ITEM 3. LEGAL PROCEEDINGS
On July 19, 1994, the Company filed three separate actions in two United States District Courts against the United States Department of the Interior ("Interior") and the Secretary of the Interior ("Secretary") in connection with the issuance to the Company of first-half final certificates and patents under the Mining Law for unpatented mining claims held by the Company.
The two suits, Santa Fe Pacific Gold Corporation and Hospah Coal Company v. Bruce Babbitt, the United States Department of the Interior and the United States Bureau of Land Management, Case No. CV-N-94-476-HDM, and Santa Fe Pacific Gold Corporation v. Bruce Babbitt, the United States Department of the Interior, and the United States Bureau of Land Management, Case No. CV-N-94-477-ECR, seek the issuance of first-half final certificates for patent applications for which Interior and the Secretary had not issued first-half final certificates and the completion of the patenting process on unpatented mining claims for which a first-half final certificate had been issued involving unpatented mining claims held by the Company at the Twin Creeks Mine, the Lone Tree Mine, and the Mule Canyon Project. Even though the Mining Law confers upon the Company the full right to possess and mine gold and other locatable minerals from an unpatented mining claim, the Mining Law also entitles a mining claimant to purchase ownership of the fee title to the unpatented mining claim from the United States government, and it is the right to acquire fee title by patent that the Company seeks to enforce in these lawsuits.
The actions are equitable in nature and necessary, in the Company's opinion, to cause the issuance of first-half final certificates and patents for unpatented mining claims in a period of time consistent with historical practice under the Mining Law. The Company believes the Secretary and Interior have departed from historical practice in delaying the processing of the Company's patent applications.
The Secretary and Interior filed answers in these actions generally denying that the Company is entitled to the relief sought. The Secretary and Interior have not raised substantive defenses in any of the actions.
On a motion for summary judgment by the Company in one of the Nevada actions, the judge denied the motion without prejudice and allowed the company to proceed with discovery. However, the judge indicated that he would reconsider the Company's motion for summary judgment if first-half final certificates were not issued by April 1, 1995. Subsequently, the first-half final certificates involved in the case were issued. Nevertheless, Interior and the Secretary have moved to dismiss the Company's action on the basis of the holding of another judge in the United States District Court for the District of Nevada. On March 18, 1996, the District Court judge denied the Secretary's and Interior's motion. The Company was granted permission to file another motion for summary judgment in its favor and that motion has been decided adversely to the Company.
The second action has been transferred to the judge hearing, but has not been consolidated with, the action described above. The Secretary and Interior have resisted disclosing information and allowing depositions of certain government witnesses. The Company has made two motions to compel disclosure of this information, both of which have been granted by the magistrate judge. The Secretary and Interior appealed those decisions to the District Court judge who denied the appeal. Discovery can now be completed and, thereafter, a trial date will be set.
Settlement negotiations with the Secretary and Interior have been initiated by the Company.
On May 13, 1996, the Secretary issued patents to the Company for the mining claims covered by two of the thirteen patent applications at the Twin Creeks Mine which were the subjects of the two lawsuits and thereby conveyed title to approximately 373 acres. On June 3, 1996, the Secretary issued patents to the Company for the mining claims covered by another of the thirteen patent applications at the Twin Creeks Mine which were the subjects of the two lawsuits and thereby conveyed title to approximately 331 acres. The remaining ten patent applications at the Twin Creeks Mine encompass approximately 356 acres of unpatented lode mining claims and approximately 1,193 acres of unpatented mill site claims.
On December 6, 1996, a Company stockholder filed a shareholder's class action complaint (MCKEWON V. BATCHELDER, C.A. No. 15406) against the Company and the Company's Board of Directors (collectively, "Defendants") in the Court of Chancery of the State of Delaware ("Court of Chancery"). The same day, two other Company stockholders filed two separate, but similar, class action complaints against the Company and the Company's Board of Directors in the Court of Chancery, and on December 9, 1996, three more Company stockholders (collectively with the three previously mentioned stockholder, the "Plaintiffs") filed three additional separate, but similar, class action complaints against the Company and the Company's Board of Directors in the Court of Chancery (STEINER V. JAMES, C.A. No. 15407; ARTHUR V. BATCHELDER, C.A. No. 15409; FIELDEN V. JAMES, C.A. No. 15411; BRONZAFT V. JAMES, C. A. No. 15412; and BURT V. JAMES, C.A. No. 15413). To date, the Defendants have been served only with the MCKEWON complaint.
On January 6, 1997, the Defendants moved to dismiss the MCKEWON complaint and also moved to stay discovery pending resolution of the motion to dismiss. On January 7, 1997, the Plaintiffs informed the Defendants that there was no need to comply with the Plaintiffs' First Request For Production Of Documents filed on December 31, 1996. On January 22, 1997, the Court of Chancery entered an order consolidating the six actions into one action captioned IN RE SANTA FE PACIFIC GOLD CORPORATION SHAREHOLDERS LITIGATION, Cons. C.A. No. 15406. The Order of Consolidation states that papers need only be filed in Civil Action No. 15406 (MCKEWON) and that the Plaintiffs shall file a consolidated amended complaint as soon as practicable.
The MCKEWON complaint alleges, among other things, that the members of the Company's Board of Directors breached their fiduciary duties to the Company stockholders by failing to fully consider the Newmont proposal made on December 5, 1996, The other complaints filed on December 6, 1996 and December 9, 1996, make similar allegations. The FIELDEN and BURT complaints also allege that the members of the Company's Board of Directors approved the Homestake transaction to ensure that certain of the Defendants would retain their positions. The MCKEWON action seeks, among other things, to have the Court order the Defendants to take various actions to cooperate with any entity or person interested in proposing a transaction with the Company and to act to maximize shareholder value, and seeks unspecified damages.
The Company intends to defend against the Plaintiffs' allegations.
The Company is not a party to any litigation or administrative proceeding that the Company believes would have a material adverse effect on its results of operations or financial condition and is not aware of any threat of such litigation or proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company, par value $0.01 ("Common Stock"), is listed on the New York Stock Exchange and first became available for public trading upon effectiveness of the initial public offering of the Common Stock on June 16, 1994. The high and low sales prices for the Common Stock on the New York Stock Exchange were as follows:
The Company paid a dividend of $0.05 per share of Common Stock in June 1996 and 1995. The Company's dividend policy is reviewed periodically by the Board of Directors. Declaration and payment of cash dividends will depend upon the assessment of the Board of Directors of the Company's financial condition, earnings and funds from operations, the level of its capital and exploration expenditures, its future business prospects and such other matters as the Board of Directors deems relevant. Accordingly, there can be no assurance that dividends will actually be paid in future periods.
On January 26, 1995, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right ("Right" or "Rights") to stockholders of record as of February 13, 1995, for each outstanding share of Common Stock. Each Right will entitle the holder thereof, upon the occurrence of certain events, to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01, at a price of $50, subject to adjustment ("Purchase Price"). Until the occurrence of certain specified events, the Rights will be evidenced only by the Common Stock certificates (and the Summary of Stockholder Rights Plan distributed to stockholders) and will not be transferable separately from the Common Stock. The terms and provisions of the Rights are set forth in the Rights Agreement entered into between the Company and Harris Trust and Savings Bank, as Rights Agent, which agreement is incorporated as an Exhibit hereto by reference.
In the event that any person (other than the Company, its affiliates or any person receiving newly-issued shares of Common Stock directly from the Company) acquires, or obtains the right to acquire, beneficial ownership of 15% or more of the then outstanding Common Stock ("Acquiring Person"), each holder of a Right (other than such Acquiring Person) will thereafter have the right to receive, upon exercise at the then current Purchase Price, Common Stock having a value equal to two times the Purchase Price. In the event that the Company is merged into another corporation or 50% or more of the Company's assets or earning power are sold, each holder of a Right will thereafter have the right to receive, upon exercise at the then current Purchase Price, common stock of the acquiring or surviving corporation having a value equal to two times the Purchase Price. The Rights may be redeemed by the Company for $0.01 per Right, payable in cash, stock or other consideration, at any time prior to the date that a person becomes an Acquiring Person. The Rights are subject to exchange in certain events. The Rights, if not previously exercised, redeemed or exchanged, will expire on February 13, 2005.
Since the Rights Agreement has been amended to provide that Newmont is not an Acquiring Person, a distribution of Rights certificates under the Rights plan is not contemplated at this time.
As of March 17, 1997, there were approximately 48,000 holders of record of the Company's Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND PER OUNCE DATA)
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1 Reflects acquisition of the Chimney Creek Mine and the Mesquite Mine in an asset exchange as of June 25, 1993 and the commencement of refractory ore processing at the Lone Tree Mine in February 1994.
2 Excludes development expenditures which have been capitalized.
3 Per share data for the years 1992 and 1993 are based on 112.2 million shares, which represented shares previously owned by SFP, after giving effect to a 1.122 million-for-1 stock split, which was declared on February 22, 1994.
4 Net income in 1993 includes $142.0 million ($1.26 per share) from discontinued operations, including a $117.2 million ($1.04 per share) noncash gain on an asset exchange; 1992 net income includes $34.4 million ($0.31 per share) from discontinued operations, $0.3 million gain on early retirement of debt and $2.0 million expense for the cumulative effect of a change in accounting for postretirement benefits.
5 Increase in 1993 attributable to assets acquired in an asset exchange; increases in 1995 and 1996 primarily related to capital expansion projects at the Twin Creeks Mine and the Lone Tree Complex as well as increases in deferred mining costs due to the timing of mining activities in relation to the production of gold.
6 Net cash used in 1992 related primarily to net principal payments on borrowings and gold loans and dividends paid to SFP, whereas 1993 net cash provided is related primarily to the net $54 million borrowings to finance the Lone Tree sulfide expansion project. Net cash used in 1994 is attributable to principal payments on borrowings and gold loans and dividends to SFP, partially offset by net proceeds from the Company's initial public offering. 1995 and 1996 net cash provided primarily attributable to the Company's issuance of $200 million of 8.375% senior debentures in July 1995 and $255,000 proceeds from borrowings in 1996, which were used for various capital expansion projects at the Twin Creeks Mine and the Lone Tree Complex.
7 Gold loans represent the gold bullion portion of bank project financings for the Twin Creeks Mine in 1989 and 1990 and the Lone Tree Mine in 1991. In 1994, project financings were repaid and long-term debt was reduced with a portion of net proceeds from the initial public offerings. Increase in long- term debt in 1993 is primarily attributable to borrowings to finance the Lone Tree Mine sulfide expansion project. In July 1995, the Company issued $200 million of 8.375% senior debentures, a portion of the proceeds from which were used to repay bank credit facility debt. During 1996, additional borrowings were used for various capital expansion projects at the Twin Creeks Mine and the Lone Tree Complex.
8 Cash dividends per share exclude dividends paid to SFP during the years 1992 through 1994. The Company was a subsidiary of SFP through September 1994.
9 Increase in 1993 attributable to the $117.2 million after-tax, noncash gain relating to an asset exchange; and increase in 1994 to net proceeds received from the initial public offering.
10 Represents the average of the afternoon fixing prices for gold on the London Bullion Market ("London P.M. Fix") for the year.
11 Represents per ounce production cost information in the format developed by the Gold Institute. Amounts for 1992 through 1995 have been restated to reflect the Gold Institute format. Cash costs of production include cash costs of processing, general and administrative expenses at the mine site (including overhead, taxes other than income, royalties, and credits for silver by-products) and the applicable portion of deferred mining cash costs that benefit current production. Noncash costs of production include depreciation, depletion and amortization and final reclamation accruals. Total costs of production per ounce differs from operating expenses and depreciation, depletion and amortization on the Consolidated Statement of Operations due to differences between ounces produced and ounces sold during the respective periods.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein as well as the data set forth in "Selected Financial and Operating Data."
RECENT DEVELOPMENTS AND OUTLOOK
MERGER AGREEMENT
On December 8, 1996, the Company entered into a definitive merger agreement with Homestake Mining Company ("Homestake") and a subsidiary of Homestake, under which the subsidiary of Homestake was to merge with and into the Company and each outstanding share of Company common stock was to be converted into the right to receive 1.115 Homestake common shares, subject to, among other things, shareholder and regulatory approvals. On January 7, 1997, Newmont Mining Corporation ("Newmont") announced an offer, subject to certain conditions, to exchange 0.40 of a share of Newmont common stock for each outstanding share of Company common stock. On January 13, 1997, the Company announced that it planned to meet with Newmont to discuss its proposal for a business combination so that any future actions are consistent with and advance the best interests of the Company's stockholders.
In the interest of providing the best value opportunity to its shareholders, the Company's Board of Directors invited Newmont and Homestake to make presentations on March 8, 1997. After discussions with both companies, the Company's Board of Directors determined that the merger proposal with Newmont included a superior exchange ratio (0.43) and offered a compelling fit, substantial and improved synergies and significant long-range potential for the Company's shareholders. On March 10, 1997, the merger agreement with Homestake was terminated and the Company entered into a merger agreement with Newmont. Under the Newmont agreement, each share of Company common stock will be exchanged for 0.43 share of Newmont common stock. The Newmont merger is subject to the approval of both the Company shareholders and Newmont shareholders, as well as other customary conditions. The merger, which is expected to be tax-free to Company shareholders and to be accounted for as a pooling of interests, is expected to close during the second quarter of 1997.
