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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-10012
SUNSHINE MINING AND REFINING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-2618333
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
877 W. MAIN STREET, SUITE 600 83702
BOISE, IDAHO (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(208) 345-0660
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
Convertible Subordinate Reset Debentures Due New York Stock Exchange
July 15, 2008
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Warrants, expiring May 22, 2001, for the purchase of one share of Common Stock
Warrants, expiring March 9, 1999, for the purchase of one share of Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
(CONTINUED ON NEXT PAGE)
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(CONTINUED FROM PREVIOUS PAGE)
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT AT FEBRUARY 14, 1997 WAS $255,033,039. FOR
PURPOSES OF THIS COMPUTATION, ALL OFFICERS, DIRECTORS AND BENEFICIAL OWNERS OF
10% OR MORE OF THE COMMON STOCK OF THE REGISTRANT ARE DEEMED TO BE AFFILIATES.
SUCH DETERMINATION SHOULD NOT BE DEEMED AN ADMISSION THAT SUCH OFFICERS,
DIRECTORS AND BENEFICIAL OWNERS ARE AFFILIATES.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Title of Each Class Number of Shares Outstanding
of Common Stock at February 14, 1997
--------------- --------------------
COMMON STOCK, $0.01 PAR VALUE 255,033,039
DOCUMENTS INCORPORATED BY REFERENCE
SUNSHINE MINING AND REFINING COMPANY'S DEFINITIVE PROXY STATEMENT FOR
ITS ANNUAL MEETING TO BE HELD IN JUNE 1997 (PART III).
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<PAGE> 3
PART I
1. BUSINESS.
GENERAL
Sunshine Mining and Refining Company ("Sunshine" or the "Company")
owns the Pirquitas Mine in the Jujuy Province of Northwest Argentina and the
Sunshine Mine located in the Coeur d'Alene Mining District near Kellogg, Idaho.
The Company has five additional exploration concessions in Argentina, where it
is emphasizing exploration work in the northern part of the country. The
Company also leases the Revenue Virginius property near Ouray, Colorado, which
contains a significant silver resource and is being held pending higher silver
prices. The Company's silver reserves and resources are as follows:
<TABLE>
<CAPTION>
Silver Ounces (in millions)
-------------------------------------------------------------------------
Proven and Measured and Inferred
Probable Reserves Indicated Resources Resources Total
----------------- ------------------- --------- -----
<S> <C> <C> <C> <C>
Pirquitas Mine - 118.0 193.0 311.0
Sunshine Mine 35.0 2.0 177.0 214.0
Revenue Virginius Mine 6.2 4.2 36.0 46.4
--------- ---------- -------- --------
Total 41.2 124.2 406.0 571.4
</TABLE>
The Company acquired the Pirquitas Mine in November, 1995, and since
that time has conducted an active exploration drilling and sampling program on
the site. Thus far at Pirquitas the Company has identified over 300 million
ounces of silver resources and 300 million pounds of tin resources of which 118
million ounces of silver and 117 million pounds of tin are in the measured and
indicated category. The Company believes that the property can be developed
using low-cost open-pit mining methods. Metallurgical testing, expected to be
completed in the first half of 1997, has thus far demonstrated excellent
recoveries of silver. Upon completion of the metallurgical testwork, if
favorable, the Company expects that a significant portion of the measured and
indicated resource will be classified as a proven and probable reserve.
During 1996 a geophysical study in the area of Pirquitas was
undertaken as a part of the exploration program. The study included
magnetometer and induced polarization geophysical methods which identified
numerous anomalies believed to be associated with silver and tin
mineralization. Several anomalies are located outside of the area being
evaluated under the present exploration program, indicating considerable
potential to expand the current resource.
The Sunshine Mine began operations in 1884 and has produced in excess
of 340 million ounces of silver since that time. The mine also produces
significant amounts of copper, lead and antimony as by-products. The Sunshine
Mine and Refinery Complex consists of the Sunshine Mine, a 1,000-ton-per-day
concentrator, an antimony refinery, a silver refinery and associated
facilities. These facilities form an integrated operation which can produce
refined silver with 99.99% purity. The silver refinery has a capacity to
recover up to 8 million ounces of silver and 4 million pounds of copper
annually.
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The Company's earnings are directly related to the price of silver,
which has been depressed since 1985. As a result, the Company has reported
operating losses and negative cash flow from operations since that time. In
response to low silver prices, in June 1991 the Company curtailed the Sunshine
Mine production from approximately 1,000 tons of ore per day to approximately
450-500 tons of ore per day. At low silver prices, curtailed operations have
resulted in lower aggregate operating losses and cash requirements than either
full operations or the maintenance and holding costs associated with a complete
mine shutdown. However, production costs per ounce of silver increased as a
result of the curtailment.
In recent years, exploration and development work at the Sunshine Mine
focused on the West Chance system, discovered in 1992-1993. At January 1,
1997, proven and probable reserves identified in the West Chance totaled 12.6
million ounces of silver, and all categories of resources in the West Chance
totaled 68.4 million ounces of silver. Development of the West Chance ore body
continues. Mining is in progress in four conventional stopes on the 3100 level
and two ramp-developed stopes on the 3700 level. Four additional
ramp-developed stopes are nearing production below the 3100 level. Initial
ramp development on the 2700 level will be completed in 1997 with production
commencing by mid- year. As a result, production increased in the fourth
quarter of 1996 such that by year end it was more than 75% of capacity. The
Company expects to increase this production level during 1997.
The accuracy of these forward looking statements regarding production,
reserves, resources and cash costs at the Pirquitas Mine and the Sunshine Mine
will depend upon the actual grade, quantity and other qualities of recoverable
resources, which may differ from current estimates.
Effective May 22, 1996, the Company's stockholders approved a
transaction to eliminate Sunshine's outstanding $11.94 (Stated Value)
Cumulative Redeemable Preferred Stock. The transaction was structured as a
merger into a wholly- owned subsidiary, which became the surviving entity, and
was renamed Sunshine Mining and Refining Company. Pursuant to the transaction,
Preferred Stock with a liquidation preference of $130 million was eliminated in
exchange for approximately 63 million shares of Sunshine common stock and 7.6
million warrants to buy common stock at a price of $1.38 per share. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
In March 1996, the Company, through Sunshine Precious Metals, Inc.
("SPMI"), its wholly owned subsidiary, completed an offering (the "Notes
Offering") of convertible debt securities (the "Eurobonds") conducted in Europe
only to non-U.S. persons pursuant to Regulation S of the Securities Act of
1933, as amended. SPMI issued an aggregate principal amount of $30 million, of
which the Company received net proceeds of approximately $27 million. The
Eurobonds mature in March 2000, bear interest at 8% per annum, and are
convertible into common stock at an exchange price of $1.4375 per share,
subject to reset to a minimum of $1.00 per share. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For information regarding Sunshine's business, certain classes of
products or services and sales to certain significant customers, see Notes 10
and 11 of Notes to Consolidated Financial Statements included elsewhere herein.
Sunshine is incorporated under the laws of the state of Delaware and
maintains its principal executive offices at 877 West Main Street, Suite 600,
Boise, Idaho 83702.
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SILVER SUPPLY, DEMAND, AND PRICES
According to studies published by the Silver Institute in its World
Silver Survey and/or by CPM Group (precious metal industry consultants), over
800 million ounces of silver surplus to the market's needs were generated in
the period from 1979 to 1989. These surpluses were generated in response to
high silver prices, which, in constant 1996 dollars, averaged approximately
$17.28 per ounce in the eleven year period from 1974 to 1984, inclusive. As a
result, silver supplies increased significantly during the period.
