-----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, JdROBjAc8G/bQE8EMX2TCMHgGFONfHcsnNWdR8o2uwHg+wzt442q8n7w+D6ha77N r9ulkKD1quW5Cz7a8OYV0g== 0000897101-03-000952.txt : 20030808 0000897101-03-000952.hdr.sgml : 20030808 20030808145446 ACCESSION NUMBER: 0000897101-03-000952 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030808 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08491 FILM NUMBER: 03831522 BUSINESS ADDRESS: STREET 1: 6500 N MINERAL DRIVE SUITE 200 STREET 2: NONE CITY: COEUR D'ALENE STATE: ID ZIP: 83815-9408 BUSINESS PHONE: 2087694100 MAIL ADDRESS: STREET 1: 6500 N MINERAL DRIVE SUITE 200 STREET 2: NONE CITY: COEUR D'ALENE STATE: ID ZIP: 83815-9408 10-Q 1 hecla033375_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 Commission file number 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, Suite 200 Coeur d'Alene, Idaho 83815-9408 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) 208-769-4100 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for at least the past 90 days. Yes _XX_. No ____. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes _XX_. No ____. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares Outstanding August 7, 2003 - --------------------------- --------------------------------- Common stock, par value 109,761,882 $0.25 per share Hecla Mining Company and Subsidiaries Form 10-Q For the Quarter Ended June 30, 2003 I N D E X* --------- Page ---- PART I. - Financial Information Item l - Financial Statements - Consolidated Balance Sheets - June 30, 2003 (unaudited) and December 31, 2002 3 - Consolidated Statements of Operations and Comprehensive Income - Three Months and Six Months Ended June 30, 2003 and 2002 (unaudited) 4 - Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002 (unaudited) 5 - Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 41 Item 4 - Controls and Procedures 43 PART II. - Other Information Item 1 - Legal Proceedings 44 Item 3 - Defaults Upon Senior Securities 44 Item 4 - Submission of Matters to a Vote of Security Holders 44 Item 6 - Exhibits and Report on Form 8-K 44 * Items omitted are not applicable. -2- Part I - Financial Information Hecla Mining Company and Subsidiaries Consolidated Balance Sheets (Unaudited) (In thousands, except share data)
June 30, December 31, 2003 2002 --------- --------- ASSETS ------ Current assets: Cash and cash equivalents $ 113,380 $ 19,542 Accounts and notes receivable 13,164 10,154 Inventories 15,166 14,758 Deferred income taxes 1,350 2,700 Other current assets 1,906 1,780 --------- --------- Total current assets 144,966 48,934 Investments 275 76 Restricted investments 6,455 6,428 Properties, plants and equipment, net 85,252 86,725 Mineral interests, net 5,194 5,640 Deferred income taxes 300 300 Other noncurrent assets 12,489 12,038 --------- --------- Total assets $ 254,931 $ 160,141 ========= ========= LIABILITIES ----------- Current liabilities: Accounts payable and accrued expenses $ 11,311 $ 11,731 Accrued payroll and related benefits 6,399 7,603 Current portion of long-term debt 4,279 7,296 Accrued taxes 2,301 1,572 Current portion of accrued reclamation and closure costs 7,000 7,005 --------- --------- Total current liabilities 31,290 35,207 Long-term debt 3,271 4,657 Accrued reclamation and closure costs 41,853 42,718 Other noncurrent liabilities 4,851 5,629 --------- --------- Total liabilities 81,265 88,211 --------- --------- SHAREHOLDERS' EQUITY -------------------- Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued 2003 - 752,752 shares, issued 2002 -753,402, liquidation preference 2003 - $45,580 and 2002 - $44,262 188 188 Common stock, $0.25 par value, authorized 200,000,000 shares; issued 2003 - 109,490,042 shares, issued 2002 - 86,187,468 shares 27,373 21,547 Capital surplus 492,313 405,959 Accumulated deficit (346,271) (355,544) Accumulated other comprehensive income (loss) 181 (36) Less stock held by grantor trust; 2002 - 81,696 common shares -- (66) Less treasury stock, at cost; 2003 and 2002 - 8,274 common shares (118) (118) --------- --------- Total shareholders' equity 173,666 71,930 --------- --------- Total liabilities and shareholders' equity $ 254,931 $ 160,141 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -3- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Unaudited) (Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Six Months Ended ----------------------- ----------------------- June 30, June 30, June 30, June 30, 2003 2002 2003 2002 --------- --------- --------- --------- Continuing Operations: Sales of products $ 30,203 $ 28,663 $ 56,643 $ 52,045 --------- --------- --------- --------- Cost of sales and other direct production costs 15,335 14,675 29,919 28,766 Depreciation, depletion and amortization 5,222 6,131 10,124 11,689 --------- --------- --------- --------- 20,557 20,806 40,043 40,455 --------- --------- --------- --------- Gross profit 9,646 7,857 16,600 11,590 --------- --------- --------- --------- Other operating expenses: General and administrative 2,222 1,767 4,261 3,645 Exploration 3,638 1,206 5,771 1,730 Depreciation and amortization 171 15 200 67 Provision for closed operations and environmental matters 123 148 203 257 --------- --------- --------- --------- 6,154 3,136 10,435 5,699 --------- --------- --------- --------- Income from operations 3,492 4,721 6,165 5,891 --------- --------- --------- --------- Other income (expense): Interest and other income 980 685 5,559 1,094 Miscellaneous, net (752) 237 (1,225) 91 Interest expense (323) (473) (682) (937) --------- --------- --------- --------- (95) 449 3,652 248 --------- --------- --------- --------- Income from operations before income taxes, cumulative effect of change in accounting principle and discontinued operations 3,397 5,170 9,817 6,139 Income tax provision (857) (112) (1,616) (112) --------- --------- --------- --------- Income from continuing operations before cumulative effect of change in accounting principle and discontinued operations 2,540 5,058 8,201 6,027 Cumulative effect of change in accounting principle, net of income tax -- -- 1,072 -- Discontinued operations, net of income tax -- (303) -- (786) --------- --------- --------- --------- Net income 2,540 4,755 9,273 5,241 Preferred stock dividends (659) (2,013) (1,318) (4,025) --------- --------- --------- --------- Income applicable to common shareholders $ 1,881 $ 2,742 $ 7,955 $ 1,216 ========= ========= ========= ========= Net income $ 2,540 $ 4,755 $ 9,273 $ 5,241 Change in derivative contracts -- -- -- (256) Reclassification adjustment of loss included in net income 9 10 18 20 Unrealized holding gains on securities 149 36 199 55 --------- --------- --------- --------- Comprehensive income $ 2,698 $ 4,801 $ 9,490 $ 5,060 ========= ========= ========= ========= Basic and diluted income (loss) per common share: Income from continuing operations after preferred dividends $ 0.02 $ 0.04 $ 0.06 $ 0.03 Cumulative effect of change in accounting principle -- -- 0.01 -- Loss from discontinued operations -- -- -- (0.01) --------- --------- --------- --------- Basic and diluted income per common share $ 0.02 $ 0.04 $ 0.07 $ 0.02 ========= ========= ========= ========= Basic weighted average number of common shares outstanding 109,427 75,010 109,374 74,426 ========= ========= ========= ========= Diluted weighted average number of common shares outstanding 110,052 75,010 110,173 74,426 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -4- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six Months Ended ------------------------ June 30, June 30, 2003 2002 --------- --------- Operating activities: Net income $ 9,273 $ 5,241 Noncash elements included in net income: Depreciation, depletion and amortization 10,324 11,756 Cumulative effect of change in accounting principle (1,072) -- Gain on disposition of properties, plants and equipment (296) (185) Provision for reclamation and closure costs 132 751 Deferred income taxes 1,350 -- Change in net assets of discontinued operations -- 858 Change in assets and liabilities: Accounts and notes receivable (3,010) (6,102) Inventories (408) (3,420) Other current and noncurrent assets (577) (886) Accounts payable and accrued expenses (402) 102 Accrued payroll and related benefits (554) 574 Accrued taxes 729 137 Accrued reclamation and closure costs and other noncurrent liabilities (2,499) (2,247) --------- --------- Net cash provided by operating activities 12,990 6,579 --------- --------- Investing activities: Proceeds from sale of discontinued operations -- 1,585 Additions to properties, plants and equipment (6,804) (6,070) Proceeds from disposition of properties, plants and equipment 486 5,622 Increase in restricted investments (27) -- Other, net 78 137 --------- --------- Net cash provided (used) by investing activities (6,267) 1,274 --------- --------- Financing activities: Common stock issued under warrants and stock option plans 248 2,561 Common stock issued, net of offering costs 91,270 -- Borrowings on debt 1,350 3,300 Repayments on debt (5,753) (8,201) --------- --------- Net cash provided (used) by financing activities 87,115 (2,340) --------- --------- Net increase in cash and cash equivalents 93,838 5,513 Cash and cash equivalents at beginning of period 19,542 7,560 --------- --------- Cash and cash equivalents at end of period $ 113,380 $ 13,073 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -5- Notes to Consolidated Financial Statements Note 1. Basis of Preparation of Financial Statements In the opinion of management, the accompanying unaudited consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of cash flows and notes to consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company ("we" or "our"). These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2002. Note 2. Discontinued Operations During 2000, in furtherance of our determination to focus our operations on silver and gold mining and to raise cash to retire debt and provide working capital, our board of directors made the decision to sell the industrial minerals segment. In March 2003, we sold the remaining inventories of the briquette division of the Colorado Aggregate division ("CAC") of MWCA, Inc., and no longer produce or sell any product from our former industrial minerals segment. The briquette division of CAC represented the remaining portion of our industrial minerals segment, which reported a loss from operations of approximately $26,000 and $21,000, respectively, for the second quarter and first six months of 2003. We did not record any gain or loss from discontinued operations during the second quarter and first six months of 2003, compared to a loss of $0.3 million and $0.8 million ($0.01 per common share), respectively, during the second quarter and first six months of 2002. All activity associated with the former industrial minerals segment during the second quarter and first six months of 2003 is considered a general corporate activity and is presented as "other" where appropriate. Note 3. Income Taxes The income tax provision for the first six months of 2003 and 2002 varies from the amount that would have been provided by applying the statutory rate to the income before income taxes primarily due to the availability and utilization of net operating losses in Mexico and Venezuela. For the three and six months ended June 30, 2003, we recorded a $0.9 million and $1.6 million tax provision, respectively, for foreign income taxes, consisting primarily of deferred taxes and a current provision for accrued Mexican withholding tax payable on interest expense. For the three and six months ended June 30, 2002, we recognized a $0.1 million provision for foreign income taxes due to Mexican withholding tax payable on interest expense. -6- Note 4. Inventories Inventories consist of the following (in thousands): June 30, December 31, 2003 2002 ------------- ------------- Concentrates, bullion, metals in transit and other products $ 7,004 $ 7,034 Materials and supplies 8,162 7,724 ------------- ------------- $ 15,166 $ 14,758 ============= ============= At June 30, 2003, we had forward sales contracts through December 31, 2004, for 78,728 ounces of gold at an average price of $288.25 per ounce. These contracts meet the criteria to be treated as normal sales in accordance with SFAS 138 and, as a result, these contracts are not required to be accounted for as derivatives under SFAS 133. These forward sales contracts expose us 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 Final gold price at June 30, 2003 was $346.00 per ounce. We have a quarterly Gold Lease Rate Swap at a fixed rate of 1.5% on 63,828 ounces of the above gold forward contracts. The ounces covered under the swap are adjusted each quarter, in accordance with the expiration of the gold forward contracts. At June 30, 2003, the fair market value of the Gold Lease Rate Swap was approximately $265,000, which represents the amount the counterparty would have to pay us if the contract was terminated. Note 5. Contingencies Bunker Hill Superfund Site In 1994, we, as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), entered into a consent decree with the Environmental Protection Agency ("EPA") and the State of Idaho, concerning environmental remediation obligations at the Bunker Hill Superfund site located in Kellogg, Idaho. The 1994 Consent Decree (the "1994 Decree") settled our response-cost responsibility under CERCLA at the Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and Refining Company, which was also a party to the 1994 Decree, filed for Chapter 11 bankruptcy and in January 2001, the Federal District Court approved a new Consent Decree between Sunshine, the U.S. Government and the Coeur d'Alene Indian Tribe which settled Sunshine's environmental liabilities in the Coeur d'Alene Basin lawsuits described below and released Sunshine from further obligations under the 1994 Decree. In response to a request by us and ASARCO Incorporated, the United States Federal District Court in Idaho, having jurisdiction over the 1994 Decree, issued an Order in September -7- 2001 that the 1994 Decree should be modified in light of a significant change in factual circumstances not reasonably anticipated by the mining companies at the time they signed the 1994 Decree. In its Order, the Court reserved the final ruling on the appropriate modification to the 1994 Decree until after the issuance by the EPA of a Record of Decision ("ROD") on the Basin-wide Remedial Investigation/Feasibility Study. The EPA issued the ROD on the Basin in September 2002, proposing a $359 million Basin clean-up plan to be implemented over 30 years. The ROD also establishes a review process at the end of the 30-year period to determine if further remediation would be appropriate. Based on the 2001 Order issued by the Court, in April 2003, we requested the Court to release Hecla and ASARCO from future work under the 1994 Decree within the Bunker Hill site. In addition, because we were unsuccessful in negotiating the 2003 work program during the first half of 2003, we have submitted the dispute between ourselves and the EPA concerning our obligation for 2003 work under the 1994 Decree to the Idaho Federal District Court for final determination. We expect the work program for 2003 will be subject to a final decision on modification of the 1994 Decree by the Court. On February 2, 2003, ASARCO entered into a Consent Decree with the United States relating to a transfer of certain assets to its parent corporation, Grupo de Mexico, S.A. de C.V. The Consent Decree also addresses ASARCO's environmental liabilities on a number of sites in the United States, including the Bunker Hill site. The provisions of the Consent Decree could limit ASARCO's annual obligation at the Bunker Hill site for 2003 to 2005. In addition, in February 2003, we were advised that ASARCO had reached an agreement with the Coeur d'Alene Indian Tribe settling the Tribe's claims against ASARCO for damages to natural resources. We