ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of 2000.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our company's Ordinary Shares are listed on the American Stock Exchange under the symbol "SIL." Our warrants are listed on the American Stock Exchange under the symbol "SIL.WS", and began trading on February 25, 2000. As of March 22, 2001, we had approximately 130 shareholders of record and an estimated 3,500 additional beneficial holders whose Ordinary Shares were held in street name by brokerage houses.
Our company has never paid any dividends on its Ordinary Shares and expects for the foreseeable future to retain all of its earnings from operations for use in expanding and developing its business. Any future decision as to the payment of dividends will be at the discretion of our board of directors and will depend upon our earnings, receipt of dividends from our subsidiaries, financial position, capital requirements, plans for expansion and such other factors as our board of directors deems relevant.
The following table sets forth the high and the low sale prices per share of our Ordinary Shares for the periods indicated. The closing price of the Ordinary Shares on March 22, 2001 was $7.62.
ITEM 6:
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of our company for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, and the period from December 22, 1994 (inception) through December 31, 2000, are derived from our audited consolidated financial statements. This table should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7
ITEM 7 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
You should read the following discussion and analysis together with the consolidated financial statements of Apex Silver Mines Limited and the selected financial data and related notes thereto included elsewhere in this report on form 10-K.
Apex Limited is a mining exploration and development company that holds a portfolio of silver exploration and development properties primarily in South America, Mexico and Central America. None of these properties are in production and, consequently, we have no current operating income or cash flow.
We currently focus our resources primarily on the development of our San Cristobal Project in Bolivia and our continued efforts to secure appropriate financing.
Our company completed an initial public offering of Ordinary Shares on December 1, 1997. We completed a subsequent offering of ordinary shares and warrants during November 1999.
Results of Operations
Interest and Other Income. Our company does not yet produce silver or any other mineral products and has no revenues from product sales. Our primary source of revenue is interest income. Our policy is to invest all excess cash in liquid, high credit quality, short-term financial instruments. Our interest and other income for the year ended December 31, 2000 was $5.7 million compared to $1.1 million and $2.4 million for the years ended December 31, 1999 and 1998, respectively. The 2000 increase in interest and other income compared to 1999 is primarily the result of interest earned on higher average cash balances during 2000 as the result of the net proceeds of our November 1999 offering of ordinary shares and warrants. The decrease in our interest and other income for 1999 compared to 1998 was due to the reduced average cash balance during 1999, prior to the receipt of the net proceeds of our November 1999 offering.
Exploration. Our company expenses mineral exploration expenditures as incurred on each property until we determine that mining operations on that property are feasible. Once we have determined that a mineral property has proven and probable ore reserves, we capitalize all development costs. Through December 31, 2000, we have expensed all acquisition and exploration costs as incurred. Since September 1, 1997, we have capitalized development costs associated with the San Cristobal Project and will continue to do so in the future.
Our exploration expenses, including property holding costs and allocated administrative expenses, were $4.4 million for the year ended December 31, 2000 compared to $6.0 million and $10.0 million for the years ended December 31, 1999 and 1998, respectively. The decreases in our exploration expenses for these periods is due primarily to the reduced emphasis on exploration as we concentrate our resources on the development of the San Cristobal Project.
Administrative. Our administrative expenses were $8.4 million for the year ended December 31, 2000, compared to $2.8 million and $3.3 million for the years ended December 31, 1999 and 1998, respectively. The increase in our administrative expenses in 2000 as compared to 1999 is primarily due to costs and fees directly related to our project financing efforts and stock compensation. The decrease in our administrative expenses for 1999 compared to 1998 is primarily the result of the refocusing of our efforts on development activities at the San Cristobal Project.
Income Taxes. Apex Silver Mines Corporation, our U.S. management services company, is subject to U.S. income taxes. Otherwise our company pays no income tax in the U.S. since we are incorporated in the Cayman Islands and conduct no business that currently generates U.S. taxable income. The Cayman Islands currently impose no corporate taxation. Our company has been granted exemption until January 16, 2015 from any form of corporate taxation which may subsequently be adopted in the Cayman Islands.
Liquidity and Capital Resources
As of December 31, 2000, our company had cash and cash equivalents of approximately $61.1 million compared to $96.3 million at December 31, 1999. The decrease in our cash and cash equivalents during 2000 is due to the investment of approximately $27.5 million in property, plant and equipment related to the development of San Cristobal, $7.3 million in cash used in operations, which is net of interest and other income and is primarily related to administration and exploration, and $0.4 million of payments on outstanding notes.