According to these same sources, since 1990 the demand for silver has
exceeded supply, with liquidation of above ground stocks satisfying the
production shortfalls. The availability of the surpluses generated from 1979
to 1989 has contributed to the continuing low price of silver, which in the
seven years ending 1996 averaged approximately $4.62 (in constant 1996
dollars).
According to the same industry data, the cumulative deficits in the
silver market from 1990 to 1996 has exceeded 700 million ounces, with annual
deficits in recent years exceeding 150 million ounces. This data suggests that,
if deficits to the market continue at approximately 150 million ounces per
year, the cumulative deficit since 1990 will soon exceed the surplus generated
between 1979 and 1989. As a result, above-ground silver stocks appear to have
declined to approximately the same level as existed in 1979.
The Company believes that as above-ground silver stocks continue to
decline, it will become more difficult for the deficits to be filled from these
stocks, and that the silver price should increase significantly in response.
Therefore, the Company is continuing to try to maintain and add to its silver
production capacity. Until such time as silver prices increase significantly
or the Company significantly reduces its average production cost, the Company
will operate at a loss.
These statements regarding the available supply of silver and the
resulting anticipated effect on the price of silver are forward looking, and
the actual worldwide demand for and supply of silver, and the effects of supply
and demand on the price of silver, may vary from the above discussion. The
price of silver is also influenced by factors other than supply and demand
including, but not limited to, worldwide economic and political conditions,
expectations as to inflation and speculative activity in the market.
OPERATIONS
PIRQUITAS
The Pirquitas property was acquired by the Company in November, 1995
for $1.7 million. Pirquitas is Argentina's largest historic producer of silver
and tin, with 27 million ounces of silver production and 20 thousand tonnes
(metric tons) of tin production from its underground workings between 1936 and
1990. Historic production was confined to a system of closely-spaced sheeted
veins. The property has been inactive since 1990. The Company believes the
mine can be a large, low-cost, open-pit silver and tin producer.
Pirquitas is located in the Puna de Atacama of northwestern Argentina
in the province of Jujuy at an elevation of over 14,000 feet. The nearest
major city is the provincial capital, San Salvador de Jujuy, which is about
3
<PAGE> 6
355 km southeast of Pirquitas. The Chilean and Bolivian borders lie 50 km west
and 60 km to the north, respectively.
The Company is conducting an extensive drilling and underground
sampling program that has identified a measured and indicated resource of 19.9
million tons of ore at an average grade of 5.7 ounces silver per ton and .29%
tin, containing 118 million ounces of silver and 117 million pounds of tin.
Additionally, an inferred resource totaling 193 million ounces of silver has
been estimated, principally on strike to the east and in conjunction with the
high-grade Oplaca zone.
The Company has completed over 74 thousand feet of reverse air and
core drilling, and sampled from over 5500 feet of underground workings in its
evaluation of the property. Over 24 thousand assays have been taken from
samples split from each meter of drilling and underground sampling. The total
cost of the work at the property in 1996 was over $6 million, all of which was
charged to exploration expense.
Pirquitas represents the southernmost known economic deposit
associated with the Bolivian tin belt which extends in an arc from Peru to
Argentina. The southernmost Bolivian tin deposits show an increase in silver
content, whereas silver is negligible in the tin occurrences of northern
Bolivia. Tin belt mineralization occurs in veins, stockworks, breccias,
disseminations, and mantos. The majority of deposits are associated with small
stocks 1-2 km in diameter, exhibiting many characteristics of porphyry copper
systems.
Drill tested mineralization is contained within an area of about 1100
feet in length and to a depth of approximately 750 feet. Geophysical survey
results, drilling, historic mine development, and geologic mapping indicate a
zone of mineralization extending approximately one mile along the main deposit
trend. Drilling along this strike is planned for 1997. The deposit is also
open at depth, as noted by drill holes ending in mineralization. Recent
geophysical studies indicate the possible presence of an intrusive body within
700 meters of the surface. The intrusive may be the source for generating
magmatic hydrothermal activity which resulted in the deposition of the
silver-tin mineralization at Pirquitas. In nearby Bolivian silver/tin
districts, such intrusives contain most of the silver-tin mineralization. The
intrusive target is being drilled early in 1997.
The Company expects to complete metallurgical studies in the first
half of 1997 to define metal recoveries and processing economics. Results thus
far have indicated excellent recoveries of silver through conventional
flotation and gravity circuits. Defining plant capital and operating costs,
maximizing silver recoveries and improving tin recoveries are the principal
objectives of the remaining work. If the final results are favorable, the
Company expects to classify most of the measured and indicated resource at the
property (118 million ounces) into a proven or probable reserve category and
commence feasibility studies to be used in financing the development of the
property.
4
<PAGE> 7
THE SUNSHINE MINE AND REFINERY COMPLEX
The Sunshine Mine and Refinery Complex, located in the Coeur d'Alene
Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a
1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and
associated facilities. The facility is an integrated operation which can
produce refined silver with 99.99% purity.
SPMI owns substantially all of the mining claims comprising the
Sunshine Mine. Electrical power is supplied from two local utilities, the
facilities are in good and operable condition, and access to the property is by
paved roads maintained by the county.
The Sunshine Mine is a primary silver-producing underground mine
which began operations in 1884 and has produced approximately 340 million
ounces of silver since that time. Mining operations are currently focused at
depths from 2,700 feet to 5,000 feet although the Mine's workings extend to
5,600 feet.
The ore extracted from the Sunshine Mine is introduced to the
1,000-ton-per-day flotation concentrator, which produces two concentrates, a
high-grade silver concentrate which is transferred to the antimony refinery for
antimony removal, and a lead concentrate which is shipped directly to a smelter
for further processing.
After antimony removal, the silver concentrate can be either
transferred to the silver refinery for recovery of silver and copper, or sold
to a commercial smelter. Factors which influence Sunshine's decision to refine
its products internally or sell them to a smelter include levels of production,
costs of reagents and available smelter contract terms. The refinery was
designed and built to recover up to 8.0 million ounces of silver from
concentrates annually. The refinery produced approximately 2.7 million ounces
of silver in 1994 and, as a result of the low level of through-put, Sunshine
suspended operations at the silver refinery in 1995 pending higher levels of
available feed. Until the refinery reopens, Sunshine will sell its
silver-copper concentrates to a nearby smelter for processing. Suspension of
refinery operations has not had a material impact on Sunshine's results of
operations or cash flows.
To minimize cash used by operations, the Sunshine Mine adopted a
curtailed operating plan on June 1, 1991, reducing annual production from
approximately 1,000 tons per day to approximately 450-500 tons per day. At
silver prices prevailing in recent years, curtailed mining operations have
resulted in lower aggregate operating losses and cash requirements than either
full operations or a complete mine shutdown, and permitted the Company to
conduct its West Chance exploration and development program.
As development of the West Chance ore body advanced in 1996,
production increased such that at year end the mine's production averaged more
than 75% of capacity (750 tons per day). The Company expects to increase that
rate over the course of 1997 to achieve capacity production during 1997. As a
result of increased production, the Company has seen its cash cost of
production decline significantly.