believe the settlement will have no material effect on any liability we may have for the Tribe's claims. As of June 30, 2003, we have estimated and accrued a liability for remedial activity costs at the Bunker Hill site of $8.3 million, which are anticipated to be made over the next three to five years. Although we believe the accrual is adequate based upon our current estimates of aggregate costs, it is reasonably possible that our estimate may change in the future due to the assumptions and estimates inherent in the accrual. Coeur d'Alene River Basin Environmental Claims Coeur d'Alene Indian Tribe Claims In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under CERCLA, in Idaho Federal District Court against us, ASARCO 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. In February 2003, ASARCO reached an agreement with the Coeur d'Alene Tribe settling the Tribe's claim against ASARCO. The Tribe's natural resource damage litigation has been consolidated with the United States' litigation described below. -8- U.S. Government Claims In March 1996, the United States filed a lawsuit in Idaho Federal District Court against certain mining companies that conducted historic mining operations in the Silver Valley of northern Idaho, including us. The lawsuit asserts claims under CERCLA and the Clean Water Act and seeks recovery for alleged damages to or loss of natural resources located in the Coeur d'Alene River Basin in northern Idaho for which the United States asserts it is the trustee under CERCLA. The lawsuit claims that the defendants' historic mining activity resulted in releases of hazardous substances and damaged natural resources within the Basin. The suit also seeks declaratory relief that we and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Basin outside the Bunker Hill site. We have asserted a number of defenses to the United States' claims. As discussed above, in May 1998, the EPA announced that it had commenced a Remedial Investigation/Feasibility Study under CERCLA for the entire Basin, including Lake Coeur d'Alene, in support of its response cost claims asserted in its March 1996 lawsuit. In October 2001, the EPA issued its proposed clean-up plan for the Basin. The EPA issued the ROD on the Basin in September 2002, proposing a $359 million Basin clean-up plan to be implemented over 30 years. The ROD also establishes a review process at the end of the 30-year period to determine if further remediation would be appropriate. The first phase of the trial commenced on the consolidated Coeur d'Alene Indian Tribe's and the United States' claims on January 22, 2001, and was concluded on July 30, 2001. In the first phase of the trial, the Court has been requested to determine the extent of liability, if any, of the defendants for the plaintiffs' CERCLA claims. The Court was also asked to determine the liability of the United States for its historic involvement in the Basin. No decision on the issues before the Court in the first phase of the litigation has been issued. If liability is determined in the first phase, a second trial is anticipated to be scheduled at a later date to address damages and remedy selection. Two of the defendant mining companies, Coeur d'Alene Mines Corporation and Sunshine Mining and Refining Company, settled their liabilities under the litigation during the first quarter of 2001. We and ASARCO are the only defendants remaining in the United States' litigation. During 2000 and into 2001, we were involved in settlement negotiations with representatives of the U.S. Government and the Coeur d'Alene Indian Tribe. We also participated with certain of the other defendants in the litigation in a State of Idaho-led settlement effort. On August 16, 2001, we entered into a now terminated Agreement in Principle with the United States and the State of Idaho to settle the governments' claims for natural resource damages and clean-up costs related to the historic mining practices in the Coeur d'Alene Basin in northern Idaho. In August 2002, because the parties were making no progress toward a final settlement under the terms of the Agreement in Principle, the United States, the State of Idaho and we agreed to discontinue utilizing the Agreement in Principle as a settlement vehicle. However, we may participate in further settlement negotiations with the United States, the State of Idaho and the Coeur d'Alene Indian Tribe in the future. Due to a number of -9- uncertainties related to this matter, including the outcome of pending litigation and the result of any settlement negotiations, we do not have the ability to estimate what, if any, liability we may have related to the Coeur d'Alene Basin at this time. It is reasonably possible that our ability to estimate what, if any, liability we may have relating to the Coeur d'Alene Basin may change in the near or long term depending on a number of factors. In addition, an adverse ruling against us for liability and damages in this matter could have a material adverse effect on us. Class Action Litigation On or about January 7, 2002, a class action complaint was filed in the Idaho District Court, County of Kootenai, against several corporate defendants, including Hecla. We were served with the complaint on January 29, 2002. The complaint seeks certification of three plaintiff classes of Coeur d'Alene Basin residents and current and former property owners to pursue three types of relief: various medical monitoring programs, real property remediation and restoration programs, and damages for diminution in property value, plus other damages and costs. On April 23, 2002, we filed a motion with the Court to dismiss the claims for relief relating to any medical monitoring programs and the remediation and restoration programs. At a hearing before the Idaho District Court on our and other defendants' motions held October 16, 2002, the Judge struck the complaint filed by the plaintiffs in January 2002 and instructed the plaintiffs to re-file the complaint limiting the relief requested by the plaintiffs to wholly private damages. The Court also dismissed the medical monitoring claim as a separate cause of action and stated that any requested remedy that encroached upon the EPA's cleanup in the Silver Valley would be precluded by the pending Federal Court case described above. The plaintiffs re-filed their amended complaint on January 9, 2003. As ordered by the Court, the amended complaint omits any cause of action for medical monitoring and no longer requests relief in the form of real property remediation or restoration programs. At a hearing on May 7, 2003, the Court vacated the entire amended complaint, issued sanctions against Plaintiffs' counsel for noncompliance with Idaho law, and gave Plaintiffs' counsel until June 30, 2003, to re-file an amended complaint that complies with Idaho law. Plaintiffs submitted a second amended complaint on June 9, 2003, which we have answered. We believe the claims alleged against us are subject to challenge on a number of bases and intend to vigorously defend this litigation. Insurance Coverage Litigation In 1991, we initiated litigation in the Idaho District Court, County of Kootenai, against a number of insurance companies that provided comprehensive general liability insurance coverage to us and our predecessors. We believe the insurance companies have a duty to defend and indemnify us under their policies of insurance for all liabilities and claims asserted against us by the EPA and the Tribe under CERCLA related to the Bunker Hill site and the Basin in northern Idaho. In 1992, the Idaho State District Court ruled that the primary insurance companies had a duty to defend us in the Tribe's lawsuit. During 1995 and 1996, we entered into settlement agreements with a number of the insurance carriers named in the litigation. We have -10- received a total of approximately $7.2 million under the terms of the settlement agreements. Thirty percent of these settlements were paid to the EPA to reimburse the U.S. government for past costs under the Bunker Hill site Consent Decree. Litigation is still pending against one insurer with trial suspended until the underlying environmental claims against us are resolved or settled. The remaining insurer in the litigation, along with a second insurer not named in the litigation, is providing us with a partial defense in all Basin environmental litigation. As of June 30, 2003, we have not reduced our accrual or recorded a receivable for reclamation and closure costs to reflect the receipt of any potential insurance proceeds. Other Claims On November 17, 2000, we entered into an agreement with Zemex U.S. Corporation guaranteed by its parent, Zemex Corporation of Toronto, Canada, to sell the stock of K-T Clay and K-T Mexico, which included the ball clay and kaolin operations, for a price of $68.0 million. On January 18, 2001, Zemex U.S. Corporation failed to close on the transaction, and on January 22, 2001, we brought suit in the United States District Court for the Northern District of Illinois, Eastern Division, against the parent, Zemex Corporation, under its guarantee for its subsidiary's failure to close on the purchase and meet its obligations under the November 2000 agreement. In January 2003, the parties reached an agreement to settle our claims in full for $3,950,000. The payment was recorded as other income during the first quarter of 2003. In March 2002, Independence Lead Mines Company ("Independence"), the holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the Lucky Friday mine, notified us of certain alleged defaults by us under the 1968 Lease Agreement between the unit owners (Independence and us under the terms of the 1968 DIA Unitization Agreement) as lessors and defaults by us as lessee and operator of the properties. We are a net 81.48% interest holder under these Agreements. Independence alleges that we violated the "prudent operator obligations" implied under the lease by undertaking the Gold Hunter project and violated certain other provisions of the Agreement with respect to milling equipment and calculating net profits and losses. Under the Lease Agreement, we have the exclusive right to manage, control and operate the DIA properties, and our decisions with respect to the character of work are final. On June 17, 2002, Independence filed a lawsuit in Idaho State District Court seeking termination of the Lease Agreement and requesting unspecified damages. On March 18, 2003, Independence filed a motion for partial summary judgment or in the alternative, for preliminary injunction ("Motion"). The Motion requests that the Court terminate our leasehold interest in property owned by Independence within the DIA area, rule that we have committed waste while mining ore within property owned by Independence, and prohibit us from any further mining within property owned by Independence. We filed our response to the Motion on May 28, 2003. A hearing was held in July 2003 on the Motion and we expect a decision sometime in August 2003. We believe that we have fully complied with all obligations of the 1968 Lease Agreement and intend to defend our right to operate the property under the Lease Agreement. In Mexico, our subsidiary, Minera Hecla, S.A. de C.V. ("Minera Hecla"), is involved in litigation in Mexico City concerning a lien on certain major components of the Velardena mill at -11- the San Sebastian mine that predated the sale of the mill to Minera Hecla. The unpaid amount of the lien is in dispute. At the time of the purchase, the lien amount was believed to be approximately $590,000 and that amount was deposited by us with the Court. The lien holder now alleges the amount owed is approximately $2,017,000, plus accrued interest. The lien holder has tried with limited success to remove the mill components subject to the lien. On January 23, 2003, Minera Hecla deposited $145,000, which represented the amount of accrued interest since the date of sale and Minera Hecla requested that the Court cancel the lien. The lien holder opposed the request made by Minera Hecla. On February 19, 2003, the Court in Mexico City issued a decision that the lien was fully satisfied with the deposit made by Minera Hecla on January 23, 2003, and the Court cancelled the lien. On February 24, 2003, the lien holder appealed that decision. On May 22, 2003 the Superior Court in Mexico affirmed the lower court decision to cancel the lien. On June 5, 2003, the lien holder filed an action in a federal court in Mexico that challenges the prior decision by the Superior Court in Mexico City. We believe that the lien has been fully satisfied and intend to continue to defend the suit. We are subject to other legal proceedings and claims not disclosed above which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these other matters, it is the opinion of our management that the outcome of these other proceedings will not have a material adverse effect on our financial condition. Note 6. Long-Term Debt and Credit Agreements As of June 30, 2003, our wholly owned subsidiary, Hecla Resources Investments Limited ("HRIL"), had $2.0 million outstanding under a credit agreement used to provide project financing at the La Camorra mine. The project financing agreement is repayable in semiannual payments ending June 30, 2004, and had an interest rate of 3.6% at June 30, 2003. HRIL must comply with financial and other restrictive covenants related to the available ore reserves and performance of the La Camorra mine. We are required to maintain hedged gold positions sufficient to cover all dollar loans, operating expenditures, taxes, royalties and similar fees projected for the project. At June 30, 2003, we had forward sales contracts for 78,728 ounces of gold. The forward sales contracts assume the ounces of gold committed to forward sales at the end of each quarter can be leased at a rate of 1.5% for each following quarter. We maintain a Gold Lease Rate Swap at a fixed rate of 1.5% on the outstanding notional volume of the flat forward sale, with settlement being made quarterly with us receiving the fixed rate and paying the current floating gold lease rate. In connection with the project financing agreement, we have outstanding a $2.0 million subordinated loan agreement, repayable in equal installments on December 31, 2003, and June 30, 2004. The loan agreement gives us the option to capitalize interest payments by adding them to the principal amount of the loan. At June 30, 2003, the interest amount added to principal was -12- approximately $0.7 million and is included in accrued expenses on our consolidated balance sheets. The interest rate under the subordinated loan agreement was 5.3% as of June 30, 2003. At June 30, 2003, our wholly owned subsidiary, Minera Hecla, S.A. de C.V. ("Minera Hecla"), had $3.6 million outstanding under a project loan used to acquire a processing mill at Velardena, Mexico, to process ore mined from the San Sebastian mine near Durango, Mexico. The credit facility is nonrecourse to us. Under the terms of the credit facility, Minera Hecla will make monthly payments for principal and interest over 63 months at a fixed interest rate equal to 13%. The loan is collateralized by the mill at Velardena and the Saladillo, Saladillo 1 and Saladillo 5 mining concessions. In March 2003, we canceled a $7.5 million revolving bank agreement established in March 2002. At the time of cancellation, no amount was outstanding under the agreement. Note 7. Income per Common Share The following table presents a reconciliation of the numerators and denominators used in the basic and diluted income per common share computations. Also shown is the effect that has been given to cumulative preferred dividends in arriving at the income applicable to common shareholders for the three months and six months ended June 30, 2003 and 2002, in computing basic and diluted income per common share (dollars and shares in thousands, except per-share amounts).
