-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PN2FZRjaYSFUs/iZrsEbgZcucw72cbLF+jpw50Hsuc6KEu0aofG8pMtIPNr0Lv8e 4zy51/n/E2dKjwz/qJ0qKw== 0000897069-03-000799.txt : 20030724 0000897069-03-000799.hdr.sgml : 20030724 20030724172317 ACCESSION NUMBER: 0000897069-03-000799 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030724 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COEUR D ALENE MINES CORP CENTRAL INDEX KEY: 0000215466 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 820109423 STATE OF INCORPORATION: ID FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08641 FILM NUMBER: 03801615 BUSINESS ADDRESS: STREET 1: 400 COEUR D ALENE MINES BLDG STREET 2: 505 FRONT AVE CITY: COEUR D ALENE STATE: ID ZIP: 83814 BUSINESS PHONE: 2086673511 MAIL ADDRESS: STREET 1: 400 COEUR D ALENE MINES BLDG STREET 2: 505 FRONT AVE CITY: COEUR D'ALENE STATE: ID ZIP: 83814 10-Q 1 sdc476.txt 10-Q QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003. OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission file number 1-8641 ------- COEUR D'ALENE MINES CORPORATION ------------------------- (Exact name of registrant as specified in its charter) Idaho 82-0109423 - ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) PO Box I, 505 Front Ave. Coeur d'Alene, Idaho 83816 - ------------------------------- ---------------------------------- (Address of principal (Zip Code) executive offices) (208) 667-3511 --------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 under the Exchange Act). YES X NO ----- ----- Applicable only to corporate issuers: Indicate the number of shares outstanding of each of Issuer's classes of common stock, as of the latest practicable date: Common stock, par value $1.00, of which 178,657,151 shares were issued and outstanding as of July 21, 2003. COEUR D'ALENE MINES CORPORATION INDEX Page No. ---- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets -- 3 June 30, 2003 and December 31, 2002 Consolidated Statements of Operations and Comprehensive Loss -- Three and 5 Six Months Ended June 30, 2003 and 2002 Consolidated Statements of Cash Flows -- 6 Three and Six Months Ended June 30, 2003 and 2002 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of 19 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 41 Item 4. Controls and Procedures 43 PART II. Other Information Item 2. Changes in Securities and Use of Proceeds 43 Item 4. Submission of Matters to a Vote of Security Holders 43 Item 6. Exhibits and Reports on Form 8-K 44 Signatures 45 Certifications of CEO and CFO 2 COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 2003 2002 ---------- ------------ ASSETS (In Thousands) CURRENT ASSETS Cash and cash equivalents $ 19,527 $ 9,093 Short-term investments 301 518 Receivables and prepaid expenses, net 9,309 7,185 Ore on leach pad 14,046 11,082 Metal and other inventory 15,365 14,846 --------- --------- 58,548 42,724 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 80,154 76,194 Less accumulated depreciation (50,957) (49,531) --------- --------- 29,197 26,663 MINING PROPERTIES Operational mining properties 109,574 92,149 Less accumulated depletion (86,304) (71,833) --------- --------- 23,270 20,316 Non-producing and developmental properties 25,364 28,129 Mineral interests 18,825 18,825 --------- --------- 67,459 67,270 OTHER ASSETS Non-current ore on leach pad 17,228 15,474 Restricted investments 15,006 13,108 Debt issuance costs, net 1,903 1,034 Marketable securities 522 915 Other 5,950 5,900 --------- --------- 40,609 36,431 --------- --------- TOTAL ASSETS $ 195,813 $ 173,088 ========= ========= See notes to consolidated financial statements. 3 COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2003 2002 ---------- ------------ (In Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 5,545 $ 5,962 Accrued liabilities 3,886 4,334 Accrued interest payable 1,415 1,610 Accrued salaries and wages 3,339 5,594 Current portion of remediation costs 1,174 926 13 3/8% Convertible Senior Subordinated Notes due December 2003 9,887 12,735 6 3/8% Convertible Subordinated Debentures due January 2004 5,873 -- Current portion of bank financing 6,617 4,918 --------- --------- 37,736 36,079 LONG-TERM LIABILITIES 6 3/8% Convertible Subordinated Debentures due January 2004 -- 55,132 7 1/4% Convertible Subordinated Debentures due October 2005 9,939 11,665 9% Convertible Senior Subordinated Notes due February 2007, net of discount 34,070 -- Reclamation and mine closure 20,912 14,458 Other long-term liabilities 8,094 8,456 --------- --------- 73,015 89,711 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, par value $1.00 per share-authorized 250,000,000 shares, issued 151,074,310 and 119,653,267 at June 30, 2003 and December 31, 2002 (1,059,211 shares held in treasury) 151,074 119,653 Additional paid in capital 463,238 420,863 Accumulated deficit (514,842) (479,207) Shares held in treasury (13,190) (13,190) Accumulated other comprehensive loss (1,218) (821) --------- --------- 85,062 47,298 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 195,813 $ 173,088 ========= =========
See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES
Three Months ended June 30, Six Months ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ---------- ---------- (In Thousands, except per share data) REVENUES Sales of metal $ 25,731 $ 19,565 $ 54,732 $ 36,034 Interest and other 483 2,564 745 3,092 --------- --------- --------- --------- Total revenues 26,214 22,129 55,477 39,126 COSTS and Expenses Production 19,013 16,262 36,891 34,276 Depreciation and depletion 4,679 3,533 9,698 5,411 Administrative and general 2,409 2,464 5,465 4,569 Exploration 1,127 983 2,214 1,611 Pre-feasibility 390 960 766 1,782 Interest 2,015 5,447 4,023 9,848 Other holding costs 945 667 1,568 1,460 Loss on exchange and early retirement of debt 81 2,668 28,188 2,920 --------- --------- --------- --------- Total cost and expenses 30,659 32,984 88,813 61,877 --------- --------- --------- --------- NET LOSS FROM CONTINUING OPERATIONS BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (4,445) (10,855) (33,336) (22,751) Income tax benefit -- -- (7) -- --------- --------- --------- --------- NET LOSS BEFORE CUMULATIVE EFFECT IN CHANGE IN ACCOUNTING PRINCIPLE (4,445) (10,855) (33,329) (22,751) Cumulative effect of change in accounting principle -- -- (2,306) -- --------- --------- --------- --------- Net loss (4,445) (10,855) (35,635) (22,751) Other comprehensive loss (100) (578) (397) (477) --------- --------- --------- --------- COMPREHENSIVE LOSS $ (4,545) $ (11,433) $ (36,032) $ (23,228) ========= ========= ========= ========= BASIC AND DILUTED LOSS PER SHARE: Weighted average number of shares of common stock outstanding 143,888 67,654 138,724 60,008 ========= ========= ========= ========= Net loss per common share before cumulative effect of change in accounting principle $ (0.03) $ (0.16) $ (0.24) $ (0.38) Cumulative effect of change in accounting principle -- -- (0.02) -- --------- --------- --------- --------- Net loss per common share $ (0.03) $ (0.16) $ (0.26) $ (0.38) ========= ========= ========= =========
See notes to consolidated financial statements. 5 COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three and Six Months Ended June 30, 2003 and 2002 (Unaudited)
Three Months ended June 30, Six Months ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ---------- ---------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,445) $ (10,855) $ (35,635) $ (22,751) Add (deduct) non-cash items: Depreciation and depletion 4,679 3,533 9,698 5,411 Loss on early retirement of debt 81 2,920 28,188 2,920 Non-cash interest expense 2 4,185 1,103 5,388 Cumulative effect of change in accounting method -- -- 2,306 -- Other charges 491 100 732 917 Changes in Operating Assets and Liabilities: Receivables (964) 864 (2,123) (435) Inventories (2,543) (1,348) (5,237) 1,374 Accounts payable and accrued liabilities (292) 698 (3,369) 1,754 --------- --------- --------- --------- CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,991) 97 (4,337) (5,422) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (32,203) (782) (72,953) (782) Proceeds from sales of short-term investments 51,790 2,420 71,510 3,684 Expenditures on mining assets (4,447) (3,177) (7,711) (4,731) Other (37) 121 (87) (16) --------- --------- --------- --------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,103 (1,418) (9,241) (1,845) CASH FLOWS FROM FINANCING ACTIVITIES: Retirement of debt (22,392) (9,427) (22,392) (9,427) Proceeds from issuance of long-term debt, net of issuance costs (270) 14,050 33,268 14,050 Proceeds from issuance of common stock 11,500 -- 11,500 -- Bank Borrowings on working capital facility 4,447 -- 16,603 -- Payments to Bank on working capital facility (5,126) -- (14,904) -- Other (32) (54) (63) (115) --------- --------- --------- --------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: (11,873) 4,569 24,012 4,508 --------- --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 239 3,248 10,434 (2,759) Cash and cash equivalents at beginning of period 19,288 8,707 9,093 14,714 --------- --------- --------- --------- Cash and cash equivalents at end of period $ 19,527 $ 11,955 $ 19,527 $ 11,955 ========= ========= ========= =========
See notes to consolidated financial statements. 6 Coeur d'Alene Mines Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Coeur d'Alene Mines Corporation ("Coeur" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2002. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the wholly-owned subsidiaries of the Company, the most significant of which are Coeur Rochester, Inc., Coeur Silver Valley, Inc., Coeur Alaska, Inc., CDE Cerro Bayo Ltd., Compania Minera Polimet S.A., Coeur Australia and Empressa Minera Manquiri S.R.L. The consolidated financial statements also include all entities in which voting control of more than 50% is held by the Company. The Company has no investments in entities in which it has greater than 50% ownership interest accounted for using the equity method. Intercompany balances and transactions have been eliminated in consolidation. Investments in corporate joint ventures where the Company has ownership of 50% or less and funds its proportionate share of expenses are accounted for under the equity method. The Company has no investments in entities in which it has greater than 20% ownership interest accounted for using the cost method. Revenue Recognition: Revenue is recognized when title to silver and gold passes at the shipment or delivery point to the buyer, depending on the contract. The effects of forward sales contracts are reflected in revenue at the date the related precious metals are delivered or the contracts expire. Third party smelting and refining costs are recorded as a reduction of revenue. Cash and Cash Equivalents: Cash and cash equivalents include all highly-liquid investments with a maturity of three months or less at the date of purchase. The Company minimizes its credit risk by investing its cash and cash equivalents with major international banks and financial institutions located principally in the United States and Chile with a minimum credit rating of A1 as defined by Standard & Poor's. The Company's management believes that no concentration of credit risk exists with respect to investment of its cash and cash equivalents. Short-term Investments: Short-term investments principally consist of highly-liquid United States, foreign government and corporate securities with original maturities in excess of three months and less than one year. The Company classifies all short-term investments as available-for-sale securities. Unrealized gains and losses on these investments are recorded in accumulated other comprehensive income as a separate component of shareholders' equity. Any decline in market value considered to be other than temporary is recognized in determining net income. Realized gains and losses from the sale of these investments are included in determining net loss. 7 Ore on Leach Pad: The heap leach process is a process of extracting silver and gold by placing ore on an impermeable pad and applying a diluted cyanide solution that dissolves a portion of the contained silver and gold, which are then recovered in metallurgical processes. The Company uses several integrated steps to scientifically measure the metal content of ore placed on the leach pads. As the ore body is drilled in preparation for the blasting process, samples are taken of the drill residue which is assayed to determine estimated quantities of contained metal. The Company estimates the quantity of ore by utilizing global positioning satellite survey techniques. The Company then processes the ore through a crushing facility where the output is again weighed and sampled for assaying. A metallurgical reconciliation with the data collected from the mining operation is completed with appropriate adjustments made to previous estimates. The crushed ore is then transported to the leach pad for application of the leaching solution. As the leach solution is collected from the leach pads, it is continuously sampled for assaying. The quantity of leach solution is measured by flow meters throughout the leaching and precipitation process. After precipitation, the product is converted to dore, which is the final product produced by the mine. The inventory is stated at lower of cost or market, with cost being determined using the first-in, first-out and weighted average cost methods. The Company reported ore on leach pads of $31.2 million as of June 30, 2003. Of this amount, $14.0 million is reported as a current asset and $17.2 million is reported as a non-current asset. The distinction between current and non-current is based upon the expected length of time necessary for the leaching process to remove the metals from the broken ore. The historical cost of the metal that is expected to be extracted within twelve months is classified as current and the historical cost of metals contained within the broken ore that will be extracted beyond twelve months is classified as non-current. The estimate of both the ultimate recovery expected over time and the quantity of metal that may be extracted relative to the time the leach process occurs requires the use of estimates which are inherently inaccurate since they rely upon laboratory testwork. Testwork consists of 60 day leach columns from which the Company projects metal recoveries up to five years in the future. The quantities of metal contained in the ore are based upon actual weights and assay analysis. The rate at which the leach process extracts gold and silver from the crushed ore is based upon laboratory column tests and actual experience occurring over approximately fifteen years of leach pad operations at the Rochester Mine. The assumptions used by the Company to measure metal content during each stage of the inventory conversion process includes estimated recovery rates based on laboratory testing and assaying. The Company periodically reviews its estimates compared to actual experience and revises its estimates when appropriate. The length of time necessary to achieve ultimate recoveries for silver and gold is currently estimated between 5 and 10 years. In 2003, the estimated recoveries for silver and gold used are 61.5% and 93%, respectively. However, the ultimate recovery will not be known until leaching operations cease which is currently estimated for 2011. Metal Inventories and Other: Inventories include concentrate ore, dore, ore in stockpiles and operating materials and supplies. The classification of inventory is determined by the stage at which the ore is in the production process. Inventories of ore in stock piles are sampled for gold and silver content and are valued based on the lower of actual costs incurred or estimated net realizable value based upon the period ending prices of gold and silver. Material that does not contain a minimum quantity of gold and silver to cover estimated processing expense to recover the contained gold and silver is not classified as inventory and is assigned no value. All inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out and weighted average cost methods. Concentrate and dore inventory includes product at the mine site and product held by refineries and are also valued at lower of cost or market. Property, Plant, and Equipment: Expenditures for new facilities, new assets or expenditures that extend the useful lives of existing facilities are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the shorter of estimated productive lives of such facilities or the useful life of the individual assets. Productive lives range from 7 to 31 years for buildings and improvements, 3 to 13 years 8 for machinery and equipment and 3 to 7 years for furniture and fixtures. Certain mining equipment is depreciated using the units-of-production method based upon estimated total proven and probable reserves. Maintenance and repairs are expensed as incurred. Operational Mining Properties and Mine Development: Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs incurred to develop such property including costs to further delineate the ore body and remove over burden to initially expose the ore body, are capitalized. Such costs are amortized using the units-of-production method over the estimated life of the ore body based on proven and probable reserves. Significant payments related to the acquisition of the land and mineral rights are capitalized as incurred. Prior to acquiring such land or mineral rights the Company generally makes a preliminary evaluation to determine that the property has significant potential to develop an economic ore body. The time between initial acquisition and full evaluation of a property's potential is variable and is determined by many factors including: location relative to existing infrastructure, the property's stage of development, geological controls and metal prices. If a mineable ore body is discovered, such costs are amortized when production begins using the units-of-production method based on proven and probable reserves. If no mineable ore body is discovered, such costs are expensed in the period in which it is determined the property has no future economic value. Interest expense allocable to the cost of developing mining properties and to construct new facilities is capitalized until assets are ready for their intended use. Gains or losses from sales or retirements of assets are included in interest and other income. Mineral Interests: The Company classifies mineral interests as intangible assets. The excess of the cost of each mineral interest over its estimated residual value is amortized over the estimated life of the related mineral right. Residual values for undeveloped mineral interests represent the expected fair value of the interests at the time the Company plans to convert, develop, further explore or dispose of the interests. The residual values represent a percentage of the carrying value. For mineral interests with proven and probable reserves, the amortization is based upon the units-of-production method. For mineral interests with only mineralized material, amortization is based on the straight-line method based upon the estimated useful life of the mineral interest. Asset Impairment: Management reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company utilizes the methodology set forth in Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to evaluate the recoverability of capitalized property and mineral costs. An impairment is considered to exist if total estimated future cash flows or probability-weighted cash flows on an undiscounted basis, is less than the carrying amount of the assets, including property plant and equipment, mineral property, development property, and any deferred costs such as deferred stripping. An impairment loss is measured and recorded based on discounted estimated future cash flows or the application of an expected present value technique to estimate fair value in the absence of a market price. Future cash flows include estimates of proven and probable recoverable ounces, gold and silver prices (considering current and historical prices, price trends and related factors), production levels, capital and reclamation costs, all based on detailed engineering life-of-mine plans. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Any differences between significant assumptions and market conditions and/or the Company's performance could have a material effect on the Company's financial position and results of operations. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other groups. Generally, in estimating future cash flows, all assets are grouped at a particular mine for which there is identifiable cash flow. Restricted Investments: The Company, under the terms of its lease, self insurance, and bonding agreements with certain banks, lending institutions and regulatory agencies, is required to collateralize certain portions of the Company's obligations. The Company has collateralized these obligations by assigning certificates of deposit that have maturity dates ranging from three months to a year, to the respective institutions or agency. At June 30, 2003 and December 31, 2002, the Company had certificates of deposit under these agreements of $15.0 million and $13.1 million, respectively, restricted for this purpose. The ultimate timing for 9 the release of the collateralized amounts is dependent on the timing and closure of each mine. In order to release the collateral, the Company must seek approval from certain government agencies responsible for monitoring the mine closure status. Collateral could also be released to the extent the Company was able to secure alternative financial assurance satisfactory to the regulatory agencies. The Company believes there is a reasonable probability that the collateral will remain in place beyond a twelve-month period and has therefore classified these investments as long-term. Deferred Stripping Costs: Deferred stripping costs are unique to the mining industry and are determined based on the Company's estimates for the life of mine strip ratio for each mine. These costs are capitalized in periods when the life of mine ratio is below the current mining strip ratio, and amortized during periods where the life of mine strip ratio is above the current strip ratio. The Rochester mine is the only mine that has previously capitalized deferred stripping costs. The life of mine strip ratio that was used to accumulate the deferred stripping amounts was 1.5 to 1 (waste to ore) and was based on the estimated average stripping ratio for the life of the mine, compared to the then current ratio of 2.2 to 1 (waste to ore). The deferred stripping costs have been amortized as waste and ore have been removed from the Rochester mine pit. At present the remaining life of mine plan estimates the future stripping ratio as 1.1 to 1 (waste to ore), and the remaining costs will be amortized over the remaining life of the mine. At June 30, 2003 and December 31, 2002 the carrying amount of the deferred stripping costs were $1.3 million and $1.5 million, respectively, and are included in other assets in the accompanying balance sheet. No additional deferred stripping costs were capitalized during the periods presented. Based on current reserves and current production levels complete amortization should occur in less than four years. The amounts that were amortized for the three and six months ended June 30, 2003 were $0.1 million and $0.2 million, respectively, and for the three- and six- month periods ended June 30, 2002 were $0.1 million and $0.1 million, respectively. Reclamation and Remediation Costs: The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" on January 1, 2003. SFAS No. 143 requires entities to record the fair value of liabilities for retirement obligations of acquired assets. The Company measured the cumulative accretion and accumulated depreciation for the period from the date the liability would have been recognized if FASB No. 143 were in effect when the Company incurred the liability to the date of the adoption of FASB No. 143 and has reported these as a cumulative effect of a change in accounting principle. For the initial measurement of these existing obligations we have used current information, assumptions, and interest rates. Estimated future reclamation and remediation costs are based principally on legal and regulatory requirements. The Asset Retirement Obligation is measured using assumptions for cash outflows such as expected labor costs, allocated overhead and equipment charges, contractor markup and inflation adjustments to determine the total obligation. The sum of all these costs were discounted, using the credit adjusted risk-free interest rate (current assumption of 7.5%), from the time we expect to pay the retirement obligation to the time we incur the obligation. The measurement objective is to determine the amount a third party would demand to assume the asset retirement obligation. Upon initial recognition of a liability for an asset retirement obligation, the Company capitalized the asset retirement cost with a corresponding debit to the carrying amount of the related long-lived asset. The Company will deplete this amount to operating expense using the units-of-production method. The Company evaluates the cash flow estimates at the end of each reporting period to determine whether the estimates continue to be appropriate. Upward revisions in the amount of undiscounted cash flows will be discounted using the current credit-adjusted risk-free rate. Downward revisions will be discounted using the credit-adjusted risk-free rate that existed when the original liability was recorded. 10 The following is a description of the changes to the Company's asset retirement obligations from January 1 to June 30, 2003: Assets: 2003 -------------- (in thousands) Asset Retirement Obligation - January 1, 2003 $ 20,662 Accretion 775 Additions - Settlements (716) --------- Asset Retirement Obligation - June 30, 2003 $ 20,721 Foreign Currency: Substantially all assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the date of the transaction or at the end of each period. Revenues and expenses are translated at the average exchange rate for the period. Foreign currency transaction gains and losses are included in the determination of net income. Financial Instruments: The Company uses derivative financial instruments as part of an overall risk-management strategy. These instruments are used as a means of hedging exposure to precious metals prices and foreign currency exchange rates. The Company does not hold or issue derivative financial instruments for trading purposes. If the Company enters into derivatives that qualify for hedge accounting, deferral accounting is applied only if the derivatives continue to reduce the price risk associated with the underlying hedged production. Written options do not qualify for hedge accounting and are marked to market each reporting period with corresponding changes in fair value recorded to operations as other income. The Company uses forward sales contracts to fix a portion of its exposure to precious metals prices. The underlying production for forward sales contracts is designated for physical delivery at the inception of the contract. Contracted prices on forward sales contracts are recognized in product sales as the designated production is delivered or sold. In the event of early settlement of forward contracts, gains and losses are deferred and recognized in income at the originally designated delivery date. The Company uses foreign currency contracts to hedge its exposure to movements in the foreign currency translation amounts for anticipated transactions in Chilean pesos. These contracts are marked-to-market to Other Comprehensive Income (Loss) each reporting period. Income Taxes: The Company computes income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has operating loss carryforwards which expire in 2008 through 2020 for U.S. carryforwards and indefinitely for foreign carryforwards. The Company has reviewed its net deferred tax assets and has not recognized potential tax benefits arising therefrom because at this time management believes it is more likely than not that the benefits will not be realized in future years. Comprehensive Loss: In addition to net loss, comprehensive income includes all changes in equity during a period, except those resulting from investments by and distributions to owners. Items of comprehensive income for the three- and six-month periods ended June 30, 2003 and 2002 include the following: 11 Three Months Ended Six Months Ended -------------------- -------------------- June 30, June 30, June 30, June 30, 2003 2002 2003 2002 -------- -------- -------- -------- Unrealized loss on marketable securities $(234) $(578) $(452) $(477) Change in fair value of derivative hedging, net of settlement 134 -- 55 -- ----- ----- ----- ----- Other comprehensive loss $(100) $(578) $(397) $(477) ===== ===== ===== ===== Loss Per Share: Loss per share is computed by dividing the net loss attributable to common stock by the weighted average number of common shares outstanding during each period. All stock options outstanding at each period end have been excluded from the weighted average share calculation. The effect of potentially dilutive stock options outstanding was antidilutive in the three- and six- month periods ended June 30, 2003 and 2002. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications of prior year balances have been made to conform to current year presentation. NOTE C - ORE ON LEACH PADS Ore on leach pad consists of the following: June 30, December 31, 2003 2002 -------- ------------ Ore on leach pad - Current $ 14,046 $ 11,082 Ore on leach pad - Non-current 17,228 15,474 -------- -------- Total ore on leach pads $ 31,274 $ 26,556 ======== ======== NOTE D - METAL AND OTHER INVENTORIES Inventories consist of the following: December 31, 2003 2002 -------- -------- Concentrate and dore inventory $ 10,682 $ 10,189 Supplies 4,683 4,657 -------- -------- $ 15,365 $ 14,846 ======== ======== NOTE E - INCOME TAXES The Company computes income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has operating loss carryforwards which expire in 2008 through 2020 for U.S. carryforwards and indefinitely for foreign carryforwards. The Company has reviewed its net deferred tax assets and has not recognized potential tax benefits arising therefrom because at this time management believes it is more likely than not that the 12 benefits will not be realized in future years. The amount recognized in the current quarter relates to a cash refund received during the quarter. NOTE F - LONG-TERM DEBT AND SUPPLEMENTAL CASH FLOW INFORMATION During the first half of 2003, holders of $2.8 million of the Series I 13 3/8% Convertible Senior Subordinated Notes due December 31, 2003 (the "Series I 13 3/8% Notes") voluntarily converted such notes, in accordance with original terms, into approximately 2.1 million shares of common stock. In addition, 0.1 million shares of common stock were issued as payment for $0.2 million of interest expense on the Series I 13 3/8% Notes. During the first half of 2003, the Company repurchased $26.9 million and $1.7 million principal amount of its outstanding 6 3/8% and 7 1/4% Convertible Subordinated Debentures, respectively, in exchange for 16.9 million shares of common stock and recorded a loss on exchange and early retirement of debt of approximately $28.2 million. In addition, 0.6 million shares of common stock were issued as payment for $0.9 million of interest expense as part of the transaction. In conjunction with the issuance of the 9% Convertible Senior Subordinated Notes, the Company also issued 0.6 million shares of common stock for partial payment of offering costs of $1.0 million. During the first half of 2003, the Company issued 1.2 million shares of common stock in conjunction with its long-term incentive program. During the 2nd quarter of 2002, the Company repurchased $10.3 million, $0.8 million and $0.3 million principal amount of its outstanding 6%, 6-3/8% and 7-1/4% Convertible Subordinated Debentures, respectively, in exchange for 11.9 million shares of common stock and recorded a loss on retirement of debt of approximately $2.7 million. In addition, holders of $10.3 million of the Series I Notes voluntarily converted such Notes, under the terms of the indenture, into approximately 7.7 million shares of common stock. The Company also issued 2.7 million shares of common stock as payment of $4.2 million of accrued interest on the 13 3/8% Notes. During the first half of 2002, the Company repurchased $13.8 million, $0.8 million and $0.3 million principal amount of its outstanding 6%, 6-3/8% and 7-1/4% Convertible Subordinated Debentures, respectively, in exchange for 15.3 million shares of common stock and recorded a loss on retirement of debt of approximately $2.9 million. In addition, holders of $16.0 million of the Series I Notes voluntarily converted such Notes, under the terms of the indenture, into approximately 12.8 million shares of common stock. The Company also issued 2.7 million shares of common stock as payment of $4.2 million of accrued interest on the 13 3/8% Notes. NOTE G - SEGMENT REPORTING Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is comprised of the Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer. The operating segments are managed separately because each segment represents a distinct use of Company resources and contribution to the Company's cash flows in its respective geographic area. The Company's reportable operating segments are the Rochester, Coeur Silver Valley and Cerro Bayo mining properties, and the Company's exploration programs. All operating segments are engaged in the discovery and/or mining of gold and silver and generate the majority of their revenues from the sale of precious metal concentrates and/or refined precious metals. The Coeur Silver Valley and Cerro Bayo mines sell precious metal concentrates, typically under long term contracts to smelters located in Canada (Noranda Inc. and Cominco Ltd.), and Japan (DOWA Mining Company). Refined gold and silver produced by the Rochester mine is primarily sold on a spot basis to precious metal trading banks such as Morgan Stanley, Mitsui and Standard Bank. 13 The other segment includes the corporate headquarters, elimination of intersegment transactions and other items necessary to reconcile to consolidated amounts. Revenues in the other segment are generated principally from interest received from the Company's cash and investments that are not allocated to the operating segments. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K. The Company evaluates performance and allocates resources based on each segments profit or loss before interest, income taxes, depreciation and amortization, unusual and infrequent items, and extraordinary items. Segment Reporting (In Thousands)
Rochester Silver Cerro Valley Valley Bayo Exploration Other Total --------- -------- -------- ----------- ---------- ---------- Six Months Ended June 30, 2003 Total net sales and revenues $ 20,787 $ 9,647 $ 25,104 $ 52 $ (113) $ 55,477 ======== ======== ======== ======== ========= ========= Depreciation and depletion $ 2,705 $ 751 $ 6,102 $ 16 $ 124 $ 9,698 Interest income -- -- $ 1 -- $ 157 $ 158 Interest expense -- -- $ 218 -- $ 3,805 $ 4,023 Income tax (credit) expense -- -- -- -- $ (7) $ (7) Loss on early retirement of debt -- -- -- -- $ (28,188) $ (28,188) Profit (loss) $ 3,187 $ 206 $ 12,978 $ (114) $ (7,684) $ 8,573 Segment assets (A) $ 59,814 $ 10,655 $ 33,238 $ 515 $ 48,382 $ 152,604 Capital expenditures for property $ 4,294 $ 1,634 $ 1,587 $ 55 $ 141 $ 7,711 Six Months Ended June 30, 2002 Total net sales and revenues $ 24,992 $ 13,276 $ 55 $ (385) $ 1,188 $ 39,126 ======== ======== ======== ======== ========= ========= Depreciation and depletion $ 2,137 $ 1,629 $ 1,434 $ 17 $ 194 $ 5,411 Interest income -- -- -- -- $ 181 $ 181 Interest expense -- -- -- -- $ 9,848 $ 9,848 Loss on early retirement of debt -- -- -- -- $ (2,920) $ (2,920) Profit (loss) $ (1,420) $ 3,760 $ 759 $ (1,489) $ (6,182) $ (4,572) Segment assets (A) $ 63,144 $ 27,642 $ 31,430 $ 427 $ 49,182 $ 171,825 Capital expenditures for property $ 300 $ 582 $ 4,207 -- $ 12 $ 5,101 Notes: (A) Segment assets consist of receivables, prepaids, inventories, property, plant and equipment, and mining properties
Segment Reporting Cont. (In Thousands) Six Months Ended June 30, 2003 2002 ---------- ---------- (Loss) - ------ Total profit (loss) from reportable segments $ 8,573 $ (4,572) Depreciation, depletion and amortization expense (9,698) (5,411) Interest expense (4,023) (9,848) Other (28,188) (2,920) --------- --------- Loss before income taxes $ (33,336) $ (22,751) ========= ========= June 30, 2003 2002 ---------- ---------- Assets - ------ Total assets for reportable segments 152,604 $ 171,825 Cash and cash equivalents 19,527 11,955 Short-term investments 301 763 Other assets 23,381 18,129 --------- --------- Total consolidated assets $ 195,813 $ 202,672 ========= ========= 14 Geographic Information - ---------------------- (In thousands) Long-Lived June 30, 2003 Revenues Assets ---------- ---------- United States $ 30,682 $ 59,858 Chile 24,528 16,939 Other Foreign Countries 267 19,859 --------- --------- Consolidated Total $ 55,477 $ 96,656 ========= ========= Long-Lived June 30, 2002 Revenues Assets ---------- ---------- United States $ 39,458 $ 75,080 Chile (292) 21,922 Other Foreign Countries (40) 21,341 --------- --------- Consolidated Total $ 39,126 $ 118,343 ========= ========= Revenues are geographically separated based upon the country in which operations and the underlying assets generating those revenues reside. NOTE H - HEDGING For the first half of 2003 the Company recorded a realized loss of approximately $0.5 million in connection with its gold hedge program. The Company has 40,000 ounces in forward sales in its gold protection program, whereby over the next twelve months the Company will receive an average price of $339 per ounce. The following table summarizes the information at June 30, 2003 associated with the Company's financial and derivative financial instruments that are sensitive to changes in interest rates, commodity prices and foreign exchange rates. For long-term debt obligations, the table presents principal cash flows and related average interest rates. For gold call options and amortizing forward sales, the table presents ounces contracted to be delivered and the related average price per ounce in U.S. dollars. For foreign currency exchange contracts, the table presents the notional amount in Chilean Peso's to be purchased along with the average foreign exchange rate.
