<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K/A2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_] 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
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APEX SILVER MINES LIMITED
(Exact Name of Registrant as Specified in its Charter)
Cayman Islands, British West Indies Not Applicable
(State of Incorporation or (I.R.S. Employer
Organization) Identification No.)
Caledonian House Not Applicable
Jennett Street (Zip Code)
George Town, Grand Cayman
Cayman Islands, British West Indies
(Address of principal executive
office)
(345) 949-0050
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Ordinary Shares, $0.01 par value registered
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $249,359,040 as of March 23, 1999.
The number of Ordinary Shares outstanding as of March 23, 1999 was
26,248,320.
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company and the Selected Financial
Data and related notes thereto included elsewhere in this Form 10-K.
Apex Silver Mines Limited (the "Company") is a mining exploration and
development company that holds a portfolio of silver exploration and
development properties in South America and Central America. None of these
properties are in production and, consequently, the Company has no current
operating income or cash flow.
Background
In mid-1993, Apex Silver Mines Ltd. ("Apex Bermuda") was established to
acquire and develop silver exploration properties throughout the world.
On December 22, 1994, Apex Bermuda contributed substantially all of its
assets to Apex Silver Mines LDC ("Apex LDC"), a limited duration company
formed under the laws of the Cayman Islands.
In March of 1996, Apex Silver Mines Limited ("Apex Limited"), a limited
liability company formed under the laws of the Cayman Islands, was
incorporated in order to facilitate the 1996 Private Placement. In connection
with the 1996 Private Placement, Apex Limited issued Ordinary Shares to
certain of the non-U.S. investors in Apex LDC in exchange for their interests
in Apex LDC. These transactions and the 1996 Private Placement were completed
effective August 6, 1996. In addition, certain minority shareholders of Apex
LDC were entitled to exchange their shares of Apex LDC for Ordinary Shares of
Apex Limited on a one for one basis. During 1998, Apex Limited exchanged
7,079,006 of its Ordinary Shares for an equal number of Apex LDC shares. Such
shares are included in the 26,250,761 Apex Limited Ordinary Shares outstanding
at December 31, 1998. At December 31, 1998, Apex Limited owned 100 percent of
Apex LDC.
The Initial Public Offering
On December 1, 1997, the Company closed its initial public offering (the
"Offering") of Ordinary Shares. The Company sold 5,000,000 Ordinary Shares at
a price of $11 per share on the American Stock Exchange under the symbol
"SIL". 3,720,000 Ordinary Shares were offered initially in the United States
and Canada by the U.S. Underwriters, 450,000 Ordinary Shares were offered
initially outside the United States by the International Underwriters and
830,000 Ordinary Shares were offered in a concurrent offering by the Company
directly to a shareholder. In addition, on December 23, 1997, the underwriters
exercised their option to purchase an additional 523,372 Ordinary Shares at
the initial price of $11 per share. Net proceeds raised in the Offering were
approximately $54.8 million.
The San Cristobal Project
From 1994 to 1998, the properties comprising the San Cristobal project were
acquired in a series of transactions. In 1996 the Company began exploring
these properties, and discovered the presence of a significant silver, zinc
and lead deposit with the potential to be developed as a large-scale open-pit
mining project. In the fall of 1996, an in-fill drilling program using reverse
circulation and diamond core drilling was continued in order to delineate the
deposit and to provide information to be used in a reserve determination. In
addition, an expanded exploration effort at the San Cristobal project resulted
in the discovery of additional silver and base metal anomalies. On August 15,
1997, the Company acquired the 2.5 percent minority interest in ASC Bolivia
for 268,496 Ordinary Shares of the Company valued at $11 per share. The
primary asset of ASC Bolivia is the San Cristobal project. Accordingly, the
total consideration of $2,953,456 was capitalized as mining properties.
24
<PAGE>
Drilling on the San Cristobal property during 1998 more than doubled the
proven and probable reserves. Based on the results of a pre-feasibility study
on the San Cristobal project and drill results through 1998, the proven and
probable reserves at San Cristobal contain 509 million ounces of silver, 4.1
million tonnes of zinc and 1.4 million tonnes of lead. Since the 1998 drilling
program indicated that the San Cristobal deposit is still open in many
directions, including at depth, the Company conducted a drilling program
during early 1999 to demonstrate the lateral continuation of mineralization.
The Company is targeting the completion of a bankable feasibility study of
the San Cristobal project by mid-year 1999 with a goal of securing committed
financing by the end of 1999. As part of this study, proposals for power
supply, transportation, and smelting and refining of metal concentrates are
being evaluated. Construction is expected to begin soon thereafter and
commercial production should commence in 2002. The San Cristobal project is
expected to consist of a large scale, open pit mining operations using
conventional mining and processing technologies capable of producing and
processing an aggregate 40,000 tonnes per day ("tpd") of ore.
During January 1999, the Company completed an engagement letter appointing
Barclays Capital ("Barclays") and Deutsche Bank Securities Inc. ("Deutsche
Bank") as Co-Lead Arrangers to provide exclusive financial arranging services
in regard to development of the San Cristobal project. Under the terms of the
engagement letter, Barclays and Deutsche Bank will help develop an optimal
capital structure for San Cristobal by reviewing debt financing options
through banks and debt capital markets as well as support from development
agencies. In addition, Barclays and Deutsche Bank will provide independent
technical and legal reviews of the project as well as providing advice in the
areas of insurance coverage and risk management stratagies. Barclays' and
Deutsche Bank are under no obligation to provide financing for the San
Cristobal project.
Other Projects
The Company is also evaluating the economic viability of the Cobrizos
property in Bolivia and the Platosa property in Mexico.
The Cobrizos property is located approximately 12 kilometers north of the
San Cristobal project. Recent drilling by the Company suggests the presence of
approximately 10.8 million tonnes of mineralized material containing 3.4
ounces of silver per tonne. This mineralized material estimate has been
calculated by Mine Reserves Associates, Inc., an independent mine geology
consulting firm. The mineralized body is amenable to open pit mining and is
being considered as a satellite mining operation to the San Cristobal project.
The Platosa property is located in the Durango State in northern Mexico. A
first stage drill program intersected high grade massive sulfides in one of
five drill holes. A geophysical program is being conducted to assist in the
design of a follow-up drilling program. This property is in a mining district
with well-established massive sulfide deposits that have been profitably
mined.
Results of Operations
Interest Income. The Company does not yet produce silver or any other
mineral products and has no revenues from product sales. The only source of
revenue is interest income. The Company's policy is to invest all excess cash
in liquid, high credit quality, short-term financial instruments. Interest
income for the year ended December 31, 1998 was $2,444,357 compared to
$961,810 and $574,470 for the years ended December 31, 1997 and 1996,
respectively. The increase in interest income for the comparative periods was
due to the additional cash raised in the 1996 Private Placement and the 1997
Offering.