In September 2000, our company amended and replaced its registration statement at the Securities and Exchange Commission with a universal shelf registration statement. The universal shelf registration statement became effective September 8, 2000, and allows us to raise up to $200 million by selling any combination of equity or debt securities listed in the statement. Proceeds from offering(s) under the shelf registration, if any, may be used to construct and develop San Cristobal, continue exploring our other properties, maintain control or ownership of our properties, acquire additional mining related properties or businesses and for general corporate purposes. It is anticipated that project financing will constitute the substantial majority of the overall financing for the San Cristobal Project. At December 31, 2000 no securities had been sold under the universal shelf registration statement. In February 2001, 65,000 Ordinary Shares were issued under the shelf registration statement as consideration for acquisition of an exploration property.
Based on estimated revisions made during 2000 to the September 1999 feasibility study for the San Cristobal Project, which assumes contract mining, we expect capital costs for construction to total approximately $435 million, of which approximately $23 million has been spent through December 31, 2000. The $435 million is net of approximately $60 million in expected tax credits of which approximately $35 million is expected to be recovered during the project's construction phase, and the remaining $25 million is expected to be recovered against our future Bolivian income taxes. We estimate project spending for the year 2001 to range from approximately $10 million to $25 million, depending upon when fabrication of major capital items commences. We plan to fund project expenditures from our existing cash balances. These expenditures may be significantly reduced if our company decides to delay the construction schedule while waiting for an improvement in financial and metals markets. We have this financial flexibility due to our existing cash balances and low debt.
In order to maintain our mineral properties, we must make certain payments including government mineral patent fees and commissions, work commitments, lease and option payments and advance royalties. In order to maintain our current portfolio of mineral properties, we will be required to make payments during the next twelve months of approximately $0.2 million for San Cristobal, $0.9 million for Platosa and $0.8 million for our other exploration properties. In addition, we expect to make expenditures for other continuing exploration, property acquisition, property evaluation and general corporate expenses. Total exploration and administrative expense is not anticipated to increase significantly during the next twelve months. We expect to fund these obligations from existing cash balances.
We will be required to raise significant additional debt and equity financing from outside sources to complete development of the San Cristobal Project. In May 2000, two key multilateral funding agencies, International Finance Corporation and Corporacion Andina de Fomento, joined our co-lead arrangers for project financing, Barclays and Deutsche Bank, to develop multilateral financing options for San Cristobal as part of a total financing package that may incorporate support from other official agencies as well as debt financing from banks and the capital markets. There can be no assurance that we will be able to obtain the required financing on terms that we find attractive, or at all.
Environmental Compliance
Our current and future exploration and development activities, as well as our future mining and processing operations, are subject to various federal, state and local laws and regulations in the countries in which we conduct our activities. These laws and regulations govern the protection of the environment, prospecting, development, production, taxes, labor standards, occupational health, mine safety, toxic
substances and other matters. Our management expects to be able to comply with those laws and does not believe that compliance will have a material adverse effect on our competitive position. We intend to obtain all licenses and permits required by all applicable regulatory agencies in connection with its mining operations and exploration activities. We intend to maintain standards of environmental compliance consistent with best contemporary industry practice.
Item 7A:
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, our major principal cash balances are held in U.S. dollars. We maintain minimum cash balances in foreign currencies and therefore have a relative low exposure to currency fluctuations. Because we conduct our activities largely in several foreign countries, we may in the future engage in hedging activities to minimize the risk of exposure to currency and interest rate fluctuations.
We expect that we will be required to hedge some portion of our planned production in advance in order to complete the financing necessary to develop San Cristobal. In addition, as we bring San Cristobal into production and begin to derive revenue from the production, sale and exchange of metals, we may utilize various price-hedging techniques to lock in forward delivery prices on a portion of our production. We would expect to balance the use of price-hedging techniques to mitigate some of the risks associated with fluctuations in the prices of the metals we produce while allowing us to take advantage of rising metal prices should they occur.
Our company has engaged in limited metals trading activities utilizing puts and calls in a manner similar to anticipated lender requirements. At December 31, 2000, we recorded a year-to-date mark to market gain of approximately $446,000 from these activities. There can be no assurance that we will always benefit from the use of these techniques.
ITEM 8:
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.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS OF THE REGISTRANT AND CERTAIN EXECUTIVE OFFICERS OF APEX CORPORATION
Information regarding directors of Apex Limited and certain executive officers of Apex Corporation is incorporated by reference to the section entitled "Election of Directors" in our definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2001 annual meeting of shareholders (the "Proxy Statement").