EXPANSION AND DEVELOPMENT PROJECTS
TWIN CREEKS MINE. In late 1994, the Company commenced implementation of a project to expand the operations at the Twin Creeks Mine to include mining and processing of refractory sulfide ores, which represent approximately 68% of the 11.0 million contained ounces of reserves at the Twin Creeks Mine ("Twin Creeks Sulfide Project"). The cost of the Twin Creeks Sulfide Project is estimated at approximately $250 million which is being spent over a four-year period, and as of December 31, 1996, $191.0 million had been spent. Plans include a two-phase project with two autoclaves. The required plan of operations was approved by the BLM on January 22, 1997. The first of the two autoclaves was scheduled for start-up in the first quarter of 1997. Commissioning of the autoclave began in March 1997, when some over heating of the shell within the vapor zone areas occurred. Repairs to or replacement of some of the brick lining inside the autoclave will be required, which could delay commissioning into the second quarter of 1997.
LONE TREE MINE. During 1995, the Company began engineering and design work on a flotation mill for the processing of lower-grade refractory ores at the Lone Tree Mine. The gold recovery rates for such ores using heap-leaching techniques were estimated at approximately 25%. The Company has developed a proprietary flotation technique which is expected to improve recovery rates of the lower-grade refractory ores to 80%-90%. Construction of the flotation mill began during the first half of 1996. The cost of the
flotation mill is approximately $40 million and as of December 31, 1996, approximately $27 million had been spent. The mill is expected to begin production by the second quarter of 1997.
In the Company's proprietary flotation process, sulfide mineralization, with which gold is associated, is concentrated and separated from other material present in the ore. The resulting concentrates contain higher percentages of gold in substantially smaller volumes of material, which can then be economically processed for gold recovery. Current plans include processing a portion of these concentrates through the existing Lone Tree Mine autoclave, and the remainder through the Twin Creeks Sulfide Project autoclave.
TRENTON CANYON MINE. In May 1995, the Company commenced development of the Trenton Canyon Mine, which is located 11 miles south of the Lone Tree Mine and which had proven and probable reserves of 590,000 contained ounces of gold at December 31, 1995. As of December 31, 1996, reserves at the Trenton Canyon Mine were increased to 742,000 contained ounces of gold. Construction commenced in the fourth quarter of 1995, the Company began placing ore onto the leach pads in October 1996 and gold production commenced in December 1996. Gold-loaded carbon is transported to the Lone Tree Mine for final processing. Capital expenditures for the Trenton Canyon Mine as of December 31, 1996, were approximately $27 million.
MULE CANYON MINE. Construction of the Mule Canyon Mine was initiated in early 1996 and will continue into 1997. Capital expenditures for the development of the Mule Canyon Mine are expected to be approximately $35 million and at December 31, 1996, approximately $18 million had been spent. Mining operations began on October 29, 1996, after the approval of the plan of operations, following completion of an EIS. Shipments of Mule Canyon ore to the Lone Tree Mine commenced in early November 1996 and gold production began in late November 1996 The Mule Canyon Mine is expected to produce approximately 100,000 ounces of gold in 1997. Mule Canyon ore is expected to be processed at both the Lone Tree Mine and the Twin Creeks Mine, upon commissioning of the Twin Creeks Mine autoclave.
ROSEBUD MINE. In May 1996, the Company agreed to enter into a 50/50 limited liability company with Hecla Mining Company ("Hecla") for the joint development of the Rosebud Mine. The agreement was finalized in September 1996. The Rosebud Mine is an underground, high-grade oxide gold deposit located approximately 55 miles west of Winnemucca, Nevada. Construction of the surface facilities and infrastructure commenced in August 1996. The limited liability company plans to transport ore from the Rosebud Mine to the Twin Creeks Mine for processing, subject to approval of required permit modifications. The Company will fund $12.5 million for mine development as well as certain modifications to the Twin Creeks Mine south mill facility. Completion of development and commencement of commercial production is expected in the second quarter of 1997.
GOLD PRICES AND PRICE-PROTECTION
The Company uses a variety of commodity instruments to minimize the effect of declines in the market price for gold on its results of operations for a period of time. The use of such instruments, however, may prevent the Company from fully participating in subsequent increases in the market price for gold.
The Company's average realized price per ounce has exceeded the average annual London P.M. Fix for each of the last five years as summarized below:
Commodity instruments used by the Company may include gold borrowings, fixed forward sales contracts, forward sales contracts made on a spot deferred basis ("spot deferred contracts") and purchased put and written call options contracts in combination. Under normal circumstances, counterparties under spot deferred contracts allow the Company to defer delivery of gold to a later date, if necessary, at the original contract price plus the prevailing interest-like premium.
The Company's price-protection policy allows the sale of increasing quantities of gold in the forward market as the market price for gold increases above historical averages and restricts such sales as the market price for gold decreases relative to such averages. This policy also prohibits speculative trading of commodity instruments, requires the use of creditworthy counterparties and limits the Company's maximum spot deferred position. Authority to enter into commodity instruments is vested in a limited number of officers of the Company. Additionally, monthly summaries of commodity instrument activity are provided to the Company's Board of Directors.
At December 31, 1996, the Company had spot deferred contracts for approximately 1.7 million ounces of gold relating to production during the period January 1997 - September 1998 at sales prices ranging from $386 - $438 per ounce or a weighted average price of $416 per ounce. The Company also had purchased put options on 1.2 million ounces at an exercise price of $375 per ounce and written call options on 0.4 million ounces at an exercise price of $464 per ounce. The put and call options expire on a monthly basis throughout 1997. If the options are in the money at the date of expiration, the Company may convert the options into spot deferred contracts for delivery at some date in the future, receive or pay cash for the difference between the option exercise and market prices on that date or deliver gold against the contracts and receive the option exercise price per ounce.
COSTS OF PRODUCTION
In 1996 and 1995, the Company's average cash costs of production per ounce were $215 and $194, respectively. These costs compare with 1995 average cash costs of production per ounce for the industry in the United States and worldwide of $224 and $257, respectively, based on the most recently available published industry data. The Company anticipates that its average cash costs of production from its current mines will continue to increase in 1997 and thereafter as greater proportions of gold production are expected to be derived from refractory sulfide ore rather than the more easily processed oxide ore that has previously been the predominant type of ore processed by the Company. As of December 31, 1996, approximately 66% of the Company's reserves are refractory mill ore. The Company will seek to reduce the effects of cost increases through further improvements in its equipment, technology, and the efficiency of its gold production activities. There can be no assurance, however, that the Company will continue to be able to meet its objective of maintaining lower than industry average gold production costs. Certain mining costs and depreciation, depletion and amortization costs are charged to production over the life of a mine, on the basis of its reserves. Because the determination of reserves includes an assumption about the price of gold, significant changes in gold prices will affect the Company's stated reserves and production costs by increasing or decreasing the life of each mine and, therefore, the rate at which these costs are charged to production.
LAWS AND REGULATIONS
The Company's mining operations and exploration activities in the United States are subject to extensive federal, state and local laws and regulations governing exploration, development, production, exports, taxes, labor standards, occupational health, waste disposal, protection and remediation of the environment, reclamation, mine safety, toxic substances and other matters. Compliance with such laws and regulations has increased the costs of exploration, planning, designing, drilling, developing, constructing, operating and closing the Company's mines and other facilities. It is possible that the costs and delays associated with compliance with such laws and regulations could become such that the Company would not proceed with the development or operation of a mine.
The Company has expended significant financial and managerial resources to comply with environmental-protection regulations and permitting requirements and anticipates that it will continue to do so in the future. Although the Company believes that its operations and facilities comply in all material respects with applicable environmental-protection regulations, there can be no assurance that additional significant costs will not be incurred to comply with current and future environmental-protection laws, regulations and enforcement policies thereunder. Additionally, claims for damages to property and persons resulting from the Company's operations could result in substantial costs in the future.
Reform of the General Mining Law of 1872 ("Mining Law") has been an issue of substantial debate in the Congress in recent years. Because of the uncertainty surrounding passage of reform legislation, the Company cannot predict the actual effect that any such legislation may have on the Company's results of operations or financial condition, or on its ability to conduct exploration and mine development activities on a timely basis on federal lands. Approximately 71% of the Company's reserves at December 31, 1996, were located on private mineral rights, approximately 25% on federal land controlled by the Company through unpatented mining claims with first-half final certificates and approximately 4% on unpatented mining claims without first-half final certificates.
Certain appeals have been filed with the Department of Interior Board of Land Appeals in conjunction with the Twin Creeks EIS, the Lone Tree Mine Plan of Operations and the Mule Canyon Mine Plan of Operations. These appeals seek to impose mitigation and other conditions on the mine operations. The Company has intervened and does not believe that such appeals have merit. An unfavorable outcome of such appeals, however, could result in additional conditions on operations which may have a material adverse effect on the Company's financial position or results of operations.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net income was $21.1 million ($0.16 per share) in 1996 compared to $39.8 million ($0.30 per share) in 1995. The decrease in net income of $18.7 million resulted from lower operating income of $21.3 million, higher interest expense of $3.9 million, lower other income, net of $1.6 million, partially offset by lower income taxes of $8.1 million. Lower operating income resulted primarily from higher costs of sales and from merger and restructuring expenses incurred during 1996.
Operating revenue was $343.2 million in 1996, $7.2 million lower than 1995. Lower operating revenue resulted from lower sales volumes, which reduced operating revenue by $12.9 million, partially offset by higher average realized prices per ounce in 1996 , which increased operating revenue by $4.7 million, and higher royalty and other revenue of $1.0 million. Gold sales totalled 820,000 ounces in 1996, 32,000 ounces less than the 852,000 sold in 1995. The decrease in ounces sold resulted from lower production volumes from the Lone Tree Complex and from the timing of gold sales from the Twin Creeks Mine, where 1996 production exceeded 1995 production by 35,000 ounces. Lower production from the Lone Tree Complex was due to a delay in receiving the approval of the plan of operations for mining in the Lone Tree Mine Section 14, which resulted in lower average ore grades to the heap leach circuits during 1996. Lower gold
sales at the Twin Creeks Mine resulted from an in-process inventory increase related to the start-up of the oxide circuit of the new Sage Mill.
Total costs and expenses were $300.4 million, $14.1 million higher than the $286.3 million reported in 1995. Higher costs and expenses include higher operating expenses of $13.8 million, merger and restructuring expenses of $5.4 million, partially offset by lower exploration and development expenses of $2.3 million, lower depreciation, depletion and amortization of $2.6 million and lower general and administrative expenses of $0.2 million. Higher operating expenses resulted from higher cash costs of production. Average cash costs of production increased to $215 per ounce in 1996 from $194 per ounce in 1995 primarily as a result of an increased use of reagents and consumables at the Lone Tree Complex resulting from a higher sulfide content ore placed on the heap leach pads and higher mining costs at the Mesquite Mine due to the higher mining ratio in 1996 compared to 1995, which resulted in the acceleration of the charge-out of deferred mining costs. Merger and restructuring expenses in 1996 resulted from costs associated with the proposed merger with Homestake and from severance costs associated with management's decision to restructure the Company's operations, whether or not a merger occurs.
Exploration and development expenses for 1996 totalled $32.9 million, compared to $35.2 million in 1995. Approximately 57% and 51% of exploration expenses related to foreign exploration projects in 1996 and 1995, respectively.
Interest expense increased $3.9 million due to interest associated with the $200.0 million Senior Debentures (described below) issued in July 1995 and increased borrowings on the Company's credit facility, partially offset by an increase in capitalized interest in 1996 compared to 1995. Increased borrowings were used to fund capital expansion programs.
The Company's effective tax rate was approximately 29% in both 1996 and 1995. Lower income taxes in 1996 resulted from lower income before taxes in 1996 compared to 1995.
1995 COMPARED TO 1994
Net income was $39.8 million ($0.30 per share) in 1995 compared to $56.7 million ($0.46 per share) in 1994. The weighted average number of shares outstanding increased to 131.4 million in 1995 from 122.7 million in 1994 as a result of the initial public offerings in June 1994. The decrease in net income of $16.9 million resulted from lower operating income of $19.4 million and higher interest expense of $1.9 million, partially offset by lower income taxes of $3.1 million and $1.3 million higher other income, net. Lower operating income resulted from lower sales volumes and higher cost of sales, partially offset by higher average realized prices.
Operating revenue was $25.2 million lower in 1995 than in 1994. Lower sales volumes resulted in approximately $31.1 million lower gold sales revenue, however, higher average realized prices per ounce resulted in approximately $6.3 million higher gold sales revenue in 1995 compared to 1994. Gold sales totalled 852,000 ounces in 1995, 78,000 ounces less than the 930,000 ounces sold in 1994. This decrease in ounces sold resulted from lower production volumes from the Twin Creeks Mine and from the Mesquite Mine. Lower production from the Twin Creeks Mine resulted from the pit wall slide that occurred in December 1994. Lower production from the Mesquite Mine resulted primarily from lower average ore grades.
