<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-12207
------------
PEGASUS GOLD INC.
(Exact name of registrant as specified in its charter)
PROVINCE OF BRITISH COLUMBIA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. FIRST AVE., SUITE 1500, SPOKANE, WASHINGTON 99201-3832
(Address of principal executive offices) (Zip Code)
(509) 624-4653
(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 No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
41,834,086
Common Shares, without par value, outstanding at July 31, 1998
<PAGE>
PEGASUS GOLD INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item #1
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997 . . . . . . . . . . . . . 3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997. . . 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 . . . . . . . . . . . 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND
YEAR ENDED DECEMBER 31, 1997. . . . . . . . . . . . . . . . . 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . 7
Item #2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 10
PART II. OTHER INFORMATION
Item #4
SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS . . . . . . . 15
Item #6
EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
In this Report, unless otherwise indicated, all dollar amounts are expressed in
U.S. Dollars.
2
<PAGE>
PEGASUS GOLD INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $26,198 $22,638
Forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . --- 35,665
Due from sales of products. . . . . . . . . . . . . . . . . . . . . 17,110 18,766
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,109 25,086
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . 4,752 6,036
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 75,169 108,191
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706 1,795
Property, plant, and equipment, net. . . . . . . . . . . . . . . . . . 76,624 84,700
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,072 7,036
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $156,571 $201,722
--------- ---------
--------- ---------
LIABILITIES
Liabilities not subject to compromise:
Current liabilities:
Accounts payable and other current liabilities . . . . . . . . . $8,413 $10,632
Accrued salaries, wages, and benefits. . . . . . . . . . . . . . 2,643 3,061
Current portion of capital lease obligations . . . . . . . . . . --- 3,872
Accrued care and maintenance . . . . . . . . . . . . . . . . . . 1,813 4,413
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . --- 203,266
Mining taxes payable . . . . . . . . . . . . . . . . . . . . . . 3,699 3,737
Foreign currency contracts . . . . . . . . . . . . . . . . . . . --- 15,975
--------- ---------
16,568 244,956
Noncurrent liabilities:
Capital lease obligations. . . . . . . . . . . . . . . . . . . . --- 18,693
Accrued maintenance. . . . . . . . . . . . . . . . . . . . . . . 5,937 6,153
Accrued severance. . . . . . . . . . . . . . . . . . . . . . . . 2,423 2,209
Deferred site closure and reclamation. . . . . . . . . . . . . . --- 85,488
--------- ---------
Total liabilities not subject to compromise. . . . . . . . . . 24,928 357,499
Liabilities subject to compromise. . . . . . . . . . . . . . . . . . 307,795 ---
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 332,723 357,499
--------- ---------
SHAREHOLDERS' DEFICIT
Class A preferred shares, Series 1, C$10 par value:
Authorized - 20,000,000 shares; none issued
Common shares, no par value:
Authorized - 200,000,000 shares; issued
and outstanding, June 30, 1998 - 41,834,086 shares
and December 31, 1997 - 41,833,751 shares . . . . . . . . . . . . . 428,815 428,810
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (603,917) (583,566)
Accumulated other comprehensive income . . . . . . . . . . . . . . . . (1,050) (1,021)
--------- ---------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . (176,152) (155,777)
--------- ---------
Total liabilities and shareholders' deficit. . . . . . . . . . . $156,571 $201,722
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PEGASUS GOLD INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1998 and 1997
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,810 $50,603 $53,737 $99,206
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,182 36,792 48,672 71,148
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 5,751 9,542 11,202 18,802
------- ------- ------- -------
30,933 46,334 59,874 89,950
------- ------- ------- -------
Gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . . (4,123) 4,269 (6,137) 9,256
------- ------- ------- -------
Operating expenses:
General and administrative . . . . . . . . . . . . . . . . . . . . . 1,842 2,332 3,862 4,975
Exploration and evaluation . . . . . . . . . . . . . . . . . . . . . 602 1,190 1,379 2,387
Care and maintenance . . . . . . . . . . . . . . . . . . . . . . . . 77 1,601 227 3,495