Fair Value (dollars in thousands) 2003 2004 2005 2006 2007 Thereafter Total 6/30/02 - ------------------------------------------------------------------------------------------------------------- Liabilities Long Term Debt (prior to exchange) $63,228 Fixed Rate $ 9,887 $ 5,873 $ 9,939 $ - $ 37,185 $ - $ 62,884 Average Interest Rate 9.166% 8.607% 8.681% 9.000% 9.000% Derivative Financial Instruments Gold Forward $276 Sales - USD Ounces 26,000 14,000 - - - - 40,000 Price Per Ounce $331 $353 - - - - - Foreign Currency Contracts Chilean Peso - USD $ 2,035 - - - - - $2,035 $45 Exchange Rate 708 - - - - - - (CLP to USD)
15 Fair value is determined by trading information on or near the balance sheet date. Long term debt represents the face amount of the outstanding convertible debentures and timing of when these become due. Interest rates presented in the table are calculated using the weighted average of the outstanding face amount of each debenture for the period remaining in each period presented. All long term debt is denominated in US dollars. NOTE I - stock-based compensation In December, 2002 the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation-Transition and Disclosure." SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. At June 30, 2003, the Company had one stock-based employee compensation plan. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Employee compensation cost reflected in net income was $0.2 million for restricted stock granted under this plan and no compensation cost is reflected for options granted as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Six Months Ended (In thousands except per share data) June 30, June 30, ---------------------- ----------------------- 2003 2002 2003 2002 --------- ---------- ---------- ---------- Net loss attributable to Common shareholders $ (4,445) $ (10,855) $ (35,635) $ (22,751) Unaudited net loss pro forma $ (4,455) $ (10,865) $ (35,655) $ (22,771) Basic and diluted net loss per share as reported $ (0.03) $ (0.16) $ (0.26) $ (0.38) Unaudited basic and diluted net loss per share pro forma $ (0.03) $ (0.16) $ (0.26) $ (0.38)
The provisions of SFAS 148 will not have a material impact on the Company, as it does not plan to adopt the fair-value method of accounting for stock options at the current time. NOTE J - LITIGATION AND OTHER EVENTS Federal Natural Resources Action On March 22, 1996, an action was filed in the United States District Court for the District of Idaho by the United States against various defendants, including the Company, asserting claims under CERCLA and the Clean Water Act for alleged damages to federal natural resources in the Coeur d'Alene River Basin of Northern Idaho as a result of alleged releases of hazardous substances from mining activities conducted in the area since the late 1800s. On March 16, 2001, the Company and representatives of the U.S. Government, including the Environmental Protection Agency, the Department of Interior and the Department of Agriculture, reached an agreement in principle to settle the lawsuit, which represents the only suit in which the Company has been named as a party. Pursuant to the terms of the Consent Decree, dated May 14, 2001, the Company has paid the U.S. Government a total of approximately $3.9 million, of which $3.3 million was paid in May 2001 and the remaining $.6 million was paid in June 2001. In addition, the Company will (i) pay the United States 50% of any future recoveries from insurance companies for claims for defense and indemnification coverage under general liability insurance policies in excess of $0.6 million, (ii) accomplish certain cleanup work on the Mineral Point 16 property (i.e., the former Coeur Mine site) and Caladay property, and (iii) make available certain real property to be used as a waste repository. Finally, commencing five years after effectiveness of the settlement and continuing for 15 years thereafter, the Company will be obligated to pay net smelter royalties on its operating properties, up to a maximum of $3 million, amounting to a 2% net smelter royalty on silver production if the price of silver exceeds $6.50 per ounce, and a $5.00 per ounce net smelter royalty on gold production if the price of gold exceeds $325 per ounce. The Company recorded $4.2 million of expenses, which included $3.9 million of settlement payments, in the fourth quarter of 2000 in connection with the settlement. Lawsuit to Recover Inventory During the first quarter of 2000, Handy & Harman Refining Group, Inc. ("Handy & Harman"), to which the Rochester Mine had historically sent approximately 50% of its dore, filed for Chapter 11 bankruptcy. The Company had inventory at the refinery of approximately 67,000 ounces of silver and 5,000 ounces of gold that had been delivered to certain creditors of Handy & Harman. On February 27, 2001 the Company commenced a lawsuit against Handy & Harman and certain others in the U.S. Bankruptcy Court for the District of Connecticut seeking recovery of the metals and/or damages. Handy & Harman's Chapter 11 liquidation plan was confirmed by the Bankruptcy Court in August 2001 and on November 3, 2001, the Company received approximately $294,000 from Handy & Harman as a partial payment under the plan. This suit has been settled by a payment to the Company in the amount of $50,000. The liquidating custodian of Handy & Harman under the liquidation plan filed suit against the Company in March 2002 for the value of 100,000 ounces of silver (i.e., approximately $500,000) as a preference based on the Company's draw-down of its silver held by Handy & Harman in mid-March 2000. Based on this legal action, the Company determined that the recovery of any additional amounts would be remote. As a result, the Company recorded a $1.4 million write-down of the remaining carrying amount in the fourth quarter of 2001. Settlement negotiations resulted in an agreement with the liquidating custodian for settlement of his claim. The sum of $70,000 will be paid by the Company. This payment will be deducted from a payment due to the Company in the amount of approximately $222,000. On July 10, 2003, the court approved the settlement. The appeal period for the order is 10 days following its entry. Private Property Damage Action On January 7, 2002, a private class action suit captioned Baugh v. Asarco, et al., was filed in the Idaho District Court for the First District (Lawsuit No. 2002131) in Kootenai County, Idaho against the companies that have been defendants in the prior Bunker Hill and natural resources litigation in the Coeur d'Alene Basin, including the Company, by eight northern Idaho residents seeking medical benefits and real property damages from the mining companies involved in the Bunker Hill Superfund site. In October 2002, the court conducted a hearing on motions resulting in an order striking certain of the alleged causes of action from the complaint, and dismissing the complaint with leave to amend it. In January 2003, the plaintiffs filed an amended complaint. Certain of the defendants, including the Company, filed motions to dismiss the complaint. The court struck the amended complaint and a second amended complaint has been filed. While the Company believes the suit is without merit, at this early stage of the proceedings, the Company cannot predict the outcome of this suit. State of Maine and State of Idaho Superfund Sites Related to Callahan Mining Corporation During 2001, the United States Forest Service made a formal request for information regarding the Deadwood Mine Site located in central Idaho. Callahan Mining Corporation had operated at this site during the 1940's. The Forest Service believes that some cleanup action is required at the location. However, Coeur 17 d'Alene Mines Corporation did not acquire Callahan until 1991, more than 40 years after Callahan disposed of its interest in the Deadwood property. The Company did not make any decisions with respect to generation, transport or disposal of hazardous waste at the site. Therefore, it is believed that the Company is not liable for any cleanup, and if Callahan might be liable, it has no substantial assets with which to satisfy any such liability. To date no claim has been made by the United States for any dollar amount of cleanup costs against either the Company or Callahan. During 2002, the EPA made a formal request for information regarding a Callahan mine site in the State of Maine. Callahan operated there in the late 1960's, shut the operations down in the early 1970's and disposed of the property. The EPA contends that some cleanup action is warranted at the site, and listed it on the National Priorities List in late 2002. The Company believes that because it made no decisions with respect to generation, transport or disposal of hazardous waste at this location, it is not liable for any cleanup costs. If Callahan might have liability, it has no substantial assets with which to satisfy such liability. To date, no claim has been made for any dollar amount of cleanup costs against either the Company or Callahan. NOTE K - SUBSEQUENT EVENTS Effective as of July 10, 2003, Coeur d'Alene Mines Corporation entered into a series of agreements under which indebtedness of the Company will be exchanged for or converted into shares of the Company's common stock, (the "Common Stock"). The Company and each of the holders of the Company's 9% Senior Subordinated Notes due February 2007 (the "9% Notes") entered into an Early Conversion Agreement. The amount of principal to be converted under the Early Conversion Agreements is $32.6 million, and the common shares to be issued, including interest, is approximately 27.5 million. After giving effect to the exchanges contemplated by the Early Conversion Agreements, an aggregate of $4.6 million of 9% Notes will remain outstanding. The Company expects to record a loss on early retirement of debt of $4.3 million in the third quarter of 2003 in conjunction with these transactions. In connection with the Early Conversion Agreements, the Company, the holders of the 9% Notes and the trustee under the indenture with respect to the 9% Notes also amended such indenture. The amendments are set forth in a Supplemental Indenture, dated July 15, 2003. Together with the Early Conversion Agreements, the Supplemental Indenture provides that: (i) the holders of the remaining 9% Notes will not convert such 9% Notes until the earlier of the Company's next annual shareholders meeting, at which time the approval of the Company's shareholders to issue shares in excess of the NYSE 20% limitation will be sought, or June 30, 2004; (ii) until that time, or if the stockholder approval is not obtained, any optional redemption by the Company of the remaining 9% Notes will be at a price equal to the greater of the current redemption price and the then market value of the number of shares into which the remaining 9% Notes would be convertible, but for the operation of the NYSE 20% limit; (iii) if the stockholder approval is not obtained, holders of the 9% Notes, upon their election to convert, will receive, instead of shares of Common Stock, cash at a price equal to the then market value of the number of shares into which the remaining 9% Notes would be convertible, but for the operation of the NYSE 20% limit; and (iv) each holder of 9% Notes agreed not to transfer more than 2 million shares of Common Stock to any transferee in one transaction or a series of transactions. In other exchanges subsequent to, the Company issued an aggregate of 0.8 million shares of common stock for $1.0 million principal amount of the Company's 6.3/8% Debentures, and an aggregate of 0.3 million shares of 18 common stock for $0.4 million principal amount of the Company's 7 1/4% Debentures. The Company expects to record a loss on early retirement of debt of $1.5 million in the third quarter of 2003 in conjunction with these transaction. On July 7, 2003, the Company sold 0.2 million shares of common stock to an institutional investor for an aggregate of $0.3 million, or $1.40 per share. The net proceeds from the sale of shares were used to pay amounts owed by the Company's subsidiary, Empresa Minera Manquiri S.A., a Bolivian corporation, under contracts pursuant to which it obtained certain mineral rights in Bolivia and for general corporate purposes. The sale of share was effected pursuant to the Company's shelf registration statement Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis includes references to total cash costs per ounce of silver produced both on an individual mine basis and on a consolidated basis. Total cash costs per ounce represent a non- U.S. GAAP measurement that management uses to monitor and evaluate the performance of its mining operations. A reconciliation of total cash costs per ounce to U.S. GAAP "Production Expenses" is also provided herein and should be referred to when reading the total cash cost per ounce measurement. General The results of the Company's operations are significantly affected by the market prices of silver and gold which may fluctuate widely and are affected by many factors beyond the Company's control, including, without limitation, interest rates, expectations regarding inflation, currency values, governmental decisions regarding the disposal of precious metals stockpiles, global and regional political and economic conditions, and other factors. The average prices of silver (Handy & Harman) and gold (London Final) for the first six months of 2003 were $4.66 and $349 per ounce, respectively. The market prices of silver and gold on July 21, 2003 were $4.79 per ounce and $350 per ounce, respectively. The Company's operating mines are the Rochester mine in Nevada, the Galena mine in the Coeur d'Alene Mining District of Idaho, the Cerro Bayo mine in Chile, and the Mina Martha mine in Argentina. This document contains numerous forward-looking statements relating to the Company's gold and silver mining business. The United States Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Operating, exploration and financial data, and other statements in this document are based on information the Company believes reasonable, but involve significant uncertainties as to future gold and silver prices, costs, ore grades, estimation of gold and silver reserves, mining and processing conditions, changes that could result from the Company's future acquisition of new mining properties or businesses, the risks and hazards inherent in the mining business (including environmental hazards, industrial accidents, weather or geologically related conditions), regulatory and permitting matters, and risks inherent in the ownership and operation of, or investment in, mining properties or businesses in foreign countries. Actual results and timetables could vary significantly from the estimates presented. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise. 19 The following table sets forth the amounts of silver and gold produced by the following mining properties, each of which is wholly owned by the Company, and the cash and full costs of such production during the three- and six-month periods ended June 30, 2003 and 2002: Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ROCHESTER MINE Silver ozs 1,353,346 1,637,443 2,443,046 3,053,210 Gold ozs 15,144 17,132 25,891 33,555 Cash Costs per oz./silver $ 4.33 $ 2.88 $ 5.28 $ 3.27 Full Costs per oz./silver $ 5.45 $ 3.72 $ 6.32 $ 4.11 GALENA MINE Silver ozs 1,060,696 1,383,449 2,296,467 2,856,991 Cash Costs per oz./silver $ 4.73 $ 4.14 $ 4.46 $ 4.05 Full Costs per oz./silver $ 5.10 $ 4.86 $ 4.78 $ 4.74 CERRO BAYO/MARTHA MINE (A) Silver ozs 1,347,745 260,543 2,625,202 260,543 Gold ozs 14,538 5,919 36,954 5,919 Cash Costs per oz./silver $ 1.33 $ 1.39 $ 0.54 $ 1.39 Full Costs per oz./silver $ 2.98 $ 6.79 $ 2.51 $ 6.79 CONSOLIDATED PRODUCTION TOTALS Silver ozs 3,761,787 3,281,435 7,364,715 6,170,744 Gold ozs 29,682 23,051 62,845 39,474 Primary Silver Cost per oz $ 3.37 $ 3.29 $ 3.33 $ 3.55 CONSOLIDATED SALES TOTALS Silver ozs. sold 3,624,000 3,100,000 7,774,000 6,034,000 Gold ozs. sold 33,000 19,000 68,000 36,000 Realized price per silver oz $ 4.53 $ 4.77 $ 4.65 $ 4.64 Realized price per gold oz $ 330 $ 304 $ 336 $ 298 (A) The Company commenced production in April 2002. See reconciliation of non-GAAP cash costs to GAAP production costs below under "Cost and Expenses". Note: "Cash Costs per Ounce" are calculated by dividing the cash costs computed for each of the Company's mining properties for a specified period by the amount of silver ounces produced by that property during that same period. Management uses cash costs per ounce produced as a key indicator of the profitability of each of its mining properties. Gold and silver are sold and priced in the world financial markets on a US dollar per ounce basis. By calculating the cash costs from each of the Company's mines on the same unit basis, management can easily determine the gross margin that each ounce of gold and silver produced is generating. "Cash Costs" are costs directly related to the physical activities of producing silver and gold and include mining, processing and other plant costs, deferred mining adjustments, third-party refining and smelting costs, marketing expense, on-site general and administrative costs, royalties, in-mine drilling expenditures that are related to production and other direct costs. Sales of by-product metals (primarily gold and copper) are deducted from the above in computing cash costs. Cash costs exclude depreciation, depletion and amortization, corporate general and administrative expense, exploration, interest, and pre-feasibility costs and accruals for mine reclamation. Cash costs are calculated and presented using the "Gold Institute Production Cost Standard" applied consistently for all periods presented. Total cash costs per ounce is a non-GAAP measurement and investors are cautioned not to place undue reliance on it and are urged to read all GAAP accounting disclosures presented in the consolidated financial statements and accompanying footnotes. In addition, see the reconciliation of "cash costs" to production costs under "Results of Operations - Costs and Expenses" set forth below: 20 Operating Highlights South America Cerro Bayo (Chile). At Coeur's Cerro Bayo property (formerly the Fachinal mine) in Southern Chile, the mine produced 1.3 million ounces of silver and 14,500 ounces of gold during the second quarter of 2003. Total cash costs for the latest three-month period was $1.33 per ounce. See "Cost and Expenses" below. Exploration at Cerro Bayo during the second quarter focused on reserve/resource delineation drilling of the Javiera, Wendy and Tranque Norte veins. Results from the drilling are expected to produce additional reserves and mineralized material. General reconnaissance exploration was also carried out on Coeur's properties in the Santa Cruz Province of Argentina. Results obtained from drilling adjacent to the R-4 Zone on the Martha mine property and on the Malbec property located 10 miles north of the Martha mine have indicated the presence of mineralized zones. Production at Mina Martha progressed as planned. During the quarter, ore was mines from the open pit and underground workings. During April, open pit mining was completed. Development was not started in the R-4 zone until May. North America Rochester Mine (Nevada). Coeur's Rochester mine produced 1.4 million ounces of silver and 15,100 ounces of gold, during the second quarter of 2003 compared to 1.6 million ounces of silver and 17,100 ounces of gold in the second quarter of the prior year. Total cash costs for the latest three-month period increased to $4.33 per ounce as compared to $2.88 in the second quarter of 2002. Production in the second quarter of 2003 as compared to the second quarter of 2002 was down and costs per ounce were higher as a result of the placement of lower grade ore on the leach pad, construction activities associated with the crusher relocation project, construction of a new off-pad haul road and ongoing reclamation activities. As a result, pit ore to the crusher was replaced with low-grade stockpiled ore, which ultimately reduced ounce production. With all non-production related activities complete, pit production will resume as planned and ounce production is expected to increase over the next several quarters. Coeur Silver Valley - Galena Mine (Idaho). In the latest quarter, silver production from Coeur Silver Valley was 1.1 million ounces, down from the 1.4 million ounces produced in the second quarter of 2002. Total cash costs for the current quarter rose to $4.73 per ounce compared to $4.14 per ounce in the second quarter of the prior year. During the most recent quarter, mining operations were hampered by difficult ground conditions near the 117 vein and lower than expected grades from trackless mining operations. Measures have been taken to address these short-term issues and to develop an operational base for future productivity improvements. Coeur initiated a major exploration program at the Galena mine during the first quarter of 2003. Exploration drilling has thus far focused on the down dip extension of the 164 vein from the 4900 level and the down dip extension of the silver vein from the 2400 level. Drilling of other targets located in the `upper country' as well as from the 5500 level are planned during the remainder 2003. Exploration and Development stage Projects San Bartolome (Bolivia). The final feasibility study at the San Bartolome silver project near Potosi, Bolivia is scheduled for completion in the third quarter of 2003. The Company recently completed an independent ore reserves report for the San Bartolome project. As a result, the previously reported mineralized material containing 40.3 million tons of ore with an average grade of 3.14 per ton has been reclassified to proven and probable ore reserves of 35.3 million tons with an average grade of 3.58 ounces of silver per ton resulting in 126 million ounces of contained silver. 21 RESULTS OF OPERATIONS Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Revenues Sales of metal in the second quarter of 2003 increased by $6.2 million, or 32%, from the second quarter of 2002 to $25.7 million. The increase in product sales of metal is primarily attributable to increased production of silver and gold. In the second quarter of 2003, the Company produced a total of 3.8 million ounces of silver and 30,000 ounces of gold, compared to 3.3 million ounces of silver and 23,000 ounces of gold in the second quarter of 2002. In the second quarter of 2003, the Company sold 3.6 million ounces of silver and 33,000 ounces of gold compared to 3.1 million ounces of silver and 19,000 ounces of gold for the same period in 2002. The increase in silver and gold production is the result of the start-up of operations at the Cerro Bayo and Martha Mines in the second quarter of 2002, which accounted for 1.3 million ounces of silver production and 14,500 ounces of gold production during the second quarter of 2003. Realized silver and gold prices were $4.53 and $330 per ounce, respectively, in the second quarter of 2003 compared to $4.77 and $304 in the comparable quarter of 2002. Interest and other income in the second quarter of 2003 decreased by $2.1 million compared with the second quarter of 2002. The decrease was primarily due to a gain of $1.5 million from a business interruption claim at the Galena mine and $1.0 million from sales of Pan American stock partially offset by $0.4 million in foreign exchange variations in the second quarter of 2002. Costs and Expenses Production costs in the second quarter of 2003 increased by $2.8 million, or 17%, from the second quarter of 2002 to $19.0 million. The increase is the result of an increase in production costs at the Cerro Bayo mine associated with increased metal production of approximately 1.1 million ounces for $6.8 million, increased production costs at Silver Valley of $0.4 million and lower production costs at the Rochester mine of $4.4 million, because of lower production. The following tables present a reconciliation between cash costs per ounce and GAAP production costs reported in the Statement of Operations: Three months ended June 30, 2003
Rochester Silver Valley Cerro Bayo(1) Total ----------- ------------- ------------- ----------- Production of Silver (ounces) 1,353,346 1,060,696 1,347,745 3,761,787 Cash Costs per ounce $ 4.33 $ 4.73 $ 1.33 $ 3.37 ---------- ---------- ---------- ---------- Total Cash Costs (thousands) $ 5,861 $ 5,021 $ 1,786 $ 12,668 Add/(Subtract): Third Party Smelting Costs (193) (1,287) (1,027) (2,507) By-Product Credit 5,281 585 5,019 10,885 Deferred Stripping Adjustment (80) -- -- (80) Change in Inventory (2,025) 330 (258) (1,953) ---------- ---------- ---------- ---------- Production Costs $ 8,844 $ 4,649 $ 5,520 $ 19,013 ========== ========== ========== ==========
22 Three months ended June 30, 2002
Rochester Silver Valley Cerro Bayo(1) Total ----------- ------------- ------------- ----------- Production of Silver (ounces) 1,637,443 1,383,449 260,543 3,281,435 Cash Costs per ounce $ $2.88 $ 4.14 $ 1.39 $ 3.29 ---------- ---------- ---------- ---------- Total Cash Costs (thousands) $ 4,718 $ 5,728 $ 363 $ 10,809 Add/Subtract: Third Party Smelting Costs (243) (1,939) - (2,182) By-Product Credit 5,337 792 1,873 8,002 Deferred Stripping Adjustment (68) - - (68) Change in Inventory 3,499 (271) (3,527) (299) ---------- ---------- ---------- ---------- Production Costs $ 13,243 $ 4,310 $ (1,291) $ 16,262 ========== ========== ========== ========== (1) The Cerro Bayo mine commenced production in the second quarter of 2002.
Other Expenses Depreciation and amortization increased in the second quarter of 2003 by $1.1 million, from the prior year's second quarter, primarily due to increased depletion recorded at the Cerro Bayo mine in conjunction with commencement of commercial production at the mine during the second quarter of 2002. Administrative and general expenses decreased in the second quarter of 2003 compared to the same period in 2002 by $0.1 million due to increased financing activities associated with the 9% Notes. Exploration expenses increased by $0.1 million in the second quarter of 2003 compared to the same period in 2002 as a result of the Company's expanded exploration activities in the Cerro Bayo/Martha mine property areas. Pre-feasibility expenses decreased by $0.6 million due to lower pre-feasibility expenses on the San Bartolome project in the second quarter of 2003 as compared to the same quarter of 2002. Interest expense decreased in the second quarter of 2003 compared with the second quarter of 2002 to $2.0 million from $5.4 million as a result of a decrease in the Company's overall debt level. During the second quarter of 2003, the Company recorded a loss on the early retirement of debt of $0.1 million compared to a loss of $2.7 million recorded in the same period of 2002. Net Loss As a result of the aforementioned factors, the Company's net loss amounted to $4.4 million, or $0.03 per share, in the second quarter of 2003 compared to a net loss of $10.9 million, or $0.16 per share, in the second quarter of 2002. Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002 Revenues Sales of metal in the six months ended June 30, 2003 increased by $18.7 million, or 52%, from the same period of 2002 to $54.7 million. The increase in product sales of metal is attributable to increased production of silver and gold which accounted for $16.6 million, or 89%, of the increase, and higher realized gold prices which accounted for $2.1 million, or 11%, of the increase. 23 In the six months ended June 30, 2003, the Company produced a total of 7.4 million ounces of silver and 62,800 ounces of gold, compared to 6.2 million ounces of silver and 39,500 ounces of gold in the six months ended June 30, 2002. In the six months ended June 30, 2003, the Company sold 7.8 million ounces of silver and 68,000 ounces of gold compared to 6.0 million ounces of silver and 36,000 ounces of gold for the same period in 2002. The increase in silver and gold production is the result of the start-up of operations at the Cerro Bayo and Martha Mines in the second quarter of 2002, which accounted for 2.6 million ounces of silver production and 37,000 ounces of gold production during the first half of 2003. Realized silver and gold prices were $4.65 and $336 per ounce, respectively, in the six months ended June 30, 2003 compared to $4.64 and $298 in the comparable period of 2002. Interest and other income in the six months ended June 30, 2003 decreased by $2.3 million compared with the same period of 2002. The decrease was primarily due to a gain of $1.5 million from a business interruption claim at the Galena mine and $1.0 million from sales of Pan American stock partially offset by $0.4 million in foreign exchange variations in the second quarter of 2002. Costs and Expenses Production costs in the six months ended June 30, 2003 increased by $2.6 million, or 8%, from the six months ended June 30, 2002 to $36.9 million. The increase is the result of an increase in production costs at the Cerro Bayo mine of $11.4 million associated with higher production levels and lower production costs at the Rochester and Silver Valley mines of $8.7 million and $0.1 million, respectively. The following tables present a reconciliation between cash costs per ounce and GAAP production costs reported in the Statement of Operations: Six months ended June 30, 2003
Rochester Silver Valley Cerro Bayo(1) Total ----------- ------------- ------------- ----------- Production of Silver (ounces) 2,443,046 2,296,467 2,625,202 7,364,715 Cash Costs per ounce $ 5.28 $ 4.46 $ 0.54 $ 3.33 ---------- ---------- ---------- ---------- Total Cash Costs (thousands) $ 12,900 $ 10,237 $ 1,412 $ 24,549 Add/(Subtract): Third Party Smelting Costs (366) (2,882) (3,021) (6,269) By-Product Credit 9,058 1,324 12,943 23,325 Deferred Stripping Adjustment (161) - - (161) Change in Inventory (3,832) 454 (1,175) (4,553) ---------- ---------- ---------- ---------- Production Costs $ 17,599 $ 9,133 $ 10,159 $ 36,891 ========== ========== ========== ========== Six months ended June 30, 2002 Rochester Silver Valley Cerro Bayo(1) Total ----------- ------------- ------------- ----------- Production of Silver (ounces) 3,053,210 2,856,991 260,543 6,170,744 Cash Costs per ounce $ 3.27 $ 4.05 $ 1.39 $ 3.55 ---------- ---------- ---------- ---------- Total Cash Costs (thousands) $ 9,970 $ 11,582 $ 363 $ 21,915 Add/Subtract: Third Party Smelting Costs (484) (4,010) - (4,494) By-Product Credit 10,107 1,683 1,874 13,664 Deferred Stripping Adjustment (117) - - (117) Change in Inventory 6,819 17 (3,528) 3,308 ---------- ---------- ---------- ---------- Production Costs $ 26,295 $ 9,272 $ (1,291) $ 34,276 ========== ========== ========== ========== (1) The Cerro Bayo mine commenced production in the second quarter of 2002.
