1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 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 Coeur d'Alene, Idaho 83815-8788 - ---------------------------------------- ----------------- (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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding July 31, 1998 - ---------------------------- ------------------------- Common stock, par value 55,104,639 shares $0.25 per share
2 HECLA MINING COMPANY and SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 I N D E X* Page PART I. - Financial Information Item l - Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3 - Consolidated Statements of Operations and Comprehensive Income (Loss) - Three Months and Six Months Ended June 30, 1998 and 1997 4 - Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 5 - Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. - Other Information Item 1 - Legal Proceedings 30 Item 4 - Annual Meeting of Shareholders 34 Item 6 - Exhibits and Reports on Form 8-K 35 *Items omitted are not applicable. -2-
3 PART I - FINANCIAL INFORMATION HECLA MINING COMPANY and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) (In thousands, except share data) <TABLE> <CAPTION> June 30, December 31, 1998 1997 ----------- ------------ ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 6,108 $ 3,794 Accounts and notes receivable 34,697 24,445 Income tax refund receivable 1,087 793 Inventories 20,701 22,116 Other current assets 2,212 1,416 --------- --------- Total current assets 64,805 52,564 Investments 3,204 2,521 Restricted investments 7,207 7,926 Properties, plants and equipment, net 177,421 180,037 Other noncurrent assets 8,321 7,620 --------- --------- Total assets $ 260,958 $ 250,668 ========= ========= LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 13,381 $ 12,590 Accrued payroll and related benefits 3,343 2,436 Preferred stock dividends payable 2,012 2,012 Accrued taxes 1,179 1,016 Accrued reclamation and closure costs 5,668 6,914 --------- --------- Total current liabilities 25,583 24,968 Deferred income taxes 300 300 Long-term debt 32,513 22,136 Accrued reclamation and closure costs 31,667 34,406 Other noncurrent liabilities 8,641 8,518 --------- --------- Total liabilities 98,704 90,328 --------- --------- SHAREHOLDERS' EQUITY Preferred stock, $0.25 par value, authorized 5,000,000 shares, issued and outstanding - 2,300,000 shares, liquidation preference $117,012 575 575 Common stock, $0.25 par value, authorized 100,000,000 shares; issued 1998 - 55,166,728; issued 1997 - 55,156,324 13,792 13,789 Capital surplus 374,017 373,966 Accumulated deficit (220,325) (222,143) Accumulated other comprehensive loss (4,919) (4,961) Less treasury stock, at cost; 1998 and 1997 - 62,089 shares (886) (886) --------- --------- Total shareholders' equity 162,254 160,340 --------- --------- Total liabilities and shareholders' equity $ 260,958 $ 250,668 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -3-
4 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (Dollars and shares in thousands, except for per-share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ----------------------------- ----------------------------- June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Sales of products $ 45,655 $ 46,069 $ 85,784 $ 88,525 --------- --------- --------- --------- Cost of sales and other direct production costs 36,487 34,234 67,014 68,160 Depreciation, depletion and amortization 5,048 5,051 10,174 9,403 --------- --------- --------- --------- 41,535 39,285 77,188 77,563 --------- --------- --------- --------- Gross profit 4,120 6,784 8,596 10,962 --------- --------- --------- --------- Other operating expenses: General and administrative 2,136 1,912 4,277 4,033 Exploration 1,136 2,438 1,952 3,792 Depreciation and amortization 99 78 193 157 Provision for closed operations and environmental matters 72 (41) 131 148 --------- --------- --------- --------- 3,443 4,387 6,553 8,130 --------- --------- --------- --------- Income from operations 677 2,397 2,043 2,832 --------- --------- --------- --------- Other income (expense): Interest and other income 1,403 2,070 3,937 3,221 Miscellaneous expense (94) (308) (651) (777) Gain on investments 1,155 - - 1,241 - - Interest expense: Interest costs (865) (585) (1,605) (1,420) Less amount capitalized 317 116 588 477 --------- --------- --------- --------- 1,916 1,293 3,510 1,501 --------- --------- --------- --------- Income before income taxes 2,593 3,690 5,553 4,333 Income tax benefit (provision) 403 (636) 290 (761) --------- --------- --------- --------- Net income 2,996 3,054 5,843 3,572 Preferred stock dividends (2,013) (2,013) (4,025) (4,025) --------- --------- --------- --------- Income (loss) applicable to common shareholders 983 1,041 1,818 (453) --------- --------- --------- --------- Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities 61 (287) 42 (118) --------- --------- --------- --------- Other comprehensive income (loss) 61 (287) 42 (118) --------- --------- --------- --------- Comprehensive income (loss) $ 1,044 $ 754 $ 1,860 $ (571) ========= ========= ========= ========= Basic and diluted income (loss) per common share $ 0.02 $ 0.02 $ 0.03 $ (0.01) ========= ========= ========= ========= Cash dividends per common share $ - - $ - - $ - - $ - - ========= ========= ========= ========= Weighted average number of common shares outstanding 55,102 55,091 55,098 53,960 ========= ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -4-
5 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Six Months Ended ------------------------------- June 30, 1998 June 30, 1997 ------------- ------------- <S> <C> <C> Operating activities: Net income $ 5,843 $ 3,572 Noncash elements included in net income: Depreciation, depletion and amortization 10,367 9,560 Gain on disposition of properties, plants and equipment (2,326) (1,089) Gain on sale of investments (1,241) - - Provision for reclamation and closure costs 287 474 Change in: Accounts and notes receivable (10,252) (7,407) Income tax refund receivable (294) 179 Inventories 1,415 3,104 Other current assets (796) 694 Accounts payable and accrued expenses 671 (5,330) Accrued payroll and related benefits 907 (185) Accrued taxes 163 (229) Accrued reclamation and closure costs and other noncurrent liabilities (4,149) (5,017) --------- --------- Net cash provided (used) by operating activities 595 (1,674) --------- --------- Investing activities: Additions to properties, plants and equipment (8,825) (10,322) Proceeds from disposition of properties, plants and equipment 3,506 1,242 Proceeds from sale of investments 1,241 - - Decrease in restricted investments 719 13,784 Purchase of investments and change in cash surrender value of life insurance, net (641) (783) Other, net (807) 1,740 --------- --------- Net cash provided (used) by investing activities (4,807) 5,661 --------- --------- Financing activities: Common stock issued under stock and stock option plans 54 46 Common stock issuance, net of offering costs - - 23,400 Preferred stock dividends (4,025) (4,025) Borrowings on long-term debt 26,500 27,000 Payments on long-term debt (16,003) (50,067) --------- --------- Net cash provided (used) by financing activities 6,526 (3,646) --------- --------- Net increase in cash and cash equivalents 2,314 341 Cash and cash equivalents at beginning of period 3,794 7,159 --------- --------- Cash and cash equivalents at end of period $ 6,108 $ 7,500 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -5-