Provision for closure and reclamation. . . . . . . . . . . . . . . . . --- --- --- 500
------- ------- ------- -------
2,521 5,123 5,468 11,357
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . (6,644) (854) (11,605) (2,101)
------- ------- ------- -------
Other income (expense):
Interest and other income. . . . . . . . . . . . . . . . . . . . . . --- 758 --- 1,012
Interest expense, net of amounts
capitalized (1998 contractual interest
$2,064 and $5,259) . . . . . . . . . . . . . . . . . . . . . . . . . (366) (429) (1,189) (864)
Loss on disposition of assets. . . . . . . . . . . . . . . . . . . . . (857) (3,353) (806) (3,348)
Equity in net income of affiliates . . . . . . . . . . . . . . . . . . --- 631 --- 2,012
------- ------- ------- -------
(1,223) (2,393) (1,995) (1,188)
------- ------- ------- -------
Loss before reorganization items and
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,867) (3,247) (13,600) (3,289)
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . (2,731) --- (4,275) ---
Deferred debt issuance costs written off . . . . . . . . . . . . . . . --- --- (3,508) ---
Interest earned on accumulated cash
resulting from Chapter 11 proceeding . . . . . . . . . . . . . . . . 354 --- 1,031 ---
------- ------- ------- -------
(2,377) --- (6,752) ---
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . (10,244) (3,247) (20,352) (3,289)
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . --- (97) (1) (124)
------- ------- ------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,244) (3,150) (20,351) (3,165)
------- ------- ------- -------
Other comprehensive loss, net of tax:
Unrealized holding loss on investments. . . . . . . . . . . . . . . --- (1,564) --- (1,564)
Foreign currency translation adjustment . . . . . . . . . . . . . . (58) (7,950) (29) (9,875)
------- ------- ------- -------
Other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . (58) (9,514) (29) (11,439)
------- ------- ------- -------
Comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . $(10,302) $(12,664) $(20,380) $(14,604)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share - basic . . . . . . . . . . . . . . . . . . . . . . ($0.25) ($0.08) ($0.49) ($0.08)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,834 41,191 41,834 41,169
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
PEGASUS GOLD INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Six Months Ended June 30, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(20,351) $ (3,165)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 11,533 19,168
Write-off of deferred debt issuance costs. . . . . . . . . . . . 3,508 ---
Provision for closure, reclamation and related costs . . . . . . --- 500
Payments for site closure and reclamation. . . . . . . . . . . . (3,228) (4,294)
Loss on disposition of investments . . . . . . . . . . . . . . . 857 4,962
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (714) 2,453
Change in working capital accounts . . . . . . . . . . . . . . . . . 5,659 5,222
--------- ---------
Net cash provided by (used in) operating activities before
reorganization items . . . . . . . . . . . . . . . . . . . . . . . (2,736) 24,845
--------- ---------
Operating cash flows from reorganization items:
Interest received on cash accumulated because of Chapter 11
proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 911 ---
Professional fees paid for services. . . . . . . . . . . . . . . . (674) ---
--------- ---------
Net cash provided by reorganization items. . . . . . . . . . . . . . 237 ---
--------- ---------
Net cash provided by (used in) operating activities. . . . . . . . . (2,499) 24,845
--------- ---------
Investing activities:
Additions to property, plant, and equipment, net . . . . . . . . . (1,630) (48,665)
Sale of investments. . . . . . . . . . . . . . . . . . . . . . . . 180 1,460
--------- ---------
Net cash used in investing activities. . . . . . . . . . . . . . . . (1,450) (47,205)
--------- ---------
Financing activities:
Proceeds from issuance of long-term debt . . . . . . . . . . . . . --- 19,575
Proceeds from issuance of common shares. . . . . . . . . . . . . . --- 751
Receipt of forward contract proceeds . . . . . . . . . . . . . . . 35,665 ---
Payments of long-term debt . . . . . . . . . . . . . . . . . . . . (26,336) ---
Payments of obligations under capital lease. . . . . . . . . . . . (1,820) (1,667)
--------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . 7,509 18,659
--------- ---------
Effect of exchange rate changes on cash and cash equivalents . . . . --- (188)
--------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . . . 3,560 (3,889)
Cash and cash equivalents, beginning of period . . . . . . . . . . . 22,638 8,566
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . $26,198 $4,677
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
PEGASUS GOLD INC.