Total costs and expenses decreased from $292.1 million in 1994 to $286.3 million in 1995. Operating expenses decreased $2.7 million and depreciation, depletion and amortization decreased $8.3 million, due to lower sales volumes, partially offset by higher costs of production per ounce. Average cash costs of production increased from $182 per ounce in 1994 to $194 per ounce in 1995 primarily as a result of lower production volumes.
Exploration and development expenses for 1995 totaled $35.2 million, $2.9 million higher than the amount expended in 1994, reflecting the Company's increased foreign exploration activity. Approximately 51% and 25% of exploration and development expenses related to foreign projects in 1995 and 1994, respectively.
In 1995, general and administrative expenses of $16.6 million were $2.3 million higher than in 1994, primarily as a result of higher legal and consulting fees related to foreign activities and other expenses related to the Company's status as an independent and public entity.
Other income, net increased $1.3 million in 1995 compared to 1994 due to higher interest income, related to higher cash balances resulting from the issuance of the Senior Debentures (described below), and to increased surplus property sales.
Interest expense increased to $10.7 million in 1995 from $8.8 million in 1994, principally due to higher outstanding indebtedness and higher interest rates during the second half of 1995 resulting from the $200.0 million of Senior Debentures (described below) issued by the Company in July 1995.
Income taxes decreased from $20.0 million in 1994 to $16.8 million in 1995 primarily as a result of decreased pre-tax income. The Company's effective tax rate increased from 26.1% in 1994 to 29.7% in 1995 as a result of lower depletion deductions related to lower gold sales and to increased foreign exploration expenses which are not currently deductible for federal income tax purposes.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1996, the Company's cash flows provided by operating activities were $65.2 million. These cash flows and approximately $255 million in borrowings from the Credit Facility (described below) were used for capital expenditures of $257.2 million, deferred mining costs of $52.4 million and dividend payments of $6.6 million. The increase in deferred mining costs in 1996 was due to the timing of mining activities in relation to the production of gold.
Capital expenditures during 1996 included $129.4 million for the Twin Creeks Sulfide Project, $25.8 million for the Lone Tree Mine flotation project, $16.8 for the Mule Canyon Mine, $13.1 million for the Rosebud Mine, $11.0 million for the Trenton Canyon Mine, $9.7 million for development drilling, $11.2 million for capitalized interest, $8.5 million for exploration and information systems capital and $31.7 million for dewatering and other ongoing mine capital requirements.
During the year ended December 31, 1995, the Company's cash flows provided by operating activities were $105.0 million. These cash flows, together with approximately $200 million in proceeds from the Senior Debentures (described below), were used for capital expenditures of $162.5 million, deferred mining costs of $42.9 million, loan repayments net of borrowings of $90.0 million and dividend payments of $6.6 million. Capital expenditures during 1995 included ongoing capital requirements of $46.4 million, $11.8 million and $4.5 million at the Twin Creeks Mine, the Lone Tree Mine and the Mesquite Mine, respectively, $53.3 million for the Twin Creeks Sulfide Project, $19.3 million for the Trenton Canyon Project and Mule Canyon Project, $10.0 million for development drilling at existing mines and $14.7 million for other corporate capital requirements, primarily related to information systems.
For the year ended December 31, 1994, the Company's cash flows provided by operating activities were $134.7 million. These cash flows were used for capital expenditures of $77.2 million, deferred mining costs of $17.7 million, loan repayments net of borrowings of $20.2 million and dividends of $13.5 million to the Company's former parent, Santa Fe Pacific Corporation ("SFP"), prior to the initial public offerings in June 1994. Net proceeds from the initial public offerings were $250.5 million and were used to repay all outstanding indebtedness under project financings ($60.0 million of borrowings and $133.4 million of principal payments on gold loans), to pay SFP $20.0 million for liabilities related to the asset exchange and to reduce borrowings under the October 1, 1993 credit agreement ("Credit Agreement") by $35.0 million. Capital expenditures during 1994 included $11.8 million for the Lone Tree Mine expansion and mill facility, $9.6 million for the Twin Creeks Sulfide Project, $10.7 million for development drilling at its existing mines, $8.9 million for the Mule Canyon and Trenton Canyon projects and $23.6 million,
$4.7 million and $3.9 million for ongoing capital requirements at the Twin Creeks Mine, the Lone Tree Mine and the Mesquite Mine, respectively.
The Company's estimate of 1997 capital expenditures is approximately $152 million. Capital requirements at the Twin Creeks Mine (including the Twin Creeks Sulfide Project), the Lone Tree Complex (including the flotation mill), the Mesquite Mine, and the Rosebud Mine are expected to total approximately $86 million, $41 million, $18 million and $3 million, respectively. Also included in the 1997 capital budget is approximately $4 million related to exploration capital requirements.
On October 1, 1993, the Company entered into a $190.0 million unsecured, revolving credit facility, which was replaced on March 30, 1995, with a $400.0 million unsecured, five-year revolving credit facility involving several commercial banks ("Credit Facility"). Interest rates under the Credit Facility vary depending on the interest options chosen by the Company as well as other factors, but are generally tied to margins over interest rate alternatives (LIBOR, CD or gold funding rates). The Company is also required to pay a facility fee which ranges from 0.145% to 0.3750 per annum on the aggregate amount of the commitments. As of December 31, 1996, indebtedness of $255.0 million was outstanding under the Credit Facility. The lenders' commitments under the Credit Facility terminate on April 26, 2001, at which time any outstanding indebtedness must be repaid.
The Credit Facility, as amended, contains certain financial covenants which include limitations on the incurrence of additional debt, the maintenance of a minimum tangible net worth and the maintenance of a minimum ratio of operating cash flow to consolidated debt. The Company currently believes that it will be able to comply with the covenants contained in the Credit Facility. At December 31, 1996, the Company was in compliance with the terms of all debt covenants.
In conjunction with the termination of the Homestake merger agreement, the Company paid to Homestake a $65.0 million termination fee. As a result of this payment, certain covenants under the Credit Facility were amended and the Company's ability to pay annual dividends was restricted to $1.5 million.
The Company is in the process of arranging a $50,000,000 revolving credit facility with Morgan Guaranty Trust Company of New York and The Chase Manhattan Bank to provide borrowing capacity in addition to the Company's existing $400,000,000 revolving credit facility. The $50,000,000 credit facility is expected to be in place on or around March 31, 1997.
On July 5, 1995, the Company issued $200.0 million of 8.375% senior debentures maturing July 1, 2005 ("Senior Debentures"). The Senior Debentures are not redeemable prior to maturity. A portion of the net proceeds obtained from the issuance of the Senior Debentures was used to repay $130.0 million of outstanding debt under the Credit Facility. The remaining proceeds have been used for capital expenditures and general corporate purposes. Interest payments on the Senior Debentures will be $16.8 million annually through 2004 and $8.4 million in 2005.
The Internal Revenue Service has examined Federal income tax returns through 1992, and all years prior to 1986 are closed. Issues relating to the years 1986 to 1992 are being contested through various stages of administrative appeal. In addition, the Company has various state income tax returns in the process of examination or administrative appeal. Management believes that adequate provision has been made for any adjustment which might be assessed for open years through 1996.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Shareholders of Santa Fe Pacific Gold Corporation:
The accompanying consolidated financial statements of Santa Fe Pacific Gold Corporation and its wholly-owned subsidiaries ("Company") were prepared by management, who is responsible for their integrity and objectivity. They were prepared in accordance with generally accepted accounting principles and properly include amounts that are based on management's best judgments and estimates. Other financial information included in this annual report is consistent with that in the consolidated financial statements.
The Company maintains a system of internal accounting controls, supported by adequate documentation, to provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Limitations exist in any system of internal accounting control based upon the recognition that the cost of the system should not exceed the benefit derived. The Company believes its system of internal accounting control appropriately balances the cost/benefit relationship.
Independent accountants and the internal auditor provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting control and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the consolidated financial statements.
The Board of Directors pursues its responsibility for the Company's financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. The Audit Committee meets regularly with management, the independent accountants, and the internal auditor. The independent accountants and the internal auditor have direct access to the Audit Committee, with and without the presence of management representatives, to discuss the scope and results of their audit work and their comments on the adequacy of internal accounting controls and the quality of financial reporting.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Santa Fe Pacific Gold Corporation:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Santa Fe Pacific Gold Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP Phoenix, Arizona February 1, 1997, except for the fifth paragraph of Note 1, which is as of March 10, 1997
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part these financial statements.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Santa Fe Pacific Gold Corporation and its wholly-owned subsidiaries ("Company") engages in the mining and processing of gold in the United States and controls mineral properties, and conducts exploration and development of gold properties worldwide. Exploration expenses related to foreign projects represented approximately 57%, 51%, and 25% of total exploration and development expenses in 1996, 1995, and 1994, respectively, and were incurred primarily in North and South America, Central Asia and West Africa.
The Company is not economically dependent on a limited number of customers for the sale of its product because gold commodity markets are well-established worldwide. During 1996, four customers accounted for $48.8 million, $43.6 million, $36.4 million and $33.9 million of gold sales, respectively, each of which represented more than 10% of gold sales and together accounted for approximately 48% of total gold sales. In 1995, sales to four customers accounted for $76.6 million, $67.9 million, $46.4 million and $40.5 million, respectively, or approximately 67% of total gold sales. In 1994, sales to three customers accounted for $65.0 million, $49.9 million and $47.5 million, respectively, or approximately 44% of total gold sales. There were no export sales during 1996, 1995 or 1994.
Prior to June 23, 1994, the Company was a wholly-owned subsidiary of Santa Fe Pacific Corporation ("SFP"). On June 23, 1994, the Company completed an initial public offering of 19.2 million shares (14.6%) of its common stock ("Offering") resulting in net proceeds of $250.5 million, after commissions and related expenses. The net proceeds from the Offering were used primarily to repay all outstanding indebtedness under bank project financings, for the repayment of other indebtedness, and for working capital which included the repayment of $20.0 million to SFP arising from liabilities related to discontinued operations. On September 30, 1994, SFP distributed all of the outstanding shares of common stock of the Company held by SFP to holders of SFP's common stock prior to the distribution ("Spin-Off").
On December 8, 1996, the Company entered into a definitive merger agreement with Homestake Mining Company ("Homestake") and a subsidiary of Homestake, under which the subsidiary of Homestake will merge with and into the Company and each outstanding share of Company common stock will be converted into the right to receive 1.115 Homestake common shares, subject to, among other things, shareholder and regulatory approvals. On January 7, 1997, Newmont Mining Corporation ("Newmont") announced an offer, subject to certain conditions, to exchange 0.40 of a share of Newmont common stock for each outstanding share of Company common stock. On January 13, 1997, the Company announced that it planned to meet with Newmont to discuss its proposal for a business combination so that any future actions are consistent with and advance the best interests of the Company's stockholders. The Company has held and may in the future hold discussions with Homestake regarding the Homestake merger agreement and with Newmont regarding its proposal. No assurances can be given that any particular course of action will result from these communications. Merger and restructuring expenses in 1996 includes $3.0 million relating to professional fees and other costs associated with the Homestake merger agreement.
The Company's Board of Directors invited Newmont and Homestake to make presentations to them on March 8, 1997. After discussions with both companies, the Company's Board of Directors determined that the merger proposal with Newmont included a superior exchange ratio and offered a compelling fit, substantial and improved synergies and significant long-range potential for the Company's shareholders. On March 10, 1997, the merger agreement with Homestake was terminated and the Company entered into a merger agreement with Newmont. Under the Newmont agreement, each share of Company common stock will be exchanged for 0.43 share of Newmont common stock. The Newmont merger is subject to the
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY (CONTINUED) approval of both the Company shareholders and Newmont shareholders, as well as other customary conditions. The merger, which is expected to be tax-free to Company shareholders and to be accounted for as a pooling of interests, is expected to close during the second quarter of 1997. In conjunction with the termination of the Homestake merger agreement, the Company paid to Homestake a termination fee of $65.0 million. As a result of this payment, certain covenants under the Credit Facility were amended and the Company's ability to pay annual dividends was restricted to $1.5 million.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Santa Fe Pacific Gold Corporation and its wholly-owned subsidiaries. Interests in mining joint ventures are reported using the proportional consolidation method. All significant intercompany balances and transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company estimates its proven and probable gold reserves on an annual basis using an assumed gold price per ounce ($400 per ounce at December 31, 1996 and 1995.) An independent engineering firm is then engaged to verify the Company's reserves estimates. Although a significant decrease in estimated reserves is not anticipated, such a decrease could impact the Company's ability to recover the recorded amounts of inventories, deferred mining costs and property, plant and equipment.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
DEFERRED MINING COSTS
Cash and noncash mining costs are deferred and charged to operating expenses when the related gold is sold based on the estimated mining ratio for the life of each mine. The estimated mining ratio represents total tons of material estimated to be mined to total ounces of gold estimated to be recovered. Deferred mining costs are classified as either current or long-term assets depending on the period in which such costs are expected to be charged to operating expenses.