Three Months Ended Six Months Ended ----------------------- ----------------------- June 30, June 30, 2003 2002 2003 2002 --------- --------- --------- --------- Income from continuing operations before cumulative effect of change in accounting principle, discontinued operations and preferred stock dividends $ 2,540 $ 5,058 $ 8,201 $ 6,027 Cumulative effect of change in accounting principle, net of income tax -- -- 1,072 -- Discontinued operations -- (303) -- (786) Preferred stock dividends (659) (2,013) (1,318) (4,025) --------- --------- --------- --------- Basic income applicable to common shareholders $ 1,881 $ 2,742 $ 7,955 $ 1,216 Basic weighted average number of common shares outstanding 109,427 75,010 109,374 74,426 --------- --------- --------- --------- Basic income per common share $ 0.02 $ 0.04 $ 0.07 $ 0.02 ========= ========= ========= ========= Basic weighted average number of common shares outstanding 109,427 75,010 109,374 74,426 Effect of dilutive stock options 559 -- 627 -- Effect of dilutive warrants 66 -- 172 -- --------- --------- --------- --------- Diluted weighted average number of common shares 110,052 75,010 110,173 74,426 ========= ========= ========= ========= Basic and diluted income per common share $ 0.02 $ 0.04 $ 0.07 $ 0.02 ========= ========= ========= =========
These calculations of diluted income per share for the three months and six months ended June 30, 2003 and 2002 exclude the effects of convertible preferred stock ($37.6 million in 2003 and $115.0 million in 2002), as well as common stock issuable upon the exercise of various stock options as their conversion and exercise would be antidilutive. For the three months ended June 30, 2003 and 2002, 1,689,167 and 1,034,500 stock options, respectively, were excluded in -13- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries the calculation of diluted income per share. For the six months ended June 30, 2003 and 2002, 1,328,500 and 1,034,500 stock options, respectively, were excluded. Note 8. Business Segments We are organized and managed primarily on the basis of the principal products being produced from our operating units. Three of our operating units have been aggregated into the silver segment and one into the gold segment. General corporate activities not associated with operating units, as well as idle properties, are presented as "other." The following tables present information about reportable segments for the three months and six months ended June 30, 2003 and 2002 (in thousands):
Three Months Ended Six Months Ended --------------------- --------------------- June 30, June 30, 2003 2002 2003 2002 -------- -------- -------- -------- Net sales to unaffiliated customers: Silver $ 19,272 $ 16,626 $ 36,195 $ 28,735 Gold 10,935 12,037 19,911 23,310 Other (4) -- 537 -- -------- -------- -------- -------- $ 30,203 $ 28,663 $ 56,643 $ 52,045 ======== ======== ======== ======== Income (loss) from operations: Silver $ 2,691 $ 2,187 $ 6,223 $ 2,651 Gold 3,195 4,464 4,479 7,209 Other (2,394) (1,930) (4,537) (3,969) -------- -------- -------- -------- $ 3,492 $ 4,721 $ 6,165 $ 5,891 ======== ======== ======== ========
The following table presents identifiable assets by reportable segment as of June 30, 2003 and December 31, 2002 (in thousands): June 30, December 31, 2003 2002 -------- -------- Identifiable assets: Silver $ 85,361 $ 82,522 Gold 35,347 40,004 Other 134,223 37,615 -------- -------- $254,931 $160,141 ======== ======== -14- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Note 9. Shareholders' Equity In January 2003, we completed an underwritten public offering of 23.0 million shares of our common stock. The public offering also included 2.0 million shares offered by the Hecla Mining Company Retirement Plan and the Lucky Friday Pension Plan ("the benefit plans"). We received net proceeds from the offering totaling approximately $91.2 million, which will be used to fund future exploration and development, working capital requirements, capital expenditures, possible future acquisitions and for other general corporate purposes. Our benefit plans realized net proceeds of approximately $8.0 million from the sale of the 2.0 million shares included in the public offering. We also filed a Registration Statement with the Securities and Exchange Commission covering 1,394,883 shares of our common stock offered by the benefit plans and 2.0 million shares of our common stock issuable upon exercise of a warrant issued to Great Basin Gold Ltd. ("Great Basin") pursuant to an Earn-in Agreement concerning exploration, development and production in an area of Great Basin's Hollister Development Block gold property, located on the Carlin Trend in Nevada. The Registration Statement became effective in January 2003. In July 2002, 1,546,598 preferred shares were exchanged for shares of our common stock (each preferred share was exchanged for seven shares of our common stock) in an exchange offering meant to reduce cumulative preferred dividends that are included in the calculation of earnings applicable to common shareholders. As of June 30, 2003, 752,752 shares of preferred stock remain outstanding and we have not declared or paid $7.9 million in cumulative preferred dividends. We are currently not planning to reinstate the preferred stock dividend. Note 10. Stock-Based Plans At June 30, 2003, executives, key employees and directors had been granted options to purchase our common shares or were credited with common shares under the stock-based plans below. We have adopted the disclosure-only provisions of SFAS No. 123. No compensation expense was recognized during the three and six months ended June 30, 2003 and 2002 for unexercised options related to the stock-based plans. Had compensation expense for our stock-based plans been determined based on the fair market value at the grant date for awards during these periods consistent with the provisions of SFAS No. 123, our income and per share income applicable to common shareholders would have been decreased to the pro forma amounts indicated below (in thousands, except per share amounts): -15- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ------- ------- ------- ------- Income (loss) applicable to common shareholders As reported $ 1,881 $ 2,742 $ 7,955 $ 1,216 Stock-based employee compensation expense included in reported income 206 88 591 607 Total stock-based employee compensation expense determined under fair value based methods for all awards (1,142) (1,327) (2,195) (1,927) ------- ------- ------- ------- Pro forma $ 945 $ 1,503 $ 6,351 $ (104) ======= ======= ======= ======= Income applicable to common shareholders per common share: As reported $ 0.02 $ 0.04 $ 0.07 $ 0.02 Pro forma $ 0.01 $ 0.02 $ 0.06 $ 0.00
Note 11. Asset Retirement Obligations In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations," which amends SFAS No. 19, and establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Subsequently, reclamation costs will be allocated to expense over the life of the related assets and will be adjusted for changes resulting from the passage of time and changes to either the timing or amount of the original fair value estimate underlying the obligation. The statement was required to be adopted by January 1, 2003. Upon initial application of SFAS No. 143, we recorded the following: 1. An increase of approximately $0.7 million to accrued reclamation and closure costs to reflect the estimated present value of reclamation liabilities based on the discounted fair market value of future cash flows to settle the obligation; 2. An increase to the carrying amounts of the associated long-lived assets of approximately $3.3 million to capitalize the present value of the liabilities as of the date the obligation occurred, offset by $1.5 million of accumulated depletion through January 1, 2003; and -16- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries 3. A cumulative effect of change in accounting principle of $1.1 million (gain), reflecting the difference between those amounts and amounts previously recorded in our consolidated financial statements at January 1, 2003. The sum of our estimated reclamation and abandonment costs was discounted using a credit adjusted, risk-free interest rate of 6% from the time we expect to pay the retirement obligation to the time we incurred the obligation. The following is a reconciliation of the total liability for asset retirement obligations (in thousands): Balance January 1, 2003 $ 6,053 Accretion expense 197 Cash payments (148) ---------- Balance June 30, 2003 $ 6,102 ========== There are no assets legally restricted for purposes of settling asset retirement obligations at June 30, 2003. -17- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries The following table presents the pro forma effects of the application of SFAS No. 143 for the three and six months ended June 30, 2002, as if the Statement had been in effect for those periods (in thousands, except per share data): Three Months Six Months Ended Ended June 30, June 30, 2002 2002 ------- ------- Net income $ 4,755 $ 5,241 Cost of sales and other direct production costs 295 542 Depreciation, depletion and amortization (139) (260) ------- ------- Pro forma $ 4,911 $ 5,523 ======= ======= Basic and diluted earnings per share: As reported $ 0.04 $ 0.02 Pro forma $ 0.04 $ 0.02 Note 12. New Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements, by rescinding SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Finally, SFAS No. 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The provisions of SFAS No. 145 that amend SFAS No. 13 were effective for transactions occurring after May 15, 2002, with all other provisions of SFAS No. 145 being required to be adopted by us in January 2003. The adoption of SFAS No. 145 did not have a material impact on our consolidated financial statements. -18- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation is effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We have adopted the disclosure-only provisions of SFAS No. 123 and do not intend to adopt the fair value accounting provisions of SFAS No. 123. The adoption of SFAS No. 148 did not have a material impact on our consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements." FIN 46 clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of FIN 46 did not have a material effect on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial -19- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for all contracts created or modified after June 30, 2003. We do not believe the adoption of this standard will have a material effect on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. We do not believe the adoption of SFAS No. 150 will have a material effect on our consolidated financial statements. -20- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CERTAIN STATEMENTS CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ARE FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT OUR FUTURE RESULTS, PERFORMANCE, PROSPECTS AND OPPORTUNITIES. WE HAVE TRIED TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY USING WORDS SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "INTEND," "PLAN," "ESTIMATE" AND SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO US AND ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, PROSPECTS OR OPPORTUNITIES TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. THESE RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH UNDER ITEM 1 - BUSINESS - RISK FACTORS IN OUR ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. OTHER MATTERS, INCLUDING UNANTICIPATED EVENTS AND CONDITIONS, ALSO MAY CAUSE OUR ACTUAL FUTURE RESULTS TO DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. THERE CAN BE NO ASSURANCE THAT OUR EXPECTATIONS WILL PROVE TO BE CORRECT AND UNDUE RELIANCE SHOULD NOT BE PLACED ON THESE FORWARD-LOOKING STATEMENTS. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR EXPECTATIONS AS OF THE DATE OF THIS FILING. EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS, WE DO NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. A 112-year-old company, we have long been known as a precious metals producer and are principally engaged in the exploration, development, mining and processing of silver, gold, lead and zinc. We are operated and organized into two segments, silver and gold, with three operating properties included in the silver segment (San Sebastian, Greens Creek and Lucky Friday) and one in the gold segment (La Camorra). The following maps indicate the locations of our operations: -21- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries [MAP] NAME OF MINE CITY, STATE, COUNTRY ------------- ------------------------ SILVER (AG): LUCKY FRIDAY MULTAN, IDAHO* SAN SEBASTIAN DURANGO, MEXICO GREENS CREEK JUNEAU, ALASKA GOLD (AU): LA CAMORRA BOLIVAR STATE, VENEZUELA *CORPORATE OFFICE We also own or have interests in a number of other precious and nonferrous metals properties. Our strategy for growth is to focus our efforts and resources on expanding our precious metals reserves through exploration efforts, primarily on properties we currently own. We will also consider acquisition opportunities as a component of our growth strategy. RESULTS OF OPERATIONS In January 2003, we completed an underwritten public offering of 23.0 million shares of our common stock, resulting in net cash proceeds totaling approximately $91.2 million to be used to fund future exploration and development, working capital requirements, capital expenditures, possible future acquisitions and for other general corporate purposes. For additional information regarding the public offering, see Note 9 of Notes to Consolidated Financial Statements. During the second quarter and first six months of 2003, we recorded income applicable to common shareholders of approximately $1.9 million and $8.0 million, or $0.02 and $0.07 per common share, respectively, compared to income applicable to common shareholders of $2.7 million and $1.2 million, or $0.04 and $0.02 per common share, respectively, during the second quarter and first six months of 2002. Included in the income applicable to common shareholders were undeclared and unpaid preferred stock dividends of $0.7 million and $1.3 million, respectively, during the second quarter and first six months of 2003, compared to dividends of $2.0 -22- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries million and $4.0 million, respectively, during the same periods in 2002. The variance in preferred stock dividends during the 2003 and 2002 comparative periods is due to a preferred stock exchange offer completed during the third quarter of 2002, pursuant to which 67.2% of the preferred shares outstanding at the time (2.3 million) were exchanged for shares of common stock (seven shares of common for every share of preferred). Included in income for the six months ended June 30, 2003, is a $4.0 million cash settlement received from Zemex Corporation during the first quarter of 2003 for its subsidiary's failure to close on its agreement to purchase the Kentucky-Tennessee Clay Company, Kentucky-Tennessee Clay de Mexico and certain other minor inactive industrial minerals companies (collectively the K-T Group) in January 2001. In November 2000, we entered into an agreement with Zemex U.S. Corporation, guaranteed by its parent, Zemex Corporation, to sell the stock of the K-T Group for a price of $68.0 million. For additional information on the settlement from Zemex Corporation, see Note 5 of Notes to Consolidated Financial Statements. Also included in income for the six months ended June 30, 2003 is a positive cumulative effect of a change in accounting principle of $1.1 million relating to the adoption of SFAS No. 143 "Accounting for Asset Retirement Obligations." This statement was adopted on January 1, 2003, and required that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The gain of $1.1 million recognized represents the difference between the amounts determined under SFAS No. 143 and amounts previously recorded in our consolidated financial statements. For additional information, see Note 11 of Notes to Consolidated Financial Statements. Reflected in the income applicable to common shareholders during the second quarter and first six months of 2002 is a loss from discontinued operations of $0.3 million and $0.8 million, respectively. In March 2003, we sold the remaining inventories of the briquette division of the Colorado Aggregate division ("CAC") of MWCA, Inc., and no longer produce or sell any product from our former industrial minerals segment. The briquette division of CAC represented the remaining portion of our industrial minerals segment, which reported a loss from operations of approximately $26,000 and $21,000, respectively, for the second quarter and first six months of 2003. All activity associated with the former industrial minerals segment during the second quarter and first six months of 2003 is considered a general corporate activity and is presented as "other" where appropriate. For additional information, see Note 2 of Notes to Consolidated Financial Statements. Silver Operations and Production For the three months and six months ended June 30, 2003, the silver segment reported income from -23- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries operations of $2.7 million and $6.2 million, respectively, compared to income from operations of $2.2 million and $2.7 million, respectively, during the same periods in 2002. Sales of products increased by $2.6 million and cost of sales and other direct production costs as a percentage of sales from products decreased to 59.6% in the second quarter of 2003, from 65.0% in the second quarter of 2002. During the six-month period, sales of products increased by $7.5 million and cost of sales and other direct production costs as a percentage of sales from products decreased to 60.0% in 2003 from 67.5% in the first six months of 2002. Factors contributing to these changes for both the second quarter and six-month periods are discussed by each operating property following the table below. Silver production during the second quarter and first six months of 2003 totaled 2.4 million ounces and 4.8 million ounces, respectively, compared to 2.3 million ounces and 4.3 million ounces, respectively, during the same periods in 2002. The average total cash cost decreased 24.4%, from $2.09 per silver ounce during the second quarter of 2002 to $1.58 per silver ounce during the second quarter of 2003. During the first six months of 2003, the average total cash cost decreased 28.3% compared to the same period in 2002, from $2.26 per silver ounce during the first six months in 2002 to $1.62 per silver ounce in 2003. Gold produced at our silver operations had a significant impact on our average total cash cost. Because it is considered a by-product, it contributed to the decrease in average total cash costs during the comparable periods due primarily to a higher average gold price, as well as increased gold production. The following table presents total production, total cash costs, total production costs and average metals prices as they pertain to our silver operations for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2003 2002 2003 2002 ------------------- ------------------- Silver ounces produced (in thousands): San Sebastian 1,010 881 2,032 1,649 Greens Creek 833 859 1,573 1,688 Lucky Friday 602 594 1,237 1,006 Gold ounces produced: San Sebastian 11,505 10,754 23,059 19,816 Greens Creek 8,107 8,639 14,955 15,715 Lead produced (tons): Greens Creek 2,124 2,408 4,111 4,354 Lucky Friday 3,283 2,890 6,923 4,965 Zinc produced (tons): Greens Creek 6,736 6,412 12,818 12,191 Lucky Friday 584 640 1,187 1,176
-24- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2003 2002 2003 2002 ------------------- ------------------- 1.58 2.09 1.62 2.26 Total cash costs per ounce ($/oz.) (1,2) Total production costs per ounce ($/oz.) (1,2) 2.84 3.52 2.83 3.75 Average Metals Prices: Silver-Handy & Harman ($/oz.) 4.62 4.75 4.66 4.63 Gold-London Final ($/oz.) 347 313 349 302 Lead-LME Cash ($/pound) 0.207 0.216 0.207 0.214 Zinc-LME Cash ($/pound) 0.352 0.363 0.354 0.357
(1) Includes by-product credits from gold, lead and zinc production and are calculated pursuant to standards of the Gold Institute. (2) Cash costs per ounce of silver or gold represent non-U.S. Generally Accepted Accounting Principles (GAAP) measurements that management uses to monitor and evaluate the performance of its mining operations. We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. A reconciliation of this non-GAAP measure to cost of sales and other direct production costs, the most comparable GAAP measure, can be found below. San Sebastian - ------------- For the second quarter and first six months of 2003, the San Sebastian mine, located in the State of Durango, Mexico, reported sales of $8.4 million and $16.8 million, respectively, compared to $6.7 million and $12.1 million, respectively, during the same periods in 2002. These increases are primarily due to increased production resulting from significantly higher gold and silver ore grades, combined with higher average gold prices. San Sebastian commenced mining operations in May 2001 and reached full capacity during the second quarter of 2002. The grade of silver ore at San Sebastian improved to approximately 28 ounces per ton during the second quarter of 2003, compared to 22 ounces per ton during the second quarter of 2002, and to approximately 30 ounces per ton during the first six months of 2003, compared to approximately 24 ounces per ton during the first six months of 2002. San Sebastian had an average grade of 0.32 ounce of gold per ton during the second quarter of 2003 and an average grade of 0.35 ounce of gold per ton during the first six months of 2003, a 15% and 21% increase, respectively, over the same periods in 2002. The total cash cost at San Sebastian decreased by approximately 84% and 95%, respectively, from the second quarter and first six months of 2002, to $0.20 and $0.07 per silver ounce during the second quarter and first six months of 2003, primarily due to significant -25- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries by-product credits from increased gold production and a higher average gold price. Silver and gold production at San Sebastian is estimated to be approximately 3.8 million ounces and 40,000 ounces, respectively, for the year ended December 31, 2003. Greens Creek - ------------ The Greens Creek mine, a 29.73%-owned joint-venture arrangement with Kennecott Greens Creek Mining Company located on Admiralty Island, near Juneau, Alaska, reported sales of $7.9 million and $13.4 million, respectively, for our account during the second quarter and first six months of 2003, as compared to $7.0 million and $11.7 million, respectively, during the same periods in 2002. The increase in sales is primarily due to lower smelter treatment and freight costs and a higher average gold price, partially offset by lower production of other metals due to lower ore grades. Despite lower production during the 2003 periods, the total cash costs per silver ounce decreased by approximately 31% and 22%, respectively, from $1.45 and $1.68 per silver ounce during the second quarter and first six months of 2002, to $1.00 and $1.31 per silver ounce, respectively, during the second quarter and first six months of 2003. The decreases in costs per ounce are primarily due to the increased by-product credits from a higher average gold price and lower smelter treatment and freight costs during 2003. For the year ending December 31, 2003, production is forecasted to total approximately 3.3 million silver ounces, 30,000 ounces of gold and 8,000 and 24,000 tons of lead and zinc, respectively. Lucky Friday - ------------ The Lucky Friday mine, located in northern Idaho and a producing mine for Hecla since 1958, reported sales of approximately $3.0 million and $6.1 million, respectively, during the second quarter and first six months of 2003, compared to $3.0 million and $4.9 million, respectively, during the same periods in 2002. The increase in sales during the first six months of 2003 compared with 2002 is primarily due to increased silver production during the first quarter of 2003, the result of a change in mine plan during January 2002 that caused a short-term increase in development and a resultant drop in ore tons mined during the 2002 period, as well as a 14% increase in silver ore grade during the first six months of 2003. For the second quarter and first six months of 2003, the total cash costs per silver ounce were $4.68 and $4.57, respectively, compared to $4.25 and $4.70 per silver ounce during the same periods in 2002. For the year ending December 31, 2003, production is forecasted to total approximately 1.9 million silver ounces and 14,000 tons of lead. The following tables present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs (GAAP) for our silver operations in total, as well as for each individual operating property, for the three months and six months ended June 30, 2003 and 2002 (in thousands, except costs per ounce). We believe cash costs per ounce of silver or gold provide an -26- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. Cost of sales and other direct production costs is the most comparable financial measure calculated in accordance with GAAP to total cash costs. The sum of the cost of sales and other direct production costs for our gold and silver segments is presented in our Consolidated Statement of Operations and Comprehensive Income.
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 -------- -------- -------- -------- TOTAL SILVER SEGMENT Total cash costs $ 3,850 $ 4,880 $ 7,854 $ 9,832 Divided by silver ounces produced 2,444 2,334 4,842 4,344 -------- -------- -------- -------- Total cash cost per ounce produced $ 1.58 $ 2.09 $ 1.62 $ 2.26 ======== ======== ======== ======== Reconciliation to GAAP: Total cash costs 3,850 4,880 7,854 9,832 Treatment & freight costs (4,602) (4,886) (9,255) (9,289) By-product credits 11,331 10,297 22,222 18,854 Change in product inventory 878 217 628 (619) Reclamation and other costs 40 302 273 569 -------- -------- -------- -------- COST OF SALES AND OTHER DIRECT PRODUCTION COSTS (GAAP) $ 11,497 $ 10,810 $ 21,722 $ 19,347 ======== ======== ======== ======== SAN SEBASTIAN Total cash costs $ 202 $ 1,110 $ 134 $ 2,270 Divided by silver ounces produced 1,010 881 2,032 1,649 -------- -------- -------- -------- Total cash cost per ounce produced $ 0.20 $ 1.26 $ 0.07 $ 1.38 ======== ======== ======== ======== Reconciliation to GAAP: Total cash costs 202 1,110 134 2,270 Treatment & freight costs (506) (638) (1,016) (1,183) By-product credits 3,979 3,366 8,036 6,005 Change in product inventory (243) (20) (225) 20 Reclamation and other costs (11) 121 141 220 -------- -------- -------- -------- COST OF SALES AND OTHER DIRECT PRODUCTION COSTS (GAAP) $ 3,421 $ 3,939 $ 7,070 $ 7,332 ======== ======== ======== ========
-27- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 -------- -------- -------- -------- GREENS CREEK Total cash costs $ 833 $ 1,245 $ 2,068 $ 2,829 Divided by silver ounces produced 833 859 1,573 1,688 -------- -------- -------- -------- Total cash cost per ounce produced $ 1.00 $ 1.45 $ 1.31 $ 1.68 ======== ======== ======== ======== Reconciliation to GAAP: Total cash costs 833 1,245 2,068 2,829 Treatment & freight costs (3,079) (3,315) (6,068) (6,409) By-product credits 6,170 5,930 11,687 11,005 Change in product inventory 1,081 136 789 (757) Reclamation and other costs 41 153 113 300 -------- -------- -------- -------- COST OF SALES AND OTHER DIRECT PRODUCTION COSTS (GAAP) $ 5,046 $ 4,149 $ 8,589 $ 6,968 ======== ======== ======== ======== LUCKY FRIDAY Total cash costs $ 2,815 $ 2,525 $ 5,652 $ 4,733 Divided by silver ounces produced 602 594 1,237 1,006 -------- -------- -------- -------- Total cash cost per ounce produced $ 4.68 $ 4.25 $ 4.57 $ 4.70 ======== ======== ======== ======== Reconciliation to GAAP: Total cash costs 2,815 2,525 5,652 4,733 Treatment & freight costs (1,017) 933 (2,171) (1,697) By-product credits 1,182 1,001 2,499 1,844 Change in product inventory 40 101 64 118 Reclamation and other costs 10 28 19 49 -------- -------- -------- -------- COST OF SALES AND OTHER DIRECT PRODUCTION COSTS (GAAP) $ 3,030 $ 2,722 $ 6,063 $ 5,047 ======== ======== ======== ========
-28- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Gold Operations and Production We currently operate the La Camorra mine, located in the eastern Venezuelan State of Bolivar, approximately 120 miles southeast of Puerto Ordaz. At the present time, La Camorra is our sole gold operating unit. Sales of product decreased by $1.1 million (9%) and $3.4 million (15%), respectively, during the second quarter and first six months of 2003, compared with the same periods in 2002, primarily due to decreases in gold ounces produced (30% and 22%, respectively), offset by increases in the realized price of gold, which increased 4% and 7%, respectively, during the quarter and six-month comparative periods. During the second quarter and first six months of 2003, La Camorra produced approximately 32,000 and 67,000 gold ounces, respectively, at a total cash cost of $139 and $138 per ounce, compared to approximately 46,000 and 86,000 gold ounces, respectively, at total cash costs of $131 and $134 per ounce during the same periods in 2002. During 2002, La Camorra had an average grade of 0.93 ounce of gold per ton during the second quarter and 0.88 ounce of gold per ton in the first six months and produced over 167,000 ounces of gold for the year ended December 31, 2002. In 2003, gold production is projected to reach approximately 145,000 to 150,000 ounces at an average grade of 0.74 ounce of gold per ton for the year ending December 31, 2003. La Camorra had an average grade of 0.68 ounce of gold per ton during the second quarter of 2003, with an average grade of 0.75 ounce of gold per ton for the first six months of 2003. Tons milled have also been affected by reduced equipment availability and blasting issues, as well as, lower ore to waste ratios in sublevel developments, during the second quarter and first six months of 2003, when compared to the same periods in 2002, reporting a 5% and 8% decrease, respectively. While sales decreased during the second quarter and first six-month periods in 2003, cost of sales and other direct production costs as a percentage of sales from products increased to 35.0% during the second quarter of 2003, from 32.2% during the second quarter of 2002, and decreased to 38.4% during the first six months of 2003, from 40.2% during the same period in 2002. We have been able to maintain similar costs during 2003 as compared to 2002 despite lower production levels, in part due to the weakening of the Venezuelan currency, the bolivar. As described below, the Venezuelan government has fixed the exchange rate of the bolivar to the U.S. dollar at 1,597 to 1; however, markets outside of Venezuela reflect a devaluation of the Venezuelan currency at approximately 40%, which has benefited our cost structure despite the lower production levels during the first half of 2003. Beginning late in the fourth quarter of 2002, Venezuela experienced a general strike that ended in February 2003. The result of the strike included shortages of oil and gas supplies in Venezuela and a severe economic downturn. We continued to operate the La Camorra mine -29- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries during the general strike and were able to obtain adequate supplies, including oil and gas for our operations. Although we believe we will be able to manage and operate our La Camorra mine and related exploration projects successfully, due to the continued political, regulatory and economic uncertainty and its ramifications on exchange controls, labor stoppages and supplies of oil, gas and other products, there can be no assurance we will be able to operate without interruptions to our operations. Following the general strike in Venezuela, the Venezuelan government announced its intent to implement exchange controls on foreign currency transactions. Rules and regulations regarding the implementation of exchange controls in Venezuela have not been finalized. Since February 2003, the Venezuelan government-fixed exchange rate has been 1,597 bolivares to one U.S. dollar, which is the exchange rate we have utilized to translate the financial statements of our Venezuelan subsidiary, which is included in our consolidated financial statements. Although management is actively monitoring the implementation of exchange controls in Venezuela, there can be no assurance that the exchange controls will not affect our operations in Venezuela in the future. The following table presents a reconciliation between non-GAAP total cash costs to cost of sales and other direct production costs (GAAP) for the La Camorra mine for the three months and six months ended June 30, 2003 and 2002 (in thousands, except costs per ounce). We believe cash costs per ounce of silver or gold provide an indicator of profitability and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. The sum of the cost of sales and other direct production costs for our gold and silver segments is presented in our Consolidated Statement of Operations and Comprehensive Income (Loss).
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Total cash costs $ 4,455 $ 6,029 $ 9,240 $ 11,556 Divided by gold ounces produced 32 46 67 86 -------- -------- -------- -------- Total cash cost per ounce produced $ 139 $ 131 $ 138 $ 134 ======== ======== ======== ======== Reconciliation to GAAP: Total cash costs 4,455 6,029 9,240 11,556 Treatment & freight costs (458) (513) (805) (892) Change in product inventory (183) (1,750) (842) (1,502) Reclamation and other costs 9 106 61 204 -------- -------- -------- -------- COST OF SALES AND OTHER DIRECT PRODUCTION COSTS (GAAP) $ 3,823 $ 3,872 $ 7,654 $ 9,366 ======== ======== ======== ========
-30- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Corporate Matters Interest and other income increased $4.5 million during the first six months of 2003, compared to the same period in 2002, primarily due to a cash settlement from Zemex Corporation during the first quarter of 2003 for its subsidiary's failure to close on the sale of the K-T Group in 2001 ($4.0 million), interest income generated from an increased cash balance due to the public offering in January 2003 ($0.5 million), as well interest income received during the second quarter of 2003 from the Mexican government for interest on unpaid value-added tax receivables ($0.3 million). Lower mark to market adjustments on our outstanding gold lease rate swap offset the positive variance described above during the first six months of 2003 ($0.4 million). Interest and other income increased $0.3 million during the second quarter of 2003 when compared to the second quarter of 2002. Exploration expense increased $2.4 million and $4.0 million, respectively, during the second quarter and first six months of 2003, compared to the same periods in 2002, primarily due to increased exploration expenditures in Mexico on the Don Sergio vein ($0.6 million and $0.9 million, respectively) and other areas at or near the San Sebastian mine ($0.6 million and $0.6 million, respectively); in Venezuela on the Block B concessions ($0.4 million and $0.9 million, respectively) and the Canaima resource ($0.3 million and $0.5 million, respectively), offset by lower expenditures at or near the La Camorra mine ($0.3 million and $0.2 million, respectively); and at the Hollister Development Block in Nevada ($0.6 million and $1.0 million, respectively). Also included in the increased exploration expenditures during the first six months of 2003 are other project evaluation costs ($0.3 million and $0.4 million, respectively). We estimate that exploration expenditures for the remainder of 2003 will be in the range of $6.0 million to $9.0 million, principally for continued drilling in Venezuela and Mexico and permitting activities at the Hollister Development Block in Nevada. In Venezuela, exploration will focus on the Block B concessions, Canaima and the Main and Betzy veins, all within trucking distance of the La Camorra mill. In Mexico, exploration will focus on the Don Sergio vein and other targets surrounding the San Sebastian mine. As previously announced, development of a ramp at the Don Sergio vein in Mexico has commenced. By the end of 2003, providing favorable outcomes from feasibility studies and permitting, we could also begin underground ramp development at Block B, Canaima and the Hollister Development Block, as well as construction of a shaft to the Main and Betsy veins at La Camorra. Provision for income taxes increased $0.7 million and $1.5 million, respectively, during the second quarter and first six months of 2003, compared to the same periods in 2002, primarily a result of utilization of deferred tax assets in Mexico and accrued Mexican withholding tax payable on interest expense. For further information see Note 3 of Notes to Consolidated Financial Statements. -31- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Miscellaneous expense increased $1.0 million and $1.3 million, respectively, during the second quarter and first six months of 2003, compared to the same periods in 2002, primarily due to a foreign exchange gain in 2002 due to the devaluation of the Venezuelan bolivar ($1.3 million and $1.4 million, respectively), foreign exchange variances in Mexico ($0.1 million and $0.4 million, respectively) and increased corporate insurance expense ($0.1 million and $0.2 million, respectively), offset by accruals for tax offset bonuses on employee stock option plans ($0.4 million and $0.7 million, respectively). General and administrative expenses increased $0.5 million and $0.6 million, respectively, during the second quarter and first six months of 2003, compared to the same periods in 2002, primarily due to accruals for employee incentive compensation during 2003. Interest expense decreased $0.2 million and $0.3 million, respectively, during the second quarter and first six months of 2003, compared to the same periods in 2002, principally due to lower average borrowings and lower interest rates on debt. FINANCIAL CONDITION AND LIQUIDITY Our financial condition has improved considerably since the beginning of 2003 due to operating performance and the completion of an underwritten public offering of 23.0 million shares of our common stock in January 2003, which resulted in net cash proceeds of approximately $91.2 million. At June 30, 2003, we held cash and cash equivalents of $113.4 million (compared to $19.5 million at December 31, 2002), with a current ratio of 4.6 to 1. For additional information regarding the public offering, see Note 9 of Notes to Consolidated Financial Statements. We believe cash requirements over the next twelve months will be funded through a combination of current cash, future cash flows from operations and/or future debt or equity security issuances. Although we believe existing cash and cash equivalents are adequate, we cannot project the cash impact of possible future investment opportunities or acquisitions, and our operating properties may require more cash than forecasted. Contractual Obligations and Contingent Liabilities and Commitments The table below presents our contractual obligations and commitments primarily with regards to payment of debt, certain capital expenditures and lease arrangements (in thousands). For additional information on outstanding debt, see Note 6 of Notes to Consolidated Financial Statements. -32- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries
Payments Due By Period -------------------------------------------------------------- Contractual obligations 2003 2004 2005 2006 2007 Total ------- ------- ------- ------- ------- ------- Debt $ 2,893 $ 2,332 $ 1,366 $ 959 $ -- $ 7,550 Capital expenditure commitments 1,898 -- -- -- -- 1,898 Operating lease commitments 304 534 506 482 117 1,943 ------- ------- ------- ------- ------- ------- Total contractual cash obligations $ 5,095 $ 2,866 $ 1,872 $ 1,441 $ 117 $11,391 ======= ======= ======= ======= ======= =======
We maintain reserves for costs associated with mine closure, reclamation of land and other environmental matters. At June 30, 2003, our reserves for these matters totaled $48.9 million, for which no contractual or commitment obligations exist. Future expenditures related to closure, reclamation and environmental expenditures are difficult to estimate, although we anticipate we will make expenditures relating to these reserves over the next five to ten years. During 2003, expenditures for environmental remediation and reclamation are estimated to be in the range of $6.0 million and $8.0 million. For additional information relating to our environmental obligations, see Notes 5 and 11 of Notes to Consolidated Financial Statements. Operating Activities Operating activities provided approximately $13.0 million in cash during the first six months of 2003, primarily from cash provided by La Camorra, San Sebastian and Greens Creek. Net cash provided by operating activities was negatively affected by increases in accounts and notes receivable ($3.0 million), cash required for reclamation activities and other noncurrent liabilities ($2.5 million), reductions in accrued payroll ($0.6 million), changes in other current and noncurrent assets ($0.6 million), reductions in accounts payable and other accrued expenses ($0.4 million) and increases in inventories ($0.4 million), offset by an increase in accrued taxes payable ($0.7 million). Principal noncash elements included charges for depreciation, depletion and amortization ($10.3 million) and a change in deferred income taxes ($1.4 million), offset by a gain on the disposition of fixed assets ($0.3 million) and a cumulative effect of change in accounting principle upon adoption of SFAS No. 143 ($1.1 million). Beginning late in the fourth quarter of 2002, Venezuela experienced a general strike that ended in February 2003. The result of the strike included shortages of oil and gas supplies in Venezuela and a severe economic downturn. We continued to operate the La Camorra mine during the general strike and were able to obtain adequate supplies, including oil and gas for our operations. Although we believe we will be able to manage and operate our La Camorra mine and related exploration projects successfully, due to the continued political, regulatory and economic uncertainty and its ramifications on exchange controls, labor stoppages and supplies of -33- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries oil, gas and other products, there can be no assurance we will be able to operate without interruptions to our operations. Following the general strike in Venezuela, the Venezuelan government announced its intent to implement exchange controls on foreign currency transactions. Rules and regulations regarding the implementation of exchange controls in Venezuela have not been finalized. Since February 2003, the Venezuelan government-fixed exchange rate has been 1,597 bolivares to one U.S. dollar, which is the exchange rate we utilized to translate the financial statements of our Venezuelan subsidiary, which is included in our consolidated financial statements. Although management is actively monitoring the implementation of exchange controls in Venezuela, there can be no assurance that the implementation of exchange controls will not affect our operations in Venezuela in the future. Investing Activities Investing activities required $6.3 million in cash during the first six months of 2003 primarily for additions to properties, plants and equipment of ($6.8 million), consisting of additions at the La Camorra mine ($3.5 million), the San Sebastian mine ($2.7 million) and the Greens Creek mine ($0.6 million), offset by proceeds received on the sale of fixed assets of $0.5 million. In 2003, we estimate our capital expenditures will be in the range of $19.0 to $24.0 million. The lower end of the range of capital expenditures in 2003 represents sustaining capital at our existing operations, equipment acquisitions at the San Sebastian mine in Mexico and at the Hollister Development Block in Nevada, development expenditures at the Don Sergio vein in Mexico and a custom milling project at the La Camorra mine in Venezuela. The upper end of the estimate includes other possible capital projects, including commencement of a project to construct a shaft at the La Camorra mine and for equipment and development at the Block B concessions in Venezuela. In March, we made a payment of $1.3 million due pursuant to our acquisition of the Block B lease in Venezuela during 2002, and anticipate making the final $1.0 million payment in September 2003. There can be no assurance that our estimated capital expenditures for 2003 will be in the range we have projected. Financing Activities During the first six months of 2003, financing activities generated approximately $87.1 million in cash due to the public offering in January for $91.2 million and short-term borrowings on a line of credit for national currency in Venezuela ($1.4 million), offset slightly by the repayment of project financing debt ($5.8 million), including the line of credit in Venezuela. -34- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make a wide variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Revenue Recognition Sales of metals products sold directly to smelters are recorded when title and risk of loss transfer to the smelter at current spot metals prices. Due to the time elapsed from the transfer to the smelter and the final assay settlement with the smelter (generally three months), we must estimate the price at which our metals will be sold in reporting our profitability and cash flow. Recorded values are adjusted monthly until final settlement at month-end metals prices. If there was a significant variance in estimated metals prices or assays compared to the final actual metals prices and assays, our monthly results of operations could be affected. Sales of metal in products tolled, rather than sold to smelters, are recorded at contractual amounts when title and risk of loss transfer to the buyer. Changes in the market price of metals significantly affect our revenues, profitability and cash flow. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control, such as political and economic conditions, demand, forward selling by producers, expectations for inflation, central bank sales, the relative exchange rate of the U.S. dollar, purchases and lending, investor sentiment, and global mine production levels. The aggregate effect of these factors is impossible to predict. Because a significant portion of our revenues is derived from the sale of silver, gold, lead and zinc, our earnings are directly related to the prices of these metals. If the market price for these metals falls below our total production costs, we will experience losses on such sales. Proven and Probable Ore Reserves On a periodic basis, management reviews the reserves that reflect estimates of the quantities and grades of ore at our mines which management believes can be recovered and sold at prices in excess of the total cost associated with extraction and processing the ore. Management's calculations of Proven and Probable ore reserves are based on in-house -35- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries engineering and geological estimates using current operating costs, metals prices and demand for our products. Periodically, management obtains external determinations of reserves. Reserve estimates will change as existing reserves are depleted through production, as well as changes in estimates caused by changing production cost and/or metals prices. Changes in reserves may also reflect that actual grades of ore processed may be different from stated reserve grades because of variation in grades in areas mined, mining dilution and other factors. Reserves estimated for properties that have not yet commenced production may require revision based on actual production experience. Declines in the market price of metals, as well as increased production or capital costs or reduced recovery rates, may render ore reserves uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques is sufficient to offset such effects. If our realized price for the metals we produce, including hedging benefits, were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, net losses, reduced cash flow, restatements or reductions in reserves and asset write-downs in the applicable accounting periods. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized. Depreciation and Depletion Depreciation is based on the estimated useful lives of the assets and is computed using straight-line and unit-of-production methods. Depletion is computed using the unit-of-production method. The unit-of-production method is based on Proven and Probable ore reserves. As discussed above, our estimates of Proven and Probable ore reserves may change, possibly in the near term, resulting in changes to depreciation, depletion, amortization and reclamation accrual rates in future reporting periods. Impairment of Long-Lived Assets Management reviews the net carrying value of all facilities, including idle facilities, on a periodic basis. We estimate the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. These estimates of undiscounted future cash flows are dependent upon the future metals price estimates over the estimated remaining mine life. If undiscounted cash flows are less than the carrying value of a property, an impairment loss is recognized based upon the estimated expected future cash flows from the property discounted at an interest rate commensurate with the risk involved. -36- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Management's estimates of metals prices, recoverable Proven and Probable ore reserves, and operating, capital and reclamation costs are subject to risks and uncertainties of change affecting the recoverability of our investment in various projects. Although management believes it has made a reasonable estimate of these factors based on current conditions and information, it is reasonably possible that changes could occur in the near term which could adversely affect management's estimate of net cash flows expected to be generated from our operating properties and the need for asset impairment write-downs. Environmental Matters On January 1, 2003, we adopted SFAS No. 143 "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an environmental remediation obligation, or an asset retirement obligation (ARO), at our operating properties be recognized in the period in which it is incurred. Reclamation costs are allocated to expense over the life of the related assets and will be adjusted for changes resulting from the passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation. At our non-operating properties, we accrue 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 have historically been recognized no later than completion of the remedial feasibility study for such facility and are charged to provision for closed operation and environmental matters. We periodically review our accrued liabilities for remediation costs as evidence becomes available indicating that our remediation liabilities have potentially changed. Such costs are based on management's current estimate of amounts expected to be incurred when the remediation work is performed within current laws and regulations. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Future closure, reclamation and environment-related expenditures are difficult to estimate in many circumstances due to the early stages of investigation, uncertainties associated with defining the nature and extent of environmental contamination, the uncertainties relating to specific reclamation and remediation methods and costs, application and changing of environmental laws, regulations and interpretations by regulatory authorities and the possible participation of other potentially responsible parties. Reserves for closure costs, reclamation and environmental matters totaled $48.9 million at June 30, 2003. We anticipate that expenditures relating to these reserves will be made over the next five to ten years. It is reasonably possible that the ultimate cost of remediation could change in the future and that changes to these estimates could have a material effect on future operating results as new information becomes known. -37- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations," which amends SFAS No. 19, and establishes a uniform methodology for accounting for estimated reclamation and abandonment costs. The statement was required to be adopted by January 1, 2003. For information regarding the impact to our consolidated financial statements upon adoption, see Note 11 of Notes to Consolidated Financial Statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements, by rescinding SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Finally, SFAS No. 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The provisions of SFAS No. 145 that amend SFAS No. 13 were effective for transactions occurring after May 15, 2002, with all other provisions of SFAS No. 145 being required to be adopted by us in January 2003. The adoption of SFAS No. 145 did not have a material impact on our consolidated financial statements. On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends -38- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123, which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation is effective for financial statements for fiscal years ending after December 15, 2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We have adopted the disclosure-only provisions of SFAS No. 123 and do not intend to adopt the fair value accounting provisions of SFAS No. 123. The adoption of SFAS No. 148 did not have a material impact on our consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements." FIN 46 clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of FIN 46 did not have a material effect on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for all contracts created or modified after June 30, 2003. We do not believe the adoption of this standard will have a material effect on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. We do not believe the adoption of SFAS No. 150 will have a material effect on our consolidated financial statements. -39- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries OTHER Holders of the preferred shares are entitled to receive cumulative cash dividends at the annual rate of $3.50 per share payable quarterly, when and if declared by the board of directors and have voting rights related to certain amendments to our Certificate of Incorporation. As of January 31, 2002, we had not declared and paid the equivalent of six quarterly dividends, entitling holders of the preferred shares to elect two directors at our annual shareholders' meeting. On May 10, 2002, holders of the preferred shares, voting as a class, elected two additional directors. One of the two directors elected by holders of Series B preferred stock resigned from our board of directors in October 2002 to avoid any appearance of conflict of interest as a result of a new position as a research analyst. In order to fill the resulting vacancy, the remaining director elected by the holders of Series B preferred stock will name a new director, currently anticipated to be named during 2003. As of June 30, 2003, we have not declared or paid $7.9 million of Series B preferred stock dividends. We have no current intent to pay the preferred stock dividend. We filed a Registration Statement with the Securities and Exchange Commission (SEC) covering 1,394,883 shares of our common stock held by the Hecla Mining Company Retirement Plan and the Lucky Friday Pension Plan (the "benefit plans") and 2.0 million shares of our common stock issuable upon exercise of a warrant issued to Great Basin Gold Ltd. (Great Basin) pursuant to an Earn-in Agreement concerning exploration, development and production in an area of Great Basin's Hollister Development Block gold property, located on the Carlin Trend in Nevada. The Registration Statement became effective in January 2003. For additional information, see Note 9 of Notes to Consolidated Financial Statements. For information on hedged positions and derivative instruments, see Item 3 "Quantitative and Qualitative Disclosure About Market Risk." -40- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Item 3. Quantitative and Qualitative Disclosure About Market Risk The following discussion about our risk-management activities includes forward-looking statements that involve risk and uncertainties, as well as summarizes the financial instruments and derivative instruments held by us at June 30, 2003, which are sensitive to changes in interest rates and commodity prices and are not held for trading purposes. Actual results could differ materially from those projected in the forward-looking statements. We believe there has not been a material change in our market risk since the end of our last fiscal year. In the normal course of business, we also face risks that are either nonfinancial or nonquantifiable (See Part I, Item 1 - Risk Factors in our 2002 Annual Report on Form 10-K). Interest-Rate Risk Management At June 30, 2003, our debt was subject to changes in market interest rates and was sensitive to those changes. We currently have no derivative instruments to offset the risk of interest rate changes. We may choose to use derivative instruments in the future, such as interest rate swaps, to manage the risk associated with interest rate changes. The following table presents principal cash flows (in thousands) for debt outstanding at June 30, 2003, 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.
Expected Maturity Date --------------------------------------------- Fair 2003 2004 2005 2006 2007 Total Value ---------------------------------------------------------- ------ Subordinated debt $1,000 $1,000 -- -- -- $2,000 $2,000 Average interest rate 5.1% 5.6% -- -- -- Project financing debt $1,500 $ 500 -- -- -- $2,000 $2,000 Average interest rate 3.6% 4.1% -- -- -- Project financing debt $ 393 $ 832 $1,366 $ 959 -- $3,550 $3,550 Average interest rate 13% 13% 13% 13% --
Commodity-Price Risk Management We use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production. We use these instruments to reduce risk by offsetting market exposures. We are exposed to certain losses, generally the -41- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries 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 us are not leveraged and are held for purposes other than trading. These contracts meet the criteria to be treated as normal sales in accordance with SFAS No. 138 and as a result, these contracts are not required to be accounted for as derivatives under SFAS No. 133. The following table provides information about our forward sales contracts at June 30, 2003. 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 September 30, 2003, and December 31, 2004. Expected Maturity Date Estimated ------------------------ Fair 2003 2004 Value --------- --------- --------- Forward contracts: Gold sales (ounces) 29,800 48,928 Future price (per ounce) $ 288 $ 288 Contract amount (in $000's) $ 8,590 $ 14,103 $ (4,710) Estimated % of annual production committed to contracts 25% 25% In addition to the above contracts, we have a quarterly Gold Lease Rate Swap at a fixed rate of 1.5% on 63,828 ounces of the above gold forward contracts. The ounces covered under the swap are adjusted each quarter, in accordance with the expiration of the gold forward contracts. At June 30, 2003, the fair market value of the Gold Lease Rate Swap was approximately $265,000, which represents the amount the counterparty would have to pay us if the contract was terminated. -42- Part I - Financial Information (Continued) Hecla Mining Company and Subsidiaries Item 4. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded the Company's disclosure controls and procedures were effective as of June 30, 2003, in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to June 30, 2003. -43- Part II - Other Information Hecla Mining Company and Subsidiaries Item 1. Legal Proceedings For information concerning legal proceedings, refer to Note 5 of Notes to Consolidated Financial Statements. Item 3. Defaults Upon Senior Securities As of June 30, 2003, we have not declared or paid $7.9 million of Series B Convertible Preferred stock dividends. Item 4. Submission of Matters to Vote of Security Holders At the annual meeting of shareholders held on May 9, 2003, the following matters were voted on by Hecla's shareholders: Election of Three Directors: Votes Votes For Withheld ---------- -------- Arthur Brown 92,792,083 930,798 John E. Clute 92,793,238 969,290 Joe Coors, Jr. 92,753,591 929,643 Approval of selection of BDO Seidman, LLP as Hecla's auditors for 2003: Votes Votes For Withheld Abstenions ---------- -------- ---------- 92,839,108 579,968 303,805 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See the exhibit index to this Form 10-Q for the list of exhibits. (b) Reports on Form 8-K filed during the quarter ended June 30, 2003 Form 8-K dated May 1, 2003, announcing first quarter 2003 earnings in a news release. Items 2 and 5 of Part II are not applicable and are omitted from this report. -44- Hecla Mining Company and Subsidiaries SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HECLA MINING COMPANY (Registrant) Date: August 8, 2003 By /s/ Phillips S. Baker, Jr. Phillips S. Baker, Jr., President, Chief Executive Officer and Director Date: August 8, 2003 By /s/ Lewis E. Walde Lewis E. Walde, Vice President and Chief Financial Officer Exhibit Index 3.1 Certificate of Incorporation of the Registrant as amended to date.* 3.2 By-Laws of the Registrant as amended to date. Filed as exhibit 3(ii) to Registrant's Current Report on Form 8-K dated November 13, 1998 (File No. 1-8491) and incorporated herein by reference. 4.1(a) Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant. Filed as exhibit 4.1(d)(e) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-8491) and incorporated herein by reference. 4.1(b) Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as exhibit 4.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-8491) and incorporated herein by reference. 4.2 Rights Agreement dated as of May 10, 1996, between Hecla Mining Company and American Stock Transfer & Trust Company, which includes the form of Rights Certificate of Designation setting forth the terms of the Series A Junior Participating Preferred Stock of Hecla Mining Company as Exhibit A and the summary of Rights to Purchase Preferred Shares as Exhibit B. Filed as exhibit 4 to Registrant's Current Report on Form 8-K dated May 10, 1996 (File No. 1-8491) and incorporated herein by reference. 4.3 Stock Purchase Agreement dated as of August 27, 2001, between Hecla Mining Company and Copper Mountain Trust. Filed as exhibit 4.3 to Registrant's Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333 - 100395) and incorporated herein by reference. 4.4 Warrant Agreement dated August 2, 2002, between Hecla Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.4 to Registrant's Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333 - 100395) and incorporated herein by reference. 4.5 Registration Rights Agreement dated August 2, 2002, between Hecla Mining Company and Great Basin Gold Ltd. Filed as exhibit 4.5 to Registrant's Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333 - 100395) and incorporated herein by reference. Certain instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries, where the total amount of securities authorized under any such instrument does not exceed 10% of the Registrant's consolidated total assets, are not filed herewith pursuant to Item 601(b)(ii)(A) of Regulation S-K. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. 10.2 Employment agreement dated November 6, 2001, between Hecla Mining Company and Phillips S. Baker, Jr. (Registrant has substantially identical agreements with each of Messrs. Thomas F. Fudge, Jr., Michael H. Callahan, Ronald W. Clayton, Lewis E. Walde and Ms. Vicki Veltkamp. Such substantially identical agreements are not included as separate exhibits.)* 10.3(a) Form of Executive Deferral Plan Master Document, as amended, effective November 13, 1993. Filed as exhibit 10.3(a) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-8491) and incorporated herein by reference. 10.3(b) Form of Director Deferral Plan Master Plan Document effective January 1, 1995. Filed as exhibit 10.3(b) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-8491) and incorporated herein by reference. 10.4(a) 1987 Nonstatutory Stock Option Plan of the Registrant. Filed as exhibit B to Registrant's Proxy Statement dated March 20, 1987 (File No. 1-8491) and incorporated herein by reference. 10.4(b) Hecla Mining Company 1995 Stock Incentive Plan, as amended. Filed as exhibit 99.1 to Registrant's Preliminary Proxy Statement dated April 8, 2002 (File No. 1-8491) and incorporated herein by reference. 10.4(c) Hecla Mining Company Stock Plan for Nonemployee Directors, as amended. Filed as exhibit 99.1 to Registrant's Preliminary Proxy Statement dated April 8, 2002 (File No. 1-8491) and incorporated herein by reference. 10.4(d) Hecla Mining Company Key Employee Deferred Compensation Plan. Filed as exhibit 4.3 to Registrant's Registration Statement on Form S-8 filed on July 24, 2002 (File No. 333-96995) and incorporated herein by reference. 10.5(a) Hecla Mining Company Retirement Plan for Employees and Supplemental Retirement and Death Benefit Plan. Filed as exhibit 10.11(a) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985 (File No. 1-8491) and incorporated herein by reference. 10.5(b) Supplemental Excess Retirement Master Plan Documents. Filed as exhibit 10.5(b) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-8491) and incorporated herein by reference. 10.5(c) Hecla Mining Company Nonqualified Plans Master Trust Agreement. Filed as exhibit 10.5(c) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-8491) and incorporated herein by reference. 10.6 Form of Indemnification Agreement dated May 27, 1987, between Hecla Mining Company and each of its Directors and Officers. Filed as exhibit 10.15 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 1-8491) and incorporated herein by reference. 10.7 Summary of Short-term Performance Payment Plan. Filed as exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-8491) and incorporated herein by reference. 10.8(a) Amended and Restated Golden Eagle Earn-in Agreement between Echo Bay Mines Ltd. (successor in interest to Newmont Mining Corp./Santa Fe Pacific Gold Corp.) and Hecla Mining Company dated September 6, 1996. Filed as exhibit 10.11(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-8491) and incorporated herein by reference. 10.8(b) Golden Eagle Operating Agreement between Echo Bay Mines Ltd. (successor in interest to Newmont Mining Corp./Santa Fe Pacific Gold Corp.) and Hecla Mining Company dated September 6, 1996. Filed as exhibit 10.11(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-8491) and incorporated herein by reference. 10.8(c) First Amendment to the Amended and Restated Golden Eagle Earn-in Agreement effective September 5, 2002, by and between Echo Bay Mines Ltd. and Hecla Mining Company. Filed as exhibit 10.6(c) to Registrant's Registration Statement on Form S-1 filed on October 7, 2002, (File No. 333 - 100395) and incorporated herein by reference. 10.10 Restated Mining Venture Agreement among Kennecott Greens Creek Mining Company, Hecla Mining Company and CSX Alaska Mining Inc. dated May 6, 1994. Filed as exhibit 99.A to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No. 1-8491) and incorporated herein by reference. 10.11 Credit Agreement dated as of June 25, 1999, among Monarch Resources Investments Limited as Borrower, Monarch Minera Suramericana, C.A. as an additional obligor and Standard Bank of London Limited as Collateral and Administrative Agent. Filed as exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 1-8491) and incorporated herein by reference. 10.12 Subordinated Loan Agreement dated as of June 25, 1999, among Hecla Mining Company as Borrower and Standard Bank of London Limited as Initial Lender, Collateral and Administrative Agent. Filed as exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 1-8491) and incorporated herein by reference. 10.13 Subordination Agreement dated as of June 25, 1999, among NationsBank, N.A. as Senior Creditor, Standard Bank of London Limited as Subordinated Creditor and Hecla Mining Company. Filed as exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 1-8491) and incorporated herein by reference. 10.14 Subordinated Loan Agreement dated June 29, 2000, among Hecla Mining Company as Borrower and Standard Bank of London Limited as Lender. Filed as exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-8491) and incorporated herein by reference. 10.15 Subordination Agreement dated June 29, 2000, among Hecla Mining Company and Standard Bank of London Limited as Senior Creditor and Subordinated Creditor. Filed as exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-8491) and incorporated herein by reference. 10.16 Stock Purchase Agreement dated February 27, 2001, between Hecla Mining Company and IMERYS USA, Inc. Filed as exhibit 99 to Registrant's Current Report on Form 8-K dated March 27, 2001 (File No. 1-8491) and incorporated herein by reference. 10.19 Real Estate Purchase and Sale Agreement between Hecla Mining Company and JDL Enterprises, LLC, dated October 19, 2001. Filed as exhibit 10.21 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-8491) and incorporated herein by reference. 10.21 Earn-in Agreement dated August 2, 2002, between Hecla Ventures Corp. and Rodeo Creek Gold Inc. Filed as exhibit 10.19 to Registrant's Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333 - 100395) and incorporated herein by reference. 10.22 Lease Agreement dated September 5, 2002 between Hecla Mining Company and CVG-Minerven. Filed as exhibit 10.20 to Registrant's Registration Statement on Form S-1 filed on October 7, 2002 (File No. 333 - 100395) and incorporated herein by reference. 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* - -------------------------------------------------------------------------------- * Filed herewith. EX-3.1 3 hecla033375_3-1.txt Exhibit 3.1 CERTIFICATE OF INCORPORATION OF HECLA MINING COMPANY (as reincorporated a Delaware corporation March 21, 1983, and as amended June 5, 1985, July 28, 1987, May 16, 1991, June 25, 1993 and May 10, 2002) ARTICLE I. Name The name of the Corporation shall be HECLA MINING COMPANY. ARTICLE II. Registered Office The address of the registered office of the Corporation in the State of Delaware is 306 South State Street in the City of Dover, County of Kent, and the name of its registered agent at that address is United States Corporation Company. ARTICLE III. Purpose The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV. Capital Stock Section 1. Authorized Capital Stock. The Corporation shall be authorized to issue two classes of shares of Capital Stock to be designated, respectively, "Preferred Stock" and "Common Stock"; the total number of shares of capital stock which the Corporation shall have authority to issue is 205,000,000; the total number of shares of Preferred Stock shall be 5,000,000, and each such share shall have a par value of $0.25; the total number of shares of Common Stock shall be 200,000,000, and each such share shall have a par value of $0.25. Section 2. Issuance of Preferred Stock. Shares of Preferred Stock may be issued from time to tie in one or more series. The Board of Directors of the Corporation (hereinafter referred to in this Certificate of Incorporation as the "Board") is hereby authorized to fix the voting rights, if any, designations, powers, preferences and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, of any unissued series of Preferred Stock; and to fix the number of shares constituting such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). Section 3. No Preemptive Rights. Without limiting the power of the Corporation to grant such rights by private contract, no holders of stock of the Corporation shall be entitled as such, as a matter of right, to the preemptive right to purchase or subscribe for any stock which the Corporation may issue or sell, whether or not exchangeable for any stock of the Corporation and whether out of unissued shares authorized by this Certificate of Incorporation as originally filed, or by any amendment hereof, or out of shares of stock of the Corporation acquired by it after the issuance thereof, and whether issued for cash, labor performed, personal property of any kind, including securities of other corporations, real property or interest therein, nor shall any holder of any shares of the capital stock of the Corporation be entitled as such, as a matter of right, to purchase or subscribe for any obligation which the Corporation may issue or sell which shall be attached or appurtenant to any warrant or warrants or any other instrument or instruments that shall confer upon the holder or holders of such obligation the right to subscribe for or purchase from the Corporation any shares of its capital stock. Section 4. Voting Rights. Except as otherwise provided by law or by the resolution or resolutions adopted by the Board designating the rights, powers and preferences of any series of Preferred Stock, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock being entitled to one vote for each share held. Whenever this Certificate of Incorporation or the By-Laws of the Corporation shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (such capital stock is hereinafter referred to in this Certificate of Incorporation as "Voting Stock"), voting together as a single class, for the taking of corporate action: (i) such affirmative vote shall be in addition to any other affirmative vote required by law or by the resolution or resolutions designating the rights, powers and preferences of any outstanding series of Preferred Stock; and (ii) each outstanding share of Common Stock shall be entitled to one vote and each outstanding share of each series of Preferred Stock which is Voting Stock shall be entitled to the number of votes to which it is generally entitled, pursuant to the resolution or resolutions designating the rights, powers and preferences of such series of Preferred Stock, in the election of directors. ARTICLE V By-Laws In furtherance and not in limitation of the powers conferred by law, the Board is expressly authorized to make, repeal, alter, amend and rescind the By-Laws of the Corporation by a majority vote of the entire Board at any regular or special meeting of the Board; provided, however that, notwithstanding anything contained in this Certificate of Incorporation or the By-Laws of the Corporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to (i) alter, amend or repeal any provision of the By-Laws which is substantially identical to and/or implements the last sentence of Article IV, or Articles VI, VII or VIII, of this Certificate of Incorporation or (ii) alter, amend or repeal any provision of this proviso to Article V. ARTICLE VI. Board of Directors Section 1. Number, Election and Terms. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors which, subject to any right of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances shall consist of not less than five nor more than nine persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board pursuant to a resolution adopted by a majority of the entire Board. The directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1984 Annual Meeting of Shareholders, the term of office of the second class to expire at the 1985 Annual Meeting of Shareholders and the term of office of the third class to expire at the 1986 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election. Section 2. Newly Created Directorships and Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled only by a majority vote of the directors then in office, and directors so chosen shall hold office for a term expiring at the Annual Meeting of Shareholders at which the term of the class to which they have been elected expires. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. Section 3. Removal. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the Voting Stock, voting together as a single class. Section 4. Amendment, Repeal, etc. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article VI. ARTICLE VII. Actions by Shareholders Any action required or permitted to be taken by the shareholders of the Corporation must be effected at a duly called annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing by such shareholders. Special meetings of shareholders of the Corporation may be called only by the Board pursuant to a resolution approved by a majority of the entire Board. Notwithstanding anything contained in this Certificate of Incorporate to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article VII. ARTICLE VIII. Certain Business Combinations Section 1. Vote Required for Certain Business Combinations. A. Higher Vote for Certain Business Combinations. Except as otherwise expressly provided in Section 2 of this Article VIII: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as herein defined) of $1,000,000 or more; or (iii) the issuance or transfer by the Corporation of any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any affiliate of any Interested Shareholder; shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. B. Definition of "Business Combination". The term "Business Combination" as used in this Article VIII shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this Section 1. Section 2. When Higher Vote is Not Required. The provisions of Section 1 of this Article VIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any resolution or resolutions designating the rights, powers and preferences of any outstanding series of Preferred Stock, if all of the conditions specified in either of the following paragraphs A and B are met (it being intended that in the case of a Business Combination not involving any cash or consideration other than cash to be received by the holders of each class or series of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined), the provisions of such Section 1 shall not be applicable only if the condition specified in the following paragraph A is met)" A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). B. Price and Procedure Requirements. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; (b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article VIII as the "Determination Date"), whichever is higher; and (c) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock on the Announcement Date or the Determination Date, whichever is higher, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of Common Stock. (ii) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other series of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined) shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(ii) shall be required to be met with respect to every series of outstanding Voting Stock (other than Institutional Voting Stock), whether or not the Interested Shareholder has previously acquired any shares of a particular series of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such series of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (c) the Fair Market Value per share of such series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and (d) (if applicable) the price per share equal to the Fair Market Value per share of such series of Voting Stock on the Announcement Date or the Determination Date, whichever is higher, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such series of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of such series of Voting Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of such series of Voting Stock. (iii) The consideration to be received by holders of a particular class (in the case of Common Stock) or series (in the case of Preferred Stock of outstanding Voting Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it. (iv) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combinations: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefore any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder. (v) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Section 3. Certain Definitions. For the purposes of this Article VIII: A. A "Person" shall mean any individual, firm, corporation or other entity. B. "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than 121/2% of the voting power of the outstanding Voting Stock; or (ii) if an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 12 1/2% or more of the voting power of the then outstanding Voting Stock; or (iii) if an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. C. A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring holding, voting or disposing of any shares of Voting Stock. D. For the purpose of determining whether a person is an Interested Shareholder pursuant to paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 1, 1983. F. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph B of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned directly or indirectly, by the Corporation. G. "Continuing Director" means any member of the Board who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. H. "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange - Listed Stock, or, if such stock is not quoted on the Composite Tape, on the New York Stock exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. I. "Institutional Voting Stock" shall mean any series of Voting Stock which was issued to and continues to be held solely by one or more insurance companies, pension funds, commercial banks, savings banks or similar financial institutions or institutional investors. J. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Section 2 of this Article VIII shall include the shares of Common Stock and/or the shares of any series of outstanding Voting Stock retained by the holders of such shares. Section 4. Powers of the Board of Directors. A majority of the directors of the Corporation shall have the power and duty to determine for the purposes of this Article VIII, on the basis of information known to them after reasonable inquiry (A) whether a person is an Interested Shareholder, (B) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another (D) whether a series of Voting Stock is Institutional Voting Stock and (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more. Section 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article VIII shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. Section 6. Amendment, Repeal, etc. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article VIII. ARTICLE IX. (As added May 8, 1987) Limitation of Liability and Indemnification Section 1. Limitation of Liability. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the shareholders of this article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. This paragraph shall not eliminate or limit the liability of a director for any act or omission which occurred prior to the effective date of its adoption. Any repeal or modification of this paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. Section 2. Indemnification and Insurance. A. Right to Indemnification of Directors, Officers and Employees. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer or employee and shall inure to the benefit of the indemnitees heirs, executors and administrators; provided, however, that except as provided in paragraph B hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expense incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. B. Right of Indemnitee to Bring Suit. If a claim under paragraph A of this Section is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its board of directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its shareholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses under this Section or otherwise shall be on the Corporation. C. Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, this Certificate of Incorporation, By-Law, agreement, vote of shareholders or disinterested directors or otherwise. The Corporation is authorized to enter into contracts of indemnification. D. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. E. Indemnification of Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification, and to the advancement of expenses to any agent of the Corporation to the fullest extent of the provisions of this Section with respect to the indemnification and advancement of expenses of directors, officers and employees of the Corporation. ARTICLE X. Amendment of Certificate of Corporation The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing the provisions set forth in the last sentence of Article IV, and in Articles VI, VII and VIII may not be altered, amended or repealed in any respect unless such alteration, amendment or repeal is approved as specified in each thereof. ARTICLE XI. Incorporator The name and mailing address of the incorporator of the Corporation is: John F. Johnston P.O. Box 1347 Wilmington, Delaware 19899 THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation to do business both within and without the State of Delaware and in pursuance of the Delaware General Corporation Law, does make and file this Certificate of Incorporation, hereby declaring and certifying that the facts herein stated are true, and accordingly has hereunto set his hand this 21st day of March, 1983. /s/ John F. Johnson John F. Johnston Incorporator EX-10.2 4 hecla033375_10-2.txt Exhibit 10.2 EMPLOYMENT AGREEMENT AGREEMENT by and between Hecla Mining Company, a Delaware corporation (the "Company") and PHILLIPS S. BAKER, JR. (the "Executive"), dated as of the 6th day of November 2001. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company, and to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall be the first date during the "Change of Control Period" (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if the Executive's employment with the Company is terminated or the Executive ceases to be an officer of the Company prior to the date on which a Change of Control occurs, and it is reasonably demonstrated that such termination of employment (1) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (2) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" is the period commencing on the date hereof and ending on June 1, 2003; provided, however, that commencing on June 1, 2002, and on each subsequent anniversary of such date (each such anniversary is hereinafter referred to as the "Renewal Date"), the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) The "Deemed Retirement Benefit" means the aggregate benefits that would be payable to the Executive under the Hecla Mining Company Qualified Retirement Plan and/or any successor defined benefit plan (the "Retirement Plan") and any supplemental and/or excess retirement plans in which the Executive participates (the "SERP"), assuming that (i) the Executive's age as of the Date of Termination were increased by two years for purposes of calculating the pension reduction but not for purposes of determining covered compensation (as those terms are defined in the Retirement Plan), (ii) the Executive's average annual earnings were calculated by assuming that the Executive had continued to receive the compensation required by Section 4(b) of this Agreement for two years, (iii) the Executive's years of service were increased by two years, and (iv) the Executive's benefits under the Retirement Plan and the SERP were fully vested. (d) The "Actual Retirement Benefit" means the aggregate benefits that actually are payable to the Executive under the Retirement Plan and the SERP as of the Date of Termination, determined in accordance with the applicable terms of the Retirement Plan and the SERP. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) 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") becomes the "beneficial owner" (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 Section 2(a), the following acquisitions shall not constitute a Change of Control: (I) any acquisition directly from the Company or approved by the Incumbent Directors, following which such Person owns not more than 40% of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, (II) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities, (III) any acquisition by the Company, (IV) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (V) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of Section 2(c) below; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall -2- be considered as though such individual were an Incumbent Director, 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 similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity (a "Business Combination"), in each case, unless, immediately following such Business Combination, (i) more than 60% of, respectively, the then outstanding shares of common stock and the total voting power of (A) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 80% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Outstanding Company Common Stock and Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be, were converted pursuant to such Business Combination), and such beneficial ownership of common stock or voting power among the holders thereof is in substantially the same proportion as the beneficial ownership of Outstanding Company Common Stock and the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (ii) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the outstanding shares of common stock and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), unless such acquisition is pursuant to a Business Combination that is an acquisition by the Company or a subsidiary of the Company of the assets or Stock of another entity that is approved by the Incumbent Directors, following which such person owns not more than 40% of such outstanding shares and voting power, and (iii) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change of Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Outstanding Company Common Stock or Outstanding Company Voting Securities as a result of the acquisition of Outstanding Company Common Stock or Outstanding Company Voting Securities by the Company which reduces the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities; PROVIDED, that if after such -3- acquisition by the Company such person becomes the beneficial owner of additional shares of Outstanding Company Common Stock or Outstanding Company Voting Securities that increases the percentage of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by such person, a Change of Control of the Company shall then occur. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). The Employment Period shall terminate upon the Executive's termination of employment for any reason. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage-personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. -4- (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies;" includes any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year beginning or ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the highest bonus paid or payable, including by reason of deferral, to the Executive by the Company and its affiliated companies in respect of the three fiscal years immediately preceding the fiscal year in, which the Effective Date occurs (annualized for any fiscal year during the Employment Period consisting of less than twelve full, months or with respect to which the Executive has been employed by the Company for less than twelve full months) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. In addition to Annual Base salary and Annual Bonus payable as hereinabove provided, the Executive shall be entitled to participate during the Employment Period in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event, shall such plans, practices, policies and programs provide the Executive with incentive, savings and retirement benefit opportunities, in each case, less favorable, in the aggregate, than (x) the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date of (y) if more favorable to the Executive, those provided at any time after the Effective Date to other peer executives of the Company and its affiliated companies. -5- (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent generally applicable to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than (x) the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or (y) if more favorable to the Executive, those provided at any time after the Effective Date generally to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. -6- (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer incentives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its, intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" means the absence of the Executive from the Executive's duties with the Company on a fulltime basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement. as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" means: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 4(a)) with the Company or any affiliated company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. For purposes of this Section 5(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given -7- pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 5(b)(i) or 5(b)(ii), and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason or by the Executive voluntarily without Good Reason. For purposes of this Agreement, "Good Reason" means: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failures not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof, or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. -8- For purposes of this Agreement, any good faith determination of Good Reason made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason pursuant to a Notice of Termination given during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed, to be a termination for Good Reason for all purposes of this Agreement. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (i) through (v) shall not affect the Executive's ability to terminate employment for Good Reason. (d) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). In the case of a termination of the Executive's employment for Cause, a Notice of Termination shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board prior to such vote), finding that in the good faith opinion of the Board the Executive was guilty of conduct constituting Cause. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination. The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing the Executive's rights hereunder. (e) Date of Termination. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein (which date shall be not more than 30 days after the giving of such notice), as the case may be; provided, however, that (i) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than the following obligations: (i) payment of the Executive's Annual Base Salary -9- through the Date of Termination to the extent not theretofore paid, (ii) payment of the product of (x) the greater of (A) the Annual Bonus paid or payable, including by reason of deferral, (and annualized for any fiscal year consisting of less than twelve full months or for which the Executive has been employed for less than twelve full months) for the most recently completed fiscal year during the Employment Period, if any, and (B) the Recent Annual Bonus (such greater amount hereafter referred to as the "Highest Annual Bonus") and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (iii) payment of any compensation previously deferred by the Executive (together with any accrued interest thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the amounts described in paragraphs (i), (ii) and (iii) are hereafter referred to as "Accrued Obligations"). All Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. In addition, the Executive's estate or designated beneficiaries shall be entitled to receive the Executive's Annual Base Salary for the balance of the Employment Period. Anything in this Agreement to the contrary notwithstanding, the Executive's estate and family shall be entitled to receive benefits at least equal to the most favorable benefits provided generally by the Company and any of its affiliated companies to the estates and surviving families of peer executives of the Company and such affiliated under such plans, programs, practices and policies relating to death benefits, if any, as in effect generally with respect to other peer executives and their estate and families at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect on the date of the Executive's death generally with respect to other peer executives of the Company and its affiliated companies and their families. (b) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations. All Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. In addition, the Executive shall be entitled to receive the Executive's Annual Base Salary for the balance of the Employment Period; provided, however, that such payments of Annual Base Salary shall be reduced by any benefits paid to the Executive under the Retirement Plan by reason of Disability. Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled after the Disability Effective Date to receive disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disable executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. -10- (c) Cause; other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period other than for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (d) Good Reason; Other Than for Cause or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability, or if the Executive shall terminate employment under this Agreement for Good Reason: (i) the Company shall pay, to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. all Accrued Obligations; and B. the product of (x) two and (y) the sum of (i) Annual Base Salary and (ii) the Highest Annual Bonus; and C. a lump-sum retirement benefit equal to the excess of (a) the actuarial equivalent of the Deemed Retirement Benefit over (b) the actuarial equivalent of the Executive's Actual Retirement Benefit; and for purposes of determining the amount payable pursuant to this Section 5(d)(i)C, the actuarial assumptions utilized shall be no less favorable to the Executive than those in effect with respect to the Retirement Plan and the SERP during the 90-day period immediately prior to the Effective Date; and (ii) for two additional years, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4 (b) (iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer -11- executives of the Company and its affiliated companies and their families; and for purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed for two additional years, and to have then retired; and (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion; provided, that the cost of such outplacement shall not exceed $20,000; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Companies. Notwithstanding the provisions of clause (ii) of this Section 6(d), if after using its reasonable best efforts to obtain life insurance, long-term disability or travel accident insurance coverage for the Executive as required by said clause (ii) at the lowest available rates, the Company is unable to obtain such coverage for an aggregate annual cost to the Company of not more than two percent of the Annual Base Salary, the Executive shall be required to elect to either (i) waive one or more of such coverages, or (ii) have the amount or duration of one or more of such coverages reduced, in either case so as to reduce such aggregate annual cost to not more than two percent of the Annual Base Salary. If any of such coverages cannot be obtained, or if the Executive elects to waive any of such coverages as provided in the preceding sentence, then the Company shall pay the Executive cash in lieu thereof, in the amount of two-thirds of one percent of the Annual Base Salary for each such coverage that is not provided. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other agreements with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 6(d) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, program or policy of the Company and the affiliated companies, unless otherwise specifically provided therein in a specific reference to this Agreement. -12- 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any setoff, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to Section 9 of this Agreement), plus in each case interest at the applicable Federal rate provided for in section 7872(f)(2) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to the Gross-Up Payment, but that the Parachute Value of all Payments do not exceed 110% of the Safe Harbor Amount, then no Gross-Up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section 6(d)(i), unless an alternative method of reduction is elected by the Executive, and in any event shall be made in such a manner as to maximize the Value of all Payments actually made to the Executive. For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 9(a). The Company's obligation to make Gross-Up Payments under this Section 9 shall not be conditioned upon the Executive's termination of employment. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PricewaterhouseCoopers or such other nationally recognized certified public accounting firm as may be designated by -13- the Executive (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; -14- PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and PROVIDED, FURTHER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding any other provision of this Section 9, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding. -15- (f) Definitions. The following terms shall have the following meanings for purposes of this Section 9. (i) "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax. (ii) The "Net After-Tax Amount" of a Payment shall mean the Value of a Payment net of all taxes imposed on the Executive with respect thereto under Sections 1 and 4999 of the Code and applicable state and local law, determined by applying the highest marginal rates that are expected to apply to the Executive's taxable income for the taxable year in which the Payment is made. (iii) "Parachute Value" of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a "parachute payment" under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment. (iv) A "Payment" shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise. (v) The "Safe Harbor Amount" means the maximum Parachute Value of all Payments that the Executive can receive without any Payments being subject to the Excise Tax. (vi) "Value" of a Payment shall mean the economic present value of a Payment as of the date of the change of control for purposes of Section 280G of the Code, as determined by the Accounting Firm using the discount rate required by Section 280G(d)(4) of the Code. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. -16- 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 11(c), without the prior written consent of the Executive, this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether director or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt. requested, postage prepaid, addressed as follows: If to the Executive: -------------------- Phillips S. Baker, Jr. Hecla Mining Company 6500 Mineral DriveCoeur d'Alene, Idaho 83815-8788 If to the Company: ------------------ Hecla Mining Company 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 Attention: Chief Executive Officer -17- With a copy to: -------------- Vice President - General Counsel Hecla Mining Company 6500 Mineral Drive Coeur d'Alene, Idaho 83815-8788 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's failure to insist upon strict compliance with any provision hereof or the failure to assert any right the Executive may have hereunder, including, without limitation, the right to terminate employment for Good Reason pursuant to Section 5(c)(i) - (v), shall not be deemed to be a waiver of such provision or right or any other provision or right thereof. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a), prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunder set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE HECLA MINING COMPANY By: - --------------------------- ---------------------- PHILLIPS S. BAKER, JR. ARTHUR BROWN Chairman and CEO -18- EX-31 5 hecla033375_31-1.txt Exhibit 31.1 Hecla Mining Company and Subsidiaries CERTIFICATIONS I, Phillips S. Baker, Jr., President, Chief Executive Officer and Director of Hecla Mining Company ("Hecla"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hecla Mining Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; Hecla Mining Company and Subsidiaries CERTIFICATIONS (Continued) 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ Phillips S. Baker, Jr. -------------------------------------- Phillips S. Baker, Jr. President, Chief Executive Officer and Director EX-31 6 hecla033375_31-2.txt Exhibit 31.2 Hecla Mining Company and Subsidiaries CERTIFICATIONS I, Lewis E. Walde, Vice President and Chief Financial Officer of Hecla Mining Company ("Hecla"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hecla Mining Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; Hecla Mining Company and Subsidiaries CERTIFICATIONS (Continued) 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ Lewis E. Walde ------------------------------- Lewis E. Walde Vice President and Chief Financial Officer EX-32 7 hecla033375_32-1.txt EXHIBIT 32.1 Hecla Mining Company and Subsidiaries CERTIFICATIONS I, Phillips S. Baker, Jr., President, Chief Executive Officer and Director of Hecla Mining Company ("Hecla"), certify that to my knowledge: 1. This quarterly report of Hecla on Form 10-Q ("report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Hecla. Date: August 8, 2003 /s/ Phillips S. Baker, Jr. -------------------------------------- Phillips S. Baker, Jr. President, Chief Executive Officer and Director A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Hecla Mining Company and will be retained by Hecla and furnished to the Securities and Exchange Commission or its staff upon request. - -------------------------------------------------------------------------------- The foregoing certification is being furnished in accordance with Securities and Exchange Commission Release No. 34-47551 and shall not be considered filed as part of the Form 10-Q. EX-32 8 hecla033375_32-2.txt EXHIBIT 32.2 Hecla Mining Company and Subsidiaries CERTIFICATIONS I, Lewis E. Walde, Vice President and Chief Financial Officer of Hecla Mining Company ("Hecla"), certify that to my knowledge: 1. This quarterly report of Hecla on Form 10-Q ("report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Hecla. Date: August 8, 2003 /s/ Lewis E. Walde ------------------------------------- Lewis E. Walde Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Hecla Mining Company and will be retained by Hecla and furnished to the Securities and Exchange Commission or its staff upon request. - -------------------------------------------------------------------------------- The foregoing certification is being furnished in accordance with Securities and Exchange Commission Release No. 34-47551 and shall not be considered filed as part of the Form 10-Q. -----END PRIVACY-ENHANCED MESSAGE-----