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1998 and the Year Ended
December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
Common Shares Foreign
------------------------- Currency
Number Accumulated Translation
of Shares Amount Deficit Adjustment
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996. . . . . . . . . . . . . . . . . . . . 41,092,342 $425,382 $(70,734) $8,629
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (512,832)
Common shares issued for:
Employee severance and cash . . . . . . . . . . . . . . . . . . 579,304 2,541
Stock option plan . . . . . . . . . . . . . . . . . . . . . . . 41,100 311
Employee savings plan and other . . . . . . . . . . . . . . . . 121,005 576
Foreign currency translation adjustment . . . . . . . . . . . . . (9,650)
---------- -------- --------- -------
41,833,751 428,810 (583,566) (1,021)
Balance, December 31, 1997
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,351)
Common shares issued for:
Stock option plan . . . . . . . . . . . . . . . . . . . . . . .
Employee savings plan and other . . . . . . . . . . . . . . . . 335 5
Foreign currency translation adjustment . . . . . . . . . . . . . (29)
---------- -------- --------- -------
Balance, June 30, 1998. . . . . . . . . . . . . . . . . . . . . . 41,834,086 $428,815 $(603,917) $(1,050)
---------- -------- --------- -------
---------- -------- --------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTRODUCTION
The Company, which is incorporated in British Columbia, presents all financial
statements in United States dollars and under generally accepted accounting
principles as practiced in the United States for interim financial information,
and the instructions for Form 10-Q applicable to a going concern, which
principles, except as otherwise disclosed, assume that assets will be realized
and liabilities will be discharged in the normal course of business. The
Registrant and certain of its subsidiaries (collectively, the "Debtors") filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code on
January 16, 1998 (the "Filing"). The Debtors are presently operating their
business as debtors-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the District of Nevada (the "Bankruptcy Court").
These unaudited consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K. In the opinion of management, the financial information
set forth in the accompanying unaudited interim consolidated financial
statements reflects all adjustments necessary for a fair statement of the
periods reported, and all such adjustments were of a normal and recurring
nature.
2. REORGANIZATION CASE
Substantially all liabilities as of the date of the Filing are subject to
resolution under a plan of reorganization to be voted upon by the Debtors'
creditors and confirmed by the Bankruptcy Court. Amended and Restated schedules
have been filed by the Debtors with the Bankruptcy Court setting forth the
assets and liabilities of the Debtors as of the date of the Filing as shown by
the Debtors' accounting records. Differences between amounts shown by the
Debtors and claims filed by creditors will be investigated and reconciled. The
amount and settlement terms for such disputed liabilities are subject to
allowance by the Bankruptcy Court. Ultimately, the adjustment of the total
liabilities of the Debtors remains subject to a Bankruptcy Court approved plan
of reorganization, and, accordingly, the amount of such liabilities is not
presently determinable.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other executory pre-petition contracts, subject to Bankruptcy Court approval.
The Debtors continue to review leases and contracts and cannot presently
determine or reasonably estimate the ultimate outcome of, or liability resulting
from, this review. Additional information with respect to the Debtors' Chapter
11 case is set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
On July 17, 1998, a Joint Plan of Reorganization (the "Plan") was filed with the
Bankruptcy Court for four of the individual debtor entities, Diamond Hill
Mining, Inc. (DHMI), Montana Tunnels Mining, Inc. (MTMI), Florida Canyon
Mining, Inc.(FCMI), and Pegasus Gold International, Inc. (PGII). The Plan
calls for the reorganized PGII to be redomesticated in Delaware and to become
the corporate parent of reorganized DHMI, FCMI, and MTMI. Priority claims and
convenience claims (vendors with claims under $10,000) will be paid in full, in
cash. Other vendor claims will be paid cash equal to 75 percent of the claim
amount with the remainder paid in common stock of reorganized PGII. Guaranty
claims in respect of the Revolving Credit Agreement, guaranty claims in respect
of foreign exchange contracts, and Pegasus Gold Corp. claims will be paid in
common stock of reorganized PGII. The Plan must be accepted by each class of
allowed claims whose rights are impaired. A class is deemed to have accepted
the Plan if creditors holding at least two-thirds in amount and one-half in
number of the allowed claims have voted for the Plan. A hearing date has been
set for August 25, 1998 to approve the content of the Disclosure Statement
respecting the Plan. The Bankruptcy Court has fixed October 8, 1998 as the date
for a hearing on the confirmation of the Plan. Upon confirmation of the Plan, a
consummation date will be established.
On July 31, 1998, a Joint Liquidating Plan of Reorganization (the "Liquidating
Plan") was filed with the Bankruptcy Court for the remaining fourteen debtors in
bankruptcy, including Pegasus Gold Inc., Pegasus Gold Corp., and the other non-
operating debtors. The Liquidating Plan provides for the separate liquidation
7
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. REORGANIZATION CASE, CONTINUED:
of each debtor, such that each debtor's estate will be liquidated and
distributions made to holders of allowed claims against that debtor. The
Liquidating Plan does not provide for substantive consolidation of the debtors.
