ITEM 3 LEGAL PROCEEDINGS
During the third quarter of 1994, the Pacific Rivers Council and the Wilderness Society (collectively the "PRC"), in a lawsuit filed in Federal District Court in Idaho (Pacific Rivers Council v. Thomas), sought an injunction against all ongoing and future forest activities including mining, which may affect endangered salmon, within various national forests in Idaho including the Salmon National Forest in which the Beartrack property is located. In that lawsuit, the PRC sought to require the U.S. Forest Service to consult under the Endangered Species Act (the "Act") with the National Marine Fisheries Service ("NMFS") regarding existing land resource management plans for the subject forests and their potential impacts on endangered Snake River salmon. The government defendants and the plaintiffs have subsequently negotiated a stipulated dismissal of most of the lawsuit. Under the terms of the stipulation, the parties dismissed from this litigation all projects which have undergone site-specific consultation. The company's Beartrack mine was identified by the government defendants as a project for which consultation has been completed. The Court issued an Order on Pending Claims on December 11, 1995 regarding the remaining specified projects (not including the Beartrack mine) which have not yet completed consultation. Under the terms of that Order, the Court has retained jurisdiction in this lawsuit for further proceedings regarding those projects. The Beartrack mine is not subject to or a part of the Court's order.
In October 1994, the Sierra Club Legal Defense Fund, Inc. ("Sierra"), on behalf of certain other organizations, filed a lawsuit in Federal District Court for the Western District of Washington at Seattle against NMFS and other federal agencies for violation of the Act, alleging the NMFS' biological opinion failed to satisfy the requirements of the Act. Sierra, the federal agencies and the company, as intervenor, each filed a motion for summary judgment. In November 1995, the Court ordered the federal agencies to reinitiate consultation under Section 7 of the Act on the potential environmental impacts of the Beartrack mine project on endangered salmon or the designated critical habitat for salmon. The plaintiffs did not seek, and the Court did not impose, any injunction or other restriction on the operation of the Beartrack mine pending completion of such consultation. If, upon remand, the Forest Service were to determine that an activity associated with Beartrack mine operations could preclude the development of reasonable and prudent alternatives to the project pending completion of the reinitiated consultation, such activities could be required to cease pending completion of consultation. Under the Act's regulations, consultation must be completed within 135 days of the date consultation is initiated. An extension of 60 days can be imposed by the agencies. Under the relevant statutory and regulatory authorities, the results of a consultation can range from no impact on the activities under review on the one hand to modest to significant impacts on the other. In an extreme situation, a consultation could result in the cessation of activities altogether, a potential result the company believes to be remote in the case of the Beartrack mine, which has been in operation and production since mid-1995. The company believes that the ongoing operation of the Beartrack mine will not jeopardize endangered salmon or adversely modify or destroy designated critical habitat, and that upon completion of consultation, the mine will be permitted to continue operation.
On February 16, 1996, the company settled a dispute with a subcontractor on the Beartrack project. The subcontractor made claims against the prime contractor alleging overruns for work performed which exceeded the original estimated costs for the project by approximately $8 million. These claims were disputed by the prime contractor. Arbitration of the subcontractor's claims against the prime contractor was concluded, and the company agreed to pay a settlement of $3.1 million as part of the overall arbitrated settlement. The settlement will be charged to property, plant and equipment and depreciated over the remaining life of the Beartrack property.
The company sought and obtained from the U.S. Army Corps of Engineers (the "Corps") a permit authorizing dredging and filling of wetlands in connection with construction of the Beartrack mine under Section 404 of the Clean Water Act. That permit was set to expire on October 11, 1994. On June 16, 1994, the company sought an extension of the permit under applicable regulations. Under those regulations, the filing of a request for extension operates to extend the permit until the agency acts upon the request for extension. As of this time, the Corps has not taken action upon the company's request.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three months ended December 31, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of FMC Gold Company as of March 1, 1996, together with the offices in FMC Gold Company presently held by them, their business experience since January, 1991, and their ages are as follows:
Each of the company's executive officers has been employed by the company and/or by FMC Corporation for the past five years. No family relationship exists between any of the above-listed officers and there are no arrangements or understandings between any of them and any other persons pursuant to which they were selected as an officer. All officers are elected to hold office for one year or until their successors are elected and qualify.
PART II
ITEM 5
ITEM 5 MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal public trading market for FMC Gold common stock is the New York Stock Exchange. The quarterly high and low trading prices of FMC Gold common stock as reported on the New York Stock Exchange and cash dividends paid for years ended December 31, 1995 and 1994 are set forth in the table of Supplementary Data on page 31.