5
<PAGE> 8
Ore and metals produced during 1996, 1995 and 1994, respectively,
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tons of Ore . . . . . . . . . . . . . . . . . . . . . 120,910 101,240 107,056
Metals Recovered:
Ounces of Silver . . . . . . . . . . . . . . . . 2,577,895 1,731,714 2,079,290
Pounds of Copper . . . . . . . . . . . . . . . . 671,701 731,312 826,058
Pounds of Antimony . . . . . . . . . . . . . . . 534,013 578,062 474,271
Pounds of Lead . . . . . . . . . . . . . . . . . 2,546,852 986,503 620,656
</TABLE>
These metals were recovered from ore containing an average of 22.04,
17.66 and 20.08 ounces of silver per ton, in 1996, 1995 and 1994, respectively.
Metallurgical recoveries were 97% of the contained silver and copper, and 92%
of the contained lead.
Production increased in 1996 as the Company completed initial
development of the West Chance ore body. It is expected that the bulk of the
Company's production during 1997 will be from this system. Initial development
was completed on the 3100 and 3700 levels, with an additional development on
the 2700 level to be completed in 1997.
The Sunshine Mine's proven and probable ore reserves, which include
the West Chance reserves, were estimated by the Company's technical personnel
at January 1, 1997, to be 1.6 million tons of ore containing 36.2 million
ounces of silver, 12.9 million pounds of copper, and 25.5 million pounds of
lead. The weighted average ore grades, adjusted for mining dilution, are 21.7
ounces per ton silver, .39% copper, and 2.23% lead.
Reserves increased by 5.5 million ounces of silver from the prior year
(net of production) due to the exploration and development of the West Chance
in 1996. West Chance proven and probable reserves total 12.6 million ounces of
silver, and all categories of resources in the West Chance total 68.4 million
ounces of silver at January 1, 1997.
During the three years ended December 31, 1996, the Sunshine Mine
accounted for all of the Company's silver production, and approximately 85% of
the Company's silver reserves at January 1, 1997. See Note 11 of Notes to
Consolidated Financial Statements included elsewhere herein.
In addition to the West Chance, the Sunshine Mine has a number of
other systems which have yet to be fully evaluated. The Company's geologists
believe many of these systems could have significant mineralization. Some of
these favorable structures continue to the east. The acquisition of the ConSil
property in 1995 permits evaluation of these veins and expands the Company's
resource base. The ConSil property, comprised of 99 mining claims (1233
acres), contains a shaft from the surface to a depth of 5400 feet. The
Company's future plans include upgrading the shaft to use as an
exploration/production facility for systems in the eastern part of the Sunshine
Mine.
The hourly employees at the Sunshine Mine are represented by the
United Steelworkers of America (which represents the majority of the employees)
and the International Brotherhood of Electrical Workers Union (the "Unions").
Effective May 1, 1994, the Unions and SPMI entered into new six-year labor
agreements. The salient features of the agreements are (1) continuation of the
flexible wage scale making wages variable with silver prices, with
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some increase in direct hourly wages; (2) the ability of either party to reopen
negotiations on wages and benefits at the end of the third year, subject to
mandatory arbitration if agreement is not reached; and (3) an increase in
pension benefits in exchange for the elimination of Company provided retiree
medical benefits for the current work force. In February, 1997, the Unions
notified SPMI that they were exercising their option to reopen negotiations on
wages and benefits.
OTHER EXPLORATION PROJECTS
REVENUE-VIRGINIUS
The Revenue-Virginius project is located eight miles southwest of the
town of Ouray in southwestern Colorado. Primarily an underground narrow-vein
silver property, it also contains significant gold, base metals and antimony
values. Sunshine controls the property under a mining lease calling for
minimal property payments and work commitments. The property currently
contains reserves of over 6.2 million ounces of silver, and total silver
resources exceeding 40 million ounces. Other metals contained in reserves and
resources total 105,000 ounces gold; 78,000 tons lead; 6,200 tons copper; and
24,000 tons zinc. The Company is holding the property pending higher silver
prices.
OTHER EXPLORATION IN ARGENTINA
In addition to Pirquitas, Sunshine has obtained five additional
concessions in Argentina where the Company expects to focus much of its
exploration effort in 1997. The Abra Rabon and Abra Huancar concessions are
located in Jujuy Province, the Cobre concession is located in Salta Province,
and the Cerro Choique and Loma Negro concessions are located in Rio Negro
Province. Evaluation work is currently being conducted on these concessions,
which cover a total of approximately 105,000 acres. The most advanced of these
is Cerro Choique.
CERRO CHOIQUE
Cerro Choique is located in northern Patagonia, province of Rio Negro,
approximately 25 kms east of Los Menucos. The property consists of two
concessions including Cerro Choique and Loma Negra covering over 14,530
hectares (35,900 acres). Gold mineralization occurs in silicified volcanic
rocks consisting of rhyolites and pyroclastic volcanic rocks with varying
composition, of triassic age. The zone of associated alteration extends for at
least 2,100 meters trending in a northeast-southwest direction and is up to 600
meters wide. Exploration has consisted of 1) surface rock geochemical
analysis, 2) constructing 4,650 meters of trenches across the
silicified/mineralized zone, and 3) drilling six reverse circulation holes
(1,076 meters total) on wide spaced centers to test several of the gold
anomalies. Rock geochemical and drill assay results have defined numerous
zones ranging from 0.2 - 4.34 ppm gold. Although the exploration program has,
to date, not defined an area of economic importance, it has given sufficient
encouragement to merit further exploration work in order to thoroughly evaluate
this major epithermal gold anomaly.
7
<PAGE> 10
EXPLORATION IN PERU
The Company established an office in Lima, Peru in 1994. Since that
time it has actively reviewed and bid for a number of properties. As it hasn't
at this time established a significant prospect inventory, the Company is
evaluating the merits of continuing to fund a significant exploration effort in
Peru. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
REFINING TECHNOLOGY
Numerous ore bodies worldwide contain antimony and arsenic which, due
to environmental concerns, often must be removed before shipment to a smelter
for processing or the ore will be subject to significantly increased processing
costs. The Company possesses patented technology to safely remove these
materials, and in the case of antimony, to produce a marketable product. The
Company uses this technology to remove antimony from its own concentrates and
has recently begun processing concentrates from two other mines in the Coeur
d'Alene district.
MARKETING
The Company's primary product can be either refined silver which is
sold to industrial customers or precious metals dealers, or silver-copper and
lead concentrates which are sold to smelters. Prices received for refined
silver are based on market prices at the time of shipment. Prices received for
the silver-copper concentrate are based on prices for silver and copper during
a quotational period shortly after shipment. The Company bases its decisions on
whether to refine its products internally or sell them to a smelter based on
internal production costs versus available smelter contract terms. The
Company's refined silver, antimony and copper products are generally marketed
directly to metals dealers or industrial customers. See Note 10 of Notes to
Consolidated Financial Statements included elsewhere herein.
OTHER BUSINESS AND REGULATORY FACTORS
The Company's precious metals operations are intensely competitive and
subject to risks and regulations inherent in and applicable to mining generally
and the precious metals industry specifically. Competition in the precious
metals mining industry, and particularly the silver mining industry, is very
volatile. The market for gold and silver is international and there is no
significant marketing advantage in domestic production versus international
production. No single source of silver is significant to the world market, and
many of the principal sources of silver as a primary metal have been forced to
close as a result of continued low silver prices over the past several years.
As a result, the largest sources of silver at the present time are gold,
copper, lead and zinc mines which produce silver as a by-product, and whose
economics are not significantly related to the price of silver.
In connection with its mining and other operations, the Company is
subject to a variety of extensive and changing federal, state and local laws,
regulations and ordinances. These laws and regulations control exploration and
mining and the actual and potential effects of the Company's activities on the
environment, which directly and indirectly affect the operations of the Company
and could result in potential liability to the Company. No material effect on
the Company is currently anticipated from compliance with any such provisions
or controls.