INVENTORIES
Inventories are valued at the lower of average cost or market.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include interest capitalized during construction of $11.2 million, $2.6 million and $0.4 million in 1996, 1995 and 1994, respectively. Additions and replacements are capitalized while expenditures for maintenance and repairs are charged to operating expenses. Mobile equipment and heap-leach pads are depreciated on a straight-line basis over estimated useful lives ranging from two to eight years. All other equipment and facilities are depreciated using the units-of-production method based on estimated ounces of gold to be recovered from proven and probable ore reserves or total tons to be mined. Depletion of operating mineral properties is computed using the units-of-production method based on estimated ounces of gold to be recovered from proven and probable ore reserves. Gain or loss is recognized with respect to property sold or retired.
EXPLORATION AND DEVELOPMENT COSTS
Exploration and development costs incurred prior to the determination of the feasibility of mining operations are charged to expense as incurred. Development expenditures incurred subsequent to such determination and to increase production or extend the life of existing mines are capitalized and amortized on a units-of-production basis. Ongoing development costs at producing properties to maintain production are generally charged to expense as incurred.
ASSET IMPAIRMENT
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future cash flows on an undiscounted basis is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future cash flows on a discounted basis to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates may have a material effect on the Company's financial position and results of operations.
MINE RECLAMATION
Estimated costs of final reclamation are accrued on a units-of-production basis over the expected life of each mine based on current environmental and regulatory requirements. Ongoing reclamation expenditures are expensed as incurred.
REVENUE RECOGNITION
Revenue is recognized when gold is shipped to customers.
PRICE-PROTECTION PROGRAM
In an effort to minimize exposure to fluctuations in the market price of gold, the Company may utilize a variety of commodity instruments including gold borrowings, forward sales contracts and purchased put and written call options. The Company does not acquire, hold or issue commodity instruments for trading or speculative purposes.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Proceeds from the sale of borrowed gold are recorded as gold loans at the average price realized. As gold is delivered from production in repayment of the borrowed gold, gold sales revenue is recognized at the average price realized and the gold loan balance is reduced. If gold borrowings are repaid in advance of the original repayment schedule, the resulting gain or loss is deferred and recognized in gold sales revenue over the original repayment schedule. Accrued liabilities at December 31, 1996 and 1995 includes $1.5 million of deferred revenue relating to the repayment of gold loans in 1994 in advance of the original repayment schedule. Other long-term liabilities includes deferred revenue of $3.6 million and $5.2 million at December 31, 1996 and 1995, respectively, relating to such repayments.
Forward sales contracts enable the Company to deliver a specified number of ounces of gold to a counterparty at a specified price and date. Under normal circumstances, counterparties under spot deferred contracts allow the Company to defer delivery of gold to a later date, if necessary, at the original contract price plus the prevailing interest-like premium. Revenue relating to deliveries under forward sales contracts is recognized in gold sales at the applicable contract price when the gold is delivered to the counterparty. Forward sales contracts are not reflected in the consolidated balance sheet; however, the Company evaluates its outstanding commitments under such contracts for lower of cost or market considerations.
The Company purchased put options to establish a floor under a portion of its anticipated future production. The Company simultaneously wrote call options on a portion of the same production, thereby establishing a range around a portion of its future production at no net cost. If the market price for gold falls within the range established by the options at the applicable expiration date, the options for that period will expire unexercised with no effect on the Company. If the options are in the money at the expiration date, the Company will either convert the options into spot deferred contracts for delivery at some date in the future; receive or pay cash for the difference between the option and the market prices on that date; or deliver gold against the contracts. If the Company elects to close out the options for cash, the related gain or loss will be deferred and recognized in gold sales revenue during the applicable future production period.
INCOME TAXES
The Company follows the liability method of accounting for income taxes whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement amounts and the tax bases of certain assets and liabilities.
EMPLOYEE BENEFIT PLANS
Pension costs are determined using the projected unit credit actuarial method. Pension plans are funded through annual contributions. In addition, the Company provides medical and life insurance benefits for certain retired employees and accrues the cost of such benefits over the period in which employees become eligible for the benefits. The costs of the post-retirement medical and life insurance benefits are paid at the time the services are provided. Medical benefits are provided under the Company's self-insured program while life insurance benefits are covered by an insurance program provided and administered by an independent insurance carrier.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK COMPENSATION
The Company measures compensation cost relating to employee stock options using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
ENVIRONMENTAL EXPENDITURES
Environmental expenditures are expensed or capitalized depending on their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. The Company's estimates of these costs are based upon currently available facts, existing technology, and presently enacted laws and regulations. Costs of future expenditures for environmental remediation are not discounted to their present value; such costs are based on management's current estimate of amounts that are expected to be incurred when the remediation work is performed within current laws and regulations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The possibility of recovery of some of these costs from insurance companies or other parties exists; however, the Company does not recognize these recoveries in its financial statements until they become probable. The Company's obligation for environmental remediation costs is insignificant.
INCOME PER COMMON SHARE
Income per common share amounts are computed by dividing the net income for the period by the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents include shares issuable under stock option plans using the treasury stock method. Common share equivalents are excluded from the computation if their effect is anti-dilutive.
RECLASSIFICATIONS
Certain amounts have been reclassified in prior-year presentations to conform to the current year presentation.
NOTE 3--INVENTORIES
Inventories as of December 31 consisted of the following:
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
NOTE 5--ACCRUED LIABILITIES
Accrued liabilities as of December 31 consisted of the following:
NOTE 6--LONG-TERM DEBT
Long-term debt as of December 31 consisted of the following:
SENIOR DEBENTURES
On July 5, 1995, the Company issued $200.0 million of 8.375% Senior Debentures ("Debentures") maturing on July 1, 2005. The Debentures were priced at 99.928% to yield 8.386% and are not redeemable prior to maturity. The Company used a portion of the net proceeds to repay the $130.0 million of debt outstanding at June 30, 1995, under the Credit Facility. The remaining proceeds were substantially used for capital expenditures and general corporate purposes. The costs related to the issuance of the Debentures
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LONG-TERM DEBT (CONTINUED) were capitalized and are amortized to interest expense over the term of the Debentures. The fair value of the Company's Debentures approximates their carrying value.
CREDIT FACILITY
On October 1, 1993, the Company entered into a $190.0 million unsecured, revolving credit facility which was replaced on March 30, 1995, with a $400.0 million unsecured, five-year revolving credit facility involving several commercial banks ("Credit Facility"). Interest rates under the Credit Facility vary depending on the interest options chosen by the Company as well as other factors, but generally are tied to margins over the following interest rate alternatives: LIBOR, CD, or gold funding. The interest rate on borrowings outstanding at December 31, 1996, was 6.1%. The Company is also required to pay a facility fee which ranges from 0.145% to 0.3750% per annum on the aggregate amount of the commitments. The lenders' commitment under the Credit Facility terminates on April 26, 2001, at which time any outstanding indebtedness must be repaid. The fair value of amounts outstanding under the Credit Facility approximates the related carrying value.
The Credit Facility, as amended, contains certain financial covenants which include limitations on the incurrence of additional debt, the maintenance of a minimum tangible net worth and the maintenance of a minimum ratio of operating cash flow to consolidated debt. The Company currently believes that it will be able to comply with the covenants contained in the Credit Facility and that its ability to pay dividends will not be impeded. At December 31, 1996, the Company was in compliance with the terms of all debt covenants.
NOTE 7--SHAREHOLDERS' EQUITY
The Company had 500.0 million authorized shares of common stock (par value $0.01) of which 131.5 million and 131.4 million shares were outstanding at December 31, 1996 and 1995, respectively. Also authorized are 50.0 million shares of preferred stock with a par value of $0.01, none of which was outstanding at December 31, 1996 or 1995.
The Board of Directors declared a dividend of $0.05 per common share in 1996 and 1995, which resulted in total dividend payments of $6.6 million in both years.
In January 1995, the Company adopted a Stockholder Rights Plan, the rights under which are represented by the Company's common stock certificates. These rights become exercisable by the shareholder if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or publicly announces its intention to commence a tender or exchange offer that would result in a beneficial ownership of 15% or more. The Company may redeem the rights at $0.01 each at any time before a buyer acquires 15% of the Company's voting stock.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES
The provision for income taxes for the years ended December 31 is as follows:
Income taxes as reflected in the consolidated statement of operations differ from amounts computed by applying the statutory federal corporate tax rate to income before income taxes as follows:
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED) Principal temporary differences that gave rise to the net deferred tax liability at December 31 were as follows:
At December 31, 1996, the Company had net operating loss carryforwards of $64.2 million for regular tax purposes which begin to expire in 2010, and minimum tax credit carryforwards of $28.0 million which are unlimited as to expiration. Should the Company experience an ownership change as defined by Section 382(g) of the Internal Revenue Code, the annual amount of net operating loss carryforward utilization may be limited.
The Company was included in SFP's consolidated federal income tax returns through September 30, 1994 ("Disaffiliation Date"), in accordance with an Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among Members of the Santa Fe Pacific Corporation Affiliated Group ("Tax Sharing Agreement") between SFP and its subsidiaries. Pursuant to the Tax Sharing Agreement, the Company computed its income tax provision on a separate return basis and paid to SFP amounts approximating the federal income tax liability it would have paid if the Company was an independent consolidated group. The Tax Sharing Agreement is applicable to all periods preceding the Disaffiliation Date, therefore additional payments to SFP could be required for adjustments which might be assessed if there is an audit which affects the computation of amounts paid to SFP for open years between 1986 and the Disaffiliation Date. Similar tax sharing agreements relating to certain state income or franchise tax returns for which SFP files on a combined or consolidated basis are also in effect. As a result of the Spin-Off, SFP and the Company have entered into an Agreement Concerning Taxes which modifies or supplements certain provisions of the Tax Sharing Agreement. The terms of the Agreement Concerning Taxes are not expected to change the Company's determination of income tax assets or liabilities prior to the Disaffiliation Date.
The Internal Revenue Service has examined Federal income tax returns through 1992, and all years prior to 1986 are closed. Issues relating to the years 1986 to 1992 are being contested through various stages of administrative appeal. In addition, the Company has various state income tax returns in the process of examination or administrative appeal. Management believes that adequate provision has been made for any adjustment which might be assessed for open years through 1996.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--OTHER INCOME, NET
Other income, net for the years ended December 31 consisted of the following:
NOTE 10--STOCK OPTION PLANS
LONG-TERM INCENTIVE STOCK PLAN
Effective May 25, 1995, the Company adopted a Long-Term Incentive Stock Plan ("Stock Plan") under which certain salaried employees of the Company may receive awards in the form of restricted stock, stock options, stock appreciation rights and other stock-based compensation. The Stock Plan will remain in effect for five years and is anticipated to result in the cumulative issuance of less than 5% of the Company's total outstanding shares as of January 1, 1995.
Pursuant to the Stock Plan, stock options may be granted to any salaried employee of the Company. Once granted, the options become exercisable during an option period of three years with one-third of the total options vesting on or after the first, second and third anniversary, respectively, of the grant date. The exercise price is generally equal to the fair market price of the Company's common stock on the date of the grant and the option exercise period may not exceed ten years from the grant date. At December 31, 1996, stock options covering 707,145 shares and 717,823 shares were outstanding at an exercise price of $12.38 and $14.00, respectively, which represented the market value on the date of grant.
Changes in 1996 and 1995 in stock options outstanding were as follows:
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
If the Company had elected to recognize compensation costs based on the fair value of the options at the grant date as prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", net income and income per common share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
Under the Stock Plan, restricted stock is used to implement the Bonus Stock Program operated in conjunction with the Company's Incentive Compensation Program. Eligible employees may elect to forgo up to 50% of their individual annual cash incentive compensation in exchange for restricted stock equivalent to 150% of the forgone cash award. Each eligible employee must make this election prior to a specified date in the year in which the cash award would be earned. The number of shares awarded is based on the fair market value of the Company's stock on February 15 following the year in which the incentive compensation is earned. Vesting occurs three years from the grant date. Restricted stock consists of shares of common stock that are issued to the grantee, but held by the Company during the restriction period and are subject to forfeiture based on tenure requirements. Dividends and voting rights on these securities accrue to the grantee, but the securities may not be sold, pledged, assigned, transferred or encumbered during the period of restriction.
Changes in the number of restricted shares during 1996 and 1995 were as follows:
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS (CONTINUED) PHANTOM STOCK PLAN
Effective July 1, 1993, the Company adopted the Phantom Stock Plan which enables the administration committee under the Phantom Stock Plan ("Committee") to grant Phantom Stock Options of Phantom Stock (as defined in the Phantom Stock Plan) to those individuals that the Committee believes are responsible for the Company's growth and profitability. Option awards, which vest one-third per year, entitle the recipient to receive cash for the difference between the Share Value (as defined in the Phantom Stock Plan) at the date of grant and the Share Value at the date of exercise less applicable withholding taxes. The cost of the Phantom Stock Plan is accrued over the vesting period.
At December 31, 1996 and 1995, 473,533 and 939,431 Phantom Stock Options, respectively, were outstanding. The base price per share was between $10.56 and $14.13 depending on the date of grant. Phantom Stock Plan expense was $3.7 million in 1996 and no expense was recorded in 1995. Accrued Liabilities at December 31, 1996 and 1995 included $2.2 million and $1.4 million, respectively, related to Phantom Stock Options.