Year-end 1995 and 1994 market prices of FMC Gold shares were $4.125 and $3.125 respectively.
FMC Gold had 763 shareholders of record as of December 31, 1995.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data, as it relates to the years 1991 through 1995, has been derived from the consolidated financial statements of FMC Gold, including the consolidated balance sheets at December 31, 1995 and 1994 and the related consolidated statements of income and consolidated statements of cash flows for the three years ended December 31, 1995, and the notes thereto, appearing elsewhere herein.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
SALES AND EARNINGS
Sales decreased to $57.4 million from $63.4 million in 1994, reflecting the winding down of residual heap leach production at Paradise Peak and the July 1994 shutdown of Royal Mountain King, offset by the start-up of the Beartrack mine in July 1995 and slightly higher precious metals prices. Gold production declined 7 percent and silver production declined 82 percent. At Jerritt Canyon, the company's 30 percent share of gold production was even with 1994 production of 98,000 ounces as higher mill ore grades offset slightly lower throughput and recoveries. At Paradise Peak, gold production declined to 4,000 ounces in 1995 due to residual heap leaching. The Royal Mountain King mine was shut down in July 1994, producing 26,000 ounces of gold prior to closing. Partly offsetting the lost production at Paradise Peak and Royal Mountain King was the start up of the Beartrack mine, where gold production reached 49,000 ounces in 1995. Silver production in 1995 continued to decline to 27,000 ounces compared with 154,000 ounces in 1994, as the Paradise Peak heap leach operation came to a close.
The average realized price of gold increased to $389 per ounce from $384 in 1994, reflecting higher market prices and the benefit of hedging positions on gold production from Beartrack.
On November 30, 1995, the company sold the stock of FMC Paradise Peak Corporation to Arimetco, Inc. for $4.0 million and the assumption by Arimetco of all reclamation liabilities. The company recorded a pre-tax gain on the transaction of $1.7 million and reversed $4.5 million of accrued reclamation liability through cost of sales.
Cost of sales decreased to $51.0 million in 1995 from $53.8 million in 1994 due to lower cash mining and milling costs at Jerritt Canyon, the 1994 shutdown of Royal Mountain King and the reversal of the accrued reclamation costs at Paradise Peak. Partly offsetting these reductions was the incremental production cost at Beartrack. Average cash costs of production decreased to $221 per gold equivalent ounce from $246 in 1994, reflecting the addition of lower-cost production from Beartrack. Jerritt Canyon cash costs per gold equivalent ounce decreased to $250 from $283 due to lower mining and milling costs per ton. Beartrack cash costs per gold equivalent ounce were $166. Cash costs at Paradise Peak increased to $155 per gold equivalent ounce in 1995 from $124 in 1994 as costs were spread over significantly fewer ounces of production.
Exploration spending of $11.0 million in 1995 was virtually unchanged from $11.2 million in 1994. Spending was primarily focused on the El Penon project in northern Chile and the Rossi project on the Carlin Trend in Nevada. Selling, general and administrative expenses decreased to $5.2 million in 1995 from $6.6 million in 1994 due to lower allocated costs from FMC, and continued cost reduction efforts. Costs allocated from FMC are determined as a percentage of the company's revenues relative to FMC consolidated revenue, multiplied by FMC corporate overhead. See Note 12 to the company's consolidated financial statements. Interest income decreased to $5.9 million in 1995 from $8.7 million in 1994 due to lower cash balances on loans to FMC as well as lower interest rates.
Net income was $2.3 million in 1995 compared with net income of $0.2 million in 1994. The company recognized tax benefits of $4.5 million in 1995 associated the utilization of net operating loss carrybacks. The tax benefits were made available through the company's tax sharing agreement with FMC. Earnings per share were $0.03 for 1995 compared with break-even earnings per share in 1994.
TAXES
The company's 1995 tax provision includes a $4.5 million benefit associated with the utilization of tax benefits (operating loss carrybacks) made available through the company's tax sharing agreement with FMC. In 1994, depletion tax benefits and net operating loss carryover benefits were offset by increases to the valuation allowance to fully reserve deferred tax assets. In 1995, portions of these previously reserved deferred tax assets were recognized. The 1994 tax provision primarily reflected a prior-year adjustment to the company's foreign sales corporation tax benefits generated upon completion of the company's 1993 tax return.