6 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The notes to the consolidated financial statements as of December 31, 1997, as set forth in the Company's 1997 Annual Report on Form 10-K, substantially apply to these interim consolidated financial statements and are not repeated here. For additional information, please refer to such notes. Note 2. The financial information given in the accompanying unaudited interim consolidated financial statements reflects all adjustments which, in the opinion of management, are necessary to a fair statement of the results for the interim periods reported. All such adjustments are of a normal recurring nature. All financial statements presented herein are unaudited. However, the balance sheet as of December 31, 1997, was derived from the audited consolidated balance sheet referenced in Note 1 above. Certain consolidated financial statement amounts have been reclassified to conform to the 1998 presentation. These reclassifications had no effect on the net income (loss) or accumulated deficit as previously reported. Note 3. The components of the income tax provision (benefit) for the six months ended June 30, 1998 and 1997 are as follows (in thousands): 1998 1997 ------ ----- Current: State income taxes $ 181 $ 133 Federal (517) 9 Foreign income taxes 46 619 ----- ----- Total $(290) $ 761 ===== ===== The Company's income tax provision (benefit) for the first half of 1998 and 1997 varies from the amount that would have been provided by applying the statutory rate to the income or loss before income taxes primarily due to the availability of net operating losses. -6-
7 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES Note 4. Inventories consist of the following (in thousands): June 30, Dec. 31, 1998 1997 --------- -------- Concentrates, bullion, metals in transit and other products $ 5,654 $ 4,773 Industrial mineral products 6,611 9,230 Materials and supplies 8,436 8,113 -------- -------- $ 20,701 $ 22,116 ======== ======== Note 5. Contingencies - Bunker Hill In 1994, the Company, as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA or Superfund), entered into a Consent Decree with the Environmental Protection Agency (EPA) and the State of Idaho, concerning environmental remediation obligations at the Bunker Hill Superfund Site (Bunker Hill Site) located at Kellogg, Idaho. The Consent Decree settles the Company's response-cost liability under Superfund at the Bunker Hill Site. As of June 30, 1998, the Company has estimated and accrued an allowance for liability for remedial activity costs at the Bunker Hill Site of $6.6 million. These estimated expenditures are anticipated to be made over the next three to five years. As with any estimate of this nature, it is reasonably possible that the Company's estimate of this obligation may change in the near or longer term. Coeur d'Alene River Basin Natural Resource Damage Claims - Coeur d'Alene Tribe Claims In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit, under CERCLA, in Idaho Federal District Court against the Company and a number of other mining companies asserting claims for damages to natural resources downstream from the Bunker Hill Site over which the Tribe alleges some ownership or -7-
8 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES control. The Company answered the Tribe's complaint denying liability for natural resource damages. In October 1996, following a court imposed four-year stay of the proceeding, the Tribe's natural resource damage litigation was consolidated with the United States Natural Resources Damage litigation described below. - U.S. Government Claims In March 1996, the United States filed a lawsuit in Idaho Federal District Court against certain mining companies that conducted historic mining operations in the Silver Valley of northern Idaho, including the Company. The lawsuit asserts claims under CERCLA and the Clean Water Act and seeks recovery for alleged damages to or loss of natural resources located in the Coeur d'Alene River Basin (the Basin) in northern Idaho over which the United States asserts to be the trustee under CERCLA. The lawsuit asserts that the defendants' historic mining activity resulted in releases of hazardous substances and damaged natural resources within the Basin. The suit also seeks declaratory relief that the Company and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Basin outside the Bunker Hill Site. The Company answered the complaint in May 1996, denying liability to the United States under CERCLA and the Clean Water Act and asserted a counterclaim against the United States for the federal government's involvement in mining activity in the Basin which contributed to the releases and damages alleged by the United States. The Company believes it also has a number of defenses to the United States' claims. In October 1996, the Court consolidated the Coeur d'Alene Tribe Natural Resource Damage litigation with this lawsuit for discovery and other limited pretrial purposes. The case is proceeding through discovery. Summary judgment motions related to Federal Trusteeship of Natural Resources and the Statute of Limitations applicable to the federal government's natural resource damage claims are pending before the Court. In May 1998, the EPA announced that it had commenced a remedial investigation/feasibility study under CERCLA for the entire Basin, including Lake Coeur d'Alene, in -8-
9 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES support of its response cost claims asserted in its March 1996 lawsuit. - State of Idaho Claims In March 1996, the Company entered into an agreement (the Idaho Agreement) with the State of Idaho (State) pursuant to which the Company agreed to continue certain financial contributions to environmental cleanup work in the Basin being undertaken by a State Trustees group. In return, the State agreed not to sue the Company for damage to natural resources for which the State is a trustee for a period of five years, to pursue settlement with the Company of the State's natural resource damage claims and to grant the Company credit against any such State claims for all expenditures made under the Idaho Agreement and certain other Company contributions and expenditures for environmental cleanup in the Basin. At June 30, 1998, the Company's accrual for remediation activity in the Basin, not including the Bunker Hill Site, totaled approximately $0.6 million. These expenditures are anticipated to be made over the next three years. Depending on the results of the aforementioned lawsuits, it is reasonably possible that the Company's estimate of its obligation may change in the near or longer term. Insurance Coverage Litigation In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance companies which provided comprehensive general liability insurance coverage to the Company and its predecessors. The Company believes that the insurance companies have a duty to defend and indemnify the Company under their policies of insurance for all liabilities and claims asserted against the Company by the EPA and the Tribe under CERCLA related to the Bunker Hill Site and the Basin in northern Idaho. In 1992, the Court ruled that the primary insurance companies had a duty to defend the Company in the Tribe's lawsuit. During 1995 and 1996, the Company entered into settlement agreements with a number of the insurance carriers named in the litigation. The Company has received a total of approximately $7.2 -9-