Exploration. Mineral exploration expenditures are expensed as incurred prior
to the determination of the feasibility of mining operations. Once it has been
determined that a mineral property has proven and probable ore reserves,
subsequent development costs are capitalized. Through December 31, 1998, all
acquisition and exploration costs have been expensed as incurred, except those
pertaining to the San Cristobal project. As of September 1, 1997, the Company
has capitalized development costs associated with the San Cristobal project and
will continue to do so in the future.
25
<PAGE>
Exploration expenses were $5,147,935 for the year ended December 31, 1998
compared to $9,754,231 and $9,590,632 for the years ended December 31, 1997
and 1996, respectively. The decrease in exploration expenses for 1998 compared
to 1997 is primarily the result of the capitalization of exploration costs
associated with the San Cristobal project beginning September 1, 1997.
Administrative. Administrative expenses were $5,066,652 for the year ended
December 31, 1998, compared to $4,129,623 and $1,923,165 for the years ended
December 31, 1997 and 1996, respectively. The increase in administrative
expenses for 1998 compared to 1997 is primarily the result of increased
salaries and benefits, insurance costs, and rents related to the increased
activity and personnel associated with the development and financing of the
San Cristobal project. The increase in 1997 as compared to 1996 is primarily
the result of increased expenditures related to the hiring of key management
personnel, the opening of the Apex Silver Mines Corporation ("Apex
Corporation") Denver office and employee and director stock option
compensation expense incurred in 1997.
Consulting. Consulting fees were $2,257,647 for the year ended December 31,
1998 compared to $1,523,116 and $2,506,250 for the years ended December 31,
1997 and 1996, respectively. The increase in consulting fees for 1998 compared
to 1997 is the result of increased fees associated with the financing
arrangements for San Cristobal. The decrease in consulting fees for 1997
versus 1996 is primarily due to the capitalization of technical consulting
fees associated with the San Cristobal project beginning September 1, 1997.
Professional Fees. Professional fees were $832,577 for the year ended
December 31, 1998, compared to $390,369 and $1,096,271 for the years ended
December 31, 1997 and 1996, respectively. The increase in 1998 professional
fees compared to 1997 was primarily due to higher legal and accounting fees
associated with being a public company. The decrease from 1996 to 1997 was
primarily due to the capitalization of costs associated with the Offering.
Income Taxes. Apex Corporation, the Company's U.S. management services
company, is subject to U.S. income taxes. Otherwise the Company pays no income
tax in the U.S. since the Company is incorporated in the Cayman Islands and
conducts no 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.
Employee Benefits
The Company does not provide any post-retirement or post-employment benefits
to its employees and therefore does not accrue for such expenses. In 1997,
Apex Corporation instituted a 401(k) Plan for its U.S. employees. Apex
Corporation makes monthly contributions to this 401(k) Plan, and currently
matches 50 percent of each employee's contribution up to an employee
contribution of six percent of base salary. Employees vest in the Company's
contribution at 50 percent after one year of service and 100 percent after two
years of service.
Under the Company's approved Bonus Plan, bonuses in the amount of $253,400
were awarded to employees during 1998 for services performed during the year.
The awards were paid in the form of cash of $67,775 and 21,838 Ordinary Shares
of restricted stock valued at $185,625 using an award date market value of
$8.50. Such shares are restricted for two years from the date of issuance and
may not be traded or pledged during that period. Should the employee terminate
during the restricted period the shares are forfeited to the Company. These
shares are included in the outstanding shares at December 31, 1998.
Liquidity and Capital Resources
As of December 31, 1998, the Company had cash and cash equivalents of
$26,217,241 compared to $57,033,193 at December 31, 1997. The December 31,
1997, cash and cash equivalents balance was primarily the proceeds from the
December 1997 Offering. The decrease in cash and cash equivalents during 1998
is the result of the Company's investment of $18,486,098 in the development of
the San Cristobal project, $1,421,467 to purchase plant, buildings and
equipment and expenditures related to operations of $10,641,471. In addition
the Company paid down $464,639 of its long-term debt.
26
<PAGE>
The Company is subject to a series of obligations with respect to its
mineral properties; the failure to meet any of these commitments could result
in the loss or forfeiture of one or more of the Company's properties. These
obligations consist of government mineral patent fees and commissions, work
commitments, lease payments and advance royalties. Also, a number of the
Company's property interests derive from contractual purchase options. In
order to acquire such properties, the Company will be obliged to make certain
payments to the registered concession holders and others who have interests in
the properties. In addition, it is anticipated that significant expenditures
will be made for other continuing exploration, property acquisition, property
evaluation and general corporate expenses. All such obligations and
anticipated expenditures will be funded from existing cash balances for the
next twelve months.
The Company does not currently have a line of credit with any financial
institution.
The Company's future revenues and earnings will be influenced by world
market prices for silver, zinc, lead, copper and gold, and by currency
exchange and interest rates that fluctuate and over which the Company has no
control. The Company may from time to time choose to hedge its metal, interest
rate and/or currency exposure in order to decrease fluctuations in earnings
and revenues. The Company is currently developing policies, procedures and
guidelines for the hedging of metal prices, interest rates and foreign
currency exposure.
The Company does not know of any trends, demands, commitments, events or
incidents that may result in the Company's liquidity either materially
increasing or decreasing at present or in the foreseeable future.
The development program at the San Cristobal project will require
significant external financing. Sources of financing may include bank
borrowings and future additional debt or equity financing. In January 1999,
the Company completed an engagement letter appointing Barclays and Deutsche
Bank as Co-Lead Arrangers for the project financing of the San Cristobal
project. There can be no assurance that the required financing will be
obtainable on terms that are attractive to the Company, or at all.
As of the date hereof, the Company does not plan to declare or pay a
dividend.
Environmental Compliance
The Company's current and future mining and processing operations and
exploration activities will be subject to various federal, state and local
laws and regulations in the countries in which it conducts its activities,
which govern the protection of the environment, prospecting, development,
production, taxes, labor standards, occupational health, mine safety, toxic
substances and other matters. Management does not believe that compliance with
such laws and regulations will have a material adverse effect on its
competitive position. The Company intends to obtain all licenses and permits
required by all applicable regulatory agencies in connection with its mining
operations and exploration activities. The Company intends to maintain
standards of environmental compliance consistent with best contemporary
industry practice.
The Company's preliminary analysis of the mining activities conducted by the
previous owners and operators of the Toldos mine at the San Cristobal project
indicates that some low level effluents from the site may be draining into a
seasonal stream which flows into the Rio Grande, which flows into the Salar de
Uyuni, a salt lake to the north of the San Cristobal project. Pursuant to the
recently enacted Bolivian Mining Code, mining companies are not liable for
identified pre-existing conditions Nonetheless, during construction and
operations the Company expects to improve the environmental situation which
may currently exist at the Toldos property. The Company does not expect any
such efforts to have a material adverse effect on the Company's proposed
construction or operations at the San Cristobal project.