24 Other Expenses Depreciation and amortization increased in the six months ended June 30, 2003 by $4.3 million, from the prior year's comparable period, primarily due to increased depletion recorded at the Cerro Bayo mine in conjunction with commencement of commercial production at the mine. Administrative and general expenses increased in the six months ended June 30, 2003 compared to the same period in 2002 by $0.9 million due to increased financing activities. Exploration expenses increased by $0.6 million in the six months ended June 30, 2003 compared to the same period in 2002 as a result of the Company's expanded exploration activities in the Cerro Bayo/Martha mine property areas. Pre-feasibility expenses decreased by $1.0 million due to lower pre-feasibility expenses on the San Bartolome project in six months ended June 30, 2003 as compared to the same period of 2002. Interest expense decreased in the six months ended June 30, 2003 compared with the six months ended June 30, 2002 to $4.0 million from $9.8 million as a result of a decrease in the Company's overall debt level because of exchanges of debt for equity. During the six months ended June 30, 2003, the Company recorded a loss on the early retirement of debt of $28.2 million compared to $2.9 million recorded in the same period of 2002. Cumulative Effect of Accounting Change Effective with the first quarter of 2003, the Company changed the methodology used to recognize reclamation expense pursuant to Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations. Prior to 2003, the Company recognized a pro rata share of the future estimated reclamation liability on a units-of-production basis. After January 1, 2003, companies are required to recognize the full discounted estimated future reclamation liability and set up a corresponding asset to be amortized over the life of the mine on a units-of-production basis. The impact of this change was accounted for as a change in accounting principle in the first year of implementation and resulted in a charge of $2.3 million in the first quarter of 2003. (See "Critical Accounting Policies and Estimates - Reclamation and Remediation Costs" below.) Net Loss As a result of the aforementioned factors, the Company's net loss amounted to $35.6 million, or $0.26 per share, in the six months ended June 30, 2003 compared to a net loss of $22.8 million, or $0.38 per share, in the same period of 2002. LIQUIDITY AND CAPITAL RESOURCES Working Capital; Cash and Cash Equivalents The Company's working capital at June 30, 2003, increased by $14.5 million to approximately $20.8 million compared to $6.6 million at December 31, 2002. The increase was primarily attributed to $24 million of cash provided by financing activities. The ratio of current assets to current liabilities was 1.6 to 1.0 at June 30, 2003 compared to 1.2 to 1.0 at December 31, 2002. Net cash used in operating activities in the three months ended June 30, 2003 was $3.0 million compared to net cash provided by operating activities of $0.1 million in the three months ended June 30, 2002. The decrease in operating cash flow of $3.1 million is primarily the result of increased inventory levels associated with increased 25 production levels at the Cerro Bayo/Martha Mines. Net cash provided by investing activities in the second quarter of 2003 was $15.1 million compared to net cash used in investing activities of $1.4 million in the prior year's comparable period. The increase in cash provided by investing activities primarily resulted from an increase in short-term investments purchased with the proceeds from the issuance of the 9% Notes. Net cash used in financing activities was $11.9 million in the second quarter of 2003, compared to cash provided of $4.6 million in the second quarter of 2002. The decrease was primarily a result of retirement of debt of $22.4 million offset by proceeds on issuance of common stock of $11.5 million. As a result of the above, cash and cash equivalents increased by $0.2 million in the second quarter of 2003 compared to an increase of $3.2 million for the comparable period in 2002. Net cash used in operating activities in the six months ended June 30, 2003 was $4.3 million compared to net cash used in operating activities of $5.4 million in the six months ended June 30, 2002. The increase in operating cash flow of $1.1 million is primarily the result of increased inventory levels associated with increased production levels at the Cerro Bayo/Martha Mines. Net cash used in investing activities in the six months ended June 30, 2003 was $9.2 million compared to net cash used in investing activities of $1.8 million in the prior year's comparable period. The increase in cash used in investing activities primarily resulted from an increase in capital expenditures at the Cerro Bayo and Rochester mines. Net cash provided by financing activities was $24.0 million in the six months ended June 30, 2003, compared to cash provided of $4.5 million in the same period of the prior year. The increase was primarily a result of proceeds on issuance of common stock of $11.5 million and proceeds on the issuance of long-term debt of $33.3 million offset in part by retirement of debt of $22.4 million. As a result of the above, cash and cash equivalents increased by $10.4 million in the first half of 2003 compared to decrease of $2.8 million for the comparable period in 2002. Debt and Capital Resources The Company has improved its working capital position since December 31, 2002 by completing the issuance of $37.2 million of the 9% Convertible Senior Subordinated Notes due February 2007 (the "9% Notes"). The Company will continue to make debt reduction and/or restructuring one of its primary objectives during the next twelve months and believes its debt may be further reduced by additional conversions of 13 3/8% Notes into common equity during the remainder of this year. The Company also received proceeds of $11.5 million from the sale of common stock in the second quarter of 2003. At June 30, 2003, the Company had $19.5 million of cash and approximately $5.4 million available under its working capital facility. Production ounces and production costs are near budget for the year. Management therefore believes that its existing and available cash and cash flow from operations will allow it to meet its obligations for the next twelve months. However, the Company may continue to seek various forms of financing in the future. 2003 Exchanges and Conversions During the six months ended June 30, 2003, the holders of an additional $2.8 million principal amount of the Series I 13 3/8% Convertible Senior Subordinated Notes due December 31, 2003 (the "Series I 13 3/8% Notes") converted their notes, under their original terms, into a total of 2.2 million shares of common stock, including make whole interest payments. During the six months ended June 30, 2003, the holders of the 6 3/8% Debentures due January 2004 (the "6 3/8% Debentures") exchanged $26.9 million principal amount for 15.8 million shares of common stock and holders of the 7 1/4% Debentures due October 2005 (the "7% Debentures") exchanged $1.7 million principal amount for 1.1 shares of common stock. In connection with these exchanges, the Company reported a loss on the early retirement of debt of $28.2 million in the first half of 2003. 26 Issuance of 9% Convertible Senior Subordinated Notes On February 26, 2003, the Company completed a private placement of $37.2 million principal amount of 9% Notes. The net proceeds were approximately $33.3 million. The 9% Notes are senior in right of payment to the 6 3/8% and 7 1/4% Debentures. The 9% Notes are convertible into Coeur common stock, at any time prior to maturity at a conversion price of $1.60 per share, subject to adjustment. Interest is payable semi-annually on February 15 and August 15 of each year. The Company is entitled to elect to pay interest in cash or stock, in its sole discretion. The 9% Notes are redeemable at the option of the Company six months after issuance, subject to certain conditions, and at the option of the holders in the event of a change in control. Of the financial advisory fees paid by the Company in connection with the issuance of the 9% Notes, the Company elected to issue 0.6 million unregistered shares of common stock valued at $1.54 per share in lieu of cash. On March 7, 2003, the Company called for the redemption of approximately $22.4 million principal amount of the outstanding 6 3/8% Debentures. The debt was retired on April 7, 2003. Issuance of Common Stock On May 23, 2003, the Company sold 8.1 million shares of common stock to an institutional investor for an aggregate of $10 million, or $1.23 per share. The Company also granted the investor an option, exercisable within 30 days, to purchase an additional 1.2 million shares of common stock at a price of $1.23 per share. The proceeds of the sale were used for general corporate purposes and working capital needs, including the repayment of 13 3/8% Notes and 6 3/8% Debentures. On June 20, 2003, the Company sold 1.2 million shares of common stock to the institutional investor for an aggregate of $1.5 million, or $1.23 per share, in connection with the above-referenced option. The sales of shares were effected under the Company's shelf registration statement. Subsequent Events Effective as of July 10, 2003, Coeur d'Alene Mines Corporation entered into a series of agreements under which indebtedness of the Company will be exchanged for or converted into shares of the Company's common stock, (the "Common Stock"). The Company and each of the holders of the Company's 9% Notes entered into an Early Conversion Agreement. The amount of principal to be converted under the Early Conversion Agreements is $32.6 million, and the common shares to be issued, including interest, is approximately 27.5 million. After giving effect to the exchanges contemplated by the Early Conversion Agreements, an aggregate of $4.6 million of 9% Notes will remain outstanding. The Company expects to record an estimated loss on early retirement of debt of $4.3 million in the third quarter of 2003 in conjunction with these transactions. In connection with the Early Conversion Agreements, the Company, the holders of the 9% Notes and the trustee under the indenture with respect to the 9% Notes also amended such indenture. The amendments are set forth in a Supplemental Indenture, dated July 15, 2003. Together with the Early Conversion Agreements, the Supplemental Indenture provides that: (i) the holders of the remaining 9% Notes will not convert such 9% Notes until the earlier of the Company's next annual shareholders meeting, at which time the approval of the Company's shareholders to issue shares in excess of the NYSE 20% limitation will be sought, or June 30, 2004; (ii) until that time, or if the stockholder approval is not obtained, any optional redemption by the Company of the remaining 9% Notes will be at a price equal to the greater of the current redemption price and the then market value of the number of shares into which the remaining 9% Notes would be convertible, but for the operation of the NYSE 20% limit; 27 (iii) if the stockholder approval is not obtained, holders of the 9% Notes, upon their election to convert, will receive, instead of shares of Common Stock, cash at a price equal to the then market value of the number of shares into which the remaining 9% Notes would be convertible, but for the operation of the NYSE 20% limit; and (iv) each holder of 9% Notes agreed not to transfer more than 2 million shares of Common Stock to any transferee in one transaction or a series of transactions. In other exchanges subsequent to June 30, 2003, the Company issued an aggregate of 0.8 million shares of common stock for $1.0 million principal amount of the Company's 6 3/8% Debentures, and an aggregate of 0.3 million shares of common stock for $0.4 million principal amount of the Company's 7 1/4% Debentures. The Company expects to record a loss on early retirement of debt of $1.5 million in the third quarter of 2003 in conjunction with these transaction. On July 7, 2003, the Company sold 0.2 million shares of common stock to an institutional investor for an aggregate of $0.3 million, or $1.40 per share. The net proceeds from the sale of shares were used to pay amounts owed by the Company's subsidiary, Empresa Minera Manquiri S.A., a Bolivian corporation, under contracts pursuant to which it obtained certain mineral rights in Bolivia and for general corporate purposes. The sale of share was effected pursuant to the Company's shelf registration statement. Litigation and Other Events Federal Natural Resources Action On March 22, 1996, an action was filed in the United States District Court for the District of Idaho by the United States against various defendants, including the Company, asserting claims under CERCLA and the Clean Water Act for alleged damages to federal natural resources in the Coeur d'Alene River Basin of Northern Idaho as a result of alleged releases of hazardous substances from mining activities conducted in the area since the late 1800s. On March 16, 2001, the Company and representatives of the U.S. Government, including the Environmental Protection Agency, the Department of Interior and the Department of Agriculture, reached an agreement in principle to settle the lawsuit, which represents the only suit in which the Company has been named as a party. Pursuant to the terms of the Consent Decree, dated May 14, 2001, the Company has paid the U.S. Government a total of approximately $3.9 million, of which $3.3 million was paid in May 2001 and the remaining $.6 million was paid in June 2001. In addition, the Company will (i) pay the United States 50% of any future recoveries from insurance companies for claims for defense and indemnification coverage under general liability insurance policies in excess of $0.6 million, (ii) accomplish certain cleanup work on the Mineral Point property (i.e., the former Coeur Mine site) and Caladay property, and (iii) make available certain real property to be used as a waste repository. Finally, commencing five years after effectiveness of the settlement and continuing for 15 years thereafter, the Company will be obligated to pay net smelter royalties on its operating properties, up to a maximum of $3 million, amounting to a 2% net smelter royalty on silver production if the price of silver exceeds $6.50 per ounce, and a $5.00 per ounce net smelter royalty on gold production if the price of gold exceeds $325 per ounce. The Company recorded $4.2 million of expenses, which included $3.9 million of settlement payments, in the fourth quarter of 2000 in connection with the settlement. 28 Lawsuit to Recover Inventory During the first quarter of 2000, Handy & Harman Refining Group, Inc. ("Handy & Harman"), to which the Rochester Mine had historically sent approximately 50% of its dore, filed for Chapter 11 bankruptcy. The Company had inventory at the refinery of approximately 67,000 ounces of silver and 5,000 ounces of gold that had been delivered to certain creditors of Handy & Harman. On February 27, 2001 the Company commenced a lawsuit against Handy & Harman and certain others in the U.S. Bankruptcy Court for the District of Connecticut seeking recovery of the metals and/or damages. Handy & Harman's Chapter 11 liquidation plan was confirmed by the Bankruptcy Court in August 2001 and on November 3, 2001, the Company received approximately $294,000 from Handy & Harman as a partial payment under the plan. This suit has been settled by a payment to the Company in the amount of $50,000. The liquidating custodian of Handy & Harman under the liquidation plan filed suit against the Company in March 2002 for the value of 100,000 ounces of silver (i.e., approximately $500,000) as a preference based on the Company's draw-down of its silver held by Handy & Harman in mid-March 2000. Based on this legal action, the Company determined that the recovery of any additional amounts would be remote. As a result, the Company recorded a $1.4 million write-down of the remaining carrying amount in the fourth quarter of 2001. Settlement negotiations resulted in an agreement with the liquidating custodian for settlement of his claim. The sum of $70,000 will be paid by the Company. This payment will be deducted from a payment due to the Company in the amount of approximately $222,000. On July 10, 2003, the court approved the settlement. The appeal period for the order is 10 days following its entry. Private Property Damage Action On January 7, 2002, a private class action suit captioned Baugh v. Asarco, et al., was filed in the Idaho District Court for the First District (Lawsuit No. 2002131) in Kootenai County, Idaho against the companies that have been defendants in the prior Bunker Hill and natural resources litigation in the Coeur d'Alene Basin, including the Company, by eight northern Idaho residents seeking medical benefits and real property damages from the mining companies involved in the Bunker Hill Superfund site. In October 2002, the court conducted a hearing on motions resulting in an order striking certain of the alleged causes of action from the complaint, and dismissing the complaint with leave to amend it. In January 2003, the plaintiffs filed an amended complaint. Certain of the defendants, including the Company, filed motions to dismiss the complaint. The court struck the amended complaint and a second amended complaint has been filed. While the Company believes the suit is without merit, at this early stage of the proceedings, the Company cannot predict the outcome of this suit. State of Maine and State of Idaho Superfund Sites Related to Callahan Mining Corporation During 2001, the United States Forest Service made a formal request for information regarding the Deadwood Mine Site located in central Idaho. Callahan Mining Corporation had operated at this site during the 1940's. The Forest Service believes that some cleanup action is required at the location. However, Coeur d'Alene Mines Corporation did not acquire Callahan until 1991, more than 40 years after Callahan disposed of its interest in the Deadwood property. The Company did not make any decisions with respect to generation, transport or disposal of hazardous waste at the site. Therefore, it is believed that the Company is not liable for any cleanup, and if Callahan might be liable, it has no substantial assets with which to satisfy any such liability. To date no claim has been made by the United States for any dollar amount of cleanup costs against either the Company or Callahan. 