Priority claims will be paid in full, in cash. Secured claims will either
remain unaltered, satisfied by agreement, or the collateral will be abandoned to
the claimant. General unsecured claims will receive a pro rata distribution of
available remaining cash. A hearing date has been set for September 11, 1998 to
approve the content of the Disclosure Statement respecting the Liquidating Plan.
The date for a hearing on the confirmation of the Liquidating Plan has not yet
been established.
If the Plan and the Liquidating Plan are not confirmed, there can be no
assurance that the debtors or any other parties in interest would be able to
formulate and confirm any other plans.
3. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following at June 30, 1998:
<TABLE>
<S> <C>
(In Thousands)
Convertible Subordinated Notes . . . . . . . . . $114,995
Revolving Credit Facility. . . . . . . . . . . . 61,930
Deferred site closure and reclamation. . . . . . 86,495
Capital lease obligations. . . . . . . . . . . . 20,744
Foreign currency contracts . . . . . . . . . . . 15,976
Accounts payable and other accrued liabilities . 7,655
--------
$307,795
--------
--------
</TABLE>
4. RESTRUCTURING EXPENSES
Restructuring expenses included as reorganization items in the Consolidated
Statement of Income and Comprehensive Income for the six months ended June 30,
1998 include fees for professional services totaling $4,143,000, travel expenses
totaling $86,000, and other expenses, net, totaling $45,000.
<TABLE>
<S> <C>
Accrued restructuring fees at March 31, 1998 . . $1,150
Provision for restructuring fees . . . . . . . . 2,755
Cash payments. . . . . . . . . . . . . . . . . . (281)
------
Accrued restructuring fees at June 30, 1998. . . $3,624
------
------
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, Dec. 31,
1998 1997
---------- --------
<S> <C> <C>
(In Thousands)
Deferred mining costs. . . . . . . . . . . . . . $17,046 $16,262
Materials and supplies . . . . . . . . . . . . . 5,471 5,631
Stockpiled ore . . . . . . . . . . . . . . . . . 4,511 2,761
Processed metal. . . . . . . . . . . . . . . . . 81 432
------- -------
$27,109 $25,086
------- -------
------- -------
</TABLE>
8
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Comprehensive Income", was issued. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997, and requires restatement of earlier periods
presented. The Company has applied this standard effective January 1, 1998.
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities", was issued.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
7. COMMITMENTS AND CONTINGENCIES
COMMON SHARES ISSUABLE
At June 30, 1998, a total of 14,269,228 shares of authorized common stock were
reserved for the following:
<TABLE>
<S> <C>
Convertible Notes. . . . . . . . . . . . . . . . 7,708,732
Stock Options. . . . . . . . . . . . . . . . . . 5,772,809
Employee Savings Plan. . . . . . . . . . . . . . 313,862
----------
13,795,403
----------
----------
</TABLE>
GENERAL
Various lawsuits, claims, and proceedings have been or may be instituted or
asserted against the Company. Management believes the disposition of other
matters that are pending or asserted will not have a material adverse effect on
the financial position of the Company or its results of operations.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Registrant and certain of its subsidiaries (collectively, the "Debtors")
filed petitions for relief under Chapter 11 of the United States Bankruptcy Code
on January 16, 1998 (the "Filing"). The Debtors are presently operating their
business as debtors-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the District of Nevada (the "Bankruptcy Court"). As
a result of the Filing, the cash requirements for the payment of accounts
payable and other liabilities that arose prior to the Filing are in most cases
deferred until a plan of reorganization is approved by the Bankruptcy Court.
The Company recorded a net loss of $10.2 million ($0.25 per share) in the second
quarter of 1998, compared to a net loss of $3.2 million ($0.08 per share)
during the same period in 1997. The increased loss is the result of a 27
percent decline in production, a 32 percent decrease in the realized price per
ounce of gold, and $2.4 million in net charges for reorganization items,
combined with a decrease of $0.8 million in other income. These items were only
partially offset by a 10 percent decrease in total production costs per ounce,
and lower general and administrative, exploration, and care and maintenance
expenses. The loss before reorganization items and income taxes for the second
quarter of 1998 was $7.9 million ($0.19 per share).