10 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES million under the terms of the settlement agreements. Thirty percent of these settlements were paid to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill Site Consent Decree. Litigation is still pending against one insurer with trial continued until the underlying environmental claims against the Company are resolved or settled. The remaining insurer is providing the Company with a partial defense in all Basin environmental litigation. As of June 30, 1998, the Company had not reduced its accrual for reclamation and closure costs to reflect the receipt of any anticipated insurance proceeds. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters and the proceedings disclosed above, it is the opinion of the Company's management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, financial condition or cash flows of the Company. Note 6. At June 30, 1998, there was $22.5 million outstanding under the Company's $55.0 million revolving and term loan credit facility (Loan Facility) classified as long- term debt. The Company was in compliance with all restrictive covenants of the Loan Facility as of June 30, 1998. In addition to the borrowings under the Loan Facility, the Company also has outstanding $9.8 million aggregate principal amount of tax-exempt, solid waste disposal revenue bonds as of June 30, 1998. The amount available to borrow under the Loan Facility is reduced by the $9.8 million amount of tax-exempt, solid waste bonds. At June 30, 1998, the Company had the ability to borrow approximately an additional $20.0 million under the Loan Facility. Note 7. The following table presents a reconciliation of the numerators (net income or [loss]) and denominators (shares) used in the basic and diluted income (loss) per common share computations. Also shown is the effect that has been given to preferred dividends in arriving at income (loss) applicable to common -10-
11 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES shareholders for the three months and six months ended June 30, 1998 and 1997 in computing basic and diluted income (loss) per common share (in thousands). <TABLE> <CAPTION> Three Months Ended June 30, ---------------------------------------------------------- 1998 1997 ---------------------------- ---------------------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------- ------ ------ ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Net income $ 2,996 $ 3,054 Less: Preferred stock dividends (2,013) (2,013) ------- ------- Basic income applicable to common shareholders 983 55,102 $ 0.02 1,041 55,091 $ 0.02 Effect of dilutive securities - - 10 - - - - - - - - ------- ------ ------ ------- ------ ------ Diluted income applicable to common shareholders $ 983 55,112 $ 0.02 $ 1,041 55,091 $ 0.02 ======= ====== ====== ======= ====== ====== </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, ----------------------------------------------------------- 1998 1997 --------------------------- ----------------------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------- ------ ------ ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Net income $ 5,843 $ 3,572 Less: Preferred stock dividends (4,025) (4,025) ------- ------- Basic income (loss) applicable to common shareholders 1,818 55,098 $ 0.03 (453) 53,960 $(0.01) Effect of dilutive securities - - - - - - - - - - - - ------- ------ ------ ------- ------ ------ Diluted income (loss) applicable to common shareholders $ 1,818 55,098 $ 0.03 $ (453) 53,960 $(0.01) ======= ====== ====== ======= ====== ====== </TABLE> The foregoing calculations of diluted earnings per share for each of the three months and six months then ended June 30, 1998 and 1997 exclude the effects of $115,000,000 of convertible preferred stock as such conversion would be antidilutive. For the six months ended June 30, 1998 and 1997, these calculations also excluded the effects of 1,678,500 and 1,024,077 shares of common stock issuable upon exercise of stock options as of June 30, 1998 and 1997, respectively, as their exercise would be antidilutive. For the three months ended June 30, 1998 and 1997, these calculations also excluded the effects of 1,198,000 and 1,024,077 shares -11-
12 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES of common stock issuable upon exercise of stock options as of June 30, 1998 and 1997, respectively, as their exercise would be antidulitive. Note 8. In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130), "Comprehensive Income," was issued. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented. The Company has applied this standard effective January 1, 1998. In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented. The Company does not expect the adoption of this standard to have a material impact on the financial condition or results of operations of the Company. In February 1998, Statement of Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued. SFAS 132 provides additional information to facilitate financial analysis and eliminates certain disclosures which are no longer useful. The statement also standardizes disclosure for retiree benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. The Company has applied this standard effective January 1, 1998. In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133). "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, -12-
13 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, however, earlier application of all of the provisions of this Statement is encouraged as of the beginning of any fiscal quarter. The Company does not believe the adoption of this standard will have a material impact on the financial condition or results of operations of the Company. -13-
14 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Hecla Mining Company (Hecla or the Company) is primarily involved in the exploration, development, mining, and processing of gold, silver, lead, zinc, and industrial minerals. As such, the Company's revenues and profitability are strongly influenced by world prices of gold, silver, lead, and zinc, which fluctuate widely and are affected by numerous factors beyond the Company's control, including inflation and worldwide forces of supply and demand for precious and base metals. The aggregate effect of these factors is not possible to accurately predict. In the following descriptions, where there are changes that are attributable to more than one factor, the Company presents each attribute in descending order relative to the attribute's importance to the overall change. Except for the historical information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the matters discussed below are forward-looking statements that involve risks and uncertainties, including the timely development of existing properties and reserves and future projects, the impact of metals prices and metal production volatility, changing market conditions and the regulatory environment and the other risks detailed from time to time in the Company's Form 10-K and Form 10-Qs filed with the Securities and Exchange Commission (see also "Investment Considerations" of Part I, Item 1 of the Company's 1997 Annual Report on Form 10-K). As a result, actual results may differ materially from those projected, expressed or implied. These forward- looking statements represent the Company's judgment as of the date of this filing. The Company disclaims, however, any intent or obligation to update these forward-looking statements as circumstances change or develop. The Company incurred losses applicable to common shareholders for each of the past three years in the period ended December 31, 1997. If the Company's estimates of market prices of gold, silver, lead, and zinc are realized in 1998, the Company expects to -14-