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<PAGE> 11
ENVIRONMENTAL AND SAFETY MATTERS
In connection with its operations and properties, the Company is
subject to extensive and changing federal, state and local laws, regulations
and ordinances governing health and safety and the protection of the
environment, including, without limitation, laws and regulations relating to
air and water quality, mine reclamation, waste handling and disposal, the
protection of certain species and the preservation of certain lands. These
environmental laws and regulations may require the acquisition of permits or
other authorizations for certain activities. These laws and regulations may
also limit or prohibit activities on certain lands lying within a wilderness
area, wetland area, area providing habitat for certain species or other
protected area. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue in
the future. The operations and activities of the Company require compliance
with such laws, regulations and ordinances.
The Company cannot predict what environmental legislation or
regulations will be enacted or adopted in the future or how future laws and
regulations will be administered or interpreted. Compliance with more stringent
laws and regulations, as well as potentially more vigorous enforcement policies
of regulatory agencies or stricter interpretation of existing laws, may
necessitate significant capital outlays, may materially affect the Company's
operations, or may cause material changes or delays in the Company's intended
activities. Currently, the Company does not expect to incur any material
capital expenditures associated with environmental regulations (such as
expenditures for relevant control facilities) during the fiscal year 1997. See
Note 9 of Notes to Consolidated Financial Statements included elsewhere herein;
and "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." The Company also does not
anticipate any material effect from compliance with environmental, health, and
safety laws, regulations and ordinances.
EMPLOYEES
At December 31, 1996, Sunshine and its subsidiaries, including SPMI,
employed approximately 330 persons; 291 of whom are located at the Kellogg
facilities. SEE "ITEM 1. BUSINESS. THE SUNSHINE MINE AND REFINERY COMPLEX."
1. PROPERTIES.
The information regarding the properties of Sunshine is set forth
under ITEM 1. BUSINESS, above, and in the Notes to Consolidated Financial
Statements included in Part II hereof.
2. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The EPA has identified the Company and SPMI as Potentially Responsible
Parties ("PRPs") at one site and SPMI as a PRP at another site under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI
at one site and SPMI at the other site arranged for the disposal of hazardous
substances. One of the sites is located in Kellogg, Idaho and the other site is
located in Spokane, Washington.
At the first site, the EPA, the State of Idaho and several of the
PRPs, including the Company and SPMI, have agreed to a site-wide clean-up plan,
separating the site into two distinct areas for remediation: the Bunker Hill
Smelter Complex (the "Smelter Area") and the residential and certain commercial
areas primarily in the cities of Kellogg,
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<PAGE> 12
Smelterville and Pinehurst, Idaho encompassed by the Site (the "Residential
Areas"). Without admitting liability, the Company and several PRPs have agreed
to do the remediation work in the Residential Areas pursuant to an EPA and
State of Idaho approved work plan. In exchange therefor, EPA and the State of
Idaho released the settling PRPs from all liability for cleanup of the Smelter
Area, reduced the EPA's claim for reimbursement of past costs from $17 million
to $1 million plus a percentage of proceeds received by the PRPs from insurance
companies, if any, and agreed that the work orders from 1990 through 1993 were
deemed satisfied and discharged. The remediation undertaken by the Company and
the PRPs is expected to take approximately seven years and the Company
estimates its (including SPMI's) share (12.4%) of the remediation costs will be
approximately $3 million, of which approximately $2 million has been spent
through December 31, 1996.
On November 17, 1994, the United States District Court for the
District of Idaho entered a Consent Decree containing the terms of this
agreement. The liability for remediation costs under the consent decree is
joint and several. Thus, if any other settling party or parties does not comply
with the consent decree, the exposure for the Company and SPMI could increase
proportionately. The parties have reserved their claims and defenses with
respect to natural resource damages, except for the State of Idaho which has
agreed that its claim has been settled.
On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed
an action in the United States District Court, District of Idaho against the
Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory
judgment that the Tribe has five years in which to file a natural resource
damage claim under CERCLA against the PRPs and others or, alternatively, for
damages in an unspecified amount resulting from the loss, destruction or injury
to natural resources allegedly caused by the defendants. The Company believes
that a settlement by SPMI of all natural resources claims with the State of
Idaho in May 1986 bars the Tribe's action.
On October 30, 1992, the United States District Court for the District
of Idaho issued an Order of Administrative Termination in the Tribe's action.
The case was administratively terminated because of the court's ruling in a
prior action that the State of Idaho has title to the beds and banks of all
navigable water courses and that the Tribe had no claim thereto. The decision
in the prior action between the State of Idaho and the Tribe, which was adverse
to the Tribe, was appealed to the Ninth Circuit Court of Appeals, which
affirmed in part and reversed in part the decision of the district court.
On March 22, 1996, a complaint was filed in the United States District
Court for the District of Idaho on behalf of the United States Department of
the Interior, United States Department of Agriculture and the Environmental
Protection Agency against Sunshine, SPMI and other identified PRPs for alleged
natural resource damages in the Coeur d'Alene Basin. The complaint seeks to
recover natural resource damages and response costs under CERCLA and the Clean
Water Act, and does not identify the amount of damages sought to be recovered.
The Company believes that the settlement by SPMI of all natural resource claims
with the State of Idaho in May, 1986, bars these claims, and that the complaint
is without merit.
On September 5, 1996, the United States District Court for the
District of Idaho granted the motion of the Tribe to reopen the Tribe's
lawsuit, and to consolidate the discovery and motions practice of the Tribe's
lawsuit with
10
<PAGE> 13
the United States government's natural resource damage claims currently pending
against Sunshine and other defendants in that court.
The second site where EPA has identified SPMI as a PRP under CERCLA is
the Spokane Junkyard Site near Spokane, Washington. In November 1988, the EPA
notified SPMI that it is a PRP at that site. The EPA has documented the
threatened release of hazardous substances at the site and has initiated
response actions under CERCLA.
The Company does not believe that the designation of SPMI as a PRP at
the Spokane Junkyard Site will have a material impact on the Company's results
of operations and financial condition or on its liquidity or capital resources.
SPMI does not believe it will be required to pay any clean-up costs at the
Spokane Junkyard Site. No records of SPMI have been discovered by it or the EPA
showing SPMI ever sent any material to the site. The EPA's designation of SPMI
as a PRP was based on the oral statement of a former employee at the junkyard
that sometime in the 1940's or 1950's, he recalled a SPMI truck on the site. To
date, the EPA has not filed any action against SPMI or the Company in relation
to the Spokane Junkyard Site.
OTHER LITIGATION
On March 29, 1995, a complaint was filed against the Company in
Delaware Chancery Court, New Castle County, by Harbor Finance Partners, a
Colorado Partnership, requesting class action status and alleging that the
rights and warrants issued incident to the Company's rights offering in 1994
were an impermissible distribution or dividend under the Certificate. On May
21, 1996, a majority of the Company's Preferred and Common stockholders
approved a Merger, the effect of which was to convert all shares of Preferred
stock into Common. As a result of the Merger, all parties to the Delaware
Chancery Court litigation brought by Harbor Finance Partners agreed that the
action was moot. The Company has agreed to pay plaintiffs' counsel fees and
expenses of $47,500 to resolve their claim for services rendered in the
litigation.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of Sunshine's fiscal year ended December 31, 1996.
