-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LELUppDHfIkOPb/3g5ZSoy82LdIYpjd47EWHi5pWYwzhC1eAE5Cv3PYihQSSRJKv NDoHFPWcQqFUB/wZcJNKWQ== 0000719413-99-000002.txt : 19990312 0000719413-99-000002.hdr.sgml : 19990312 ACCESSION NUMBER: 0000719413-99-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HECLA MINING CO/DE/ CENTRAL INDEX KEY: 0000719413 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 820126240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08491 FILM NUMBER: 99562435 BUSINESS ADDRESS: STREET 1: 6500 MINERAL DR STREET 2: P O BOX C8000 CITY: COEUR D ALENE STATE: ID ZIP: 83815-8788 BUSINESS PHONE: 2087694100 MAIL ADDRESS: STREET 1: 6500 MINERAL DRIVE STREET 2: NONE CITY: COEUR D'ALENE STATE: ID ZIP: 83815-8788 10-K405 1 HECLA MINING COMPANY FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 Commission File No. 1-8491 ----------------------------------------------------------- HECLA MINING COMPANY - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 82-0126240 - ------------------------------------ ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 - ------------------------------------ ------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 208-769-4100 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which each class is registered - ------------------------------------------- ------------------------------ Common Stock, par value $0.25 per share ) Preferred Share Purchase Rights for ) Series B Cumulative Convertible Preferred) New York Stock Exchange Stock, par value $0.25 per share ) ------------------------------ - -------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes XX . No . ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Registrant's voting Common Stock held by non-affiliates was $203,198,279 as of February 26, 1999. There were 55,104,618 shares of the Registrant's Common Stock outstanding as of February 26, 1999. Documents incorporated by reference herein: To the extent herein specifically referenced in Part III, the information contained in the Proxy Statement for the 1999 Annual Meeting of Shareholders of the Registrant, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the Registrant's 1998 fiscal year is incorporated herein by reference. See Part III. 2 PART I ITEM 1. BUSINESS.(1) GENERAL Hecla Mining Company (the Company or Hecla), originally incorporated in 1891, is principally engaged in the exploration, development and mining of precious and nonferrous metals, including gold, silver, lead and zinc, and certain industrial minerals. The Company owns or has interests in a number of precious and nonferrous metals properties and industrial minerals businesses. In 1998, the Company's attributable gold and silver production was approximately 127,000 ounces and 7.2 million ounces, respectively. The Company also shipped approximately 1,115,000 tons of industrial minerals products during 1998, including ball clay, kaolin, feldspar, and specialty aggregates. Additionally, the Company shipped approximately 1,078,000 cubic yards of landscape material from its MWCA subsidiary in 1998. The principal executive offices of the Company are located at 6500 Mineral Drive, Coeur d'Alene, Idaho 83815-8788, telephone (208) 769-4100. Statements made which are not historical facts, such as anticipated production, costs or sales performance are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied. These risks and uncertainties include, but are not limited to, metals price volatility, volatility of metals production, industrial minerals market conditions and project development risks. (See Investment Considerations). The Company's principal producing metals properties include the Lucky Friday silver mine, located near Mullan, Idaho, which is a significant primary producer of silver in North America; the Greens Creek silver mine, located near Juneau, Alaska, a large polymetallic mine in which the Company owns a 29.7% interest, where operations recommenced in July 1996; the Rosebud gold mine, located near Winnemucca, Nevada, in which the Company owns a 50% interest, and where operations began in March 1997; and the La Choya gold mine, located in Sonora, Mexico, where mining was completed in December 1998. - -------------- (1) For difinitions of certain mining trms used int his description, see "Glossary of Certain Mining Terms" at the end of Item 1, of this Form 10-K, page 41. -1- 3 The following table presents certain information regarding the Company's metal mining and development properties, including the relative percentage each contributed to the Company's 1998 revenues: Date Ownership Percentage of Name of Property Acquired Interest 1998 Revenue(1) - ---------------- -------- --------- ------------ La Choya 1991 100.0% 7.6% Greens Creek 1988 29.7% 13.6% Rosebud 1994 50.0% 12.6% Lucky Friday 1958 100.0% 12.9% American Girl 1994 47.0% 0.5% ___________________ (1) In addition to the percentage contributions of revenue from the metal mines, the industrial minerals segment contributed 52.8% of revenue in 1998. The Company's industrial minerals segment consists of Kentucky- Tennessee Clay Company (ball clay and kaolin divisions), K-T Feldspar Corporation, K-T Clay de Mexico, S.A. de C.V., and MWCA, Inc. MWCA operates two divisions: the Colorado Aggregate division and the Mountain West Products division. The Company's industrial minerals segment is a significant producer of three of the four basic ingredients required to manufacture ceramic and porcelain products, including sanitaryware, pottery, dinnerware, electric insulators, and tile. At current production rates, the Company has over 20 years of Proven and Probable ore reserves of ball clay, kaolin and feldspar. The Company has experienced losses from operations for each of the last eight years. For the year ended December 31, 1998, the Company reported a net loss of approximately $0.3 million (before preferred dividends of $8.1 million), or $0.01 per share of common stock, compared to a net loss of approximately $0.5 million (before preferred stock dividends of $8.1 million), or $0.01 per share of common stock, for the year ended December 31, 1997. The Company's strategy is to focus its efforts and resources on expanding its gold and silver reserves and industrial minerals operations through a combination of acquisition and exploration efforts. In order to provide funds for possible metals and industrial minerals expansion projects, as well as to reduce indebtedness, the Company has decided to attempt to sell MWCA, Inc. in 1999, although there can be no assurance that the Company will be successful. The Company has also implemented cost cutting measures to preserve cash in the current low metals price environment. -2- 4 The Company's domestic exploration plan for 1999 consists primarily of exploring for additional reserves at, or in the vicinity of, its domestic owned properties. The Company's foreign exploration plan for 1999 will focus on exploration targets in Mexico and South America. At the same time, the Company will continue to evaluate acquisition and other exploration opportunities. The Company's revenues and profitability are strongly influenced by global prices of silver, gold, lead and zinc. Metals prices fluctuate widely and are affected by numerous factors beyond the Company's control, including inflation and worldwide forces of supply and demand. The aggregate effect of these factors on the Company cannot be accurately predicted. Sales of metal concentrates and metal products are made principally to custom smelters and metal traders. Industrial minerals are sold principally to domestic, Mexican, and other foreign manufacturers and wholesalers. The percentage of revenue contributed by each class of product is reflected in the following table: Years ------------------------ Product 1998 1997 1996 ----------------- ---- ---- ---- Gold 21.2% 34.9% 40.7% Silver, lead and zinc 26.0 19.7 10.7 Industrial minerals 44.4 38.4 40.0 All others(1) 8.4 7.0 8.6 (1) All others include sales from MWCA-Mountain West Products division exclusive of scoria sales. Refer to Note 9 of Notes to Consolidated Financial Statements forming part of the Company's audited Consolidated Financial Statements for the year ended December 31, 1998 (the Notes to Consolidated Financial Statements) for information with respect to export sales. -3- 5 The table below summarizes the Company's production and average cash operating cost, average total cash cost, and average total production cost per ounce for gold and silver for each period indicated:
Years ------------------------------------ Products 1998 1997 1996 -------- ----------- ---------- ----------- Gold (ounces)(1) 127,433 174,164 169,376 Silver (ounces)(2) 7,244,657 5,147,009 3,024,911 Lead (tons) 34,455 24,995 22,660 Zinc (tons) 20,155 16,830 7,464 Average cost per ounce of gold produced: Cash operating cost $ 177 $ 166 $ 273 Total cash cost $ 189 $ 173 $ 276 Total production cost $ 262 $ 239 $ 364 Average cost per ounce of silver produced: Cash operating cost $ 3.96 $ 3.58 $ 4.24 Total cash cost $ 3.96 $ 3.58 $ 4.24 Total production cost $ 5.37 $ 5.42 $ 5.47 Industrial minerals (tons shipped) 1,114,987 1,025,993 1,072,319 (1) The decrease in gold production from 1997 to 1998 is principally due to decreased production at La Choya of 38,205 ounces due to completion of mining activities in December 1998 and decreased production at Grouse Creek of 27,158 ounces due to the suspension of operations in April 1997. These decreases were partially offset by increased production at Rosebud of 18,522 ounces due to operating a full year in 1998 versus nine months in 1997. The increase in gold production from 1996 to 1997 is principally due to increased gold production of 46,974 ounces at the Rosebud mine, where operations commenced in April 1997; and increased gold production from the Greens Creek mine of 13,518 ounces due to the mine operating the entire year after operations recommenced in July 1996. These increases were partially offset by decreased gold production at the Grouse Creek mine of 34,242 ounces due to the suspension of operations in April 1997 and decreased gold production from the American Girl mine of 17,824 ounces due to the suspension of operations in the fourth quarter of 1996. (2) Increased silver, lead, and zinc production from 1997 to 1998 is principally due to increased production at Lucky Friday due to increased silver grade and increased tons mined from the Lucky Friday expansion area in 1998 and increased silver production at Rosebud due to increased tons mined. These increases were partially offset by decreased silver, lead, and zinc production at Greens Creek and other idle properties. Increased silver, lead, and zinc production from 1996 to 1997 is principally due to increased silver, lead and zinc production from the Greens Creek mine due to twelve months of operations at Greens Creek in 1997 following the recommencement of operations in July 1996.
-4- 6 METALS - SILVER SEGMENT LUCKY FRIDAY MINE - IDAHO The Lucky Friday, a deep underground silver and lead mine, located in northern Idaho and 100% owned by the Company, has been a producing mine for the Company since 1958. The cash operating cost, total cash cost, and total production cost per ounce of silver decreased from $5.47, $5.47, and $6.72, respectively, in 1997 to $4.71, $4.71, and $5.59, respectively, in 1998. The decreases were due principally to lower mining costs, economies of scale and higher ore grade in the newly developed Lucky Friday expansion area. In 1998, the expansion area produced 73% of total tons milled. 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 1200-foot level to and below the 5930-foot level, which is currently being developed. During 1991, the Company 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. In an extensive exploration program in 1992, the Company undertook an underground evaluation of the Gold Hunter property mineralization. The program referred to now as the "Lucky Friday Expansion Project," discovered mineralization containing significant amounts of silver and lead in an area accessible from the 4050-foot level of the Lucky Friday mine. The exploration program and a preliminary feasibility study were completed during 1993. In 1994, the Company approved the first phase of development of the Lucky Friday expansion project. The first phase consisted primarily of driving an access drift from the 4900-foot level of the Lucky Friday workings, which intersected the Gold Hunter ore zone approximately 850 feet below the previously explored area. The access drift advanced 3,000 feet in 1995, and exploratory drilling started in the second quarter of 1996. A final feasibility study was completed in 1997, and the Company's Board of Directors approved a $16.0 million development plan. Initial production from the project was achieved in 1997, and full production was reached on schedule in the second quarter of 1998. The Company controls the Gold Hunter property under a long-term operating agreement, which entitles the Company, as operator, to a -5- 7 79.08% interest in the net profits from operations from the Gold Hunter properties. The Company will be obligated to pay a royalty after it has recouped its costs to explore and develop the properties. As of December 31, 1998, unrecouped costs totaled approximately $33.0 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 1998, ore was processed at a rate of approximately 1,037 tons per day at the Lucky Friday mine site. The flotation process produces both a silver-lead concentrate and a zinc concentrate. During 1998, approximately 94.6% of the silver, 93.4% of the lead, and 38.5% of the zinc were economically recovered. The Lucky Friday mine/mill facility, surface and underground equipment are in good working condition. The mill was originally constructed approximately 40 years ago. The Company maintains and modernizes the plant and equipment on an ongoing basis to keep the plant and equipment in good physical and operating condition. The net book value of the Lucky Friday mine property and its associated plant and equipment was approximately $41.3 million as of December 31, 1998. Ultimate reclamation activities contemplated include stabilization of tailings ponds and waste rock areas. Reclamation expense recognized in 1998 was approximately $30,000, including $16,000 for concurrent reclamation activities. Even though recent historical total production costs have exceeded revenues realized from the sale of recovered metals, based upon management's estimates of metal to be recovered and considering estimated future production costs and metals prices, the Company's management believes that the carrying value of the Lucky Friday mine is recoverable from future undiscounted cash flows generated from operations and the estimated salvage value of the surface plant, equipment and the value associated with property rights. In evaluating the carrying value of the Lucky Friday mine, the Company used metals prices of $5.50 per ounce silver in 1999, $5.75 silver in 2000, and $6.00 silver thereafter; $0.25 per pound lead in 1999 and 2000, and then $0.27 lead thereafter; and $0.50 per pound zinc in 1999, and then $0.55 zinc thereafter. These prices were utilized as the Company's management believes that they are reasonable estimates of prices over the remaining life of the mine. In contrast to longer-term prices used for estimating life-of- mine revenues and resultant cash flows, the Company uses near-term -6- 8 estimates of metal prices to estimate ore reserves as they more closely reflect the current economic conditions at the measurement date. Estimated future production costs were derived from actual production costs currently being experienced at the Lucky Friday mine, adjusted for anticipated changes resulting from the execution of the Company's mine production plan. Based upon these projected factors, the Company currently estimates that future cash and total production costs per ounce of silver produced over the remaining life of mine would be approximately $4.51 and $5.91, respectively. As these amounts are derived from numerous estimates, the most volatile of which are metal prices, there can be no assurance that actual results will correspond to these estimates. Historically, the Lucky Friday silver-lead concentrate has been shipped primarily to the ASARCO smelter in East Helena, Montana. With the increased production in 1998 from the Gold Hunter orebody, the silver-lead concentrates were shipped to five different smelters in Canada, the United States, Mexico, and Europe. In 1999, it is estimated that 45% of the Lucky Friday production will be shipped to ASARCO's smelter in East Helena, Montana, 35% to Met-Mex Penoles' smelter in Torreon, Coahuila, Mexico, and 20% to Noranda's smelter in Belledune, New Brunswick, Canada. The Lucky Friday zinc concentrates are shipped to Cominco's smelter in Trail, British Columbia, Canada. Based on the Company's experience in operating deep mines in the Coeur d'Alene Mining District, where the persistence of mineralization to greater depths may be reliably inferred from operating experience and geological data, the Company's policy is to develop new levels at a minimum rate consistent with the requirements for uninterrupted and efficient ore production. A new level is developed and brought into production only to replace diminishing ore reserves from levels being mined out. The length and strength of the orebodies have not materially diminished on the lowest developed level of the mine. Based upon this factor, drilling data and extensive knowledge of the geologic character of the deposit, and many years of operating experience in the Lucky Friday mine and Coeur d'Alene Mining District, there are no geologic factors known at present which appear to prevent the assumed continuation of the Lucky Friday and Gold Hunter orebodies for a considerable distance below the lowermost working level. Although there can be no assurance of the extent and quality of the mineralization which may be developed at greater depths, the existing data and operating experience justify, in the opinion of the Company's management and based upon industry standards, the conclusion that the mineralization will extend well below the lowest developed levels. Information with respect to the Lucky Friday mine's production, Proven and Probable ore reserves, and average cost per ounce of -7- 9 silver produced for the past three years is set forth in the table below:
Years ---------------------------------- Production (100%) 1998 1997 1996 - ------------------- --------- --------- --------- Ore milled (tons) 263,502 193,399 188,272 Silver (ounces) 4,137,135 1,943,373 1,906,333 Gold (ounces) 925 853 947 Lead (tons) 27,708 19,270 20,971 Zinc (tons) 2,648 3,168 3,653 Proven and Probable Ore Reserves(1) - --------------- Total tons 1,220,820 1,388,590 1,245,660 Silver (ounces per ton) 15.9 14.8 14.9 Lead (percent) 10.5 10.2 11.3 Zinc (percent) 1.8 1.9 2.2 Contained silver (ounces) 19,459,256 20,532,121 18,512,024 Contained lead (tons) 128,748 141,470 140,608 Contained zinc (tons) 21,965 25,703 26,872 Average Cost per Ounce of Silver Produced - ------------------ Cash operating costs $ 4.71 $ 5.47 $ 4.24 Total cash costs $ 4.71 $ 5.47 $ 4.24 Total production costs $ 5.59 $ 6.72 $ 5.47 _________________________________ (1) At the Lucky Friday mine, reserves lying above or between developed levels are classified as Proven reserves. Reserves lying below the lowest developed level, projected to 200 feet below the lowest level or to one-half the exposed strike length, whichever is less, are classified as Probable reserves. Mineralization known to exist only from drill-hole intercepts does not meet the Company's current Proven or Probable reserve criteria and is excluded from these reserve categories. For additional Proven and Probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms.
At December 31, 1998, there were 200 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 12, 1999. The Company currently anticipates no work stoppage and that a satisfactory contract can be renegotiated with the Lucky Friday hourly employees, although there can be no assurance that the contract can be renegotiated without a disruption to production. Avista Corporation (formerly Washington Water Power Company) supplies electrical power to the Lucky Friday mine. -8- 10 GREENS CREEK MINE - ADMIRALTY ISLAND, ALASKA At December 31, 1998, the Company held a 29.7% interest in the Greens Creek mine, located on Admiralty Island, near Juneau, Alaska, through a joint venture arrangement with Kennecott Greens Creek Mining Company, the manager of the mine and a wholly owned subsidiary of Kennecott Corporation. 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 obtained 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. In February 1993, as a result of depressed metals prices and a glut in world concentrate markets, the decision was made to place the mine on temporary shutdown. Commercial production ceased in April 1993, and the mine and mill were placed on a care and maintenance basis. Exploration and mine development activities continued at the mine during the shutdown. Follow-up drilling on previously identified targets was successful in identifying a new ore zone, the Southwest Extension. In January 1994, a feasibility study was initiated to determine the advisability of placing the mine back into production. The feasibility study was completed in the fourth quarter of 1994 and in 1995 the decision was made to reopen the Greens Creek mine, with commercial production estimated to recommence by early 1997. Included in the reopening project were development of the Southwest ore zone, purchase of new mine mobile equipment, upgrading of ancillary facilities, improvement of environmental control systems and modification of the process plant. The reopening project was completed ahead of schedule, production began in July 1996 and full production levels were achieved in January 1997. Environmental permitting during the reopening project included obtaining regulatory agency approval of the updated General Plan of Operations and Large Mine Permit. The approvals included revisions to appendices regarding fresh water monitoring, tailings site operation and maintenance, development rock management and water systems operation. Other actions included Forest Service approval to house production workers in a worker- camp at Hawk Inlet, and State of Alaska legislative changes allowing extended working shifts for miners. State of Alaska permitting action included renewal of the Air Quality Permit by the Alaska Department of Environmental Control. Permits that were in-progress at the end of 1998 included the Alaska Department of -9- 11 Environmental Control solid waste permit for tailings disposal and renewal of the mine waste-water discharge permit. As part of a settlement for civil penalties associated with past discharges, Greens Creek is under an Administrative Consent Decree with the Environmental Protection Agency. Currently, Greens Creek is mining 1,500 tons per day underground from 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. A lesser amount of the concentrates are sold to metal merchants under short-term agreements. Concentrates are shipped from a marine terminal located about nine miles from the mine site. The Greens Creek mine uses electrical power provided by diesel-powered generators located on-site. A land exchange agreement was approved by Congress and signed into law by President Clinton on April 1, 1996. The joint venture secured private property equal to a value of $1.0 million and transferred title to the USDA Forest Service. Greens Creek thereby 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. Exploration efforts in 1997 at Greens Creek discovered an extension to the Southwest ore zone called the 200 South ore deposit. Definition drilling during 1998 on the new 200 South ore zone has resulted in important additions to the mine's Proven and Probable ore reserves. As of December 31, 1998, there were 266 employees at the Greens Creek mine. The employees at the Greens Creek mine are not represented by a bargaining agent. At December 31, 1998, the Company's interest in the net book value of the Greens Creek mine property and its associated plant and equipment was $70.8 million. Based upon management's estimates of metal to be recovered and considering estimated future production costs and metals prices, the Company's management believes that the carrying value of the Greens Creek mine is recoverable from future undiscounted cash flows generated from operations. In evaluating the carrying value of the Greens Creek mine, the Company used metals prices of $300 per ounce of gold in 1999, $325 gold in 2000, and $350 gold thereafter; $5.50 per ounce of silver in 1999, $5.75 silver in 2000, and $6.00 silver thereafter; $0.25 per pound of lead in 1999 and 2000, and $0.27 per pound lead thereafter; and $0.50 per pound of zinc in 1999, and $0.55 zinc thereafter. These prices -10- 12 were utilized as the Company's management believes that they are reasonable estimates of average prices over the remaining life of the mine. In contrast to longer-term prices used for estimating life-of-mine revenues and resultant cash flows, the Company uses near-term estimates of metals prices, process recoveries and smelter terms to estimate ore reserves as they more closely reflect the current economic conditions at the measurement date. Estimated future production costs were derived from actual production costs experienced at the mine, adjusted, as necessary, for anticipated changes resulting from the execution of the mine manager's mine production plan. Based upon these projected factors, the Company estimates that future cash and total production costs per ounce of silver produced over the remaining life of the mine would be $1.99 and $4.99, respectively. As these amounts are derived from numerous estimates, the most volatile of which are metals prices, there can be no assurance that actual results will correspond to these estimates. 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. The estimated ore reserves for the Greens Creek mine are computed by Kennecott Greens Creek Mining Company's geology and engineering staff with technical support from Kennecott Corporation. Geologic interpretations and reserve methodology are reviewed by the Company, but the reserve compilation is not independently confirmed by the Company in its entirety. Information with respect to the Company's 29.7% share of production, Proven and Probable ore reserves, and average cost per ounce of silver produced is set forth in the table below: -11- 13
Years (Company's Interest) ------------------------------------------------ Production 1998 (29.7%) 1997 (29.7%) 1996(1)(29.7%) ---------- ------------- -------------- -------------- Ore milled (tons) 160,567 145,676 42,737 Silver (ounces) 2,823,660 2,889,265 827,799 Gold (ounces) 18,008 16,604 3,086 Zinc (tons) 17,507 13,662 3,811 Lead (tons) 6,747 5,725 1,689 Proven and Probable Ore Reserves(2,3,4) ------------------- Total tons 2,901,028 2,494,085 2,642,000 Silver (ounces per ton) 15.4 18.6 19.5 Gold (ounces per ton) 0.14 0.15 0.15 Zinc (percent) 12.3 12.7 12.6 Lead (percent) 4.5 4.5 4.6 Contained gold (ounces) 411,946 369,173 398,046 Contained silver (ounces) 44,733,855 46,467,846 51,587,608 Contained zinc (tons) 357,407 317,497 333,849 Contained lead (tons) 130,836 112,234 120,096 Average Cost per Ounce of Silver Produced(5) --------------------------- Cash operating costs $ 2.86 $ 2.31 - - Total cash costs $ 2.86 $ 2.31 - - Total production costs $ 5.06 $ 4.55 - - - ---------------------------------- (1) Operations were suspended in April 1993 and restarted in July 1996. (2) For Proven and Probable ore reserve assumptions and definitions, see Glossary of Certain Mining Terms. (3) Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Process plant recoveries of ore reserve grades are expected to be 73% for silver, 62% for gold, 85% for zinc and 78% for lead. Payable recoveries of ore reserve grades by smelters and refiners are expected to be 63% for silver, 47% for gold, 67% for zinc and 60% for lead. (4) The decrease in contained silver in 1998 versus 1997 is a result of reductions for 1998 production and Southwest Ore Zone adjustments due to capping of high grades, restriction of the mineral envelope, and to a lesser extent, smelter contract changes, and mining recovery and dilution assumptions. These decreases were partially offset by the addition of the new 200 South Ore Zone and the 5250 Ore Zone. (5) The Greens Creek mine recommenced operations in July 1996, on a start-up basis; as such, no cost per ounce amounts are reported for 1996.
METALS - GOLD SEGMENT ROSEBUD GOLD MINE - NEVADA The Rosebud Gold Mine, in which the Company has 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, 760 unpatented lode-mining claims, -12- 14 and four additional patented lode-mining claims currently under lease. Additionally, Rosebud has a 52% interest in 48 lode- mining claims held under a joint venture agreement with N.A. Degerstrom Inc. The total 815 claims cover approximately 16,840 acres and collectively comprise the "Rosebud mine." Patent application has been made on the 13 claims that contain all of the Proven and Probable ore reserves. The Rosebud mine may be reached from Winnemucca, Nevada, by travelling west a distance of approximately 58 miles on an all-weather gravel road. At December 31, 1998, Hecla's interest in the net book value of property, plant, and equipment at the Rosebud mine totaled $11.7 million. On September 6, 1996, the Company and Santa Fe Pacific Gold Corporation entered into a 50/50 joint venture agreement to develop the Rosebud mine. Pursuant to the agreement, a limited liability corporation (The Rosebud Mining Company, L.L.C.) was established to develop the Rosebud gold property with each party owning a 50% interest. In May 1997, Santa Fe was merged into Newmont Gold Company (Newmont) thus becoming the successor in interest to Santa Fe's portion of The Rosebud Mining Company, L.L.C. Under the terms of the agreement, the Company manages the mining activities and ore is hauled via truck approximately 110 miles to Newmont's Twin Creeks Pinon mill for processing. Mine site construction began during September 1996 and was completed during March 1997. Capital expenditures to bring the mine into production totaled $18.7 million. Newmont funded the first $12.5 million of mine-site development and also funded costs of road and mill facility improvements which were completed during 1997. Newmont also contributed to the joint venture exploration property located near the Rosebud property, and has funded the first $1.0 million in exploration expenditures, and two-thirds of all exploration expenditures beyond the initial $1.0 million. In 1993, the Company sold, for $2.5 million, a 2.5% net smelter return royalty and an option to purchase an additional 1.5% net smelter return royalty on the Rosebud property to Euro-Nevada Mining Corporation Inc. (Euro-Nevada). The option for the additional 1.5% royalty was exercised, by Euro-Nevada, in the fourth quarter of 1996. The proceeds of $2.5 million were retained by Hecla under the terms of the agreement with Newmont. Gold mineralization in the South, North and East Zones, as in many other volcanic-hosted gold deposits, is erratically distributed with numerous low-grade drill hole intercepts interspersed with higher grade drill hole intercepts over an area of approximately 1,000 feet east-west and 1,000 feet north-south. Drilling has also intersected further mineralization proximal to the mine. Permitting related work, which began during 1994, was completed during 1996. Following completion of construction and mine development activities, the mine commenced operations in March of 1997. The -13- 15 Company's share of production in 1997 was approximately 47,000 gold ounces and 169,000 silver ounces. The Company's share of 1998 production was approximately 65,000 gold ounces and 278,000 silver ounces. Mine production during 1998 averaged in excess of 900 tons-per- day of ore. Ore grades milled were 0.40 gold ounce per ton and 3.06 ounces of silver per ton. The ore produced from the mine is processed in a conventional carbon-in-leach circuit. The mill produces a high quality gold-silver dore. During 1998, 97.0% of the gold and 54.4% of the silver processed at the mill were economically recovered. The cash operating cost, total cash cost, and total production cost per ounce of gold were $157, $176, and $274, respectively, for 1998 and $137, $156, and $263, respectively, for 1997. Mine production levels for 1998 were higher than expected. However, costs for trucking and milling were also higher than expected. The following table presents information with respect to the Company's 50% share of production, Proven and Probable ore reserves, and the average cost per ounce of gold produced for the Rosebud Project as of the dates indicated:
Years ------------------------------------------- 1998 1997 1996 --------- --------- --------- Production (50%) - ---------------- Ore milled 171,493 99,050 - - Gold Recovered (ounces) 65,496 46,974 - - Silver Recovered (ounces) 278,290 168,584 - - Proven and Probable Ore Reserves (1)(2)(3) - ---------------------- Total tons 241,927 471,521 638,317 Gold (oz. per ton) 0.392 0.420 0.392 Contained gold (ounces) 94,808 197,817 249,942 Silver (ounces per ton) 1.80 2.92 2.70 Contained silver (ounces) 436,252 1,378,201 1,713,945 Average Cost per Ounce of Gold Produced - ---------------------- Cash operating costs $ 157 $ 137 - - Total cash costs $ 176 $ 156 - - Total production costs $ 274 $ 263 - - -14- 16 (1) The Proven and Probable ore reserves reflect only the Company's share (50%) pursuant to the September 6, 1996 sale of a 50% interest in its Rosebud property. (2) For Proven and Probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (3) The decrease in tons of Proven and Probable ore reserves in 1998 compared to 1997 is primarily attributable to production during 1998, reestimation of the East Zone using 108 new drill holes, an increase in cutoff grade from 0.150 oz./ton to 0.180 oz./ton, and reclassification of reserve blocks that no longer meet Proven and Probable criteria. The decrease in tons of Proven and Probable ore reserves in 1997 compared to 1996 is attributable to production during 1997 and a decrease in dilution in the South Zone from 27.6% at a gold grade of 0.074 oz./ton and a silver grade of 0.75 oz./ton to 13.8% at a gold grade of 0.077 oz./ton and a silver grade of 1.06 oz./ton. This reduction in dilution for the South Zone is based on actual dilution figures from production during 1997 and represents the subtraction of 40,800 tons (50%) grading 0.077 oz. Au/ton, 1.06 oz. Ag/ton from the 1996 reserve.
As of December 31, 1998, there were 104 employees at the Rosebud Mine. The employees at the mine are not represented by a bargaining agent. The Rosebud mine uses power provided by Sierra Pacific Power. LA CHOYA GOLD MINE - SONORA, MEXICO The La Choya gold mine is located 30 miles south of the U.S. border in the State of Sonora, Mexico, and is 100% owned by the Company through a Mexican subsidiary, Minera Hecla, S.A. de C.V. In May 1992, the Company exercised its option to purchase the Mexican mineral concessions related to this property, which includes a land position of over 16,000 acres. The La Choya gold mine commenced operations in February 1994 and produced approximately 80,000 ounces in 1996, 78,000 ounces in 1997, and 40,000 ounces in 1998. The Company expects to produce 10,000 ounces of gold in 1999 from La Choya. Proven and Probable ore reserves were exhausted and the La Choya gold mine was shut down on December 19, 1998. However, additional gold will be recovered over the next one-and-a-half years from residual leaching and rinsing of the leach pads. The ore was mined via conventional open pit methods at a stripping ratio of 2.50:1 utilizing a cut-off grade of 0.012 ounce of gold per ton, crushed to two inches in size, and then cyanide leached on a leach pad. Uncrushed low-grade rock, grading down to 0.006 ounce of gold per ton, was also dumped on the pads and leached. The gold in the leach solution is processed in a carbon recovery plant to produce a gold and silver dore, which is transported to the U.S. for further refining. The average life-of-mine recovery of contained gold ounces is estimated at approximately 85.1%. -15- 17 The Company conducted exploration drilling programs between 1994 and 1998 in an effort to expand the gold reserves and mine life at La Choya. Drilling results in 1994 were successful in adding approximately 55,000 ounces of contained gold to the Proven and Probable ore reserve category. The 1995 program added approximately 18,000 ounces to the existing ore reserve, and approximately 50,000 ounces of gold were added during 1996. In 1997, approximately 21,000 ounces of gold were added to the reserve as a result of mining more gold than was previously estimated to be contained in the reserve. An exploration drilling program was conducted early in 1998 to evaluate the feasibility of pushing back the south highwall of the La Choya open pit. This program resulted in an additional 18,000 ounces of gold to the ore reserve. Information with respect to the La Choya gold mine production, Proven and Probable ore reserves, and average cost per ounce of gold produced as of the dates indicated are set forth in the following table:
Years ------------------------------------- Production (100%) 1998 1997 1996 ----------------- ----------- ----------- ----------- Ore processed (tons) 1,672,438 2,828,335 3,571,047 Gold (ounces) 39,965 78,170 80,171 Proven and Probable Ore Reserves(1) --------------- Total tons - - 632,844 3,005,231 Gold (oz. per ton) - - 0.018 0.024 Contained gold (oz.)(2) 11,883 46,545 115,418 Average Cost per Ounce of Gold Produced ---------------- Cash operating costs $ 211 $ 183 $ 190 Total cash costs $ 211 $ 184 $ 190 Total production costs $ 242 $ 224 $ 305 ______________________________ (1)For Proven and Probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (2)Contained gold ounces include estimated recoverable gold ounces on the heap leach pads totaling approximately 12,000, 35,000, and 44,000 gold ounces at December 31, 1998, 1997, and 1996, respectively. These ounces were placed on the pads during 1994-1998 and are currently estimated to be recovered over the mine's remaining life.