Year 2000 Date Conversion
The inability of certain computer programs to interpret "00" as the year
2000 does not appear to be a significant problem for the Company. As of
December 31, 1998, the Company does not maintain a mainframe
27
<PAGE>
computer or central database, and the accounting system is supported by
personal computers and their related software. The Company believes that its
computer systems are year 2000 compliant. Notwithstanding this fact, the
Company, for reasons independent of year 2000 issues, expects to complete
installation of upgraded accounting software at its major locations by mid
1999. All such software is year 2000 compliant. To further mitigate the risk
of data loss or corruption, the Company performs regular tape backups of all
files, stays in contact with software manufacturers regarding updates to their
products and keeps informed of the latest developments concerning year 2000
issues. The Company's costs with respect to the year 2000 issue have been
minimal.
The Company is in a development stage and as such does not expect to have
any customers until after the year 2000. The Company has not evaluated whether
its suppliers and other service providers are year 2000 compliant. However,
the Company does not believe that the failure of its suppliers and service
providers to timely achieve year 2000 compliance would have a material adverse
affect on earnings. Accordingly the Company has not developed a contingency
plan at this time. The Company will continue to monitor the need for a
contingency plan as additional information is acquired.
Forward-Looking Statements
This filing contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in this filing
which address activities, events or developments that the Company expects,
believes, intends or anticipates will or may occur in the future, including
such matters as future investments in existing development projects and the
acquisition of new mineral properties (including the amount and nature
thereof), business strategies, mine development and construction plans, costs,
grade production and recovery rates, permitting, financing needs from external
sources, the availability of financing on acceptable terms, the timing of
engineering studies and environmental permitting, and the markets for silver,
zinc and lead, are forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy, and some of which might not even be anticipated. 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 such expectations will prove to be correct. Future events and
actual results, financial and otherwise, could differ materially from those
set forth in or contemplated by the forward-looking statements herein.
Factors that could cause actual results to differ materially include, among
others: worldwide economic and political events affecting the supply of and
demand for silver, zinc, and lead; volatility in market prices of silver, zinc
and lead; financial market conditions, and availability of financing on terms
acceptable to the Company; uncertainties associated with the development of 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 of and timing of acceptable arrangements
for power, transportation, water and smelting; the availability of experienced
employees; and variations in smelting operations and capacity. Many such
factors are beyond the Company's ability to control or predict. The reader is
cautioned not to put undue reliance on forward looking statements. The Company
disclaims any intent or obligation to update publicly the forward looking
statements, whether as a result of new information, future events or
otherwise.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Currently, the Company's major principal cash balances are held in U.S.
dollars. Subsidiary cash balances in foreign currencies are held to minimum
balances and therefore have a minimum risk to currency fluctuations. As a
result of its operations 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.
28
<PAGE>
To complete the financing necessary to develop its mineral properties,
including San Cristobal, the Company anticipates that it will be required to
hedge some portion of its planned production in advance. In addition, as its
mineral properties are brought into production and the Company begins to
derive revenue from the production, sale and exchange of metals, the Company
may utilize various price-hedging techniques to lock in forward delivery
prices on a portion of its production. Such price-hedging techniques would be
balanced to mitigate some of the risks associated with fluctuations in the
prices of the metals the Company produces while allowing the Company to take
advantage of rising metal prices should they occur.
The Company is currently developing policies, procedures and guidelines for
the hedging of metal prices, interest rates and foreign currency exposure.
There can be no assurance that the use of hedging techniques will always
benefit the Company.
29
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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary information filed as
part of this Item 8 are listed under Part IV, Item 14, "Exhibits, Financial
Statement Schedules and Reports on Form 8-K" and contained in this Form 10-K
at page F-1.
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management...................................................... F-2
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet at December 31, 1998 and 1997.................. F-3
Consolidated Statement of Operations for the years ended December 31,
1998, 1997, and 1996 and for the period from December 22, 1994
(inception) through December 31, 1998.................................... F-4
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997, and 1996 and for the period from December
22, 1994 (inception) through December 31, 1998........................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997, and 1996 and for the period from December 22, 1994
(inception) through December 31, 1998.................................... F-6
Notes to the Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial
statements and for other financial and operating information appearing in the
annual report. It believes that its accounting systems and internal accounting
controls, together with other controls, provide assurance that all accounts
and records are maintained by qualified personnel in requisite detail, and
accurately and fairly reflect transactions of Apex Silver Mines Limited and
its subsidiaries in accordance with established policies and procedures.
The Board of Directors has an Audit Committee, all of whose members are
neither officers nor employees of the Company or its affiliates. The Audit
Committee recommends independent public accountants to act as auditors for the
Company for consideration by the Board of Directors; reviews the Company's
financial statements; confers with the independent accountants with respect to
the scope and results of their audit of the Company's financial statements and
their reports thereon; reviews the Company's accounting policies, tax matters
and internal controls; and oversees compliance by the Company with the
requirements of federal regulatory agencies. Access to the Audit Committee is
given to the Company's financial and accounting officers and independent
accountants.
<TABLE>
<S> <C>
/s/ Thomas S. Kaplan /s/ Mark A. Lettes
Thomas S. Kaplan Mark A. Lettes
Chairman Vice President and Chief Financial Officer
Apex Silver Mines Limited Apex Silver Mines Corporation
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Apex Silver Mines Limited
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Apex Silver Mines Limited (successor to Apex Silver Mines LDC) and its
subsidiaries at December 31, 1998 and 1997 and the results of their operations
and their cash flows for the years ended December 31, 1998, 1997 and 1996 and
the period from December 22, 1994 (inception) through December 31, 1998, 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.
