Company
filed a motion with the Court to dismiss the claims for relief relating to the
medical monitoring programs and the remediation and restoration programs. At a
hearing before the Idaho District Court on the Company's and other defendants'
motions held October 16, 2002, the Judge struck the complaint filed by the
plaintiffs in January 2002 and instructed the plaintiffs they have 60 days to
re-file the complaint limiting the relief requested by the plaintiffs to wholly
private damages they may have incurred from their claims of trespass and
nuisance. The Court dismissed the medical monitoring claim as a separate cause
of action and stated that any requested remedy that encroached upon the EPA's
clean up in the Silver Valley would be precluded by the pending Federal Court
case.
Insurance Coverage Litigation
In 1991, Hecla initiated litigation in the Idaho District Court, County of
Kootenai, against a number of insurance companies that provided comprehensive
general liability insurance coverage to the Company and its predecessors. Hecla
believes the insurance companies have a duty to defend and indemnify Hecla under
their policies of insurance for all liabilities and claims asserted against
Hecla by the EPA and the Tribe under CERCLA related to the Bunker Hill site and
the Basin in northern Idaho. In 1992, the Idaho State District Court ruled that
the primary insurance companies had a duty to defend Hecla in the Tribe's
lawsuit. During 1995 and 1996, Hecla entered into settlement agreements with a
number of the insurance carriers named in the litigation. Hecla has
F-42
received a total of approximately $7.2 million under the terms of the settlement
agreements. Thirty percent of these settlements were paid to the EPA to
reimburse the U.S. Government for past costs under the Bunker Hill site Consent
Decree. Litigation is still pending against one insurer with trial suspended
until the underlying environmental claims against Hecla are resolved or settled.
The remaining insurer in the litigation, along with a second insurer not named
in the litigation, is providing Hecla with a partial defense in all Basin
environmental litigation. As of September 30, 2002, Hecla had not reduced its
accrual for reclamation and closure costs to reflect the receipt of any
potential insurance proceeds.
Other Claims
In 1997, Hecla's then subsidiary, Kentucky-Tennessee Clay Company (K-T
Clay), terminated shipments (comprising approximately 1% of annual ball clay
production) sold to animal feed producers, when the Food and Drug Administration
determined trace elements of dioxin were present in poultry. Dioxin is
inherently present in ball clays generally. On September 22, 1999, Riceland
Foods (the primary purchaser of ball clay from K-T Clay used in animal feed)
commenced litigation against K-T Clay in State Court in Arkansas to recover its
losses and its insurance company's payments to downstream users of its animal
feed. The complaint alleged negligence, strict liability and breach of implied
warranties and seeks damages in excess of $7.0 million. Legal counsel retained
by the insurance company for K-T Clay had the case removed to Federal District
Court in Arkansas. In July 2000, a second complaint was filed against K-T Clay
and Hecla in State Court in Arkansas by Townsends, Inc., another purchaser of
animal feed containing ball clay sold by K-T Clay. A third complaint was filed
in the Federal District Court in Arkansas on August 31, 2000, by Archer Daniels
Midland Company, a successor in interest to Quincy Soybean Company, a third
purchaser of ball clay sold by K-T Clay and used in the animal feed industry.
The Townsends' and Archer Daniels' lawsuits allege damages totaling
approximately $300,000 and $1.4 million, respectively. These complaints contain
similar allegations to the Riceland Foods' case and legal counsel retained by
the insurance carrier is defending K-T Clay and Hecla in these lawsuits. The
Company believes that these claims comprise substantially all the potential
claims related to this matter. In January 2001, Hecla was dismissed from the
only lawsuit in which it had been named as a defendant. In March 2001, prior to
trial, K-T Clay settled the Riceland Foods' litigation against K-T Clay through
a settlement payment substantially funded by K-T Clay's insurance carrier. K-T
Clay contributed $230,000 toward the Riceland Foods' settlement. In August 2001,
the Federal District Court dismissed the Archer Daniels' litigation; however, a
similar lawsuit based upon implied warranty was refiled by Archer Daniels
against K-T Clay on October 24, 2001, in Arkansas Federal Court. The defense of
the Townsends' lawsuit is being covered by insurance. The Company believes that
K-T Clay's insurance coverage is available to cover the remaining claims. On
March 27, 2001, Hecla sold its interest in K-T Clay. However, Hecla agreed to
indemnify the purchaser of K-T Clay from all liability resulting from these
dioxin claims and litigation to the extent not covered by insurance. In July
2002, K-T Clay, through its insurance carrier, negotiated settlements of both
remaining lawsuits. The settlement payments will be funded 100% by K-T Clay's
insurance carrier. Based on the settlement agreements, the respective courts
dismissed both lawsuits.