-16- 18 Reclamation activities will be completed at the end of the mine's life and will include rinsing of the heap leach pads, followed by recontouring of the pads, and regrading and revegetating the site. No reclamation expense was recognized in 1998 due to estimated reclamation costs being fully accrued at December 31, 1997. As of December 31, 1998, there were 75 employees at the La Choya gold mine. The labor agreement with the National Union of Mine, Metallurgical and Related Workers of the Mexican Republic was terminated in December 1998. As of December 31, 1998, the Company's net book value of the La Choya mine property, plant and equipment totaled $2.6 million. Electrical power is provided by on-site diesel generators. INDUSTRIAL MINERALS SEGMENT The Company's principal industrial minerals assets are its ball clay operations in Kentucky, Tennessee, and Mississippi; its kaolin operations in South Carolina and Georgia; its feldspar operations in North Carolina; its clay slurry plant in Monterrey, Mexico; its lawn and garden products operations in Idaho, western Montana and South Dakota; and its specialty aggregate operations (primarily scoria) in southern Colorado and northern New Mexico. The Company conducts these operations through four wholly owned subsidiaries: (1) Kentucky-Tennessee Clay Company (K-T Clay), which operates its ball clay and kaolin divisions; (2) K-T Feldspar Corporation (K-T Feldspar), which operates the feldspar business; (3) K-T Clay de Mexico, S.A. de C.V. (K-T Mexico), which operates the clay slurry plant business; and (4) MWCA, Inc., which operates the lawn and garden products business and the Company's specialty aggregate business. K-T CLAY BALL CLAY DIVISION K-T Clay is a major supplier of premium ball clay to North America and worldwide. Ball clay, which is of sedimentary origin, consists of several basic clay minerals along with a slight amount of organic content, a combination of materials that gives ball clay its unique character. The principal use of ball clay is in the ceramic and porcelain fields, which includes use for such items as pottery, dinnerware, tile, electrical insulators and sanitaryware. Ball clay is also used in refractories and abrasives and has applications in other specialty industries as well. Mining of ball clay is accomplished through strip mining methods. The mining activity requires definition drilling and the removal of overburden in order to expose the clay strata to be mined. Mining activity is selective based on clay grade and strata control. The clays are mined with loaders and backhoes, loaded into trucks and hauled to one of K-T Clay's plants for processing. Processing of ball clay consists of shredding and classification -17- 19 of clay by various grades, hammer or roller milling to reduce particle size, drying and packaging. The clays can be shipped in bulk or blended and bagged in order to meet a particular customer's requirements. A particular clay or blend of several clays can also be shipped to customers in a water slurry form in tanker trucks or rail cars. There are many grades of ball clay which K-T Clay mines, processes and blends to meet the specifications and requirements of its various customers. Different uses may require mixtures of ball clay having substantially different physical properties, and K-T Clay, through many years of experience and ongoing research performed in its laboratories, possesses the expertise and reserves of various types of ball clays that enables it to respond to changes in customer requirements with minimal advance notice. The marketing of ball clays is directed from K-T Clay's resource center in Nashville, Tennessee. K-T Clay's marketing personnel are trained in ceramic engineering or related technical fields, which also enables K-T Clay to respond to changes in its customer requirements. K-T Clay mines and processes different grades of ball clays in Kentucky, Tennessee, and Mississippi. K-T Clay has identified or delineated deposits of ball clay on numerous properties. Such properties are either owned in fee simple or held under long-term lease. The royalties or other holding costs of leased properties are consistent with the industry, and the expiration of any particular lease would not affect K-T Clay's ability to operate at current levels of operations. K-T Clay has sufficient mineral reserve positions to maintain current operations in excess of 20 years. K-T Clay is also continuously exploring for new deposits of ball clay, either to replace certain grades of clay that may become mined out or to locate new deposits that can be mined at lower cost. Minimum standards for strip mining reclamation have been established by various governmental agencies which affect K-T Clay's ball clay mining operations. The Tennessee Surface Mining Law and the Mississippi Geological Economics and Topographical Survey, Division of Mining and Reclamation, require all ball clay producers, including K-T Clay, to post a performance bond on acreage to be disturbed. The release of the bond is dependent on the successful grading, seeding and planting of spoil areas associated with current mining operations. In addition, the United States Environmental Protection Agency has issued guidelines and performance standards which K-T Clay must meet. K-T Clay may be required to obtain other licenses or permits from time to time, but it is not expected that any such requirements will have a material effect upon the Company's results of operations or financial condition. There were 158 people employed by K-T Clay at its ball clay operations as of December 31, 1998. There were 78 hourly employees represented by the United Steelworkers of America as of -18- 20 December 31, 1998. The employment of these employees is subject to a four-year labor agreement which expires on February 8, 2000. The net book value of the K-T ball clay division properties, plants and equipment was $9.8 million at December 31, 1998. K-T CLAY DE MEXICO, S.A. DE C.V. In 1993, K-T Clay completed construction of its clay slurry plant in Monterrey, Mexico, which now supplies clay slurry to the Mexican ceramics industry. Prior to construction, semi-dried clay was shipped to Mexico. The plant was built to provide K-T Clay's Mexican customers with a high-quality clay product, slurry, at an economical price and to ensure K-T was the vendor of choice in Mexico. To reduce freight costs, a bulk air-floated clay weighing substantially less than clay slurry is now shipped by rail from K-T Clay's domestic operations to the K-T Mexico slurry plant in Monterrey. The clay is then blended to customer specifications and converted to a slurry form for final shipment to its customers in the region. K-T Mexico also uses its Monterrey facilities to blend complete prepared ceramic bodies for its sanitaryware customers. The complete bodies, which are supplied ready to use, utilize K-T's slurry and local ingredients purchased in the domestic market. At December 31, 1998, the net book value of K-T Mexico's property and associated plant and equipment was $3.1 million. K-T Mexico utilizes electrical power from the local public utility. There were 36 people employed by K-T Mexico as of December 31, 1998, who are represented by the Industrial Labor Union of Nuevo Leon. The labor agreement is currently expired. There has been no work stoppage at K-T Mexico, and the Company and the Union continue to negotiate toward a reasonable contract, although there can be no assurance that the contract can be renegotiated without a disruption to production. The decline of the Mexican peso has not significantly impacted the results at K-T Mexico as both funding for operations and sales are denominated in dollars. Further declines in the Mexican peso, or accelerated levels of inflation in Mexico, could, however, adversely impact the Company's Mexican operations. K-T CLAY KAOLIN DIVISION K-T Clay acquired the kaolin operations and assets of Cyprus Minerals Company's clay division on February 17, 1989, which included kaolin mines and plants at Deepstep and Sandersville, Georgia, and Aiken, South Carolina. On June 1, 1995, K-T Clay acquired the operation and assets of the Langley plant of JM Huber Corporation in Langley, South Carolina. Kaolin, or china clay, is a nearly white clay of sedimentary origin, and is consumed in a variety of end uses including ceramic whiteware, textile grade fiberglass, rubber and paper filler, and miscellaneous plastics, adhesives and pigment applications. Kaolin is a unique industrial mineral because of its wide range of chemical and physical -19- 21 properties. The K-T Clay kaolin division mines, processes, and blends numerous grades of clay to meet the specifications and requirements of its customers. Markets for K-T Clay's kaolin products are similar to ball clay and adverse shifts in market demand could occur due to mineral substitution and decreased demand for end-use products, which could adversely impact the demand for kaolin. Kaolin currently competes with minerals such as calcium carbonate in many filler applications, but the substitution of other minerals for kaolin in ceramic and fiberglass applications is presently limited. The marketing of kaolin to the ceramics industry is carried out by K- T Clay's sales force. Marketing to other industries is done through sales and distribution agents. Kaolin is mined by open-pit methods. Orebodies are identified and delineated by exploration drilling and overburden is removed by scrapers down to favorable clay strata. Select mining of clay is then accomplished by backhoe with over-the-road truck haulage to the processing and stockpiling facilities. K-T Clay operates kaolin mines in Georgia, serving its processing plants located at Sandersville and Deepstep, Georgia. K-T Clay also operates kaolin mines located in South Carolina, serving a processing plant located in Langley, South Carolina. Processing of the clays is completed by the air-floating method where clay is shredded, dried, ground and separated by particle size at the Sandersville, Deepstep, and Langley locations. In addition, clay is processed into a water slurry mixture at the Sandersville location. K-T Clay's kaolin division holds in excess of 20 years of mineral reserves based on current sales and product mix. Reserves are held on fee simple and leased property. K-T Clay is also continuously exploring for new deposits of kaolin, either to replace certain grades of kaolin that may become mined out or to locate new deposits that can be mined at lower cost. The kaolin division operates its mines in Georgia and South Carolina under mine permits issued by the Environmental Protection Division, Department of Natural Resources of the State of Georgia, and the Land Resource Conservation Commission, Division of Mining and Reclamation of the State of South Carolina. All kaolin division mines and processing plants have current permit status and are in good standing. There were 121 people employed by K-T Clay at its kaolin division as of December 31, 1998, with less than 25% of the labor force being represented by the Cement, Lime, Gypsum and Allied Workers Division of International Brotherhood of Boilermakers. The current labor contract at the Sandersville, Georgia, operation expired on March 1, 1999. There has been no work stoppage at the Sandersville operation, and the Company and the Union continue to negotiate toward a reasonable contract, although there can be no -20- 22 assurance that the contract can be renegotiated without a disruption to production. Both the ball clay and kaolin divisions of K-T Clay's plants and equipment have been operational in excess of 30 years. The Company has upgraded and modernized these facilities over the years and has a continuing maintenance program to maintain the plant and equipment in good physical and operating condition. In 1998, a major expansion at the Gleason, Tennessee, ball clay operation was completed to service a new customer in the fiberglass industry. The expansion increased the plant's capacity by 60,000 tons annually. The net book value of the K-T Clay kaolin division property and its associated plant and equipment was $13.6 million as of December 31, 1998. K-T Clay utilizes power from several public utilities as well as local utility cooperatives located in the vicinity of K-T Clay's operating plants. K-T FELDSPAR CORPORATION The Company acquired the operations and assets of K-T Feldspar Corporation on December 13, 1990, including sodium feldspar mines and a processing plant located near Spruce Pine, North Carolina. Feldspars are a mineral group that are the major constituents of igneous rocks and important constituents of other major rock types. The feldspars are the most widespread mineral group and make up 60% of the earth's crust. Chemically the feldspars are aluminosilicates that contain potassium, sodium and calcium. K-T Feldspar mines, processes and blends sodium feldspar and feldspar-silica products. It also produces by-product mica concentrate and construction sand. K-T Feldspar products are primarily used in the ceramic whiteware, glass and paint industries. Markets for feldspar have fluctuated slightly over time as a result of mature market conditions. However, adverse shifts in market demand could occur due to mineral substitution and decreased demand for end-use products. Feldspar currently competes with nepheline syenite and silica in some market segments and substitution between minerals is linked to economics, physical-chemical characteristics and supplier reliability. The marketing of feldspar to the ceramics and filler industries is carried out by K-T Clay's sales force and through sales and distribution agents. Feldspar ore is mined by open-pit methods using a 40-foot bench mining plan. Ore is drilled and blasted, loaded by hydraulic shovel or front-end loader into off-highway dump trucks and transported to the processing plant. K-T Feldspar operates several mine locations in the Spruce Pine, North Carolina area, all serving the centrally located processing plant. Processing of the feldspar ores consists of crushing, grinding, density -21- 23 separation, flotation, drying and high intensity magnetic separation. K-T Feldspar holds in excess of 20 years of mineral reserves based on current sales, product mix and lease terms. Reserves are held on fee simple and leased properties. K-T Feldspar operates its mines and plant under permits issued by the North Carolina Department of Natural Resources and Community Development. All permits are in good standing. K-T Feldspar's plant and equipment have been operational in excess of 30 years. K-T Feldspar has upgraded and modernized these facilities over the years and has a continuing maintenance program to maintain the plant and equipment in good physical and operating condition. The net book value of the K-T Feldspar property and its associated plant and equipment was $5.4 million as of December 31, 1998. Carolina Power & Light Company, a regulated public utility, provides the electric power utilized for operations at K-T Feldspar. There were 48 employees employed by K-T Feldspar as of December 31, 1998; none of whom are represented by a bargaining agent. MWCA, INC. - MOUNTAIN WEST PRODUCTS DIVISION The Company acquired the operations and assets of Mountain West in December 1993, including processing plants in Rexburg, Idaho, and Superior, Montana. In April 1995, Mountain West purchased the assets of Western Bark Company, which included processing plants at Kamiah, Idaho, Osburn, Idaho, and Piedmont, South Dakota. In 1997, Mountain West Products, Inc. and Colorado Aggregate Company of New Mexico, both wholly owned subsidiaries of the Company, were combined into MWCA, Inc. In order to provide funds for possible metals and industrial minerals expansion projects, as well as to reduce indebtedness, the Company has decided to attempt to sell MWCA in 1999, although there can be no assurance that the Company will be successful. MWCA-Mountain West Products division's primary business is the purchasing, processing and marketing of certain wood by-products from lumber milling operations in the western intermountain region. These products are sold as organic soil amendments, organic landscape mulches and organic decorative landscape ground cover. The wood by-products are purchased by MWCA and transported by truck for processing at its plants. The processing plants are owned by MWCA and the sources of wood by-product supply are held under contracts. The lumber mills, which supply the wood by- products, are not owned by MWCA. MWCA's plants are located near the current sources of the raw materials to reduce transportation costs. The principal customers are lawn and garden retail outlets, lawn and garden product distributors and discount retail chain stores. -22- 24 Most of MWCA's sales are in the western U.S. and take place in the first six months of the year due to the seasonality of the market. The plants have operated in excess of 17 years at Rexburg, ten years at Superior, ten years at Kamiah, and eight years at Piedmont. In late 1996, the equipment and processing capacity of the Osburn plant was consolidated with the Superior plant due to close proximity of plants and operating efficiencies. In late 1998, the Kamiah plant was closed and its operations were consolidated with other plant operations. All plants are maintained and upgraded continually and are in good working order. The net book value of the associated plant and equipment was approximately $4.9 million as of December 31, 1998. Utah Power and Light, Montana Power Company, Idaho County Light, and Black Hills Power provide electrical power utilized by the operations at Rexburg, Superior, Kamiah, and Piedmont, respectively. Mountain West had 116 employees as of December 31, 1998; none of whom are represented by a bargaining agent. MWCA, INC. - COLORADO AGGREGATE DIVISION MWCA-Colorado Aggregate division (CAC) mines and sells volcanic rock (scoria) for use as briquettes in gas barbecue grills, as decorative ground cover, and paints gravel bedding which is used in aquariums. Volcanic scoria is a lightweight clinker-like material produced during gaseous volcanic eruptions that form cinder cones. These cones occur frequently in the geological environment but are unique by density, texture and color. The Company operates mines at Mesita, Colorado, and in northern New Mexico as well as processing plants at San Acacio and Antonito, Colorado, and Neosho, Missouri. All mining is open pit with minimal requirements for the removal of overburden. The principal customers for scoria briquettes are manufacturers and retailers of gas barbecue grills. Landscapers, distributors of landscaping materials, lawn and garden retailers and discount chain stores are the principal customers for scoria landscape stone. Pet supply retailers and discount chain stores are the principal customers for aquarium gravel. The Mesita mine is owned by CAC. Due to the seasonal nature of CAC's business, it is usually anticipated that most of its annual sales and profits will be generated in the first two quarters of each calendar year. The Company has over five years of mineral reserves at the Mesita, Colorado, location and has developed in excess of 22 years of mineral reserves at the Red Hill mine, in northern New Mexico, which is under lease from the Bureau of Land Management. CAC purchases the rock used for aquarium gravel. -23- 25 CAC's plants and equipment have been operational in excess of 24 years. CAC has upgraded and modernized these facilities over the years and has a continuing maintenance program to maintain the plants and equipment in good physical and operating condition. The net book value of CAC's property and its associated plants and equipment was $3.4 million as of December 31, 1998. Public Service Company of Colorado, San Luis Valley Rural Electric Cooperative, and Empire District Electric Company provide the electric power utilized for operations at CAC. CAC had 79 employees as of December 31, 1998. The Teamsters Union is the bargaining agent for CAC's hourly employees. The current labor agreement expires on September 17, 2001. OTHER PROPERTIES REPUBLIC MINE - REPUBLIC, WASHINGTON The Company owns the Republic gold mine located in the Republic Mining District near Republic, Washington. In February 1995, the Company completed operations at the Republic mine and has commenced reclamation work in connection with the mine and mill closure. The Company's land position in the Republic area consists of approximately five square miles. In August 1995, the Company entered into an agreement with Newmont to explore and develop the Golden Eagle deposit on the Republic mine property. Newmont conducted extensive exploration on the property and in the third quarter of 1996 entered into a joint venture agreement concerning the property. Newmont paid Hecla $2.5 million for an immediate 75% interest in the joint venture. Newmont is required to fund all expenditures necessary at the Golden Eagle through the feasibility stage. At December 31, 1998, the accrued reclamation and closure costs balance totaled $4.3 million. Reclamation and closure efforts commenced in 1995. During 1998, the reclamation accrual was reduced by $0.5 million to reflect current estimates of remaining work to be performed. Post-reclamation monitoring will be conducted for approximately three years, following completion of reclamation activities. Reclamation and closure cost expenditures totaling approximately $0.2 million during 1998 were charged against the previously established reclamation and closure cost accrual. The remaining net book value of the Republic mine property and its associated plant and equipment was approximately $0.6 million as of December 31, 1998. There was one person employed by the Company at the Republic mine at December 31, 1998. -24- 26 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. Mineral rights comprising the mine cover 9.1 square miles, and consist of 15 patented lode mining claims, and two patented placer claims, 43 unpatented millsite claims, and 17 unpatented lode claims for which patent applications are pending. The remainder of the mineral rights in the Yankee Fork Mining District consist of 260 unpatented claims. The mine consists of two distinct ore deposits: the Sunbeam deposit and the Grouse deposit. In 1994, the Company sold to Great Lakes Minerals Inc. (Great Lakes) a 20% undivided interest in the mine. Pursuant to the acquisition and joint venture agreements, Great Lakes was required to fund its 20% pro-rata portion of all capital and operating costs. Mining in the Sunbeam pit began in late 1994, and operations in 1994 and 1995 experienced higher than expected operating costs and less than expected operating margins resulting from higher than expected start up costs and lower than expected ore grade. Mining indicated that mill grade ore occurred in thinner, less continuous structures than had been originally interpreted. The Company thus recorded a write-down of the mine's carrying value totaling $97.0 million in 1995 to properly reflect the net realizable value of its interest in the Grouse Creek joint venture. In 1996, the Company completed metallurgical testing and economic analysis of the Grouse deposit. Based upon this analysis, the Company determined that ore contained in the Grouse deposit was not economical at the then current metals prices. The Company decided to suspend operations at the Grouse Creek mine following completion of mining of the remaining ore in the Sunbeam pit. In connection with this decision, the Company recorded 1996 adjustments 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. In January 1997, Great Lakes and the Company entered into a letter agreement terminating the Grouse Creek joint venture and conveying Great Lakes' approximate 20% interest in the project to the Company. Great Lakes retained a 5% defined net proceeds interest in the project. The Company assumed 100% of the interests and obligations associated with the property. Following completion of mining in the Sunbeam pit in April 1997, the Company placed the Grouse Creek mine on a care-and- maintenance status. Under U.S. Forest Service agreements, the care-and-maintenance period for the property can only extend to June 2000. However, the Company may request a maximum of two -25- 27 one-year extensions to remain in a care-and-maintenance status past the initial three-year period. On or before June 2000, operations must either recommence, the Company must receive an extension on the care-and-maintenance period, or the site must initiate final reclamation. The approved mining and reclamation plans for the facility will remain in effect during the suspension period. During the period that the property is on a care-and-maintenance basis, reclamation activities will be undertaken as necessary to prevent degradation of the property. During 1997, the milling facilities were mothballed, and the following reclamation activities were completed: the Sunbeam open cut was regraded and an interim cap of compacted waste rock was placed on the floor; the waste rock storage facility was regraded to comply with requirements in the permits for permanent reclamation and an interim cap of compacted waste rock was placed over the entire surface; the underground adits were sealed and the surface facilities for the underground mine were removed, then the site was regraded to comply with the requirements in the permits for permanent reclamation; and approximately 30 acres of exploration roads and other disturbed areas were regraded, seeded and trees and shrubs planted for final reclamation. During 1998, the permanent engineered soil cap was constructed on the waste rock storage facility and additional water treatment facilities were constructed. Ultimately, the milling facilities will be removed and the foundations buried. Concurrent reclamation practices will be employed whenever possible. The original reclamation plan concepts have been approved by the appropriate state and federal agencies, and as new technology and new reclamation practices evolve, they will be evaluated and, when applicable, proposed to the appropriate agencies for approval. Following completion of reclamation, post-reclamation monitoring will occur for about five years. During 1998, the Company increased the accrual for reclamation and closure costs by approximately $0.5 million to reflect current estimates of remaining reclamation and closure costs. As of December 31, 1998, the Company's accrual for remaining holding, reclamation and closure costs totals $11.4 million, although it is possible that the estimate may change in the future. As of December 31, 1998, there were 22 employees at the Grouse Creek mine. The employees are not represented by a bargaining agent. AMERICAN GIRL MINE - CALIFORNIA The Company acquired the American Girl gold mine in March 1994 as part of the Equinox Resources (Equinox) acquisition. The mine property is located in Imperial County, California. The property includes three mining areas: the Padre-Madre area, the American Girl area, and the Oro Cruz area where production commenced in late 1995. -26- 28 The mine is managed by MK Gold Company, the Company's joint venture partner. The Company has a 47% interest in the mine with MK Gold having the remaining 53% interest. MK Gold receives a monthly management fee of 2% of certain specified costs of the joint venture. Certain matters regarding the joint venture require the approval of the joint venture management committee which consists of two representatives of the Company and two representatives of MK Gold. MK Gold announced plans for suspension of American Girl mine operations on September 5, 1996. The joint venture completed a thorough evaluation of shutdown and alternative operating strategies for the operation and determined no practical mining and processing methods could be developed which would justify continued operations. The remaining Oro Cruz underground reserves were not economical due to high development costs and the remaining surface reserves were not economical at current metals prices due to higher mining costs and stripping ratio than originally expected. As part of the suspension plan, the joint venture agreed to a modified program and budget for the remainder of 1996 which called for suspension of surface and underground mining in mid-September 1996. Crushing and milling operations ceased in mid-October 1996. Reclamation activities began in September 1996 and full mine reclamation is expected to be completed by mid-1999. Various regulatory agencies then require approximately five years of post- closure monitoring. Reclamation activity included limited backfilling of mine pits, recontouring and revegetating pits and heap leach pads. Final reclamation will include removal of buildings and closure of two solution ponds. During 1998, the Company decreased the accrual for reclamation and closure costs by approximately $1.0 million to reflect current estimates of remaining reclamation and closure costs. The reclamation accrual at December 31, 1998, totaled $0.9 million. The American Girl mine is held through a combination of patented and unpatented claims either owned outright or through leases. Properties are subject to underlying net smelter return royalties ranging from 3.5% to 12.5% depending upon the lessor, gold price and recovery of capital costs. During production through October 1996, ore was processed by leaching and conventional milling facilities owned by the joint venture. Electric power is generated on-site by equipment owned by the joint venture. As of December 31, 1998, there were five full-time employees at the site. Employees are not represented by a bargaining unit. CACTUS MINE - CALIFORNIA The Cactus mine consists of approximately 1,300 acres of leasehold lands, mining claims and millsites, and fee property located approximately 85 miles northeast of Los Angeles, California, in -27- 29 the Mojave Mining District. The property is readily accessible year-round by all-weather roads. The Company currently has a 63.75% effective interest in Cactus Gold Mines Company (Cactus) and manages Cactus' two open-pit heap leach mines, the Middle Buttes and Shumake. The Company, as manager of Cactus, receives a management fee equal to 2% of net revenues of Cactus as defined in the mining venture agreement and is reimbursed for costs incurred on behalf of Cactus. The Middle Buttes mine began production in August 1986 and reclamation was completed in 1997. Post-closure monitoring is currently in progress. Development of the Shumake mine was completed in November 1988, with commercial production beginning in December 1988. Mining operations at the Shumake mine were completed in February 1992. Nominal gold production was obtained during 1998 from solution contained in the process ponds and drained from the heap. Reclamation of the Shumake heap was substantially completed during 1998. However, additional work remains to be done to reclaim the process ponds and plant site. Following completion of reclamation, approximately three years of post-reclamation monitoring is required. An additional reclamation and closure expense of $124,000 was recognized in 1998. At December 31, 1998, the accrual for estimated remaining reclamation and closure costs totaled $0.5 million. The book value of the Company's interest in the Cactus mine property and its associated plant and equipment was fully depreciated as of December 31, 1998. As of December 31, 1998, there were two employees at the Cactus mine. Cactus is owned 75% by Middle Buttes Partners Limited (MBPL) and 25% by Dakota Mining Corporation (Dakota). MBPL is a limited partnership in which the Company is both the sole general partner (52.50%) and a limited partner (11.25%). The Company, as general partner of MBPL, receives 75% of the production from Cactus subject to payment of 11.25% of the net cash flows to the other limited partner of MBPL. Dakota has informed the Company that it may not be able to fund its 25% share of remaining reclamation and closure costs. As such, the Company may have to fund Dakota's 25% share of remaining reclamation and closure costs. YELLOW PINE - IDAHO The Yellow Pine gold mine is located in Valley County, Idaho, about 50 miles east of McCall in central Idaho, and is accessed by secondary roads and air. The property consists of 26 patented claims which are held by the Company under lease from the Bradley Mining Company of San Francisco, California, and 57 unpatented claims. The lease provides for production royalties equal to 6% of net smelter returns plus 10% of cumulative cash flow, and also provides for a minimum royalty payment of $3,500 per month reduced by current production royalties. Production from the oxide -28- 30 mineralization ceased in 1992; the operation has been undergoing reclamation since that time. During 1998, reclamation of the mine's Homestake open pit was completed and additional recontouring and reclamation occurred at the facility site. Mineralized sulfide material, estimated at between 15 and 20 million tons containing approximately 0.09 ounce of gold per ton, is also located on the property. The Company continues to seek other parties interested in the further exploration and development of this extensive gold-bearing deposit. The net book value of the Yellow Pine property, plant and equipment was fully depreciated as of December 31, 1998. During 1998, the Company accrued an additional $0.8 million for reclamation and closure costs to reflect current estimates of remaining costs. As of December 31, 1998, the Company's accrual for remaining reclamation and closure totals $1.4 million. Following completion of reclamation, approximately five years of post- reclamation monitoring will be required. DEVELOPMENT PROJECT NOCHE BUENA GOLD PROJECT - SONORA, MEXICO The Noche Buena project is located 44 miles northwest of Caborca, Mexico, and 25 miles south of the Company's La Choya mine. The Noche Buena project is in the state of Sonora and is 100% owned by the Company through its Mexican subsidiary, Minera Hecla, S.A. de C.V. Minera Hecla purchased the Noche Buena concessions from MXUS, S.A. de C.V., a subsidiary of USMX, Inc., in October 1998 subsequent to acquiring an exploration option in November 1997. There are 18,916 acres currently under concession and an application has been filed for concessions to an additional 15,439 acres. During 1998, Minera Hecla compiled data generated on the property from previous exploration activities and drilled 8,200 meters of core in 63 holes and 17,041 meters of reverse circulation in 130 drill holes. At December 31, 1998, the Company had identified a resource of 11,525,000 tons grading 0.027 gold ounce per ton. Reserve definition, leach pad condemnation, and step-out exploration drilling will continue into 1999. The detailed feasibility study for a conventional open-pit heap- leach operation, using personnel and surplus equipment from the Company's La Choya mine, is anticipated to be completed during the second quarter of 1999. Costs in the amount of $2.3 million have been capitalized as of December 31, 1998. EXPLORATION The Company conducts exploration activities from its headquarters in Coeur d'Alene, Idaho. The Company owns or controls patented and unpatented mining claims, fee land, mineral concessions, and -29- 31 state and private leases in the United States, Mexico, and South America. The Company's strategy regarding reserve replacement is to concentrate its efforts on (1) existing operations where an infrastructure already exists, (2) other properties presently being developed and advanced-stage exploration properties that have been identified as having potential for additional discoveries, (3) advanced-stage exploration acquisition opportunities, and (4) grass roots exploration opportunities. The Company is currently concentrating its exploration activities at the Lucky Friday silver mine, the Greens Creek silver mine, in which the Company maintains a 29.73% interest, the Rosebud gold mine, in which the Company maintains a 50% interest, and other properties in Mexico, South America and Nevada. The Company remains active in other exploration areas and is seeking advanced- stage acquisition opportunities principally in the United States and Mexico. Mineral exploration, particularly for gold and silver, is highly speculative in nature, involves many risks and frequently is nonproductive. There can be no assurance that the Company's 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 the Company's 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 the Company's inventory as a result of exploration and acquisition activities. Exploration expenditures for the three years ended December 31, 1998, 1997 and 1996 were approximately $4.9 million, $7.4 million and $4.8 million, respectively. Exploration expenditures for 1999 are estimated to be in the range of $4.0 to $5.0 million. HEDGING ACTIVITIES The Company's policy guidelines for hedging gold, silver, lead, and zinc production permit management to utilize various hedging mechanisms and strategies for up to 50% of the Company's annual estimated available metal production. Hedging contracts are restricted to no longer than 36 months without approval of the Company's Board of Directors and will be spread among a number of available customers. At December 31, 1998, the Company had 7% of 1999 budgeted gold production and 7% of 1999 budgeted silver production hedged utilizing forward sales contracts. There were no hedging contracts for lead or zinc outstanding at December 31, 1998. None of the aforementioned activities have been entered -30- 32 into for speculative purposes at December 31, 1998. For additional information regarding hedging activities, see Notes 1 and 2 of Notes to the Consolidated Financial Statements and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K. INDUSTRY SEGMENTS Financial information with respect to industry segments is set forth in Note 9 of Notes to the Consolidated Financial Statements. COMPETITION The Company is engaged in the mining and processing of gold, silver, other nonferrous metals, and industrial minerals in the United States and Mexico. The Company encounters strong competition from other mining companies in connection with the acquisition of properties producing, or capable of producing, gold, silver and industrial minerals. The Company also competes with other companies both within and outside the mining industry in connection with the recruiting and retention of qualified employees knowledgeable in mining operations. Silver and gold are worldwide commodities and, accordingly, the Company sells its production at world market prices. The Company cannot compare sales from its ball clay mining operations with sales of other ball clay producers because the principal competitors are either family-owned or divisions of larger, diversified companies, but the Company believes that K-T Clay is one of the more significant producers of ball clay in the United States. The principal competitors of the Company in the ball clay industry are H. C. Spinks Clay Company, Watts Blake Bearne & Company, and Old Hickory Clay Company. With the acquisition of kaolin assets from Cyprus Minerals Company in 1989 and JM Huber Corporation in 1995, the Company has also become an important producer in the United States of ceramic-grade kaolin. The principal competitors of the Company in the kaolin industry are Albion Kaolin Company, Evans Clay Company, Wilkinson Clay, and Dixie Clay. The Company, with the acquisition of Indusmin Incorporated's feldspar assets, is also a major producer and supplier of sodium feldspar products. The principal competitors of the Company in the feldspar industry are Feldspar Corporation and Unimin Corporation. The Company competes with other producers of scoria and with manufacturers of ceramic briquettes in the production and sale of briquettes. The Company has limited information as to the size of the barbecue briquette industry, but believes that it supplies a major portion of the scoria briquettes used in gas barbecue grills. Price and natural product characteristics, such as color, uniformity of size, and lack of contained moisture and density are important competitive considerations. The Company believes that it has a significant portion of the landscape scoria market east of the Continental Divide. -31- 33 The Company competes with other producers of lawn and garden and soil products, decorative bark products and landscape mulches. The principal competitors are either privately owned companies or divisions of larger diversified companies that operate in numerous regional markets. The Company has limited information about the sales of competing products in its overall markets but believes it supplies a significant portion of the market for its product in the intermountain region of the United States. REGULATION OF MINING ACTIVITY The mining operations of the Company 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. It is the Company's policy to comply with the directives and regulations of MSHA. In addition, the Company generally takes such necessary actions as, in its judgment, are required to provide for the safety and health of its employees. MSHA directives have had no material adverse impact on the Company's results of operations or financial condition, and the Company believes that it is substantially in compliance with the regulations promulgated by MSHA. All of the Company's exploration, development, and production activities in the United States, Mexico, South America, and Canada 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. The Company believes that it is in substantial compliance with applicable environmental regulations. Many of the regulations also require permits to be obtained for the Company's activities; these permits normally are subject to public review processes resulting in public approval of the activity. While these laws and regulations govern how the Company conducts many aspects of its business, management of the Company does not believe that they have a material adverse effect on its results of operations or financial condition at this time. The Company's 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, the Company's operations. It is possible that future changes in these laws or regulations could have a significant impact on some portion of the Company's business, causing those activities to be economically reevaluated at that time. The Company believes that adequate provision has been made for disposal of mine waste and mill tailings at all of its operating and nonoperating properties in a manner that complies with current federal and state environmental requirements. -32- 34 Environmental laws and regulations may also have an indirect impact on the Company, such as increased cost for electricity due to acid rain provisions of the Clean Air Act Amendments of 1990. Charges by smelters to which the Company sells its metallic concentrates and products have substantially increased over the past several years because of requirements that smelters meet revised environmental quality standards. The Company has no control over the smelters' operations or their compliance with environmental laws and regulations. If the smelting capacity available to the Company was significantly reduced because of environmental requirements, it is possible that the Company's silver operations could be adversely affected. The Company is 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. Revisions to CERCLA and ESA are being considered by Congress; the impact on the Company of these revisions is not clear at this time. LEGISLATION During the past five years, the U.S. Congress considered a number of proposed amendments to the General Mining Law of 1872, as amended (the General Mining Law), which governs mining claims and related activities on federal lands. In 1992, a holding fee of $100 per claim was imposed upon unpatented mining claims located on federal lands. In October 1994, a one-year moratorium on processing of new patent applications was approved. This moratorium has been extended each year thereafter. In addition, legislation to further amend the General Mining Law was introduced in the U.S. Congress during 1996 and debated again in 1997 and 1998 with limited progress. The legislation would, among other things, change the current patenting procedures, impose royalties, and enact new reclamation, environmental controls and restoration requirements. The royalty proposals range from a 2% royalty on "net profits" from mining claims to an 8% royalty on the modified gross income/net smelter returns. The extent of any such changes is not presently known and the potential impact on the Company as a result of congressional action is difficult to predict. Although a majority of the Company's existing mining operations occur on private or patented property, the proposed changes to the General Mining Law could adversely affect the Company's ability to economically develop mineral resources on federal lands. EMPLOYEES As of December 31, 1998, the Company and its subsidiaries employed 1,184 people. -33- 35 INVESTMENT CONSIDERATIONS The following Investment Considerations, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in the Company's securities. LIQUIDITY Cash and cash equivalents at December 31, 1998 were $2.5 million. In addition, the Company had the ability to borrow the remaining $12.2 million under its existing $55.0 million revolving and term loan credit facility (the Bank Agreement). Due to the low metals price environment at December 31, 1998, the Company decided it was necessary to adjust a number of the financial covenants and the debt capacity calculation of its Bank Agreement. On February 25, 1999, the Company received a commitment from the lead bank under the Bank Agreement to amend the Bank Agreement (see Note 5 of Notes to the Consolidated Financial Statements). The amount available to borrow under the Bank Agreement, as to be amended, is in part based on a cash earnings calculation which is heavily reliant on the prices for the Company's metals products. Accordingly, there can be no assurance that full availability can be maintained for the life of the facility. Based upon the Company's estimate of metals prices for 1999, the Company currently believes that the Company's operating cash flows and amounts available to borrow under the Bank Agreement will be adequate to fund the combined total of anticipated minimum capital expenditure requirements, idle property expenditures, exploration expenditures, and the Company's preferred dividend requirement. Additional cash flow will be required to fund possible metals and industrial minerals expansion projects or acquisitions and to reduce outstanding debt. In an effort to preserve cash, reduce outstanding debt, and to fund possible metals and industrial minerals expansion projects or acquisitions, the Company has decided to market for sale its MWCA subsidiary and certain other assets. In addition, the Company has also implemented certain cost cutting measures to attempt to further reduce operating cash costs in 1999. Without the proceeds from the possible sale of MWCA and other assets, successful implementation of cost cutting measures, and other possible financings including equity offerings (all of which the Company is actively pursuing), the Company may have limited resources available to fund possible metals and industrial minerals expansion projects or acquisitions, other cash requirements, and to reduce outstanding debt. There can be no assurance that the Company will be successful in its efforts to sell its MWCA subsidiary and other assets, in its implementation of cost cutting measures, or in its ability to complete other possible financings including equity offerings. -34- 36 RECURRING LOSSES The Company has experienced losses from operations for each of the last eight years. For the year ended December 31, 1998, the Company reported a net loss of approximately $0.3 million (before preferred stock dividends of $8.1 million) or $0.01 per share of common stock compared to a net loss of approximately $0.5 million (before preferred stock dividends of $8.1 million) or $0.01 per share of common stock for the year ended December 31, 1997. Without improvements in the current prices of metals, the Company anticipates that its history of losses applicable to common shareholders will continue. Due to the volatility of metals prices and the significant impact metals price changes have on the Company's operations, there can be no assurance that the Company will be profitable in the future. METAL PRICE VOLATILITY Because a significant portion of the Company's revenues are derived from the sale of gold, silver, lead and zinc, the Company's earnings are directly related to the prices of these metals. Gold, silver, lead and zinc prices fluctuate widely and are affected by numerous factors beyond the Company's control, including expectations for inflation, speculative activities, the relative exchange rate of the U.S. dollar, global and regional demand and production, political and economic conditions and production costs in major producing regions. The aggregate effect of these factors, all of which are beyond the Company's control, is impossible for the Company to predict. If the market price for these metals falls below the Company's full production costs and remains at such level for any sustained period, the Company will experience additional losses and may determine to discontinue the development of a project or mining at one or more of its properties. While the Company has periodically used limited hedging techniques to reduce a portion of the Company's exposure to the volatility of gold, silver, lead and zinc prices, there can be no assurance that it will be able to do so effectively in the future (see Hedging Activities). -35- 37 The following table sets forth the average daily closing prices of the following metals for 1980, 1985, 1990, 1993, and each year thereafter through 1998.