15 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES record income or (loss) in the range of $1.0 million to $(5.0) million after the expected dividends to preferred shareholders totaling approximately $8.1 million for the year ending December 31, 1998. Due to the volatility of metals prices and the significant impact metals price changes have on the Company's operations, there can be no assurance that the actual results of operations for 1998 will be as projected. The variability of metals prices requires that the Company, in assessing the impact of prices on recoverability of its metals segment assets, exercise judgment as to whether price changes are temporary or are likely to persist. The Company performs a comprehensive evaluation of the recoverability of its assets on a periodic basis. This evaluation includes a review of estimated future net cash flows against the carrying value of the Company's assets. Moreover, a review is made on a quarterly basis to assess the impact of significant changes in market conditions and other factors. Asset write-downs may occur if the Company determines that the carrying values attributed to individual assets are not recoverable given reasonable expectations for future production and market conditions. During the first six months of 1998, the Company produced approximately 67,000 ounces of gold compared to approximately 89,000 ounces of gold production in the first six months of 1997. The decrease in gold production in 1998 is the result of the suspension of operations at the Grouse Creek mine in April 1997 and decreased gold production at the La Choya mine in 1998, partly offset by increased gold production at the Rosebud mine where operations commenced in April 1997. The Company's gold production in the first six months of 1998 was from the following sources: the Rosebud mine - approximately 32,000 ounces; the La Choya mine - approximately 23,000 ounces; the Greens Creek mine - approximately 8,000 ounces; and an additional 4,000 ounces from other sources. For the year ending December 31, 1998, the Company expects to produce between 120,000 and 128,000 ounces of gold compared to actual 1997 gold production of approximately 174,000 ounces of gold. The 1998 estimated gold production includes 60,000 to 64,000 ounces from the Company's interest in the Rosebud mine, 41,000 to 44,000 ounces -15-
16 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES from the Company's La Choya mine, 16,000 to 17,000 ounces from the Company's interest in the Greens Creek mine, and 3,000 ounces from other sources. In the first six months of 1998, the Company produced approximately 3.2 million ounces of silver compared to the first six months of 1997 silver production of 2.5 million ounces. The increase in silver production in 1998 is principally the result of increased silver production at the Lucky Friday mine due to mining in the higher silver grade expansion area in the 1998 period. The Company's silver production in the first six months of 1998 was principally from the Lucky Friday mine - approximately 1.8 million ounces, the Greens Creek mine - approximately 1.3 million ounces, and the Rosebud mine - approximately 0.1 million ounces. The Company's silver production for 1998 is expected to be between 6.9 and 7.1 million ounces compared to 1997 production of approximately 5.1 million ounces. The 1998 estimated silver production includes 4.1 to 4.2 million ounces from the Lucky Friday mine, 2.5 to 2.6 million ounces from the Company's interest in the Greens Creek mine and an additional 0.3 million ounces from other sources. The Company's shipments of industrial minerals, including ball clay, kaolin, feldspar, and specialty aggregates, are expected to increase in 1998 to approximately 1,087,000 tons compared to 1,026,000 tons in 1997. Additionally, the Company expects to ship approximately 1,037,000 cubic yards of landscape material from its Mountain West Products operation in 1998 compared to 891,000 cubic yards in 1997. RESULTS OF OPERATIONS FIRST SIX MONTHS 1998 COMPARED TO FIRST SIX MONTHS 1997 The Company reported net income of approximately $5.8 million, or $0.11 per share on both a basic and diluted basis, in the first six months of 1998 compared to net income of approximately $3.6 million, or $0.07 per share on both a basic and diluted basis, in the same period of 1997. After $4.0 million in dividends to shareholders of the Company's Series B Cumulative Convertible Preferred Stock, the Company's income applicable to common shareholders for the first six -16-
17 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES months of 1998 was $1.8 million, or $0.03 per share on both a basic and diluted basis, compared to a loss of $0.5 million, or $0.01 per common share on both a basic and diluted basis, in the comparable 1997 period. The change in income in the first six months of 1998 was attributable to a variety of factors, the most significant of which are discussed below in descending order of magnitude. Comparing the average metal prices for the six months of 1998 with the comparable 1997 period, gold decreased by 14% to $297 per ounce from $347 per ounce, silver increased by 22% to $5.97 per ounce from $4.89 per ounce, lead decreased by 17% to $0.246 per pound from $0.296 per pound, and zinc decreased by 14% to $0.480 per pound from $0.561 per pound. During the first six months of 1998, the Company's realized gold price per ounce decreased 19% from $373 per ounce in the first six months of 1997 to $303 per ounce in the same period in 1998. Sales of the Company's products decreased by approximately $2.7 million, or 3%, in the first six months of 1998 as compared to the same period in 1997. The decreased product sales resulted from lower sales totaling approximately $12.3 million from the gold operations due to decreased production at the Grouse Creek and La Choya mines, and a lower gold price. The decrease in sales from the gold operations was partly offset by increased sales from the industrial minerals segment of $6.4 million where sales improved at both the K-T Clay companies and MWCA, and increased sales from the silver operations of $3.1 million due to increased production and a higher silver price, partly offset by lower lead and zinc prices. Cost of sales and other direct production costs decreased approximately $1.1 million, or 2%, from the first six months of 1997 to the comparable 1998 period primarily attributable to (1) decreased production costs of $9.2 million at the Grouse Creek mine where operations were suspended in April 1997 and (2) decreased production costs at the La Choya mine of $2.9 million, due to lower production. These decreases in cost of sales and other direct production costs were partially offset by increases in operating costs at other operations including (1) increased production -17-
18 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES costs of $5.9 million at the industrial minerals segment resulting from increased sales of products, a litigation settlement at K-T Clay, and organizational restructuring costs at MWCA; (2) increased production costs at the Rosebud mine totaling approximately $4.0 million due to the commencement of operations in April 1997; and (3) increased production costs at the Greens Creek mine of $1.5 million due to increased product shipments and mill throughput. Cost of sales and other direct production costs as a percentage of sales increased from 77.0% in the first half of 1997 to 78.1% in the comparable 1998 period. The slight increase is primarily due to decreased production and sales at the La Choya mine, partly offset by the suspension of operations at the higher cost Grouse Creek mine in April 1997, and the addition of the lower cost Rosebud mine in April 1997. Depreciation, depletion and amortization increased approximately $0.8 million, or 8%, from the first six months of 1997 to the comparable 1998 period primarily due to (1) increased depreciation at the Rosebud mine ($1.7 million) the result of operating six months in 1998 versus three months in 1997; (2) increased depreciation at the Lucky Friday mine ($0.4 million) due to increased production in the 1998 period; and (3) increased depreciation at the industrial minerals segment ($0.2 million). These increases were partly offset by decreased depreciation, depletion, and amortization at (1) the La Choya mine of $1.3 million due to fully depreciating the property, plant, and equipment as of December 31, 1997 and (2) the Greens Creek mine ($0.2 million). Cash operating cost, total cash cost and total production cost per gold ounce increased from $169, $175 and $233 for the first six months of 1997 to $170, $181 and $239 for the comparable 1998 period, respectively. Cash operating cost, total cash cost and total production cost per silver ounce increased from $3.40, $3.40 and $5.27 in the first six months of 1997 to $4.06, $4.06 and $5.53 in the comparable 1998 period, respectively. The increases in the cost per silver ounce are due primarily to increased cost per ounce -18-