LIQUIDITY AND CAPITAL RESOURCES
Cash to meet the company's operating needs, finance capital expenditures and fund exploration activities was provided from existing cash reserves (including loans to FMC). At December 31, 1995, cash and cash equivalents totaled $79.2 million, primarily in the form of loans to FMC, which have varying maturities and are payable on demand. As of December 31, 1995, FMC's cash on hand and available credit lines were more than adequate to allow repayment of these loans.
Capital expenditures decreased to $36.9 million in 1995 from $56.2 million in 1994. Capital expenditures in 1995 related to Beartrack were $25.1 million versus $48.0 million in 1994. In 1995, $11.9 million of mine development and equipment additions were made at Jerritt Canyon.
On December 31, 1995, the company paid a dividend on common stock of $0.05 per share to stockholders of record on December 7, 1995.
Expected cash requirements for 1996 include approximately $16.0 million for planned capital expenditures, primarily associated with mine development at Jerritt Canyon and ongoing project development at Beartrack. Exploration spending for 1996 is expected to approximate $7.9 million and $3.7 million is planned for dividends based on the current dividend rate. The company expects to fund these requirements from cash flow from operations and existing cash and cash equivalents. In addition, in the event that the ongoing strategic review process results in any significant proceeds from asset sales, it is possible that a distribution of such proceeds and some portion of existing cash balances may occur.
Should mine development at any of the company's existing properties prove beneficial, significant cash requirements may be necessary. The company believes that any unexpected cash requirements could be funded by existing cash reserves, loans due from FMC or borrowings from third parties.
OUTLOOK
Annual production is estimated to be approximately 200,000 ounces per year in 1996 and 1997 based upon continued operation of the Beartrack and Jerritt Canyon mines. This higher production level should further reduce cash costs per gold equivalent ounce and improve operating profitability in both years. The production from Beartrack will help offset a decline at Jerritt Canyon, where production through 1997 will primarily come from underground sources. Exploration at both the Chilean and Rossi properties has been successful in delineating mineralization.
As discussed in Note 13 to the consolidated financial statements, management is pursuing, in consultation with FMC, an ongoing strategic review process that may result in one or more transactions involving the company, some or all of its assets, or FMC's 80 percent equity interest in the company. See "1995 Developments" under Items 1 and 2 on page 7 for additional information regarding this process.
See Item 3 to Form 10-K on page 9 for a description of legal proceedings relating to the Beartrack mine and the company's assessment of risks related thereto.
1994 COMPARED WITH 1993
Sales decreased to $63.4 million from $118.9 million in 1993, reflecting the July 1994 shutdown of the mill at Royal Mountain King and heap-leach only production at Paradise Peak, offset slightly by higher precious metals prices. Gold production declined 49 percent and silver production declined 82 percent. At Paradise Peak, gold production declined to 39,000 ounces in 1994, due to the May 1993 mill shutdown and the winding down of the heap-leach operation. At Jerritt Canyon, the company's 30 percent share of gold production declined to 98,000 ounces due to lower ore grades and recoveries in both the ore- roasting process and the wet mill. The Royal Mountain King mine produced 26,000 ounces of gold in 1994, a 53 percent decrease from 1993. Silver production continued to decline in 1994, to 154,000 ounces compared with 863,000 ounces in 1993, with the winding down of the Paradise Peak heap-leach operation.
The average realized price of gold increased to $384 per ounce from $357 in 1993. Average realized silver prices rose to $5.29 per ounce from $3.94 per ounce in 1993. The company's average precious metal prices were essentially equal to commodity market averages.
Cost of sales decreased to $53.8 million in 1994 due to the mills shutdown at Paradise Peak and Royal Mountain King and a $4.0 million reversal of previously accrued reclamation expense. Of this amount, $2.8 million in previously accrued reclamation was reversed for Paradise Peak, and another $1.2 million was reversed for the Austin joint venture, which went out of production in 1989. The reversals were based on the latest estimates for total reclamation spending for these properties. Offsetting some of these cost reductions was an increase in Jerritt Canyon depletion expense of $4.8 million due to a deterioration of mineable tons in several open pits. Average cash costs of production increased to $246 per gold equivalent ounce from $194 in 1993, reflecting the exhaustion of low-cost mill ore at Paradise Peak. Cash costs at Paradise Peak increased to $124 per gold equivalent ounce in 1994, as costs were spread over fewer ounces produced. Royal Mountain King cash
costs per ounce declined to $296 from $336 in 1993 due to lower mining costs. Jerritt Canyon cash costs per gold equivalent ounce increased to $283 per ounce from $240 in 1993 due to a 9 percent decline in production and higher mining costs per ton.