The year-to-date net loss of $20.4 million ($0.49 per share) is worse than the
1997 loss for the same period of $3.2 million ($0.08 per share) due to lower
production, lower realized prices for gold, reorganization items, and a decrease
in other income.
GOLD PRODUCTION
The following chart details gold production, cash costs and total production
costs per ounce by location for the three months and six months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
FLORIDA CANYON MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . 41,658 45,480 75,248 85,611
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . $244 $290 $259 $284
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . $255 $300 $271 $295
Total production cost. . . . . . . . . . . . . . . . . . . . $322 $397 $339 $396
MONTANA TUNNELS MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . 18,373 22,921 41,447 42,075
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . $219 $201 $176 $197
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . $244 $239 $202 $239
Total production cost. . . . . . . . . . . . . . . . . . . . $385 $387 $329 $395
DIAMOND HILL MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . 7,960 78 12,866 793
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . $431 $27 $293 $250
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . $434 $27 $298 $250
Total production cost. . . . . . . . . . . . . . . . . . . . $483 $97 $346 $356
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
BEAL MOUNTAIN MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . --- 2,890 --- 10,773
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . --- $205 --- $318
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . --- $239 --- $348
Total production cost. . . . . . . . . . . . . . . . . . . . --- $345 --- $442
BLACK PINE MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . --- 11,022 4,063 24,526
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . --- $321 $434 $289
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . --- $344 $475 $314
Total production cost. . . . . . . . . . . . . . . . . . . . --- $358 $512 $328
MT. TODD MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . --- 4,938 --- 11,038
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . --- $408 --- $419
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . --- $414 --- $422
Total production cost. . . . . . . . . . . . . . . . . . . . --- $517 --- $525
ZORTMAN MINE:
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . --- 5,447 --- 5,447
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . --- $295 --- $295
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . --- $310 --- $310
Total production cost. . . . . . . . . . . . . . . . . . . . --- $444 --- $444
CONSOLIDATED TOTALS
Ounces of gold . . . . . . . . . . . . . . . . . . . . . . . 67,991 92,776 133,624 180,263
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . . . . . . . . . $260 $276 $242 $275
Total cash cost. . . . . . . . . . . . . . . . . . . . . . . $273 $295 $258 $296
Total production cost. . . . . . . . . . . . . . . . . . . . $358 $398 $342 $400
Average price per ounce sold . . . . . . . . . . . . . . . . $300 $441 $296 $450
</TABLE>
___________
(1) Effective January 1, 1997, the Company adopted the gold production cost
standard developed by the Gold Institute in order to facilitate comparisons
among companies in the gold industry. Cash production costs reported in
prior periods have been restated as cash operating costs and total cash
costs in accordance with the new standard. Cash operating costs calculated
under the new standard include all operating costs (including overhead) at
the mine sites, but exclude royalties, production taxes and reclamation and
are reported net of by-product credits. Total cash costs include royalties
and production taxes, but exclude reclamation. Total production costs
remain unchanged and include reclamation in addition to depreciation,
depletion and amortization.
REVENUES
GOLD: Revenue from the sale of gold decreased 50 percent to $20.4 million
during the second quarter of 1998 as a result of a 27 percent decline in gold
production and a 32 percent decrease in the realized price per ounce. Lower
production reflects the fact that the Company has shutdown operations at Mt.
Todd, Beal Mountain, Zortman, and Black Pine which added 24,297 ounces to
commercial production during the second
11
<PAGE>
quarter of 1997. Year-to-date gold revenue has decreased 51 percent as a
result of lower production and lower realized prices.
Average realized gold prices for the second quarter of 1998 and 1997 were $300
and $441 per ounce, respectively, compared to average second quarter COMEX gold
prices of $300 and $343 in 1998 and 1997, respectively. The decline in the
average realized gold prices per ounce during the quarter and for the year-
to-date is the result of the closeout of all of the Company's forward sales
contracts during December 1997 and January 1998.
OTHER METALS: Sales of other metals decreased $2.9 million to $6.6 million in
the second quarter of 1998. Lower production of all metals, combined with
decreased prices for zinc and lead, were only partially offset by higher
realized prices for silver. Realized prices were $5.41 per ounce, $0.47 per
pound, and $0.22 per pound for silver, zinc, and lead, respectively, compared to
$4.85, $0.56, and $0.24, respectively, in the second quarter of 1997.