1980 1985 1990 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- -------- -------- -------- -------- Gold(1) (per oz.) $ 612.56 $ 317.26 $ 383.46 $ 359.77 $ 384.01 $ 384.16 $ 387.70 $ 331.10 $ 294.16 Silver(2) (per oz.) 20.63 6.14 4.82 4.30 5.28 5.19 5.18 4.90 5.53 Lead(3) (per lb.) 0.41 0.18 0.37 0.18 0.25 0.29 0.35 0.28 0.24 Zinc(4) (per lb.) 0.34 0.36 0.69 0.44 0.45 0.47 0.46 0.60 0.46 - -------------------- (1)London Final. (2)Handy & Harman. (3)London Metals Exchange -- Cash. (4)London Metals Exchange -- Special High Grade -- Cash.
On February 26, 1999, the closing prices for gold, silver, lead, and zinc were $287.05 per ounce, $5.53 per ounce, $0.24 per pound, and $0.47 per pound, respectively. VOLATILITY OF METALS PRODUCTION The Company's future gold and silver production will be dependent upon the Company's success in developing new reserves, as well as exploration efforts (see Project Development Risks and Exploration). If metals prices continue to decline, the Company could determine that it is not economically feasible to continue development of a project or continue commercial production at some of its properties (see Metal Price Volatility). PROJECT DEVELOPMENT RISKS The Company from time to time engages in the development of new orebodies both at newly acquired properties and presently existing mining operations (collectively "Development Projects"). The Company's ability to sustain or increase its present level of metals production is dependent in part on the successful development of such new orebodies and/or expansion of existing mining operations. The economic feasibility of any individual Development Project and all such Development Projects collectively is based upon, among other things, estimates of reserves, metallurgical recoveries, and capital and operating costs of such Development Projects, and future metal prices. Development Projects are also subject to the successful completion of feasibility studies, issuance of necessary permits and receipt of adequate financing. Development Projects may have no operating history upon which to base estimates of future operating costs and capital requirements. -36- 38 Particularly for Development Projects, estimates of reserves, metal recoveries, and cash operating costs are to a large extent based upon the interpretation of geologic data obtained from a finite number of drill holes and other sampling techniques and feasibility studies. Estimates of cash operating costs are then derived based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the orebody, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. As a result, it is possible that actual cash operating costs and economic returns of any and all Development Projects may materially differ from the costs and returns estimated. RESERVES The ore reserve figures presented in this Form 10-K and in the Company's other SEC filings are, in large part, estimates made by the Company's technical personnel, and no assurance can be given that the indicated level of recovery of these metals will be realized. Reserves estimated for properties that have not yet commenced production may require revision based on actual production experience. Market price fluctuations of the various metals mined by the Company, as well as increased production costs or reduced recovery rates, may render ore reserves containing relatively lower grades of mineralization uneconomic and may ultimately result in a restatement of reserves. Moreover, short-term operating factors relating to the ore reserves, such as the need for sequential development of orebodies and the processing of new or different ore grades, may adversely affect the Company's profitability in any particular accounting period. The metals prices used to determine ore reserves at a particular mine are typically estimated by the entity managing the mine. These metals prices may vary, depending on each entity's assessment of metals prices over the near term and other factors that such entity believes relevant. The Company estimates metals prices for its ore reserve calculations, which approximate current market prices, but these metals prices may vary from current market prices based on a number of factors the Company believes likely to influence metals prices over the near term. For Proven and Probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. Declines in the market price of metals may also render ore reserves containing relatively lower grades of mineralization uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques is sufficient to offset the effects of a drop in the market price of the metals expected to be mined from such reserves. If the Company's realized price for the metals it produces, including hedging benefits, were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, increased net losses, reduced cash flow, reductions in reserves and asset write-downs. -37- 39 JOINT DEVELOPMENT AND OPERATING ARRANGEMENTS The Greens Creek mine, the Cactus property, and the American Girl property are operated through joint venture arrangements. The Company owns an undivided interest in the assets of the venture. The Company's Rosebud mine is operated through a Limited Liability Company (LLC) with the Company holding 50% of the interest in the LLC. The LLC arrangement operates similar to joint venture arrangements. Under the joint venture and LLC agreements, the joint participants, including the Company, 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 a joint venture or LLC agreement (including as a result of insolvency), the Company could incur losses in excess of its pro-rata share of the joint venture. In the event any participant so defaults, each 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 parties' 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 the Company, the Company has no reason to believe that its joint venture or LLC participants with respect to the Greens Creek, American Girl, and Rosebud properties will be unable to meet their financial obligations under the terms of the respective agreements. Dakota, which has a 25% interest in the Cactus property, has informed the Company that Dakota may not be able to fund its share of remaining reclamation and closure costs at Cactus. The Company's estimate of its 75% liability for reclamation and closure costs at Cactus totals $0.5 million. The Company may also have to fund Dakota's 25% share of the remaining closure and reclamation obligation. COMPETITION FOR PROPERTIES Because mines have limited lives based on proven ore reserves, the Company is continually seeking to replace and expand its reserves. The Company encounters strong competition from other mining companies in connection with the acquisition of properties producing or capable of producing gold, silver, lead, zinc and industrial minerals. As a result of this competition, some of which is with companies with greater financial resources than the Company, the Company may be unable to acquire attractive mining properties on terms it considers acceptable. In addition, there are a number of uncertainties inherent in any program relating to the location of economic ore reserves, the development of appropriate metallurgical processes, the receipt of necessary governmental permits and the construction of mining and processing facilities. Accordingly, there can be no assurance that the Company's programs will yield new reserves to replace and expand current reserves. -38- 40 TITLE TO PROPERTIES The validity of unpatented mining claims, which constitute a significant portion of the Company's undeveloped property holdings in the United States, is often uncertain and may be contested. Although the Company has attempted to acquire satisfactory title to its undeveloped properties, the Company, in accordance with mining industry practice, does not generally obtain title opinions until a decision is made to develop a property, with the attendant risk that some titles, particularly titles to undeveloped properties, may be defective. MINING RISKS AND INSURANCE The business of mining is generally subject to a number of risks and hazards, including environmental hazards, industrial accidents, labor disputes, encountering unusual or unexpected geologic formations, cave-ins, rockbursts, flooding and periodic interruptions due to inclement or hazardous weather conditions. Such risks could result in damage to, or destruction of, mineral properties or producing facilities, personal injury, environmental damage, delays in mining, monetary losses and possible legal liability. Although the Company maintains insurance within ranges of coverage it believes to be consistent with industry practice, no assurance can be given that such insurance will be available at economically feasible premiums. Insurance against environmental risks (including potential for pollution or other hazards as a result of disposal waste products occurring from exploration and production) is not generally available at economical terms to the Company or to other companies within the industry. To the extent the Company is subject to environmental liabilities, the payment of such liabilities would reduce the funds available to the Company. Should the Company be unable to fund fully the cost of remedying an environmental problem, the Company might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy. FOREIGN OPERATIONS The Company's La Choya gold mine is located in Sonora, Mexico, and the Company's K-T Mexico clay slurry plant is located in Monterrey, Mexico. The Company also has exploration projects and mining investments in Mexico, Canada and South America. Such projects and investments could be adversely affected by exchange controls, currency fluctuations, political risks, taxation and laws or policies of either foreign countries or the United States affecting foreign trade, investment and taxation, which, in turn, could affect the Company's current or future foreign operations. HEDGING ACTIVITIES Hedging activities are intended to minimize the effect of declines in metals prices on results of operations for a period of time. -39- 41 Although hedging activities may protect a company against low metals prices, it may also limit the price that can be received on hedged products, subject to forward sales and call options, potentially resulting in the Company foregoing the realization of revenues to the extent the market prices of metals exceed the related metals price in a forward sale or call option contract. The Company 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. ENVIRONMENTAL LIABILITIES Reserves for closure costs, reclamation and environmental matters totaled $29.8 million and $41.3 million at December 31, 1998 and 1997, respectively. The Company anticipates that expenditures relating to these reserves will be made over the next several years. Future closure, reclamation, and environmental related expenditures are difficult to estimate in many circumstances due to the early stages of investigation, the uncertainties relating to specific reclamation and remediation methods and costs, the possible participation of other potentially responsible parties and changing environmental laws, regulations, and interpretations. It is possible that changes to estimates of future closure, reclamation, and environmental contingencies could have a material effect on future operating results, as new information becomes known. -40- 42 GLOSSARY OF CERTAIN MINING TERMS Ball Clay -- A fine-grained, plastic, white firing clay used principally for bonding in ceramic ware. Cash Operating Costs -- Includes all direct and indirect operating cash costs incurred at each operating mine, excluding royalties and mine production taxes. Cash Operating Costs Per Ounce -- Calculated based upon cash operating costs, as defined herein, net of by-product revenues from all metals other than the primary metal produced at each mine, divided by the total ounces of the primary metal produced. Decline -- An underground passageway connecting one or more levels in a mine, providing adequate traction for heavy, self-propelled equipment. Such underground openings are often driven in an upward or downward spiral, much the same as a spiral staircase. Development -- Work carried out for the purpose of opening up a mineral deposit and making the actual ore extraction possible. Dilution -- The amount of waste which must be mined along with the ore in order to obtain the ore. Dore -- Unrefined gold and silver bullion bars consisting of approximately 90% precious metals which will be further refined to almost pure metal. Exploration -- The searching for ore, usually by geological surveys, geophysical prospecting, drilling, surface or underground headings, drifts, or tunnels. Feldspar -- A crystalline mineral consisting of aluminum silicates and other elements that is an essential ingredient for the ceramics industry, and also is used in the glass and paint industries. Grade -- The average assay of a ton of ore, reflecting metal content. Heap Leaching -- A process involving the percolation of a cyanide solution through crushed ore heaped on an impervious pad or base to dissolve minerals or metals out of the ore. Kaolin -- Also known as china clay, kaolin is a white alumina-silicate clay used in porcelain, paper, plastics, rubber, paints, and many other products. -41- 43 Mill -- A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to effect recovery of the pure metal. Mineral-Bearing Material -- Material for which quantitative estimates are based on inferences from known mineralization, or on drill-hole samples too few in number to allow for classification as Probable ore reserves. Mineralization - The process by which a mineral or minerals are introduced into a rock, resulting in a valuable deposit. 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. Orebody -- A continuous, well-defined mass of material of sufficient ore content to make extraction economically feasible. Patented Mining Claim -- A parcel of land originally located on federal lands as an unpatented mining claim under the General Mining Law, the title of which has been conveyed from the federal government to a private party pursuant to the patenting requirements of the General Mining Law. Proven and Probable Ore Reserves -- Reserves that reflect estimates of the quantities and grades of mineralized material at the Company's mines which the Company believes can be recovered and sold at prices in excess of the total cash cost associated with extracting and processing the ore. The estimates are based largely on current costs and on projected prices and demand for the Company's products. Mineral reserves are stated separately for each of the Company's mines based upon factors relevant to each mine. Reserves represent diluted in-place grades and do not reflect losses in the recovery process. The Company's estimates of Proven and Probable reserves for the Lucky Friday mine, the Rosebud mine and the La Choya mine at December 31, 1998 and 1997 are based on gold prices of $350 and $350 per ounce, silver prices of $5.50 and $5.20 per ounce, lead prices of $0.26 and $0.29 per pound, and zinc prices of $0.55 and $0.65 per pound, respectively. Proven and Probable ore reserves for the Greens Creek mine are based on calculations of reserves provided to the Company by the operator of Greens Creek that have been reviewed but not independently confirmed by the Company. Kennecott Greens Creek Mining Company's estimates of Proven and Probable reserves for the Greens Creek mine as of December 1998 and 1997 are derived from successive generations of reserve and feasibility analyses -42- 44 for different areas of the mine each using a separate assessment of metal prices. The weighted-average prices used were: December 31, December 31, 1998 1997 ------------- ------------- Gold $ 327 $ 359 Silver 5.11 4.85 Lead 0.29 0.29 Zinc 0.56 0.56 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. Probable Reserves -- Resources for which tonnage and grade and/or quality are computed primarily 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. Proven Reserves -- Resources for which tonnage is computed from dimensions revealed in outcrops, trenches, workings or drill holes and for which the grade and/or quality is computed from the results of detailed sampling. 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. Reserves -- That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves are customarily stated in terms of "Ore" when dealing with metalliferous minerals. Rockburst -- Explosive rock failures caused by the pressure exerted by rock adjacent to mine openings far below the surface. Sand Fill -- The coarser fraction of concentrator tailings, which is conveyed as a slurry in underground pipes to support cavities left by extraction of ore. -43- 45 Shaft -- A vertical or steeply inclined excavation for the purpose of opening and servicing a mine. It is usually equipped with a hoist at the top which lowers and raises a conveyance for handling personnel and materials. Stope -- An underground excavation from which ore has been extracted either above or below mine level. Total Cash Costs -- Includes all direct and indirect operating cash costs incurred at each operating mine. Total Cash Costs Per Ounce -- Calculated based upon total cash costs, as defined herein, net of by-product revenues from all metals other than the primary metal produced at each mine, divided by the total ounces of the primary metal produced. Total Production Costs -- Includes total cash costs, as defined, plus depreciation, depletion, amortization, and reclamation accruals relating to each operating mine. 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. Troy Ounce -- Unit of weight measurement used for all precious metals. The familiar 16-ounce avoirdupois pound equals 14.583 Troy Ounces. Underhand Mining -- The primary mining method employed in the Lucky Friday mine utilizing mechanized equipment, a ramp system and cemented sand fill. The method has proven effective in reducing mining costs and rockburst activity. 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. Vein -- A mineralized zone having a more or less regular development in length, width and depth which clearly separates it from neighboring rock. Waste -- Barren rock in a mine, or mineralized material that is too low in grade to be mined and milled at a profit. -44- 46 ITEM 2. PROPERTIES. The Company's principal mineral properties are described in Item 1 above. The Company also has interests in a number of other mineral properties in the United States, Canada, 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 the Company's 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 important to the business of the Company taken as a whole. The general corporate office of the Company is located in Coeur d'Alene, Idaho, on a tract of land containing approximately 13 acres. The Company also owns and has subdivided approximately 34 adjacent acres presently held for sale. The administrative office of the Company's ball clay, kaolin and feldspar operations is located in Nashville, Tennessee. Additionally, there are general offices and laboratory facilities at each operating location. The Company also owns approximately 1,600 acres of land principally for use in connection with milling and storage operations for the industrial minerals operations. The administrative offices of K-T Clay de Mexico are located with the clay slurry processing facility on a parcel of land near Monterrey, Mexico. The general offices of MWCA, Inc. are located in Rexburg, Idaho. Bark processing facilities are located in Rexburg, Idaho, Superior, Montana, and Piedmont, South Dakota. The Company owns a parcel of land of approximately 20 acres in the vicinity of Antonito, Colorado, on which are located building, storage and shipping facilities utilized in its scoria business, and a bagging plant for landscape scoria. The Company also owns a bagging facility, utilized for scoria briquettes, located at San Acacio, Colorado. The Company believes that its existing facilities are sufficient for their intended purposes. ITEM 3. LEGAL PROCEEDINGS. 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, as amended (CERCLA or Superfund), 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 (Bunker Hill Site) located at Kellogg, Idaho. The Consent Decree settled -45- 47 the Company's response-cost liability under Superfund at the Bunker Hill Site. As of December 31, 1998, the Company has estimated and accrued an allowance for liability for remedial activity costs at the Bunker Hill Site of $5.0 million. These estimated expenditures are anticipated to be made over the next three to five years. As with any estimate of this nature, it is reasonably possible that the Company's estimate of this obligation may change in the near term. Coeur d'Alene River Basin Natural Resource Damage Claims - - Coeur d'Alene Tribe Claims In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit, under CERCLA, in Idaho Federal District Court against the Company 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 Company answered the Tribe's complaint denying liability for natural resource damages. In October 1996, following a court imposed four-year stay of the proceeding, the Tribe's natural resource damage litigation was consolidated with the United States Natural Resources Damage (NRD) 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 the Company. 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 (the Basin) in northern Idaho over 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. The Company answered the complaint in May 1996, denying liability to the United States under CERCLA and the Clean Water Act and asserted a counterclaim against the United States for the federal government's involvement in mining activity in the Basin which contributed to the releases and damages alleged by the United States. The Company believes it also has a number of defenses to the United States' claims. In October 1996, the Idaho Federal District Court consolidated the Tribe's NRD litigation with the U.S. Government's lawsuit for discovery and other limited pretrial purposes. On September 30, 1998, the Federal District Court granted the Company's summary judgment motion with respect to the applicable -46- 48 statute of limitations and dismissed the United States' NRD claim due to the failure of the EPA to comply with federal law and EPA regulations in expanding the Natural Priority List site boundaries to include the entire Coeur d'Alene River/Lake Coeur d'Alene Basin which would have the effect of extending the statute of limitations. The United States has appealed the Federal District Court's decision to the Ninth Circuit Court of Appeals. The case is proceeding through discovery. Summary judgment motions related to i) the extent of Federal Trusteeship over Natural Resources in the Coeur d'Alene Basin, ii) a constitutional challenge to the retroactive application of Superfund liability at the site, and iii) case management are pending before the Federal District Court. 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. - - State of Idaho Claims In March 1996, the Company entered into an agreement (the Idaho Agreement) with the State of Idaho (the State) pursuant to which the Company agreed to continue certain financial contributions to environmental cleanup work in the Basin being undertaken by a State trustees group. In return, the State agreed not to sue the Company for damage to natural resources for which the State is a trustee for a period of five years, to pursue settlement with the Company of the State's NRD claims and to grant the Company credit against any such State claims for all expenditures made under the Idaho Agreement and certain other Company contributions and expenditures for environmental cleanup in the Basin. At December 31, 1998, the Company's accrual for remediation activity in the Basin, not including the Bunker Hill Site, totaled approximately $0.4 million. These expenditures are anticipated to be expended during 1999. Depending on the results of the aforementioned lawsuits, it is reasonably possible that the Company's estimate of its obligation may change in the near or longer term. Insurance Coverage Litigation In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance companies which provided comprehensive general liability insurance coverage to the Company and its predecessors. The Company believes that the insurance companies have a duty to defend and indemnify the Company under their policies of insurance for all liabilities and claims asserted against the Company 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 the Company in the Tribe's -47- 49 lawsuit. During 1995 and 1996, the Company entered into settlement agreements with a number of the insurance carriers named in the litigation. The Company 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 continued until the underlying environmental claims against the Company are resolved or settled. The remaining insurer is providing the Company with a partial defense in all Basin environmental litigation. As of December 31, 1998, the Company had not reduced its accrual for reclamation and closure costs to reflect the receipt of any anticipated insurance proceeds. Other Claims On October 22, 1998, the Company and certain affiliates were served with a lawsuit filed in Superior Court of Kern County, California. The complaint pertains to the Cactus Gold mine located near Mojave, California. Seventy-four plaintiffs allege that during the period from 1960 through the present, the named defendants' operations and activities caused personal injury and property damage to the plaintiffs. The plaintiffs seek monetary damages of $29.6 billion for general negligence, nuisance, trespass, statutory violations, ultra-hazardous activities, strict liability, and other torts. The Company has provided notice and demand for defense/indemnity to its insurance carriers providing coverage for the Cactus Gold mine operation. To date, the Company has not received any response from the carriers. The Company has retained outside counsel to defend the Company in advance of any response from the insurance companies. Based on a preliminary review with outside counsel of the allegations in the complaint as it relates to the historical operations at the Cactus Gold mine, the Company believes the allegations are without merit. The Company is subject to other legal proceedings and claims 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 matters and the proceedings disclosed above, it is the opinion of the Company's management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, financial condition or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. -48- 50 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) (i) Shares of the Common Stock are traded on the New York Stock Exchange, Inc., New York, New York. (ii) The price range of the Common Stock on the New York Stock Exchange for the past two years was as follows: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 - High $ 6.69 $ 7.13 $ 5.31 $ 5.25 - Low 4.44 4.81 3.19 3.50 1997 - High $ 7.25 $ 6.25 $ 6.13 $ 6.31 - Low 5.25 5.25 4.94 4.38 (b)As of December 31, 1998, there were 10,162 holders of record of the Common Stock. (c)There were no Common Stock cash dividends paid in 1998 or 1997. The amount and frequency of cash dividends are significantly influenced by metals prices, operating results and the Company's cash requirements. -49- 51 ITEM 6. SELECTED FINANCIAL DATA. (dollars in thousands except for per-share amounts)
Years Ended December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Total revenue $ 165,148 $ 168,569 $ 166,882 $ 159,704 $ 130,569 ========= ========= ========= ========= ========= Net loss $ (300) $ (483) $ (32,354) $(101,719) $ (24,613) Preferred stock dividends (8,050) (8,050) (8,050) (8,050) (8,050) --------- --------- --------- --------- --------- Loss applicable to common shareholders $ (8,350) $ (8,533) $ (40,404) $(109,769) $ (32,663) ========= ========= ========= ========= ========= Basic and diluted loss per common share $ (0.15) $ (0.16) $ (0.79) $ (2.28) $ (0.74) ========= ========= ========= ========= ========= Total assets $ 252,062 $ 250,668 $ 268,393 $ 258,190 $ 344,582 ========= ========= ========= ========= ========= Long-term debt - Notes and contracts payable $ 42,923 $ 22,136 $ 38,208 $ 36,104 $ 1,960 ========= ========= ========= ========= ========= Cash dividends per common share $ - - $ - - $ - - $ - - $ - - ========= ========= ========= ========= ========= Cash dividends per preferred share $ 3.50 $ 3.50 $ 3.50 $ 3.50 $ 3.50 ========= ========= ========= ========= ========= Common shares issued 55,166,728 55,156,324 51,199,324 48,317,324 48,144,274 Shareholders of record 10,162 10,636 11,299 12,210 13,196 Employees 1,184 1,202 1,254 1,259 1,204
-50- 52 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(1) INTRODUCTION Hecla Mining Company (Hecla or the Company) is primarily involved in the exploration, development, mining, and processing of gold, silver, lead, zinc, and industrial minerals. The Company's revenues and profitability are strongly influenced by world prices of gold, silver, lead, and zinc, which fluctuate widely and are affected by numerous factors beyond the Company's 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. In the following descriptions, where there are changes that are attributable to more than one factor, the Company presents each attribute in descending order relative to the attribute's importance to the overall change. Except for the historical information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the matters discussed below are forward- looking statements. Forward-looking statements involve risks and uncertainties, including: the timely development of existing properties and reserves and future projects, the impact of metals prices and metals production volatility, changing market conditions and the regulatory environment and the other risks detailed below and elsewhere in this Form 10-K (see "Investment Considerations" of Part I, Item 1 of this Form 10-K) and from time to time, as necessary, in the Company's periodic reports filed with the Securities and Exchange Commission. As a result, actual results may differ materially from those projected or implied. These forward-looking statements represent the Company's judgment as of the date of this filing. The Company disclaims, however, any intent or obligation to update these forward-looking statements as circumstances change or develop. In 1998, the Company produced approximately 127,000 ounces of gold compared to approximately 174,000 ounces of gold in 1997. The decrease in gold production during 1998 is the result of the suspension of operations at the Grouse Creek mine in April 1997 and decreased gold production at the La Choya mine in 1998 resulting from the completion of mining in 1998. This was partly offset by increased gold production at the Rosebud mine where operations commenced in April 1997. The Company's gold production in 1998 was from the following sources: the Rosebud mine - approximately 65,000 ounces, the La Choya mine - approximately 40,000 ounces, the Greens Creek mine - approximately 18,000 ounces, and an additional 4,000 ounces from other sources. In - --------------------- (1) For definitions of certain mining terms used in this description, see "Glossary of Certain Mining Terms" at the end of Item 1 of this Form 10-K, page 41. -51- 53 1999, the Company expects to produce between 77,000 and 83,000 ounces of gold. The 1999 estimated gold production includes 47,000 to 51,000 ounces from the Company's interest in the Rosebud mine, 18,000 to 20,000 ounces from the Company's interest in the Greens Creek mine, and 12,000 ounces from the La Choya mine and other sources. In 1998, the Company produced approximately 7.2 million ounces of silver compared to 1997 production of approximately 5.1 million ounces. The increase in silver production in 1998 is principally the result of increased silver production at the Lucky Friday mine due to mining in the higher silver grade expansion in the 1998 period. The Company's silver production in 1998 was principally from the Lucky Friday mine - approximately 4.1 million ounces, the Greens Creek mine - approximately 2.8 million ounces, and the Rosebud mine - approximately 0.3 million ounces. The Company's share of silver production for 1999 is expected to be between 7.2 and 7.5 million ounces. The 1999 estimated silver production includes 4.5 to 4.7 million ounces from the Lucky Friday mine, 2.5 to 2.6 million ounces from the Company's interest in the Greens Creek mine and an additional 0.2 million ounces from other sources. In 1998, the Company shipped approximately 1,005,000 tons of product from the Kentucky-Tennessee Clay (K-T Clay) group, including ball clay, kaolin, and feldspar. The Company's shipments of products from the K-T Clay group are expected to increase in 1999 to approximately 1,090,000 tons. In 1998, the Company shipped approximately 110,000 tons of specialty aggregates from its MWCA-Colorado Aggregate division, and approximately 1,078,000 cubic yards of landscape material from its MWCA-Mountain West Products division. In order to provide funds for possible metals and industrial minerals expansion, as well as to reduce indebtedness, the Company has decided to attempt to sell MWCA in 1999, although there can be no assurance that the Company will be successful. RESULTS OF OPERATIONS 1998 vs 1997 The Company incurred a net loss of approximately $0.3 million ($0.01 per common share) in 1998 compared to a net loss of approximately $0.5 million ($0.01 per common share) in 1997. After $8.1 million in dividends to holders of the Company's Series B Cumulative Convertible Preferred Stock, the Company's loss applicable to common shareholders for 1998 was approximately $8.4 million, or $0.15 per common share, compared to $8.5 million, or $0.16 per common share in 1997. The change in the loss applicable to common shareholders during 1998 was attributable to a variety of factors, the most significant of which are discussed below in descending order of magnitude. -52- 54 Comparing the average metal prices for 1998 with 1997, gold decreased 11% from $331 per ounce to $294 per ounce, silver increased 13% from $4.90 per ounce to $5.53 per ounce, lead decreased 14% from $0.28 per pound to $0.24 per pound, and zinc decreased 22% from $0.60 per pound to $0.47 per pound. During 1998, the Company's realized gold price per ounce decreased 15% from $356 per ounce to $301 per ounce. Sales of the Company's products decreased by approximately $4.7 million, or 2.9%, in 1998 compared to 1997. The decreased product sales resulted from lower sales totaling approximately $23.5 million from gold operations due to decreased production and a lower gold price in the 1998 period. The decrease in sales from gold operations was partly offset by increased sales from the industrial minerals segment of $9.7 million where sales improved at both K-T Clay and MWCA. In addition, there were increased sales from silver operations of $9.1 million due principally to increased production at the Lucky Friday mine and a higher silver price, partly offset by lower gold, zinc, and lead by-product prices. Cost of sales and other direct production costs increased $1.2 million from $126.7 million in 1997 to $127.9 million in 1998, primarily due to increases in operating costs at (1) the industrial minerals segment of $8.5 million resulting from increased sales of products at K-T Clay and MWCA, combined with reorganization costs at MWCA and a patent litigation settlement at K-T Clay; (2) the Lucky Friday mine totaling $4.8 million resulting from increased production and sales from the newly developed expansion area; (3) the Rosebud mine of $4.7 million due to operating the mine for a full year in 1998 compared to nine months in 1997 following the commencement of operations in April 1997; and (4) the Greens Creek mine of $0.4 million. These increases in operating costs were partly offset by (1) decreased operating costs of $10.3 million at the Grouse Creek mine where operations were suspended in April 1997; (2) decreased operating costs at the La Choya mine of $6.3 million, due to decreased production; and (3) decreased costs at other operations totaling approximately $0.5 million. Cost of sales and other direct production costs as a percentage of sales increased from 77.3% in 1997 to 80.3% in 1998. The increase is primarily due to the effects of decreased gold production at the La Choya mine, and lower gold, zinc, and lead prices in the 1998 period. Depreciation, depletion and amortization increased $1.2 million, or 5.7%, from 1997 to 1998 principally due to (1) increased depreciation at the Rosebud mine ($1.5 million), the result of operating twelve months in 1998 versus nine months in 1997; (2) increased depreciation at the Lucky Friday mine ($1.2 million), due to increased production in the 1998 period; and (3) increased depreciation at the industrial minerals segment ($0.2 million). These increases were partly offset by decreased depreciation, -53- 55 depletion, and amortization at (1) the La Choya mine ($1.5 million) as a result of the majority of the current property, plant, and equipment being fully depreciated as of December 31, 1997, and (2) the Greens Creek mine ($0.3 million). Cash operating costs, total cash costs, and total production costs per gold ounce increased from $166, $173, and $239 in 1997 to $177, $189, and $262 in 1998, respectively. The increases in the cash operating, total cash and total production costs per gold ounce were mainly attributed to increased per ounce costs at both the La Choya mine, the result of decreased production, and the Rosebud mine, the result of higher milling costs and mining of lower grade gold ore. Cash operating costs and total cash costs per silver ounce increased from $3.58 and $3.58 in 1997 to $3.96 and $3.96 in 1998, respectively. The increases in cash costs per ounce amounts are due primarily to increased costs per ounce amounts at the Greens Creek mine due to the impact of lower gold, zinc, and lead by-product prices, partly offset by decreased costs per ounce amounts at Lucky Friday resulting from increased silver production from higher grade ore, which was also offset by lower by-product metal prices. Total production costs per silver ounce decreased slightly from $5.42 per ounce in 1997 to $5.37 per ounce in 1998 principally the result of lower depreciation and depletion per ounce at the Lucky Friday mine due to increased ore reserves. Gold, lead, and zinc are by-products of the Company's silver production, the revenues from which are netted against production costs in the calculation of the production costs per ounce of silver. Other operating expenses decreased by approximately $2.1 million, or 13.6%, from 1997 to 1998, due principally to (1) a decrease in exploration expenditures ($2.6 million), principally in Mexico at the La Jojoba and El Porvenir properties, partly offset by increased expenditures in Peru and Chile at the Alto Dorado and Cacique sites; (2) non-recurrence of a reduction in carrying value of mining properties ($0.7 million), the result of a $0.5 million adjustment in 1997 at the Lisbon Valley joint venture, a uranium property, and a $0.2 million adjustment of material and supplies inventory at the Grouse Creek mine in 1997; and (3) decreased general and administrative expenditures ($0.4 million). These items were partly offset by an increased provision for closed operations and environmental matters totaling $1.5 million, consisting of (a) a provision in 1998 at the closed Star mine versus a benefit in 1997 ($1.3 million); (b) a decreased benefit from the American Girl mine in 1998 ($1.2 million); and (c) other net increases of $0.3 million. These increases in the provision were partly offset by a decreased provision at Grouse Creek ($1.3 million). Other income was approximately $3.3 million in 1998 compared to $0.9 million in 1997. The $2.4 million increase was primarily due to (1) a gain on investments in 1998 versus a loss in 1997 ($1.5 -54- 56 million); (2) an increase in interest and miscellaneous income in 1998 over 1997 ($1.3 million) resulting from gains on the sale of land located near the Company's corporate headquarters ($3.0 million), partly offset by the 1997 gain on sale of an 8% interest in the Buckhorn Joint Venture, in Nevada, of $1.1 million and decreased royalty income ($0.5 million); and (3) decreased miscellaneous expense ($0.2 million). These items were partly offset by increased total interest costs as a result of increased borrowings under the Company's revolving and term loan credit facility and increased interest expense and fees associated with the Company's tax-exempt solid waste disposal bonds. Capitalized interest costs increased $0.2 million due to increased capitalized interest associated with the Lucky Friday expansion project ($0.4 million), which was partly offset by decreased capitalized interest at the Rosebud mine. Income taxes reflect a benefit of $0.9 million in 1998 compared to a provision of $1.9 million in 1997. The benefit in 1998 primarily relates to the resolution of outstanding foreign tax matters in the Company's favor during 1998, combined with the carryback of certain various 1998 expenditures to reduce U.S. income taxes previously provided, partly offset by a provision for various state income taxes. The provision in 1997 primarily reflects the provisions for foreign income taxes as well as various state income taxes, partially offset by the carryback of certain 1997 expenditures to reduce U.S. income taxes previously provided. RESULTS OF OPERATIONS 1997 vs 1996 The Company incurred a net loss of approximately $0.5 million ($0.01 per common share) in 1997 compared to a net loss of approximately $32.4 million ($0.63 per common share) in 1996. After payment of $8.1 million in dividends to holders of the Company's Series B Cumulative Convertible Preferred Stock, the Company's loss applicable to common shareholders for 1997 was approximately $8.5 million, or $0.16 per common share, compared to $40.4 million, or $0.79 per common share in 1996. The smaller loss in 1997 was due to various factors, the most significant of which were 1996 adjustments, totaling $35.7 million for severance, holding, reclamation, closure costs, and carrying value adjustments at the Grouse Creek and American Girl mines. Sales of the Company's products increased by approximately $5.7 million, or 3.6%, in 1997 compared to 1996, principally due to increased sales totaling approximately $36.9 million, most notably from the Greens Creek mine where operations recommenced in July 1996, and the Rosebud mine where operations commenced in April 1997. These factors were partially offset by decreased sales of approximately $31.2 million principally at the Grouse Creek mine where operations were completed in April 1997, decreased sales at the American Girl mine where operations were suspended in the -55- 57 fourth quarter of 1996, decreased sales at the La Choya mine principally the result of lower average gold prices and slightly lower production, decreased sales at MWCA-Mountain West Products division primarily due to unfavorable weather conditions during the selling season and resulting competitive pricing pressures in the 1997 period, decreased sales at the Lucky Friday mine principally due to decreased lead and silver prices, decreased sales at K-T Clay's Kaolin division due to increased competition and product substitution in export business to the fiberglass industry, and decreased sales at K-T Feldspar resulting from a weaker domestic ceramic market and losses to competition and substitute products. Comparing the average metals prices for 1996 with 1997, gold decreased 15% from $388 per ounce to $331 per ounce, silver decreased 5% from $5.18 per ounce to $4.90 per ounce, lead decreased 20% from $0.35 per pound to $0.28 per pound, and zinc increased 30% from $0.46 per pound to $0.60 per pound. During 1997, the Company's realized gold price per ounce decreased 9% from $393 per ounce to $356 per ounce. Cost of sales and other direct production costs decreased slightly from $126.9 million in 1996 to $126.7 million in 1997, primarily a result of (1) increased production costs of $13.8 million at the Greens Creek mine where operations recommenced in July 1996; (2) increased production costs of $7.4 million at the Rosebud mine, where operations commenced in April 1997; (3) increased production costs of $1.2 million at the Lucky Friday mine associated with increased production; and (4) production cost increases at MWCA-Colorado Aggregate division, K-T Clay Ball Clay division, and K-T Clay de Mexico in direct correlation to increased sales at these operations. These increases in cost of sales and other direct production costs were partially offset by decreases in operating costs at other operations of approximately $26.1 million. These decreases are primarily due to (1) decreased production costs at the Grouse Creek mine of $15.4 million due to the suspension of operations in April 1997; (2) decreased production costs at the American Girl mine of $8.6 million due to the suspension of operations in the fourth quarter of 1996; (3) decreased production costs at La Choya of $0.9 million, the result of lower production levels; and (4) decreased production costs at industrial minerals operations, including K-T Kaolin, K-T Feldspar, and MWCA-Mountain West Products division resulting from decreased sales volumes. Cost of sales and other direct production costs as a percentage of sales improved from 80.2% in 1996 to 77.3% in 1997. The improvement is primarily due to the shutdown of the higher cost American Girl mine in late 1996, and the suspension of operations at the higher cost Grouse Creek mine in April 1997, as well as the addition of the lower cost Rosebud and Greens Creek mines. Depreciation, depletion and amortization increased $0.6 million, or 2.7%, from 1996 to 1997 principally due to (1) Rosebud mine depreciation expense ($4.8 million) resulting from the -56- 58 commencement of operations in April 1997; (2) increased depreciation expense at the Greens Creek mine ($4.8 million) resulting from the recommencement of operations in July 1996; and (3) increased depreciation expense at the Lucky Friday mine associated with increased production. These increases in depreciation, depletion and amortization were partially offset by decreases at (1) the La Choya mine ($6.0 million), the result of a lower depletion rate in 1997 attributable to the 1996 increase in total estimated recoverable ounces from the mine; (2) decreased depreciation expense at the Grouse Creek mine ($2.2 million) resulting from the 1996 write-down of the remaining carrying value of property, plant, and equipment; and (3) decreased depreciation expense at the American Girl mine ($1.3 million) resulting from the suspension of operations at the American Girl mine in late 1996. Cash operating costs, total cash costs, and total production costs per gold ounce decreased from $273, $276, and $364 in 1996 to $166, $173, and $239 in 1997, respectively. The decreases in the cash operating, total cash and total production costs per gold ounce were mainly attributed to the suspension of operations at the higher cost American Girl and Grouse Creek mines, as well as the commencement of production at the lower cost Rosebud mine. The total production costs per ounce was also favorably impacted by the decreased depletion rate per ounce at the La Choya mine in 1997 compared to 1996. Cash operating costs, total cash costs, and total production costs per silver ounce decreased from $4.24, $4.24, and $5.47 in 1996 to $3.58, $3.58, and $5.42 in 1997, respectively. The decreases in cash costs per ounce amounts were due primarily to recommencement of operations at the Greens Creek mine in July 1996, partially offset by increased per ounce costs at the Lucky Friday mine resulting from decreased lead by-product credits in the 1997 period. Gold, lead, and zinc are by-products of the Company's silver production, the revenues from which are netted against production costs in the calculation of the production costs per ounce of silver. Other operating expenses decreased by approximately $32.9 million, or 67.7%, from 1996 to 1997, due principally to a decrease in the provision for closed operations and environmental matters totaling $23.5 million, consisting of (a) the 1996 provision at the Grouse Creek mine ($22.5 million); (b) the 1996 provision for environmental matters within the Coeur d'Alene River Basin ($2.7 million); (c) a benefit from the American Girl mine in 1997 versus a provision in 1996 ($1.8 million); and (d) reductions in the provision for closed operations and environmental matters in 1997 at other properties, including Kirkland Lake ($0.8 million), Republic ($0.7 million), Buckhorn ($0.6 million), Star ($0.3 million), and Escalante ($0.2 million). These decreases in the provision were partly offset by increased provisions including (a) the receipt of $2.6 million in insurance proceeds in 1996 related to the remediation liability at Bunker Hill; and (b) increases in -57- 59 the provision for closed operations and environmental matters in 1997 at other properties including Grouse Creek ($1.8 million), Cactus ($0.7 million), Durita ($0.7 million), Yellow Pine ($0.3 million), and other idle properties ($0.2 million). Also, contributing to the decrease in other operating expenses was a decrease in reduction in carrying value of mining properties of $12.2 million, consisting of the Company's 1996 reduction in carrying value of the Company's interest in the American Girl mine ($7.6 million) and the Grouse Creek mine ($5.3 million), partly offset by the 1997 reduction in mining properties related to the Lisbon Valley joint venture, a uranium property ($0.5 million), and material and supplies inventory at the Grouse Creek mine ($0.2 million). These decreases were partially offset by increased exploration expenditures of $2.6 million, most notably at the La Jojoba ($1.6 million) and El Porvenir ($1.3 million) gold properties in Mexico, partly offset by other net exploration decreases ($0.3 million); and increased general and administrative expenses of $0.2 million. Other income was approximately $0.9 million in 1997 compared to $6.0 million in 1996. The $5.1 million decrease was primarily due to (1) decreased interest and other income ($4.0 million) resulting principally from the 1996 gain on sale of a royalty interest in the Rosebud mine to Euro-Nevada ($2.5 million), 1996 gain on sale of the Apex mine ($1.0 million), 1996 sale of an interest in the Golden Eagle joint venture ($0.6 million), other 1996 gains on the sales of assets, including land in Coeur d'Alene ($0.6 million), and decreased interest income due to release of restricted investments in 1997 ($0.5 million), partially offset by the 1997 gain on sale of an 8% interest in the Buckhorn joint venture, in Nevada, ($1.1 million); (2) increased net interest cost of $1.0 million; and (3) increased loss on investments of $0.4 million principally the result of a write-down of an investment in common stock. These decreases were partially offset by decreased miscellaneous expense in 1997 of $0.2 million. Total interest cost decreased $0.6 million in 1997, principally due to lower borrowings in 1997 under the Company's revolving and term loan credit facility. Capitalized interest costs decreased $1.6 million principally due to decreased capitalized interest costs associated with the Greens Creek development, the Rosebud mine which was completed in March 1997, and the American Girl mine, partly offset by increased capitalized interest at the Lucky Friday expansion project. Income taxes reflect a provision of $1.9 million in 1997 compared to a provision of $0.7 million in 1996. The provision in 1997 primarily reflects the provisions for foreign income taxes as well as a provision for various state income taxes, partially offset by the carryback of certain various 1997 expenditures to reduce U.S. income taxes previously provided. The provision in 1996 primarily reflects the provisions for foreign income taxes as well as a provision for state income taxes, partially offset by the carryback of certain 1996 expenditures to reduce U.S. income taxes previously provided. -58- 60 FINANCIAL CONDITION AND LIQUIDITY A substantial portion of the Company's revenue is derived from the sale of products, the prices of which are affected by numerous factors beyond the Company's control. Prices may change dramatically in short periods of time and such changes have a significant effect on revenues, profitability and liquidity of the Company. The Company is subject to many of the same inflationary pressures as the U.S. economy in general. The Company continues to implement cost-cutting measures in an effort to reduce per unit production costs. Management believes, however, that the Company may not be able to continue to offset the impact of inflation over the long term through cost reductions alone. However, the market prices for products produced by the Company have a much greater impact than inflation on the Company's revenues and profitability. Moreover, the discovery, development and acquisition of mineral properties are in many instances unpredictable events. Future metals prices, the success of exploration programs, changes in legal and regulatory requirements, and other property transactions can have a significant impact on the need for capital (see "Investment Considerations" in this Form 10-K). The variability of metals prices requires that the Company, in assessing the impact of prices on recoverability of its metals segment assets, exercise judgment as to whether price changes are temporary or are likely to persist. The Company performs a comprehensive evaluation of the recoverability of its assets on a periodic basis. This evaluation includes a review of estimated future net cash flows against the carrying value of the Company's assets. Moreover, a review is made on a quarterly basis to assess the impact of significant changes in market conditions and other factors. Asset write-downs may occur if the Company determines that the carrying values attributed to individual assets are not recoverable given reasonable expectations for future production and market conditions. At December 31, 1998, assets totaled approximately $252.1 million and shareholders' equity totaled approximately $151.7 million. Cash and cash equivalents decreased by $1.3 million from $3.8 million at the end of 1997 to $2.5 million at December 31, 1998. During 1998, $12.9 million of cash was provided by financing activities. The major source of cash was borrowings on long-term debt of $44.5 million. This source of cash was partially offset by uses of cash including repayments on long-term debt of $23.7 million and payment of preferred stock dividends of $8.1 million. Operating activities provided $2.0 million of cash during 1998. The primary sources of cash were from the Rosebud mine, the La Choya mine, the Greens Creek mine, and the Company's industrial minerals operations. Partially offsetting these sources were (1) decreases, totaling $12.6 million, in accrued reclamation and other noncurrent liabilities principally for reclamation and -59- 61 closure activities at the Grouse Creek mine, the Bunker Hill Superfund Site, the Cactus mine, the Coeur d'Alene River Basin, the Durita site, the Republic mine, and the American Girl mine; (2) gain on disposition of properties, plants, and equipment ($2.6 million), most notably for land located near the Company's corporate headquarters; (3) gain on sale of investments ($1.1 million); and (4) other working capital items of $4.5 million. Principal noncash charges included in operating activities include (1) depreciation, depletion, and amortization costs of approximately $22.6 million and (2) provisions for reclamation and closure costs of approximately $0.6 million. The Company's investing activities used $16.2 million of cash during 1998. The most significant use of cash was $22.5 million for properties, plants, and equipment additions described below and the purchase of investments and increase in cash surrender value of life insurance of $0.7 million. These uses were partially offset by (1) proceeds from sales of assets ($3.7 million); (2) the release of $1.6 million in restricted assets; and (3) proceeds of $1.3 million from the sale of investments. During 1998, the most significant asset additions were $6.2 million at the Lucky Friday mine related to the expansion project, $6.0 million at the industrial minerals operations including a plant expansion at the Gleason, Tennessee ball clay plant, $3.8 million at the La Choya mine for costs associated with pushing the pit wall back, $3.0 million for capitalized expenditures at Greens Creek, $2.3 million at the Noche Buena project, and capitalized interest of approximately $1.0 million. Due to recent declines in the prices of metals that the Company produces, including gold, silver, lead, and zinc, the Company has developed plans to generate and preserve cash during the current low metals price environment. Gold (London Initial), silver (Handy & Harman), lead (LME Cash), and zinc (LME Cash) closed the year at $287 per ounce, $5.05 per ounce, $0.225 per pound, and $0.415 per pound, respectively. The Company's 1999 plans include marketing for sale its MWCA subsidiary and certain other assets. The Company has also implemented certain cost cutting measures to reduce operating cash costs in 1999. Without improvements in the prices of metals, the Company anticipates that its history of losses applicable to common shareholders will continue. There can be no assurance that the Company will be successful in its efforts to sell the MWCA subsidiary and other assets, or in its implementation of cost cutting measures. The Company currently estimates that minimum 1999 capital expenditures will be approximately $6.8 million. These expenditures consist primarily of (1) the Company's share of capital expenditures at the Greens Creek mine ($3.5 million); (2) capital expenditures at the Noche Buena project ($1.7 million); (3) industrial minerals capital expenditures ($1.2 million); and (4) capital expenditures at other operating locations ($0.4 million). These planned capital expenditures will depend, in large part, on the Company's ability to obtain the required funds -60- 62 from operating activities, and amounts available under its revolving and term loan credit facility. There can be no assurance that actual capitalized expenditures will be as projected based upon the uncertainties associated with the estimates for capital projects, uncertainties associated with possible development projects, and the Company's ability to generate adequate funding for the projected capital expenditures. The Company's estimate of its capital expenditure requirements assumes, with respect to the Greens Creek and Rosebud properties, that the Company's joint venture partners will not default with respect to their respective portions of development costs and capital expenditures. Pursuant to a Registration Statement filed with the Securities and Exchange Commission and declared effective in the third quarter of 1995, the Company can, at its option, offer and sell debt securities, common shares, preferred shares or warrants in an amount not to exceed $100.0 million in the aggregate. To date, the Company has issued $48.4 million of the Company's common shares under the Registration Statement. On September 30, 1998, the Company amended its revolving and term loan credit facility (the Bank Agreement). Under the terms of the Bank Agreement, the Company may borrow up to $55.0 million, subject to certain limitations, on a revolving credit basis through December 31, 2001, repayable in eight quarterly installments beginning March 31, 2002. During the commitment period, the Company pays an annual facility fee ranging from $178,750 to $261,250, the amount of which is based on average quarterly borrowings. The Bank Agreement includes certain collateral provisions, including the pledging of the common stock of certain of the Company's subsidiaries and providing the lenders a security interest in accounts receivable. Under the Bank Agreement, the Company is required to maintain certain financial ratios, and meet certain net worth and indebtedness tests for which the Company was in compliance at December 31, 1998. Amounts available under the Bank Agreement are based on a defined debt to cash flow test. As of December 31, 1998, the Company had borrowings of $42.8 million (including $9.8 million in solid waste disposal revenue bonds) and the ability to borrow the remaining $12.2 million under the facility. The interest rate for borrowings under the Bank Agreement as of December 31, 1998, was 7.06%. Interest rates on the Bank Agreement are based on LIBOR or the prime rate and may vary based upon the Company's debt level. On February 25, 1999, the Company received a commitment from the lead bank under the Bank Agreement to amend the Bank Agreement. Under the revised terms of the Bank Agreement, the amount available to borrow will remain up to $55.0 million, subject to certain limitations. The ability to borrow under the amended Bank Agreement will be based upon historical cash earnings, as defined, plus the value of a specified amount of eligible accounts receivable and inventory. Under the revised terms, the -61- 63 Company will have to maintain certain financial ratios, and meet certain net worth and indebtedness tests, and the Company will be required to pay an annual facility fee in the range of $192,500- $275,000, based on average quarterly borrowings. Collateral provisions under the terms of the amended agreement will be increased to include a secured interest in the Company's inventory. Interest rates under the amended agreement will continue to be based on LIBOR or the prime rate. All other terms under the existing Bank Agreement remain as they were previously. The Company's planned environmental and reclamation expenditures for 1999 are expected to be between $9.0 and $10.0 million, principally for environmental and reclamation activities at the Grouse Creek mine, the Bunker Hill Superfund Site, the Coeur d'Alene River Basin, and the American Girl, Yellow Pine, Cactus, and Republic properties. Exploration expenditures for 1999 are currently estimated to range from $4.0 to $5.0 million. Depending on the results of exploration activities, actual costs could be higher or lower than estimated. The Company's exploration strategy will focus further exploration at, or in the vicinity of, its currently owned domestic and foreign properties, as well as grass roots and advanced stage projects. Accordingly, 1999 domestic exploration expenditures will be incurred principally at the Greens Creek, Rosebud, and Lucky Friday properties. Foreign exploration efforts in 1999 will center primarily on targets in Mexico and South America. In the normal course of its business, the Company uses forward sales commitments and commodity put and call option contracts to manage its exposure to fluctuations in the prices of certain metals which it produces. Contract positions are designed to ensure that the Company will receive a defined minimum price for certain quantities of its production. Gains and losses, and the related costs paid or premiums received, for contracts which hedge the sales prices of commodities are deferred and included in income as part of the hedged transaction. Revenues from these contracts are recognized at the time the contracts are closed out by delivery of the underlying commodity, when the Company matches specific production to a contract, or upon settlement of the net position in cash. The Company 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. At December 31, 1998, the Company had forward sales commitments through June 30, 1999, for 6,000 ounces of gold at an average price of $354 per ounce. The estimated fair value of these forward sales commitments was $371,000 at December 31, 1998. The London Initial gold price at year end was $287 per ounce. Additionally, at December 31, 1998, the Company had forward sales commitments through June 30, 1999, for 500,000 ounces of silver at an average price of $6.54. The estimated fair value of these -62- 64 forward sales commitments was $740,000 at December 31, 1998. The Handy & Harman silver price at year end was $5.05 per ounce. The nature and purpose of these forward sales contracts, however, does not presently expose the Company to any significant net loss. All of these contracts are designated as hedges at December 31, 1998. In November 1994, the Company entered into a court-approved Consent Decree requiring the Company and certain other mining companies to undertake specific remediation work with respect to the Bunker Hill Superfund Site in northern Idaho. At December 31, 1998, the Company's allowance for Bunker Hill Superfund Site remedial action costs was approximately $5.0 million. Although the Company believes the allowance is adequate based on current estimates of aggregate costs, the Company plans to reassess its obligations under the Consent Decree during 1999. Depending on the results of the reassessment, it is reasonably possible that the Company's estimate of its obligation may change. The Company is subject to a lawsuit filed by the Coeur d'Alene Tribe and the U.S. Government claiming natural resource damages and response costs in portions of the Coeur d'Alene River Basin in northern Idaho and downstream. The claims have been made against the Company and a number of mining companies under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), based upon these companies' historical mining practices. In May 1998, the Environmental Protection Agency (EPA) announced that it had commenced a remedial investigation/feasibility study under Superfund for the entire Coeur d'Alene Basin, including Lake Coeur d'Alene, in support of its response cost claims asserted in one lawsuit. In 1997, K-T Clay terminated shipments of 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. The Company believes $11.0 million of insurance coverage is available for about $8.0 million in claims to date. Although the outcome cannot be assured, the Company believes that there will be no material adverse financial effect on the Company from this matter. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated (see Note 6 of Consolidated Financial Statements). Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company's management, based upon the information available at this time, that the expected outcome of these suits and proceedings will not have a material adverse effect on the results of operations or financial condition of the Company and its subsidiaries. -63- 65 YEAR 2000 The Company utilizes software and related technologies throughout its business that will be affected by the "Year 2000 computer problem," which is common to many corporations and governmental entities. This problem concerns the inability of information systems, primarily computer software programs and certain hardware, to properly recognize and process date-sensitive information as the Year 2000 approaches. Absent corrective actions, computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in system failures or miscalculations causing disruptions to various activities and operations. The Company has established thirteen teams to identify and correct Year 2000 compliance issues. The Company's primary information systems (IS) with non-compliant code are expected to be modified or replaced with systems that are Year 2000 compliant. The Company is also evaluating its non-IS applications, primarily systems embedded in processing and other facilities. Additionally, the teams are responsible for evaluating the Company's critical suppliers and vendors as to their state of readiness for the Year 2000. The Company's primary IS was originally evaluated in 1996, and out of 2,300 programs, 850 were identified that required modification. All of the 850 programs have been modified, installed and tested by the Company's information services department. End user testing is approximately 40% complete with expected completion by March 31, 1999. The Company's other IS's are currently being evaluated and progress is being made in identifying non-compliant systems. Plans are also being made to remediate the non-compliant systems. The Company currently anticipates completing its evaluation of the other IS's, along with plans for remediating non-compliant systems by March 31, 1999. Inventories and assessments of non-IS systems have been completed by all thirteen teams. Remediation efforts are currently being implemented, where necessary. Contingency plans will be developed for all major components in case of system failures surrounding the Year 2000. The Company is utilizing independent consultants to oversee the Year 2000 project as well as to perform certain remediation efforts. In addition, progress on the Year 2000 project is also monitored by senior management, and reported to the Board of Directors at each respective meeting. The Company has identified critical suppliers, as well as other essential service providers, and has surveyed their Year 2000 compliancy. Based on expected compliance dates expressed by some of these critical suppliers and other service providers, additional follow-up will be required to fully assess their state -64- 66 of readiness for the Year 2000. These follow-up activities will occur throughout 1999. For other suppliers and service providers, risk assessments and contingency plans, where necessary, will be finalized by mid-year 1999. The Company has taken the above described steps to address issues surrounding suppliers and service providers; however, the Company has no direct ability to influence other parties' compliance actions. The Company believes it has taken the necessary actions to mitigate the effect of Year 2000 risks, although the Company is not able to eliminate the risks or to estimate the ultimate effect Year 2000 will have on the Company's operating results and financial condition. Contingency plans for Year 2000 related business interruptions are being developed and will include, but are not limited to, the development of emergency backup recovery procedures, replacing automated processes with manual processes, identification of alternate suppliers, and increasing raw material supplies and finished goods inventory prior to December 31, 1999. All plans are expected to be completed by the end of the second quarter of 1999, but ongoing monitoring will continue throughout 1999. The Company's most likely potential risk is a temporary inability to process and ship its products, as well as the inability of some customers to order and pay on a timely basis. Incremental costs directly related to Year 2000 issues are estimated to be $201,000 from 1998 to 2000, of which approximately $108,000 has been spent as of December 31, 1998. The Company's current estimate of expected costs is based upon work performed to date, and depending on the results of future work, the cost estimate may increase. This estimate assumes that the Company will not incur significant Year 2000 costs on behalf of its suppliers or customers. The Company's Year 2000 efforts are ongoing and its overall plan, as well as the consideration of contingency plans, will continue to evolve as new information becomes available. While the Company is taking steps it believes to be necessary to prevent any major interruption to its business activities, that will depend in part, upon the ability of third parties to be Year 2000 compliant. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all -65- 67 fiscal quarters of fiscal years beginning after June 15, 1999, however, earlier application of all of the provisions of this statement is encouraged as of the beginning of any fiscal quarter. The Company is presently evaluating the effect the adoption of this standard will have on the Company's financial condition, results of operations, and cash flows. 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 and organizational expenses 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. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. The Company is presently evaluating the effect the adoption of SOP 98-5 will have on the Company's financial condition and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discussion about the Company's risk-management activities include "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The following tables summarize the financial instruments and derivative instruments held by the Company at December 31, 1998, which are sensitive to changes in interest rates and commodity prices. In the normal course of business, the Company also faces risks that are either nonfinancial or nonquantifiable (See "Investment Considerations" of Part I, Item 1 of this Form 10-K). Interest-Rate Risk Management At December 31, 1998, the Company's debt is subject to changes in market interest rates and is sensitive to those changes. The Company currently has no derivative instruments to offset the risk of interest rate changes. The Company may choose to use derivative instruments, such as interest rate swaps to manage the risk associated with interest rate changes. -66- 68 The following table presents principal cash flows for debt outstanding at December 31, 1998, 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. Outstanding Debt (in thousands)
Fair 1999 2000 2001 2002 2003 Thereafter Total Value ------- ------- ------- ------- ------- ---------- ------- ------- Bank credit agreement $ - - $ - - $ - - $16,500 $16,500 $ - - $33,000 $33,000 Average interest rate 6.78% 6.87% 7.07% 7.18% 7.35% Revenue bonds $ - - $ - - $ - - $ - - $ - - $ 9,800 $ 9,800 $ 9,800 Average interest rate 3.30% 3.60% 3.75% 3.87% 3.97% 4.18%
Commodity-Price Risk Management The Company uses commodity forward sales commitments and commodity put and call option contracts to manage its exposure to fluctuation in the prices of certain metals which it produces. Contract positions are designed to ensure that the Company will receive a defined minimum price for certain quantities of its production. The Company uses these instruments to reduce risk by offsetting market exposures. The Company 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 instruments held by the Company are not leveraged and are held for purposes other than trading. All of these contracts are designated as hedges at December 31, 1998. The Company enters into forward sales commitments to hedge a portion of its annual production of certain metals that it produces. At December 31, 1998, the Company had hedged approximately 7% and 7% of its anticipated 1999 silver and gold production, respectively. -67- 69 The following table provides information about the Company's forward sales commitments at December 31, 1998. 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 January 1, 1999, and June 30, 1999.