DIRECTOR'S STOCK COMPENSATION PLAN
In May 1996, the stockholders approved the Directors' Stock Compensation Plan ("Plan") under which each Eligible Director shall be granted a stock award for each quarter. Each director shall be the full owner of shares of stock granted and shall have all the rights of a stockholder. No more than 1,200 shares of stock may be awarded to a director under the Plan for any Plan year. The Plan will terminate on March 31, 2001, and the number of shares of stock which may be issued thereunder shall not exceed 200,000 shares in the aggregate. During 1996, 7,200 shares were issued under the Plan, which resulted in compensation expense of $0.1 million.
During 1996, a director of the Company who is Chairman of the Executive and Policy Committee, received an option to acquire 50,000 shares of Common Stock under the Plan at a price of $15.375 per share, which was equal to the average of the high and low prices of a share of Common Stock on the New York Stock Exchange on March 1, 1996. The option may be exercised as to 25,000 shares on or after March 1, 1997, if the director continues as an Eligible Director until that date; the remaining 25,000 shares may be exercised on or after March 1, 1998, if the director continues as an Eligible Director until that date.
NOTE 11--PENSION PLANS
Prior to the Spin-Off, all salaried employees of the Company were included with employees of certain other SFP affiliates in a number of pension plans, the most significant of which was the trusteed noncontributory Santa Fe Pacific Corporation Retirement Plan ("SFP Plan"). On October 1, 1994, the Company established a defined benefit pension plan, the trusteed noncontributory Santa Fe Pacific Gold Corporation Retirement Plan ("Retirement Plan") for the benefit of its salaried employees. The Retirement Plan provides benefits similar to those provided under the SFP Plan. Initial funding for the Retirement Plan was provided by a transfer of assets from the SFP Plan in an amount equivalent to the Company's proportionate share of the accumulated benefit obligation for persons covered as of the transfer date as well as an allocation of excess assets in the SFP Plan.
The Retirement Plan complies with the Employee Retirement Income Security Act of 1974 ("ERISA") requirements and covers substantially all officers and salaried employees of the Company. Benefits payable under the Retirement Plan are based on years of service and compensation during the
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--PENSION PLANS (CONTINUED) sixty highest paid consecutive months of service during the ten years immediately preceding retirement. The Company's funding policy is to contribute annually not less than the ERISA minimum, and not more than the maximum amount deductible for income tax purposes. Retirement Plan assets are invested in common stock, U.S. government securities and money market mutual funds.
Plan assets and liabilities are measured at October 1. A reconciliation of the funded status of the Retirement Plan with amounts recorded is as follows:
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--OTHER POST-RETIREMENT BENEFITS
The Company provides health care and life insurance benefits for certain retired employees. Covered employees become eligible for these benefits at retirement after meeting minimum age and service requirements.
The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. The plan also contains fixed deductible, coinsurance and out-of-pocket limitations. The medical plan was amended in 1992 to provide for the annual adjustment of retiree contributions. The life insurance plan is noncontributory and covers retirees only.
As of June 1994, salaried employees who have rendered ten years of service after attaining age 45 are eligible for both medical benefits and life insurance coverage during retirement (collectively, the "Plans"). Prior to June 1994, salaried employees who had attained age 55 and rendered ten years of service were eligible for such benefits. This change in eligibility requirements resulted in a $0.9 million pre-tax curtailment gain in 1994 relating to employees who are not currently eligible for post-retirement medical benefits, and a negative plan amendment due to a reduction in the accumulated post-retirement benefit obligation related to remaining eligible active employees.
The following table shows the reconciliation of the Plans' obligations to amounts accrued at December 31, 1996 and 1995. The Company uses an October 1 measurement date to value the Plans' obligations.
The unrecognized prior service credit is amortized on a straight-line basis over the average length of future service to full eligibility of the active population.
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement benefit obligation for the medical plan by $0.6 million and the aggregate of the service and interest components of net periodic post-retirement benefit cost recognized in 1996 by $0.2 million. Other Long-Term Liabilities at December 31, 1996 and 1995, included $7.6 million and $7.0 million, respectively, related to the Company's post-retirement obligations.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--OTHER POST-RETIREMENT BENEFITS (CONTINUED) Components of net periodic post-retirement benefit cost relating to the medical plan and the life insurance plan were as follows:
NOTE 13--RETIREMENT AND SAVINGS PLAN
On July 1, 1994, the Company established the Santa Fe Pacific Gold Corporation Retirement and Savings Plan ("Retirement and Savings Plan") which offers eligible employees an opportunity to make long-term investments on a regular basis through salary contributions which are supplemented by employer matching contributions. Substantially all salaried and hourly employees are eligible to participate in the Retirement and Savings Plan upon completion of 30 days of service. Eligible employees may contribute up to 12% of their eligible compensation on either a before-tax or after-tax basis. The Company makes matching contributions equal to the first 4% of employee before-tax contributions, up to a maximum contribution of $6,000 per year. An employer retirement contribution equal to 2% of before-tax eligible compensation is also provided for eligible hourly employees. Participants automatically vest in their own before-tax contributions while Company matching contributions vest at a rate of 20% per year of service. Vested accounts are distributable upon a participant's disability, death, retirement or separation of service. Company contributions to the Retirement and Saving Plan, as well as certain predecessor plans in 1994, were $3.6 million, $3.1 million, $2.3 million, respectively, for the years ended December 31, 1996, 1995, and 1994.
NOTE 14--COMMITMENTS AND CONTINGENCIES
PRICE-PROTECTION PROGRAM
The Company uses a variety of commodity instruments to minimize the effect of declines in the market price for gold on its results of operations for a period of time. The use of such instruments, however, may prevent the Company from fully participating in subsequent increases in the market price for gold.
Commodity instruments used by the Company may include gold borrowings, fixed forward sales contracts, forward sales contracts made on a spot deferred basis ("spot deferred contracts") and purchased put and written call options contracts in combination. Under normal circumstances, counterparties under spot deferred contracts allow the Company to defer delivery of gold to a later date, if necessary, at the original contract price plus the prevailing interest-like premium.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's price-protection policy allows the sale of increasing quantities of gold in the forward market as the market price for gold increases above historical averages and restricts such sales as the market price for gold decreases relative to such averages. This policy also prohibits speculative trading of commodity instruments, requires the use of creditworthy counterparties and limits the Company's maximum spot deferred position. Authority to enter into commodity instruments is vested in a limited number of officers of the Company. Additionally, monthly summaries of commodity instrument activity are provided to the Company's Board of Directors.
At December 31, 1996, the Company had spot deferred contracts for approximately 1.7 million ounces of gold relating to production during the period January 1997 - September 1998 at sales prices ranging from $386 - $438 per ounce or a weighted average price of $416 per ounce. The Company also had purchased put options on 1.2 million ounces at an exercise price of $375 per ounce and written call options on 0.4 million ounces at an exercise price of $464 per ounce. The put and call options expire on a monthly basis throughout 1997. If the options are in the money at the date of expiration, the Company may convert the options into spot deferred contracts for delivery at some date in the future, receive or pay cash for the difference between the option exercise and market prices on that date or deliver gold against the contracts and receive the option exercise price per ounce.
FINAL RECLAMATION
As of December 31, 1996, estimated final reclamation costs for the Company's operating mines were $56.1 million, based on current environmental and regulatory requirements. Other Long-Term Liabilities at December 31, 1996 and 1995, include $11.0 million and $8.7 million, respectively, related to final reclamation costs.
SEVERANCE BENEFITS
The Company has a severance program for all full-time, salaried employees who are terminated or constructively terminated by the Company or by an acquiror, other than for cause, as defined in the program. The Company also has severance agreements covering certain employees who are terminated within 24 months following a change in control. During December 1996, the Company began to restructure its operations whether or not a merger occurs. As a result of that decision, certain employees were terminated in December 1996 and became entitled to receive severence benefits of $2.4 million, which are included in Merger and restructuring expenses. The Company anticipates that additional expenses under the severance program and severance agreements will be incurred during 1997.
LITIGATION
On December 6 and 9, 1996, a total of six Company stockholders filed class action complaints against the Company and the Company's Board of Directors (collectively, "Defendants"). To date, the Defendants have been served only with the first complaint. The complaints allege, among other things, that members of the Company's Board of Directors breached their fudiciary responsibilities to the Company's stockholders by failing to consider fully the Newmont proposal to acquire the Company and that the Company's Board of Directors approved the Homestake merger transaction to ensure that certain of the Defendants would retain their positions. The actions seek, among other things, to have the Court of Chancery ("Court") order the Defendants to take various actions to cooperate with any entity or person interested in
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--COMMITMENTS AND CONTINGENCIES (CONTINUED) proposing a transaction with the Company and to act to maximize shareholder value and seek unspecified damages. The Defendants moved to dismiss the first complaint on January 6, 1997, and also moved to stay discovery pending resolution of the motion to dismiss. On January 22, 1997, the Court entered an order consolidating the six actions into one action. The Company intends to defend against the allegations.
The Company is party to a number of other legal actions arising in the ordinary course of business. Although the final outcome of these actions cannot be predicted with certainty, it is the opinion of Company management that none of these actions, when finally resolved, will have a material adverse effect on the Company's financial position or results of operations.
ENVIRONMENTAL-PROTECTION REGULATION
The Company's business is subject to government regulations relating to the mining and exploration of mineral properties, as well as the possible effects of such activities upon the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations in a manner to protect the public health and environment. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations. In light of frequent changes in such laws and regulations and the inherent uncertainties in this area, the Company is unable to estimate accurately the total amount of expenditures over the long term. There are currently no actions against the Company for violations of environmental-protection laws and regulations which would have a material adverse effect on the Company's financial position or results of operations.
Certain appeals have been filed with the Department of Interior Board of Land Appeals in conjunction with the Twin Creeks EIS, the Lone Tree Mine Plan of Operations and the Mule Canyon Mine Plan of Operations. These appeals seek to impose mitigation and other conditions on the mine operations. The Company has intervened and does not believe that such appeals have merit. An unfavorable outcome of such appeals, however, could result in additional conditions on operations which may have a material adverse effect on the Company's financial position or results of operations.
CONTINGENT LIABILITY
In a 1993 asset exchange transaction, a wholly-owned subsidiary of Santa Fe Pacific Gold Corporation transferred a coal lease with Chaco Energy Company ("Chaco") to Hanson Natural Resources Company ("HNRC") with respect to which the subsidiary had collected $484.0 million in advance royalty payments. The lease provides for HNRC to collect another $390.0 million from 1994 through 2018 from Chaco. In the event of a title failure as stated in the lease, this subsidiary has a primary obligation to refund the advance royalty payments previously collected and has a secondary obligation as assignor to HNRC to refund any of the $390.0 million HNRC collects if HNRC fails to meet its refund obligation to Chaco. The subsidiary has an indemnity agreement with HNRC for the latter amounts. Santa Fe Pacific Gold Corporation has no direct liability to Chaco under the coal lease. The subsidiary has title insurance on the leased coal deposits in the amount of $240.0 million. Santa Fe Pacific Gold Corporation and the subsidiary regard the circumstances entitling Chaco to a refund as remote.
Santa Fe Pacific Gold Corporation has agreed with Chaco to maintain the subsidiary's net worth at $108.0 million until July 1, 2025. As a result of this restriction, $133.5 million of consolidated retained income as of December 31, 1996, is available for payment of cash dividends, subject to restrictions contained in the Credit Facility.
SANTA FE PACIFIC GOLD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--COMMITMENTS AND CONTINGENCIES (CONTINUED) TAX INDEMNIFICATION AGREEMENT
To protect SFP from federal and state income taxes, penalties, interest and additions to tax that could be incurred by it if the Spin-Off were determined to be a taxable event, the Company entered into an agreement with SFP under which it will indemnify SFP with respect to tax liabilities resulting from actions taken by the Company at any time during the one-year period commencing with the close of the Spin-Off. Substantially all of the actions for which the Company has indemnified SFP pursuant to this agreement were within the Company's control. The Company believes it took no actions during such one-year period that would have had such an effect.
LEASES
The Company leases certain mining equipment and facilities, vehicles, office equipment, and other property. Future minimum lease payments for operating leases for the years 1997 through 2001 are $2.0 million, $1.5 million, $1.3 million, $0.5 million and $0.1 million, respectively. Rental expense attributable to continuing operations was $3.8 million, $3.7 million and $2.3 million in 1996, 1995, and 1994, respectively.
OTHER COMMITMENTS
As of December 31, 1996, the Company had outstanding commitments of $49.6 million for the purchase of mining equipment and facilities, all of which will be paid during 1997. In addition, the Company has issued letters of credit totaling $0.9 million which expire from September 1997 to February 1998.
Pursuant to a resolution of the Company's Board of Directors in December 1996, the Company will pay to a director of the Company, $1.05 million for certain advisory services this director has provided and will provide to the Company in connection with its consideration of strategic alternatives.