Exploration spending declined to $11.2 million in 1994 as a result of the capitalization of $2.9 million of exploration spending at Jerritt Canyon, and slightly lower spending for grassroots programs. Selling, general and administrative expenses decreased slightly to $6.6 million in 1994, due to lower allocated costs from FMC, as well as continued cost reduction efforts. Costs allocated from FMC are determined as a percentage of the company's revenues relative to FMC consolidated revenue, multiplied by FMC Corporate overhead. See Note 12 to the company's consolidated financial statements. Interest income increased to $8.7 million in 1994 as improved interest rates on loans to FMC overcame the decrease in cash and cash equivalents that occurred in the second half of 1994 due to development spending at Beartrack.
Net income was $0.2 million in 1994 compared with net income of $9.3 million before the impact of write-downs and other charges in 1993. After $60.6 million of write-downs and other charges the company reported a net loss of $51.3 million in 1993. Earnings per share were break-even for 1994 compared with losses per share of $0.70 in 1993.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders, FMC Gold Company:
We have audited the consolidated balance sheets of FMC Gold Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FMC Gold Company and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah January 18, 1996
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements and related information have been prepared by management, which is responsible for the integrity and objectivity of that information. Where appropriate, they reflect estimates based on judgments of management. The statements have been prepared in conformity with accounting principles generally accepted in the United States. Financial information included elsewhere in this annual report is consistent with that contained in the consolidated financial statements.
FMC Gold maintains a system of internal control over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition which is designed to provide reasonable assurance as to the reliability of financial records and the safeguarding of such assets. The system is maintained by the selection and training of qualified personnel, by establishing and communicating sound accounting and business policies, and by an internal auditing program which constantly evaluates the adequacy and effectiveness of such internal controls, policies and procedures.
The Audit Committee of the Board of Directors, composed of outside directors of the company, inquires into the company's financial and accounting organization, accounting controls and the quality of financial reporting. The independent auditors and the internal auditors have free access to the Audit Committee to discuss their audits.
Jay A. Nutt Principal Accounting Officer
Alan L. Lowe Chief Financial Officer
Reno, Nevada January 18, 1996
FMC GOLD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
FMC GOLD COMPANY
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
FMC GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Supplemental disclosure of cash flow information:
Cash paid and (refunds received) for income taxes during 1995, 1994 and 1993 were $(2,857), $895 and $3,180, respectively.
See notes to consolidated financial statements.
FMC GOLD COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 PRINCIPAL ACCOUNTING POLICIES
Nature of Operations
FMC Gold Company ("FMC Gold" or "the company") is a producer of precious metals.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of FMC Gold Company and all majority-owned subsidiaries. The accounts of joint ventures in which the company holds an interest are consolidated on a pro rata basis. All significant intercompany accounts are eliminated in consolidation.
Revenue Recognition
Revenue is generally recognized upon shipment of gold and silver dore to third parties.
Cash and Cash Equivalents
Cash and cash equivalents consists of loans and amounts due from FMC Corporation ("FMC") less outstanding checks in excess of bank balances.
Loans due from FMC consist of three notes, with varying maturities, due upon demand. Terms and conditions of these loans are covered by the management services agreement between the company and FMC (Note 12).
As a result of the company's participation in FMC's centralized cash management system, the company reported a liability at December 31, 1995, 1994 and 1993 for outstanding checks in excess of bank balances due to the timing of cash transfers from FMC.
Inventories
Finished goods inventories are stated at the lower of the average cost or market, and include labor, materials, other production costs and depreciation. No inventory value is assigned to stockpiled ore or in-process material, except for certain stockpiled leach-pad ore where cost includes labor, materials and other production costs.
Property, Plant and Equipment
Property, plant and equipment, including development costs and capitalized interest associated with the construction of certain capital assets, is recorded at cost. Depreciation and amortization for financial reporting purposes is provided principally on the straight-line basis over the shorter of the estimated lives of the assets or the estimated proven and probable recoverable reserves. Some assets are depreciated on a units of production basis, with depreciation rates established according to estimated producible units at the time the assets are placed in service. Gains and losses are reflected in income upon sale or retirement of assets.
Maintenance and repairs are charged to expense in the year incurred. Expenditures that extend the useful life of property, plant and equipment or increase its productivity are capitalized.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mineral Exploration and Development Costs
Mineral exploration and preliminary development costs are expensed as incurred. Development costs applicable to mineralized properties deemed capable of commercial production are capitalized and then amortized over units of production.