Expected Maturity Estimated -------- Fair 1999 Value -------- ------ Forward contracts: Gold sales (ounces) 6,000 Future price (per ounce) $354 Contract amount (in $000's) $2,124 $371 Silver sales (ounces) 500,000 Future price (per ounce) $6.54 Contract amount (in $000's) $3,270 $740
-68- 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 of this Report for information with respect to the financial statements filed as a part hereof, including financial statements filed pursuant to the requirements of this Item 8. SELECTED QUARTERLY DATA (dollars in thousands except for per-share amounts)
First Second Third Fourth 1998: Quarter Quarter Quarter Quarter Total - ---- --------- --------- --------- --------- --------- Sales of products $ 40,129 $ 45,655 $ 38,611 $ 34,836 $ 159,231 Gross profit (loss) $ 4,476 $ 4,120 $ 3,029 $ (2,533) $ 9,092 Net income (loss) $ 2,847 $ 2,996 $ (641) $ (5,502) $ (300) Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050) Income (loss) applicable to common shareholders $ 835 $ 983 $ (2,654) $ (7,514) $ (8,350) Basic and diluted income (loss) per common share $ 0.02 $ 0.02 $ (0.05) $ (0.14) $ (0.15) 1997: - ---- Sales of products $ 42,456 $ 46,069 $ 41,204 $ 34,219 $ 163,948 Gross profit (loss) $ 4,178 $ 6,784 $ 5,438 $ (203) $ 16,197 Net income (loss) $ 518 $ 3,054 $ 935 $ (4,990) $ (483) Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050) Income (loss) applicable to common shareholders $ (1,494) $ 1,041 $ (1,078) $ (7,002) $ (8,533) Basic and diluted income (loss) per common share $ (0.03) $ 0.02 $ (0.02) $ (0.13) $ (0.16)
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None. -69- 71 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Reference is made to the information with respect to the directors of the Company set forth under the caption "Election of Directors" in the Company's proxy statement to be filed pursuant to Regulation 14A for the annual meeting scheduled to be held on May 7, 1999 (the Proxy Statement), which information is incorporated herein by reference. Information with respect to executive officers of the Company is set forth as follows: Age at May 7, Name 1999 Position and Term Served ------------------- ------ ---------------------------- William B. Booth 48 Vice President - Investor and Public Affairs since May 1994; various administrative functions with the Company since December 1985. Arthur Brown 58 Chairman since June 1987; Chief Executive Officer since May 1987; President since May 1986. J. Gary Childress 51 Vice President - Industrial Minerals since February 1994; President and General Manager of Kentucky-Tennessee Clay Company from 1987 to 1994. George R. Johnson 50 Vice President - Metal Mining since 1996; Manager of Opera- tions - Metal Mining from 1990 to 1996; Senior Project Engineer from 1989 to 1990. Roger A. Kauffman 55 Executive Vice President and Chief Operating Officer since June 1996; President and Chief Operating Officer of Amax Gold from 1994 to 1996; previously employed with the Company from 1985 to 1994 serving as Vice President -Industrial Minerals from 1986 to 1994. -70- 72 Age at May 7, Name 1999 Position and Term Served ------------------- ------ ---------------------------- Jon T. Langstaff 62 Vice President - Human Resources since May 1995; Personnel Manager from 1982 to 1995. John P. Stilwell 46 Vice President - Chief Financial Officer since May 1996; Vice President - Chief Financial Officer and Treasurer from May 1996 to May 1997; Vice President - Finance and Treasurer May 1994 to May 1996; Treasurer since June 1991. Michael B. White 48 Vice President - General Counsel and Secretary since May 1992; Secretary since November 1991; Assistant Secretary from March 1981 to November 1991; General Counsel since June 1986. David F. Wolfe 55 Treasurer since May 1997; Manager of Precious Metals Marketing since 1993; Assistant Treasurer from June 1985 to May 1997. There are no family relationships between any of the executive officers. ITEM 11. EXECUTIVE COMPENSATION. Reference is made to the information set forth under the caption "Compensation of Executive Officers" in the Proxy Statement (except the Report on the Compensation Committee on Executive Compensation set forth therein) to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information set forth under the caption "Other Transactions" in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. -71- 73 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements See Index to Financial Statements on Page F-1 (a)(2) Financial Statement Schedules See Index to Financial Statements on Page F-1 (a)(3) Exhibits See Exhibit Index following the financial statements (b) Reports on Form 8-K Form 8-K, dated November 13, 1998, filed on November 25, 1998, related to Company's By-Laws. Form 8-K/A, dated November 13, 1998, filed on December 7, 1998, related to Company's By-Laws. -72- 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1999. HECLA MINING COMPANY By /s/ Arthur Brown -------------------------------- Arthur Brown, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Arthur Brown 3/10/99 /s/ Theodore Crumley 3/10/99 - ------------------------------- -------------------------------- Arthur Brown Date Theodore Crumley Date Chairman and Director Director (principal executive officer) /s/ Lewis E. Walde 3/10/99 /s/ Leland O. Erdahl 3/10/99 - ------------------------------- -------------------------------- Lewis E. Walde Date Leland O. Erdahl Date Assistant Controller Director (principal accounting officer) /s/ John P. Stilwell 3/10/99 /s/ Charles L. McAlpine 3/10/99 - ------------------------------- -------------------------------- John P. Stilwell Date Charles L. McAlpine Date Vice President - Chief Financial Director Officer (principal financial officer) /s/ John E. Clute 3/10/99 /s/ Thomas J. O'Neil 3/10/99 - ------------------------------- -------------------------------- John E. Clute Date Thomas J. O'Neil Date Director Director /s/ Joe Coors, Jr. 3/10/99 /s/ Jorge E. Ordonez 3/10/99 - ------------------------------- -------------------------------- Joe Coors, Jr. Date Jorge E. Ordonez Date Director Director /s/ Paul A. Redmond 3/10/99 - ------------------------------- Paul A. Redmond Date Director -73- 75 INDEX TO FINANCIAL STATEMENTS Page ---- Financial Statements - -------------------- Report of Independent Accountants F-2 Consolidated Balance Sheets at December 31, 1998 and 1997 F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 to F-36 Financial Statement Schedules* - ----------------------------- *Financial statement schedules have been omitted as not applicable F-1 76 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of Hecla Mining Company In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Hecla Mining Company and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for environmental remediation liabilities in 1996. /s/ PRICEWATERHOUSECOOPERS LLP Spokane, Washington February 8, 1999, except for Note 5, as to which the date is February 25, 1999. F-2 77 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) ---------
ASSETS December 31, ----------------------- 1998 1997 ---------- ---------- Current assets: Cash and cash equivalents $ 2,480 $ 3,794 Accounts and notes receivable 25,919 24,445 Income tax refund receivable 1,087 793 Inventories 22,757 22,116 Other current assets 1,251 1,416 ---------- ---------- Total current assets 53,494 52,564 Investments 3,406 2,521 Restricted investments 6,331 7,926 Properties, plants and equipment, net 178,168 180,037 Other noncurrent assets 10,663 7,620 ---------- ---------- Total assets $ 252,062 $ 250,668 ========== ========== LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 12,172 $ 12,590 Accrued payroll and related benefits 2,852 2,436 Preferred stock dividends payable 2,012 2,012 Accrued taxes 772 1,016 Accrued reclamation and closure costs 6,537 6,914 ---------- ---------- Total current liabilities 24,345 24,968 Deferred income taxes 300 300 Long-term debt 42,923 22,136 Accrued reclamation and closure costs 23,216 34,406 Other noncurrent liabilities 9,542 8,518 ---------- ---------- Total liabilities 100,326 90,328 ---------- ---------- Commitments and contingencies (Notes 1, 2, 3 and 6) SHAREHOLDERS' EQUITY Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued and outstanding - 2,300,000 shares, liquidation preference $117,012 575 575 Common stock, $0.25 par value, authorized 100,000,000 shares; issued 1998 - 55,166,728 shares, issued 1997 - 55,156,324 shares 13,792 13,789 Capital surplus 374,017 373,966 Accumulated deficit (230,493) (222,143) Accumulated other comprehensive loss (5,269) (4,961) Less treasury stock, at cost; 1998 - 62,110 common shares, 1997 - 62,089 common shares (886) (886) ---------- ---------- Total shareholders' equity 151,736 160,340 ---------- ---------- Total liabilities and shareholders' equity $ 252,062 $ 250,668 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-3 78 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, ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Sales of products $ 159,231 $ 163,948 $ 158,252 Cost of sales and other direct production costs 127,933 126,742 126,878 Depreciation, depletion and amortization 22,206 21,009 20,451 ---------- ---------- ---------- 150,139 147,751 147,329 ---------- ---------- ---------- Gross profit 9,092 16,197 10,923 ---------- ---------- ---------- Other operating expenses: General and administrative 7,583 7,976 7,745 Exploration 4,866 7,422 4,843 Depreciation and amortization 389 311 338 Provision for (benefit from) closed operations and environmental matters 734 (724) 22,806 Reduction in carrying value of mining properties - - 715 12,902 ---------- ---------- ---------- 13,572 15,700 48,634 ---------- ---------- ---------- Income (loss) from operations (4,480) 497 (37,711) ---------- ---------- ---------- Other income (expense): Interest and other income 5,917 4,621 8,630 Miscellaneous expense (1,487) (1,643) (1,870) Gain (loss) on investments 1,136 (405) (28) Interest expense: Interest costs (3,261) (2,462) (3,058) Less amount capitalized 959 806 2,360 ---------- ---------- ---------- 3,264 917 6,034 ---------- ---------- ---------- Income (loss) before income taxes (1,216) 1,414 (31,677) Income tax benefit (provision) 916 (1,897) (677) ---------- ---------- ---------- Net loss (300) (483) (32,354) Preferred stock dividends (8,050) (8,050) (8,050) ---------- ---------- ---------- Loss applicable to common shareholders (8,350) (8,533) (40,404) ---------- ---------- ---------- Other comprehensive loss, net of tax: Unrealized losses on securities (115) (351) (195) Reclassification adjustment for losses included in net loss 96 320 63 Minimum pension liability adjustment (289) - - - - ---------- ---------- ---------- Other comprehensive loss (308) (31) (132) ---------- ---------- ---------- Comprehensive loss applicable to common shareholders $ (8,658) $ (8,564) $ (40,536) ========== ========== ========== Basic and diluted loss per common share $ (0.15) $ (0.16) $ (0.79) ========== ========== ========== Weighted average number of common shares outstanding 55,101 54,763 51,133 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-4 79 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Year Ended December 31, --------------------------------- 1998 1997 1996 --------- --------- --------- Operating activities Net loss $ (300) $ (483) $ (32,354) Noncash elements included in net loss: Depreciation, depletion and amortization 22,595 21,320 20,789 Gain on disposition of properties, plants and equipment (2,648) (1,111) (706) (Gain) loss on investments (1,136) 405 28 Reduction in carrying value of mining properties - - 715 12,902 Provision for reclamation and closure costs 581 1,341 28,284 Change in: Accounts and notes receivable (1,474) (277) 192 Income tax refund receivable (294) 469 (525) Inventories (641) 548 (4,239) Other current and noncurrent assets (1,747) 868 (479) Accounts payable and accrued expenses (478) (4,787) 3,232 Accrued payroll and related benefits 416 (796) 15 Accrued taxes (244) (411) 385 Accrued reclamation and other noncurrent liabilities (12,587) (11,772) (5,210) -------- -------- --------- Net cash provided by operating activities 2,043 6,029 22,314 -------- -------- --------- Investing activities Additions to properties, plants and equipment (22,495) (24,794) (33,731) Proceeds from disposition of properties, plants and equipment 3,733 1,872 3,641 Proceeds from sale of investments 1,294 - - 130 Decrease (increase) in restricted investments 1,595 13,845 (4,368) Purchase of investments and change in cash surrender value of life insurance, net (734) (1,233) 75 Other, net 399 1,642 (480) -------- -------- --------- Net cash used by investing activities (16,208) (8,668) (34,733) -------- -------- --------- Financing activities Common stock issued under stock and stock option plans 54 41 55 Issuance of common stock, net of offering costs - - 23,355 21,873 Dividends on preferred stock (8,050) (8,050) (8,050) Borrowing on long-term debt 44,531 57,601 51,631 Repayment on long-term debt (23,684) (73,673) (48,918) -------- -------- --------- Net cash provided (used) by financing activities 12,851 (726) 16,591 -------- -------- --------- Change in cash and cash equivalents Net increase (decrease) in cash and cash equivalents (1,314) (3,365) 4,172 Cash and cash equivalents at beginning of year 3,794 7,159 2,987 -------- -------- --------- Cash and cash equivalents at end of year $ 2,480 $ 3,794 $ 7,159 ======== ======== ========= Supplemental disclosure of cash flow information Cash paid during year for: Interest, net of amount capitalized $ 1,784 $ 912 $ 249 ======== ======== ========= Income tax payments, net of refunds $ 439 $ 333 $ 148 ======== ======== ========= See Note 3 for noncash investing and financing activities.
The accompanying notes are an integral part of the consolidated financial statements. F-5 80 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996 (dollars and shares in thousands, except per share amounts) ------------
Accumulated Preferred Stock Common Stock Other --------------- --------------- Capital Accumulated Comprehensive Treasury Shares Amount Shares Amount Surplus Deficit Loss Stock ------ ------ ------ ------- --------- --------- ------------- -------- Balances, December 31, 1995 2,300 $ 575 48,317 $12,079 $ 330,352 $(173,206) $(4,798) $ (886) Net loss (32,354) Preferred stock dividends ($3.50 per share) (8,050) Stock issued for cash, net of issuance costs 2,875 719 21,154 Stock issued to directors 7 2 53 Other comprehensive loss (132) ----- ------ ------ ------- --------- --------- ------- ------- Balances, December 31, 1996 2,300 575 51,199 12,800 351,559 (213,610) (4,930) (886) Net loss (483) Preferred stock dividends ($3.50 per share) (8,050) Stock issued for cash, net of issuance costs 3,950 987 22,368 Stock issued to directors 7 2 39 Other comprehensive loss (31) ----- ------ ------ ------- --------- --------- ------- ------- Balances, December 31, 1997 2,300 575 55,156 13,789 373,966 (222,143) (4,961) (886) Net loss (300) Preferred stock dividends ($3.50 per share) (8,050) Stock issued under stock option plans 2 1 11 Stock issued to directors 9 2 40 Other comprehensive loss (308) ----- ------ ------ ------- --------- --------- ------- ------- Balances, December 31, 1998 2,300 $ 575 55,167 $13,792 $ 374,017 $(230,493) $(5,269) $ (886) ===== ====== ====== ======= ========= ========= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-6 81 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. The Company'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 the Company'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 generally accepted accounting principles 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 1998 presentation. These reclassifications had no effect on the net loss, comprehensive loss or accumulated deficit as previously reported. B. COMPANY'S BUSINESS AND CONCENTRATIONS OF CREDIT RISK -- The Company is engaged in mining and mineral processing activities, including exploration, extraction, processing, and reclamation. The Company's principal products are metals (primarily gold, silver, lead, and zinc) and industrial minerals (primarily clay, aggregate and landscape products). Substantially all of the Company's operations are conducted in the United States and Mexico. Sales of metals products are made principally to domestic and foreign custom smelters and metal traders. The Company sells substantially all of its metallic concentrates to smelters which are subject to extensive regulations including environmental protection laws. The Company has no control over the smelters' operations or their compliance with environmental laws and regulations. If the smelting capacity available to the Company were significantly reduced because of environmental requirements or otherwise, it is possible that the Company's silver operations could be adversely affected. Industrial minerals are sold principally to domestic and Mexican manufacturers and wholesalers. F-7 82 The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company 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. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. C. INVENTORIES -- Inventories are stated at the lower of average cost or estimated net realizable value. D. INVESTMENTS -- The Company uses the equity method to account for investments in common stock of operating companies 20% to 50% owned. Investments in nonoperating companies that are not intended for resale or are not readily marketable are valued at the lower of cost or net realizable value. Marketable equity securities are categorized as available for sale. 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. Restricted investments held at December 31, 1998 and 1997, 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 the Company reviews the net carrying value of all facilities, including idle facilities, on a periodic basis. These reviews consider, among other factors, (1) the net realizable value of each major type of asset, on a property-by- property basis, to reach a judgment concerning possible permanent impairment of value and any need for a write-down in asset value; (2) the ability of the Company to fund all care, maintenance and standby costs; (3) the status and usage of the assets, while in a standby mode, to thereby determine whether some form of amortization is appropriate; and (4) current estimates of metal prices that affect the decision to continue operations, reopen or make a disposition of the assets. The Company estimates the net F-8 83 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 and, where appropriate, from the continuity of existing, developed orebodies, 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 the Company's investment in various projects. Although management has made its best 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. Depreciation is based on the estimated useful lives of the assets and is computed using straight-line, declining-balance, and unit- of-production methods. Depletion is computed using the unit-of- production method. 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 the Company's estimates of proven and probable reserves. It is reasonably possible that certain of the Company's estimates of proven and probable reserves will change in the near term resulting in a change to amortization and reclamation accrual rates in future reporting periods. F. MINE EXPLORATION AND DEVELOPMENT -- Exploration costs are charged to operations as incurred, as are normal development costs at operating mines. Major mine development expenditures are capitalized at operating properties and at new mining properties not yet producing. G. RECLAMATION OF MINING AREAS -- All of the Company'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 the Company. 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 F-9 84 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 reflected on a prospective basis 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 the Company'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 -- The Company accrues costs associated with environmental remediation obligations 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 matters. Costs of future expenditures for environmental remediation are not discounted to their present value. 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. In 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP 96-1). The Company adopted the provisions of SOP 96-1 during 1996. The adoption of the provisions of SOP 96-1 had no material effect on the results of operations or financial condition of the Company. 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. The Company periodically reviews its accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has potentially changed. I. INCOME TAXES -- The Company 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 F-10 85 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 1998, 1997, and 1996, potentially dilutive securities were excluded from the calculation of diluted EPS as they were anti-dilutive. Therefore, there was no difference in the calculation of basic and diluted EPS in 1998, 1997, and 1996. K. REVENUE RECOGNITION -- Sales of metal products sold directly to smelters are recorded when title and risk of loss transfer to the smelter, at estimated metal prices. Recorded values are adjusted periodically and upon final settlement. Metal in products tolled (rather than sold to smelters) is sold under contracts for future delivery; such sales are recorded at contractual amounts when products are available to be processed by the smelter or refinery. Sales of industrial minerals are recognized as the minerals are shipped. L. INTEREST EXPENSE -- Interest costs incurred during the construction of qualifying assets are capitalized as part of the asset cost. M. CASH EQUIVALENTS -- The Company considers cash equivalents to consist of highly liquid investments with a remaining maturity of three months or less when purchased. N. FOREIGN CURRENCY TRANSLATION -- The Company operates in Mexico with its two wholly owned subsidiaries: Minera Hecla, S.A. de C.V. (Minera Hecla) and K-T Clay de Mexico, S.A. de C.V. (K-T Mexico). The functional currency for Minera Hecla and K-T Mexico is the U.S. dollar. Accordingly, the Company translates the monetary assets and liabilities of both 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. Prior to the second quarter of 1995, K-T Mexico's functional currency was the Mexican peso. During the second quarter of 1995, K-T Mexico commenced invoicing its customers in U.S. dollars instead of the Mexican peso. This change indicated a change in the functional currency from the Mexican peso to the U.S. dollar. The change in the functional currency has been accounted for prospectively commencing in the second quarter of 1995. Accumulated translation adjustments from prior periods are included as a separate component of shareholders' equity. The F-11 86 translated amounts for nonmonetary assets prior to the change have become the accounting bases for those assets. O. RISK MANAGEMENT CONTRACTS -- In the normal course of its business, the Company uses derivative commodity instruments to manage its exposure to fluctuations in the prices of certain metals which it produces. The Company does not hold or issue derivative instruments for trading purposes. The Company uses forward sales and commodity put and call options to hedge anticipated sales of certain metal products it produces. The Company also utilizes forward contracts to sell its unhedged production of metal products. The Company accounts for commodity put and call options by deferring any gains and losses, and the related costs paid or premium received, for contracts which hedge the sales prices of commodities until the hedged position is settled. Gains and losses, and the related costs paid or premiums received are included in sales on the original settlement date of the contracts. The Company recognizes revenue on forward sales contracts designated as hedges at the time the Company matches specific production to a forward contract, or upon settlement of the net position in cash. For contracts where the net position is settled in cash, revenues are recognized on the original settlement date of the contracts. In the case of matching specific production to a contract, the revenue may be recognized in a period prior to the receipt of cash, in which case a receivable is established for the expected receipt, although this time period is typically less than two months. Specific criteria required for commodity put and call options and forward sales contracts accounting include the Company's ability to produce the underlying commodity prior to the contract settlement date, the existence of price risk associated with the underlying commodity, the designation of the transaction at the time the contract is entered into as a hedge against price volatility, and whether this type of transaction effectively reduces the price risk associated with the underlying commodity. The Company also uses forward contracts as a means to sell available production. Revenue from these contracts is recognized at the time the contracts are entered into, with a corresponding receivable, as the commodity has already been produced and is available for delivery. Upon delivery of the underlying commodity on the settlement date, cash is received from the sale. The only criterion for utilizing this method is the availability of produced metal at the time the contract is entered into. P. ACCOUNTING FOR STOCK OPTIONS -- In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 encourages all entities to adopt a F-12 87 fair value based method of accounting, but allows an entity to continue to measure compensation cost for those plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company adopted only the disclosure provisions of SFAS 123 in 1996. Q. COMPREHENSIVE LOSS -- In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130), "Comprehensive Income" was issued. SFAS 130 establishes standards for reporting and display of comprehensive loss and its components in a full set of general purpose financial statements. The Company adopted SFAS 130 in 1998. Accordingly, prior periods presented have been reclassified to reflect this new standard. R. NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, however, earlier application of all of the provisions of this statement is encouraged as of the beginning of any fiscal quarter. The Company is presently evaluating the effect the adoption of this standard will have on the Company's financial condition, results of operations, and cash flows. 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. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company is presently evaluating the effect the adoption of SOP 98-5 will have on the Company's financial condition and results of operations. F-13 88 NOTE 2: INVENTORIES Inventories consist of the following (in thousands): December 31, 1998 1997 -------- -------- Concentrates, bullion, metals in transit and other products $ 3,879 $ 4,773 Industrial minerals products 10,240 9,230 Materials and supplies 8,638 8,113 -------- -------- $ 22,757 $ 22,116 ======== ======== At December 31, 1998, the Company had forward sales commitments through June 30, 1999, for 6,000 ounces of gold at an average price of $354 per ounce and forward sales commitments through June 30, 1999, for 500,000 ounces of silver at an average price of $6.54 per ounce. All of the aforementioned contracts are designated as hedges at December 31, 1998. The Company 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 Initial gold price at December 31, 1998, was $287 per ounce. The Handy & Harman silver price at December 31, 1998, was $5.05 per ounce. NOTE 3: PROPERTIES, PLANTS AND EQUIPMENT The major components of properties, plants and equipment are (in thousands): December 31, 1998 1997 --------- --------- Mining properties $ 19,485 $ 21,076 Development costs 147,384 146,988 Plants and equipment 245,216 231,107 Land 4,926 6,158 --------- --------- 417,011 405,329 Less accumulated depreciation, depletion and amortization 238,843 225,292 --------- --------- Net carrying value $ 178,168 $ 180,037 ========= ========= The net carrying values of the major mining properties of the Company that were on a standby or idle basis at December 31, 1998 and 1997, were approximately $1.0 million and $2.8 million, respectively. In 1998, the Company sold 11 parcels of land located near the Company's corporate headquarters and realized a gain of approximately $3.0 million. Proceeds included cash receipts of F-14 89 $3.3 million and issuance of three notes receivable totaling $0.9 million. In 1997, as a result of the expiration of the underlying lease agreement, the Company recorded an adjustment, totaling $0.5 million, to reduce the carrying value of its interest in the Lisbon Valley joint venture. On January 31, 1997, Great Lakes Minerals Inc. (Great Lakes) and the Company entered into a letter agreement terminating the Grouse Creek joint venture and conveying Great Lakes' interest in the Grouse Creek mine to Hecla. Great Lakes retained a 5% defined net proceeds interest in the project. The Company has assumed 100% of the interests and obligations associated with the property. In 1996, based on its periodic reviews of the status of various mining properties, the Company determined that certain adjustments were necessary to properly reflect estimated net realizable values. These adjustments, totaling $12.9 million, consisted of write-downs of properties, plant and equipment, inventories and production notes payable for the Company's interest in the American Girl mine ($7.6 million), and properties, plant and equipment and inventories for the Company's interest in the Grouse Creek mine ($5.3 million). On September 6, 1996, Hecla and Santa Fe Pacific Gold Corporation (Santa Fe), which was subsequently acquired by Newmont Gold Company (Newmont), entered into a joint venture agreement with respect to the development and operation of the Rosebud mine. Pursuant to the agreement, a limited liability corporation was established with each party owning a 50% interest in the mine. No gain or loss was recognized in connection with the agreement. Under the terms of the agreement, Hecla manages the mining activities and Newmont manages mill processing. Total mine-site capital expenditures to bring the mine into production were $18.7 million; all of which had been expended through December 31, 1997. Under the terms of the agreement, Newmont funded the first $12.5 million of mine-site development and also funded costs of road and mill facility improvements. Newmont also contributed exploration property adjacent to the Rosebud property, and funded the first $1.0 million in exploration expenditures in 1997, and will fund two-thirds of future exploration expenditures beyond the initial $1.0 million. In 1996, Euro-Nevada Mining Corporation Inc. (Euro-Nevada) exercised its option to purchase an additional 1.5% Net Smelter Return (NSR) royalty on the Rosebud property for $2.5 million, the proceeds of which were retained by Hecla under the terms of the agreement with Newmont. After the exercise of its option, Euro-Nevada holds a 4% NSR royalty on production from the Rosebud property. The Company recognized a gain of $2.5 million in 1996 associated with this transaction. F-15 90 In 1996, the Company and Santa Fe entered into a joint venture agreement for the Golden Eagle property located adjacent to the Company's Republic property. This agreement was assumed by Newmont as part of its acquisition of Santa Fe. Newmont purchased an immediate 75% interest in the joint venture for $2.5 million. The Company recorded a gain on the transaction totaling $0.6 million. Under the agreement, Newmont is to fund all expenditures at the property through the economic feasibility stage. NOTE 4: INCOME TAXES Major components of the Company's income tax provision (benefit) for the years ended December 31, 1998, 1997, and 1996 are as follows (in thousands): 1998 1997 1996 ------- ------- ------- Current: Federal $ (509) $ 24 $ (749) State 227 345 341 Foreign (634) 1,528 1,085 ------- ------- ------- Income tax provision (benefit) $ (916) $ 1,897 $ 677 ======= ======= ======= Domestic and foreign components of income (loss) before income taxes for the years ended December 31, 1998, 1997, and 1996 are as follows (in thousands): 1998 1997 1996 ------- ------- -------- Domestic $(1,177) $(4,922) $(36,468) Foreign (39) 6,336 4,791 ------- ------- -------- Total $(1,216) $ 1,414 $(31,677) ======= ======= ======== F-16 91 The components of the net deferred tax liability were as follows (in thousands): December 31, 1998 1997 --------- --------- Deferred tax assets: Accrued reclamation costs $ 10,130 $ 14,039 Investment valuation differences 2,113 2,062 Capital loss carryover 1,633 2,373 Postretirement benefits other than pensions 1,034 1,051 Deferred compensation 1,332 1,059 Accounts receivable 456 456 Foreign net operating losses 3,478 2,634 Federal net operating losses 91,323 83,715 State net operating losses 10,022 8,372 Tax credit carryforwards 3,070 3,487 Miscellaneous 1,446 1,446 --------- --------- Total deferred tax assets 126,037 120,694 Valuation allowance (115,654) (112,478) --------- --------- Net deferred tax assets 10,383 8,216 --------- --------- Deferred tax liabilities: Properties, plants and equipment (7,786) (5,815) Deferred income (58) (134) Pension costs (2,085) (1,461) Inventories (454) (806) Deferred state income taxes, net (300) (300) --------- --------- Total deferred tax liabilities (10,683) (8,516) --------- --------- Net deferred tax liability $ (300) $ (300) ========= ========= The Company 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, 1998, 1997, and 1996 are as follows (in thousands): 1998 1997 1996 --------- --------- --------- Balance at beginning of year $(112,478) $(107,937) $ (97,705) Increase related to nonutilization of net operating loss carry- forwards and nonrecognition of deferred tax assets due to uncertainty of recovery (3,176) (4,541) (10,232) --------- --------- --------- Balance at end of year $(115,654) $(112,478) $(107,937) ========= ========= ========= F-17 92 The annual tax provision (benefit) is different from the amount which would be provided by applying the statutory federal income tax rate to the Company's pretax income (loss). The reasons for the difference are (in thousands):