29 During 2002, the EPA made a formal request for information regarding a Callahan mine site in the State of Maine. Callahan operated there in the late 1960's, shut the operations down in the early 1970's and disposed of the property. The EPA contends that some cleanup action is warranted at the site, and listed it on the National Priorities List in late 2002. The Company believes that because it made no decisions with respect to generation, transport or disposal of hazardous waste at this location, it is not liable for any cleanup costs. If Callahan might have liability, it has no substantial assets with which to satisfy such liability. To date, no claim has been made for any dollar amount of cleanup costs against either the Company or Callahan. RISK FACTORS The following information sets forth information relating to important risks and uncertainties that could materially adversely affect the Company's business, financial condition or operating results. References to "we," "our" and "us" in these risk factors refer to the Company. Additional risks and uncertainties that we do not presently know or that we currently deem immaterial may also impair our business operations. We have incurred losses in the last five years and expect to continue to do so. We have incurred net losses in the last five years, and have had losses from continuing operations in each of those periods. Significantly contributing to the losses were: o historically low silver and gold market prices; o our deliberate pursuit of a growth policy calling for the acquisition of mining properties and companies and financing such growth principally by incurring convertible indebtedness; and o significant write-downs for impaired assets in 1998 ($223.2 million), 1999 ($16.2 million), 2000 ($12.2 million), 2001 ($6.1 million) and 2002 ($19.0 million), While market prices for silver and gold have recently increased, if silver and gold prices were to remain at current levels or decline and we are unable to reduce our production costs below prevailing price levels, our losses will continue. Because low silver and gold prices may make mining at our properties uneconomical, if these prices decline, we may be required to recognize additional impairment write-downs. This would increase our operating losses. We have not had sufficient earnings to cover fixed charges in recent years and presently expect that situation to continue. As a result of our net losses, our earnings have not been adequate to satisfy fixed charges (i.e., interest, preferred stock dividends and that portion of rent deemed representative of interest) in each of the last five years. The amounts by which earnings were inadequate to cover fixed charges were approximately $227.0 million in 1998, $29.3 million in 1999, $47.5 million in 2000, $3.1 million in 2001 and $81.2 million in 2002, respectively. As of June 30, 2003, we were required to make fixed payments on the following securities: o $5.9 million principal amount of our 6 3/8% Convertible Subordinated Debentures 2004, requiring annual interest payments of approximately $0.4 million until their maturity on January 31, 2004; 30 o $9.9 million principal amount of our 7 1/4% Convertible Subordinated Debentures due 2005, requiring annual interest payments of approximately $0.7 million until their maturity on October 31, 2005; and o $9.9 million of our Series I 13 3/8% Senior Convertible Notes due 2003, requiring interest payments (in cash or in common stock) of approximately $1.3 million in December 2003. o $37.2 million of our 9% Convertible Senior Subordinated Notes due 2007, requiring annual interest payments (in cash or in common stock) of approximately $3.3 million until their maturity on February 26, 2007. Effective as of July 10, 2003, Coeur d'Alene Mines Corporation entered into a series of agreements under which indebtedness of the Company will be exchanged for or converted into shares of the Company's common stock (the "Common Stock"). The total number of shares of Common Stock to be issued with respect to the $32.6 million principal amount of 9% Notes is 27.5 million. After giving effect to the exchanges contemplated by these agreements, an aggregate of $4.6 million of 9% Notes will remain outstanding. In connection with the agreements to exchange or convert indebtedness, the Company, the holders of the 9% Notes and the trustee under the indenture with respect to the 9% Notes also amended such indenture. The amendments are set forth in a Supplemental Indenture, dated July 15, 2003. Together with the agreements, the Supplemental Indenture provides that: (i) the holders of the remaining 9% Notes will not convert such 9% Notes until the earlier of the Company's next annual shareholders meeting, at which time the approval of the Company's shareholders to issue shares in excess of the NYSE 20% limitation will be sought, or June 30, 2004; (ii) until that time, or if the stockholder approval is not obtained, any optional redemption by the Company of the remaining 9% Notes will be at a price equal to the greater of the current redemption price and the then market value of the number of shares into which the remaining 9% Notes would be convertible, but for the operation of the NYSE 20% limit; (iii) if the stockholder approval is not obtained, holders of the 9% Notes, upon their election to convert, will receive, instead of shares of Common Stock, cash at a price equal to the then market value of the number of shares into which the remaining 9% Notes would be convertible, but for the operation of the NYSE 20% limit; and (iv) each holder of 9% Notes agreed not to transfer more than 2 million shares of Common Stock to any transferee in one transaction or a series of transactions. In other exchanges subsequent to June 30, 2003, the Company issued an aggregate of .08 million shares of common stock for $1.0 million principal amount of the Company's 6.375% Convertible Subordinated Debentures due January 2004, and an aggregate of 0.3 million shares of common stock for $0.4 million principal amount of the Company's 7.25% Convertible Subordinated Debentures due October 2005. We expect to satisfy our fixed charges and other expense obligations in the future from cash flow from operations and, if cash flow from operations is insufficient, from working capital, which amounted to approximately $20.8 million at June 30, 2003, and, if necessary, the sale of assets or equity or debt securities. We have recently been experiencing negative cash flow from operating activities. The amount of net cash used 31 in our operating activities amounted to approximately $4.3 million for the first half of 2003 and $5.4 million for the first half of 2002. The availability of future cash flow from operations or working capital to fund the payment of interest on our debentures and other fixed charges will be dependent upon numerous factors, including our results of operations, silver and gold prices, levels and costs of production at our mining properties, the amount of our capital expenditures and expenditures for acquisitions, developmental and exploratory activities, and the extent to which we are able to reduce the amount of our indebtedness through additional exchanges. The market price of silver and gold over which we have no control, is volatile and is at a level that adversely affects us. Because we derive greater than 61.3% of our revenues from sales of silver and gold, our earnings are directly related to the price of these metals. Silver and gold prices fluctuate widely and are affected by many factors beyond our control, including interest rates, expectations regarding inflation, speculation, currency values, governmental decisions regarding the disposal of precious metals stockpiles, global and regional demand and production, political and economic conditions and other factors. The market price of silver (Handy & Harman) and gold (London Final) on July 21, 2003 was $4.79 and $350 per ounce, respectively. The price of silver and gold may decline in the future. Factors that are generally understood to contribute to a decline in the price of silver include sales by private and government holder, and a general global economic slowdown. If the prices of silver and gold become depressed for a sustained period, our net losses will continue, we may suspend mining at one or more of our properties until the price increases, and we may be required to record additional asset impairment write-downs pursuant to SFAS 144 (as discussed below). We have recorded significant write-downs of mining properties in recent years and may have to recognize additional write-downs in the future. Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," established accounting standards for impairment of the value of long-lived assets such as mining properties. SFAS 144 require a company to review the recoverability of its assets by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment must be recognized when the carrying value of the asset exceeds these cash flows. Recognizing impairment write-downs has negatively impacted our results of operations in recent years. We have recorded significant write-downs of our mining properties in recent years, amounting to $16.2 million in 1999, $12.2 million in 2000, $6.1 million in 2001 and $19.0 million in 2002. The 1999 write-downs consisted of $16.2 million at the Yilgarn Star Mine in Australia. The 2000 write-down included an impairment of $12.2 million for our investment in Gasgoyne Gold Mines NL. The 2001 write-down consisted of an additional impairment of $6.1 million at the Kensington property, in addition to the $121.5 million written-off in 1998. The 2002 write-down consisted of a $19.0 million impairment at Coeur Silver Valley. 32 While we do not believe that any of our other properties presently require a write-down pursuant to SFAS No. 144, if silver prices become depressed for a sustained period of time and/or we fail to reduce production costs or expand mineable ore reserves at our mining properties, we may recognize further asset write-downs. We also might have to record other types of additional mining property write-downs in the future to the extent a property is sold by us for a price less than the carrying value of the property or reserves have to be created in connection with the closure and reclamation of a property. The estimation of ore reserves is imprecise and subjective, requiring the use of uncertain metals market prices and other assumptions. Estimated ore reserves may not be realized in future actual production and operating results. The ore reserve figures presented in this report are estimates made by our technical personnel. Reserve estimates are a function of geological and engineering analysis and also require us to make assumptions about production costs and silver and gold market prices. Reserve estimation is necessarily an imprecise and subjective process and the accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation, judgment and experience. Assumptions about silver and gold market prices are subject to great uncertainty as those prices have fluctuated widely in the past. Declines in the market prices of silver or gold may render reserves containing relatively lower grades of ore uneconomic to exploit, and we may be required to further reduce reserve estimates, discontinue development or mining at one or more of our properties, or write down assets as impaired. Should we encounter mineralization or geologic formations at any of our mines or projects different from those predicted by drilling, sampling and similar examinations, then our reserve estimates may be adjusted and mining plans may be altered, which may adversely affect our actual production and operating results. Ore reserves at most of our mining properties operated by us are the subject of verification by independent consulting geologists or mining engineers. Ore reserves at mining properties in which we have an ownership interest but which are operated by other companies are prepared by such companies, reviewed by us and may not be subject to independent verification. Silver and gold reserves at mining properties owned by us and in which we have an ownership interest were calculated at or about December 31, 2002. Our ore reserve determinations were based on a silver price of $5.00 per ounce and a gold price of $350 per ounce. Significant risks and costs are associated with our exploration, development and mining activities. Our ability to sustain or increase our present production levels depends in part on successful exploration and development of new ore bodies and/or expansion of existing mining operations. Mineral exploration, particularly for silver and gold, involves many risks and frequently is not productive. If and when mineralization is discovered, it may take a number of years until production is possible, during which time the economic viability of the project may change. Substantial expenditures are required to establish ore reserves, extract the metals from the ores and, in the case of new properties, to construct mining and processing facilities. The economic feasibility of any individual development project and all such projects collectively is based upon, among other things, estimates of the size and grade of ore reserves, proximity to infrastructures and other resources (such as water and power), metallurgical recoveries, production rates and capital and operating costs of such development projects, and future metals prices. Development projects are also subject to the completion of favorable feasibility studies, issuance of necessary permits and receipt of adequate financing. 33 Development projects may have no operating history upon which to base estimates of future operating costs and capital requirements. Particularly for development projects, estimates of reserves, metal recoveries and cash operating costs are to a large extent based upon the interpretation of geologic data obtained from a limited number of drill holes and other sampling techniques and feasibility studies. Estimates of cash operating costs are then derived based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the orebody, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. As a result, actual cash operating costs and economic returns of any and all development projects may materially differ from the costs and returns estimated. Our silver and gold production may decline in the future. Our future silver and gold production may decline as a result of the exhaustion of reserves and possible closure of mines. It has been and will continue to be our business strategy to conduct silver and gold exploratory activities at our existing mining and exploratory properties as well as at new exploratory projects, and to acquire silver and gold mining properties and/or businesses that possess mineable ore reserves and are expected to become operational in the near future. Although that is our business strategy, we can provide no assurance that our silver and gold production in the future will not decline. There are significant risks associated with our mining activities, not all of which are fully covered by insurance. The mining business is generally subject to risks and hazards, including quantity of production, quality of the ore, environmental hazards, industrial accidents, the encountering of unusual or unexpected geological formations, cave-ins, flooding, earthquakes and periodic interruptions due to inclement or hazardous weather conditions. These occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, reduced production and delays in mining, asset write-downs, monetary losses and possible legal liability. Although we maintain insurance in an amount that we consider to be adequate, liabilities might exceed policy limits, in which event we could incur significant costs that could adversely affect our results of operation. Insurance fully covering many environmental risks (including potential liability for pollution or other hazards as a result of disposal of waste products occurring from exploration and production) is not generally available to us or to other companies in the industry. We are subject to significant environmental and other governmental regulations that can require substantial expenses and capital expenditures. Our mining activities are subject to extensive federal, state, local and foreign laws and regulations governing environmental protection, natural resources, prospecting, development, production, post-closure reclamation, taxes, labor standards, occupational health and safety including, mine safety, toxic substances and other matters. Although these laws and regulations have never required us to close any mine, the costs associated with compliance with such laws and regulations are substantial and possible future laws and regulations, or more stringent enforcement thereof by governmental authorities could cause additional expense, capital expenditures, restrictions on or suspensions of our operations and delays in the development of our properties. Moreover, these laws and regulations allow governmental authorities and private parties to bring lawsuits based upon damages to property and injury to persons resulting from the environmental, health and safety impacts of our past and current operations, and can lead to the imposition of substantial fines, penalties and other civil and criminal sanctions. Risks of substantial costs and liabilities, including for the restoration of the environment after the closure of our mines, are inherent in our operations. Although we believe we are in substantial compliance with applicable laws 34 and regulations, we cannot assure you that any such law, regulation, enforcement or private claim will not have a material adverse effect on our business, financial condition or results of operations. Certain of our mining wastes are currently exempt to a limited extent from the extensive set of federal Environmental Protection Agency (EPA) regulations governing hazardous waste under the Resource Conservation and Recovery Act (RCRA). If the EPA designates these wastes as hazardous under RCRA in the future, we would be required to expend additional amounts on the handling of such wastes and to make significant expenditures on the construction of hazardous waste disposal facilities. In addition, regardless of whether these wastes are designated as hazardous under RCRA, if they cause contamination in or damage to the environment at a mining facility, such facility may be designated as a "Superfund" site under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Under CERCLA, any owner or operator of a Superfund site since the time of its contamination may be held liable and may be forced to undertake extensive remedial cleanup action or to pay for the government's cleanup efforts. Additional regulations or requirements are also imposed upon our tailings and waste disposal areas in Idaho and Alaska under the federal Clean Water Act (CWA) and in Nevada under the Nevada Water Pollution Control Law which incorporates the CWA. Airborne emissions are subject to controls under the air pollution statutes implementing the Clean Air Act in Nevada, Idaho and Alaska. In the context of environmental permitting, including the approval of reclamation plans, we must comply with standards and regulations which entail significant costs and can entail significant delays. Significant risks are associated with our foreign operations and activities. Chile, Argentina and Bolivia are the most significant foreign countries in which we directly or indirectly own or operate mining properties or developmental projects. We also conduct exploratory projects in Chile, Argentina and Bolivia. Although the governments and economies of these countries have been relatively stable in recent years, property ownership in a foreign country generally is subject to the risk of expropriation or nationalization with inadequate compensation. Any foreign operations or investment may also be adversely affected by exchange controls, currency fluctuations, taxation and laws or policies of particular countries as well as laws and policies of the United States affecting foreign trade investment and taxation. There are significant risks associated with any future acquisitions by us. An important element of our business strategy has been the opportunistic acquisition of silver and gold mines, properties and businesses. While it is our practice to engage independent mining consultants to assist in evaluating and making acquisitions, mining properties acquired by us in the future might not be developed profitably or, if profitable when acquired, that profitability might not be sustained. In connection with any future acquisitions, we may incur indebtedness or issue equity securities, resulting in dilution of the percentage ownership of existing shareholders. We intend to seek shareholder approval for any such acquisitions only to the extent required by applicable law, regulations or stock exchange rules. Finding and acquiring new mineral properties is very difficult and competitive. Because mines have limited lives based on proven and probable ore reserves, we, like other mining companies are continually seeking to replace and expand our ore reserves. Identifying promising mining properties is difficult. Furthermore, we encounter strong competition from other mining companies in connection with the acquisition of properties producing or capable of producing silver and gold. Many of these companies 35 have greater financial resources than we do. Consequently, we may be unable to replace and expand current ore reserves through the acquisition of new mining properties on terms we consider acceptable. Significant risks are associated with our purchases of currencies of foreign countries in which we do business. We may enter into agreements which require us to purchase currencies of foreign countries in which we do business in order to ensure fixed exchange rates. In the event that actual exchange rates vary from those set forth in the hedge contracts, we will experience U.S. dollar-denominated currency gains or losses. We will have to use some of our cash to provide financial assurance relating to our Rochester Mine's future reclamation liability. The insurance company that issued the surety bond required under Nevada law to cover our estimated $21.8 million of future mine closure reclamation costs relating to the Rochester Mine filed for liquidation in the first quarter of 2001. We have reached an agreement with this insurance company and the State of Nevada regarding financial assurance for reclamation costs at the Rochester Mine. This settlement requires us to make an initial payment of a premium at policy inception, a large portion of which is placed in a "Reclamation" Experience account (R.E.A.) intended to pay for the reclamation expenses insured under the policy as they occur. The policy is also designed to provide the insured mine owner with the benefit of regulatory risk transfer by providing a limit of liability that is significantly greater than the estimated reclamation cost at policy inception. We estimate that the annual funding required by the settlement will be approximately $1.8 million, which adversely affects our working capital position. Third parties may dispute our unpatented mining claims. The validity of unpatented mining claims, which constitute a significant portion of our property holdings in the United States, is often uncertain and may be contested. Although we have attempted to acquire satisfactory title to undeveloped properties, we, in accordance with mining industry practice, do not generally obtain title opinions until a decision is made to develop a property, with the attendant risk that some titles, particularly titles to undeveloped properties, may be defective. We are required to obtain government permits to expand operations or begin new operations, which is often a costly and time-consuming process. Mining companies are required to seek governmental permits for expansion of existing operations or for the commencement of new operations. Obtaining the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions and often involving public hearings and costly undertakings on our part. The duration and success of permitting efforts are contingent on many factors that are out of our control. Government permitting may increase costs and cause delays depending on the nature of the activity to be permitted, and in an extreme case, could cause us to not proceed with the development of a mine. The market price of our common stock could decrease as a result of the impact of an increase in the number of our outstanding shares that may result from issuances of shares in exchange for our outstanding convertible debt. We may, from time to time, enter into exchange transactions with holders of our outstanding convertible debt involving the issuance of additional shares of common stock. The impact of the issuance of a significant amount of common stock may place downward pressure on the market price of the common stock. 