PricewaterhouseCoopers LLP
Denver, Colorado
March 24, 1999
F-2
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
CONSOLIDATED BALANCE SHEET
(Expressed in United States dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 26,217,241 $ 57,033,193
Accrued interest receivable...................... 126,332 102,412
Amounts due from affiliates...................... -- 722,717
Prepaid expenses and other assets................ 1,197,622 968,050
------------ ------------
Current assets................................ 27,541,195 58,826,372
Mining properties and development costs.......... 29,777,360 11,888,258
Plant, buildings and equipment (net)............. 2,229,584 1,149,842
Value added tax recoverable...................... 2,725,803 1,351,004
Deferred organizational costs (net).............. 56,592 113,183
Other............................................ 16,500 --
------------ ------------
Total assets.................................. $ 62,347,034 $ 73,328,659
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accrued salaries, wages and benefits............. $ 154,800 $ 40,736
Accounts payable and other accrued liabilities... 1,580,123 553,130
Current portion of long-term debt................ 248,773 412,408
------------ ------------
Current liabilities............................ 1,983,696 1,006,274
Long-term debt..................................... 1,966,588 3,093,788
Commitments and contingencies (Note 12)............ -- --
Shareholders' equity
Ordinary Shares, $.01 par value, 75,000,000
shares authorized; 26,250,761 and 19,124,916,
shares issued and outstanding, respectively
(See Note 1e)................................... 262,507 191,249
Contributed surplus.............................. 97,946,434 97,819,969
Accumulated deficit.............................. (39,812,191) (28,782,621)
------------ ------------
Total shareholders' equity..................... 58,396,750 69,228,597
------------ ------------
Total liabilities and shareholders' equity..... $ 62,347,034 $ 73,328,659
============ ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-3
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
CONSOLIDATED STATEMENT OF OPERATIONS
(Expressed in United States dollars)
<TABLE>
<CAPTION>
For the
period
December 22,
1994
(inception)
Year ended Year ended Year ended through
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income
Interest income....... $ 2,444,357 $ 961,810 $ 574,470 $ 4,458,140
------------ ------------ ------------ ------------
Total income........ 2,444,357 961,810 574,470 4,458,140
------------ ------------ ------------ ------------
Expenses
Exploration........... 5,147,935 9,754,231 9,590,632 26,157,857
Administrative........ 5,066,652 4,129,623 1,923,165 12,249,481
Consulting............ 2,257,647 1,523,116 2,506,250 6,991,913
Professional fees..... 832,577 390,369 1,096,271 2,997,438
Amortization and
depreciation......... 169,116 149,429 57,392 432,528
------------ ------------ ------------ ------------
Total Expense....... 13,473,927 15,946,768 15,173,710 48,829,217
------------ ------------ ------------ ------------
Loss before minority
interest............... (11,029,570) (14,984,958) (14,599,240) (44,371,077)
Minority interest in
loss of Consolidated
subsidiary............. -- -- 2,875,927 4,558,886
------------ ------------ ------------ ------------
Net loss for the
period............. $(11,029,570) $(14,984,958) $(11,723,313) $(39,812,191)
============ ============ ============ ============
Net loss per Ordinary
Share--Basic and
diluted(1)............. $ (0.42) $ (0.72) $ (0.66) $ (1.96)
============ ============ ============ ============
Weighted average
Ordinary Shares
outstanding (See Note
1e).................... 26,212,009 20,929,882 17,672,206 20,348,742
============ ============ ============ ============
</TABLE>
- - --------
(1) Diluted earnings per share were antidilutive for all periods presented
The accompanying notes form an integral part of these consolidated financial
statements.
F-4
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Expressed in United States dollars)
<TABLE>
<CAPTION>
Accumulated
Deficit & Total
Shares Contributed Comprehensive Shareholders'
Outstanding Amount Surplus Deficit Equity
----------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of shares upon
incorporation December
22, 1994............... 8,822,546 $ 88,225 $ 5,571,398 $ -- $ 5,659,623
Net loss and
comprehensive loss..... -- -- -- (213,165) (213,165)
---------- -------- ----------- ------------ ------------
Balance, December 31,
1994................... 8,822,546 88,225 5,571,398 (213,165) 5,446,458
Net loss and
comprehensive loss..... -- -- -- (1,861,185) (1,861,185)
---------- -------- ----------- ------------ ------------
Balance, December 31,
1995................... 8,822,546 88,225 5,571,398 (2,074,350) 3,585,273
Issuance of shares in
private placement...... 4,256,700 42,567 32,406,783 -- 32,449,350
Net loss and
comprehensive loss..... -- -- -- (11,723,313) (11,723,313)
---------- -------- ----------- ------------ ------------
Balance, December 31,
1996................... 13,079,246 130,792 37,978,181 (13,797,663) 24,311,310
Purchase of minority
interest in ASC
Bolivia................ 268,496 2,685 2,950,771 -- 2,953,456
Issuance of shares to
associates............. 138,595 1,386 1,523,159 -- 1,524,545
Issuance of shares for
services............... 115,207 1,152 231,566 -- 232,718
Stock option
compensation expense... -- -- 416,562 -- 416,562
Issuance of shares upon
Initial Public
Offering............... 5,523,372 55,234 54,719,730 -- 54,774,964
Net loss and
comprehensive loss..... -- -- -- (14,984,958) (14,984,958)
---------- -------- ----------- ------------ ------------
Balance, December 31,
1997................... 19,124,916 191,249 97,819,969 (28,782,621) 69,228,597
Exchange of Apex LDC
shares................. 7,079,006 70,790 (70,790) -- --
Stock options
exercised.............. 25,001 250 197,473 -- 197,723
Restricted stock
awards................. 21,838 218 185,407 -- 185,625
Unearned compensation... -- -- (185,625) -- (185,625)
Net loss and
comprehensive loss..... -- -- -- (11,029,570) (11,029,570)
---------- -------- ----------- ------------ ------------
Balance, December 31,
1998................... 26,250,761 $262,507 $97,946,434 $(39,812,191) $ 58,396,750
========== ======== =========== ============ ============
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-5
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in United States dollars)
<TABLE>
<CAPTION>
For the
period
December 22,
1994
(inception)
Year ended Year ended Year ended through
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net cash used in
operating activities
(See Note 11)........ $(10,641,471) $(17,776,508) $(12,091,580) $(44,328,776)
------------ ------------ ------------ ------------
Cash flows from
investing activities:
Mining properties and
development costs.... (18,486,098) (5,428,606) -- (23,914,704)
Purchase of plant,
buildings and
equipment............ (1,421,467) (719,146) (524,335) (2,664,948)
------------ ------------ ------------ ------------
Net cash used in
investing
activities......... (19,907,565) (6,147,752) (524,335) (26,579,652)
------------ ------------ ------------ ------------
Cash flows from
financing activities:
Net proceeds from
issuance of Ordinary
Shares............... -- 55,007,682 35,269,068 97,675,541
Payment of debt....... (464,639) -- -- (464,639)
Proceeds from exercise
of stock options 197,723 -- -- 197,723
Deferred
organizational and
financing costs...... -- -- -- (282,956)
------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities......... (266,916) 55,007,682 35,269,068 97,125,669
------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ (30,815,952) 31,083,422 22,653,153 26,217,241
Cash and cash
equivalents beginning
of period.............. 57,033,193 25,949,771 3,296,618 --
------------ ------------ ------------ ------------
End of period........... $ 26,217,241 $ 57,033,193 $ 25,949,771 $ 26,217,241
============ ============ ============ ============
Supplemental non-cash
transactions:
Acquisition of
minority interest in
ASC Bolivia for
Ordinary Shares at
$11 per share........ $ -- $ 2,953,456 $ --
Acquisition of mining
properties for
assumption of debt... $ -- $ 3,506,196 $ --
Non-cash debt
extinguished by one-
time early cash
payment (See Note
7)................... $ 826,196 $ -- $ --
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
F-6
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
1. Incorporation, Recapitalization, Initial Public Offering, Ownership and
Operations
a. Apex Silver Mines Limited ("Apex Limited" or the "Company") was formed
under the laws of the Cayman Islands in March of 1996 for the sole purpose of
serving as a holding company for certain ownership interests in Apex Silver
Mines LDC ("Apex LDC"). On April 15, 1996, holders of approximately 55% of the
then-outstanding shares of Apex LDC elected to participate, effective as of
the completion of a proposed private placement of shares of Apex Limited which
was completed as of August 6, 1996, in a recapitalization effected by an
exchange, on a one-for-one basis, of their shares in Apex LDC for identical
equity instruments of Apex Limited (the "Recapitalization"). The balance of
shareholders retained a direct ownership interest in Apex LDC. As a result of
this recapitalization, Apex LDC became a majority-owned subsidiary of Apex
Limited. The accompanying financial statements reflect the historical accounts
of the Company's predecessor, Apex LDC. For purposes of the accompanying
consolidated financial statements of Apex Limited, the recapitalization has
been given retroactive effect to the date of incorporation of Apex LDC, with
the results of operations and equity attributable to the other ownership
interests in Apex LDC being reflected in "minority interest in consolidated
subsidiary". Consequently, for purposes of these financial statements, Apex
Limited is considered the successor to Apex LDC.