Reclamation
Reclamation and shutdown costs to be incurred when mining operations are closed are estimated and accrued over the life of the mine.
Income Taxes
Deferred tax liabilities and assets are recognized for expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. The company is subject to a tax sharing agreement with FMC, which is further described in Note 8. The application of the tax sharing agreement does not materially affect the company's accounting for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109.
Forward Sales and Hedging
In order to minimize exposure to decreasing prices for portions of its gold production, the company has hedged future gold production by entering into contracts, such as fixed forward sales contracts and put options. Costs associated with the purchase of certain hedge instruments for open put options included in other assets were $3.4 million as of December 31, 1995 and $4.0 million as of December 31, 1994. These costs were deferred and are recognized in the period the revenues related to the hedged production are recorded.
Earnings Per Common Share
Earnings per common share are computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents (incentive plan shares) outstanding during the year (73,484,395 shares in 1995, 1994 and 1993).
Financial Instruments
The fair values of financial instruments (primarily short-term deposits) approximated their carrying values at December 31, 1995, 1994 and 1993. Fair values have been determined through information obtained from both market sources and management estimates.
Accounting Standards Not Adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" will be adopted by the company effective January 1, 1996. SFAS No. 121 establishes criteria for recognizing, measuring and disclosing impairments of long-lived assets. The company plans to adopt the new standard on January 1, 1996 but does not expect a significant impact on its consolidated financial position or results of operations at the date of adoption.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," also effective for fiscal years beginning after December 15, 1995. Upon adoption of SFAS No. 123, the company plans to continue its current accounting for employee stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, as permitted under SFAS No. 123, and, if material, to disclose the pro forma effect of the fair value accounting method in the notes to its consolidated financial statements.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2 ACQUISITIONS AND DIVESTITURES
On November 30, 1995, the company's 100 percent interest in Paradise Peak Corporation was sold to Arimetco, Inc. for $4 million in the form of cash and a note receivable, resulting in a $1.7 million gain on the sale of the assets and the reversal of $4.5 million of accrued reclamation liability through cost of sales.
In June 1994, the company agreed to purchase the remaining 14 percent interest in the Beartrack joint venture from MINEX for $6.0 million, bringing the company's ownership in the property to 100 percent. The first installment of $1.5 million was made to Minex in June, 1994. Another $1.5 million payment was made in June 1995, with the balance owed to Minex to be paid in $1.0 million installments in 1996 and 1997, and $0.5 million installments in 1998 and 1999.
In April 1993, the company purchased the remaining 50 percent interest in the Humboldt Gold Venture from TRE Management Company for $5.5 million, bringing the company's ownership interest in all gold and precious metal- bearing ores in the related property to 100 percent. The former Humboldt Gold Venture is targeting deep gold mineralization at the "Rossi Property" on the Carlin Gold Trend in Nevada.
NOTE 3 WRITE-DOWNS AND OTHER CHARGES
In December 1993, the company recorded a special charge of $60.6 million, or $0.82 per share. This charge included a write-down of $51.0 million for the Beartrack development property and related investments. The Beartrack property was acquired for stock in 1990. Gold prices did not increase as projected and, therefore, the book value of the property was written down to reflect the lower prices. As a result of improved prices and project economics, the company decided in May 1994 to invest $57 million to develop the project.
Also included in the December, 1993 special charge was $4.6 million associated with the write-down of fixed assets at the Royal Mountain King mine, which completed production in mid-1994. A charge of $5.0 million was also recorded at Paradise Peak for additional mine closure costs in 1994 and beyond. The Paradise Peak mill shut down in May, 1993.
NOTE 4 INVENTORIES
Inventories (at cost) consist of the following:
Gold and silver inventories are in the form of dore, which is suitable for delivery to precious metal treatment facilities. These inventories are generally sold to and further processed by these facilities into forms suitable for end uses.
Heap leach pad ore increased to $11.4 million at December 31, 1995, from $2.7 million at December 31, 1994. The increase represents the cost of loading ore on the heap leach pads at the Beartrack mine, and includes labor, materials and other production costs. Mining at the Beartrack operation commenced in August 1994, and at December 31, 1995 there were approximately 4.7 million tons of ore under leach containing approximately 113,000 ounces of gold.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
NOTE 6 ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities comprise the following:
NOTE 7 OTHER LONG-TERM LIABILITIES
Other long-term liabilities comprise the following:
Shutdown and reclamation accruals represent estimated costs of earthwork such as detoxification and recontouring, revegetation, and stabilization. Also included are heap-leach encapsulation and facility decommissioning costs.