1998 1997 1996 ----------------- ----------------- ----------------- Computed "statutory" provision (benefit) $ (413) (34)% $ 481 34% $(10,770) (34)% Nonutilization of net operating losses and effect of foreign taxes (730) (60) 1,188 84 11,716 37 State income taxes, net of federal tax benefit 227 19 228 16 (269) (1) -------- ---- -------- ---- -------- ---- $ (916) (75)% $ 1,897 134% $ 677 2% ======== ==== ======== ==== ======== ====
As of December 31, 1998, for income tax purposes, the Company has operating loss carryovers of $268.0 million and $140.0 million, for regular and alternative minimum tax purposes, respectively. These operating loss carryovers substantially expire over the next 15 years, the majority of which expire between 2006 and 2012. In addition, the Company has foreign tax operating losses of approximately $10.0 million which expire prior to 2003 and investment tax credit carryovers of $0.6 million which expire prior to 2002. Approximately $17.0 million and $8.0 million of regular and alternative minimum tax loss carryovers, respectively, are subject to limitations in any given year due to mergers. The Company has approximately $1.2 million in alternative minimum tax credit carryovers eligible to reduce future regular tax liabilities. NOTE 5: LONG-TERM DEBT AND CREDIT AGREEMENT Long-term debt consists of the following (in thousands): December 31, 1998 1997 --------- ---------- Revolving credit agreement $ 33,000 $ 12,000 Revenue bonds 9,800 9,800 Other long-term debt 213 486 --------- ---------- 43,013 22,286 Less current portion (90) (150) --------- ---------- $ 42,923 $ 22,136 ========= ========== F-18 93 Future minimum debt repayments associated with long-term debt as of December 31, 1998 are as follows (in thousands): Year ending December 31, ------------------------ 1999 $ 90 2000 98 2001 9 2002 16,508 2003 16,508 Thereafter 9,800 ------- Total long-term debt repayments $43,013 ======= Revolving Credit Agreement On August 11, 1997, the Company entered into a revolving and term loan credit facility to replace the prior facility. On September 30, 1998, the Company amended its revolving and term loan credit facility (as amended, the Bank Agreement). Under the terms of the Bank Agreement, the Company may borrow up to $55.0 million, subject to certain limitations, on a revolving credit basis through December 31, 2001, repayable in eight quarterly installments beginning March 31, 2002. During the commitment period, the Company pays an annual facility fee ranging from $178,750 to $261,250, the amount of which is based on average quarterly borrowings. The Bank Agreement includes certain collateral provisions, including the pledging of the common stock of certain of the Company's subsidiaries and providing the lenders a security interest in accounts receivable. Under the Bank Agreement, the Company is required to maintain certain financial ratios, and meet certain net worth and indebtedness tests for which the Company was in compliance at December 31, 1998. Amounts available for borrowing under the Bank Agreement are based on a defined debt to cash flow test. At December 31, 1998, the Company had borrowings of $33.0 million under the Bank Agreement. The amount available to borrow is reduced by the $9.8 million amount of tax-exempt solid waste disposal bonds outstanding (described below). At December 31, 1998, the Company had the ability to borrow an additional $12.2 million under the Bank Agreement. The interest rate for borrowing under the Bank Agreement as of December 31, 1998 was 7.06%. Interest rates are based on LIBOR or the prime rate and may vary based upon the Company's debt level. On February 25, 1999, the Company received a commitment from the lead bank under the Bank Agreement to amend the Bank Agreement. Under the revised terms of the Bank Agreement, the amount available to borrow will remain up to $55.0 million, subject to certain limitations. The ability to borrow under the amended Bank Agreement will be based upon historical cash earnings, as defined, plus the value of a specified amount of eligible accounts receivable and inventory. Under the revised terms, the F-19 94 Company will have to maintain certain financial ratios, and meet certain net worth and indebtedness tests, and the Company will be required to pay an annual facility fee in the range of $192,500- $275,000, based on average quarterly borrowings. Collateral provisions under the terms of the amended agreement will be increased to include a secured interest in the Company's inventory. Interest rates under the amended agreement will continue to be based on LIBOR or the prime rate. All other terms under the existing Bank Agreement remain as they were previously. Revenue Bonds On July 30, 1997, the Company issued $9.8 million aggregate principal amount of tax-exempt, solid waste disposal revenue bonds. The net proceeds of approximately $9.6 million from the issuance were initially used to pay down debt under the Company's existing revolving and term loan credit facility. The bonds mature on July 1, 2007. The payment of the unpaid principal and up to $140,959 of interest (35 days at an annual rate of 15%) on the bonds is collateralized by an irrevocable, direct-pay letter of credit, which will expire on July 31, 1999, unless extended. The letter of credit has a fee of 1.7% of the amount of the letter of credit. The bonds initially bear interest at the weekly rate as determined by the remarketing agent. At the Company's option, the weekly rate may be converted to a fixed rate or variable rate. While the bonds bear interest at the weekly rate or the flexible rate, the bonds are redeemable at the option of the Company, in whole or in increments of $100,000, upon at least 30 days written notice. Certain restrictions are applicable to optional redemptions while the bonds bear interest at the fixed rate. At December 31, 1998, there was $9.8 million in revenue bonds outstanding. The interest rate on the bonds as of December 31, 1998, was 4.2%. NOTE 6: COMMITMENTS AND CONTINGENCIES Commitments The Company leases various facilities and equipment under noncancelable operating lease arrangements. The major facilities and equipment leases are for terms of three to seven years. Future minimum lease payments under these noncancelable operating leases as of December 31, 1998, are as follows (in thousands): Year ending December 31, ------------------------ 1999 $ 3,811 2000 2,935 2001 2,084 2002 1,399 2003 390 Thereafter 153 ------- Total minimum lease payments $10,772 ======= F-20 95 Rent expense incurred for operating leases during the years ended December 31, 1998, 1997, and 1996 was approximately $3.9 million, $4.8 million, and $4.2 million, respectively. 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, as amended (CERCLA or Superfund), 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 (Bunker Hill Site) located at Kellogg, Idaho. The Consent Decree settled the Company's response-cost liability under Superfund at the Bunker Hill Site. As of December 31, 1998, the Company has estimated and accrued an allowance for liability for remedial activity costs at the Bunker Hill Site of $5.0 million. These estimated expenditures are anticipated to be made over the next three to five years. As with any estimate of this nature, it is reasonably possible that the Company's estimate of this obligation may change in the near term. Coeur d'Alene River Basin Natural Resource Damage Claims - - Coeur d'Alene Tribe Claims In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit, under CERCLA, in Idaho Federal District Court against the Company 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 Company answered the Tribe's complaint denying liability for natural resource damages. In October 1996, following a court imposed four-year stay of the proceeding, the Tribe's natural resource damage litigation was consolidated with the United States Natural Resources Damage (NRD) 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 the Company. 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 (the Basin) in northern Idaho over 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 F-21 96 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. The Company answered the complaint in May 1996, denying liability to the United States under CERCLA and the Clean Water Act and asserted a counterclaim against the United States for the federal government's involvement in mining activity in the Basin which contributed to the releases and damages alleged by the United States. The Company believes it also has a number of defenses to the United States' claims. In October 1996, the Idaho Federal District Court consolidated the Tribe's NRD litigation with the U.S. Government's lawsuit for discovery and other limited pretrial purposes. On September 30, 1998, the Federal District Court granted the Company's summary judgment motion with respect to the applicable statute of limitations and dismissed the United States' NRD claim due to the failure of the EPA to comply with federal law and EPA regulations in expanding the Natural Priority List site boundaries to include the entire Coeur d'Alene River/Lake Coeur d'Alene Basin which would have the effect of extending the statute of limitations. The United States has appealed the Federal District Court's decision to the Ninth Circuit Court of Appeals. The case is proceeding through discovery. Summary judgment motions related to i) the extent of Federal Trusteeship over Natural Resources in the Coeur d'Alene Basin, ii) a constitutional challenge to the retroactive application of Superfund liability at the site, and iii) case management are pending before the Federal District Court. 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. - - State of Idaho Claims In March 1996, the Company entered into an agreement (the Idaho Agreement) with the State of Idaho (the State) pursuant to which the Company agreed to continue certain financial contributions to environmental cleanup work in the Basin being undertaken by a State trustees group. In return, the State agreed not to sue the Company for damage to natural resources for which the State is a trustee for a period of five years, to pursue settlement with the Company of the State's NRD claims and to grant the Company credit against any such State claims for all expenditures made under the Idaho Agreement and certain other Company contributions and expenditures for environmental cleanup in the Basin. At December 31, 1998, the Company's accrual for remediation activity in the Basin, not including the Bunker Hill Site, totaled approximately $0.4 million. These expenditures are anticipated to be expended during 1999. Depending on the results of the aforementioned lawsuits, it is reasonably possible that F-22 97 the Company's estimate of its obligation may change in the near or longer term. Insurance Coverage Litigation In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance companies which provided comprehensive general liability insurance coverage to the Company and its predecessors. The Company believes that the insurance companies have a duty to defend and indemnify the Company under their policies of insurance for all liabilities and claims asserted against the Company 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 the Company in the Tribe's lawsuit. During 1995 and 1996, the Company entered into settlement agreements with a number of the insurance carriers named in the litigation. The Company 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 continued until the underlying environmental claims against the Company are resolved or settled. The remaining insurer is providing the Company with a partial defense in all Basin environmental litigation. As of December 31, 1998, the Company had not reduced its accrual for reclamation and closure costs to reflect the receipt of any anticipated insurance proceeds. Other Claims On October 22, 1998, the Company and certain affiliates were served with a lawsuit filed in Superior Court of Kern County, California. The complaint pertains to the Cactus Gold mine located near Mojave, California. Seventy-four plaintiffs allege that during the period from 1960 through the present, the named defendants' operations and activities caused personal injury and property damage to the plaintiffs. The plaintiffs seek monetary damages of $29.6 billion for general negligence, nuisance, trespass, statutory violations, ultra-hazardous activities, strict liability, and other torts. The Company has provided notice and demand for defense/indemnity to its insurance carriers providing coverage for the Cactus Gold mine operation. To date, the Company has not received any response from the carriers. The Company has retained outside counsel to defend the Company in advance of any response from the insurance companies. Based on a preliminary review with outside counsel of the allegations in the complaint as it relates to the historical operations at the Cactus Gold mine, the Company believes the allegations are without merit. F-23 98 In 1997, K-T Clay terminated shipments of 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. The Company believes $11.0 million of insurance coverage is available for about $8.0 million in claims to date. Although the outcome cannot be assured, the Company believes that there will be no material adverse financial effect on the Company from this matter. The Company is subject to other legal proceedings and claims 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 matters and the proceedings disclosed above, it is the opinion of the Company's management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, financial condition or cash flows of the Company. NOTE 7: EMPLOYEE BENEFIT PLANS The Company and certain subsidiaries sponsor defined benefit pension plans covering substantially all employees. The Company also provides certain postretirement benefits, principally health care and life insurance benefits for qualifying retired employees. F-24 99 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, 1998, and a statement of the funded status as of December 31 of each year (in thousands): Pension Benefits Other Benefits 1998 1997 1998 1997 -------- -------- -------- -------- Change in benefit obligation Benefit obligation at beginning of year $ 37,991 $ 33,615 $ 1,915 $ 1,881 Service cost 1,111 1,007 18 15 Interest cost 2,581 2,443 134 143 Plan amendments 183 - - - - - - Actuarial (gain) loss 1,739 2,639 77 (56) Benefits paid (2,293) (1,713) (89) (68) -------- -------- -------- -------- Benefit obligation at end of year 41,312 37,991 2,055 1,915 -------- -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year 51,684 44,984 - - - - Actual return on plan assets 1,688 8,245 - - - - Employer contributions 169 168 89 68 Benefits paid (2,293) (1,713) (89) (68) -------- -------- -------- -------- Fair value of plan assets at end of year 51,248 51,684 - - - - -------- -------- -------- -------- Funded status at end of year 9,936 13,693 (2,055) (1,915) Unrecognized net actuarial gain (5,028) (10,039) (158) (601) Unrecognized transition asset (1,313) (1,742) - - - - Unrecognized prior-service cost 1,796 1,819 - - - - -------- -------- -------- -------- Net amount recognized in consolidated balance sheets $ 5,391 $ 3,731 $ (2,213) $ (2,516) ======== ======== ======== ========
The following table provides the amounts recognized in the consolidated balance sheets as of December 31 of both years (in thousands): Pension Benefits Other Benefits 1998 1997 1998 1997 -------- -------- -------- -------- Prepaid benefit costs $ 6,405 $ 4,487 $ - - $ - - Accrued benefit liability (2,285) (756) (2,213) (2,516) Intangible asset 982 - - - - - - Accumulated other comprehensive loss 289 - - - - - - ------- ------- ------- ------- Net amount recognized $ 5,391 $ 3,731 $(2,213) $(2,516) ======= ======= ======= ======= The benefit obligation was calculated by applying the following weighted-average assumptions: Pension Benefits Other Benefits 1998 1997 1998 1997 -------- -------- -------- -------- Discount rate 6.50% 7.00% 6.50% 7.00% Expected rate on plan assets 9.00% 9.00% - - - - Rate of compensation increase 4.00% 4.00% - - - - F-25 100 Net periodic pension cost (income) for the plans consisted of the following in 1998, 1997, and 1996 (in thousands):
Pension Benefits Other Benefits 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- Service cost $ 1,111 $ 1,007 $ 925 $ 18 $ 15 $ 16 Interest cost 2,581 2,443 2,287 134 143 145 Expected return on plan assets (4,557) (3,962) (3,500) - - - - - - Amortization of transition asset (429) (429) (415) - - - - - - Amortization of unrecognized prior service cost 206 206 102 - - - - - - Amortization of unrecognized net gain from earlier periods (403) (380) 18 77 (56) (24) ------- ------- ------- ------- ------- ------- Net periodic pension cost (income) $(1,491) $(1,115) $ (583) $ 229 $ 102 $ 137 ======= ======= ======= ======= ======= =======
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 $5,447,000, $4,808,000, and $2,953,000, respectively, as of December 31, 1998, and $1,807,000, $1,187,000, and $0, respectively, as of December 31, 1997. The Company has a nonqualified Deferred Compensation Plan which permits eligible officers, directors and key employees to defer a portion of their compensation. In November 1998, the Company 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. 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, 1998 and 1997, amounted to approximately $3.9 and $3.1 million, respectively. The Company 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. The Company makes a matching contribution of 25% of an employee's contribution up to, but not exceeding, 6% of the employee's earnings. The Company's contribution was approximately $274,000 in 1998, $263,000 in 1997, and $190,000 in 1996. The Company has an employee's 401k plan which is available to all hourly employees at the Company's Lucky Friday mine after completion of six months of service. Employees may contribute from 2% to 15% of their compensation to the plan. The Company makes a matching contribution of 25% of an employee's contribution up to, but not exceeding, 5% of the employee's earnings. The Company's contribution was approximately $46,000 in 1998, $34,000 in 1997, and $36,000 in 1996. F-26 101 NOTE 8: SHAREHOLDERS' EQUITY Preferred Stock The Company 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. 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 of common stock. The Preferred Shares were not redeemable by the Company prior to July 1, 1996. After such date, the shares are redeemable at the option of the Company at any time, in whole or in part, initially at $52.45 per share and thereafter at prices declining ratably on each July 1 to $50.00 per share on or after July 1, 2003. Holders of the Preferred Shares have no voting rights except if the Company fails to pay the equivalent of six quarterly dividends. If these dividends are not paid, the holders of 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 the Company's Articles of Incorporation. The Preferred Shares rank senior 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 declared and unpaid dividends which total $117,012,000 at December 31, 1998. Shareholder Rights Plan In 1996, the Company 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 the Company'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 the Company or the acquiring company having a market value of twice the $50 exercise price of the right. The rights are nonvoting, may be redeemed 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. F-27 102 Stock Based Plans At December 31, 1998, 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. The Company has adopted the disclosure-only provisions of SFAS 123. No compensation expense has been recognized in 1998, 1997, or 1996 for unexercised options related to the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997, and 1996 consistent with the provisions of SFAS 123, the Company'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): 1998 1997 1996 -------- -------- -------- Loss applicable to common shareholders: As reported $ 8,350 $ 8,533 $ 40,404 Pro forma $ 9,420 $ 9,229 $ 40,731 Loss applicable to common shareholders per share: As reported $ 0.15 $ 0.16 $ 0.79 Pro forma $ 0.17 $ 0.17 $ 0.81 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: 1998 1997 1996 -------- -------- -------- Expected dividend yield 0.00% 0.00% 0.00% Expected stock price volatility 49.57% 45.31% 42.65% Risk-free interest rate 4.79% 6.42% 5.63% Expected life of options 4.1 years 4.1 years 4.1 years The weighted average fair value of options granted in 1998, 1997, and 1996 was $2.45, $2.27, and $3.40, respectively. The Company 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 1998, 1997, and 1996, respectively, 12,000, 53,577, and 47,000 options to acquire shares expired under the 1987 plan. The F-28 103 ability to grant further options under the plan expired on February 13, 1997. In 1995, the shareholders of the Company approved the 1995 Stock Incentive Plan which provides for a variety of stock-based grants to the Company'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 the Company. 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 1998, 1997, and 1996, respectively, 708,000, 480,500, and 278,000 options to acquire shares were granted to the Company's officers and key employees of which 585,000, 348,000, and 215,000, respectively, of these options to acquire shares were granted with vesting requirements of 20% on the grant date and 20% on each of the next four anniversary dates from the grant date. During 1998 and 1996, respectively, 11,500 and 1,500 options to acquire shares expired under the 1995 plan. At December 31, 1998, there were 546,500 options to acquire shares available for future grant under the 1995 plan. In 1995, the Company 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 the Company'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 the Company. 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 1998, 1997, and 1996, respectively, 8,404, 7,000, and 7,000 shares were credited to the nonemployee directors. During 1998, 1997, and 1996, $42,000, $41,000, and $55,000, respectively, were charged to operations associated with the Directors' Stock Plan. At December 31, 1998, there were 91,057 shares available for grant in the future under the plan. F-29 104 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, 1995 316,492 $ 10.51 Year ended December 31, 1996 Granted 278,000 $ 8.28 Expired (48,500) $ 10.57 --------- Outstanding, December 31, 1996 545,992 $ 9.37 Year ended December 31, 1997 Granted 480,500 $ 5.63 Expired (53,577) $ 10.50 --------- Outstanding, December 31, 1997 972,915 $ 7.46 Year ended December 31, 1998 Granted 708,000 $ 5.88 Exercised (2,000) $ 5.63 Expired (23,500) $ 8.85 Outstanding, December 31, 1998 1,655,415 $ 6.76 ========= The following table displays exercisable stock options and the weighted-average exercise price of the exercisable options as of December 31, 1998, 1997, and 1996: 1998 1997 1996 ------- ------- ------- Exercisable options 892,615 565,515 373,992 Weighted-average exercise price $ 7.34 $ 8.15 $ 9.84 The following table presents information about the stock options outstanding as of December 31, 1998:
Weighted Average Range of Remaining Shares Exercise Price Exercise Price Life (Years) --------- ---------------- -------------- ------------ Exercisable options 690,700 $ 5.63 - $ 8.63 $ 6.43 9 Exercisable options 201,915 $ 9.32 - $12.25 $10.47 4 --------- Total exercisable options 892,615 $ 5.63 - $12.25 $ 7.34 7 Unexercisable options 762,800 $ 5.63 - $ 8.63 $ 6.09 9 --------- Total all options 1,655,415 $ 5.63 - $12.25 $ 6.76 8 =========
No amounts were charged (credited) to operations in connection with the stock option plans in 1998, 1997, or 1996. F-30 105 Common Stock Offering In February 1997, the Company issued 3,950,000 shares of its common stock realizing proceeds of approximately $23.4 million, net of issuance costs of approximately $1.3 million. The shares were sold under the Company's existing Registration Statement which provides for the issuance of up to $100.0 million of equity and debt securities. The Company used $23.0 million of the net proceeds to pay down debt under its existing revolving and term loan credit facility. On January 23, 1996, 2,875,000 shares of the Company's common stock were sold under the Company's existing Registration Statement. The net proceeds from the offering of approximately $22.0 million were used principally to reduce outstanding borrowings under the Company's revolving and term loan credit facility. NOTE 9: BUSINESS SEGMENTS In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise" replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 revised the disclosure of segment information. Prior to 1998, the Company presented two business segments: metals and industrial minerals. With the adoption of SFAS 131, the metals segment was further segregated between gold and silver operations. Accordingly, prior year's segment information has been restated to present the Company's three reportable segments - Metals-Gold, Metals-Silver, and Industrial Minerals. The accounting policies of the segments are the same as those described in Note 1. Segment data excludes intrasegment revenues. The Company evaluates the performance of its segments and allocates resources to them based on income (loss) from operations. The Company is organized and managed primarily on the basis of the principal products being produced from its ten operating units. Two of the operating units have been aggregated into the Metals- Gold segment, two of the operating units have been aggregated into the Metals-Silver segment, and six operating units have been combined to form the Industrial Minerals segment. General corporate activities not associated with operating units as well as idle properties are presented as Other. F-31 106 The tables below present information about reportable segments as of and for the years ended December 31 (in thousands): 1998 1997 1996 --------- --------- --------- Net sales to unaffiliated customers: Metals-Gold (including $11,626, $26,918, and $32,034 from Mexico in 1998, 1997, and 1996) $ 32,791 $ 56,257 $ 65,550 Metals-Silver 42,317 33,229 15,859 Industrial Minerals (including $7,285, $5,051, and $4,204 from Mexico in 1998, 1997, and 1996) 84,123 74,462 76,843 --------- --------- --------- $ 159,231 $ 163,948 $ 158,252 ========= ========= ========= Income (loss) from operations: Metals-Gold (including $2,046, $11,757, and $7,734 from Mexico in 1998, 1997, and 1996) $ 269 $ 7,339 $ (36,998) Metals-Silver (1,196) (4,619) (1,720) Industrial Minerals (including $278, $68, and $92 from Mexico in 1998, 1997, and 1996) 5,153 4,072 9,083 Other (8,706) (6,295) (8,076) --------- --------- --------- $ (4,480) $ 497 $ (37,711) ========= ========= ========= Capital expenditures: Metals-Gold (including $3,789, $240, and $411 in Mexico in 1998, 1997, and 1996) $ 6,233 $ 6,536 $ 7,440 Metals-Silver 10,130 14,018 22,909 Industrial Minerals (including $375, $129, and $93 in Mexico in 1998, 1997, and 1996) 6,100 3,610 3,075 Other 32 630 307 --------- --------- --------- $ 22,495 $ 24,794 $ 33,731 ========= ========= ========= Depreciation, depletion, and amortization: Metals-Gold $ 7,522 $ 7,526 $ 12,241 Metals-Silver 9,648 8,707 3,487 Industrial Minerals 5,036 4,776 4,723 Other 389 311 338 --------- --------- --------- $ 22,595 $ 21,320 $ 20,789 ========= ========= ========= F-32 107 1998 1997 1996 --------- --------- --------- Other significant non-cash items: Metals-Gold $ 145 $ 2,433 $ 36,166 Metals-Silver 211 183 17 Industrial Minerals 223 226 173 Other 734 (1,777) (7) --------- --------- --------- $ 1,313 $ 1,065 $ 36,349 ========= ========= ========= Identifiable assets: Metals-Gold (including $7,947, $6,462, and $7,268 in Mexico in 1998, 1997, and 1996) $ 23,808 $ 28,304 $ 37,733 Metals-Silver 127,499 122,553 117,349 Industrial Minerals (including $4,141, $3,606 and $3,513, in Mexico in 1998, 1997, and 1996) 71,593 68,413 70,613 Other 29,162 31,398 42,698 --------- --------- --------- $ 252,062 $ 250,668 $ 268,393 ========= ========= ========= The following is sales information by geographic area for the years ended December 31 (in thousands): 1998 1997 1996 --------- --------- --------- United States $ 113,722 $ 124,917 $ 141,203 Foreign 45,509 39,031 17,049 --------- --------- --------- $ 159,231 $ 163,948 $ 158,252 ========= ========= ========= The following is long-lived asset information by geographic area as of December 31 (in thousands): 1998 1997 1996 --------- --------- --------- United States $ 170,058 $ 176,955 $ 171,950 Foreign 8,110 3,082 5,805 --------- --------- --------- $ 178,168 $ 180,037 $ 177,755 ========= ========= ========= F-33 108 Significant export sales, as a percentage of total foreign sales, were as follows for the years ended December 31: 1998 1997 1996 --------- --------- --------- Canada 19.7% 28.2% 27.7% Mexico 43.9% 17.8% 32.9% Belgium 0.0% 13.6% 0.0% Japan 5.5% 13.4% 2.3% England 15.3% 11.4% 5.6% 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: 1998 1997 1996 --------- --------- --------- Customer A 24.0% 30.1% 31.2% Customer B 12.3% 19.8% 29.5% Customer C 19.5% 12.8% 16.0% Customer D 10.3% 0.0% 0.0% NOTE 10: 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 the Company 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. Fair value of forward contracts is supplied by the Company'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. The discount rate is estimated using the rates currently offered for debt with similar remaining maturities. F-34 109 The estimated fair values of financial instruments are as follows (in thousands): December 31, 1998 1997 ------------------- ------------------- Carrying Fair Carrying Fair Amounts Value Amounts Value -------- -------- -------- -------- Financial assets: Cash and cash equivalents $ 2,480 $ 2,480 $ 3,794 $ 3,794 Accounts and notes receivable 25,919 25,919 24,445 24,445 Investments Equity securities available for sale 72 72 229 229 Restricted 6,331 6,331 7,926 7,926 Gold forward sales contracts - - 371 - - 931 Silver forward sales contracts - - 740 - - - - Financial liabilities: Current liabilities 24,345 24,345 24,968 24,968 Long-term debt - principal 42,923 42,923 22,136 22,136 Silver forward sales contracts - - - - - - 701 NOTE 11: LOSS PER COMMON SHARE The following table presents a reconciliation of the numerators (net 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 preferred dividends in arriving at loss applicable to common shareholders for the years ended December 31, 1998, 1997, and 1996 in computing basic and diluted loss per common share.
1998 1997 1996 ----------------------------- ----------------------------- ------------------------------ Per-Share Per-Share Per-Share Net Loss Shares Amount Net Loss Shares Amount Net Loss Shares Amount ----------------------------- ----------------------------- ------------------------------ Loss before preferred stock dividends $ (300) $ (483) $ (32,354) Less: Preferred stock dividends (8,050) (8,050) (8,050) --------- --------- --------- Basic loss per common share Loss applicable to common shareholders (8,350) 55,101 (0.15) (8,533) 54,763 (0.16) (40,404) 51,133 (0.79) Effect of dilutive securities(1) --------- ------ ------- --------- ------ ------- --------- ------ ------- Diluted loss per common share $ (8,350) 55,101 $ (0.15) $ (8,533) 54,763 $ (0.16) $ (40,404) 51,133 $ (0.79) ========= ====== ======= ========== ====== ======= ========= ====== ======= (1) Dilutive Securities As of December 31, 1998, 1997, and 1996, there were 1,655,000, 973,000, and 546,000 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 anti-dilutive. The Company also has 2.3 million shares of convertible preferred stock outstanding that, if converted, would be anti-dilutive, and were therefore excluded from the determination of diluted loss per share.