b. In August of 1996, Apex Limited issued 4,256,700 Ordinary Shares in a
private placement transaction (the "Private Placement") for net proceeds of
$32.4 million. These proceeds were contributed to Apex LDC in exchange for the
issuance by Apex LDC of 4,256,700 shares of its share capital. As a result of
this private placement, the Company's ownership interest in Apex LDC was
increased from approximately 55% to 65%.
c. On December 1, 1997, the Company closed its initial public offering (the
"Offering") of Ordinary Shares. The Company sold 5,000,000 Ordinary Shares at
a price of $11 per share on the American Stock Exchange under the symbol
"SIL". In addition, on December 23, 1997, the underwriters exercised an option
to purchase an additional 523,372 Ordinary Shares at the initial price of $11
per share. Net proceeds raised in the offering were approximately $54.8
million. These proceeds were contributed to Apex LDC in exchange for the
issuance by Apex LDC of 5,523,372 shares of its capital.
d. Apex LDC was incorporated under the laws of the Cayman Islands on
November 23, 1994 as a 30-year limited duration company on the contribution of
all the assets of its predecessor entity, Apex Silver Mines Ltd., a Bermuda
corporation. (Actual contribution occurred on December 22, 1994.) The
Company's principal activities are the exploration and development of mineral
properties. The Company participates in the acquisition and exploration of
mineral properties for possible future development directly and indirectly
through Apex LDC's principal subsidiaries, Andean Silver Corporation LDC
("Andean"), ASC Bolivia LDC ("ASC Bolivia"), Apex Asia LDC ("Apex Asia"),
Minera de Cordilleras (Honduras), S. de R.L. ("Cordilleras Honduras"),
Cordilleras Silver Mines Ltd. ("Cordilleras Bahamas"), Cordilleras Silver Mines
(Cayman) LDC ("Cordilleras Cayman"), Compania Minerales de Zacatecas,
S. de R.L. de C.V. ("CMZ"), Apex Silver Mines Corporation, ("Apex Corporation")
and ASC Peru LDC ("ASC Peru").
e. In conjunction with the Recapitalization and the Private Placement, Apex
Limited and the shareholders of Apex LDC entered into a Buy-Sell Agreement
(the "Buy-Sell Agreement") which is intended to maintain the same beneficial
interest in Apex LDC attributable to all shareholders of Apex LDC prior to the
Recapitalization and Private Placement. During 1998, Pursuant to the terms of
the Buy-Sell Agreement, Apex Limited exchanged 7,079,006 of its Ordinary
Shares for an equal number of Apex LDC shares. Such shares are included in the
26,250,761 Apex Limited Ordinary Shares outstanding at December 31, 1998. At
December 31, 1998, Apex Silver Mines Limited owned 100 percent of Apex LDC.
Per the provisions of the Buy-Sell
F-7
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
Agreement, all of the outstanding shares of Apex LDC are considered Ordinary
Shares outstanding for the purposes of computing net loss per Ordinary Share
for the periods presented.
f. The Company, through indirect subsidiaries, is active in Central America
and South America and currently holds interests in, or is the beneficial owner
of, non-producing silver resource properties in Chile, Bolivia, Honduras,
Mexico and Peru. The Company is in the process of evaluating certain of its
properties to determine the economic feasibility of bringing one or more of
the properties into production.
2. Summary of Significant Accounting Policies
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP"). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates. The policies adopted, considered by management to
be significant, are summarized as follows:
a. Basis of consolidation
These consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in joint ventures are
proportionately consolidated consistent with generally accepted accounting
practices in the mining industry.
b. Translation of foreign currencies
Substantially all expenditures are made in United States dollars.
Accordingly, the Company uses the United States dollar as its functional
currency.
c. Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Short-term investments
include certificates of deposit with maturities greater than three months, but
not exceeding twelve months. Short-term investments are recorded at cost which
approximates fair value.
d. Mining properties, exploration and development costs
The Company expenses general prospecting costs and the costs of acquiring
and exploring unevaluated mining properties. When a property is determined to
have proven and probable reserves, further development costs are capitalized.
When ore reserves are developed and operations commence, capitalized costs
will be amortized using the units-of-production method. Upon abandonment or
sale of projects, all capital costs relating to the specific project are
written off in the year abandoned or sold and a gain or loss is recognized.
Beginning September 1, 1997, all costs associated with the Company's San
Cristobal project have been capitalized. As of December 31, 1998, capitalized
property and development costs related to the San Cristobal project amounted
to $29,777,360. No other amounts related to mineral properties have been
capitalized.
e. Fixed assets
Buildings and equipment are carried at cost and are depreciated on a
straight-line basis over estimated useful lives of three to thirty years.
F-8
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
f. Deferred organizational costs
Costs incurred in the organization of the Company have been capitalized and
are being amortized on a straight-line basis over five years.
g. 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 net 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 net 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. To date no such impairments have
been identified.
h. Stock compensation
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company has elected to
measure compensation expense as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under that method,
the difference between the exercise price and the estimated fair value of the
shares at the date of grant is charged to compensation expense ratably over
the vesting period.
i. Net loss per ordinary share
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share, which requires the presentation of basic
and diluted earnings per share. All prior period earnings per share data have
been restated to conform with the provisions of this Statement.
Basic earnings per share excludes dilution and is computed by dividing net
earnings available to ordinary shareholders by the weighted average number of
Ordinary Shares outstanding for the period. Diluted earnings per share reflect
the potential dilution that would occur if securities or other contracts to
issue Ordinary Shares were exercised or converted into Ordinary Shares.