36 The market price of our common stock has been volatile and may decline. The market price of our common stock has been volatile and may decline in the future. The high and low closing sale prices of our common stock were $4.13 and $0.81 per share in 2000, $1.23 and $0.87 in 2001 and $2.50 and $0.78 in 2002. The closing sale price at July 21, 2003 was $1.51 per share. The market price of our common stock historically has fluctuated widely and been affected by many factors beyond our control. These factors include: o the market prices of silver and gold; o general stock market conditions; o interest rates; o expectations regarding inflation; o currency values; and o global and regional political and economic conditions and other factors. We do not anticipate paying dividends on the common stock. We do not anticipate paying any cash dividends on the common stock at this time. Therefore, holders of the common stock will likely not receive a dividend return on their investment and there is a significant likelihood that holders of the common stock will not realize any value through the receipt of cash dividends. We are subject to anti-takeover provisions in our charter and in our contracts that could delay or prevent an acquisition of us even if such an acquisition would be beneficial to our shareholders. Certain provisions of our articles of incorporation and our contracts could delay or prevent a third party from acquiring us, even if doing so might be beneficial to our shareholders. Some of these provisions: o authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior shareholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of the common stock; and o require that a "fair price" be paid in such business transactions. We have also implemented a shareholder rights plan which could delay or prevent a third party from acquiring us. The uncertainties inherent in estimating inventory mean that our estimates of current and non-current inventories may not be realized in future actual production and operating results. We use estimates, based on prior production results and experiences, to determine whether heap leach inventory will be recovered more than one year in the future, and is non-current inventory, or will be recovered within one year, and is current inventory. The estimates involve assumptions that may not prove to be consistent with our actual production and operating results. We cannot determine the amount ultimately recoverable until leaching is completed. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and 37 Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note B in the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Note that our preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The most critical accounting principles upon which the Company's financial status depends are those requiring estimates of recoverable ounces from proven and probable reserves and/or assumptions of future commodity prices. Such estimates and assumptions affect the value of inventories (which are stated at the lower of average cost or net realizable value) and the potential impairment of long-lived assets. These estimates and assumptions also affect the rate at which depreciation and amortization are charged to earnings. Ore on Leach Pad The Rochester Mine utilizes the heap leach process to extract silver and gold from ore. The heap leach process is a process of extracting silver and gold by placing ore on an impermeable pad and applying a diluted cyanide solution that dissolves a portion of the contained silver and gold, which are then recovered in metallurgical processes. The key stages in the conversion of ore into silver and gold are (i) the blasting process in which the ore is broken into large pieces; (ii) the processing of the ore through a crushing facility that breaks it into smaller pieces; (iii) the transportation of the crushed ore to the leach pad where the leaching solution is applied; (iv) the collection of the leach solution; (v) subjecting the leach solution to the precipitation process, in which gold and silver is converted back to a fine solid; (vi) the conversion of the precipitate into dore; and (vii) the conversion by a third party refinery of the dore into refined silver and gold bullion. We use several integrated steps to scientifically measure the metal content of ore placed on the leach pads during the key stages. As the ore body is drilled in preparation for the blasting process, samples of the drill residue are assayed to determine estimated quantities of contained metal. We estimate the quantity of ore by utilizing global positioning satellite survey techniques. We then process the ore through a crushing facility where the output is again weighed and sampled for assaying. A metallurgical reconciliation with the data collected from the mining operation is completed with appropriate adjustments made to previous estimates. We then transport the crushed ore to the leach pad for application of the leaching solution. As the leach solution is collected from the leach pads, we continuously sample for assaying. We measure the quantity of leach solution by flow meters throughout the leaching and precipitation process. After precipitation, the product is converted to dore, which is the final product produced by the mine. We again sample and assay the dore. Finally, a third party smelter converts the dore into refined silver and gold bullion. At this point we are able to determine final ounces of silver and gold available for sale. We then review this end result and reconcile it to the estimates we had used and developed throughout the production process. Based on this review, we adjust our estimation procedures when appropriate. Our reported inventories include metals estimated to be contained in the ore on the leach pads of $31.2 million as of June 30, 2003. Of this amount, $14.0 million is reported as a current asset and $17.2 million is reported as a noncurrent asset. The distinction between current and noncurrent is based upon the expected length of time necessary for the leaching process to remove the metals from the broken ore. The historical cost of the metal that is expected to be extracted within twelve months is classified as current and the historical cost of metals contained within the broken ore that will be extracted beyond twelve months is classified as noncurrent. The estimate of both the ultimate recovery expected over time, and the quantity of metal that may be extracted relative to such twelve month period, requires the use of estimates which are inherently inaccurate since 38 they rely upon laboratory testwork. Testwork consists of 60 day leach columns from which we project metal recoveries up to five years in the future. The quantities of metal contained in the ore are based upon actual weights and assay analysis. The rate at which the leach process extracts gold and silver from the crushed ore is based upon laboratory column tests and actual experience occurring over approximately fifteen years of leach pad operation at the Rochester Mine. The assumptions we use to measure metal content during each stage of the inventory conversion process includes estimated recovery rates based on laboratory testing and assaying. We periodically review our estimates compared to actual experience and revise our estimates when appropriate. The length of time necessary to achieve our currently estimated ultimate recoveries of 61.5% for silver and 93% for gold is estimated to be between 5 and 10 years. However, the ultimate recovery will not be known until leaching operations cease, which is currently estimated for 2011. When we began operations in 1986, based solely on laboratory testing, we estimated the ultimate recovery of silver and gold at 50% and 80%, respectively. Since 1986, we have adjusted the expected ultimate recovery 3 times (once in each of 1989, 1997 and 2003) based upon actual experience gained from leach operations. In 1989, we increased our estimated recoveries for silver and gold to 55% and 85%, respectively. The change was accounted for prospectively as a change in estimate, which had the effect of increasing the estimated recoverable ounces of silver and gold contained in the heap by 1.6 million ounces and 10,000 ounces, respectively. In 1997, we revised our estimated recoveries for silver and gold to 59% and 89%, respectively, which increased the estimated recoverable ounces of silver and gold contained in the heap by 4.7 million ounces and 39,000 ounces, respectively. Finally, in 2003, we revised our estimated recoveries for silver and gold to 61.5% and 93%, respectively, which increased the estimated recoverable ounces of silver and gold contained in the heap by 1.8 million ounces and 41,000 ounces, respectively. Inventories of ore on leach pads are valued based upon actual costs incurred to place such ore on the leach pad, less costs allocated to minerals recovered through the leach process. The costs consist of those production activities occurring at the mine site and include the costs, including depreciation, associated with mining, crushing and precipitation circuits. In addition, refining is provided by a third party refiner to place the metal extracted from the leach pad in a saleable form. These additional costs are considered in the valuation of inventory. Property, Plant and Equipment Property, Plant, and Equipment balances are stated at cost, reduced by provisions to recognize economic impairment in value when management determines that such impairment has occurred. Mineral property, buildings and improvements, and machinery and equipment are depreciated using either the straight-line method or the units-of-production method over the estimated useful lives as of the in-service date or date of major improvements. We evaluate the realizability of our long-lived assets, property, plant and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset's carrying value as compared to its estimated fair value. Reclamation and Remediation Costs Reclamation and remediation costs are based principally on legal and regulatory requirements. Management estimates costs associated with reclamation of mining properties as well as remediation cost for inactive properties. The estimated undiscounted cash flows generated by our assets and the estimated liabilities for reclamation and remediation are determined using the Company's assumptions about future costs, mineral prices, mineral processing recovery rates, production levels and capital and reclamation costs. Such assumptions are based on the Company's current mining plan and the best available information for making such estimates. 39 On an ongoing basis, management evaluates its estimates and assumptions; however, actual amount could differ from those based on such estimates and assumptions. Effective with the first quarter of 2003 the Company was required by the FASB to change the methodology used to recognize its reclamation obligations. Prior to 2003, the Company recognized a pro rata share of the future estimated reclamation liability on a units-of-production basis. After January 1, 2003 companies are required to recognize the full discounted estimated future reclamation liability and set up a corresponding asset to be amortized over the life of the mine on a units-of-production basis. The impact of this change is accounted for as a change in accounting principle in the first year of implementation, and the effects of this change are discussed below. Upon initial application of FASB No. 143, the Company recognized the following: 1. A liability of $20.7 million for the existing asset retirement obligations based on the discounted fair market value of future cash flows to settle the obligations, 2. An asset of $11.4 million to reflect the retirement cost capitalized as an increase to the carrying amount of the associated long-lived asset, offset by $7.6 million of accounting depletion through January 1, 2003, and 3. A cumulative effect of change in accounting principle of $2.3 million at January 1, 2003. The Company measured the cumulative accretion and accumulated depreciation for the period from the date the liability would have been recognized if FASB No. 143 were in effect when the Company incurred the liability to the date of the adoption of the Statement and has reported these as a cumulative effect of a change in accounting principle. For the initial measurement of these existing obligations the Company used current information, assumptions, and interest rates. The initial implementation of FASB No. 143 also required the Company to reverse all previously recognized retirement obligations (reclamation accruals) as part of the cumulative effect adjustment. The Asset Retirement Obligation is measured using the following factors: 1) Expected labor costs, 2) Allocated overhead and equipment charges, 3) Contractor markup, 4) Inflation adjustment, and 5) Market risk premium. The sum of all these costs was discounted, using the credit adjusted risk-free interest rate (current assumption of 7.5%), from the time we expect to pay the retirement obligation to the time we incur the obligation. The measurement objective is to determine the amount a third party would demand to assume the asset retirement obligation. Upon initial recognition of a liability for an asset retirement obligation, the Company capitalized the asset retirement cost with a corresponding debit to the carrying amount of the related long-lived asset. The Company will deplete this amount to operating expense using the units-of-production method. The Company is not required to re-measure the obligation at fair value each period, but the Company is required to evaluate the cash flow estimates at the end of each reporting period to determine whether the estimates continue to be appropriate. Upward revisions in the amount of undiscounted cash flows will be discounted using the current credit-adjusted risk-free rate. Downward revisions will be discounted using the credit-adjusted risk-free rate that existed when the original liability was recorded. 40 The following is a description of the changes to the Company's asset retirement obligations from January 1 to June 30, 2003: Assets: 2003 -------------- (in thousands) Asset Retirement Obligation - January 1, 2003 $ 20,662 Accretion 775 Additions - Settlements (716) --------- Asset Retirement Obligation - June 30, 2003 $ 20,721 Significant Mining Properties The Company's currently operating mines consist of the Rochester Mine, a heap leach silver and gold mine in northern Nevada of which the Company owns 100%; the Galena Mine, an underground silver mine in Idaho that is 100% owned by Coeur's wholly-owned subsidiary, Coeur Silver Valley, Inc.; the Cerro Bayo mine, where Coeur commenced gold and silver production at an open pit and underground mine in May 2002; and the Martha Mine, which commenced underground and open pit operations in July, 2002. The Company also owns 100% of the San Bartolome silver project in Bolivia where it is conducting final feasibility studies and expects to commence silver production in 2005, and the Kensington property in Alaska where Coeur is in the initial steps of development of an underground gold mine. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company plans to adopt SFAS No. 149 on July 1, 2003 and does not expect a material impact on its financial condition and results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FASB No. 150 requires that those instruments be classified as liabilities in statements of financial position. The Statement is effective for financial instruments entered into or modified after May 31, 2003, otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently assessing the impact of SFAS No. 150 on its financial condition and results of operations. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks as a part of its operations. As an effort to mitigate losses associated with these risks, the Company may, at times, enter into derivative financial instruments. These may take the form of forward sales contracts, foreign currency exchange contracts and interest rate swaps. The Company does not actively engage in the practice of trading derivative securities for profit. This discussion of the Company's market risk assessments contains "forward looking statements" that contain risks and uncertainties. Actual results and actions could differ materially from those discussed below. 41 The Company's operating results are substantially dependent upon the world market prices of silver and gold. The Company has no control over silver and gold prices, which can fluctuate widely and are affected by numerous factors, such as supply and demand and investor sentiment. In order to mitigate some of the risk associated with these fluctuations, the Company will at times, enter into forward sale contracts. The Company continually evaluates the potential benefits of engaging in these strategies based on the then current market conditions. The Company may be exposed to nonperformance by counterparties as a result of its hedging activities. This exposure would be limited to the amount that the spot price of the metal falls short of the contract price. The Company operates in several foreign countries, specifically Bolivia, Argentina and Chile, which exposes it to risks associated with fluctuations in the exchange rates of the currencies involved. As part of its program to manage foreign currency risk, the Company will enter into foreign currency forward exchange contracts. These contracts enable the Company to purchase a fixed amount of foreign currencies in the future for United States dollars at a pre-determined exchange rate. Gains and losses on foreign exchange contracts that are related to firm commitments are designated and effective as hedges and are deferred and recognized in the same period as the related transaction. All other contracts that do not qualify as hedges are marked-to-market and the resulting gains or losses are recorded in income. The Company continually evaluates the potential benefits of entering into these contracts to mitigate foreign currency risk and proceeds when it believes that the exchange rates are most beneficial. All of the Company's long-term debt at June 30, 2003 is fixed-rate based. The Company's exposure to interest rate risk, therefore, is limited to the amount it could pay at current market rates. The Company currently does not have any derivative financial instruments to offset the fluctuations in the market interest rate. It may choose to use instruments, such as interest rate swaps, in the future to manage the risk associated with interest rate changes.