F-35 110 NOTE 12: OTHER COMPREHENSIVE LOSS Due to availability of net operating losses, there is no tax effect associated with any component of other comprehensive loss. The following table lists the beginning balance, yearly activity, and ending balance of each component of accumulated other comprehensive loss (in thousands):
Minimum Accumulated Foreign Unrealized Pension Other Currency Gains (Losses) Liability Comprehensive Items on Securities Adjustment Loss --------- -------------- ---------- ------------- Balance December 31, 1995 $ (4,898) $ 100 $ - - $ (4,798) 1996 change - - (132) - - (132) -------- -------- -------- -------- Balance December 31, 1996 (4,898) (32) - - (4,930) 1997 change - - (31) - - (31) -------- -------- -------- -------- Balance December 31, 1997 (4,898) (63) - - (4,961) 1998 change - - (19) (289) (308) -------- -------- -------- -------- Balance December 31, 1998 $ (4,898) $ (82) $ (289) $ (5,269) ======== ======== ======== ========
F-36 111 HECLA MINING COMPANY and WHOLLY OWNED SUBSIDIARIES FORM 10-K - December 31, 1998 INDEX TO EXHIBITS Number and Description of Exhibits ---------------------------------- 3.1(a) Certificate of Incorporation of the Registrant as amended to date.(2) 3.1(b) Certificate of Amendment of Certificate of Incorporation of the Registrant, dated as of May 16, 1991.(2) 3.2 By-Laws of the Registrant as amended to date.(2) 4.1(a) Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant.(2) 4.1(b) Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant.2 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.(2) 10.1 Credit Agreement dated as of August 11, 1997, among Registrant and Certain Subsidiaries and NationsBank of Texas, N.A., as Agent, and Certain Banks as Lenders.(2) 10.2 Employment agreement dated November 10, 1989 between Hecla Mining Company and Arthur Brown. (Registrant has substantially identical agreements with each of Messrs. William B. Booth, J. Gary Childress, George R. Johnson, Roger A. Kauffman, Jon T. Langstaff, John P. Stilwell, and Michael B. White. Such substantially identical agreements are not included as separate Exhibits.)(1,2) 112 INDEX TO EXHIBITS (continued) Number and Description of Exhibits ---------------------------------- 10.3(a) Form of Executive Deferral Plan Master Document, as amended, effective November 13, 1998.(1,2) Attached 10.3(b) Form of Director Deferral Plan Master Plan Document effective January 1, 1995.(1,2) 10.4(a) 1987 Nonstatutory Stock Option Plan of the Registrant.(1,2) 10.4(b) Hecla Mining Company 1995 Stock Incentive Plan.(1,2) 10.4(c) Hecla Mining Company Stock Plan for Non- employee Directors.(1,2) 10.5(a) Hecla Mining Company Retirement Plan for Employees and Supplemental Retirement and Death Benefit Plan.(1,2) 10.5(b) Supplemental Excess Retirement Master Plan Document.(1,2) 10.5(c) Hecla Mining Company Nonqualified Plans Master Trust Agreement.(1,2) 10.6 Form of Indemnification Agreement dated May 27, 1987 between Hecla Mining Company and each of its Directors and Officers.(1,2) 10.7 Summary of Short-term Performance Payment Plan.(1,2) 10.8(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.(2) 10.8(b) Golden Eagle Operating Agreement between Santa Fe Pacific Gold Corporation and Hecla Mining Company dated as of September 6, 1996.(2) -2- 113 INDEX TO EXHIBITS (continued) Number and Description of Exhibits ---------------------------------- 10.9 Limited Liability Company Agreement of the Rosebud Mining Company, L.L.C. among Santa Fe Pacific Gold Corporation and Hecla Mining Company dated as of September 6, 1996.(2) 10.10 Restated Mining Venture Agreement among Kennecott Greens Creek Mining Company, Hecla Mining Company and CSX Alaska Mining Inc. dated May 6, 1994.(2) 11. Computation of weighted average number of common shares outstanding. Attached 12. Statement of Computation of Ratio of Earnings to Fixed Charges. Attached 13. Hecla Mining Company Fourth Quarter and Year-End Results for the Period Ended December 31, 1998.(2) Attached 21. List of subsidiaries of the Registrant. Attached 23.1 Consent of PricewaterhouseCoopers LLP to incorporation by reference of their report dated February 8, 1999, except for Note 5, as to which the date is February 25, 1999, on the Consolidated Financial Statements of the Registrant in the Registrant's Registration Statements on Form S-3, No. 33-72832, and No. 33-59659, Form S-8, No. 33-7833, No. 33-41833, No. 33-14758, No. 33-40691, No. 33-60095 and No. 33-60099.(2) Attached 27. Financial Data Schedule Attached - ------------------------ 1. Indicates a management contract or compensatory plan or arrangement. 2. These exhibits were filed in SEC File No. 1-8491 as indicated on the following page and are incorporated herein by this reference thereto. -3- 114 Corresponding Exhibit in Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K, Proxy Statement or Registration Statement, as Indicated Exhibit in Below; All References are to SEC File this Report No. 1-8491. - ----------- ----------- 3.1(a) & (b) 3.1 (10-K for 1987) 3.2 2 (Current Report on Form 8-K dated November 13, 1998) 4.1(a) & (b) 4.1(d)(e) and 4.5 (10-Q for June 30, 1993) 4.2 4 (Current Report on Form 8-K dated May 10, 1996) 10.1 10.1 (10-Q for September 30, 1997) 10.2 10.2(b) (10-K for 1989) 10.3(b) 10.3(b) (10-K for 1994) 10.4(a) B (Proxy Statement dated March 20, 1987) 10.4(b) A (Proxy Statement dated March 27, 1995) 10.4(c) B (Proxy Statement dated March 27, 1995) 10.5(a) 10.11(a) (10-K for 1985) 10.5(b) 10.5(b) (10-K for 1994) 10.5(c) 10.5(c) (10-K for 1994) 10.6 10.15 (10-K for 1987) 10.7 10.7 (10-K for 1994) 10.8(a) 10.11(a) (10-Q for September 30, 1996) 10.8(b) 10.11(b) (10-Q for September 30, 1996) 10.9 10.12 (10-Q for September 30, 1996) 10.10 A (10-Q for June 30, 1994) -4- EX-10.3(A) 2 FORM OF DEFERRAL PLAN MASTER DOCUMENT 1 EXHIBIT 10.3(a) HECLA MINING COMPANY Executive Deferral Plan Master Plan Document - ----------------------------------------------------------------- Effective January 1, 1995 As Amended and Restated as of November 13, 1998. 2 HECLA MINING COMPANY Executive Deferral Plan Master Plan Document - ----------------------------------------------------------------- PURPOSE The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees who contribute materially to the continued growth, development and future business success of Hecla Mining Company, a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 Definitions ----------- For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean with respect to a Participant, a credit on the records of the Employer equal to (i) the sum of the Deferral Account balance and the Employer Matching Account balance, (ii) less all distributions made in accordance with the Plan. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual Salary, paid annually to a Participant as an Employee under any Employer's annual bonus and incentive plans. 1.3 "Annual Deferral Amount" shall mean (i) that portion of a Participant's Base Annual Salary that a Participant elects to have and is actually deferred, in accordance with Article 3, for any one Plan Year, plus (ii) that portion of a Participant's Annual Bonus that is actually deferred, in accordance with Article 3, during any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 3 1.4 "Base Annual Salary" shall mean the annual compensation, excluding bonuses, commissions, overtime, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, and including automobile allowances, paid to a Participant for employment services rendered to any Employer, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 plans of any Employer. 1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.6 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.7 "Board" shall mean the board of directors of the Company. 1.8 "Business Day" shall mean a day upon which the New York Stock Exchange is open for trading. 1.9 "Change in Control" shall mean the first to occur of any of the following events: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")(a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"), provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which compiles with clauses (i), (ii), and (iii) of subsection (c) below; or 4 (b) Individuals who, as of October 1, 1994 constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided, however, that any individual becoming a director subsequent to October 1, 1994, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such 5 ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 1.10 "Claimant" shall have the meaning set forth in Section 14.1. 1.11 "Code" shall mean the Internal Revenue Code of 1986, as may be amended from time to time. 1.12 "Committee" shall mean the committee described in Article 12. 1.13 "Company" shall mean Hecla Mining Company, a Delaware corporation. 1.14 "Crediting Rate" shall mean, for each Plan Year, the Moody's Rate for that Plan Year, which shall be an interest rate that is published in Moody's Bond Record under the heading of "Moody's Corporate Bond Yield Averages--Av. Corp" and is (i) in the case of the Plan's first Plan Year, the average corporate bond yield for the month of September 1994, and (ii) in the case of any subsequent Plan Year, the average corporate bond yield for the month of March of the Plan Year that precedes the Plan Year for which the rate is to be used. 1.15 "Deferral Amount" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Deferral Account. 1.16 "Deduction Limitation" shall mean the following described limitation on the annual benefit that may be distributed pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer 6 solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited with interest in accordance with Section 3.5 below. The amounts so deferred and interest thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. 1.17 "Disability" shall mean a period of disability during which a Participant qualifies for benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such a plan or discontinues to sponsor such a plan, a Disability shall be determined by the Committee in its sole discretion. 1.18 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.19 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.20 "Employee" shall mean a person who is an employee of any Employer. 1.21 "Employer(s)" shall mean the Company and/or any of its subsidiaries that have been selected by the Board to participate in the Plan. 1.22 "Employer Matching Amount" shall mean any amount credited by the Company to a Participant's account for a Plan Year in accordance with Section 3.7 below. 7 1.23 "Employer Matching Account" shall mean (i) the sum of the Participant's Employer Matching Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Employer Matching Amount, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Employer Matching Account. 1.24 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as may be amended from time to time. 1.25 "Participant" shall mean any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. 1.26 "Plan" shall mean the Company's Executive Deferral Plan, which shall be evidenced by this instrument and by each Plan Agreement, as may be amended from time to time. 1.27 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant shall provide for the entire benefit to which such Participant is entitled to under the Plan, and the Plan Agreement bearing the latest date of acceptance by the Committee shall govern such entitlement. 1.28 "Plan Year" shall, for the first Plan Year, begin on January 1, 1995, and end on May 31, 1995. For each Plan Year thereafter, the Plan Year shall begin on June 1 of each year and continue through May 31. 1.29 "Preferred Rate" shall mean, for each Plan Year, an interest rate that is equal to the Crediting Rate multiplied by 1.23. 1.30 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.31 "Retirement", "Retires" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five with ten (10) Years of Service. 8 1.32 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.33 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.34 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.35 "Termination of Employment" shall mean the ceasing of employment with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. Without limiting the generality of the foregoing, if an Employer other than the Company ceases to be a subsidiary of the Company, all of the Participants who remain employed by such Employer shall be considered to have experienced a Termination of Employment at the time of such cessation unless the Company determines otherwise. 1.36 "Stock" shall mean Hecla Mining Company, common stock, par value $0.25, or any other equity securities of the Company designated by the Committee. 1.37 "Stock Rate" shall mean a rate of return such that an amount allocated to the Stock Rate shall be credited or debited, as the case may be, as if 100% of such amount were invested in Stock, with any dividends paid on such Stock being deemed immediately reinvested in Stock. 1.38 "Stock Rate Account" shall have that meaning as set forth in Section 3.8(d)(2). 1.39 "Trust" shall mean the trust established pursuant to that certain Master Trust Agreement, dated as of October 1, 1994, between the Company and the trustee named therein, as amended from time to time. 1.40 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.41 "Window Period" shall mean the time period beginning December 1, 1998 and ending March 31, 1999, inclusive. 9 1.42 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections are made under this Plan). For purposes of a Participant's first Plan Year of participation only, any partial Plan Year of participation shall be treated as a full Plan Year. In addition, during any period of time during which a Participant is suffering a Disability, he or she will not be credited with any additional Years of Plan Participation. 1.43 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 Selection; Enrollment; Eligibility ---------------------------------- 2.1 SELECTION BY COMMITTEE. Participation in the Plan shall be limited to a select group of management and highly compensated Employees of the Employers. From that group, the Committee shall select, in its sole discretion, Employees to participate in the Plan. 2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected Employee shall complete, execute and return to the Committee within 30 days of selection a Plan Agreement, an Election Form and a Beneficiary Designation Form. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within 30 days of selection, that Employee shall start participation in the Plan on the first day of the month following the month in which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the required 30 day period, that Employee shall not be eligible to participate in the 10 Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. ARTICLE 3 Deferral Commitments/Interest Crediting --------------------------------------- 3.1 MINIMUM DEFERRAL. (a) MINIMUM. For each Plan Year, a Participant may elect to defer Base Annual Salary in an amount that is not less than $2,000 for each deferral elected. For each calendar year, a Participant may elect to defer Annual Bonus that is not less than $2,000 for each deferral elected. If no elections are made, the amount deferred shall be zero. (b) SHORT PLAN YEAR BASE ANNUAL SALARY. If a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the first Plan Year of the Plan itself, the minimum Base Annual Salary deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12. 3.2 MAXIMUM DEFERRAL. For each Plan Year, a Participant may elect to defer up to 50% of Base Annual Salary. For each calendar year, a Participant may elect to defer up to 100% of Annual Bonus. 3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM. (a) FIRST PLAN YEAR. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the 11 Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. 3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Bonus portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. 3.5 EMPLOYER MATCHING AMOUNT. (a) MATCH AGAINST AMOUNTS ALLOCATED TO PREFERRED RATE. For each Plan Year, a Participant's Account Balance shall be credited as of the last day of that Plan Year with an Employer Matching Amount which is equal to 12.5% of the balance of that portion of the Participant's Annual Deferral Amount which is (i) actually withheld during the Plan Year and (ii) allocated to the Preferred Rate in accordance with Section 3.8(c). (b) MATCH AGAINST AMOUNTS ALLOCATED TO STOCK RATE. For each Plan Year, a Participant's Account Balance shall be credited as of the last day of that Plan Year with an Employer Matching Amount which is equal to 37.5% of the balance of that portion of the Participant's Annual Deferral Amount which is (i) actually withheld during the Plan Year and (ii) allocated to the Stock Rate in accordance with Section 3.8. (c) LIMITATION. Notwithstanding the provisions of Section 3.5(a) and Section 3.5(b) above, the Annual Deferral Amount that is taken into account in determining the Employer Matching Amounts under both Section 3.5(a) and Section 3.5(b) for a Plan Year shall not exceed the difference between (i) 20% multiplied by the sum of (a) the Participant's Base Annual Salary for the Plan Year and (b) the portion of the Participant's Annual Bonus that is paid in that Plan Year, and (ii) the portion of the Participant's Base Annual Salary and/or Annual Bonus that is deferred for the Plan Year by the 12 Participant under the Company's 401(k) Plan (such difference being referred to herein as the "Limitation"). If, for a Plan Year, the sum of the Employer Matching Amounts calculated under Section 3.5(a) and Section 3.5(b) above exceeds the Limitation, then both (i) that portion of the Annual Deferral Amount that is allocated to the Preferred Rate and is taken into account in determining the Employer Matching Amount under Section 3.5(a), and (ii) that portion of the Annual Deferral Amount that is allocated to the Stock Rate and is taken into account in determining the Employer Matching Amount under Section 3.5(b), will be reduced pro rata, one against the other, until the Limitation is equal to zero. 3.6 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee. 3.7 VESTING. (a) Except as otherwise provided in Section 7.1 below, a Participant shall at all times be 100% vested in his or her Deferral Account (including his or her Stock Rate Account) and his or her Employer Matching Amounts credited under Section 3.5(a) above. (b) A Participant shall be vested in his or her Employer Matching Amounts credited under Section 3.5(b) above in accordance with the following schedule: COMPLETION OF YEARS VESTED PERCENTAGE OF EMPLOYER MATCHING OF PLAN PARTICIPATION AMOUNTS CREDITED UNDER SECTION 3.5(b) Less than Five Years 33 1/3% Five Years or More 100% Despite the foregoing schedule, if the Participant was a participant in the 1985 Hecla Mining Company Deferred Compensation Plan for Executive Officers, then for purposes of this Section 3.7, he or she shall be treated as having completed five Years of Plan Participation at the time of his or her commencement of participation in this Plan. 13 3.8 CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) ELECTION OF MEASUREMENT RATES. In connection with each Election Form delivered to the Committee, a Participant shall elect one or more Measurement Rate(s) (as described in Section 3.8(c) below) to be used to determine the additional amounts to be credited (or debited) to his or her Account Balance for the Plan Year to which such Election Form relates. (b) PROPORTIONATE ALLOCATION. In making any election described in Section 3.8(a) above, the Participant shall specify on the Election Form, in increments of 5%, the percentage of his or her Annual Deferral Amount to be allocated to a Measurement Rate (as if the Participant were making an investment which carried that Measurement Rate with that portion of his or her Account Balance). If a Participant fails to make an allocation to a Measurement Rate, then he or she shall be deemed to have made an allocation of 100% of his or her Annual Deferral Amount to the Preferred Rate. (c) MEASUREMENT RATES. The Participant may elect one or more of the following Measurement Rates (the "Measurement Rates") for the purpose of crediting additional amounts to his or her Account Balance: (i) the Preferred Rate; or (ii) the Stock Rate. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Rate. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. The performance of each elected Measurement Rate (either positive or negative) will be determined by the Committee, in its reasonable discretion, based on the performance of the Measurement Rates themselves. A Participant's Account Balance shall be credited or debited as set forth in Section 3.8(d) below, based on the performance of each Measurement Rate selected by the Participant, AS DETERMINED BY THE COMMITTEE IN ITS SOLE DISCRETION. 14 (d) CREDITING OR DEBITING METHOD. (i) PREFERRED RATE. Prior to any distribution of benefits under Articles 4, 5, 6, 7, or 8, interestInterest shall be credited and compounded annually on the portion of a Participant's Account Balance that is allocated to the Preferred Rate (the "Preferred Rate Account") as though (i) that portion of the Participant's Annual Deferral Amount which he or she allocated to the Preferred Rate for that Plan Year was withheld at the beginning of the Plan Year, or, in the case of the first year of Plan participation, was withheld on the date that the Participant commenced participation in the Plan, and (ii) the Employer Matching Amount relating to that portion of the Participant's Annual Deferral Amount which was allocated to the Preferred Rate for the Plan Year was credited on the last day of the Plan Year. The rate of interest for crediting shall be the Preferred Rate, except as otherwise provided in this Plan. In the event of Retirement, Disability, death, Termination Of Employment or reallocation election (pursuant to Section 3.12 below) prior to the end of a Plan Year, the basis for that year's interest crediting will be a fraction of the full year's interest, based on the number of full months that the Participant was employed by the Employer during the Plan Year prior to the occurrence of such event. If a distribution is made under this Plan, for purposes of crediting interest, the Account Balance shall be reduced as of the first day of the month in which the distribution is made. (ii) STOCK RATE. Prior to any distribution of benefits under Articles 4, 5, 6, 7, or 8, anAn amount shall be credited to a Participant's Account Balance as though that portion of the Participant's Annual Deferral Amount which he or she allocated to the Stock Rate for that Plan Year were credited to a separate account on the lastfirst day of the Plan Year, or, in the case of the first year of Plan participation, was credited on the date that the Participant commenced participation in the Plan (such account being referred to herein as the "Stock Rate Account"). The Stock Rate Account balance shall be deemed invested in Stock as of the first day of the Plan Year, 15 using for such purpose the average closing price for a share of Stock on the New York Stock Exchange during the Plan Year (the "Applicable Period"); provided that, in the case of a Participant's first year of Plan participation, or in the event of a Participant's Retirement, Disability, death or Termination Of Employment during a Plan Year, the Applicable Period shall be the period of the Participant's participation during the Plan Year. The Employer Matching Amount relating to that portion of the Participant's Annual Deferral Amount which was allocated to the Stock Rate for the Plan Year shall be deemed invested in Stock on the last day of the Plan Year, using for such purpose the average closing price for a share of Stock on the New York Stock Exchange during the Plan Year, and shall be distributed to the Stock Rate Account. The entire balance of the Stock Rate Account shall then be distributed intoallocated to the Account Balance. (e) NO ACTUAL INVESTMENT. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Rates are to be used for measurement purposes only, and a Participant's election of any such Measurement Rate, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such fund, stock or other investment vehicle. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any vehicle related to any or all of the Measurement Rates, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. (f) EMPLOYEES OF SUBSIDIARIES. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, a Participant who is an Employee of an Employer that is not the Company shall neither (i) allocate any portion of his or 16 her Annual Deferral Amount to the Stock Rate pursuant to the remainder of this Section 3.8, nor (ii) reallocate any portion of his or her Account Balance to the Stock Rate pursuant to Section 3.12. (g) STOCK RATE ACCOUNT LIMITATION. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, no Participant shall be permitted to allocate any Deferral Amounts to the Stock Rate Account under the Plan, which amounts, in the aggregate, would result in a deemed investment in such account of more than 500,000 shares of Stock. 3.9 FICA AND OTHER TAXES. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, or an Employer Matching Amount is being credited to a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount and Employer Matching Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.9. 3.10 DISTRIBUTIONS. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. Such withholdings may include the withholding of Stock that would otherwise be delivered to a Participant. Any portion of a Participant's Account that is allocated to the Stock Rate Account shall be delivered to the Participant only in Stock, notwithstanding any other provision of this Plan; provided, that cash shall be paid in lieu of any fractional share of Stock. 3.11 SPECIAL RULE FOR AMOUNTS ALLOCATED TO STOCK RATE. The portion of each Participant's Account that is allocated to the Stock Rate (if any) shall be valued for all purposes under the Plan at the closing price of shares of Stock on the New York Stock Exchange as of the relevant date. 17 3.12 REALLOCATION ELECTION; INCENTIVE. At any time during the Window Period, each Participant who has a positive Account Balance may elect, in dollar increments, the dollar amount of his or her Account Balance to be allocated to the Preferred Rate or to the Stock Rate (any such amount so allocated to the Stock Rate, the "Stock Reallocation Amount"). This election shall be made on an Election Form provided by and in a manner prescribed by the Company. The Stock Reallocation Amount shall be deemed invested in Stock, using for such purpose the average closing price for a share of Stock on the New York Stock Exchange for the last two full calendar months preceding the date such election is made, and shall be credited to the Participant's Account Balance as of the last business day of the last month preceding such election date. In addition, the Company shall credit the Participant's Account Balance with an amount equal to 25% of the Participant's Stock Reallocation Amount, similarly deemed invested in Stock, using for such purpose the same average closing price for a share of Stock and the same crediting date described in the preceding sentence. If a Participant fails to make an election under this Section 3.12, he or she shall be deemed to have allocated 100% of his or her Account Balance during and after the Window Period to the Preferred Rate. Any election under this Section 3.12 shall be irrevocable. Notwithstanding the foregoing, the Company reserves the right to offer similar reallocation opportunities, which may include similar Company incentives, from time to time and at its sole discretion. ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Payout ----------------- 4.1 SHORT-TERM PAYOUT. Subject to the Deduction Limitation, in connection with each election to defer an Annual Deferral Amount, a Participant may elect to receive a future "Short-Term Payout" from the Plan with respect to that Annual Deferral Amount. The Short-Term Payout shall be (i) in the case of amounts allocated to the Preferred Rate Account, a lump sum payment in an amount that is equal to the Annual Deferral Amount plus interest credited in the manner provided in Section 3.5 above on that amount, but using the applicable interest rate set forth in Section 7.1 below; and (ii) in the case of the Stock Rate Account, (A) that number of shares of Stock credited to the Participant's Stock Rate below.Account with respect to such Annual Deferral Amounts, plus (B) that number of shares of Stock that have subsequently been credited to the Participant's Stock 18 Rate Account with respect to deemed dividends on the shares described in clause (A), in any. No Short-Term Payout shall be available for any Employer Matching Amount. Subject to the other terms and conditions of this Plan, each Short-Term payout elected shall be paid within 60 days of the first day of the Plan Year that is the latter of (i) the first day of the Plan Year that is 3 years after the first day of the Plan Year to which the applicable Annual Deferral Amount election relates, or (ii) the first day of any Plan Year thereafter elected by the Participant on the Election Form electing the Annual Deferral Amount. 4.2 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.2 shall not be subject to the Deduction Limitation. ARTICLE 5 Retirement Benefit ------------------ 5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 5.2 PAYMENT OF RETIREMENT BENEFITS. (a) A Participant, in connection with his or her commencement of participation in the Plan and/or first allocation to the Stock Rate Account, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or in equal monthly payments (the latter determined in accordance with Section 3.6 above) over a period of 60, 120 or 180 months. the timing of such Retirement Benefit. The Participant may change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 3 years prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall 19 govern the payout of the Retirement Benefit. Except as otherwise provided in Section 5.2(c) below, the lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Participant Retires. (b) The portion of the Participant's Account Balance as shares of Stock shall be payable that is allocated to the Preferred Rate Account may be paid in a lump sum or in equal monthly payments (the latter determined in accordance with Section 3.6 above) over a period of 60, 120 or 180 months. (c) The portion of the Participant's Account Balance that is allocated to the Stock Rate Account may be paid in one or more of the following ways: (i) in a lump sum; (ii) in a lump sum on January 2 of the calendar year subsequent to the calendar year in which the Participant Retired, was Disabled, or died; (iii) in 5 annual installments; or (iv) in 5 annual installments commencing on January 2 of the calendar year subsequent to the calendar year in which the Participant Retired, was Disabled, or died. If the Stock Rate Account is to be distributed to the Participant in 5 annual installments, it first shall be divided into 5 tentative installments. If the tentative installments are comprised of other than whole numbers, then the tentative installments shall be recalculated as follows: (i) the first four installments shall be rounded down to whole numbers, and (ii) the payment of any fractional amounts shall be deferred until the fifth and final installment. Any dividend accruing on Stock during the five year installment period shall be credited to the Stock Rate Account as if it contained shares of Stock, with the dividend then being reinvested in Stock and accrued until the fifth installment. 5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFITS. If a Participant dies after Retirement but before the Retire ment Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of months and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. 20 ARTICLE 6 Pre-Retirement Survivor Benefit ------------------------------- 6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, and except as provided in Section 6.3 below, if a Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance. 6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFITS. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or in equal monthlyinstallment payments (the latter determined in accordance with Section 5.2 3.6 above) over a period of 60, 120 or 180 months.above). The Participant may change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, or the Beneficiary petitions the Committee for a lump sum payment, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or in installment payments that do not exceed five years in duration. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. 6.3 RESTRICTION IN THE EVENT OF SUICIDE OR FALSELY PROVIDED INFORMATION. In the event of a Participant's suicide within 2 years after the Participant first becomes a Participant, or in the event the Participant's death is determined to be from a bodily or mental cause or causes, the information about which was withheld, knowingly concealed, or falsely provided by the Participant if requested to furnish evidence of good health, the Pre-Retirement Survivor Benefit shall be equal to the sum of the Participant's Annual Deferral Amounts, without interest and without all Employer Matching Amounts, all determined as of his or her date of death. 21 ARTICLE 7 Termination Benefit ------------------- 7.1 TERMINATION BENEFITS. Subject to the Deduction Limitation, if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's vested Account Balance, with interest credited in the manner provided in Section 3.5 above, but using the applicable interest rate set forth in the following schedule: COMPLETION OF YEARS OF PLAN APPLICABLE RATE PARTICIPATION Less than five years Crediting Rate Five or more years Preferred Rate Despite the foregoing schedule, if the Participant was a participant in the 1985 Hecla Mining Company Deferred Compensation Plan for Executive Officers, then for purposes of this Section 7.1, he or she shall be treated as having completed five Years of Plan Participation at the time of his or her commencement of participation in this Plan. 7.2 PAYMENT OF TERMINATION BENEFIT. The Termination Benefit shall be paid in a lump sum within 60 days of the Termination of Employment. ARTICLE 8 Disability Waiver and Benefit ----------------------------- 8.1 DISABILITY WAIVER. (a) ELIGIBILITY. By participating in the Plan, all Participants are eligible for this waiver. (b) WAIVER OF DEFERRAL; CREDIT FOR PLAN YEAR OF DISABILITY. A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and/or Annual Bonus for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections. 22 (c) RETURN TO WORK. If a Participant returns to employment with an Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 DISABILITY BENEFIT. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right, in its sole and absolute discretion and for purposes of this Plan only, to terminate a Participant's employment at any time after such Participant is determined to be suffering from a permanent Disability. ARTICLE 9 Beneficiary Designation ----------------------- 9.1 BENEFICIARY. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the 23 Participant and accepted by the Committee prior to his or her death. 9.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent. 9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 Leave of Absence ---------------- 10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the 24 Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 Termination, Amendment or Modification -------------------------------------- 11.1 TERMINATION. Any Employer reserves the right to terminate the Plan at any time with respect to its participating Employees by the actions of its board of directors. Upon the termination of the Plan, all Plan Agreements of a Participant shall terminate and his or her Account Balance, determined as if he or she had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired on the date of Plan termination, shall be paid to the Participant as follows. Prior to a Change in Control, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or in monthly installments for up to 5 years, with interest or dividend reinvestments credited during the installment period as provided in Section 3.6.Section 3.8(d). After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments by paying the present value equivalent of such payments, using the Crediting Rate for the Plan Year in which the termination occurs as the discount rate, in a lump sum or pursuant to a different payment schedule. 11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the actions of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification, or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of 25 the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the present value equivalent of such payments, using the Crediting Rate for the Plan Year of the amendment or modification as the discount rate, in a lump sum or pursuant to a different payment schedule. 11.3 INTEREST RATE IN THE EVENT OF A CHANGE IN CONTROL AND INTEREST. If a Change in Control occurs, the applicable interest rate to be used in determining a Participant's benefitPreferred Rate Account in connection with a Termination of Employment after the Change in Control, or a Plan termination, amendment or modification under Sections 11.1 and 11.2, shall be the Preferred Rate. However, the Crediting Rate for the applicable Plan Year, and not the Preferred Rate, shall be used as the discount rate for determining present value. 11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. ARTICLE 12 Administration -------------- 12.1 COMMITTEE DUTIES. This Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan (including, but not limited to, rules deemed necessary by the Committee to insure compliance with Rule 16-b of the Securities Exchange Act of 1934) and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. 12.2 AGENTS. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 26 12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless the members of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members. 12.5 EMPLOYER INFORMATION. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. ARTICLE 13 Other Benefits and Agreements ----------------------------- 13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. 13.2 ROLLOVER OF BENEFITS. The Company, in its sole discretion, may designate that the benefits under any nonqualified plan sponsored by the Company may be rolled over to this Plan. If such a designation is made, the Participant's account balance under that plan shall be added to his or her Account Balance under this Plan and any such transferred account balance shall become subject to the terms and conditions of this Plan. Upon the completion of that rollover, the Participant's participation in the deferred compensation plan shall cease and he or she shall have no further interest in that plan, unless otherwise specified by the Company. The Committee, in its sole discretion, shall provide rules and procedures with respect to any elections or beneficiary designations that may be required as a result of the rollover. 27 ARTICLE 14 Claims Procedures ----------------- 14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. The claim must state with particularity the determination desired by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the 28 denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 DECISION ON REVIEW. The Committee shall render its deci sion on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 Trust ----- 15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and the Employers shall at least annually transfer over to the Trust such assets as the Employers determine, in their sole discretion, are necessary to provide for their respective future liabilities created with respect to the Annual Deferral Amounts and interest credits for that year. 15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the 29 assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Agreement. ARTICLE 16 Miscellaneous ------------- 16.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. Any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.2 EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.3 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non- transferable, except that the foregoing shall not apply to any family support obligations set forth in a court order. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 16.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, 30 unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.5 FURNISHING INFORMATION. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.6 TERMS. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.7 CAPTIONS. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.8 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the laws of the State of Idaho without regard to its conflicts of laws principles. 16.9 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Hecla Mining Company Executive Deferral Plan 6500 Mineral Drive Coeur d'Alene, Idaho 83814-8788 Attn: Jon T. Langstaff Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 31 16.10 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.11 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.12 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.13 INCOMPETENT. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.14 COURT ORDER. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. 16.15 DISTRIBUTION IN THE EVENT OF TAXATION. (a) GENERAL. If, for any reason, all or any portion of a Participant's benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld, a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance 32 under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. IN WITNESS WHEREOF, the Company has signed this Plan document as of November 13, 1998. "Company" HECLA MINING COMPANY, a Delaware corporation By: /s/ Michael B. White --------------------------- Title: Vice-President ------------------------ EX-11 3 WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1 FORM 10-K DECEMBER 31, 1998 COMMISSION FILE NO. 1-8491 EXHIBIT 11 HECLA MINING COMPANY AND SUBSIDIARIES CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING For the Years Ended December 31, 1998, 1997 and 1996
Year Ended December 31, ------------------------------------- 1998 1997 1996 ---------- ---------- ----------- Shares of common stock issued at beginning of period 55,156,324 51,199,324 48,317,324 The incremental effect of the issuance of new shares for cash, net of issuance costs - - 3,620,833 2,875,000 The incremental effect of the issuance of new shares under Stock Option and Employee Stock Ownership Plans 7,238 5,084 3,230 ---------- ---------- ---------- 55,163,562 54,825,241 51,195,554 Less: Weighted average treasury shares held 62,091 62,087 62,075 ---------- ---------- ---------- Weighted average number of common shares outstanding during the period 55,101,471 54,763,154 51,133,479 ========== ========== ==========
EX-12 4 COMPUTATION OF RATIO OF EARNINGS AND FIXED CHARGES 1 Exhibit 12 HECLA MINING COMPANY FIXED CHARGE COVERAGE RATIO CALCULATION For the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and the three months ended December 31, 1997 and 1998 (In thousands, except ratios)
4th Qtr 4th Qtr 1994 1995 1996 1997 1998 1997 1998 --------- --------- --------- -------- --------- --------- --------- Net income (loss) before income taxes and extraordinary item $ (24,248) $(101,410) $ (31,667) $ 1,414 $ (1,216) $ (4,479) $ (6,122) Add: Fixed Charges 10,857 10,551 11,651 11,126 11,384 2,655 2,876 Less: Capitalized Interest (1,751) (1,516) (2,360) (806) (959) (197) (9) --------- --------- --------- --------- --------- --------- --------- Net income (loss) before income taxes and extraordinary item $ (15,142) $ (92,375) $ (22,376) $ 11,734 $ 9,209 $ (2,021) $ (3,255) ========= ========= ========= ========= ========= ========= ========= Fixed charges: Preferred stock dividends $ 8,050 $ 8,050 $ 8,050 $ 8,050 $ 8,050 $ 2,012 $ 2,012 Interest portion of rentals 166 541 543 614 73 111 10 Interest expense 2,606 1,960 3,058 2,462 3,261 532 854 Amortization of LYONs 35 - - - - - - - - - - - - --------- --------- --------- --------- --------- --------- --------- Total fixed charges $ 10,857 $ 10,551 $ 11,651 $ 11,126 $ 11,384 $ 2,655 $ 2,876 ========= ========= ========= ========= ========= ========= ========= Fixed Charge Ratio (a) (a) (a) 1.05 (a) (a) (a) Inadequate coverage $ 25,999 $ 102,926 $ 34,027 $ - - $ 2,175 $ 4,676 $ 6,131 ========= ========= ========= ========= ========= ========= ========= Write-downs and other noncash charges: DD&A(b) (mining activity) $ 14,233 $ 23,462 $ 20,451 $ 21,009 $ 22,206 $ 5,872 $ 6,354 DD&A(b) (corporate) 524 367 338 311 389 78 96 Provision for (benefit from) closed operations 11,353 4,615 22,806 (724) 734 (963) 271 Reduction in carrying value of mining properties 7,864 97,387 12,902 715 - - 715 - - --------- --------- --------- --------- --------- --------- --------- $ 33,974 $ 125,831 $ 56,497 $ 21,311 $ 23,329 $ 5,702 $ 6,721 ========= ========= ========= ========= ========= ========= ========= (a) Earnings for period inadequate to cover fixed charges. (b) "DD&A" is an abbreviation for "depreciation, depletion and amoritization."