Outstanding options to purchase 626,571, 455,625 and 281,250 Ordinary Shares
were not included in the computation of diluted earnings per share at December
31, 1998, 1997, and 1996 respectively, because to do so would have been
antidilutive.
j. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. For fair-
value hedge transactions in which the Company is hedging changes in an
asset's, liability's, or firm commitment's fair value, changes in the fair
value of the derivative instrument will generally be offset by changes in the
hedged item's fair value. For cash flow hedge transactions, in which the
Company is hedging the variability of cash flows related to a variable-rate
asset, liability or forecasted transaction, changes
F-9
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that
are reported in other comprehensive income will be reclassified as earnings in
the periods in which earnings are impacted by the variability of cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current-period earnings.
The Company has not yet determined the future impact that the adoption of
FAS 133 will have on its earnings or statement of financial position.
Other pronouncements issued by authoritative bodies with future effective
dates are either not applicable or not material to the consolidated financial
statements of the Company.
3. Income Taxes
The provision for income taxes includes United States federal, state and
foreign income taxes currently payable and deferred based on currently enacted
tax laws. Deferred income taxes are provided for the tax consequences of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is recognized if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
There is currently no taxation imposed by the Cayman Islands. If any form of
taxation were to be enacted, the Company has been granted exemption therefrom
to January 16, 2015. The Company's subsidiaries which do business in other
countries have not generated income and therefore are not liable for local
income taxes.
As of December 31, 1998 and 1997, operating loss carryforwards generated by
ASC Bolivia amounted to approximately $13.1 and $9.6 million, respectively.
Operating losses (as adjusted for inflation) may be carried forward and
deducted from taxable income indefinitely. The deferred tax asset resulting
from the operating loss carryforwards has been entirely offset by a valuation
allowance.
No net deferred tax assets related to operating losses generated through
December 31, 1998 by the Company's other foreign subsidiaries have been
included in the accompanying financial statements, as all such assets have
been entirely offset by a valuation allowance.
4. Value Added Tax Recoverable
The Company has recorded value added tax ("VAT") paid by ASC Bolivia and
Cordilleras Honduras as recoverable assets. The VAT paid by ASC Bolivia is
expected to be recovered through production from the proven and probable
reserves at the San Cristobal Project that the Company intends 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 Honduras is related to exploration activities and is
recoverable upon application to the tax authorities. During 1998, Cordilleras
Honduras received VAT refunds totaling $68,946 relating to VAT paid in 1996.
Applications for refund of VAT paid in 1997 and 1998 have been filed and are
expected to be paid in due course. At December 31, 1998, the recoverable VAT
recorded by ASC Bolivia and Cordilleras Honduras is $2,539,586 and $186,217
respectively.
Because of the uncertainty of the recoverability of VAT paid by ASC Peru,
during 1998 the Company recorded a one-time charge of $202,560 related to the
ASC Peru VAT receivable. All future VAT costs incurred by ASC Peru will be
charged to expense as incurred.
F-10
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
5. Plant, Buildings and Equipment
The components of plant, buildings and equipment were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Buildings.......................................... $ 828,077 $ 410,639
Mining equipment and machinery..................... 1,513,757 728,313
Other furniture and equipment...................... 229,475 104,529
---------- ----------
2,571,309 1,243,481
Less: Accumulated depreciation..................... (341,725) (93,693)
---------- ----------
$2,229,584 $1,149,842
========== ==========
</TABLE>
Depreciation expense for the period ended December 31, 1998, 1997 and 1996
totaled $112,471, $92,838 and $801, respectively. During 1998, $135,561 of
depreciation associated with the San Cristobal development was capitalized. No
amounts were capitalized during 1997 and 1996.
6. Deferred Organizational Costs
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Organizational costs............................... $ 282,956 $ 282,956
Less: Accumulated amortization..................... (226,364) (169,773)
--------- ---------
$ 56,592 $ 113,183
========= =========
</TABLE>
Amortization expense was $56,591 for each of the years ended December 31,
1998, 1997 and 1996.
7. Long-term Debt
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Banco de Santa Cruz............................... $ 515,361 $ 536,000
Barex............................................. 900,000 900,000
Banco Industrial.................................. -- 1,126,196
Monica de Prudencio............................... 800,000 944,000
---------- ----------
Sub-total..................................... 2,215,361 3,506,196
Less Current Portion.............................. (248,773) (412,408)
---------- ----------
Total......................................... $1,966,588 $3,093,788
========== ==========
</TABLE>
The following debt was assumed as a result of the Company's decision to
exercise its option to purchase the Toldos property, a portion of San
Cristobal, in December 1997:
Banco de Santa Cruz--The Company made an initial payment of $53,600 on
March 31, 1998. Beginning in 1999, the Company will pay $68,914 for each of
the next seven years, plus interest at Banco de Santa Cruz' preferential
rate of interest. As of December 31, 1998, the preferential interest rate
was approximately 14%. Although the principal payments of $68,914 are due
annually, the Company is required to make interest payments on a quarterly
basis.
Barex--The Company will make one payment of $900,000 on December 1, 2001.
No interest is due on this debt.
F-11
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
Banco Industrial - Originally this debt was to be paid through a 5% net
smelter return royalty during the first year of production. However, on
March 31, 1998,Banco Industrial agreed to extinguish the debt for a one-time
payment of $300,000. Such settlement was based upon the resolution of several
uncertainties relative to the determination of the fair value of the debt
assumed and the resulting value to be assigned to the mineral property.
Accordingly, the Company recorded an approximate $800,000 fair market value
adjustment to the purchase price upon the resolution of this
pre-acquisition contingency.
Monica de Prudencio--This debt was acquired in September 1997, when the
Company exercised its option to purchase various properties in the San
Cristobal area. The total option price was $2,000,000 of which $1,020,000
was paid in cash. The remainder is being paid in 78 monthly installments of
$12,000 due the fifteenth of every month until June, 2004 and a final
payment of $8,000 due July 15, 2004. No interest is due on this debt.
8. Stock Option Plans
The Company has established a plan to issue share options and other awards
to be valued in whole or part by reference to the Company's Ordinary Shares
for officers, employees, consultants and agents of the Company and its
subsidiaries (the "Plan"). Under the Plan, the total number of options and
other awards outstanding at any time cannot exceed ten percent of the
Company's share capital. Options granted and other awards under the Plan are
non-assignable. Options exist for a term, not to exceed ten years, as fixed by
the Compensation Committee of the board of directors of the Company (the
"Committee"). Options vest ratably over periods of up to four years with the
first tranche vesting on the date of grant or the anniversary of the date of
grant. Unexercised options expire ten years after the date of grant.