NOTE 15--SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly earnings data for the years ended December 31, 1996 and 1995 follow:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
CLASS I DIRECTORS (TERMS TO EXPIRE AT 1999 ANNUAL MEETING)
DAVID H. BATCHELDER, 47, was elected a Director in 1996. Since March 1996, Mr. Batchelder has been a managing member of Relational Investors LLC, the General Partner of Relational Investors LP, an active investing limited partnership. Since 1988, Mr. Batchelder has been Chief Executive Officer of Batchelder & Partners, Inc., a financial advisory and investment banking firm based in San Diego, California. From 1978 to 1987, Mr. Batchelder was an employee of Mesa Petroleum Company, and he served as President and Chief Operating Officer from January 1986 to February 1987. He is currently a director of Morrison Knudsen Corporation and Chairman of MacFrugal's Bargains-Close-outs, Inc. Mr. Batchelder serves on the Audit Committee and the Committee on Directors.
ROBERT D. KREBS, 54, was elected a Director in 1991. Since September 1995, Mr. Krebs has served as President and Chief Executive Officer, and since January 1997 as Chairman of Burlington Northern Santa Fe Corporation. From June 1988 to September 1995, Mr. Krebs served as Chairman, President and Chief Executive Officer of Santa Fe Pacific Corporation (until September 1994, the parent of the Corporation). From July 1987 to June 1988, he served as President and Chief Executive Officer of Santa Fe Pacific Corporation. Mr. Krebs is a director of Burlington Northern Santa Fe Corporation, Burlington Northern Inc., Phelps Dodge Corporation, Northern Trust Corporation, Santa Fe Pacific Pipelines, Inc. and Burlington Northern Railroad Company. Mr. Krebs serves on the Compensation and Benefits Committee and the Committee on Directors.
RICHARD J. STOEHR, 69, was elected a Director in 1994. Mr. Stoehr is currently a consultant to various entities in the mining and minerals business and was formerly Senior Vice President and a director of Homestake Mining Company. Mr. Stoehr chairs the Committee on Directors and also serves on the Audit Committee.
CLASS II DIRECTORS (TERMS TO EXPIRE AT 1997 ANNUAL MEETING)
JAMES T. CURRY, 60, was elected a Director in 1994. In 1991, Mr. Curry retired as Chief Executive Officer of the Minerals Division, and as a director, of Broken Hill Proprietary Ltd. Mr. Curry is a director of SRI International. Mr. Curry serves on the Executive and Policy Committee and the Audit Committee.
DONALD W. GENTRY, 54, was elected a Director in 1994. Dr. Gentry is Professor of Mining Engineering at the Colorado School of Mines. In addition, Dr. Gentry is a consultant in the areas of mine valuation, corporate planning, investment decision analysis, and project financing. Dr. Gentry serves on the Compensation and Benefits Committee and the Audit Committee.
GEORGE B. MUNROE, 75, was elected a Director in 1994. Mr. Munroe retired as Chairman of the Board of Directors and Chief Executive Officer of Phelps Dodge Corporation in February 1987. From December 1983 to April 1994, Mr. Munroe served as a director of Santa Fe Pacific Corporation (until September 1994, the parent of the Corporation). Mr. Munroe is a director of The New York Times Company. Mr. Munroe chairs the Audit Committee and serves on the Executive and Policy Committee.
CLASS III DIRECTORS (TERMS TO EXPIRE AT 1998 ANNUAL MEETING)
PATRICK M. JAMES, 51, was elected a Director of the Company in 1984. Mr. James has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since January 1, 1995,
and has served as the Company's President since January 1994. From January 1991 until he assumed the presidency, he served as Executive Vice President and, from January 1991 through December 1994, served as the Company's Chief Operating Officer. He has been employed by the Company or its affiliates in various capacities since 1979. Mr. James serves on the Executive and Policy Committee and the Committee on Directors.
JEAN HEAD SISCO, 71, was elected a Director in 1994. Mrs. Sisco is a partner in Sisco Associates, a management consulting firm. From 1975 to September 1995, she served as a director of Santa Fe Pacific Corporation (until September 1994, the parent of the Company). She is also a director of Chiquita Brands International, K-Tron International, Inc., American Funds Tax Exempt Series I, The Neiman Marcus Group, Inc., Textron Inc., and Washington Mutual Investors Fund. Mrs. Sisco chairs the Compensation and Benefits Committee and serves on the Committee on Directors.
PETER STEEN, 66, was elected a Director effective March 1, 1996. Mr Steen has a long history in the management of mining companies having served as President and Chief Executive Officer of Inspiration Consolidated Copper Company (1978-1983), President and Chief Executive Officer of International Corona Corporation (1986-1992), President and Chief Operating Officer of Homestake Mining Company (1992-1994), President and Chief Executive Officer of Lac Minerals Ltd. (1994), and most recently as Chairman of Eldorado Corporation Ltd. Mr. Steen chairs the Executive and Policy Committee and serves on the Compensation and Benefits Committee.
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS
BOARD OF DIRECTORS MEETINGS. The Board of Directors met nine times in 1996. All members of the Board of Directors attended at least 75% of the meetings of the Board of Directors and of its Committees on which they are members, except for Mr. Curry who attended eight of the nine meetings of the Board of Directors, six of the seven Executive and Policy Committee meetings and one of the three Compensation and Benefits Committee meetings held while he was a member of the Compensation and Benefits Committee through May 1996.
COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors has established an Executive and Policy Committee, a Compensation and Benefits Committee, an Audit Committee, and a Committee on Directors.
The Executive and Policy Committee was formed as of March 1, 1996, to perform the functions of the former Executive Committee and the Policy Committee which were discontinued as of that date. The Executive Committee had not met in 1995. The Policy Committee had met four times in 1995. The Executive and Policy Committee met seven times during 1996. The principal functions of the Executive and Policy Committee are to meet on a regular basis to discuss major issues affecting the Corporation, to make recommendations on such major issues to the Board of Directors and the Chief Executive Officer, to facilitate communication between the Board of Directors and the Chief Executive Officer, and to exercise the powers of the Board of Directors in the management of the business and affairs of the Company when the Board of Directors is not in session. Peter Steen as Chairman, Patrick M. James, James T. Curry, and George B. Munroe currently serve on the Executive and Policy Committee.
The Compensation and Benefits Committee met five times during 1996. The principal functions of the Compensation and Benefits Committee are to administer and make recommendations to the Board of Directors concerning executive and employee benefits, compensation and retirement plans, management organization, election of officers and membership of committees appointed under retirement plans. No member of the Compensation and Benefits Committee is an employee of the Company or its subsidiaries. Members of the Compensation and Benefits Committee are not eligible to participate in any benefit plans of the Corporation that they administer. Jean Head Sisco as Chairman, Donald W. Gentry, Robert D. Krebs, and Peter Steen currently serve on the Compensation and Benefits Committee.
The Audit Committee met three times during 1996. The principal functions of the Audit Committee include recommending to the Board of Directors the engagement of independent accountants, overseeing the financial reporting process, and overseeing the performance and reviewing the scope of the audit function of the Company's independent accountants and internal auditor. The Audit Committee also reviews, among other things, audit plans and procedures, the Company's policies with respect to conflicts of interest and the prohibition on the use of corporate funds or assets for improper purposes, changes in accounting policies and the use of independent accountants for non-audit services. No member of the Audit Committee is an employee of the Company or its subsidiaries. George B. Munroe as Chairman, David H. Batchelder, James T. Curry, Donald W. Gentry, and Richard J. Stoehr currently serve on the Audit Committee.
The Committee on Directors met three times during 1996. The principal functions of the Committee on Directors are to consider and recommend to the Board of Directors candidates to fill vacancies on the Board of Directors, assignment of Directors to Committees of the Board of Directors, and certain policies for the Board of Directors. The Committee on Directors also administers the Company's Directors' Stock Compensation Plan described below. Richard J. Stoehr as Chairman, David H. Batchelder, Jean Head Sisco, Patrick M. James and Robert D. Krebs currently serve on the Committee on Directors. The Committee on Directors will consider nominees for Directors recommended by stockholders. Any such recommendation, together with the nominee's qualifications and consent to being considered as a nominee, should be sent, in writing, to the Secretary of the Company on or before December 1 of the year preceding the Annual Meeting of Stockholders.
EXECUTIVE OFFICERS
Each executive officer of the Company is elected for an indefinite term and serves until her or his successor is elected or appointed or until her or his earlier death, resignation or removal. The current executive officers of the Company, their ages and positions are as follows:
The business background of each of the above executive officers is described below.
Bruce D. Hansen began working for the Company in 1982. He has held the positions of Mining Engineer, Manager of Business Development, Director of Corporate Development, Vice President-- Finance and Development, and, since April 1994, his current position of Senior Vice President--Corporate Development. Prior to joining the Company, Mr. Hansen held engineering positions with Consolidation Coal Company, Union Oil Company's Molycorp Division and Phillips Coal Company.
Patrick M. James was elected Chairman and Chief Executive Officer of the Company in October 1994, assuming those positions on January 1, 1995. He has held the position of President of the Company since January 1994. From January 1991 through January 1994, he was the Executive Vice President and Chief Operating Officer. He has been a director of the Company since 1984. He has been with the Company since 1979, working in various positions including Manager of Underground Mining, Manager of Mine Construction, and Vice President--Operations. Prior to joining the Company, Mr. James worked in a variety of engineering and management positions for Kerr-McGee Corporation, Peter Kiewit Sons Company, and Gulf Mineral Resources Corporation.
Wayne Jarke has been an employee and the General Counsel of the Company since September 1990 and has been Secretary of the Company since July 1993. From 1975 to September 1990, Mr. Jarke provided legal services to the Company as a lawyer employed by either Santa Fe Railway (1975-1978), Santa Fe Industries, Inc. (1978-1985), or SFP (1985-1990). Since 1979, Mr. Jarke has been responsible for managing the legal affairs of the Company and for directing the efforts of staff and outside legal counsel.
Ronald L. Parratt joined the Company's predecessor in 1978 and has held the position of Vice President--Exploration since October 15, 1996. His prior positions with the Company included Director-- North America Exploration, Director--U.S. Exploration, Director--Minerals Exploration Northwest Region, Manager--Minerals Exploration Northwest Region and Senior Geologist. Prior to his employment with the Company's predecessor, Mr. Parratt was employed as a geologist by Stauffer Chemical Company.
David A. Smith began his employment with the Company as Vice President and Chief Financial Officer in late April 1994. Prior to joining the Company, Mr. Smith was employed by Catellus, a real estate development and management corporation, during the period from 1989 to 1994 in the positions of Vice President--Finance, Vice President and Chief Financial Officer, and finally as Senior Vice President and Chief Financial Officer. Mr. Smith was employed by SFP from 1984 to 1989, as Director of Finance, and as Assistant Vice President--Finance. Prior to 1984, Mr. Smith was employed by Southern Pacific Company.
Linda K. Wheeler has been employed by the Company since 1983 and was appointed as Controller in May 1994. Prior to this appointment, she had been Assistant Controller since May 1990 and previously had held other positions with the Company related to accounting and taxation. Before joining the Company, Ms. Wheeler had been employed with a predecessor to Santa Fe Energy Resources, Inc., in the field of taxation. Ms. Wheeler is a certified public accountant in the State of New Mexico.
LeRoy E. Wilkes joined the Company in May 1995 and held the position of Senior Vice President-- Operations until February 1996, when he became Executive Vice President and Chief Operating Officer. Prior to joining the Company, Mr. Wilkes was Executive Vice President for Washington Corporations from 1988 until 1995. Mr. Wilkes was employed as Vice President and General Manager for Ridgeway Mining Company from 1986 to 1988 and in the positions of Director of Business Development and General Manager for Anaconda Minerals Company from 1974 to 1982. Prior to that he worked in supervisory positions for Columbia Cement Corporation and Kennecott Copper Corporation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes, for the years indicated, compensation received by the Company Executive Officers for fiscal year ended December 31, 1996. Such officers served as Chief Executive Officer or were one of four most highly compensated executive officers (other than the Chief Executive Officer) for the fiscal year ended December 31, 1996.
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(1) For the years 1994 and 1995, the Company Executive Officers exchanged up to 50% of their annual incentive bonus for Restricted Stock awards pursuant to the Company's Bonus Stock Program under the LTISP. Each award of Restricted Stock was the number of shares having a market value (as defined in the Bonus Stock Program) at the date of grant equal to 1.5 times the amount of annual incentive bonus exchanged. For 1994, Mr. James exchanged $106,801 for 15,630 shares of Common Stock; Mr. Smith exchanged $42,335 for 6,195 shares; Mr. Hogan exchanged $23,004 for 3,366 shares; and Mr. Jarke exchanged $29,313 for 4,290 shares; all based on a market value of $10.25 per share on the grant date, February 15, 1995. For 1995, Mr. James exchanged $54,690 for 5,027 shares; Mr. Wilkes exchanged $16,084 for 1,478 shares; Mr. Smith exchanged $23,915 for 2,198 shares; Mr. Hogan exchanged $7,421 for 682 shares; and Mr. Jarke exchanged $8,186 for 752 shares; all based on a market value of $16.32 per share on the grant date, February 15, 1996. The Company Executive Officers have not exchanged any 1996 annual incentive bonus for Restricted Stock awards in 1997. The amounts shown in this column for the Company Executive Officers who participated in the Bonus Stock Program for 1994 and 1995 represent cash received.