In determining the estimated costs, the company considers such factors as changes in laws and regulations, the likelihood of additional permits being required, requirements under existing operating permits, and estimated operating costs. Such analyses are performed on an ongoing basis.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, accrued reclamation costs, including those identified in Note 6--Accrued and Other Liabilities, associated with Royal Mountain King were $5.2 million, Beartrack $0.7 million, Austin $0.3 million, and Jerritt Canyon $2.9 million. Reclamation spending at each of these facilities is expected to continue in 1996 and beyond.
NOTE 8 INCOME TAXES
On March 31, 1994, FMC increased its ownership interest in the company to 80 percent. Thereafter, the company agreed to be included in FMC's consolidated federal income tax return. Under a tax-sharing agreement, the company pays to FMC amounts generally equal to the tax the company would have been required to pay had it filed a separate return, and FMC pays to the company amounts generally equal to any tax benefits the company would have realized through carryover on a separate return basis.
For state tax purposes, the company generally continues to be included in FMC's combined returns. The tax-sharing agreement for periods beginning after April 1, 1994 provides that the company will be liable for the incremental impact the company has on FMC's state tax liability in states where FMC files combined returns. In addition, in the states where the company files separate state tax returns, the company is responsible for the tax due thereunder.
The company's management believes that all determinations under the agreements have been made in a manner that is fair and reasonable in the circumstances.
The provision (benefit) for income taxes is presented below. The 1995 benefit of $4.5 million resulted from tax benefits realized under the tax sharing agreement with FMC.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the company's deferred tax assets and liabilities are as follows:
The valuation allowance for deferred tax assets as of December 31, 1995 was $29.1 million. The net decrease in the allowance during 1995 of $1.7 million includes an increase in the allowance against benefits to be realized through loss carryforwards more than offset by the realization of benefits through loss carrybacks pursuant to the tax sharing agreement.
At December 31, 1995, the company has an AMT credit carryover of $12.8 million. Generally, this credit can be carried forward to offset regular tax to the extent it exceeds the AMT in a carryover year. During 1995, FMC Gold reduced its deferred asset for AMT by $3.3 million as a result of loss carrybacks allowed pursuant to the tax sharing agreement with FMC.
The effective income tax provision (benefit) differs from that computed by applying the applicable federal statutory rate of 35 percent for 1995 and 1994 and 34 percent for 1993 to income before taxes for the following reasons:
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9 EXPORT SALES AND SALES TO MAJOR CUSTOMERS
U.S. export sales to unaffiliated customers by destination of sale are as follows:
The company's products may be purchased and refined by several Canadian, European and domestic refiners. Sales to two refiners in 1995, three refiners in 1994, and four refiners in 1993 each represented 10 percent or more of consolidated sales. Specifically, sales to these companies amounted to $55.8 million in 1995, $62.8 million in 1994 and $118.5 million in 1993. The company believes that because there are several alternative refiners, each capable of refining the company's products, no adverse effect will result should any of the current refiners discontinue buying the company's products.
NOTE 10 EMPLOYEE PLANS
All company employees are covered by FMC's defined contribution postretirement health care and life insurance benefit program. The cost of these benefits is included in the allocation of overhead from FMC (Note 12). Employees, other than hourly employees at the Royal Mountain King operating mine, are included in FMC's employee thrift plan and funded retirement plan. Charges for these benefits were $0.2 million, $0.5 million and $1.1 million in 1995, 1994 and 1993, respectively, and are included in the costs paid under the management services agreement as discussed in Note 12. Hourly employees at Royal Mountain King participated in a separate thrift and stock purchase plan which is qualified under Section 401(k) of the Internal Revenue Code. Charges against income for contributions made to this plan were negligible in 1995, 1994 and 1993 and are included in the costs paid under the management services agreement discussed in Note 12. As of December 1995, there are 203 employees under this plan. The company has no pension obligations other than the payment of charges from FMC under the management services agreement.
In 1989, the stockholders approved the FMC Gold Company 1988 Long-Term Incentive Compensation Plan, which authorized the Board of Directors of the company (the Board) to grant awards, payable in the form of cash and non- qualified stock options, to key employees of the company if certain specified performance objectives were met over a four-year period ended December 31, 1991. The Board established as a base performance objective the discovery of a certain quantity of profitable gold reserves. The stock options granted in 1988 bear an exercise price ranging from $9.625 to $11.25, the fair market value at the date of grant, and expire May 6, 1998. During 1992, additional options for 223,000 shares of common stock were granted at an exercise price of $4.25 and with an expiration date of April 2007.
NOTE 11 COMMITMENTS AND CONTINGENT LIABILITIES
During the second quarter of 1994, the company purchased put options and entered into certain forward contracts in connection with gold production from the Beartrack property. The forward contracts were for 23,800 ounces of gold, deliverable between April 1995 and April 1996. The options were originally purchased for $4 million and provide the company the right to sell gold at an agreed-upon price. At December 31, 1995, the carrying value of the remaining options (at cost) was $3.4 million. The market values of the options as of December 31, 1995 and 1994 were approximately $2.8 million and $1.1 million, respectively. The cost of the options was recognized concurrently with the revenues related to the hedged production.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 the company held forward contracts for 10,500 ounces of gold. Contracts for 3,000 ounces expire January 31, 1996 with the remaining contracts for 7,500 ounces expiring April 30, 1996. The options are recorded in other assets and will be amortized in accordance with utilization. The options carry a strike price of $400 per ounce. The value of these options varies with changes in market prices of the commodity and management continually evaluates the desirability of exercise in relation to current market prices. The options expire according to the following schedule:
The company's mining operations and exploration activities are subject to various federal, state and local laws, and regulation governing protection of the environment. These laws are continually changing and, as a general matter, are becoming more restrictive. The company's policy is to conduct its business in a manner that safeguards public health and the environment. The company believes that its operations are in compliance with all applicable laws and regulations, and has no reason to believe that compliance problems exist at operations in which it holds a joint-venture interest. To comply with these federal, state and local laws, the company has made, and in the future will be required to make, capital and operating expenditures on environmental projects. However, the company currently has no environmental projects that will require substantial and extraordinary expenditures. Expenditures for environmental projects were not substantial in 1995, nor are they expected to be substantial in 1996.
The company leases office and warehouse space in Reno and Denver and various types of equipment (primarily mobile mining equipment at the Beartrack mine). Total rent expense under all leases amounted to $1.1 million, $0.5 million and $0.6 million for 1995, 1994 and 1993 respectively. Minimum future rentals under noncancellable leases aggregated approximately $9.8 million as of December 31, 1995, and are estimated to be payable $1.9 million in 1996, $1.8 million in 1997, $1.5 million in 1998, $1.5 million in 1999, $1.5 million in 2000, and $1.7 million beyond.
As discussed in Note 13, the company has hired financial advisers in connection with the possible sale of the company. Due to the possibility of a sale, selected employees were informed of severance benefits that would become available in the event of a change in control of the company, resulting in the loss of employment. Because it is unclear whether a sale will take place or how such a transaction may be structured, the company has not accrued severance benefits. Should a transaction be agreed upon, resulting in the company incurring severance costs, management estimates the cost of such benefits could be as much as $2.0 million, primarily covering employees based in Reno, Denver, and Chile.
The company has certain other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes that the probable resolution of such contingencies will not materially affect the financial position or results of operations of the company.
NOTE 12 RELATED PARTY TRANSACTIONS
At December 31, 1995, 80 percent of the outstanding common stock of the company was held by FMC.
Certain agreements exist between the company and FMC concerning income taxes (Note 8) and management services.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the management services agreement, the company will be charged at FMC's direct and indirect cost, including allocated overhead, for certain general, administrative and other services provided by FMC. Overhead allocations of $1.0 million, $1.6 million and $2.6 million in 1995, 1994 and 1993, respectively, are based generally on the level of company sales to aggregate FMC sales. The company's management believes that all determinations with respect to direct and indirect costs, including allocated overhead, have been made in a reasonable and consistent manner.
In addition, the agreement states that either the company or FMC may borrow up to $50 million from the other on a short-term basis. Borrowings exceeding $50 million are made upon the review and approval of the lending company. All such borrowings are payable on a demand basis and bear interest at a floating rate equal to FMC's current weighted average rate on its borrowings under its credit facilities, or its investing rate, for the relevant period. The company's management believes that any demand by FMC Gold for repayment of FMC's borrowings under the management services agreement is legally enforceable. During 1995, FMC decreased its total borrowings from the company by $39.5 million, ending the year with a balance of $80.8 million (consisting of three notes with varying maturities), and paid $5.7 million in interest at an average rate of 6.2 percent. During the year, the highest outstanding balance owed was $120.3 million. The company believes it has received an equal or better yield on its loans to FMC than it could have received from comparable investments and plans to continue this cash management arrangement in the future. The company is an unsecured creditor of FMC, and as such it receives the same treatment as any other FMC unsecured creditor. In the opinion of management, FMC's cash on hand and available credit lines at year- end were more than adequate to allow repayment of these loans.