Fair Value (dollars in thousands) 2003 2004 2005 2006 2007 Total 6/30/03 - ----------------------------------------------------------------------------------------------- Liabilities Long Term Debt Fixed Rate $ 9,887 $ 5,873 $ 9,939 $ - $37,185 $62,884 $63,228 Average Interest Rate 9.166% 8.607% 8.681% 9.000% 9.000% Derivative Financial Instruments Gold Forward Sales - USD $276 Ounces 26,000 14,000 - - - 40,000 Price Per Ounce $331 $353 - - - Foreign Currency Contracts $45 Chilean Peso - USD $ 2,035 - - - - $ 2,035 Exchange Rate 708 - - - - (CLP to USD)
Fair value is determined by trading information on or near the balance sheet date. Long term debt represents the face amount of the outstanding convertible debentures and timing of when these become due. Interest rates presented in the table are calculated using the weighted average of the outstanding face amount of each debenture for the period remaining in each period presented. All long term debt is denominated in US dollars. 42 Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective based on their evaluation of such controls and procedures as of June 30, 2003. There were no changes in the Company's internal control over financial reporting during the second quarter of 2003 that has materially affected, or is responsibly likely to materially affect the Company's internal controls over financial reporting. PART II. OTHER INFORMATION Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) Sale of Unregistered Securities On February 26, 2003, the Company privately sold $37.2 million principal amount of 9% Convertible Senior Subordinated Notes due February 2007 (the "9% Notes"). The offering was not underwritten. The 9% Notes were sold to a total of 12 institutional investors. The Company received net proceeds of approximately $33.8 million. Additional information regarding the 9% Notes and the private placement are set forth above under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - - Issuance of 9% Convertible Senior Subordinated Notes" included under Item 2 of Part I of this report. The 9% Notes were issued pursuant to an Indenture, dated as of February 26, 2003, between the Company and the Bank of New York, as trustee. Each of the institutional investors qualified as an "accredited investor" within the meaning of Rule 501(a) under the Act. Of the financial advisory fees paid by the Company in connection with the issuance of the 9% Notes, the Company elected to issue 0.6 million unregistered shares of common stock valued at $1.54 per share in lieu of cash. The private issuance of 9% Notes and common stock was exempt from registration under the Act in reliance upon Section 4(2) thereof. Pursuant to the terms of the Purchase Agreements, dated as of February 20, 2003, between the Company and the institutional investors and the related Registration Rights Agreements, dated as of February 26, 2003, between the Company and such institutional investors, as well as the Registration Rights Agreement, dated as of March 20, 2003, between the Company and the financial advisor, the Company filed Amendment No. 2 to its Registration Statement on Form S-3 on March 21, 2003, in order to register the 9% Notes that had been issued in the private placement (as well as the shares of common stock issuable upon conversion thereof and as interest thereon) and the shares of common stock issued in lieu of cash financial advisory fees for resale in the future by the holders thereof under the Act. This Registration Statement became effective on May 2, 2003. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 20, 2003. Of the Company's total 140,121,504 shares of common stock outstanding on April 7, 2003 (the record date), 107,480,297 shares (or 76.7% of the outstanding) were represented in person or by proxy at the Annual Meeting. The first proposal was the election of directors. The following persons were nominated and elected to serve as members of the Board of Directors for one year or until their successors are elected and qualified by the votes indicated: Cecil D Andrus - 104,599,393 for and 2,880,904 withheld; James J. Curran - 105,772,749 for and 1,707,548 withheld; James A. McClure - 105,709,973 for and 1,770,324 withheld; Robert E. Mellor - 105,630,713 for and 1,849,584 withheld; John H. Robinson - 105,698,384 for and 1,781,913 withheld; Timothy R. Winterer - -105,751,088 for and 1,729,209 withheld; J. Kenneth Thompson - 105,777,138 for and 1,703,159 withheld; and Dennis E. Wheeler - 104,625,139 for and 2,855,158 withheld. The second proposal was the proposed adoption of a new Long-Term Incentive Plan to replace an existing plan and the reservation of 6,800,000 shares of common stock under the terms of the plan commencing in 2004. The proposal was approved by the holders of more than the required majority of the shares of common stock voting at the meeting. The proposal was approved by a vote of 100,017,600 shares for (representing 71.4% of the shares voting), 6,452,044 shares against with 1,010,653 shares abstaining. 43 Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- 4.1 First Supplemental Indenture, dated as of July 15, 2003, by and between the Company and The Bank of New York, as trustee, relating to the Company's 9% Convertible Senior Subordinated Notes due February 26, 2007. (Incorporated herein by reference to Exhibit No. 4.1 to the Company's Current Report on Form 8-K dated July 10, 2003 and filed on July 16, 2003). 10.1 Common Stock Purchase Agreement, dated as of May 23, 2003, by and between the Company and the person signatory thereto. (Incorporated herein by reference to Exhibit No. 10.1 to the Company's Current Report on Form 8-K dated and filed May 23, 2003). 10.2 Form of Early Conversion Agreement, dated as of July 10, 2003, by and among the Company and each of the persons signatory and listed on Annex A thereto. (Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 10, 2003 and filed on July 16, 2003). 10.3 Employment Agreement, dated as of June 9, 2003, between the Company and James R. Arnold (filed herewith). 99.1 Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (This certification, required as Exhibit 31 under Item 601(a) of Regulation S-K, is filed as Exhibit 99.1 pursuant to SEC interim filing guidance.) 99.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (This certification, required as Exhibit 31 under Item 601(a) of Regulation S-K, is filed as Exhibit 99.2 pursuant to SEC interim filing guidance.) 99.3 Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This certification, required as Exhibit 32 under Item 601(a) of Regulation S-K, is furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K as Exhibit 99.3 pursuant to SEC interim filing guidance.) (b) Reports on Form 8-K. During the quarter ended June 30, 2003, the Company filed Current Reports on Form 8-K dated May 14, 2003 (furnishing the Company's press release announcing quarterly results of operations - filed May 15, 2003 under Item 12); May 23, 2003 (reporting an event under Item 5 - filed May 23, 2003); and June 20, 2003 (reporting an event under Item 5 - filed June 23, 2003). Subsequent to the end of the quarter, the Company filed a Current Report on Form 8-K dated July 10, 2003 (reporting an event under Item 5 - filed on July 16, 2003). 44 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. COEUR D'ALENE MINES CORPORATION (Registrant) Dated July 24, 2003 /s/ Dennis E. Wheeler ------------------------------- DENNIS E. WHEELER Chairman and Chief Executive Officer Dated July 24, 2003 /s/ James A.Sabala ------------------------------- JAMES A. SABALA Executive Vice President and Chief Financial Officer 45 EX-10.3 3 sdc476a.txt EMPLOYMENT AGREEMENT Exhibit 10.3 Employment Agreement This Agreement is made this 9th day of June, 2003, between Coeur d'Alene Mines Corporation ("Company") and James R. Arnold, ("Employee"). WITNESSETH: In consideration of the mutual promises and covenants herein contained to be kept and performed by the parties hereto, the parties agree as follows: 1. Employment. The Company has heretofore, and hereby does, employ Employee as Vice President Technical Services and Projects, and Employee accepts such employment, on the terms and conditions of this Agreement. 2. Term Of Employment. The term of employment shall be from June 11, 2003 through the 31st day of May, 2005, unless sooner terminated as herein provided. 3. Compensation. The Company shall pay to Employee during the duration of the term of this Agreement as follows: (a) A base salary of $153,500 annually, payable in equal monthly installments, which may be reviewed annually during any Agreement year, and any higher salary to become the base salary for the purposes of this provision, it being understood, however, that failure to increase the salary shall not be grounds for termination of this Agreement; and (b) Such other compensation and benefits that may be made available by the Company in the discretion of the Board of Directors, consisting of bonuses, short-term and long-term incentive plans, pension plan, retirement plan, profit sharing plan, stock purchase plan and any other kind or type of incentive programs approved by the Board. It is understood that Employee shall be a participant in all compensation and benefit programs, including welfare benefit plans, which exist for the executive staff of the Company. 4. Duties. Employee, during the term of this Agreement, shall perform the duties usually and customarily associated with the office specified in paragraph (1) above and as assigned to him from time-to-time by the Chief Executive Officer of Company. Employee shall devote his best efforts and substantially all of his time during business hours to advance the interests of the Company. He shall not engage in business activity in competition with the Company. 1 5. Vacations. Employee shall be entitled to three weeks vacation during each year of this Agreement, during which the compensation provided in this Agreement shall be paid in full. 6. Disability. In the event Employee becomes disabled (inability or incapacity due to physical or mental illness or injury to perform his duties) during the term of this Agreement, which enables him unable to perform his duties, he shall be entitled to participate in the Company's disability payment plan in effect at the time of the disability. 7. Termination Of Employment. This Agreement shall be terminated as follows: (a) At the expiration of the term set forth above. (b) Upon the death of Employee. (c) By mutual agreement of the parties. (d) Upon disability of Employee, when such disability renders Employee unable to perform his duties for more than 90 continuous days. (e) By the Company without giving any reason for termination, but with the understanding that the compensation provided herein shall be paid or provided in full to Employee in accordance with this Agreement, for the period of the remaining duration of this Agreement. (f) By the Company for cause, which means that Employee has failed to perform his duties after having received from the Company a written notice that his duties are not being performed, which written notice shall specify how performance is deficient, and Employee then fails to resume performance promptly after receipt of notice and failure of performance is not rectified. For cause also means conviction of a felony or engagement in illegal conduct which is injurious to the Company, in either such case Company need not allow Employee to rectify nonperformance. 2 (g) Upon change in control of Company, as "change in control" is defined in the so-called change in control agreement between Company and Employee, a copy of which is attached hereto as Attachment A, and which will be executed by the parties hereto when this Agreement is executed by them. In the event of termination for this reason, Employee's and Company's rights with respect to compensation and all other matters related to employment shall be as specified in the change in control agreement, and not this Agreement. 8. Confidentiality. Employee agrees to keep all information acquired in connection with his employment confidential, in accordance with the confidentiality agreement executed by him which is attached to this Agreement, marked Attachment B. 9. Specific Performance. Employee understands that the obligations undertaken by him as set forth in this Agreement are unique, and that Company will likely have no adequate remedy at law in the event such obligations are breached. Employee therefore confirms that Company has the right to seek specific performance if Company feels such remedy is essential to protect the rights of Company. Accordingly, in addition to any other remedies which Company might have in law or equity, it shall have the right to have all obligations specifically performed, and to obtain injunctive relief, preliminary or otherwise, to secure performance. Employee agrees that the arbitration provision below will not be used to assert dismissal of an action in court for injunctive relief, and agrees that the availability of arbitration is not intended by the parties to prevent Company from seeking specific performance and injunctive relief. 10. Arbitration. The Company and Employee will attempt to resolve any disputes under this Agreement by negotiation. If any matter is not thereby resolved, within 30 days after written notice by either party to the other, any dispute or disagreement arising out of or relating to this Agreement, or the breach of it, will be subject to exclusive, final and binding arbitration to be conducted in Coeur d'Alene, Idaho in accordance with the Labor Arbitration Rules of Procedure of the American Arbitration Association and the laws of the State of Idaho governing arbitration of disputes. 11. Other Items. This Agreement shall not be amended or modified in any way unless the amendment or modification is in writing, signed by the parties. There shall be no oral modification of this Agreement. No provision of this Agreement shall be waived 3 by conduct of the parties or in any other way. This Agreement and its validity, interpretation, construction and performance shall be governed by the laws of the State of Idaho. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. Coeur d'Alene Mines Corporation By /s/ Dennis E. Wheeler ------------------------------------- /s/ James R. Arnold - ---------------------------------------- James R. Arnold 4 EX-99.1 4 sdc476b.txt CERTIFICATION BY CEO Exhibit 99.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 I, Dennis E. Wheeler , certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Coeur d'Alene Mines Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 24, 2003 /s/ Dennis E. Wheeler -------------------------------- Dennis E. Wheeler Chief Executive Officer EX-99.2 5 sdc476c.txt CERTIFICATION BY CFO Exhibit 99.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 I, James A. Sabala, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Coeur d'Alene Mines Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 24, 2003 /s/ James A. Sabala --------------------------------- James A. Sabala Chief Financial Officer EX-99.3 6 sdc476d.txt CERTIFICATION OF PERIODIC FIN RPT BY CEO AND CFO Exhibit 99.3 Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of Coeur d'Alene Mines Corporation (the "Company"), hereby certify, based on their knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dennis Wheeler - ------------------------------------ Dennis E. Wheeler Chief Executive Officer /s/ James A. Sabala - ------------------------------------ James A. Sabala Chief Financial Officer Date: July 24, 2003 -----END PRIVACY-ENHANCED MESSAGE-----