The Company has established a share option plan for its non-employee
directors (the "Director Plan"). Under the Director Plan, the total number of
options outstanding at any one time cannot exceed five percent of the
Company's share capital. Pursuant to the Director Plan non-employee directors
receive i) at the effective date of their initial election to the Company's
board of directors, an option to purchase the number of Ordinary Shares equal
to $50,000 divided by the closing price of the Ordinary Shares on the American
Stock Exchange the "AMEX") on such date, ii) at the close of business of each
annual meeting of the Company's shareholders, an option to purchase the number
of Ordinary Shares equal to $50,000 divided by the closing price of the
Ordinary Shares on the AMEX on such date, and iii) at the close of business of
each meeting of the Company's board of directors, an option valued at $3,000
calculated using the Black-Scholes option-pricing model to purchase Ordinary
Shares with an exercise price equal to that of the closing price of the
Ordinary Shares on the AMEX on such date. Options granted to a non-employee
director vest on the date of the grant and expire 10 years after the date of
the grant or one year after the date that such non-employee director ceases to
be a director of the Company. Options granted under the Director Plan are
transferable only in limited circumstances.
The following table summarizes stock option information:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Options outstanding at beginning of
period................................ 455,625 281,250 --
Options granted during period.......... 195,947 174,375 281,250
Options exercised during period........ (25,001) -- --
--------- --------- ---------
Options outstanding at end of period... 626,571 455,625 281,250
========= ========= =========
Options exercisable at end of period... 391,222 241,727 73,438
Weighted average grant-date fair value
of options granted during period...... $ 1.98 $ 1.08 $ 1.30
Weighted average remaining Contractual
life.................................. 8.3 years 8.9 years 9.7 years
</TABLE>
F-12
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
Options granted during the period were at an average exercise price of
$10.69, $8.00 and $8.00 for the years 1998, 1997 and 1996 respectively.
Options granted during 1998 ranged in price from $8.25 to $12.75.
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company has accounted for its stock options
under the fair value method of SFAS No. 123. For purposes of calculating the
fair value of options, volatility was not considered for the years ended
December 31, 1997 and 1996, as the Company was non-public at the date of those
grants. The volatility for 1998 is based on the historical volatility of the
Company's stock over its public trading life. The Company currently does not
foresee the payment of dividends in the near term. The fair value for these
options was estimated at the date of grant using the Black-Scholes option-
pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average risk-free interest
rate............................... 5.55% 6.27% 6.45%
Volatility.......................... 48.10% 0.00% 0.00%
Expected dividend yield............. -- -- --
Weighted average expected life (in
years)............................. 2.53 2.33 2.78
</TABLE>
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
As reported
Net loss........................ $(11,029,570) $(14,984,958) $(11,723,313)
Net loss per Ordinary Share..... (.42) (.72) (.66)
Pro forma
Net loss........................ $(11,548,400) $(15,199,421) $(11,852,522)
Net loss per Ordinary Share..... (.44) (.73) (.67)
</TABLE>
In addition, on December 15, 1998, the Company issued 21,838 of its Ordinary
Shares to employees as a portion of performance bonuses paid during the year.
Such shares are restricted for two years from the date of issuance and may not
be traded or pledged during that period. Should the employee terminate during
the restricted period the shares are forfeited to the Company. These shares
are included in the outstanding shares at December 31, 1998.
9. Events Subsequent to December 31, 1998
During January 1999, the Company completed an engagement letter appointing
Barclays Capital ("Barclays") and Deutsche Bank Securities Inc. ("Deutsche
Bank") as Co-Lead Arrangers to provide exclusive financial arranging services
in regard to development of the Company's San Crisobal project. Under the
terms of the engagement letter, Barclays and Deutsche Bank will assist in the
develop of an optimal capital structure for the San Cristobal project by
reviewing debt financing options through banks and debt capital markets as
well as support from development agencies. In addition, Barclays and Deutsche
Bank will provide independent technical and legal reviews of the project as
well as providing advice in the areas of insurance coverage and risk
management strategies. Barclays' and Deutsche Bank are under no obligation to
provide financing for the San Cristobal project. Consistent with these
financing measures, the Company plans on filing a Universal Shelf Registration
with the Securities and Exchange Commission by the end of the first quarter of
1999.
F-13
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
10. Related Party Transactions
Apex LDC engaged Tigris Financial Group Ltd. ("Tigris") and LCM Holdings LDC
("LCM") to provide management advisory services to Apex LDC and its
subsidiaries. Tigris is wholly owned by Mr. Thomas S. Kaplan, a director and
officer of Apex LDC and a director and shareholder of the Company. LCM is
wholly owned by a shareholder of the Company. The LCM consulting arrangement
was terminated at the end of the first quarter of 1997, following the
formation of Apex Corporation. During the years ended December 31, 1998, 1997
and 1996 fees and reimbursed expenses paid to Tigris and LCM for such services
amounted to $39,637, $93,964, and $423,684, respectively. Apex Corporation has
provided management, advisory and administrative services for the Company
pursuant to a Management Services Agreement dated October 22, 1996, for a fee
equal to 110% of certain costs incurred as provided by the agreement.
During the years ended December 31, 1997 and 1996, Apex LDC hired both
individuals and companies ("associates") to perform services on its behalf in
countries in which Apex LDC has mineral interests. These services include
property acquisitions on Apex LDC's behalf, consulting services and
administrative costs. In certain cases persons affiliated with such associates
served as officers or directors of certain Apex LDC's subsidiaries. During the
years ended December 31, 1997 and 1996, the total amounts charged to Apex LDC
by such related associates were $7,395,441 and $5,695,193 respectively, and
are included in the statement of operations under the applicable captions.
Prior to 1998 all of these associates became employees or subsidiaries of Apex
LDC and are no longer considered related parties.
During the year ended December 31, 1996, Apex LDC paid an associate who,
until August 6, 1996, was a shareholder of certain subsidiaries of Apex LDC,
$485,179 in consideration for geology services provided and disbursements made
on Apex LDC's behalf. During 1997, this associate became an employee of Apex
Corporation and thus, is not considered a related party.
Two individuals, one of whom is an officer of a subsidiary and a shareholder
of the Company, the second of whom is an officer of certain of the Company's
subsidiaries, are shareholders and directors of Begeyge Minera Ltda.
("Begeyge"), from whom the Company has the right to purchase the Suyatal
Project in Honduras for an aggregate purchase price of $3,000,000 (see Note
12). Begeyge also served as an associate during the years ended December 31,
1997 and 1996. During 1996, the Company paid Begeyge $106,691 for consulting
services.