19 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES amounts at the Greens Creek mine due to decreased silver production and the impact of lower gold, zinc, and lead prices on by-product credits, partly offset by decreased cost per ounce amounts at the Lucky Friday mine resulting from increased silver production. Gold, lead, and zinc are by-products of the Company's silver operations, the revenues from which are netted against production costs in the calculation of production cost per ounce of silver. Other operating expenses decreased $1.6 million, or 19%, from the 1997 period to the 1998 period, due principally to decreased exploration expenditures of $1.8 million, most notably at Mexican exploration properties. This decrease was partly offset by increased general and administrative expenses of $0.2 million. Other income was $3.5 million in the first six months of 1998 compared to $1.5 million in the comparable 1997 period. The $2.0 million increase was primarily due to (1) a $1.2 million gain on sale of investments in 1998 and (2) an increase in interest and other income of $0.7 resulting from a gain on sale of land located near the Coeur d'Alene office of $2.3 million, partly offset by a 1997 gain on sale of an 8% interest in the Buckhorn Joint Venture, in Nevada, of $1.1 million and decreased royalty income of $0.5 million. Total interest cost increased approximately $0.2 million due to higher interest and fees associated with the Company's tax-exempt solid waste disposal bonds and the revolving and term loan facility. Capitalized interest costs increased $0.1 million principally due to increased capitalized interest at the Lucky Friday expansion project partly offset by decreased capitalized interest costs associated with the Rosebud mine. Income taxes decreased $1.1 million from a provision of $0.8 million in 1997 to a benefit of $0.3 million in the 1998 period. The benefit in 1998 relates principally to the carry back of certain environmental remediation expenditures for federal income tax purposes. -19-
20 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 The Company had net income of approximately $3.0 million, or $.05 per share on both a basic and diluted basis, in the second quarter of 1998 compared to net income of approximately $3.1 million, or $0.06 per share on both a basic and diluted basis, in the same period of 1997. After $2.0 million in dividends to shareholders of the Company's Series B Cumulative Convertible Preferred Stock, the Company's net income applicable to common shareholders for the second quarters of 1998 and 1997 was $1.0 million, or $0.02 per share on both a basic and diluted basis. The income in the second quarter of 1998 and the comparable 1997 period was attributable to a variety of factors, the most significant of which are discussed below in descending order of magnitude. Comparing the average metals prices for the second quarter of 1998 with the comparable 1997 period, gold decreased by 13% to $300 per ounce from $343 per ounce, silver increased by 20% to $5.71 per ounce from $4.76 per ounce, lead decreased by 13% to $0.248 per pound from $0.284 per pound, and zinc decreased by 19% to $0.479 per pound from $0.590 per pound. During the second quarter of 1998, the Company's realized gold price per ounce decreased 17% from $371 per ounce in the second quarter of 1997 to $307 per ounce in 1998. Sales of the Company's products decreased by approximately $0.4 million, or 1%, in the second quarter of 1998 as compared to the same period in 1997. The decreased product sales resulted from lower sales totaling approximately $6.2 million from the gold operations resulting from decreased production at the Grouse Creek and La Choya mines, and a lower gold price. The decrease in sales from the gold operations were partly offset by increased sales from the industrial minerals segment of $4.1 million where sales improved at both the K-T Clay companies and MWCA, and increased sales from the silver operations of $1.7 million due to increased production and a higher silver price, partly offset by lower lead and zinc prices. Cost of sales and other direct production costs increased $2.3 million, or 7%, from the second quarter -20-
21 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES of 1997 to the comparable 1998 period primarily due to (1) increased production costs at the Company's industrial minerals segment of $4.0 million the result of increased sales, a litigation settlement at K-T Clay, and organizational restructuring costs at MWCA; (2) increased costs at the Rosebud mine where operations commenced in April 1997 ($1.3 million); and (3) increased production costs at the Greens Creek mine due to increased product shipments and higher mill throughput ($0.9 million). These increases in cost of sales and other direct production costs were partially offset by decreases in operating costs at other operations totaling $3.9 million. These decreases are primarily attributable to (1) decreased production costs at the Grouse Creek mine of $2.3 million due to suspension of operations in April 1997 and (2) decreased production costs at the La Choya mine totaling approximately $1.4 million due to decreased production. Cost of sales and other direct production costs as a percentage of sales from products increased from 74.3% in the second quarter of 1997 to 79.9% in the comparable 1998 period. The increase is primarily due to decreased production and sales at the La Choya mine and higher costs as a percentage of sales at the industrial minerals operation, partly offset by the suspension of operations at the higher cost Grouse Creek mine in April 1997, and the addition of the lower cost Rosebud mine in April 1997. Depreciation, depletion and amortization remained constant at $5.0 million during the 1998 period, primarily the result of increased depreciation, depletion, and amortization at (1) the Greens Creek mine ($0.2 million); (2) the Lucky Friday mine ($0.2 million); (3) the Rosebud mine ($0.1 million); and (4) the industrial minerals segment ($0.1 million). These increases were offset by decreases in depreciation, depletion, and amortization at the La Choya mine of $0.6 million the result of the property, plant and equipment being fully depreciated as of December 31, 1997. Cash operating cost, total cash cost and total production cost per gold ounce increased from $146, $155 and $225 for the second quarter of 1997 to $179, -21-