The following schedule summarizes the activity of indebtedness to and from FMC in 1995, 1994 and 1993.
FMC GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) FMC is obligated under a $75 million issue of exchangeable senior subordinated debentures in Europe. The debentures bear interest at 6 3/4 percent and are exchangeable at $15 1/8 per share, subject to change as defined in the offering circular, into FMC Gold Company common stock currently held by FMC. If exchanged at $15 1/8, non-FMC ownership of the company would increase to 28 percent and FMC's ownership would be reduced to 72 percent.
The company purchases liquid sodium cyanide from the Alkali Chemicals Division of FMC. Such purchases amounted to $1.0 million, $1.9 million and $2.0 million in 1995, 1994 and 1993, respectively. Contracts are in effect to purchase sodium cyanide through 1996 for approximately $1.2 million. The purchases from FMC were transacted on terms no less favorable to the company than those which the company believes could have been obtained from an unaffiliated third party.
FMC, as controlling stockholder, will be able to control all decisions with respect to the use of cash generated by the company, including dividend policy. Any determination as to the use of cash generated by the company may be affected by factors related to FMC's cash requirements, which may differ from those of other stockholders of the company and may conflict with the use that the company would otherwise make of its cash, such as for new exploration or the funding of development activity. No such conflict is presently anticipated.
FMC has engaged in hedging transactions with respect to its portion of production of precious metals. FMC may engage in such transactions in the future for its own account as a means of offsetting the decline in the company's income that could result if gold prices should decrease.
NOTE 13 SUBSEQUENT EVENTS (UNAUDITED)
In September 1995, the company engaged the investment banking firm of CIBC Wood Gundy Securities Inc. ("Wood Gundy") to act as its financial adviser in connection with the possible sale of the company. On February 9, 1996, the company announced that it had determined that it will augment its previously- announced sale process to include a range of options based on current gold equity market conditions and interest in individual properties. The company is retaining J. P. Morgan & Co., Inc. to join Wood Gundy as financial advisers for this process. At this time, there can be no assurance as to whether any transaction will result from the company's work with Wood Gundy and J. P. Morgan & Co., Inc. or as to the value, timing or structure of any such transaction. Management's decisions with respect to the value or structure of a potential sale could have a material impact on the valuation of the company and its assets.
On February 16, 1996 the company settled a dispute with a subcontractor on the Beartrack project. The subcontractor made claims against the prime contractor alleging overruns for work performed which exceeded the original estimated costs for the project by approximately $8 million. These claims were disputed by the prime contractor. Arbitration of the subcontractor's claims against the prime contractor was concluded in February 1996, and the company agreed to pay a settlement of $3.1 million as part of the overall arbitrated settlement. The settlement will be charged to property, plant and equipment and depreciated over the remaining life of the Beartrack property.
SUPPLEMENTARY DATA
FMC GOLD COMPANY QUARTERLY RESULTS AND STOCK MARKET DATA
- -------- (1) Quarterly earnings per common share and net income (loss) may differ from the full-year amounts due to rounding.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable for the two-year period ended December 31, 1995.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is incorporated by reference to page 2 of FMC Gold's Proxy Statement dated March 26, 1996. Executive Officers of the Registrant are identified under Item 4 on page 10 of this Form 10-K.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to page 6 of FMC Gold's Proxy Statement dated March 26, 1996. The information related to Board Compensation is identified separately therein and is not incorporated herein.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF THE COMPANY
The information required by this item is incorporated by reference to page 3 of FMC Gold's Proxy Statement dated March 26, 1996.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to page 4 of FMC Gold's Proxy Statement dated March 26, 1996.
PART IV
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and Reports
See Index to Financial Statements and Supplementary Data on page 14.
Schedules not included in this 10-K have been omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits: See attached Index to Exhibits, page 34.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the three months ended December 31, 1995.
(c) Exhibits
See Index to Exhibits, page 34.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FMC Gold Company (Registrant)
Brian J. Kennedy President
/s/ Brian J. Kennedy By: ______________________________________ Brian J. Kennedy
Date: March 26, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
/s/ Alan L. Lowe *By ______________________________ March 26, 1996 Alan L. Lowe
INDEX TO EXHIBITS FILED WITH OR INCORPORATED BY REFERENCE INTO FORM 10-K OF FMC GOLD COMPANY FOR YEAR ENDED DECEMBER 31, 1995
- -------- * Indicates a compensatory plan or arrangement.