F-14
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
11. Cash Flow Information
A reconciliation of net earnings to cash from operations is as follows:
<TABLE>
<CAPTION>
For the
period
December 22,
1994
(inception)
Year ended Year ended Year ended through
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(11,029,570) $(14,984,958) $(11,723,313) $(39,812,191)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Amortization and
depreciation......... 169,116 149,429 57,392 432,528
Minority interest in
loss of consolidated
subsidiary........... -- -- (2,875,927) (4,558,886)
Stock option
compensation
expense.............. -- 416,562 -- 416,562
Shares issued in
consideration for
services............. -- 1,524,545 -- 1,524,545
Changes in operating
assets and
liabilities:
(Increase) decrease in
accrued interest
receivable........... (23,920) (102,412) 66,112 (126,332)
(Increase) in prepaid
expenses............. (229,572) (813,825) (154,225) (1,197,622)
(Increase) in Value
Added Tax
recoverable.......... (1,374,799) (1,351,004) -- (2,725,803)
(Increase) decrease in
amounts due to/from
affiliates........... 722,717 (1,254,800) 411,246 --
Increase (decrease) in
other current assets
& liabilities........ 1,124,557 (1,360,045) 2,127,135 1,718,423
------------ ------------ ------------ ------------
Net cash used in
operating activities... $(10,641,471) $(17,776,508) $(12,091,580) $(44,328,776)
============ ============ ============ ============
</TABLE>
F-15
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
12. Commitments and Contingencies
The Company has outstanding options and other optional payments relating to
certain mineral properties at December 31, 1998, as follows:
<TABLE>
<CAPTION>
Property 1999 2000 2001 2002 2003 Thereafter
-------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Honduras
El Coloal
District(1).......... $ 200,000 $ 75,000 $ 75,000 $ 75,000 $ 75,000 $ --
Suyatal(2)............ 25,000 40,000 40,000 40,000 40,000 2,745,000
Bolivia
San Cristobal......... 464,480 256,116 245,712 1,137,829 229,945 --
Choroma............... 56,357 -- -- -- -- --
Ximena Group(3)....... 133,582 122,345 122,345 2,345 2,345 --
General............... 33,521 33,521 33,521 33,521 33,521 --
Pulacayo(4)........... 18,000 18,000 18,000 18,000 18,000 --
Peru
Otuzco(5)............. 54,798 54,798 54,798 54,798 54,798 --
Aventura(6)........... 15,689 15,689 15,689 15,689 15,689 --
San Juan de
Lucanas(7)........... 1,292,852 42,852 42,852 42,852 42,852 --
General............... 19,600 19,600 19,600 19,600 19,600 --
Chile................... 24,080 24,080 24,080 24,080 24,080 --
Mexico
General............... 34,900 34,900 34,900 34,900 34,900 --
San Juan Cordero(8)... 36,000 137,000 218,000 390,000 1,560,000 148,000
Saltillera &
Platosa(9)........... 370,000 700,000 1,100,000 1,200,000 975,000 --
---------- ---------- ---------- ---------- ---------- ----------
Total............... $2,778,859 $1,573,901 $2,044,497 $3,088,614 $3,125,730 $2,893,000
========== ========== ========== ========== ========== ==========
</TABLE>
- - --------
(1) This district is comprised of five separate properties. Upon production,
the Company would also pay a 5% net smelter return ("NSR") royalty on one
of these properties.
(2) Annual installments are not to exceed the greater of $40,000, or a 2% NSR.
(3) These payments include purchase payments of $120,000 per year plus
property payments of $2,345.
(4) These payments will be applied toward a joint venture with Cooperativa
Minera Pulacayo.
(5) Otuzco is comprised of five properties, two of which are leased with an
option to buy. Should the Company elect to exercise these options,
payments would total $550,000.
(6) Aventura is comprised of five properties, two of which are leased with an
option to buy. Should the Company elect to exercise these options,
payments would total $90,000.
(7) The Company has an option to purchase this property for $2.1 million
payable in 15 installments. This table reflects the payments to be made
after the Company made an initial payment in June 1998.
(8) San Juan Cordero is comprised of three properties. In addition to the
lease payments scheduled in this table, the Company has an option to
purchase two of the properties for a $462,000 payment in February 2004. In
lieu of the purchase payment the Company may elect to pay $1,250,000 to
the owners of the two properties through a 2.5% net smelter return royalty
("NSR"). In addition to the lease payments in this schedule the third
property also carries a 2% NSR capped at $2,000,000. Also included in the
lease payment schedule is $75,000 in finder's fees payable to a third
party. As part of the finder's fee agreement the third party is also
entitled to a 0.35% NSR capped at $425,000.
F-16
<PAGE>
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Expressed in United States dollars)
(9) With the final payment in 2003 the Company would own 65% of Saltillera and
Platosa. Included in the payment schedule are $1,775,000 in lease payments
and $2,570,000 of work commitments. In addition to these scheduled
payments, the owners would retain a 3%, 1.5 year NSR capped at $2,000,000.
13. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
receivables, VAT recoverable, accounts payable, other current liabilities and
long-term debt. Except for the VAT and long-term debt, the carrying amounts of
these financial instruments approximate fair value due to their short
maturities. The estimated fair values of the Company's long-term financial
instruments, as measured on December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
VAT Recoverable.................. $2,725,803 $2,145,645 $1,351,004 $ 995,314
Long-term Debt................... 1,966,588 1,449,227 3,093,788 2,046,358
</TABLE>
The fair values of the VAT recoverable and the long-term debt are estimated
based on expected discounted future cash flows.
14. Segment Information
In 1998, the Company adopted SFAS 131, "Disclosure about segments of an
Enterprise and Related Information." The Company's sole activity is
exploration for and development of silver properties and, consequently, the
Company has only one operating segment mining.
Substantially all of the Company's long-lived assets are in Bolivia.
F-17
<PAGE>
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
October 5, 1999 on its behalf by the undersigned, thereunto duly authorized.
Apex Silver Mines Limited
Registrant
/s/ Thomas S. Kaplan
By: _________________________________
Thomas S. Kaplan
Chairman, Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant,
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas S. Kaplan Director October 5, 1999
______________________________________
Thomas S. Kaplan
/s/ Michael Comninos Director October 5, 1999
______________________________________
Michael Comninos
Director October 5, 1999
______________________________________
Harry M. Conger
Director October 5, 1999
______________________________________
Eduardo S. Elsztain
Director October 5, 1999
______________________________________
David Sean Hanna
/s/ Ove Hoegh Director October 5, 1999
______________________________________
Ove Hoegh
/s/ Keith R. Hulley Director October 5, 1999
______________________________________
Keith R. Hulley
Director October 5, 1999
______________________________________
Richard Katz
/s/ Paul Soros Director October 5, 1999
______________________________________
Paul Soros
</TABLE>
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 JAN-01-1998
<CASH> 26,217,241 57,033,193
<SECURITIES> 0 0
<RECEIVABLES> 126,332 825,129
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 27,541,195 58,826,372
<PP&E> 2,571,309 1,243,481
<DEPRECIATION> 341,725 93,693
<TOTAL-ASSETS> 62,347,034 73,328,659
<CURRENT-LIABILITIES> (1,983,696) (1,006,274)
<BONDS> 0 0
0 0
0 0
<COMMON> (262,507) (191,249)
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> (62,347,034) (73,328,659)
<SALES> 0 0
<TOTAL-REVENUES> (2,444,357) (961,810)
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 13,473,927 15,946,768
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 11,029,570 14,984,958
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 11,029,570 14,984,958
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,029,570 14,984,958
<EPS-BASIC> 0.42 0.72
<EPS-DILUTED> 0.42 0.72
</TABLE>