EX-13 5 FOURTHQUARTER AND YEAR-END RESULTS 1 Exhibit 13 [Hecla Logo] 99-03 PRECIOUS AND BY-PRODUCT METALS PRICES PUSH HECLA RESULTS DOWN COMPANY REPORTS QUARTER AND YEAR-END LOSS For the Period Ended December 31, 1998 For Release: February 11,1999 COEUR D'ALENE, IDAHO -- Depressed lead, zinc and gold prices contributed to a fourth quarter loss for Hecla Mining Company (HL & HL-PrB:NYSE) of $7.5 million, or 14 cents per share, compared to a loss of $7.0 million, or 13 cents per share, during the fourth quarter of 1997. For the full year 1998, Hecla's net loss was approximately $300,000 before dividends to preferred shareholders. Following the dividend payments to owners of preferred stock, the total loss applicable to common shareholders was approximately $8.4 million, or 15 cents per share. This compares to a loss in 1997 of $8.5 million, or 16 cents per share. PRODUCTION & COSTS Hecla's silver production increased 41% to 7.2 million ounces in 1998 from 5.1 million ounces in 1997. Increased production is due primarily to the successful expansion of the Lucky Friday mine in northern Idaho into a new, higher-grade ore body. Costs per ounce decreased at Lucky Friday due to the expansion. However, because of lower by-product metals revenue for lead and zinc, the total average cash cost per ounce for all silver produced by the company increased from $3.58 per ounce in 1997 to $3.96 in 1998. Hecla produced 127,433 ounces of gold in 1998, at an average total cash cost per ounce of $189, compared to 174,164 ounces of gold at $173 per ounce in 1997. Hecla Mining Company Chairman and Chief Executive Officer Arthur Brown said, "In addition to depressed precious metals prices, the low prices of lead and zinc negatively impacted Hecla because we use the revenue from those by- product metals to offset our cost per ounce at our silver operations. Despite disappointing financial results, we enjoyed very good operating performance from all of our mines. Our silver production increased for the fourth consecutive year, and our gold operations and industrial minerals cash flow remain strong." Brown said goals and challenges for 1999 include adding to gold reserves, increasing silver production and reducing long-term debt. METALS PRICES All four major metals produced by Hecla suffered from low prices in 1998, with gold averaging $294 per ounce compared to $331 in 1997. Although better than last year, the silver price continues to remain below our expectations at an average of $5.53 per ounce. Zinc, an important by-product at the Greens Creek silver mine in Alaska, plummeted from an average price of 60 cents per pound in 1997 to 47 cents per pound in 1998. Lead also decreased from 1997's average price of 28 cents per pound to 24 cents in 1998. PROJECTS Exploration efforts were expanded in 1998 to help achieve Hecla's goal of growth in precious metals reserves. At the Noche Buena gold property in Sonora, Mexico, Hecla has identified more than 250,000 ounces of gold resource. Noche Buena is the most advanced of the company's projects, and a detailed feasibility study to determine a production decision is expected to be completed in the first half of 1999. During 1998, Hecla Contact Bill Booth, vice president-investor and public affairs, or Vicki Veltkamp, manager-corporate communications 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 208/769-4100 FAX 208/769-4159 2 compiled data on Noche Buena from previous exploration activities, as well as drilling 193 core and reverse circulation holes. Reserve definition, leach pad condemnation, step-out drilling and other feasibility work will continue into 1999. Hecla increased its presence in South America in 1998 by acquiring the Cacique, Chile, and Alto Dorado, Peru, gold exploration projects. Cacique is located in Chile's productive Maricunga gold belt. A drilling program will begin this quarter to test a surface bulk minable gold target that shows promise, based on trenching and previous drilling results. The Peruvian gold project, Alto Dorado, consists of five separate mineralized zones. Mineralization was discovered on this early-stage project during 1998, and work will continue there in 1999. As part of the company's Nevada reconnaissance program, Hecla added the Sunset gold property in Mineral County to its exploration portfolio. A number of ore-grade intercepts have been encountered in the drilling programs so far. Drilling will continue during 1999. In the meantime, Hecla continues to aggressively explore around its existing mines. Drilling programs are under way at the Rosebud gold mine and the Lucky Friday and Greens Creek silver mines. LUCKY FRIDAY The successful on-time, on-budget completion of the expansion at Lucky Friday was a highlight of 1998 and contributed to annual silver production doubling at the mine to 4.1 million ounces for the year. Total cash costs per ounce of silver at Lucky Friday decreased by 76 cents to $4.71. Operations at the Lucky Friday were temporarily suspended for 14 days during the end of January and beginning of February 1999 to repair the #2 shaft, which is used as the mine's secondary escapeway. The mine went back into full operation on February 8. The shaft was damaged by a groundfall on the 2450 level. No damage occurred to the operating portion of the mine, but in compliance with safety regulations, the mine did not operate until the secondary escapeway was repaired. During the temporary shutdown of the mine, the mill continued to process stockpiled ore for the balance of the month of January. The temporary suspension of operations should not materially impact the projected production of approximately 4.5 million ounces of silver at Lucky Friday during 1999, although first quarter production at the mine is expected to be reduced by approximately 8%. GREENS CREEK Hecla has a 29.73% interest in the Greens Creek silver/zinc/lead/gold mine in Alaska, which contributed about 2.8 million ounces of silver to Hecla's account in 1998, at a total cash cost per ounce of $2.86. During 1998, a land exchange was completed with the U.S. Forest Service, giving geologists access to about 7,500 acres surrounding the mine for exploration purposes. GOLD The Rosebud underground gold mine in Nevada had a successful year, producing more than 65,000 ounces of gold for Hecla in 1998 at a total cash cost of $176 per ounce. La Choya gold reserves were mined out in December, and after five years of operation mining has shut down at the northern Mexico mine. However, additional gold will be recovered until mid-2000 from residual leaching of the ore pads. La Choya produced nearly 40,000 ounces of gold at a total cash cost of $211 per ounce in 1998. Contact Bill Booth, vice president-investor and public affairs, or Vicki Veltkamp, manager-corporate communications 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 208/769-4100 FAX 208/769-4159 3 INDUSTRIAL MINERALS In 1998, Hecla's industrial minerals segment reported its highest sales revenue ever and increased profitability over 1997. In addition to record sales, a major expansion of Kentucky-Tennessee Clay Company's ball clay plant in Tennessee was successfully completed. K-T Clay is a wholly owned subsidiary of Hecla. In January 1999, Hecla made the decision to sell MWCA, Inc., a lawn and garden market subsidiary. MWCA, Inc. is headquartered in Rexburg, Idaho, and produces bark and aggregates for landscaping purposes. The decision to sell MWCA, Inc. was made in order to provide a sharper focus on Hecla's primary mission of mining and processing minerals. The company expects a transaction to be completed during the first half of 1999 and intends to use the proceeds from the sale for precious metals acquisitions, additional K-T Clay expansion, debt reduction and other corporate purposes. FINANCIAL Very strong assets and good working capital underpin Hecla's balance sheet. However, lower-than-anticipated metals prices affected the company's cash flow in 1998, resulting in increased bank debt. The proceeds from bank borrowings were used mainly for capital expansion projects. A combination of anticipated operating cash flow and proceeds from the sale of MWCA, Inc. in 1999 is expected to be used to decrease bank debt. Hecla benefited in 1998 from a gain of $3 million on the sale of surplus land in Coeur d'Alene, Idaho, and the 1998 precious metals hedging program, which increased revenues by $1.5 million. A tax credit of about $700,000 during the year was somewhat offset by a foreign exchange loss when the peso fell against the dollar. RESERVES During 1998, Hecla reevaluated ore reserves based on decreased metals prices and other factors. The evaluation resulted in little change at the Lucky Friday silver mine, which shows 19.5 million ounces of silver in proven and probable reserves as of December 31, 1998. At the Greens Creek mine, information derived from production experience, drilling and sampling in the Southwest Ore Zone was used to update the geologic model and resulted in decreased silver reserves from that area of the mine. However, newly discovered reserves nearly offset the decrease, with Greens Creek reporting 44.7 million ounces of proven and probable silver reserves to Hecla's account. The new overall reserve is lower grade, averaging 15.4 ounces of silver per ton, compared to 18.6 ounces per ton a year ago. Further exploration efforts continue to identify proven and probable reserves that will increase Greens Creek ore reserves and extend the mine's life. Rosebud ore reserves were also reestimated based on a higher cutoff grade. As of December 31, 1998, Hecla's share of the Rosebud gold mine proven and probable reserves is 94,800 ounces of gold. After adjusting for 1998's production of 65,000 ounces, the decrease amounts to 38,500 fewer ounces of gold compared to a year ago. Contact Bill Booth, vice president-investor and public affairs, or Vicki Veltkamp, manager-corporate communications 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 208/769-4100 FAX 208/769-4159 4
Ore Reserves - Proven and Probable at December 31, 1998 - ---------------------------------------------------------------------------------------------------------------------- Grade Contained ---------------------------------- -------- ---------- ------- ------- Tons Gold Silver Lead Zinc Gold Silver Lead Zinc Mine - (Hecla interest in %) (000) oz/ton (oz/ton) (%) (%) (ounces) (ounces) (tons) (tons) - ---------------------------- ----- ------ -------- ----- -------- -------- ---------- ------- ------- Lucky Friday 1,221 - - 15.9 10.5 1.8 - - 19,459,256 128,748 21,965 Greens Creek (29.73%) 2,901 0.142 15.4 4.5 12.3 411,946 44,733,855 130,836 357,407 Rosebud (50.0%) 242 0.392 1.80 - - - - 94,808 436,252 - - - - - ---------------------------- ------- ---------- ------- ------- TOTAL 506,754 64,629,363 259,585 379,373 - ---------------------------- ------- ---------- ------- -------
Ore Reserves - Proven and Probable at December 31, 1997 - ---------------------------------------------------------------------------------------------------------------------- Grade Contained ---------------------------------- -------- ---------- ------- ------- Tons Gold Silver Lead Zinc Gold Silver Lead Zinc Mine - (Hecla interest in %) (000) oz/ton (oz/ton) (%) (%) (ounces) (ounces) (tons) (tons) - ---------------------------- ----- ------ -------- ----- -------- -------- ---------- ------- ------- La Choya 633 0.018 - - - - - - 46,545(1) - - - - - - Lucky Friday 1,389 - - 14.8 10.2 1.9 - - 20,532,121 141,470 25,703 Greens Creek (29.73%) 2,494 0.148 18.6 4.5 12.7 369,173 46,467,846 112,234 317,497 Rosebud (50.0%) 472 0.420 2.92 - - - - 197,817 1,378,201 - - - - - ---------------------------- ------- ---------- ------- ------- TOTAL 613,535 68,378,168 253,704 343,200 - ----------------------------
1 Includes 35,022 recoverable ounces on heap leach pads. Hecla Mining Company, headquartered in Coeur d'Alene, Idaho, is one of the United States' best-known silver producers. The company also produces gold and is a major supplier of ball clay, kaolin and other industrial minerals. Hecla's operations are principally in the U.S. and Mexico. Statements made which are not historical facts, such as anticipated production, costs or sales performance are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, expected or implied. These risks and uncertainties include, but are not limited to, metals prices volatility, volatility of metals production, exploration project uncertainties, industrial minerals market conditions and project development risks. Refer to the company's Form 10-Q and 10-K reports for a more detailed discussion of factors that may impact expected future results. Hecla undertakes no obligation to publicly update or revise any forward-looking statements. Hecla Mining Company news releases can be accessed on the Internet at: http://www.hecla-mining.com Contact Bill Booth, vice president-investor and public affairs, or Vicki Veltkamp, manager-corporate communications 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 208/769-4100 FAX 208/769-4159 5
HECLA MINING COMPANY (dollars in thousands, except per share, per ounce and per pound amounts - unaudited) Fourth Quarter Ended Year Ended ----------------------------- ----------------------------- HIGHLIGHTS Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997 - --------------------------------------------------------------------------------------------------------- FINANCIAL DATA - --------------------------------------------------------------------------------------------------------- Total revenue $ 36,072 $ 34,880 $ 165,148 $ 168,569 Gross profit (loss) (2,533) (203) 9,092 16,197 Net loss (5,502) (4,990) (300) (483) Loss applicable to common shareholders (7,514) (7,002) (8,350) (8,533) Basic and diluted loss per common share (0.14) (0.13) (0.15) (0.16) Cash flow provided (used) by operating activities 756 (206) 2,043 6,029 - --------------------------------------------------------------------------------------------------------- SALE OF PRODUCTS BY SEGMENT - --------------------------------------------------------------------------------------------------------- Gold operations $ 8,011 $ 12,395 $ 32,791 $ 56,257 Silver operations 10,827 6,807 42,317 33,229 Industrial minerals 15,998 15,017 84,123 74,462 ---------- ---------- ---------- ----------- Total sales $ 34,836 $ 34,219 $ 159,231 $ 163,948 - --------------------------------------------------------------------------------------------------------- GROSS PROFIT (LOSS) BY SEGMENT - --------------------------------------------------------------------------------------------------------- Gold operations $ (86) $ 3,119 $ 3,926 $ 14,978 Silver operations (1,486) (2,097) (800) (3,786) Industrial minerals (961) (1,225) 5,966 5,005 ---------- ---------- ---------- ----------- Total gross profit (loss) $ (2,533) $ (203) $ 9,092 $ 16,197 OTHER DATA - --------------------------------------------------------------------------------------------------------- EBITDA BY SEGMENT(1) - --------------------------------------------------------------------------------------------------------- Gold operations $ 2,502 $ 5,672 $ 11,448 $ 22,504 Silver operations 1,047 (2) 8,848 4,921 Industrial minerals 268 (1) 10,988 9,781 ---------- ---------- ---------- ----------- Total EBITDA $ 3,817 $ 5,669 $ 31,284 $ 37,206 - --------------------------------------------------------------------------------------------------------- PRODUCTION SUMMARY - TOTALS - --------------------------------------------------------------------------------------------------------- Gold - Ounces 32,030 43,673 127,433 174,164 Silver - Ounces 1,893,724 1,273,722 7,244,657 5,147,009 Lead - Tons 9,120 6,096 34,455 24,995 Zinc - Tons 5,790 4,147 20,155 16,830 Industrial minerals - Tons shipped 245,313 237,802 1,114,987 1,025,993 Average cost per ounce of gold produced: Cash operating costs ($/oz.) 190 159 177 166 Total cash costs ($/oz.) 200 167 189 173 Total production costs ($/oz.) 301 239 262 239 Average cost per ounce of silver produced: Cash operating costs ($/oz.) 4.18 4.33 3.96 3.58 Total cash costs ($/oz.) 4.18 4.33 3.96 3.58 Total production costs ($/oz.) 5.60 6.09 5.37 5.42 - --------------------------------------------------------------------------------------------------------- AVERAGE METAL PRICES - --------------------------------------------------------------------------------------------------------- Gold - Realized ($/oz.) 301 329 301 356 Gold - London Final ($/oz.) 294 307 294 331 Silver - Handy & Harman ($/oz.) 4.96 5.27 5.53 4.90 Lead - LME Cash (cents/pound) 22.5 25.6 24.0 28.3 Zinc - LME Cash (cents/pound) 43.3 53.8 46.5 59.7
(1) EBITDA represents earnings before interest, income taxes, depreciation, depletion, amortization and items classified as other operating expenses not occurring at the operating sites. The company believes EBITDA is helpful in understanding cash flow generated from operations that is available for income taxes, debt service, capital expenditures, and other nonsite operating expenses. 6 HECLA MINING COMPANY Consolidated Statements of Operations and Comprehensive Loss (dollars and shares in thousands, except per share amounts - unaudited)
Fourth Quarter Ended Year Ended ------------------------------ ------------------------------ Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997 -------------- -------------- -------------- -------------- Sales of products $ 34,836 $ 34,219 $ 159,231 $ 163,948 --------- --------- --------- --------- Cost of sales and other direct production costs 31,015 28,550 127,933 126,742 Depreciation, depletion and amortization 6,354 5,872 22,206 21,009 --------- --------- --------- --------- 37,369 34,422 150,139 147,751 --------- --------- --------- --------- Gross profit (loss) (2,533) (203) 9,092 16,197 --------- --------- --------- --------- Other operating expenses: General and administrative 1,637 1,992 7,583 7,976 Exploration 1,518 1,892 4,866 7,422 Depreciation and amortization 96 78 389 311 Provision for (benefit from) closed operations and environmental matters 271 (963) 734 (724) Reduction in carrying value of mining properties - - 715 - - 715 ---------- --------- --------- --------- 3,522 3,714 13,572 15,700 ---------- --------- --------- --------- Income (loss) from operations (6,055) (3,917) (4,480) 497 ---------- --------- --------- --------- Other income (expense): Interest and other income 1,236 661 5,917 4,621 Miscellaneous expense (300) (483) (1,487) (1,643) Gain (loss) on investments (158) (405) 1,136 (405) Interest expense: Total interest cost (854) (532) (3,261) (2,462) Less amount capitalized 9 197 959 806 ---------- --------- --------- --------- (67) (562) 3,264 917 ---------- --------- --------- --------- Income (loss) before income taxes (6,122) (4,479) (1,216) 1,414 Income tax benefit (provision) 620 (511) 916 (1,897) ---------- --------- --------- - --- ------------- Net loss (5,502) (4,990) (300) (483) Preferred stock dividends (2,012) (2,012) (8,050) (8,050) ---------- --------- --------- --------- Loss applicable to common shareholders (7,514) (7,002) (8,350) (8,533) ---------- --------- --------- --------- Other comprehensive income (loss), net of tax: Unrealized losses on securities (16) (86) (115) (351) Reclassification adjustment for losses included in net loss 158 320 96 320 Minimum pension liability adjustment (289) - - (289) - - ---------- --------- --------- --------- Other comprehensive income (loss) (147) 234 (308) (31) ---------- --------- --------- --------- Comprehensive loss $ (7,661) $ (6,768) $ (8,658) $ (8,564) ========== ========= ========= ========= Basic and diluted loss per common share $ (0.14) $ (0.13) $ (0.15) $ (0.16) ========== ========= ========= ========= Weighted average number of common shares outstanding 55,105 55,094 55,101 54,763 ========== ========= ========= =========
7 HECLA MINING COMPANY Consolidated Balance Sheets (dollars and shares in thousands - unaudited)
Dec. 31, 1998 Dec. 31, 1997 - --------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 2,480 $ 3,794 Accounts and notes receivable 25,919 24,445 Income tax refund receivable 1,087 793 Inventories 22,757 22,116 Other current assets 1,251 1,416 --------- --------- Total current assets 53,494 52,564 Investments 3,406 2,521 Restricted investments 6,331 7,926 Properties, plants and equipment, net 178,168 180,037 Other noncurrent assets 10,663 7,620 --------- --------- Total assets $ 252,062 $ 250,668 ========= ========= - --------------------------------------------------------------------------- LIABILITIES - --------------------------------------------------------------------------- Current liabilities: Accounts payable and accrued expenses $ 12,172 $ 12,590 Accrued payroll and related benefits 2,852 2,436 Preferred stock dividends payable 2,012 2,012 Accrued taxes 772 1,016 Accrued reclamation and closure costs 6,537 6,914 --------- --------- Total current liabilities 24,345 24,968 Deferred income taxes 300 300 Long-term debt 42,923 22,136 Accrued reclamation and closure costs 23,216 34,406 Other noncurrent liabilities 9,542 8,518 --------- --------- Total liabilities 100,326 90,328 --------- --------- - --------------------------------------------------------------------------- SHAREHOLDERS" EQUITY - --------------------------------------------------------------------------- - ------ Preferred stock 575 575 Common stock 13,792 13,789 Capital surplus 374,017 373,966 Accumulated deficit (230,493) (222,143) Accumulated other comprehensive loss (5,269) (4,961) Treasury stock (886) (886) --------- --------- Total shareholders' equity 151,736 160,340 --------- --------- Total liabilities and shareholders' equity $ 252,062 $ 250,668 ========= ========= Common shares outstanding at end of period 55,105 55,094 ========= =========
8 HECLA MINING COMPANY Consolidated Statements of Cash Flows (dollars in thousands - unaudited)
Year Ended ------------------------------- Dec. 31, 1998 Dec. 31, 1997 - -------------------------------------------------------------------------------------- OPERATING ACTIVITIES - -------------------------------------------------------------------------------------- Net loss $ (300) $ (483) Noncash elements included in net income: Depreciation, depletion and amortization 22,595 21,320 Gain on disposition of properties, plants and equipment (2,648) (1,111) (Gain) loss on investments (1,136) 405 Reduction in carrying value of mining properties - - 715 Provision for reclamation and closure costs 581 1,341 Change in: Accounts and notes receivable (1,474) (277) Income tax refund receivable (294) 469 Inventories (641) 548 Other current and noncurrent assets (1,747) 868 Accounts payable and accrued expenses (478) (4,787) Accrued payroll and related benefits 416 (796) Accrued taxes (244) (411) Accrued reclamation and other noncurrent liabilities (12,587) (11,772) ---------- ---------- Net cash provided by operating activities 2,043 6,029 ---------- ---------- - -------------------------------------------------------------------------------------- INVESTING ACTIVITIES - -------------------------------------------------------------------------------------- Additions to properties, plants and equipment (22,495) (24,794) Proceeds from disposition of properties, plants and equipment 3,733 1,872 Proceeds from sale of investments 1,294 - - Decrease in restricted investments 1,595 13,845 Purchase of investments and increase in cash surrender value of life insurance, net (734) (1,233) Other, net 399 1,642 ---------- ---------- Net cash used by investing activities (16,208) (8,668) ---------- ---------- - -------------------------------------------------------------------------------------- FINANCING ACTIVITIES - -------------------------------------------------------------------------------------- Common stock issued under stock and stock option plans 54 41 Issuance of common stock, net of offering costs - - 23,355 Dividends on preferred stock (8,050) (8,050) Borrowings on long-term debt 44,531 57,601 Repayment on long-term debt (23,684) (73,673) ---------- ---------- Net cash provided (used) by financing activities 12,851 (726) ---------- ---------- Net decrease in cash and cash equivalents (1,314) (3,365) Cash and cash equivalents at beginning of period 3,794 7,159 ---------- ---------- Cash and cash equivalents at end of period $ 2,480 $ 3,794 ========== ==========
9 HECLA MINING COMPANY Production Data
Fourth Quarter Ended Year Ended ----------------------------- ----------------------------- Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997 - --------------------------------------------------------------------------------------------------------------- LA CHOYA UNIT - --------------------------------------------------------------------------------------------------------------- Tons of ore processed 570,554 777,301 1,672,438 2,828,335 Days of operation 92 92 365 365 Mining cost per ton $1.84 $1.93 $1.59 $2.28 Ore grade crushed - Gold (oz./ton) 0.020 0.027 0.019 0.029 Gold produced (oz.) 11,292 20,291 39,965 78,170 Silver produced (oz.) 992 2,173 4,264 8,130 Average cost per ounce of gold produced: Cash operating costs $226 $180 $211 $183 Total cash costs $226 $181 $211 $184 Total production costs $329 $223 $242 $224 - --------------------------------------------------------------------------------------------------------------- ROSEBUD UNIT (Reflects Hecla's 50% share)(1) - --------------------------------------------------------------------------------------------------------------- Tons of ore mined 39,727 37,619 169,492 112,841 Tons of ore milled 41,362 35,327 171,493 99,050 Days of operation 92 92 365 275 Mining cost per ton $28.37 $28.66 $26.88 $28.33 Milling cost per ton $11.56 $11.59 $14.66 $12.18 Ore grade milled - Gold (oz./ton) 0.384 0.501 0.400 0.494 Ore grade milled - Silver (oz./ton) 2.71 2.98 3.06 2.96 Gold produced (oz.) 14,946 17,833 65,496 46,974 Silver produced (oz.) 64,488 55,979 278,290 168,584 Average cost per ounce of gold produced: Cash operating costs $163 $136 $157 $137 Total cash costs $181 $151 $176 $156 Total production costs $279 $259 $274 $263 - --------------------------------------------------------------------------------------------------------------- LUCKY FRIDAY UNIT - --------------------------------------------------------------------------------------------------------------- Tons of ore milled 78,125 44,687 263,502 193,399 Days of operation 63 63 254 254 Mining cost per ton $50.95 $43.90 $47.62 $43.73 Milling cost per ton $6.99 $8.61 $7.52 $7.98 Ore grade milled - Silver (oz./ton) 15.95 11.55 16.60 10.33 Silver produced (oz.) 1,167,810 498,200 4,137,135 1,943,373 Lead produced (tons) 7,185 4,645 27,708 19,270 Zinc produced (tons) 721 750 2,648 3,168 Average cost per ounce of silver produced: Cash operating costs $5.00 $6.33 $4.71 $5.47 Total cash costs $5.00 $6.33 $4.71 $5.47 Total production costs $5.89 $7.46 $5.59 $6.72
(cont.) 10 HECLA MINING COMPANY Production Data (cont.)
Fourth Quarter Ended Year Ended ----------------------------- ---------------------------- Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec.31, 1997 - --------------------------------------------------------------------------------------------------------------- GREENS CREEK (Reflects Hecla's 29.73% share) - --------------------------------------------------------------------------------------------------------------- Tons of ore milled 43,331 36,420 160,567 145,676 Days of operation 92 92 365 365 Mining cost per ton $24.10 $44.32 $28.81 $39.58 Milling cost per ton $18.76 $25.80 $20.62 $23.15 Ore grade milled - Silver (oz./ton) 19.90 25.31 22.74 25.68 Silver produced (oz.) 660,234 716,601 2,823,660 2,889,265 Gold produced (oz.) 4,982 4,473 18,008 16,604 Lead produced (tons) 1,935 1,451 6,747 5,725 Zinc produced (tons) 5,069 3,397 17,507 13,662 Average cost per ounce of silver produced: Cash operating costs $2.73 $2.94 $2.86 $2.31 Total cash costs $2.73 $2.94 $2.86 $2.31 Total production costs $5.08 $5.13 $5.06 $4.55 - --------------------------------------------------------------------------------------------------------------- OTHER(2) - --------------------------------------------------------------------------------------------------------------- Gold produced (oz.) 810 1,076 3,964 32,416 Silver produced (oz.) 200 769 1,308 137,657
(1) The Rosebud mine commenced operations in April 1997. (2) Includes the company's share of production from the Grouse Creek mine and other sources. CAPITAL EXPENDITURES (dollars in thousands) Year Ended ----------------------------------- Dec. 31, 1998 Dec. 31, 1997 --------------- --------------- Lucky Friday $ 6,183 $ 11,215 Greens Creek (29.73%*) 3,024 2,266 Rosebud (50%*) 118 6,027 La Choya 3,789 240 Noche Buena 2,326 - - Industrial minerals 6,030 3,587 Capitalized interest 959 806 Other 66 653 ------------- ------------ Total Capitalized $ 22,495 $ 24,794 ============= ============ *Hecla's share HEDGED POSITIONS As of Dec. 31, 1998 Silver: 500,000 ounces hedged @ average price of $6.54. Gold: 6,000 ounces hedged @ average price of $354. EX-21 6 LIST OF SUBSIDIARIES OF REGISTRANT 1 FORM 10-K DECEMBER 31, 1998 COMMISSION FILE NO. 1-8491 EXHIBIT 21 HECLA MINING COMPANY AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT December 31, 1998 State or Country Percentage of in Which Voting Securities Organized Owned ---------------- ----------------- Equinox Resources, Inc. Nevada 100 (A) Kentucky-Tennessee Clay Company Delaware 100 (A) K-T Clay de Mexico, S.A. de C.V. Mexico 100 (A) K-T Feldspar Corporation North Carolina 100 (A) Minera Hecla, S.A. de C.V. Mexico 100 (A) MWCA, Inc. Idaho 100 (A) (A) Included in the consolidated financial statements filed herewith. EX-23.1 7 CONSENT OF AUDITORS 1 Exhibit 23.1 Form 10-K December 31, 1998 Commission File No. 1-8491 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Hecla Mining Company and subsidiaries on Forms S-3 (File No. 33-72832 and No. 33-59659) and Forms S-8 (File No. 33- 7833, 33-41833, 33-14758, 33-40691, 33-60095 and 33-60099) of our report, which includes an explanatory paragraph concerning changes in accounting for environmental remediation liabilities in 1996, dated February 8, 1999, except for Note 5, as to which the date is February 25, 1999, on our audits of the consolidated financial statements of Hecla Mining Company and subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Form 10-K. /s/ PricewaterhouseCoopers LLP Spokane, Washington March 5, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 1 2,480 0 25,919 0 22,757 53,494 417,011 (238,843) 252,062 24,345 9,800 0 575 13,792 137,369 252,062 159,231 165,148 127,933 150,139 13,572 0 2,302 (1,216) 916 (300) 0 0 0 (300) (0.15) (0.15)
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