11
<PAGE> 14
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Sunshine's Common Stock is listed for trading on the New York Stock
Exchange (symbol "SSC"). Sunshine currently does not pay cash dividends on its
Common Stock and has not paid any since the third quarter of 1981. At February
14, 1997, Sunshine had approximately 33,000 holders of record of its Common
Stock. On February 14, 1997, the closing price of the Common Stock price as
reported on the New York Stock Exchange, Inc. composite transactions was $1.00.
The following table sets forth the range of high and low sales prices
for the Common Stock as reported on the New York Stock Exchange, Inc.,
composite tape for the periods indicated. Such quotations represent
inter-dealer prices without retail markup, markdown or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1996 QUARTERS 1995 QUARTERS
---------------------------------------------
HIGH LOW HIGH LOW
- ---------------------------------------------------------------------
<S> <C> <C>
1st Quarter 2 1 5/32 2 1 1/2
- ---------------------------------------------------------------------
2nd Quarter 1 3/4 1 1/4 2 3/8 1 3/4
- ---------------------------------------------------------------------
3rd Quarter 1 1/2 1 1/8 2 1/8 1 5/8
- ---------------------------------------------------------------------
4th Quarter 1 1/4 7/8 1 7/8 1 1/4
- ---------------------------------------------------------------------
</TABLE>
The Company's March 9, 1999 and May 22, 2001 common stock purchase
warrants are traded on the NASDAQ National Market System (symbols "SILVW"and
"SILVZ") with high and low sales prices as reported by NASDAQ during 1996 of
$0.75 and $0.3125; and $0.875 and $0.4063, respectively.
The indentures governing the Eurobonds and Sunshine's outstanding
Convertible Subordinated Reset Debentures due July 15, 2008, impose certain
restrictions on Sunshine's ability to declare or pay cash dividends and make
certain distribution on its capital stock (including Sunshine's Common Stock).
Pursuant to these restrictions, at December 31, 1996, the Company was
prohibited from paying cash dividends on shares of its Common Stock.
12
<PAGE> 15
6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical financial
information of Sunshine as of the dates and the periods set forth in the table
below. All amounts are in thousands, except price and production statistics and
per share amounts.
<TABLE>
<CAPTION>
==================================================================
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996(5) 1995 1994(4) 1993(3) 1992(2)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues . . . . . . . . . . . . . $15,315 $15,623 $17,732 $14,306 $13,316
Mark to market gains (losses) . . . . . . . . (1,101) 911 (320) 3,275 (390)
--------- ---------- --------- ---------- ---------
Total revenues . . . . . . . . . . . . . 14,214 16,534 17,412 17,581 12,926
Loss from continuing operations . . . . . . . (24,887) (15,483) (4,923) (28,611) (40,261)
Loss before extraordinary item and
cumulative effect of change in
accounting principle . . . . . . . . . . (24,887) (15,483) (4,923) (28,611) (40,664)
Net loss . . . . . . . . . . . . . . . . . . (24,887) (15,483) (4,923) (42,257) (13,372)
Income (loss) applicable to common shares . . 12,615 (25,572) (15,383) (53,077) (24,860)
Income (loss) per common share:
Continuing operations . . . . . . . . . . .06 (.13) (.08) (.25) (.44)
Extraordinary item . . . . . . . . . . . --- --- --- (.09) .33
Cumulative effect of change in
accounting principle . . . . . . . . . --- --- --- --- (.10)
Net income (loss) . . . . . . . . . . . . .06 (.13) (.08) (.34) (.21)
Weighted average common shares . . . . . . . 222,584 193,044 185,634 155,383 118,740
PRICE AND PRODUCTION STATISTICS:
Average Silver prices received . . . . . . . $5.11 $5.20 $5.29 $4.34 $3.95
Tons . . . . . . . . . . . . . . . . . . 120,910 101,240 107,056 100,441 104,602
Silver grade (ounces per ton) . . . . . . 22.04 17.66 20.08 23.49 24.77
Silver ounces . . . . . . . . . . . . . . 2,577,895 1,731,714 2,079,290 2,298,155 2,540,363
Cash cost per ounce(1) . . . . . . . . . . . $6.12 $6.61 $5.83 $5.10 $4.40
BALANCE SHEET DATA:
Cash and cash investments . . . . . . . . . . $16,317 $12,837 $26,581 $4,304 $4,654
Working capital . . . . . . . . . . . . . . . 25,559 23,550 38,537 15,651 13,399
Total assets . . . . . . . . . . . . . . . . 105,486 101,134 116,657 100,360 113,036
Long-term debt and capital lease obligations 31,515 1,519 1,519 9,493 19,669
Stockholders' equity:
Preferred Stock . . . . . . . . . . . . . --- 82,268 80,707 78,774 76,482
Other . . . . . . . . . . . . . . . . . . 57,863 2,814 19,701 (11,531) (9,282)
Book value per common share . . . . . . . . . .23 (.22) (.10) (.26) (.24)
Common shares outstanding . . . . . . . . . . 254,981 193,096 192,995 168,559 146,478
</TABLE>
- ---------------
(1) Cash cost per ounce includes all expenditures (other than exploration
costs and capital expenditures) related to the operation of the
Sunshine Mine and Refinery Complex, less any by-product revenues.
Such costs include
13
<PAGE> 16
non-capital development costs, production and maintenance costs, ad
valorem taxes, insurance, and postemployment benefit costs incurred
on site.
(2) In 1992, the Company recorded an extraordinary gain of $38.6 million
on the extinguishment of eight series of silver indexed bonds issued
between 1980 and 1986 by SPMI (the "Old Silver Indexed Bonds") and an
$11.3 million charge due to the cumulative effect on prior years of a
change in the method of accounting for postretirement benefits other
than pensions.
(3) In 1993, the Company recorded a charge of $12.5 million resulting from
an induced conversion of the 8% Silver Indexed Bonds, and
extraordinary losses aggregating $13.6 million resulting from
redemptions of the 8% Silver Indexed Bonds. See Note 5 of Notes to
Consolidated Financial Statements.
(4) In 1994, the Company recorded gains totaling $6.9 million due to the
curtailment of postretirement medical benefits for certain of its
employees and retirees. See Note 8 of Notes to Consolidated Financial
Statements.
(5) During 1996 the Company recorded a gain applicable to common shares of
$40 million due to the retirement of all of the Company's outstanding
Preferred Stock. See Note 7 of Notes to Consolidated Financial
Statements.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Pirquitas is expected to be a large, low-cost silver/tin producer and
it is receiving a substantial investment of the Company's resources. In 1996,
the Company's total exploration expenditures were $10 million of which over $6
million was devoted to the Pirquitas evaluation. The Company hopes to complete
a feasibility study regarding development of the property during 1997. The
Company expects to spend $3-5 million in further exploration work on the
property in 1997 and in completion of the feasibility study. It is currently
expected that capital requirements for development of the property may be in
excess of $100 million. Given the negative impact of low silver prices on the
Company's cash flow from operations, the cost of the Company's ongoing
pre-feasibility and feasibility work at Pirquitas, and general and
administrative and other expenses, the Company will be evaluating opportunities
to raise new working capital in 1997. This may be done through the sale of
equity or debt securities or the sale of certain assets. The Company's working
capital totaled $25.6 million at December 31, 1996, and is considered adequate
for the foreseeable future, excluding a determination regarding the capital
requirements at Pirquitas.