On November 17, 2000, the Company entered into an agreement with Zemex
U.S. Corporation guaranteed by its parent, Zemex Corporation of Toronto, Canada,
to sell the stock of K-T Clay and K-T Mexico, which included the ball clay and
kaolin operations, for a price of $68.0 million. On January 18, 2001, the
Company brought suit in the United States District Court for the Northern
District of Illinois, Eastern Division against the parent, Zemex Corporation,
under its guarantee for its subsidiary's failure to close on the purchase and
meet its obligations under the November 2000 agreement. Discovery has been
completed and the Court has set the trial to commence in late January 2003. At
September 30, 2002, the Company has not recorded any potential gain from the
settlement of this litigation and has recorded the associated costs to expense
as incurred.
In March 2002, Independence Lead Mines Company ("Independence"), the
holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the
Lucky Friday mine, notified Hecla of certain alleged defaults by Hecla under the
1968 Lease Agreement between the unit owners (Independence and Hecla under the
terms of the 1968 DIA Unitization Agreement) as lessors and defaults by Hecla as
lessee and operator of the properties. Hecla is a net 81.48% interest holder
under these Agreements. Independence alleges that Hecla violated the "prudent
operator obligations" implied under the lease by undertaking the Gold Hunter
project and violated certain other provisions of the Agreement with respect to
milling equipment and calculating net profits and losses. Under the Lease
Agreement, Hecla has the exclusive right to manage, control and operate the DIA
properties, and its decisions with respect to the character of work are final.
On June 17, 2002, Independence filed a lawsuit in Idaho State
F-43
District Court seeking termination of the Lease Agreement and requesting
unspecified damages. Hecla believes that it has fully complied with all
obligations of the 1968 Lease Agreement and will be able to successfully defend
its right to continue to operate the property under the Lease Agreement.
In Mexico, a claim has been made, in one court, as to the validity of the
ownership of the Velardena mill and, in another court, the validity of a lien
that predates acquisition of the mill by Hecla's subsidiary. Recent decisions
rendered by these courts have upheld the validity of the mill sale to Hecla's
subsidiary and upheld validity of the lien as to Hecla's subsidiary as
purchaser. Hecla's subsidiary is evaluating whether to proceed with other legal
action to preclude enforcement of the lien. Although the Company believes it
holds good title to the mill, there is no assurance that Hecla will prevail in
this litigation. In addition, IIG Capital, LLC, the lender to the project loan
used to acquire the mill, agreed to indemnify Hecla for all obligations or
losses relating to these liens or claims. However, losing the litigation could
result in an interruption of production or even the loss of the mill.
The Company is subject to other legal proceedings and claims not disclosed
above which have arisen in the ordinary course of business and have not been
finally adjudicated. Although there can be no assurance as to the ultimate
disposition of these other matters, it is the opinion of management that the
outcome of these other matters will not have a material adverse effect on
Hecla's financial condition.
Note 6. Long-Term Debt and Credit Agreements
As of September 30, 2002, Hecla's wholly owned subsidiary Hecla Resources
Investments Limited (HRIL), had $5.0 million outstanding under a credit
agreement used to provide project financing at the La Camorra mine. The project
financing agreement is repayable in semiannual payments ending December 31,
2004, and had an interest rate of 4.9% at September 30, 2002.
HRIL must maintain compliance with certain financial and other restrictive
covenants related to the available ore reserves and performance of the La
Camorra mine. The Company is required to maintain hedged gold positions
sufficient to cover all dollar loans, operating expenditures, taxes, royalties
and similar fees projected for the project. At September 30, 2002, there were
123,786 ounces of gold sold forward. The forward sales agreement assumes the
ounces of gold committed to forward sales at the end of each quarter can be
leased at a rate of 1.5% for each following quarter. The Company maintains a
Gold Lease Rate Swap at a fixed rate of 1.5% on the outstanding notional volume
of the flat forward sale, with settlement being made quarterly with the Company
receiving the fixed rate and paying the current floating gold lease rate.
As of September 30, 2002, the Company has a $3.0 million outstanding
subordinated loan due in three equal semiannual payments commencing in June of
2003. The loan agreement gives the Company the option to capitalize interest
payments by adding them to the principal amount of the loan. At September 30,
2002, the interest amount added to principal was approximately $0.6 million. The
interest rate on the subordinated debt was 5.86% as of September 30, 2002.
At September 30, 2002, Hecla's wholly owned subsidiary, Minera Hecla, S.A.
de C.V. (Minera Hecla), had $5.8 million outstanding under a project loan used
to acquire a processing mill at Velardena, Mexico, to process ore mined from the
San Sebastian mine near Durango, Mexico. Under the terms of the credit facility,
Minera Hecla will make monthly payments for principal and interest over 63
months. The loan bears interest at the rate of 13%.
On March 27, 2002, Hecla entered into a $7.5 million revolving bank
agreement due in March of 2004. Amounts under the bank agreement are available
for general corporate purposes and are collateralized by Hecla's interest in the
Greens Creek Joint Venture. At September 30, 2002, there was no amount
outstanding under the revolving agreement.
On April 8, 2002, Hecla completed a sales transaction for its headquarters
building, terminating a $3.0 million revolving bank agreement collateralized by
the building. For additional information relating to the sale of the
headquarters building, see Note 9 of Notes to Consolidated Financial Statements.
Note 7. Income (Loss) per Common Share
F-44
The following table presents a reconciliation of the numerators and
denominators used in the basic and diluted income (loss) per common share
computations. Also shown is the effect that has been given to cumulative
preferred dividends in arriving at the loss applicable to common shareholders
for the three months and nine months ended September 30, 2002 and 2001, in
computing basic and diluted loss per common share (dollars and shares in
thousands, except per-share amounts). A non-cash dividend of approximately $17.6
million was included in the 2002 amounts related to the completed preferred
stock exchange offering. For additional information relating to the exchange
offering, see Note 10 of Notes to Consolidated Financial Statements.
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Income (loss) before preferred stock dividends $ 1,533 $ (2,456) $ 6,774 $ 5,524
Less: Preferred stock dividends (18,568) (2,013) (22,593) (6,038)
----------- ----------- ----------- -----------
Basic loss applicable to common shareholders $ (17,035) $ (4,469) $ (15,819) $ (514)
Effect of dilutive securities -- -- -- --
----------- ----------- ----------- -----------
Diluted loss applicable to common shareholders $ (17,035) $ (4,469) $ (15,819) $ (514)
Basic and dilutive weighted average shares 86,031 70,946 78,294 68,194
----------- ----------- ----------- -----------
Basic and diluted loss per common share $ (0.20) $ (0.06) $ (0.20) $ (0.01)
=========== =========== =========== ===========
These calculations of diluted losses per share for the three months and
nine months ended September 30, 2002 and 2001 exclude the effects of convertible
preferred stock ($37.7 million in 2002 and $115.0 million in 2001), as well as
common stock issuable upon the exercise of various stock options and warrants,
as their conversion and exercise would be antidilutive, as follows:
Three and Nine Months Ended
------------------------------
September 30,
2002 2001
----------- ------------
Stock Options 2,817,335 2,329,000
Warrants 2,000,000 1,506,998
Note 8. Business Segments
Hecla is organized and managed primarily on the basis of the principal
products being produced from its gold and silver operating units. One of the
operating units has been aggregated into the Gold segment and three of the
operating units have been aggregated into the Silver segment. General corporate
activities not associated with operating units as well as idle properties are
presented as Other.
F-45
The following tables present information about reportable segments for the
three months and nine months ended September 30 (in thousands):
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales to unaffiliated customers:
Gold $ 13,807 $ 10,634 $ 37,118 $ 28,741
Silver 13,983 11,867 42,718 34,738
----------- ----------- ----------- -----------
$ 27,790 $ 22,501 $ 79,836 $ 63,479
=========== =========== =========== ===========
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Income (loss) from operations:
Gold $ 5,242 $ 2,848 $ 12,451 $ 6,916
Silver (85) (3,037) 2,567 (5,259)
Other (2,025) (1,949) (5,995) (6,328)
----------- ----------- ----------- -----------
$ 3,132 $ (2,138) $ 9,023 $ (4,671)
=========== =========== =========== ===========
The following table presents identifiable assets by reportable segment
as of September 30, 2002, and December 31, 2001 (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Identifiable assets:
Gold $ 38,576 $ 40,489
Silver 83,114 84,845
Discontinued operations 375 2,714
Other 32,918 25,068
------------- ------------
$ 154,983 $ 153,116
============= ============
Note 9. Sale of Building
On April 8, 2002, Hecla completed a sale of its headquarters building in
Coeur d'Alene, Idaho, for $5.6 million in cash. Proceeds from the sale are for
general corporate purposes. Hecla has leased a portion of the building over a
period of five years and will amortize the gain on the sale of $0.6 million over
the lease term. Hecla has agreed to a five-year lease, including leasing
approximately 50% of the building for two years, at which time the Company can
elect to reduce the amount of lease space to 25% for the remaining three years.
The landlord may terminate the lease during the first two years of the lease
subject to certain restrictions.
Note 10. Tender Offer
On June 13, 2002, Hecla announced its intent to offer to holders of its
Series B Cumulative Convertible Preferred stock to exchange each of their
Preferred shares for seven shares of Hecla Common stock until July 25, 2002.
Hecla offered the holders of preferred stock the opportunity to exchange their
shares at a higher rate in order to limit the impact of the dividend arrearages
and to eliminate the liquidation preferences for retired preferred. The dividend
arrearages have the effect of preventing Hecla from paying any dividends on
common stock and entitle the holders of preferred stock to elect two directors
to Hecla's board of directors. The arrearages may hinder Hecla's ability to
raise capital or negotiate third-party mergers and acquisitions, and may
adversely affect the market value of Hecla's common and preferred stock. In
addition, Hecla believed that the prospect of not receiving future dividends
might be untenable to Hecla's preferred holders and that they should have the
opportunity to exchange their shares for a more actively traded security. A
total of 1,546,598 shares, or 67.2%, of the total number of
F-46
preferred shares outstanding was validly tendered and exchanged into 10,826,186
shares of the Company's common stock.
In the third quarter of 2002, the Company incurred a non-cash dividend of
approximately $17.6 million related to the completed exchange offering. The
$17.6 million dividend represents the difference between the value of the common
stock issued in the exchange offer and the value of the shares that were
issuable under the stated conversion terms of the preferred stock. The non-cash
dividend charge had no impact on the Company's total shareholders' equity, as
the offset was an increase in common stock and surplus. As a result of the
completed exchange offering, the total of cumulative preferred dividends is
anticipated to be $23.4 million for the year ending December 31, 2002. Beginning
in 2003, the $8.0 million annual cumulative preferred dividends that have
historically been included in income (loss) applicable to common shareholders
will be reduced to approximately $2.6 million. The completed exchange offering
also eliminated $10.9 million of previously undeclared and unpaid preferred
stock dividends.
Note 11. Hollister Development Block
On August 2, 2002, the Company, through its wholly owned subsidiary Hecla
Ventures Corporation, entered into an earn-in agreement with Rodeo Creek Gold,
Inc., a wholly owned subsidiary of Great Basin Gold Ltd. ("Great Basin"),
concerning exploration, development and production on Great Basin's Hollister
Development Block gold property, located on the Carlin Trend of Nevada. An
"earn-in" agreement is an agreement under which a party must take certain
actions in order to "earn" an interest in an entity. The agreement provides
Hecla with an option to earn a 50% working interest in the Hollister Development
Block in return for funding a two-stage, advanced exploration and development
program leading to commercial production, estimated to cost $21.8 million. Hecla
intends to fund its earn-in activities with existing cash and cash equivalents,
future cash flow from operations and amounts available under existing credit
agreements. Hecla is obligated to fund the first stage estimated to cost $10
million. Upon earn-in, Hecla will operate the mine.
Pursuant to the Earn-In Agreement, each of the Company and Great Basin
have agreed to issue a series of warrants to the other party, to purchase their
common stock exercisable within two years at prevailing market prices at the
time of their issuance. At execution of the agreement, the Company issued a
warrant to purchase 2.0 million shares of Hecla common stock to Great Basin and
Great Basin issued warrants to purchase 1.0 million shares of its common stock
to Hecla. The warrant to purchase Hecla common stock is exercisable on or before
August 1, 2004 at $3.73 per share. The beneficial owner of the warrant to
purchase Hecla common stock is Great Basin Gold Ltd. The agreement obligates the
Company to issue a warrant to purchase an additional 1.0 million shares of Hecla
common stock to Great Basin when Hecla decides to commence certain development
activities, and an additional warrant to purchase 1.0 million shares of Hecla
common stock following completion of such activities. Great Basin will issue
warrants to purchase 500,000 shares of its common stock to the Company
immediately upon receipt of the second and third warrants to purchase Hecla
stock. The Company has entered into a registration rights agreement with Great
Basin that requires Hecla to use reasonable efforts to cause the shares
underlying the respective warrants to be registered within four months of the
date the warrants are issued. The Company has filed a registration statement
with respect to the shares, although such registration statement is not yet
effective. For additional information relating to the registration rights
agreement, see Note 14 of Notes to Consolidated Financial Statements. In
addition to the foregoing, the Company will pay to Great Basin from Hecla's
share of commercial production a sliding scale royalty that is dependent on the
cash operating profit per ounce of gold equivalent production.
Note 12. Block B
In March 2002, Hecla announced it had been awarded the Block B exploration
and mining lease near El Callao in the Venezuelan State of Bolivar by
CVG-Minerven (a Venezuelan government-owned gold mining company). Block B is a
1,795-hectare land position in the historic El Callao gold district that
includes the historic Chile, Laguna and Panama mines, which produced over 1.5
million ounces of gold between 1921 and 1946. Pursuant to the agreement with
CVG-Minerven, the Company paid CVG-Minerven $500,000 on September 6, 2002. Six
months thereafter, an additional payment of $1.25 million will be required, with
a final payment of $1.0 million due in September 2003. The Company will also pay
CVG-Minervan a royalty of 2% to 3% (depending on the gold price) on production
from Block B.
F-47
Note 13. New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations," which amends SFAS No. 19, and establishes a uniform
methodology for accounting for estimated reclamation and abandonment costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The statement is required to be adopted by
January 1, 2003, and the Company will record the estimated present value of
reclamation liabilities and increase the carrying value of related assets.
Subsequently, reclamation costs will be allocated to expense over the life of
the related assets and will be adjusted for changes resulting from the passage
of time and changes to either the timing or amount of the original present value
estimate underlying the obligation. The Company is currently in the process of
quantifying the effect the adoption of this statement will have on the Company's
consolidated financial statements.
The FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This statement became effective for fiscal years
beginning after December 15, 2001 and did not have an effect on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements, by rescinding SFAS No. 4, which required all gains and losses
from extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effects. As a result, the criteria
in Accounting Principles Board Opinion No. 30 will now be used to classify those
gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Finally, SFAS No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. The provision of SFAS No. 145
that amends SFAS No. 13 is effective for transactions occurring after May 15,
2002, with all other provisions of SFAS No. 145 being required to be adopted by
the Company in its consolidated financial statements for the first quarter of
fiscal 2003. Management currently believes that the adoption of SFAS No. 145
will not have a material impact on the Company's consolidated financial
statements.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Management currently believes the adoption of SFAS No.
146 will not have a material impact on the Company's consolidated financial
statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." SFAS No. 147 removes the special distinction of financial
institution acquisitions from the scope of both SFAS No. 72 and FASB
Interpretation No. 9. The former method of recognizing any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
assets as an unidentifiable intangible asset no longer applies to acquisitions
of financial institutions or branches of financial institutions. These
acquisitions will be accounted for in accordance with FASB Statements Nos. 141
and 142, which will require the recording of goodwill that is not amortized, but
rather tested for impairment. Further this Statement amends SFAS No. 144, to
include in its scope long-term customer relationships such as depositor and
borrower relationship intangible assets and credit cardholder intangible assets.
The adoption of SFAS No. 147 will not have any impact on the Company's
consolidated financial statements.
F-48
Note 14. Subsequent Events
During October 2002, the Company filed a Registration Statement with the
Securities and Exchange Commission covering 5,995,248 shares of Hecla common
stock that may be offered or sold from time to time by Great Basin Gold Ltd.
("Great Basin"), Hecla Mining Company Retirement Plan and Lucky Friday Pension
Plan. Although this Registration Statement has been filed, the Statement has not
become effective. For additional information regarding Great Basin, see Note 11
of Notes to Consolidated Financial Statements.
Hecla Mining Company Retirement Plan and Lucky Friday Pension Plan (the
Hecla Benefit Plans) are employee benefit plans in which certain employees can
participate. Copper Mountain Trust, the trustee for each Hecla Benefit Plan,
purchased Hecla stock at the instruction of each Hecla Benefit Plan's
independent fiduciary, Consulting Fiduciaries, Inc. In connection with the
purchase, each plan received the right to request that the Company register the
shares of common stock held by each plan. In connection with prudent investment
strategy and in order to comply with certain guidelines governing the
concentration and size of investments held by Hecla employee benefit plans,
Hecla's board of directors has instructed management to work with the Hecla
Benefit Plans to reduce their equity investments including Hecla common stock.
F-49
20,000,000 Shares
Hecla Mining Company
Common Stock
-------------------
PROSPECTUS
__________, 2003
-------------------
1
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, all of which are to
be borne by us, in connection with the registration, issuance, and distribution
of the securities being registered hereby. All amounts are estimates except the
SEC registration fee.
SEC Registration Fee......................... $ 10,813
NASD fees.................................... 12,253
NYSE Listing Fees............................ 110,800
Legal Fees and Expenses...................... 150,000
Accountants' Fees and Expenses............... 75,000
Printing Expenses............................ 100,000
Blue Sky Expenses............................ 10,000
Miscellaneous................................ 31,134
---------
Total..................................... $ 500,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
We are organized under the Delaware General Corporation Law (DGCL) which
empowers Delaware corporations to indemnify any director or officer, or former
director or officer, who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that such person is or was a
director or officer of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in connection with such action,
suit or proceeding, provided that such director or officer acted in good faith
in a manner reasonably believed to be in, or not opposed to, the best interests
of the corporation, and, with respect to any criminal action or proceeding,
provided further that such director or officer has no reasonable cause to
believe his conduct was unlawful.
The DGCL also empowers Delaware corporations to provide similar indemnity
to any director or officer, or former director or officer, for expenses,
including attorneys' fees, actually and reasonably incurred by the person in
connection with the defense or settlement of actions or suits by or in the right
of the corporation if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the interests of the corporation,
except in respect of any claim, issue or matter as to which such director or
officer shall have been adjudged to be liable to the corporation unless and only
to the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability, but in view of all of the circumstances of the case, such director
or officer is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
The DGCL further provides that (i) to the extent a present or former
director or officer of a corporation has been successful in the defense of any
action, suit or proceeding described above or in the defense of any claim, issue
or matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person, in connection
therewith; and (ii) indemnification and advancement of expenses provided for,
by, or granted pursuant to, the DGCL shall not be deemed exclusive of any other
rights to which the indemnified party may be entitled.
The DGCL permits a Delaware corporation to purchase and maintain on behalf
of any director or officer, insurance against liabilities incurred in such
capacities. The DGCL also permits a corporation to pay expenses incurred by a
director or officer in advance of the final disposition of an action, suit or
proceeding, upon receipt of an undertaking by the director or officer to repay
such amount if it is determined that such person is not entitled to
indemnification.
The DGCL further permits a corporation, in its original certificate of
incorporation or an amendment thereto, to eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for violations of the director's fiduciary duty except: (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
DGCL (providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions) or (iv) for any transaction from which
a director derived an improper personal benefit.
Our certificate of incorporation eliminates the personal liability of
directors to us or our stockholders for monetary damages for breach of fiduciary
duty to the extent permitted by Delaware law. Our certificate of incorporation
and by-laws provide that we will indemnify our officers and directors to the
extent permitted by Delaware law.
In addition, we have entered into an Indemnification Agreement with each
of our officers and directors, which states that if the officer or director that
is a party to the agreement was, is, or becomes a party to or witness or other
participant in, or is threatened to be made a party to, or witness or other
participant in, any threatened, pending, or completed action, suit, or
proceeding or any inquiry or investigation, whether conducted by us or any other
party, by reason of (or arising in part out of) any event or occurrence related
to the fact that the officer or director is or was our director, officer,
employee, agent, or fiduciary or is or was serving at our request as a director,
officer, employee, trustee, agent, or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust, or other enterprise or
by reason of anything done or not done by the officer or director that is a
party to the agreement in any such capacity, we shall indemnify such officer or
director to the fullest extent permitted by law against any and all attorneys'
fees and all other costs, expenses, and obligations paid or incurred in
connection with investigating, defending, being a witness in, or participating
in any claim described above, and judgments, fines, penalties, and amounts paid
in settlement of any claim described above, provided that a member or members of
our board of directors has not concluded upon review of the claim that the
director or officer party to the agreement would not be permitted to be
indemnified under applicable law. Prior to our change in control, as defined in
the agreement, the director or officer who is a party to the agreement will not
be entitled to indemnification in connection with any claim described above by
such officer or director against us or any of our other directors or officers
except under certain circumstances. In the event of a change in control, as
defined in the agreement, other than a change in control which has been approved
by a majority of our Board of Directors who were directors immediately prior to
such change in control, then with respect to all matters thereafter rising
concerning the rights of the director or officer party to the agreement to
indemnity payments, we are required to seek legal advice only from special,
independent counsel selected by such officer or director and approved by us.
The foregoing statements are subject to the detailed provisions of the
DGCL and our certificate of incorporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We sold 5,749,883 shares of common stock to Copper Mountain Trust on
August 27, 2001 for an aggregate purchase price of $5,462,388.85. Copper
Mountain Trust purchased such stock on behalf of Hecla Mining Company Retirement
Plan (4,610,174 shares) and Lucky Friday Pension Plan (1,139,709 shares). The
sale of stock was exempt from registration under Section 5 of the Securities Act
pursuant to Section 4(2) of the Securities Act and pursuant to Rule 506 of
Regulation D under the Securities Act. In the purchase agreement for the shares
of common stock, Copper Mountain Trust represented that it is an accredited
investor as defined under Rule 501(a) of Regulation D under the Securities Act.
On August 2, 2002, through our wholly owned subsidiary Hecla Ventures
Corporation, we entered into an earn-in agreement with Rodeo Creek Gold Inc., a
wholly owned subsidiary of Great Basin Gold Ltd. ("Great Basin"). An "earn-in"
agreement is an agreement under which a party must take certain actions in order
to "earn" an interest in an entity. Pursuant to the Earn-In Agreement, we have
agreed to issue to Great Basin and Great Basin has agreed to issue to us, a
series of warrants to purchase common stock exercisable within two years at
prevailing market prices at the time of their issuance. At execution of the
agreement, we issued a warrant to purchase 2.0 million shares of our common
stock to Great Basin and Great Basin issued warrants to purchase 1.0 million
shares of its common stock to us. The warrant to purchase our common stock is
exercisable on or before August 1, 2004 at
$3.73 per share. The beneficial owner of the warrant to purchase our common
stock is Great Basin Gold Ltd. The agreement obligates us to issue a warrant to
purchase an additional 1.0 million shares of our common stock to Great Basin
when we decide to commence certain development activities, and an additional
warrant to purchase 1.0 million shares of our common stock following completion
of such activities. Great Basin will issue warrants to purchase 500,000 shares
of its common stock to us immediately upon receipt of each of the second and
third warrants to purchase our stock. We have entered into a registration rights
agreement with Great Basin that requires us to use reasonable efforts to cause
the shares underlying the respective warrants to be registered within four
months of the date the warrants are issued. THE SALE OF WARRANTS WAS EXEMPT FROM
REGISTRATION UNDER SECTION 5 OF THE SECURITIES ACT pursuant to Section 4(2) of
the Securities Act and PURSUANT TO RULE 506 OF REGULATION D UNDER THE SECURITIES
ACT.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index at the end of this registration statement.
The Financial Statement Schedules are not included because they are not
applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereto) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Coeur d'Alene, State of Idaho on January 7, 2003.
HECLA MINING COMPANY
By: /s/ Arthur Brown
------------------------------------
Arthur Brown
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on January 7, 2003.
Signature Title
/s/ Arthur Brown Chairman and Chief Executive Officer
--------------------------------- (principal executive officer)
Arthur Brown
/s/ Phillips S. Baker, Jr. President, Chief Operating Officer,
--------------------------------- Chief Financial Officer (principal
Phillips S. Baker, Jr. financial officer) and Director
/s/ Lewis E. Walde
--------------------------------- Vice President - Controller (principal
Lewis E. Walde accounting officer) and Treasurer
/s/ John E. Clute Director
---------------------------------
John E. Clute
/s/ Joe Coors, Jr. Director
---------------------------------
Joe Coors, Jr.
/s/ Theodore Crumley Director
---------------------------------
Theodore Crumley
/s/ Charles L. McAlpine Director
---------------------------------
Charles L. McAlpine
/s/ Jorge E. Ordonez C. Director
---------------------------------
Jorge E. Ordonez C.
/s/ Anthony P. Taylor Director
---------------------------------
Anthony P. Taylor
Exhibit Index
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1.1 Form of Purchase Agreement.*
3.1(a) Certificate of Incorporation of the Registrant as amended to date.
Filed as exhibit 3.1 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1987 (File No. 1-8491) and incorporated
herein by reference.
3.1(b) Certificate of Amendment of Certificate of Incorporation of the
Registrant. Filed as exhibit 3.1(b) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987 (File No. 1-8491) and
incorporated herein by reference.
3.2 By-Laws of the Registrant as amended to date. Filed as exhibit 3(ii)
to Registrant's Current Report on Form 8-K dated November 13, 1998
(File No. 1-8491) and incorporated herein by reference.
4.1(a) Certificate of Designations, Preferences and Rights of Series A
Junior Participating Preferred Stock of the Registrant. Filed as
exhibit 4.1(d)(e) to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 (File No. 1-8491) and incorporated
herein by reference.
4.1(b) Certificate of Designations, Preferences and Rights of Series B
Cumulative Convertible Preferred Stock of the Registrant. Filed as
exhibit 4.5 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993 (File No. 1-8491) and incorporated
herein by reference.
4.2 Rights Agreement dated as of May 10, 1996, between Hecla Mining
Company and American Stock Transfer & Trust Company, which includes
the form of Rights Certificate of Designation setting forth the
terms of the Series A Junior Participating Preferred Stock of Hecla
Mining Company as Exhibit A and the summary of Rights to Purchase
Preferred Shares as Exhibit B. Filed as exhibit 4 to Registrant's
Current Report on Form 8-K dated May 10, 1996 (File No. 1-8491) and
incorporated herein by reference.
4.3 Stock Purchase Agreement dated as of August 27, 2001 between Hecla
Mining Company and Copper Mountain Trust. Filed as exhibit 4.3 to
Registrant's Registration Statement on Form S-1 filed on October 7,
2002 (File No. 333-100395) and incorporated herein by reference.
4.4 Warrant Agreement dated August 2, 2002 between Hecla Mining Company
and Great Basin Gold Ltd. Filed as exhibit 4.4 to Registrant's
Registration Statement on Form S-1 filed on October 7, 2002 (File
No. 333-100395) and incorporated herein by reference.
4.5 Registration Rights Agreement dated August 2, 2002 between Hecla
Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.5 to
Registrant's Registration Statement on Form S-1 filed on October 7,
2002 (File No. 333-100395) and incorporated herein by reference.
Certain instruments defining the rights of holders of long-term debt
of the Registrant and its consolidated subsidiaries, where the total
amount of securities authorized thereunder does not exceed 10% of
the Registrant's consolidated total assets, are not filed herewith
pursuant to Item 601(b)(ii)(A) of Regulation S-K. The Registrant
agrees to furnish a copy of any such instrument to the Commission
upon request.
5.1 Opinion (including consent) of Michael B. White, Esq. as to the
legality of the securities being registered.*
10.1 Employment agreement dated June 1, 2000, between Hecla Mining
Company and Arthur Brown. (Registrant has substantially identical
agreements with each of Messrs. Phillips S. Baker, Thomas F. Fudge,
Michael H. Callahan, Ronald W. Clayton, Lewis E. Walde and Ms. Vicki
J. Veltkamp. Such substantially identical agreements are not
included as separate Exhibits.) Filed as exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 (File No. 1-8491) and
incorporated herein by reference.
10.2(a) 1987 Nonstatutory Stock Option Plan of the Registrant. Filed as
exhibit B to Registrant's Proxy Statement dated March 20, 1987 (File
No. 1-8491) and incorporated herein by reference.
10.2(b) Hecla Mining Company 1995 Stock Incentive Plan. Filed as exhibit
10.4(c) to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 (File No. 1-8491) and incorporated
herein by reference.
10.2(c) Hecla Mining Company Stock Plan for Nonemployee Directors. Filed as
exhibit B to Registrant's Proxy Statement dated March 27, 1995 (File
No. 1-8491) and incorporated herein by reference.
10.2(d) Hecla Mining Company Key Employee Deferred Compensation Plan. Filed
as exhibit 4.3 to Registrant's Registration Statement on Form S-8
filed on July 24, 2002 (File No. 1-8491) and incorporated herein by
reference.
10.3(a) Hecla Mining Company Retirement Plan for Employees and Supplemental
Retirement and Death Benefit Plan. Filed as exhibit 10.11(a) to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1985 (File No. 1-8491) and incorporated herein by reference.
10.3(b) Supplemental Excess Retirement Master Plan Documents. Filed as
exhibit 10.5(b) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 (File No. 1-8491) and incorporated
herein by reference.
10.3(c) Hecla Mining Company Nonqualified Plans Master Trust Agreement.
Filed as exhibit 10.5(c) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference.
10.4 Form of Indemnification Agreement dated May 27, 1987, between Hecla
Mining Company and each of its Directors and Officers. Filed as
exhibit 10.15 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987 (File No. 1-8491) and incorporated
herein by reference.
10.5 Summary of Short-term Performance Payment Plan. Filed as exhibit
10.7 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-8491) and incorporated herein by
reference.
10.6(a) Amended and Restated Golden Eagle Earn-In Agreement between Santa Fe
Pacific Gold Corporation and Hecla Mining Company dated as of
September 6, 1996. Filed as exhibit 10.11(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996 (File No. 1-8491) and incorporated herein by reference.
10.6(b) Golden Eagle Operating Agreement between Santa Fe Pacific Gold
Corporation and Hecla Mining Company dated as of September 6, 1996.
Filed as exhibit 10.11(b) to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 1-8491) and
incorporated herein by reference.
10.6(c) First Amendment to the Amended and Restated Golden Eagle Earn-in
Agreement effective September 5, 2002 by and between Echo Bay Mines
Ltd. and Hecla Mining Company. Filed as exhibit 10.6(c) to
Registrant's Registration Statement on Form S-1 filed on October 7,
2002 (File No. 333-100395) and incorporated herein by reference
10.7 Limited Liability Company Agreement of the Rosebud Mining Company,
LLC among Santa Fe Pacific Gold Corporation and Hecla Mining Company
dated as of September 6, 1996. Filed as exhibit 10.12 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (File No. 1-8491) and incorporated herein by
reference.
10.8 Restated Mining Venture Agreement among Kennecott Greens Creek
Mining Company, Hecla Mining Company and CSX Alaska Mining Inc.
dated May 6, 1994. Filed as exhibit 99.A to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994 (File No.
1-8491) and incorporated herein by reference.
10.9 Stock Purchase Agreement dated November 17, 2000, between Hecla
Mining Company and Zemex U.S. Corporation. Filed as exhibit 10.1 to
Registrant's Current Report on Form 8-K dated November 17, 2000
(File No. 1-8491) and incorporated herein by reference.
10.10 Stock Purchase Agreement dated February 27, 2001, between Hecla
Mining Company and IMERYS USA, Inc. Filed as exhibit 99 to
Registrant's Current Report on Form 8-K dated March 27, 2001 (File
No. 1-8491) and incorporated herein by reference.
10.11 Form of Retention Agreement dated July 20, 2001, between Hecla
Mining Company and Arthur Brown. (Registrant has substantially
identical agreements, with each of Messrs. Thomas F. Fudge, Lewis E.
Walde and Ms. Vicki J. Veltkamp. Filed as exhibit 10.19 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 (File No. 1-8491) and incorporated herein by
reference.
10.12 Retention Agreement dated November 6, 2001 between Hecla Mining
Company and Phillips S. Baker, Jr.**
10.13 Real Estate Purchase and Sale Agreement between Hecla Mining Company
and JDL Enterprises, LLC dated October 19, 2001. Filed as exhibit
10.21 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No.
1-8491) and incorporated herein by reference.
10.14 Credit Agreement dated March 27, 2002 between Hecla Mining Company
and IIG Capital LLC. Filed as exhibit 10.18 to Registrant's
Registration Statement on Form S-1 filed on October 7, 2002 (File
No. 333-100395) and incorporated herein by reference.
10.15 Earn-In Agreement dated August 2, 2002 between Hecla Ventures Corp.
and Rodeo Creek. Filed as exhibit 10.19 to Registrant's Registration
Statement on Form S-1 filed on October 7, 2002 (File No. 333-100395)
and incorporated herein by reference.
10.16 Lease Agreement dated September 5, 2002 between Hecla Mining Company
and CVG-Minerven. Filed as exhibit 10.20 to Registrant's
Registration Statement on Form S-1 filed on October 7, 2002 (File
No. 333-100395) and incorporated herein by reference.
11. Computation of weighted average number of common shares outstanding.
Filed as exhibit 11 to Registrant's Amendment No. 1 to Registration
Statement on Form S-1 filed on December 3, 2002 (File No.
333-100395) and incorporated herein by reference.
21. List of subsidiaries of the Registrant. Filed as exhibit 21 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001 (File No. 1-8491) and incorporated herein by reference.
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of PricewaterhouseCoopers LLP**
23.3 Consent of BDO Seidman, LLP**
23.4 Consent of SRK Consulting**
23.5 Consent of AMEC E&C Services**
---------------------
* To be filed by amendment
** Filed herewith