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption "Executive Compensation and Other Information" in our proxy statement, which information (except for the report of the board of directors on executive compensation and the performance graph) is incorporated by reference in this report on Form 10- K.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth under the caption "Security Ownership of Principal Shareholders and Management" in our proxy statement, which information is incorporated by reference in this report on Form 10-K.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption "Certain Transactions" contained in our proxy statement, which information is incorporated by reference in this report on Form 10-K.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report on Form 10-K or incorporated by reference.
1. The consolidated financial statements of the Company are listed on the "Index to Financial Statements", on Page to this report.
2. Financial Statement Schedules (omitted because not material or not applicable).
3. The following exhibits are filed with this report on Form 10-K or incorporated by reference.
- -------- (1) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-34685). (3) Incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-3 (File No. 333-76181), as amended, of the Registrant, first filed with the Securities and Exchange Commission on April 13, 1999. (4) Incorporated by reference to Exhibit 4.1 to the Form 8-K of the Registrant, filed with the Securities and Exchange Commission on November 8, 1999. (5) Incorporated by reference to Exhibit 4.3 in our Registration Statement on Form S-8 (File No. 333-53185).
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 March 26, 2001 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.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX
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.
Thomas S. Kaplan Mark A. Lettes Chairman Vice President and Chief Financial Apex Silver Mines Limited Officer Apex Silver Mines Corporation
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Apex Silver Mines Limited
In our opinion, the accompanying consolidated balance sheets 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 and the period from December 22, 1994 (inception) through December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America 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 our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado February 16, 2001
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
CONSOLIDATED BALANCE SHEET (Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
CONSOLIDATED STATEMENT OF OPERATIONS (Expressed in United States dollars)
- -------- (1) Diluted earnings per share were antidilutive for all periods presented.
The accompanying notes form an integral part of these consolidated financial statements.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in United States dollars)
The accompanying notes form an integral part of these consolidated financial statements.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)
1. Incorporation, Recapitalization, Initial Public Offering, Subsequent Offerings, 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. 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 its subsidiaries.
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 was 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 34,486,629 Apex Limited Ordinary Shares outstanding at December 31, 2000. At December 31, 2000, Apex Silver Mines Limited owned 100 percent of Apex LDC. Per the provisions of the Buy-Sell 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. In November 1999, pursuant to a shelf registration statement filed with the Securities and Exchange Commission, the Company sold 8,090,132 Ordinary Share units, resulting in proceeds before commissions and fees of approximately $97.1 million and net proceeds of approximately $94.1 million. The Ordinary Share units, each priced at $12.00 per unit, were comprised of one Ordinary Share and a warrant which is exercisable into
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
one-half of an Ordinary Share at any time on or before November 4, 2002 at a price of $18.00 per ordinary share. The warrants, if exercised, would raise an additional $73.6 million for the Company and would result in the issuance of 4,045,066 ordinary shares.
g. The Company, through indirect subsidiaries, is active in Mexico, Central America and South America and currently holds interests in, or is the beneficial owner of, non-producing silver resource properties in 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 unincorporated joint ventures are proportionately consolidated.
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, 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 period 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, 2000, capitalized property and development costs related to the San Cristobal Project amounted to $72,819,859. No other amounts related to mineral properties have been capitalized.
e. Property, plant and equipment
Mineral properties include costs to acquire development properties and property development costs. Mineral properties brought into production are charged to operations using the units-of-production method based on
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
estimated recoverable reserves. Buildings are stated at cost and are depreciated using the straight-line method, over useful lives of thirty to forty years. Mining equipment and machinery are stated at cost and are depreciated using the straight-line method over useful lives of three to eight years. Other furniture and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to five years.
f. 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.
g. 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.
h. Net loss per ordinary share
Basic earnings per share excludes dilution and is computed by dividing net earnings available to ordinary shareholders by the weighted average number of 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 1,498,128, 915,817 and 626,571 Ordinary Shares were not included in the computation of diluted earnings per share at December 31, 2000, 1999, and 1998 respectively, because to do so would have been antidilutive.
i. Derivative financial instruments
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, as amended by FAS 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 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 the fair value of an asset, liability, or firm commitment, 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 in the fair value of the derivative instrument will be reported in other comprehensive
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
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.
Our company engages in limited metals trading activities utilizing puts and calls andwe mark the open positions to market recording the difference in the carrying value to current earnings, in accordance with FAS 133, which will be effective January 1, 2001. During 2000, the Company recorded mark to market gains of approximately $446,000, which is included in interest and other income in the Consolidated Statement of Operations.
j. Reclassification of prior year balances
Certain prior year balances have been reclassified to conform to the classifications being presented at December 31, 2000.