Because the price of silver since 1985 has been only slightly in
excess of, or less than, the Company's cash cost to produce an ounce of silver,
the Company's operations have not been able to generate cash flow sufficient to
cover its costs of exploration, research, general and administrative expenses,
and interest, as well as non-cash charges such as depreciation, depletion, and
amortization. Until such time as the price of silver increases significantly or
higher production is achieved at a lower cost, the Company will continue to
generate a negative cash flow from operations. Should they continue, these
losses will require the Company to seek new sources of funding for its ongoing
operations.
In March, 1996, SPMI concluded the Notes Offering, conducted in Europe
only to non-U.S. persons pursuant to Regulation S of the Securities Act of
1933, as amended. SPMI issued $30 million aggregate principal amount of
14
<PAGE> 17
Senior Exchangeable Notes due 2000 (the "Eurobonds") pursuant to the Notes
Offering. The net proceeds, approximately $27 million, are being used to fund
development and exploration opportunities of the Company, and for working
capital.
The Eurobonds bear interest at 8% per annum and mature March 21, 2000.
The Eurobonds are exchangeable into a specified number of shares of Common
Stock of the Company at an exchange price of $1.4375 per share, subject to
reset and adjustment in certain events. At any time after one year from the
date of issuance and prior to maturity, SPMI may force the exchange of the
Eurobonds, in whole or in part, subject to certain restrictions, and may redeem
the Eurobonds at any time at the principal amount if United States withholding
taxes are imposed on payments in respect of the Eurobonds. The Eurobonds are
guaranteed by Sunshine, which guarantee ranks senior to all unsecured and
subordinated obligations, including the currently outstanding Convertible
Subordinated Reset Debentures due July 15, 2008. See Note 5 of Notes to
Consolidated Financial Statements.
FUTURE EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company's exploration expenditures for 1996 totaled approximately
$10 million, principally at the Pirquitas Mine and the Sunshine Mine. These
expenditures significantly advanced the Pirquitas project evaluation and the
West Chance development, increasing and/or improving the definition of the
Company's silver reserves and resources. The Company expects to incur
substantial costs in both projects in 1997 which, at current silver prices,
will need to be funded from working capital.
The Company has steadily increased its level of exploration
expenditures in recent years as it has identified and acquired a growing list
of prospects that it felt had the potential to add significantly to operating
income, cash flow, and mineral resources and reserves. The acquisition and
successful development of such prospects is central to the Company's plan to
return to profitability. Continuation of such efforts at their 1996 levels
will be contingent on future silver prices and the Company's ability to raise
additional funding.
PREFERRED STOCK RETIREMENT
Effective May 22, 1996, Common and Preferred stockholders of Sunshine
approved the merger (the "Merger") of Sunshine with and into its wholly-owned
subsidiary, Sunshine Merger Company, pursuant to which Sunshine Merger Company
was the surviving entity and was renamed Sunshine Mining and Refining Company.
The purpose of the Merger was to retire all of Sunshine's outstanding Preferred
Stock in exchange for, initially, 46 million shares of Common Stock and 7.6
million Warrants to purchase one share of Common Stock at $1.92. As a result,
the Company recognized a $40.1 million gain applicable to Common Shares
representing the excess of the aggregate redemption value of the Preferred
Stock (including cumulative dividends in arrears of $44.8 million) over the sum
of the value of securities issued and related transaction costs.
Terms of the Merger included a formula whereby additional shares would
be issued and the exercise price of the warrants would be reduced if the
average price of the Common Stock was less than $1.75 over the period from May
22 to November 11, 1996. Pursuant to that provision, an additional 16.8
million shares were issued, and the exercise price of the warrants was reduced
to $1.38.
15
<PAGE> 18
As a result of the Merger, all parties to the Delaware Chancery Court
litigation brought by Harbor Finance Partners agreed that the action was moot.
The Company has agreed to pay plaintiffs' counsel fees and expenses of $47,500
to resolve their claim for services rendered in the litigation. See "LEGAL
PROCEEDINGS--OTHER LITIGATION."
EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE
As the price of silver since 1985 has been only slightly in excess of,
or less than, the Company's cash cost to produce an ounce of silver, the
Company's operations have not been able to generate cash flow sufficient to
cover its costs of exploration, research, general and administrative expenses,
and interest, as well as non-cash charges such as depreciation, depletion, and
amortization.
In order to minimize losses at the Sunshine Mine, in June of 1991 the
Company reduced ore tonnage produced from the Mine to about one-half its 1,000
tons-per-day capacity. While this reduction in output has caused an increase
in the per-unit cash cost of silver production due to certain fixed costs which
are not variable with production, it has served to minimize the aggregate
losses at the Sunshine Mine, while allowing the Company to pursue its new
exploration program in the western sections of the Mine.
The Company periodically, and at least annually, evaluates its mining
properties for permanent impairment based on undiscounted expected future cash
flows. Such estimates are based on assumptions as to future silver prices,
mining costs, and recoverable reserves and resources which management believes
are reasonable based on historical silver prices and production. In constant
1996 dollars, the price of silver averaged approximately $10.49 per ounce over
the 29 year period since silver has been allowed to trade on an essentially
free market basis, including the most recent seven-year period during which the
price of silver averaged only $4.62 per ounce (in constant 1996 dollars). The
Company currently believes that the price of silver will increase to a more
normal historical trading range in constant dollars and that additional
reserves of higher grades than have been mined recently are present in the
Sunshine Mine. Accordingly, the Company does not believe it is probable that
its investment in the Sunshine Mine has been permanently impaired at December
31, 1996.
Future increases in the price of silver and the presence of higher
grade ore are forward-looking statements regarding matters over which the
Company has no control. Actual future silver prices and the results of current
exploration may differ from anticipated values. Unless the price of silver
increases or the cost of production per ounce is reduced, the Company will not
be able to recover its investment in the Sunshine Mine.
In the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets, and for Long-Lived Assets to be Disposed of" ("SFAS 121").
The adoption of SFAS 121 had no impact on the Company's financial condition as
the Company's methodology for evaluating its mining properties for impairment
is consistent with SFAS 121.
16
<PAGE> 19
OTHER
The Company and SPMI have been identified by the EPA as a PRP at the
Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane
Junkyard Site. The Company believes that its status as a PRP will not have a
material adverse effect on its consolidated financial position or results of
operations. See "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS" and Note 9 of
Notes to Consolidated Financial Statements.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities was $11.9 million in 1996 compared
with $6.9 million in 1995 and $6.5 million in 1994. The 1996 increase resulted
primarily from increases (over 1995 levels) in cash operating losses of $3.3
million and a $1.0 million increase in inventories in 1996 versus a $1.7
million decrease in 1995, partially offset by other changes in working capital
items. Cash operating losses increased primarily due to a $2.5 million
increase in interest expense and a $1.1 million mark-to-market loss in 1996
versus a $.9 million gain in 1995.
$11.3 million of cash was used by investing activities during 1996,
including $10.2 million for exploration expenditures and $2.6 million for
additions to property, plant and equipment, partially offset by proceeds from
investments of $1.7 million.
Cash used by investing activities during 1995 was $6.9 million,
including $6 million for exploration expenditures and $2.5 million for the
acquisition of the Pirquitas property in Argentina and the ConSil property
adjacent to the Sunshine Mine, offset by $2.2 million of cash proceeds from the
sale of certain marketable securities. In 1994, cash used by investing
activities was $2.3 million, including $1.9 million for exploration
expenditures.