Year-to-date revenue from the sale of other metals decreased 20 percent to $14.2
million as a result of lower production of silver and lead and lower realized
prices for zinc and lead. Realized prices were $5.57 per ounce, $0.46 per
pound, and $0.25 per pound through the first six months of 1998, compared to
$4.67, $0.55, and $0.27, respectively during the same period in 1997.
OPERATING COSTS
The average total cash cost of production decreased seven percent to $273 per
ounce of gold in the second quarter of 1998 from $295 per ounce in the second
quarter of 1997. For the year-to-date, total cash costs decreased 13 percent
to $258 in 1998 compared to $296 in 1997. Decreased cash costs reflect
higher by-product credits per ounce year-to-date, lower royalties, and the
shutdown of operations at Mt. Todd, Zortman, Black Pine, and Beal Mountain,
which were high-cost mines during 1997. Total cash costs per ounce at
Florida Canyon decreased 15 percent. In 1997, the site was mining harder,
more abrasive ore, resulting in higher mining and crushing costs. At Montana
Tunnels, cash costs increased slightly during the quarter as a result of
lower by-product credits per ounce. For the year-to-date, total cash costs
are 15 percent below the prior year due to higher by-product credits per
ounce, lower unit costs of production and lower royalties. Higher total cash
costs at Black Pine for the year-to-date are attributable to the lower
production associated with residual leaching. At Diamond Hill, 1997 cash
costs for the second quarter and year-to-date are the result of settlement
adjustments of previously shipped ore. No batches were run in the first six
months of 1997. In 1998, the high cash costs are due to lower grade ore
processed in the June campaign.
Depreciation and amortization charges decreased 17 percent to $85 per ounce in
the second quarter of 1998, compared to $103 per ounce in 1997. For the year-
to-date, depreciation and amortization charges decreased from $104 per ounce in
1997 to $84 per ounce in 1998. The decrease reflects the property write-downs
recorded in the third and fourth quarters of 1997, which significantly reduced
the Company's property, plant, and equipment balances.
Exploration and evaluation expenses of $0.6 million in the second quarter of
1998 are 49 percent lower than during the same period in 1997 due to cutbacks in
program expenditures in South America and lower overall planned expenditures for
exploration. For the year-to-date, expenses of $1.4 million are 42 percent
below the first six months of 1997.
Care and maintenance costs decreased to $0.1 million in the second quarter of
1998, compared to $1.6 million during the same period in 1997. The decrease
reflects the accrual of expenses at Zortman in the fourth quarter of 1997 in
conjunction with property write-offs recorded, and the accrual of remaining mine
closure and reclamation costs. The costs incurred thus far in 1998 represent
land holding costs at Pullalli pending completion of the sale of that property.
Compared to 1997, general and administrative expenses decreased 21 percent to
$1.8 million in the second quarter of 1998 and 22 percent to $3.9 million for
the year-to-date, primarily as a result of fewer employees, reduced outside
fees, decreased travel costs associated with the Company's foreign operations,
and an overall cost savings program undertaken at the corporate level.
Professional fees incurred as a result of the
12
<PAGE>
Filing are separately classified as reorganization items in the Consolidated
Statement of Income and Comprehensive Income.
OTHER INCOME (EXPENSE) AND TAXES
Interest income for the first and second quarters of 1998 has been classified as
a reorganization item. The interest was earned on cash balances accumulated due
to the deferral of payments to creditors as a result of the Filing. Cash and
cash equivalents in the first six months of 1998 included proceeds from the
closeout of the Company's forward contracts in December 1997 and January 1998.
Interest expense in the second quarter of 1998 was unchanged from the same
period in the prior year. In 1997, all interest associated with the Revolving
Credit Facility (the "Revolver") and the Convertible Subordinated Notes (the
"Notes") was capitalized against the construction of the Mt. Todd Project.
Interest expense for 1997 represents interest on capital lease obligations. In
1998, interest expense includes interest accrued on outstanding debt balances in
the pre-petition period from January 1 to January 15, 1998, as well as interest
on capital lease obligations for the first and second quarters. No interest has
been accrued on the Revolver or the Notes since the Filing. There was no
interest capitalized in the first six months of 1998.
The Company has also recorded $0.9 million in losses from the sale of its shares
in Argosy Mining ($0.1 million) and the write-off of its investment in Dakota
Mining ($0.8 million).
The Company recorded a charge of $3.5 million associated with the write-off of
remaining deferred debt issuance costs associated with the Notes and the
Revolver. This charge has been classified as a reorganization item.
The Company has classified $4.5 million of professional fees related to the
Chapter 11 proceedings incurred in the first six months of 1998 as a
reorganization item. This amount includes $2.9 million recorded in the second
quarter.
Equity in net income of affiliates in 1997 is comprised of the Company's
proportionate share of earnings from the Emerging Markets Gold Fund, which was
liquidated and its assets distributed in the second quarter of 1997.
FINANCING, CAPITAL INVESTMENT, AND LIQUIDITY
At June 30, 1998, the Company had working capital of $58.6 million. Cash and
cash equivalents totaled $26.2 million at June 30, 1998, compared to $22.6
million at the end of 1997.
OPERATING ACTIVITIES
Cash flow used in operating activities was $2.5 million for the first half of
1998, compared to cash flow generated from operations of $24.8 million during
the same period in 1997. Decreased cash flow from operations is due to lower
production and lower realized prices for gold. Cash flow used in operations
before working capital changes was $8.2 million for the first six months of 1998
compared to cash flow generated from operations of $19.6 million for the same
period in 1997.
INVESTING ACTIVITIES
During the first half of 1998, the Company invested $1.6 million in property,
plant and equipment, compared to $48.7 million in 1997. 1998 expenditures have
primarily been for leach pad expansion at Florida Canyon and development at
Diamond Hill. 1997 expenditures included $24.4 million for expansion at Mt.
Todd, $4.4 million at Florida Canyon, $2.8 million at Pullalli, $2.9 million at
Zortman, $6.5 million at the Company's other operating mine sites and corporate
office, and $7.7 million of capitalized interest.
FINANCING ACTIVITIES
Cash flow provided by financing activities for the first half of 1998 includes
$35.7 million received from the closeout of forward contracts in January 1998,
less repayment of $26.3 million under the Revolver resulting
13
<PAGE>
from the set off of proceeds received on the closeouts. During 1997, cash
flows from financing activities included borrowings under the Revolver of
$19.6 million and $0.8 million raised from the issuance of common stock to
the employee savings plan and through stock option exercises.
CONCLUSION
The Company believes that the $26.2 million in cash and cash equivalents on hand
will be adequate to meet its current liquidity and capital expenditure
requirements; however, cash flow generated by or used in operations is subject
to certain risks that could materially impact available cash. Until a plan of
reorganization is approved, the Company's long-term liquidity and the adequacy
of its capital resources cannot be determined.
YEAR 2000
As a result of the Company's uncertain future, the Company has not yet completed
a review of its computer-based operations and financial systems for the purpose
of developing a plan that will ensure that all of these systems will be Year
2000 compliant, nor has management determined what the potential cost of
compliance might be. The Company expects to begin implementation of any
necessary corrective measures in the fourth quarter of 1998.
SAFE HARBOR
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the Company's
future plans, objectives or goals, including words to the effect that the
Company or management expects a stated condition or result to occur. Since
forward-looking statements address future events and conditions, by their
very nature, they involve inherent risks and uncertainties. Actual results
in each case could differ materially from those currently anticipated in such
statements by reason of factors such as production at the Company's mines,
changes in operating costs, changes in general economic conditions and
conditions in the financial markets, changes in demand and prices for the
products the Company produces, litigation, legislative, environmental and
other judicial, regulatory, political and competitive developments in areas
in which the Company operates, and technological and operational difficulties
encountered in connection with mining activities.
14
<PAGE>
PART II. OTHER INFORMATION
PEGASUS GOLD INC.
Items 1, 2, 3, and 5 of Part II are omitted from this report as inapplicable.
Item 4. Submission of Matters to Vote of Security Holders
(a) The 1998 Annual General Meeting of shareholders was held on
June 30, 1998.
(b) The following directors were elected at the above meeting:
Lawrence I. Bell, Werner G. Nennecker, and Anthony J. Petrina.
The following Directors' terms of office did not expire at the
meeting and they continued in office after the meeting: Peter
M.D. Bradshaw, Douglas R. Cook, Michael A. Grandin, Peter R.
Kutney, Lindsay D. Norman, and Fred C. Schulte.