22 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES $192 and $253 for the second quarter of 1998, respectively. The increase in the cash operating, total cash and total production cost per gold ounce is mainly attributed to lower production at the La Choya mine and higher production costs at the Rosebud mine. Cash operating and total cash cost per silver ounce increased from $3.61 and $3.61 in the second quarter of 1997 to $3.70 and $3.70 in the second quarter of 1998, respectively. The slight increase is due to higher per ounce costs at Greens Creek due to lower silver production and lower by-product metal prices, partly offset by lower per ounce amounts at Lucky Friday as a result of increased silver production. Total production costs per ounce decreased slightly from $5.23 per ounce in the second quarter of 1997 to $5.14 per ounce in the second quarter of 1998 due to the same reasons discussed above combined with the higher percentage of overall silver production coming from the Lucky Friday mine which carries a lower per ounce depreciation rate as compared to the Greens Creek mine. Gold, lead, and zinc are by-products of the Company's silver production, the revenues from which are netted against production costs in the calculation of production cost per ounce of silver. Other operating expenses decreased by $0.9 million, or 22%, from the 1997 period to the 1998 period, due principally to a decrease in exploration expenditures of $1.3 million resulting from lower expenditures at Mexican exploration targets, partly offset by increased general and administrative costs of $0.2 million and an increase in the provision for closed operations and environmental matters of $0.1 million. Other income was $1.9 million in the 1998 period compared to $1.3 million in the 1997 period. The $0.6 million increase was primarily due to (1) a gain on sale of investments of $1.2 million in 1998 and (2) a decrease in miscellaneous expense of $0.2 million. These favorable items were partly offset by (1) a decrease in interest and other income of approximately $0.7 million, most notably from the 1997 gain on sale of an 8% interest in the Buckhorn Joint Venture in Nevada of $1.1 million, partly offset by a 1998 gain on sale of land located near the Coeur d'Alene office of $0.5 million and (2) increased net interest costs of -22-
23 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES $0.1 million. Total interest cost increased $0.3 million due to increased borrowing in 1998 under the Company's revolving and term loan facility than in 1997. Capitalized interest costs increased $0.2 million principally due to increased capitalized interest costs associated with the Lucky Friday expansion project. Income taxes decreased $1.0 million from a provision of $0.6 million in 1997 to a benefit of $0.4 million in the 1998 period. The benefit in 1998 relates principally to the carryback of certain environmental remediation expenditures for federal income tax purposes. FINANCIAL CONDITION AND LIQUIDITY A substantial portion of the Company's revenue is derived from the sale of products, the prices of which are affected by numerous factors beyond the Company's control. Prices may change dramatically in short periods of time and such changes have a significant effect on revenues, profits and liquidity of the Company. The Company is subject to many of the same inflationary pressures as the U.S. economy in general. The Company continues to implement cost-cutting measures in an effort to reduce per unit production costs. Management believes, however, that the Company may not be able to continue to offset the impact of inflation over the long term through cost reductions alone. However, the market prices for products produced by the Company have a much greater impact than inflation on the Company's revenues and profitability. Moreover, the discovery, development and acquisition of mineral properties are in many instances unpredictable events. Future metals prices, the success of exploration programs, changes in legal and regulatory requirements, and other property transactions can have a significant impact on the need for capital. At June 30, 1998, assets totaled approximately $261.0 million and shareholders' equity totaled approximately $162.3 million. Cash and cash equivalents increased by $2.3 million to $6.1 million at June 30, 1998 from $3.8 million at the end of 1997. -23-
24 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES During the first half of 1998, approximately $6.5 million of cash was provided by financing activities. The major source of cash was borrowings of long-term debt of $26.5 million. This source was partially offset by uses of cash, including repayments of long- term debt of $16.0 million, and payment of preferred stock dividends of $4.0 million. Operating activities provided approximately $0.6 million of cash during the first half of 1998. The primary sources of cash were from Rosebud, Greens Creek, La Choya, and the industrial minerals segment. Significant uses of cash included (1) a $10.3 million increase in accounts and notes receivable principally due to seasonal sales at MWCA and increased sales at Greens Creek, Lucky Friday, and the K-T Clay group and (2) $4.1 million for reclamation activities and other noncurrent liabilities. Principal noncash charges included depreciation, depletion, and amortization of approximately $10.4 million and provision for reclamation and closure costs of $0.3 million. The Company's investing activities used $4.8 million of cash during the first half of 1998. The most significant uses of cash were (1) additions to properties, plants, and equipment totaling $8.8 million, including significant additions at the Lucky Friday mine of $4.4 million, the industrial minerals segment of $2.1 million, the Greens Creek mine of $1.3 million, and other additions, including capitalized interest of $1.0 million; (2) the purchase of investments and increase in cash surrender value of life insurance required cash of approximately $0.6 million. These uses of cash were partly offset by (1) proceeds from disposition of properties, plants, and equipment during the first six months of 1998 totaling approximately $3.5 million, principally from sale of land located near the Company's corporate headquarters; (2) proceeds from the sale of investments of $1.2 million; and (3) the release of restricted investments ($0.7 million). The Company estimates that capital expenditures to be incurred during the remainder of 1998 will be approximately $8.7 million including capitalized interest costs of $0.4 million. These capital expenditures, excluding capitalized interest, consist -24-
25 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES primarily of (1) capitalized expenditures at the Company's industrial minerals operations totaling approximately $2.9 million; (2) capitalized expenditures at Greens Creek of $2.2 million; (3) development expenditures at the Lucky Friday expansion project expected to total approximately $1.9 million; and (4) other capitalized expenditures of $1.7 million. These planned capital expenditures are anticipated to be funded from operating activities, and amounts available under the revolving term loan credit facility. There can be no assurance that actual capitalized expenditures will be as projected based upon the uncertainties associated with capital expenditure estimates, the Company's ability to generate funds from operating activities, and the availability of amounts under the revolving term loan credit facility. The Company's estimate of its capital expenditure requirements assumes, with respect to the Greens Creek and Rosebud properties, that the Company's joint venture partners will not default with respect to their portion of development costs and capital expenditures. Pursuant to a Registration Statement filed with the Securities and Exchange Commission and declared effective in the third quarter of 1995, the Company can, at its option, issue debt securities, common shares, preferred shares or warrants in an amount not to exceed $100.0 million in the aggregate. To date, the Company has issued $48.4 million of the Company's common shares under the Registration Statement. At June 30, 1998, there was $22.5 million outstanding under the Company's $55.0 million revolving and term loan credit facility classified as long-term debt. The Company was in compliance with all restrictive covenants of the facility as of June 30, 1998. In addition to the borrowings under the Loan Facility, the Company also has outstanding $9.8 million aggregate principal amount of tax-exempt, solid waste disposal revenue bonds as of June 30, 1998. The amount available to borrow under the Loan Facility was reduced by the $9.8 million amount of tax-exempt, solid waste disposal bonds. At June 30, 1998, the Company had the ability to borrow approximately an additional $20.0 million under the Loan Facility. -25-
26 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES The Company's planned environmental and reclamation expenditures for the balance of 1998 are expected to be approximately $7.5 to $8.5 million, principally for environmental and reclamation activities at the Grouse Creek mine, the Bunker Hill Superfund site, the Republic mine, the Coeur d'Alene River Basin, the American Girl mine, the Yellow Pine mine, the Durita property, and the Cactus mine. As with any estimate of this nature, it is reasonably possible that the Company's estimate of environmental and reclamation expenditures may change. Exploration expenditures for the balance of 1998 are estimated to be approximately $2.5 to $3.0 million. The Company's exploration strategy is to focus further exploration at, or in the vicinity of, its currently owned domestic and foreign properties. Accordingly, domestic exploration expenditures will be incurred principally at the Greens Creek, Rosebud, and Lucky Friday mines. Foreign exploration efforts in 1998 will center primarily on targets in Mexico and South America. In the normal course of its business, the Company uses forward sales commitments and commodity put and call option contracts to manage its exposure to fluctuations in the prices of certain metals which it produces. Contract positions are designed to ensure that the Company will receive a defined minimum price for certain quantities of its production. Gains and losses, and the related costs paid or premium received, for contracts which hedge the sales prices of commodities are deferred and included in income as part of the hedged transaction. Revenues from the aforementioned contracts are recognized at the time contracts are closed out by delivery of the underlying commodity, or when the Company matches specific production to a contract. For contracts where the net position is settled in cash, revenues are recognized on the original settlement date of the contracts. The Company is exposed to certain losses, generally the amount by which the contract price exceeds the spot price of a commodity, in the event of nonperformance by the counterparties to these agreements. -26-
27 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES At June 30, 1998, the Company had forward sales commitments through June 30, 1999 for 6,000 ounces of gold at an average price of $354 per ounce. The estimated fair value of these forward sales commitments was $270,000 as of June 30, 1998. The London Final gold price at June 30, 1998, was $296. Additionally, at June 30, 1998, the Company had forward sales commitments through June 30, 1999 for 1,250,000 ounces of silver at an average price of $6.18. If the Company's forward silver sales commitments were closed on June 30, 1998, the estimated fair value of these commitments was approximately $728,000. The Handy & Harman silver price at June 30, 1998 was $5.38. The nature and purpose of the forward sales contracts, however, do not presently expose the Company to any significant net loss. All of the aforementioned contracts were designated as hedges as of June 30, 1998. As of June 30, 1998, the Company had settled 6,000 ounces of forward gold sales contracts with scheduled deliveries from July through December 1998. The Company received $347,000 upon settlement of these contracts and will recognize this revenue over the balance of 1998. The Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated (see Part II. Item 1. Legal Proceedings). Although the ultimate disposition of these matters and various other pending legal actions and claims is not presently determinable, it is the opinion of the Company's management, based upon the information available at this time, that the expected outcome of these suits and proceedings will not have a material adverse effect on the results of operations and financial condition of the Company and its subsidiaries. The Company utilizes software and related technologies throughout its business that will be affected by the "Year 2000 problem," which is common to many corporations, and concerns the inability of information systems, primarily computer software programs, to recognize and process date-sensitive information properly as the Year 2000 approaches. Evaluation of the Company's primary accounting system for the Year -27-
28 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES 2000 problem has been completed, and changes to the programs began in 1997 that are anticipated to be completed by the end of 1998. An internal study is currently under way to determine the full scope and related costs of the Year 2000 problem with respect to other systems the Company maintains to ensure that the Company's systems continue to meet its internal needs and those of its customers. As a part of the internal study, the Company is also addressing key vendors and customers to determine the impact, if any, on the Company's business. The internal study and the resulting work requirements of the study are expected to be completed by the end of 1998, although, there can be no assurance that all steps will be completed in a timely manner, until the full scope of the Year 2000 problem is evaluated. The Company currently does not believe that the Year 2000 problem will have a material impact on the Company's financial condition or results of operations. The Company currently estimates that the cost of evaluating and correcting Year 2000 problems will be in the range of $180,000 to $225,000, although the ultimate amount may be greater depending on the results of the aforementioned internal study. In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130), "Comprehensive Income," was issued. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented. The Company has applied this standard effective January 1, 1998. In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented. The Company does not expect the adoption of this standard to have a material impact on the -28-
29 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES financial condition or results of operations of the Company. In February 1998, Statement of Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued. SFAS 132 provides additional information to facilitate financial analysis and eliminates certain disclosures which are no longer useful. The statement also standardizes disclosure for retiree benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. The Company has applied this standard effective January 1, 1998. In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133). "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, however, earlier application of all of the provisions of this Statement is encouraged as of the beginning of any fiscal quarter. The Company does not believe the adoption of this standard will have a material impact on the financial condition or results of operations of the Company. -29-
30 PART II - OTHER INFORMATION HECLA MINING COMPANY and SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS - Bunker Hill In 1994, the Company, as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA or Superfund), entered into a Consent Decree with the Environmental Protection Agency (EPA) and the State of Idaho, concerning environmental remediation obligations at the Bunker Hill Superfund Site (Bunker Hill Site) located at Kellogg, Idaho. The Consent Decree settles the Company's response-cost liability under Superfund at the Bunker Hill Site. As of June 30, 1998, the Company has estimated and accrued an allowance for liability for remedial activity costs at the Bunker Hill Site of $6.6 million. These estimated expenditures are anticipated to be made over the next three to five years. As with any estimate of this nature, it is reasonably possible that the Company's estimate of this obligation may change in the near or longer term. Coeur d'Alene River Basin Natural Resource Damage Claims - Coeur d'Alene Tribe Claims In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit, under CERCLA, in Idaho Federal District Court against the Company and a number of other mining companies asserting claims for damages to natural resources downstream from the Bunker Hill Site over which the Tribe alleges some ownership or control. The Company answered the Tribe's complaint denying liability for natural resource damages. In October 1996, following a court imposed four-year stay of the proceeding, the Tribe's natural resource damage litigation was consolidated with the United States Natural Resources Damage litigation described below. - U.S. Government Claims In March 1996, the United States filed a lawsuit in Idaho Federal District Court against certain mining companies that conducted historic mining operations in the Silver Valley of northern Idaho, including the -30-
31 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES Company. The lawsuit asserts claims under CERCLA and the Clean Water Act and seeks recovery for alleged damages to or loss of natural resources located in the Coeur d'Alene River Basin (the Basin) in northern Idaho over which the United States asserts to be the trustee under CERCLA. The lawsuit asserts that the defendants' historic mining activity resulted in releases of hazardous substances and damaged natural resources within the Basin. The suit also seeks declaratory relief that the Company and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Basin outside the Bunker Hill Site. The Company answered the complaint in May 1996, denying liability to the United States under CERCLA and the Clean Water Act and asserted a counterclaim against the United States for the federal government's involvement in mining activity in the Basin which contributed to the releases and damages alleged by the United States. The Company believes it also has a number of defenses to the United States' claims. In October 1996, the Court consolidated the Coeur d'Alene Tribe Natural Resource Damage litigation with this lawsuit for discovery and other limited pretrial purposes. The case is proceeding through discovery. Summary judgment motions related to Federal Trusteeship of Natural Resources and the Statute of Limitations applicable to the federal government's natural resource damage claims are pending before the Court. In May 1998, the EPA announced that it had commenced a remedial investigation/feasibility study under CERCLA for the entire Basin, including Lake Coeur d'Alene, in support of its response cost claims asserted in its March 1996 lawsuit. - State of Idaho Claims In March 1996, the Company entered into an agreement (the Idaho Agreement) with the State of Idaho (State) pursuant to which the Company agreed to continue certain financial contributions to environmental cleanup work in the Basin being undertaken by a State Trustees group. In return, the State agreed not to sue the Company for damage to natural resources for which the State is a trustee for a period of five years, to pursue settlement with the Company of the State's -31-
32 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES natural resource damage claims and to grant the Company credit against any such State claims for all expenditures made under the Idaho Agreement and certain other Company contributions and expenditures for environmental cleanup in the Basin. At June 30, 1998, the Company's accrual for remediation activity in the Basin, not including the Bunker Hill Site, totaled approximately $0.6 million. These expenditures are anticipated to be made over the next three years. Depending on the results of the aforementioned lawsuits, it is reasonably possible that the Company's estimate of its obligation may change in the near or longer term. Insurance Coverage Litigation In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance companies which provided comprehensive general liability insurance coverage to the Company and its predecessors. The Company believes that the insurance companies have a duty to defend and indemnify the Company under their policies of insurance for all liabilities and claims asserted against the Company by the EPA and the Tribe under CERCLA related to the Bunker Hill Site and the Basin in northern Idaho. In 1992, the Court ruled that the primary insurance companies had a duty to defend the Company in the Tribe's lawsuit. During 1995 and 1996, the Company entered into settlement agreements with a number of the insurance carriers named in the litigation. The Company has received a total of approximately $7.2 million under the terms of the settlement agreements. Thirty percent of these settlements were paid to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill Site Consent Decree. Litigation is still pending against one insurer with trial continued until the underlying environmental claims against the Company are resolved or settled. The remaining insurer is providing the Company with a partial defense in all Basin environmental litigation. As of June 30, 1998, the Company had not reduced its accrual for reclamation and closure costs to reflect the receipt of any anticipated insurance proceeds. -32-
33 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters and the proceedings disclosed above, it is the opinion of the Company's management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, financial condition or cash flows of the Company. -33-
34 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES ITEM 4. ANNUAL MEETING OF SHAREHOLDERS At the annual meeting of shareholders held on May 8, 1998 the following matters were voted on by the Company's shareholders: Election of Three Directors: Votes Votes For Withheld ----- -------- Ted Crumley 42,765,487 2,223,749 ---------- --------- Charles L. McAlpine 42,769,004 2,220,232 ---------- --------- Jorge E. Ordonez C. 42,766,746 2,222,490 ---------- --------- Approval of selection of Coopers & Lybrand L.L.P. as the Company's Auditors for 1998 Votes Votes For Against Abstentions ----- ------- ----------- 44,522,781 248,979 217,476 ---------- ---------- ----------- -34-
35 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12 - Fixed Charge Coverage Ratio Calculation 13 - Second Quarter Report to Shareholders for the quarter ended June 30, 1998, for release dated August 4, 1998. 27 - Financial Data Schedule (b) Reports on Form 8-K None Items 2, 3, and 5 of Part II are omitted from this report as inapplicable. -35-
36 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 10, 1998 By /s/ Arthur Brown -------------------------------- Arthur Brown, Chairman, President and Chief Executive Officer Date: August 10, 1998 By /s/ Stanley E. Hilbert ------------------------------- S. E. Hilbert, Corporate Controller (Chief Accounting Officer) -36-
37 EXHIBIT INDEX Exhibit No. Description - -------- ---------------------- 12 Fixed Charge Coverage Ratio Calculation 13 Second Quarter Report to Shareholders for the quarter ended June 30, 1998, for release dated August 4, 1998 27 Financial Data Schedule -37-