Cash provided by financing activities was $26.7 million in 1996
resulting from the Company's Notes Offering, partially offset by the cost
associated with the Merger. Cash provided by financing activities was $31.1
million in 1994 principally as a result of the Company's rights offering.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
The Company's net loss increased $9.4 million in 1996 to $24.9 million
compared with the net loss of $15.5 million in 1995. This increase resulted
primarily from the $4.2 million increase in exploration expenditures as a
result of the Company's increased exploration program, particularly at
Pirquitas; the $2.5 million increase in interest expense resulting from the
Notes Offering; the $.7 million increase in depreciation, depletion and
amortization; and a $1.1 million mark-to-market loss in 1996 versus a $.9
million gain in 1995.
Consolidated operating revenues decreased approximately $300 thousand
(2%) for 1996 compared to 1995 due primarily to a 9c. reduction in average
silver prices received in 1996 and a $277 thousand reduction in premiums
received from the sale of covered calls. Sales volumes in the two periods were
similar, despite production in 1996 being much higher, due to the closure of
the Company's silver refinery in 1995. This closure, and the resultant sale of
concentrate to a third-party smelter, resulted in shorter processing time
before sales recognition and therefore a significant inventory drawdown.
17
<PAGE> 20
The mark-to-market loss of $1.1 million on silver inventories and
silver bullion held for investment during 1996 was due to the decrease in
silver prices from the beginning of the year. The mark-to-market gain of $.9
million in 1995 was due to the increase in silver prices from the beginning of
that year.
Cost of revenues increased $408 thousand (2%) (from $17.6 million in
1995 to $18.0 million in 1996) due to increased development costs and
associated waste haulage partially offset by lower unit production costs and
the drawdown in inventories in 1995 discussed above. Unit production costs
decreased primarily due to the 49% increase in silver production and a 25%
increase in average grades from 1995 to 1996 (2.6 million ounces produced from
120,910 tons at 22.04 ounces per ton in 1996 versus 1.7 million ounces from
101,240 tons at 17.66 ounces per ton in 1995). Unit production costs include a
$2 million increase in development costs primarily devoted to ramping in the
West Chance area of the Sunshine Mine from which the main production benefit
will be realized in 1997. Such ramping provides access to the West Chance area
for the Company's newly acquired rubber-tired loaders, which is the basis for
the Company's plan to return the Mine to full production.
Exploration expense increased $4.2 million (69%) in 1996 compared to
1995 as a result of the Company's increased exploration program, primarily at
Pirquitas. (See "Liquidity and Capital Resources - Future Exploration and
Development Activities.)
Depreciation, depletion, and amortization increased approximately $713
thousand primarily as a result of the 49% increase in production in 1996.
General and administrative expense decreased $460 thousand primarily
due to reduced legal and staffing costs.
Interest expense increased $2.5 million due to the outstanding
Eurobonds.
Other, net increased $293 thousand due to a $700 thousand gain from a
litigation settlement in 1996, partially offset by a $400 thousand reduction in
gains from sale of marketable securities and investments.
1995 COMPARED TO 1994
The Company's net loss increased $10.6 million in 1995 to $15.5
million compared with the net loss of $4.9 million in 1994. This increase
resulted primarily from the $4.2 million increase in exploration expenditures
pursuant to the Company's plan to increase exploration at the Sunshine Mine and
other sites in Argentina, Peru and the United States, and the $6.9 million gain
from curtailment of postretirement medical benefits in 1994.
Consolidated operating revenues decreased approximately $2.1 million
(12%) for 1995 compared to 1994 due to lower sales volume (2.5 million ounces
in 1995 compared to 2.9 million ounces in 1994).
During 1995, due to the increase in silver prices from the beginning
of the year, the Company realized a mark-to-market increase of $.9 million on
its silver inventories and silver bullion held for investment. In 1994, due to
the decline in silver prices from the beginning of the year of $5.09 per ounce
to the year end price of $4.88, the Company realized a mark-to-market writedown
of $.3 million.
During the first quarter of 1995, the Company suspended operation of
its silver refinery. As a result, the Company began selling silver and copper
concentrate to a third-party smelter instead of refining silver bullion and
copper metal for sale to commercial and industrial customers. This resulted in
a shorter processing time before sales
18
<PAGE> 21
recognition, causing a $2.4 million drawdown of work-in-process inventories.
Cost of revenues decreased $900 thousand in 1995 compared to 1994, due to lower
sales volume of custom material (375 thousand ounces in 1995 versus 825
thousand ounces in 1994) resulting in $1.8 million reduction in cost of
revenues and a decrease in ounces of silver produced, partially offset by the
inventory drawdowns and higher unit production costs. Unit production costs
increased primarily due to declines in silver production from 1994 to 1995 (1.7
million ounces produced from 101,000 tons at 17.7 ounces per ton in 1995 versus
2.1 million ounces from 107,000 tons at 20.1 ounces per ton in 1994). Mine
production declined due to a reduction in mill head grades as a result of
extensive underground development activities. Additionally, the operations at
the Sunshine Mine experienced earlier than expected mineout and adverse mining
conditions in many of the mine's productive stopes.
Depreciation, depletion, and amortization declined by approximately
$555 thousand as a result of lower production in 1995.
Interest income increased by $202 thousand (18%) due to higher cash
balances after the Company's rights offering in March, 1994.
Interest expense was reduced $409 thousand (34%) due to the reduction
of approximately $8 million (84%) in the aggregate principal amount of debt
outstanding in the first quarter of 1994.
Other, net declined $416 thousand due to a $1.0 million gain from a
litigation settlement in 1994, partially offset by a $.6 million gain on sale
of marketable securities in 1995.
THE EFFECTS OF CHANGING PRICES
Substantially all of the Company's revenues are from sales of silver.
Volatility in the price of silver causes substantial fluctuations in the
Company's revenues and financial condition. There are many factors which
influence the volatility of silver prices. Changes in supply and demand,
worldwide economic and political conditions, expectations as to inflation and
speculative activity in the market all cause fluctuations in prices received.
As previously discussed, the price of silver in recent years has been
depressed.
The Company maintains an investment inventory of silver bullion
totaling approximately 1.7 million ounces. To earn current income on this
investment the Company from time to time will sell covered calls against this
inventory. As of February 14, 1997, the Company had outstanding calls on this
inventory aggregating 600,000 ounces at strike prices from $5.50 to $6.00,
expiring between July and December, 1997. Premiums received from the sale of
these calls were from $0.10 to $0.15 per ounce. Total premiums earned for the
sale of covered calls aggregated $164,500, $442,250 and $347,000 in 1996, 1995
and 1994, respectively. The Company's policy is not to sell any uncovered
calls.
19
<PAGE> 22
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed herewith begin on page F-1 hereof.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to the Company's directors and nominees for
election as directors and information relating to the executive officers of the
Company is incorporated herein by reference from the Company's Proxy Statement
for its 1996 Annual Meeting of Stockholders (the "Proxy Statement").
11. EXECUTIVE COMPENSATION.
The discussion under "Management Remuneration and Transactions" in the
Company's Proxy Statement for its Annual Meeting of Stockholders is
incorporated herein by reference.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement for its Annual Meeting of
Stockholders is incorporated herein by reference.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under "Management Remuneration and Transactions -
Employment Contracts" in the Company's Proxy Statement for its Annual Meeting
of Stockholders is incorporated herein by reference.
20
<PAGE> 23
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements. See Index to Financial
Statements and Financial Statements Schedules on page F-1
hereof.
2. Consolidated Financial Statement Schedules.
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
3. Exhibits.
EXHIBIT
NO. EXHIBIT
------- -------
2.1 Form of Agreement and Plan of Merger to be entered into by and among
Sunshine and Sunshine Merger Company, Exhibit 2.1 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876 and incorporated herein by reference.