(c) The following matters were voted upon at the meeting:
<TABLE>
<CAPTION>
For Against Withheld Abstained Not Voted
---------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors:
Mr. Bell 31,139,480 --- 78,905 1,427,810 1,502
Mr. Nennecker 31,146,209 --- 72,176 1,427,810 1,502
Mr. Petrina 31,175,427 --- 42,958 1,427,810 1,502
Re-appointment of
Coopers & Lybrand, as
Auditors of the
Company for 1998 31,963,079 444,533 20,323 219,762 ---
Remuneration of Auditors 31,775,807 634,899 --- 236,987 4
</TABLE>
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
April 6, 1998
Item 5 - News releases announcing the promotion of Michelle G.
Viau to Vice President, Chief Financial Officer, replacing
Phillips S. Baker, Jr., and ore reserves and resources as of
December 31, 1997, combined with a 1997 production and
exploration update. Also, the filing of the first monthly report
with the U.S. Bankruptcy Court in Reno, Nevada, for the period
January 16, 1998 through February 28, 1998.
April 21, 1998
Item 5 - News release announcing the Company's 1997 year-end
results. Also, the filing of the Company's second monthly report
with the U.S. Bankruptcy Court in Reno, Nevada, for the period
March 1, 1998 through March 31, 1998.
May 28, 1998
Item 5 - News release announcing that the Company intends to file
a Plan of Reorganization with the U.S. Bankruptcy Court by
July 31, 1998.
15
<PAGE>
PEGASUS GOLD INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS GOLD INC.
(Registrant)
Date: August 11, 1998 By: /s/ Michelle G. Viau.
----------------------------
Michelle G. Viau
Vice President, Finance
Chief Financial Officer, and
Principal Accounting Officer
16
<PAGE>
EXHIBIT 11.0
<PAGE>
EXHIBIT 11.0
PEGASUS GOLD INC.
DEBTOR-IN-POSSESSION
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, except for share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, June 30,
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
BASIC
Earnings:
Net loss applicable to basic
earnings per share calculation . . . . . . . . . . . . . ($10,244) $(3,150) $(20,351) $(3,165)
-------- -------- -------- -------
-------- -------- -------- -------
Weighted average number of shares
outstanding, as adjusted . . . . . . . . . . . . . . . . . 41,834 41,190 41,834 41,163
-------- -------- -------- -------
-------- -------- -------- -------
Net loss per share - primary . . . . . . . . . . . . . . . . ($0.25) ($0.08) ($0.49) ($0.08)
-------- -------- -------- -------
-------- -------- -------- -------
DILUTED:
Earnings:
Net loss applicable to basic and diluted
earnings per share calculation . . . . . . . . . . . . . . ($10,244) ($3,150) ($20,351) ($3,165)
Weighted average number of shares
outstanding:
Common shares and equivalents. . . . . . . . . . . . . . . 41,834 41,190 41,834 41,163
Additional shares outstanding assuming
exercise of stock options reduced by the
number of shares which could have
been purchased with the proceeds from
the exercise of such options . . . . . . . . . . . . . . --- 1 --- 8
Additional average shares outstanding
assuming conversion of 6.25%
convertible subordinated notes (b) . . . . . . . . . . . --- 7,709 --- 7,709
-------- -------- -------- -------
Weighted average number of shares
outstanding, as adjusted . . . . . . . . . . . . . . . . 41,834 48,900 41,834 48,880
-------- -------- -------- -------
-------- -------- -------- -------
Net loss per share - fully diluted (a) . . . . . . . . . . . ($0.25) ($0.06) ($0.49) ($0.06)
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
(b) The convertible subordinated notes included in the diluted earnings per
share calculation for 1997 have been excluded for 1998 as a result of the
Company's Chapter 11 bankruptcy filing. The Plans of Reorganization filed
with the Bankruptcy Court will not result in any distribution to the
convertible subordinated note holders.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ART. 5 FOR
2ND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,198
<SECURITIES> 0
<RECEIVABLES> 17,110
<ALLOWANCES> 0
<INVENTORY> 27,109
<CURRENT-ASSETS> 75,169
<PP&E> 76,624
<DEPRECIATION> 0
<TOTAL-ASSETS> 156,571
<CURRENT-LIABILITIES> 16,568
<BONDS> 0
0
0
<COMMON> 428,815
<OTHER-SE> (604,967)
<TOTAL-LIABILITY-AND-EQUITY> 156,571
<SALES> 53,737
<TOTAL-REVENUES> 53,737
<CGS> 48,672
<TOTAL-COSTS> 59,874
<OTHER-EXPENSES> 1,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,189
<INCOME-PRETAX> (20,352)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (20,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,351)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