(2) Net value of options for common stock of SFP, the former parent of the Company, exercised during 1994. Includes tax adjustments for certain relocation and club membership expense. Includes amounts deferred under SFP's retirement and savings plan and supplemental retirement and savings amounts deferred under SFP's retirement and savings plan and supplemental retirement and savings plan maintained by SFP during 1994. Includes amounts deferred under the Retirement and Savings Plan and the Supplemental Retirement and Savings Plan during 1994.
(3) Amounts represent the value of the Restricted Stock shares granted on the date of the award. On December 31, 1996, the Company Executive Officers held the following numbers of shares of Restricted Stock which had the following aggregate value on such date based on the NYSE closing price of Common Stock on the last trading day of 1996 of $15.375 per share: Mr. James, 20,657 shares worth $317,601; Mr. Wilkes, 1,478 shares worth $22,724; Mr. Smith, 8,393 shares worth $129,042; Mr. Hogan, 4,048 shares worth $62,238; and Mr. Jarke, 5,042 shares worth $77,521.
(4) Represents number of options granted under the Company's Phantom Stock Plan in 1994 (in the case of Mr. Smith) and the LTISP in 1995 and 1996.
(5) Includes matching contributions made by SFP and earnings on contributions pursuant to SFP's retirement and savings plan and supplemental retirement and savings plan during 1994. Includes matching contributions made by the Company and earnings on contributions pursuant to the Retirement and Savings Plan and the Supplemental Retirement and Savings Plan during 1994, 1995 and 1996. Includes relocation payments to Mr. Smith in 1994.
All Other Compensation for 1996, the last fiscal year, includes the amounts shown in the following table for the Company Named Executive Officers.
OPTION/SAR GRANTS IN 1996
The Following table sets forth certain information with respect to options to acquire Common Stock that were granted during 1996 to each Executive Officer under the Company's stock option plans.
OPTION/SAR EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to the individuals named in the Summary Compensation Table concerning unexercised options under the LTISP and the Phantom Stock Plan held as of the end of 1996.
AGGREGATED STOCK OPTION/SAR EXERCISES IN 1996 AND YEAR-END OPTION/SAR VALUES
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(1) Dollar values are calculated by determining the difference between the fair market value of the securities underlying the Phantom Stock Options at year-end ($15.375) and the exercise or base price of the options ($10.56).
(2) Dollar values are calculated by determining the difference between the fair market value of the securities underlying the Phantom Stock Options at year end ($15.375) and the exercise or base price of the options ($13.53).
(3) Dollar values are calculated by determining the difference between the fair market value of the securities underlying the options at year end ($15.375) and the exercise or base price of the options ($12.38).
(4) Dollar values are calculated by determining the difference between the fair market value of the securities underlying the options at year end ($15.375) and the exercise or base price of the options ($14.00).
(5) Options are in-the-money if the fair market value of the underlying securities exceeds the exercise or base price of the option.
RETIREMENT PLANS
The Company maintains a Retirement Plan and a Supplemental Retirement Plan. The following table shows the estimated annual benefits to a covered participant at normal retirement age (age 65) under the Retirement Plan, as supplemented by the Supplemental Retirement Plan, for various levels of compensation and years of service. Benefit figures shown are amounts payable based on a straight-line annuity assuming retirement by the participant at the normal retirement age of 65 without a joint survivorship provision and are not subject to any offsets for Social Security.
PENSION PLAN TABLE
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(1) Compensation is equal to the highest yearly average compensation for any 60 consecutive months in the past 10 years. Compensation for purposes of the Retirement Plan and the Supplemental Retirement Plan includes salary and bonus as set forth in the Santa Fe Summary Compensation Table.
The 1996 compensation taken into account for purposes of determining the aggregate pension benefit under both retirement plans was $307,500 for Mr. James, $204,167 for Mr. Wilkes, $159,671 for Mr. Smith, $162,065 for Mr. Hogan and $141,813 for Mr. Jarke. As of December 31, 1996, Messrs. James, Wilkes, Smith, Hogan and Jarke had approximately 17, 2, 23, 6 and 21 years of benefit services, respectively.
DIRECTORS' COMPENSATION
The Directors' Stock Compensation Plan was approved by the stockholders at the 1996 Annual Meeting of Stockholders. The Company implemented a revised compensation policy for Directors who are not employees of the Company or any of its subsidiaries, effective as of April 1, 1996. Under the revised policy, Directors who are not employees of the Company or any of its subsidiaries will receive an annual retainer fee of $12,000, paid quarterly, plus a grant of 1,200 shares of Common Stock per year under the Directors' Stock Compensation Plan. The grant of Common Stock is made at the rate of 300 shares at the end of each calendar quarter beginning with the second quarter of 1996. Directors who are not employees of the Company or its subsidiaries will also be paid an attendance fee of $1,000 for each Board of Directors meeting and $800 for each Committee meeting attended ($1,200 for a Committee Chairman), plus expenses for each meeting.
Prior to April 1, 1996, Directors who were not employees of the Company or its subsidiaries received an annual retainer fee of $20,000, an attendance fee of $800 for each meeting of the Board of Directors and each Committee meeting attended ($1,200 for the Committee Chairman), plus expenses for each Board of Directors meeting or Committee meeting attended.
As an inducement to Peter Steen to become a member of the Board of Directors and the Chairman of the Executive and Policy Committee, the Company has agreed to pay him a fee as Chairman of the Executive and Policy Committee of $25,000 in arrears for each three-month period of service in that position beginning March 1, 1996, which fee will be in lieu of attendance fees for that Committee. Under the Directors' Stock Compensation Plan, Mr. Steen will also receive the stock options described below in connection with the Directors' Stock Compensation Plan.
As Chairman of the Executive and Policy Committee, Peter Steen received an option to acquire 50,000 shares of Common Stock at a price of $15.375 per share, which is equal to the average of the high and low prices of a share of Common Stock on the New York Stock Exchange on March 1, 1996. The option may be exercised as to 25,000 shares on or after March 1, 1997, if Mr. Steen continues as an Eligible Director until that date; may
be exercised as to the remaining 25,000 shares on or after March 1, 1998, if Mr. Steen continues as an Eligible Director until that date; and is otherwise subject to the Stock Plan.
Pursuant to a resolution of the Board of Directors on December 5, 1996, the Company will pay to David H. Batchelder $1,050,000 for certain advisory services Mr. Batchelder has provided and will provide to the Company in connection with its consideration of strategic alternatives. Such amount is payable in quarterly installments of $87,500, or as to remaining installments, upon termination of Mr. Batchelder's assignment by the Board of Directors, if earlier.
DIRECTOR RETIREMENT POLICY
Effective March 1, 1995, the Board of Directors adopted a Director Retirement Policy for the Company providing that no individual shall serve as a Director beyond the annual meeting of stockholders on or following his or her own 75th birthday and providing that a Director who is also an employee of the Company shall retire as a Director effective as of termination of his or her employment with the Company.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
SEVERANCE AGREEMENTS. The Company has in effect severance agreements ("Severance Agreements") with 27 current executive and key employees (including each of the individuals named in the Summary Compensation Table). The Severance Agreements are intended to encourage such employees to remain in the employ of the Company. The Company's obligations under each Severance Agreement are triggered if such person's employment is terminated within 24 months following a change in control (as defined). Under each Severance Agreement, a terminated person would receive a cash severance payment equal to (i) two (2) times the higher of (a) the person's annual base salary as in effect immediately prior to the date of termination or, (b) the highest annual base salary paid to the person during the period of twenty-four (24) months prior to the change in control (as defined) related to termination of the person's employment, plus (ii) two (2) times the maximum incentive award payable to the person under any annual bonus or incentive plan maintained by the Company, for the fiscal year during which the date of termination occurs or, if higher, for the fiscal year during which first occurs an event or circumstance constituting good reason (as defined), assuming for purposes hereof that the person had been employed by the Company for all of such year, that all performance objectives for such year had been met at the maximum levels and that the person had been entitled to a full award thereunder. The Severance Agreements also provide for the continuation of health care and life insurance and also provide for certain other benefits such as outplacement services and relocation benefits. Notwithstanding the forgoing, the benefits payable under the Severance Agreements will be reduced to the extent necessary to assure that the Company will not lose its ability to deduct any such payments for federal income tax purposes by virtue of Section 280G of the Code ("Parachute Payment Limit"). The Severance Agreements also provide that such person may elect to receive severance benefits over an extended period of time (without interest), rather than in a lump sum payment, in accordance with the following options ("Extended Payments"): (i) in equal monthly installments over a period not to exceed 36 months; (ii) if such person has reached age 55 and accrued 10 years of pension vesting service at the time of termination, over a period of time ending on the earliest to occur of (A) the date such person commences receiving benefits under the Company's qualified pension plan, (B) attainment of age 65 and (C) attainment of age 62 and accrual of 30 years of pension vesting service; and (iii) if such person has reached age 40 and the sum of such person's age and number of years of pension vesting service equals or exceeds 50 at the time of termination, over a period of time ending on the date such person commences receiving benefits under the Company's qualified pension plan. Any such person electing to receive Extended Payments will be entitled to receive continued health and welfare coverage and will continue to accrue service credit under the Company's Supplemental Retirement Plan so long as the Extended Payments continue.
SEVERANCE PROGRAM. The Corporation has a severance program ("Severance Program") for all full-time, salaried employees who are terminated or constructively terminated by the Company or by an acquiring company, other than for Cause (as defined in the Severance Program). However, following a change in control (as defined in the Severance Agreements), an employee who has entered into a Severance Agreement is not eligible to
receive duplicate benefits under both a Severance Agreement and the Severance Program. A participant in the Severance Program is generally entitled to an amount of up to one year's pay based upon the participant's age, length of service and current salary, or in certain circumstances, early retirement supplemental payments, provided that the aggregate of such payments does not exceed two years' salary for the year preceding the year in which termination occurs. In addition, a participant is entitled to continuation of health and life insurance benefits for two years or for the duration of severance payments, whichever is longer. Each January 1, the term of the Severance Program is automatically extended for an additional one-year period, unless by September 30 of the prior year the Company has given notice that the Severance Program will not be so extended. Following a Change in Control the Severance Program may not be modified or terminated for 24 months. The payments and benefits provided by the Severance Program are subject to the Parachute Payment Limit.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Jean Head Sisco, Robert D. Krebs, Donald W. Gentry and James T. Curry serve on the Compensation and Benefits Committee, with Jean Head Sisco serving as Chairman. No member of this Committee is a current or former employee of the Corporation.
COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION.
The Compensation and Benefits Committee ("Committee") of the Board of Directors is composed entirely of outside directors, none of whom are employees or former employees of the Company or its subsidiaries. The Committee is responsible for the overall executive compensation strategy of the Company, the ongoing monitoring of the strategy's implementation, and recommendations to the Board of Directors to implement such strategies.
EXECUTIVE OFFICERS COMPENSATION POLICY. The Company's executive compensation policy, as recommended by the Committee, has four overall objectives: (1) to align the interests of the Company's executives with those of the Company's stockholders; (2) to link compensation to the performance of the Company, as well as to the individual contribution of each executive; (3) to emphasize variable as opposed to fixed compensation; and (4) to compensate executives at a level which is competitive in the marketplace so that the Company can continue to attract, motivate, and retain executives with outstanding abilities.
MANAGEMENT OF ANNUAL COMPENSATION. The Committee's executive compensation strategy encompasses conservatively managing fixed compensation and emphasizing variable, results-oriented compensation, while ensuring that it offers a competitive total compensation package to executives. The Committee monitors total remuneration data on an annual basis to ensure that the Company is appropriately aligned with the market for executive talent. Base salaries for all executives and for all other salaried employees are based upon salary ranges which are conservatively established for each position. Salary ranges are determined through annual competitive salary surveys. In addition, each employee's salary is based on an annual assessment of his or her performance.
The Committee compares the compensation levels of the Company with those of gold mining corporations of comparable size, revenues, and employee base. The Hay Group databases of gold mining companies were the basis for comparing compensation levels with respect to executives employed by the Company. Based upon the study, it was determined that the Company is below the 50th percentile of total compensation for all executive employees. For 1997, base executive salaries and benefits have been set at conservative levels and total compensation is tied directly to performance levels. Thus, executive compensation will be largely variable and should fluctuate with the performance of the Company and stockholder value.
PERFORMANCE-BASED EXECUTIVE COMPENSATION PLANS. The Committee seeks to tie compensation to the Company's performance and individual performance through incentive plans maintained by the Company. Executives of the Company participate in the Santa Fe Pacific Gold Corporation Incentive Compensation Plan ("Incentive Plan"). The Incentive Plan provides for the establishment of annual performance goals which include performance goals for the Company and may include individual productivity objectives. Under the Incentive Plan,
the principal goals for executives are achievement of a targeted level of operating income for the Company which is set at the beginning of each year based upon an aggressive evaluation of the operating income estimated to the attainable by the Company in that year, the growth in gold reserves and annual gold production. Up to 10% of the total annual award may be based on individual productivity objectives which are derived from the Company's key strategic objectives during each calendar year. A participant's compensation depends on the goals achieved, with the maximum eligibility award during 1997 being an amount between 10 percent and 100 percent of a participant's salary.
An incentive and retention program ("Bonus Stock Program") implemented under the Company's Long Term Incentive Stock Plan (described below) in connection with the Incentive Plan provides each executive and other key employees the opportunity to exchange up to 50 percent of the amount that would otherwise have been payable in cash to such executive or employee as an annual incentive bonus for an award of restricted Common Stock ("Restricted Stock"). The number of shares of Restricted Stock subject to such an award will be the number of shares having a market value at the date of grant equal to 1.5 times the bonus amount forgone.
The Committee determined that providing participants with shares of Restricted Stock having an initial 50% premium above the amount of cash that would otherwise be payable to them is necessary and appropriate to encourage stock ownership by executives and other key employees.
In general, shares of Restricted Stock awarded under the Bonus Stock Program will vest on the third anniversary of the award, except that all such awarded shares will become vested upon the occurrence of certain events (death of the participant or a change in control of the Company ) and that a pro rata portion of such shares may vest upon the occurrence of certain other events (such as retirement or an involuntary termination of employment without cause).
The Committee approved the Bonus Stock Program to achieve two objectives. First, the Committee believed that the amount of the Common Stock owned by executives should be increased to align further the economic interests of management with those of stockholders. Second, the Committee believed it was necessary to enhance the retentive effort of the Company's compensation practices through an award that provided an incentive to the executives to enhance stockholder value and to remain in the Company's employ.
The Committee has undertaken to review the impact upon the Company of recent federal tax law changes disallowing the deductibility of certain executive compensation in excess of $1 million unless it is performance-based (as defined in applicable federal tax regulations). The tax law changes apply to compensation in excess of $1 million paid to the chief executive officer and the other four highest compensated officers of publicly held corporations. In 1997, it is expected that no officer of the Corporation will earn compensation in excess of $1 million that is not performance-based.
LONG-TERM INCENTIVE PLANS. Annual incentive awards are made pursuant to the Company's Long Term Incentive Stock Plan ("LTISP"). Each of the five named executives of the Company received a grant during 1996 of non-qualified stock options (as defined in the LTISP). Non-qualified stock options vest one-third per year.
The purpose of the LTISP is to align the interests of the Company's salaried employees with those of the stockholders of the Company by encouraging significant stock ownership and superior performance by salaried employees by allowing the Company to award several forms of incentive compensation to employees. The LTISP is also intended to assist the Company in attracting and retaining the services of qualified, capable salaried employees. Options, Restricted Stock, Performance Shares, Performance Units and Stock Appreciation Rights ("Awards") may be granted under the LTISP. The LTISP provides for equitable adjustment of the number of shares subject to the Plan and to the terms of any outstanding Awards in the event of a change in the capitalization of the Company due to a stock split, stock dividend, recapitalization, merger or similar event. Subject to adjustment, the maximum number of shares of Common Stock with respect to which Options, Restricted Stock, Performance Shares and Stock Appreciation Rights may be granted under the LTISP in any calendar year shall not exceed one percent of the Company's outstanding Common Stock as of January 1 of such calendar year, plus the number of shares of Common Stock which became available for Awards in prior calendar
years but which have not been awarded. All salaried employees of the Company are eligible to participate in the LTISP, subject to the complete discretion of the Committee. No person may receive any Award or combination of Awards in a share equivalent amount of more than 200,000 shares during any calendar year. The Committee administers the LTISP and has full discretion with respect to the identity of grantees of various Awards and the amounts, exercise period, option prices and restrictions applicable to Awards. The Committee may authorize the Chairman of the Board of Directors or the Company's Chief Executive Officer to allocate Awards among individual employees within the classes to which grants are made, provided, however, that the Committee may not delegate its authority with regard to awards to persons subject to Section 16 of the Securities Exchange Act of 1934, nor may it delegate its authority in any manner which would cause the LTISP to fail to comply with Rule 16b-3 or any successor federal regulation concerning the treatment of Awards under Section 16 of the Securities Exchange Act.
Non-Qualified Stock Options are non-statutory options and grants thereof may be made to any salaried employee of the Corporation. Both the purchase price of the Common Stock subject to such options and the exercise period of such options will be determined in the discretion of the Committee, subject to the limitations that the exercise price may not be less than 100% of the fair market value of the Common Stock (defined in the LTISP as the mean between the highest and lowest quoted sales price of the Common Stock on the New York Stock Exchange Composite Transaction Report) on the grant date and the option exercise period may not exceed ten years from the grant date. Restricted Stock consists of Awards of shares of Common Stock that are subject to forfeiture based on tenure requirements or failure to achieve designated Company or individual goals, or a combination of tenure and performance requirements. Restricted Stock will also be used under the LTISP to implement the Bonus Stock Program operated in conjunction with the Corporation's goals designated by the Committee. All goals which are performance-related shall be based on, singly or in combination, criteria related to the maintenance of gold reserves, the cash costs of production per ounce of gold or the meeting of certain gold production targets. No Awards of Performance Units, Performance Shares or Stock Appreciation Rights have been made under the LTISP, and the Committee does not intend to make any such Awards during 1997.
If a Change in Control (as defined in the LTISP) occurs while any shares of Restricted Stock remain subject to restrictions, then such restrictions and all restricted periods and performance periods shall lapse, all defined goals shall be deemed to have been met. If a Change in Control occurs while unexercised Options remain outstanding under the LTISP, then all Options shall become exercisable in full, whether or not otherwise exercisable.
No payment, benefit or acceleration of exercisability with respect to Options will be made if such payment or acceleration, when aggregated with other payments or benefits to the participant, would result in "excess parachute payments" equal to or greater than three times the "base amount", as defined in Section 280G of the Internal Revenue Code.
The Board of Directors may suspend, terminate, or amend the LTISP, provided that any amendment (other than an adjustment as a result of a change in the Company's capitalization) that would (i) increase the aggregate number of shares which may be issued under the LTISP, (ii) materially increase the benefits accruing to participants under the LTISP, or (iii) materially alter the requirements for eligibility for participation in the LTISP will be subject to approval by the Company's stockholders.
Unless previously terminated by the Board of Directors, the LTISP shall terminate in May 2000.
The Company adopted the Phantom Stock Option Plan ("Phantom Stock Plan") as of July 1, 1993. The Phantom Stock Plan allows the Phantom Stock Plan administration committee to grant Phantom Stock Options (as defined in the Phantom Stock Plan) which, when exercised, entitle the recipient to the cash value of the difference between the share value of Phantom Stock as defined in the Phantom Stock Plan at the date of grant and the share value of Phantom Stock at the date of exercise. The Phantom Stock Plan administration committee, in its discretion, may select those employees to whom awards will be granted, the form and the amount of awards, and the terms and conditions of awards. Officers, managers, and key employees who are responsible for the Company's growth and profitability are eligible to receive awards under the Phantom Stock Plan. Phantom Stock
Options vest one-third per year. Upon exercise, the difference between the share value of Phantom Stock at the date of grant and the share value of Phantom Stock at the date of exercise will be paid in cash after withholding of all applicable taxes. The share value of Phantom Stock on a given date is the mean between the highest and lowest quoted sales price on the New York Stock Exchange Composite Transaction Report of a share of Common Stock on that date. The Phantom Stock Plan contains standard anti-dilution provisions. The expected cost of the Phantom Stock Plan is estimated and accrued as an expense over the length of the vesting period. All Phantom Stock Options become fully vested upon the participant's death, or upon a Change in Control (as defined in the Phantom Stock Plan). If the participant terminates employment on account of retirement or disability or under the Company's Severance Program (as described below) the participant will vest in any outstanding Phantom Stock Options on a pro-rata basis. If a participant voluntarily terminates employment (for reasons other than death, disability or retirement), or the participant's employment is terminated by the Company for Cause (as defined in the Phantom Stock Plan), all outstanding Phantom Stock Options which have not vested will be forfeited on the participant's termination date. If a participant's employment terminates by reason of early retirement or disability, or the participant's employment is terminated by the Company for reasons other than Cause, the participant may exercise any outstanding Phantom Stock Options for a period of three months following the participant's termination of employment. In the event of the participant's death, all outstanding Phantom Stock Plan options vest and are exercisable for a period of 12 months. The five named executives of the Company received Phantom Stock Option grants during 1993 or 1994 in the case of Mr. Smith. No Phantom Stock Option grants were provided to the five named executives during 1996.
The Company has also adopted ownership goals for the five named executives of the Company and for certain senior managers of the Company that require ownership of shares of Common Stock having a value equal to one to three times an individual's base pay. Messrs. James and Mr. Wilkes have share ownership goals of three times pay, and Messrs. Smith, Hogan, and Jarke have share ownership goals of two times pay, to be achieved over a five-year period ending in 1999.
THE 1996 COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The factors upon which Mr. James' 1996 compensation was based are the same as described above for all executive officers pursuant to the Company's executive compensation strategy. Mr. James is eligible to participate in the same compensation plans maintained by the Company that are available to other executive officers of the Company as described above.
Compensation and Benefits Committee: Jean Head Sisco, Chairman Robert D. Krebs Peter Steen Donald W. Gentry
PERFORMANCE GRAPH
The following graph depicts a comparison of cumulative total stockholder returns for the period from June 16, 1994, the date on which the Common Stock was registered under the Securities Exchange Act of 1934, through December 31, 1996, assuming reinvestment of dividends, for the Company, the Standard & Poor's 500 Stock Index ("S&P 500"), and the S&P Gold and Precious Metals Mining ("S&P Gold"). The Company is included within both the S&P 500 and the S&P Gold indices. The graph assumes that on June 16, 1994, $100 was invested in the Common Stock, in the S&P 500 and in the Gold Group and assumes reinvestment of the pre-tax value of all dividends.
COMPARISON OF 30-MONTH CUMULATIVE TOTAL RETURN AMONG SANTA FE PACIFIC GOLD CORPORATION, THE S & P 500 INDEX AND THE S & P GOLD PRECIOUS METALS MINING INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1996, no person is known to the Company to own beneficially more than 5% of the outstanding Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows, as of February 28, 1997, the number of shares of Company Common Stock deemed beneficially owned by each director and each of the executive officers named in the Summary Compensation Table and by all present directors and executive officers of the Company as a group.
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(1) Each person has, unless otherwise indicated in the following notes, sole voting and investment power with respect to the indicated shares.
(2) Common Stock beneficially owned does not exceed one percent of the outstanding Company Common Stock as of December 31, 1996.
(3) Mr. Hogan ceased to be a designated executive officer of the Company for purposes of Section 16 of the Securities Exchange Act of 1934 by action of the Company's Board of Directors taken on January 23, 1997.
(4) Includes 1,809 shares held by Mr. Munroe's spouse, of which Mr. Munroe disclaims beneficial ownership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Notes 1, 8, 11 and 14 to the Consolidated Financial Statements of the Company incorporated herein by reference for descriptions of certain transactions between the Company and its former parent, SFP.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
2. Financial Statement Schedules:
No Financial Statement Schedules are applicable.
3. Exhibits:
See Index to Exhibits on page 87 of this Report for a statement of the exhibits filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K dated December 9, 1996.
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.
SANTA FE PACIFIC GOLD CORPORATION
By: /s/ PATRICK M. JAMES ----------------------------------------- Patrick M. James Chairman, President and Chief Executive Officer
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- -------------------
/S/ PATRICK M. JAMES Chairman, President and - ------------------------------ Chief Executive Officer March 19, 1997 Patrick M. James and Director
/s/ DAVID A. SMITH - ------------------------------ Vice President and Chief March 19, 1997 David A. Smith Financial Officer
/s/ LINDA K. WHEELER - ------------------------------ Controller March 19, 1997 Linda K. Wheeler
/s/ DAVID H. BATCHELDER - ------------------------------ Director March 19, 1997 David H. Batchelder
/s/ JAMES T. CURRY - ------------------------------ Director March 19, 1997 James T. Curry
/s/ DONALD W. GENTRY - ------------------------------ Director March 19, 1997 Donald W. Gentry
/s/ ROBERT D. KREBS - ------------------------------ Director March 19, 1997 Robert D. Krebs
/s/ GEORGE B. MUNROE - ------------------------------ Director March 19, 1997 George B. Munroe
/s/ JEAN HEAD SISCO - ------------------------------ Director March 19, 1997 Jean Head Sisco
/s/ PETER STEEN - ------------------------------ Director March 19, 1997 Peter Steen
/s/ RICHARD J. STOEHR - ------------------------------ Director March 19, 1997 Richard J. Stoehr
EXHIBIT INDEX
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* Incorporated by reference to the Company's Registration Statement on Form S-1 (File Number 33-7774) on April 15, 1994, as amended by Amendment No. 1 thereto filed on May 24, 1994.
** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
*** Incorporated by reference to the Company's Form 8-A on January 31, 1995.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
+ Compensatory plan or arrangement.
/ / Incorporated by reference to the Company's Form 8-K on June 21, 1995, in conjunction with the Company's Registration Statement of Form S-3 (File Number 33-92762) filed on May 26, 1995.
TRIANGLE Incorporated by reference to the Company's Form 8-K on December 9, 1996.
++ Incorporated by reference to the Company's Form 8-K on March 10, 1997.