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, 2000 and 1999, operating loss carryforwards generated by ASC Bolivia amounted to approximately $16.6 and $16.1 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, 2000 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 of approximately $15.9 million.
4. Value Added Tax Recoverable
The Company has recorded value added tax ("VAT") paid in Bolivia and Mexico as recoverable assets. Bolivian law states that VAT paid prior to production is recoverable as a credit against Bolivian taxes arising from production, including income tax. The VAT paid in 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. The VAT paid in Mexico is related to exploration activities and is recoverable upon application to the tax authorities. We have received VAT refunds relating to VAT paid in Mexico through 1998. Applications for refund of the remaining VAT paid in Mexico through 2000 have been filed and payment is expected in due course. At December 31, 2000, the recoverable VAT recorded for Bolivia and Mexico is $4,731,003 and $293,018 respectively.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
Because of the uncertainty of the recoverability of VAT paid in Peru, VAT costs incurred in Peru are charged to expense as incurred.
5. Property, Plant and Equipment
The components of property, plant, and equipment were as follows:
Depreciation expense for the periods ended December 31, 2000, 1999 and 1998 totaled $210,278, $176,395 and $112,471, respectively. For the periods ended December 31, 2000, 1999 and 1998 respectively, $195,505, $168,461 and $135,561 of depreciation associated with the San Cristobal Project was capitalized.
6. Notes Payable
The Company's Notes Payable consists of the following:
In 1996, 1997 and 1998 the Company exercised options to purchase the Toldos and other properties in the San Cristobal area. The following outstanding notes payable were recorded on the Company's books:
Banco de Santa Cruz--The Company will make annual payments of $68,914 for each of the next five years, plus interest at Banco de Santa Cruz' preferential rate of interest which was approximately 14% as of December 31, 2000. The note plus accrued interest was being carried on the Company's books for $344,571 at December 31, 2000.
Barex--The Company will make one payment of $900,000 on December 1, 2001. No interest is due on this note.
Monica de Prudencio--The Company makes monthly payments of $12,000 per month through June 2004 and a final payment of $8,000 due July 15, 2004. No interest is due on this debt. The note was being carried on the Company's books for $512,000 at December 31, 2000.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
Oscar Bonifaz--The note was being carried on the Company's books for $60,000 at December 31, 2000. No interest is due on this debt. The note will be repaid in 2001.
San Cristobal Foundation--In 1999 our company executed a note agreement with the San Cristobal Foundation for $2 million payable by the end of 2005. Payments in the amount of $47,261 and $200,000 were made on the note during 2000 and 1999 respectively.
7. Stock Option Plans
The Company has established a plan to issue share options and other awards to be valued by reference to the Company's 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.
A summary of our company's stock options at December 31, 2000, 1999 and 1998 and changes during those years is presented in the following table:
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
Options granted during 2000, 1999 and 1998 ranged in exercise price from $9.13 to $11.63, $7.94 to $14.88 and $8.25 to $12.75 respectively.
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 for the three years presented 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:
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:
In addition, on December 13, 2000, December 14, 1999 and December 15, 1998, the Company issued 15,361, 15,542 (net of forfeitures) and 21,838 respectively of its Ordinary Shares to employees as a portion of performance bonuses paid during these years.
8. Related Party Transactions
Apex LDC engaged Tigris Financial Group Ltd. ("Tigris") 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. The consulting arrangement with Tigris was terminated at the end of 1999. During the years ended December 31, 1999 and 1998 fees and reimbursed expenses paid to Tigris for such services amounted to $20,495 and $39,637 respectively.
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.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
9. Cash Flow Information
A reconciliation of net earnings to cash from operations is as follows:
10. Commitments and Contingencies
The Company has lease commitments associated with the corporate headquarters office space as follows:
Payments associated with this lease were recorded to rent expense by the Company in the amounts of $203,759, $146,714 and $140,650 for the years ended December 31, 2000, 1999 and 1998 respectively.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Expressed in United States dollars)
11. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, receivables, value added tax recoverable, accounts payable, other current liabilities and long-term debt. Except for the value added tax 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, 2000 and 1999, are as follows:
The fair values of the value added tax recoverable and the long-term debt are estimated based on the expected timing of future cash flows.
12. 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.
13. Quarterly Results of Operations (Unaudited)
The following table summarizes our company's quarterly results of operations for the years ended December 31, 2000 and 1999: