UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM________TO________. COMMISSION FILE NUMBER 1-13627 APEX SILVER MINES LIMITED ------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CAYMAN ISLANDS, BRITISH WEST INDIES NOT APPLICABLE - -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) CALEDONIAN HOUSE 69 JENNETTE STREET GEORGETOWN, GRAND CAYMAN CAYMAN ISLANDS, BRITISH WEST INDIES NOT APPLICABLE - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (345) 949-0050 - -------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO --------- ------- AT NOVEMBER 9, 2000, 34,471,268 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING. -1-
APEX SILVER MINES LIMITED FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2000 INDEX PART I - FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS....................................... 3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 7 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND HEDGING ACTIVITIES......................... 10 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.......................................... 11 ITEM 2. CHANGES IN SECURITIES...................................... 11 ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................ 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 11 ITEM 5. OTHER INFORMATION.......................................... 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 11 SIGNATURES ............................................................. 12 -2-
PART I. FINANCIAL INFORMATION Item 1. Financial Statements APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED BALANCE SHEET (Expressed in United States dollars) (Unaudited) <TABLE> <CAPTION> September 30, December 31, 2000 1999 ------------- ------------- <S> <C> <C> Assets Current assets Cash and cash equivalents $ 70,619,858 $ 96,296,577 Accrued interest receivable - - Prepaid expenses and other assets 281,208 362,604 ------------- ------------- Total current assets 70,901,066 96,659,181 Property, plant and equipment (net) 70,188,748 50,561,766 Value added tax recoverable 4,799,773 3,810,460 Other non-current assets 334,023 45,997 ------------- ------------- Total assets $ 146,223,610 $ 151,077,404 ============= ============= Liabilities and Shareholders' Equity Current liabilities Accounts payable and other accrued liabilities $ 2,181,038 $ 2,210,585 Current portion of notes payable 1,175,254 901,459 ------------- ------------- Total current liabilities 3,356,292 3,112,044 Notes payable 2,605,700 3,137,368 Commitments and contingencies (Note 5) Shareholders' equity Ordinary shares, $.01 par value, 75,000,000 shares authorized; 34,471,268 and 34,466,168, share344,713d and outstanding for respective periods 344,713 344,662 Contributed surplus 192,467,547 192,274,553 Accumulated deficit (52,550,642) (47,791,223) ------------- ------------- Total shareholders' equity 140,261,618 144,827,992 ------------- ------------- Total liabilities and shareholders' equity $ 146,223,610 $ 151,077,404 ============= ============= </TABLE> The accompanying notes form an integral part of these consolidated financial statements. -3-
APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENT OF OPERATIONS (Expressed in United States dollars) (Unaudited) <TABLE> <CAPTION> For the Period Three Months Ended Nine Months Ended December 22, September 30, September 30, 1994 (inception) ----------------------------- ----------------------------- through 2000 1999 2000 1999 Sept. 30, 2000 ----------------------------- ----------------------------- ---------------- <S> <C> <C> <C> <C> <C> Income Interest and other income $ 1,382,814 $ 87,698 $ 4,538,728 $ 576,285 $ 10,110,415 ------------ ------------ ------------ ------------ ------------ Total income 1,382,814 87,698 4,538,728 576,285 10,110,415 ------------ ------------ ------------ ------------ ------------ Expenses Exploration 1,463,784 1,783,833 3,751,963 5,307,402 51,918,672 Administrative 2,000,346 473,790 5,368,314 1,871,584 14,457,886 Amortization and depreciation 66,753 60,130 177,889 154,350 843,402 ------------ ------------ ------------ ------------ ------------ Total expenses 3,530,883 2,317,753 9,298,166 7,333,336 67,219,960 ------------ ------------ ------------ ------------ ------------ Loss before minority interest (2,148,069) (2,230,055) (4,759,438) (6,757,051) (57,109,545) Minority interest in loss of consolidated subsidiary - - - - 4,558,886 ------------ ------------ ------------ ------------ ------------ Net loss for the period $ (2,148,069) $ (2,230,055) $ (4,759,438) $ (6,757,051) $(52,550,659) ------------ ------------ ------------ ------------ ------------ Net loss per Ordinary Share -- basic and diluted(1) $ (0.06) $ (0.08) $ (0.14) $ (0.26) $ (2.24) ============ ============ ============ ============ ============ Weighted average Ordinary Shares outstanding 34,471,268 26,266,883 34,471,268 26,255,871 23,437,067 ============ ============ ============ ============ ============ </TABLE> (1) Diluted earnings per share were antidilutive for all periods presented. The accompanying notes form an integral part of these consolidated financial statements. -4-
APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in United States dollars) (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, December 22, ------------------------------- 1994 (inception) 2000 1999 through ------------------------------- ---------------- <S> <C> <C> <C> Cash flows from operating activities: Net cash used in operating activities $ (5,369,138) $ (5,912,323) $ (59,021,976) ------------- ------------- ------------- Cash flows from investing activities: Purchase of short-term investments - - - Mining properties and development costs - - - Purchases of property, plant and equipment (19,835,054) (13,906,092) (61,084,459) ------------- ------------- ------------- Other - - - ------------- ------------- ------------- Net cash used in investing activities (19,835,054) (13,906,092) (61,084,459) ------------- ------------- ------------- Cash flows from financing activities: Payments of notes payable (net) (472,527) (192,766) (1,173,700) Net proceeds from issuance of Ordinary Shares - - 191,761,070 Proceeds from exercise of stock options - 224,156 421,879 Deferred organization costs - - (282,956) ------------- ------------- ------------- Net cash from (used in) financing activities (472,527) 31,390 190,726,293 ------------- ------------- ------------- Net decrease in cash and cash equivalents (25,676,719) (19,787,025) 70,619,858 Cash and cash equivalents - beginning of period 96,296,577 26,217,241 - ------------- ------------- ------------- Cash and cash equivalents - end of period $ 70,619,858 $ 6,430,216 $ 70,619,858 ============= ============= ============= Supplemental disclosure of non-cash transactions: Capitalization of depreciation expense related to San Cristobal Project $ 143,496 $ 116,708 Stock issued as compensation $ 55,463 $ - </TABLE> The accompanying notes form an integral part of these consolidated financial statements. -5-
APEX SILVER MINES LIMITED An Exploration and Development Stage Company NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars) 1. Basis of Preparation of Financial Statements These unaudited interim consolidated financial statements of Apex Silver Mines Limited (the "Company") and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, so long as such omissions do not render the financial statements misleading. Certain prior year balances have been reclassified to conform to the classifications being presented at September 30, 2000. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair statement of the results for the periods presented. All adjustments were of a normal recurring nature. These interim financial statements should be read in conjunction with the annual financial statements of the Company included in its 1999 Annual Report on Form 10-K. 2. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging Activities ("SFAS 133"). SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company), and establishes accounting and reporting standards for derivative instruments and hedging activities. The Company is engaged in limited metals trading activities utilizing puts and calls in a manner similar to anticipated lender requirements. In the near term the Company will continue to mark its open positions to market and record the difference in the carrying value to current earnings. During the first nine months of 2000 the Company recorded mark to market gains of approximately $400,000, which is included in interest and other income in the Consolidated Statements of Operations. In December 1999, the SEC released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The objective of this SAB is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. The Company does not believe adoption of SAB 101 will have a material effect on its financial position or results of operations. 3. Value Added Tax Recoverable The Company has recorded value added tax ("VAT") paid by its wholly owned subsidiaries, ASC Bolivia and Cordilleras Mexico, as recoverable assets. The VAT paid by ASC Bolivia is expected to be recovered through the sales of its production from the proven and probable reserves at the San Cristobal Project that the Company has begun to develop. Bolivian law states that VAT paid prior to production may be recovered as a credit against Bolivian taxes arising from production, including income tax. The VAT paid by Cordilleras Mexico is related to exploration activities and is recoverable upon application to the tax authorities. Cordilleras Mexico continues to receive VAT refunds relating to VAT paid during prior periods and has currently received, and continues to receive, refunds for VAT taxes paid through the early part of 1999. Applications for refund of the remaining VAT taxes continue to be filed on an ongoing basis and the remaining refunds are expected in due course. At September 30, 2000, the recoverable VAT recorded by ASC Bolivia and Cordilleras Mexico is $4,519,110 and $280,623 respectively. -6-
4. Property, Plant and Equipment The components of property, plant and equipment were as follows: September 30, December 31, 2000 1999 ------------- ------------ Mineral properties .................. $ 65,980,454 $48,056,283 Buildings ........................... 1,166,868 1,137,173 Mining equipment .................... 2,947,872 1,267,679 Other furniture and equipment ....... 767,230 765,241 ------------- ------------- 70,862,424 51,226,376 Less: Accumulated depreciation ...... (673,676) (664,610) ------------- ------------- $ 70,188,748 $ 50,561,766 ============= ============= 5. Commitments and Contingencies The Company had outstanding letters of credit in the amounts of approximately $300,000 and $0, for the periods ended September 30, 2000 and December 31, 1999, respectively. The letters of credit are associated with infrastructure development at the San Cristobal Project. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis summarizes the results of operations of Apex Silver Mines Limited (the "Company") for the three months ended September 30, 2000 and 1999 and for the nine months ended September 30, 2000 and 1999 and changes in its financial condition from December 31, 1999. This discussion should be read in conjunction with the Management's Discussion and Analysis included in the Company's 1999 Annual Report on Form 10-K. The Company is a mining exploration and development company that holds a portfolio of silver and base metal exploration and development properties in South America, Mexico and Central America. None of these properties are in production and, consequently, the Company has no current operating income or cash flow. The sole source of income for the Company since inception has been interest income. The Company's policy is to invest all excess cash in liquid, high credit quality, short-term financial instruments. The Company is incorporated in the Cayman Islands and does not conduct any business that currently generates U.S. taxable income. There is currently no corporate taxation imposed by the Cayman Islands. If any form of taxation were to be enacted in the Cayman Islands, the Company has been granted exemption until January 16, 2015. Apex Silver Mines Corporation ("Apex Corporation"), the Company's U.S. management services company, is subject to U.S. federal, state and local income taxes. Other than the management services company, the Company does not pay income tax in the U.S. Results of Operations - Three Months Ended September 30, 2000 Interest and other income. Interest and other income for the third quarter of 2000 was $1,382,814 as compared to $87,698 for the third quarter of 1999. The increase in interest and other income for the third quarter of 2000 is primarily the result of higher cash balances during 2000, resulting from proceeds of the November 1999 offering of Ordinary Shares and warrants, compared to cash balances during the same period of 1999. Exploration. Exploration expense was $1,463,784 for the third quarter of 2000, compared to $1,783,833 for the third quarter of 1999. The decreased exploration expense for 2000 is due to reduced exploration activity worldwide, as the Company is focusing its attention on the development of its San Cristobal Project in Bolivia. Administrative. Administrative expenses were $2,000,346 for the third quarter of 2000, compared to $473,790 for the third quarter of 1999. The 2000 administrative expenses are higher as the result of -7-
increased corporate activities primarily attributable to outside consulting including advisory fees associated with San Cristobal Project financing. Results of Operations - Nine Months Ended September 30, 2000 Interest and other income. Interest and other income was $4,538,728 for the nine months ended September 30, 2000, compared to $576,285 for the same period of 1999. The increase in interest and other income for the nine month period of 2000 is primarily the result of higher cash balances during 2000, resulting from proceeds of the November 1999 offering of Ordinary Shares and warrants, compared to cash balances during the same period of 1999. Exploration. Exploration expense was $3,751,963 for the nine months ended September 30, 2000, compared to $5,307,402 for the same period of 1999. The decreased exploration expense for 2000 is due to reduced exploration activity worldwide, as the Company is focusing its attention on the development of its San Cristobal Project in Bolivia. Administrative. Administrative expenses were $5,368,314 for the nine months ended September 30, 2000, compared to $1,871,584 for the same period of 1999. The 2000 administrative expenses are higher as the result of increased corporate activities primarily attributable to outside consulting including advisory fees associated with San Cristobal Project financing. Liquidity and Capital Resources As of September 30, 2000, the Company had cash and cash equivalents of $70,619,858 compared to $96,296,577 at December 31, 1999. The decrease is the result of $5,369,138 used in operations, including $3,751,963 spent on exploration, $19,835,054 invested in property, plant and equipment primarily related to the development of the San Cristobal Project, and a $472,527 reduction of debt. Based on recent estimated revisions to the September 1999 feasibility study for the San Cristobal Project, which assumes contract mining, the Company expects capital costs for construction to total approximately $435 million, excluding approximately $60 million in expected tax credits. Approximately $35 million of the tax credits are expected to be recovered during the construction phase of the Project while the remaining $25 million in tax credits are expected to be recovered against the Company's future Bolivian income taxes. In addition, the Company expects that the Project will require approximately $15 million of working capital. With infrastructure arrangements, primarily related to the power supply facilities, in the process of being finalized the Company has focused its efforts on continuing to advance the Project engineering and permitting, thereby lowering spending on the Project. The Company estimates Project spending for the year 2000 to be approximately $25 million, which will be funded from our existing cash balances. The Company expects to raise significant additional financing from outside sources to complete development of the San Cristobal project. These outside sources of financing for the San Cristobal project will include both debt and equity. The Company continues to work with Barclays Bank PLC, Deutsche Bank Securities Inc., the International Finance Corporation and Corporacion Andina de Fomento to develop multilateral financing options as part of a total financing package that may incorporate support from other official agencies as well as debt financing from banks and capital markets. There can be no assurance that the Company will be able to obtain the required financing on terms that it finds attractive, or at all. Recent Developments On September 6, 2000, the Company amended and replaced its current registration statement at the Securities and Exchange Commission with a universal shelf registration statement. The universal shelf registration statement became effective September 8, 2000, and allows the Company to raise up to $200 million by selling any combination of equity or debt securities listed in the statement. Proceeds from offering(s) under the shelf registration, if any, may be used to construct and develop San Cristobal, continue exploring the Company's other properties, maintain control or ownership of our properties, acquire additional mining related properties or businesses and for general corporate purposes. It is -8-
anticipated that project financing will constitute the substantial majority of the overall financing for the San Cristobal project. In September 2000, the Company announced the finalization of a letter of intent with Kvaerner, an independent engineering firm, whereby Kvaerner will perform detailed engineering, procurement and construction (EPC) services on the Company's San Cristobal Project. The letter of intent frames the conditions for a lump sum EPC contract. The Company also announced in September 2000, the finalization of a letter of intent with Washington Group International (Washington), formerly known as Morrison Knudsen Corporation, framing the conditions for a long-term mining contract. Washington's contract mining bid is approximately 17 percent lower than what was assumed in the Feasibility Study for contract mining. The Company believes that this savings makes it economically feasible to utilize contract mining services for the life of the mine rather than converting to owner mining after five years as was originally anticipated in the Feasibility Study. This should eliminate approximately $53 million in mining capital required to convert to owner mining, originally anticipated in year six of operations, while retaining the Feasibility Study's low-cost operating economics. Forward-Looking Statements Some information contained in or incorporated by reference into this report may contain forward-looking statements. These statements include comments regarding mine development and construction plans, costs, grade, production and recovery rates, permitting, financing needs, the availability of financing on acceptable terms, the timing of engineering studies and environmental permitting, and the markets for silver, zinc and lead. The use of any of the words "anticipate", "continue," "estimate," "expect," "may," "will," "project," "should," "believe" and similar expressions are intended to identify uncertainties. The Company believes the expectations reflected in those forward-looking statements are reasonable. However, the Company cannot assure that these expectations will prove to be correct. Actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors set forth in, or incorporated by reference into, this report: . worldwide economic and political events affecting the supply of and demand for silver, zinc and lead; . volatility in market prices for silver, zinc and lead; . financial market conditions, and the availability of financing on terms acceptable to our company; . uncertainties associated with developing a new mine, including potential cost overruns and the unreliability of estimates in early stages of mine development; . variations in ore grade and other characteristics affecting mining, crushing, milling and smelting operations and mineral recoveries; . geological, technical, permitting, mining and processing problems; . the availability and timing of acceptable arrangements for power, transportation, water and smelting; . uncertainties regarding future changes in tax legislation or implementation of existing tax legislation; . variations in smelting operations and capacity; . the availability of experienced employees; and . the factors discussed under "Risk Factors" in the Company's Form 10-K dated December 31, 1999. Many of those factors are beyond our ability to control or predict. You should not unduly rely on these forward-looking statements. These statements speak only as of the date of this report on Form 10-Q. Except as required by law, we are not obligated to publicly release any revisions to these forward- looking statements to reflect future events or developments. -9-
Item 3. Quantitative and Qualitative Disclosures About Market Risk and Hedging Activities Currently, the Company's major principal cash balances are held in U.S. dollars. The Company maintains minimum cash balances in foreign currencies and therefore has a relative low exposure to currency fluctuations. Because the Company conducts its activities largely in several foreign countries, the Company may in the future engage in hedging activities to minimize the risk of exposure to currency and interest rate fluctuations. The Company expects that it will be required to hedge some portion of its planned production in advance in order to complete the financing necessary to develop San Cristobal. In addition, as the Company brings San Cristobal into production and begins to derive revenue from the production, sale and exchange of metals, it may utilize various price-hedging techniques to lock in forward delivery prices on a portion of its production. The Company would expect to balance the use of price-hedging techniques to mitigate some of the risks associated with fluctuations in the prices of the metals it produces while allowing it to take advantage of rising metal prices should they occur. The Company is engaged in limited metals trading activities utilizing puts and calls in a manner similar to anticipated lender requirements. At September 30, 2000, the Company recorded a year-to-date mark to market gain of approximately $400,000 from these activities. There can be no assurance that the Company will always benefit from the use of these techniques. -10-
PART II: OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None. Item 6. (a) Reports on Form 8-K None. (b) Exhibits 27 Financial Data Schedule -11-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned thereunto duly authorized. APEX SILVER MINES LIMITED (Registrant) Date: November 9, 2000 By: /s/ Thomas S. Kaplan --------------------- Thomas S. Kaplan Chairman, Board of Directors -12-