3.1 Certificate of Incorporation of Sunshine to the Company's
Registration Statement on Form S-4, Registration No. 33-98876 and
incorporated herein by reference.
3.2 Bylaws of Sunshine filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876
and incorporated herein by reference.
4.1 Warrant Agreement dated as of February 1, 1996, between Sunshine
Merger Company and American Stock Transfer & Trust Company, as
Warrant Agent, filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-4, Registration No. 33-98876 and incorporated
herein by reference.
4.2 Warrant Agreement, dated as of February 3, 1994, between Sunshine
and American Stock Transfer & Trust Company, as Warrant Agent,
filed as Exhibit 4.3 to Sunshine's Registration Statement on Form
S-1 (Registration No. 33-73608), as amended and incorporated
herein by reference.
4.3 Form of Supplemental Warrant Agreement dated as of February 1, 1996
between Sunshine Merger Company and American Stock Transfer &
Trust company, as Warrant Agent, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4 (Registration No.
33-98876) and incorporated herein by reference.
4.4 Warrant Certificate filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876 and
incorporated herein by reference.
4.5 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's
Registration Statement on Form S-1 (Registration No. 33-73608),
as amended and incorporated herein by reference.
4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of
Sunshine, filed as Exhibit 4.2 to Sunshine's Registration
Statement on Form S-1 (Registration No. 33-63446) as amended, and
incorporated herein by reference.
21
<PAGE> 24
4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and
MTrust Corp., National Association, with respect to Sunshine's
Convertible Subordinated Debentures due July 15, 2008, filed as
Exhibit 4.25 to Sunshine's Registration Statement on Form S-3
(Registration No. 33-21159) and incorporated herein by reference.
4.8 First Supplemental Indenture, dated as of August 8, 1988, Second
Supplemental Indenture dated as of November 10, 1988, and Third
Supplemental Indenture, dated as of April 10, 1991, by and
between the Company and Ameritrust Texas, N.A., the successor to
MTrust Corp., National Association relating to the issuance of
the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990, and
incorporated herein by reference.
4.9 Form of Fourth Supplemental Indenture, by and between the Company
and Texas Commerce Bank National Association, as successor to
Ameritrust Texas National Association formerly known as MTrust
Corp., National Association, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876 and incorporated herein by reference..
-10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as
Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986, and incorporated herein by
reference.
-10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan
of Sunshine, filed as Exhibit 10.8 to Sunshine's Registration
Statement on Form S-1 (Registration No. 33-63446), as amended and
incorporated herein by reference.
-10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan
of Sunshine, filed as Exhibit 10.1 to Sunshine's Quarterly Report
on Form 10-Q for the period ended June 30, 1994, and incorporated
herein by reference.
-10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18
to Sunshine's Registration Statement on Form S-1 (Registration
No. 33-63446), as amended and incorporated herein by reference.
*-10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine.
-10.6 Form of Executive Employment Agreement entered into as of January 1,
1994, between Sunshine and John S. Simko, filed as Exhibit 10.8
to Sunshine's Registration Statement on Form S-1 (Registration
No. 33-73608), as amended and incorporated herein by reference.
-10.7 Form of Executive Employment Agreement entered into as of January 1,
1994, between Sunshine and William W. Davis, filed as Exhibit
10.9 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated herein
by reference.
-10.8 Form of Executive Employment Agreement entered into as of January 1,
1994, between Sunshine and Harry F. Cougher, filed as Exhibit
No. 10.10 to Sunshine's Annual Report on Form 10-k for the fiscal
year ended December 31, 1993, and incorporated herein by
reference.
22
<PAGE> 25
10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius
Mines Corporation, a Colorado corporation, as lessor, and
Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's
Quarterly Report on Form 10-Q for the period ended March 31,
1994, and incorporated herein by reference.
10.10 Agreement dated July 1, 1995 by and between Consolidated Silver
Corporation and Sunshine Precious Metals, Inc., as purchaser, for
the purchase of a certain mining property, filed as Exhibit 10.1
to Sunshine's Quarterly Report on Form 10-Q for the period ended
June 30, 1995, and incorporated herein by reference.
22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992,
and incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*24.1 Power of attorney of the officers and directors of the Company,
included on the signature page hereof.
*27.1 Financial Data Schedules
- -----------
* Filed herewith
- Management contract or compensatory plan or arrangement.
Schedules other than those included in the Consolidated Financial
Statements, if any, are omitted for the reason that they are either not
required, not applicable or the required information is included in the
Consolidated Financial Statements or Notes thereto.
(a) Reports on Form 8-K:
On December 9, 1996, the Company filed a report on Form 8-K,
reporting matters under Item 5 of that Report.
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Sunshine Mining and Refining Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED this 28th day of February, 1997.
SUNSHINE MINING AND REFINING COMPANY
By /s/ WILLIAM W. DAVIS
------------------------------------------
William W. Davis, Executive Vice President
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and directors of Sunshine Mining and Refining Company (the "Company") hereby
constitutes and appoints John S. Simko, William W. Davis, and Robert H.
Peterson, or any of them (with full power to each of them to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution,
for him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute and file any and all documents relating to the
Company's Form 10-K for the year ended December 31, 1996, including and all
amendments and supplements hereto, with any regulatory authority granting said
attorneys, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as he himself might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done.
<PAGE> 27
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of the 28th day of February,
1997.
NAME CAPACITIES
- ---- ----------
/s/ JOHN S. SIMKO Director, Chairman of the Board, and
- ------------------------------ Chief Executive Officer
John S. Simko
/s/ G. CHRIS ANDERSEN Director
- ------------------------------
G. Chris Andersen
/s/ DANIEL D. JACKSON Director
- ------------------------------
Daniel D. Jackson
/s/ V. DALE BABBITT Director
- ------------------------------
V. Dale Babbitt
/s/ WILLIAM W. DAVIS Executive Vice President
- ------------------------------ and Chief Financial Officer
William W. Davis
/s/ ROBERT B. SMITH, JR. Director
- ------------------------------
Robert B. Smith, Jr.
/s/ OREN G. SHAFFER Director
- ------------------------------
Oren G. Shaffer
/s/ GEORGE M. ELVIN Director
- ------------------------------
George M. Elvin
<PAGE> 28
Sunshine Mining and Refining Company
Consolidated Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
<PAGE> 29
Report of Independent Auditors
The Board of Directors and Stockholders
Sunshine Mining and Refining Company
We have audited the accompanying consolidated balance sheets of Sunshine Mining
and Refining Company (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sunshine Mining and Refining Company at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG L.L.P.
Dallas, Texas
February 21, 1997
F-1
<PAGE> 30
Sunshine Mining and Refining Company
Consolidated Balance Sheets
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash investments $ 16,317 $ 12,837
Silver bullion (Note 2) 7,989 8,976
Accounts receivable 2,624 1,583
Inventories (Note 2) 2,523 1,477
Other current assets 1,108 1,605
--------- ---------
Total current assets 30,561 26,478
Property, plant, and equipment, at cost (Note 3) 141,409 140,886
Less accumulated depreciation, depletion, and amortization (72,124) (69,967)
--------- ---------
69,285 70,919
Investments and other assets 5,640 3,737
--------- ---------
Total assets $ 105,486 $ 101,134
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 987 $ 687
Accrued expenses (Note 4) 4,015 2,241
--------- ---------
Total current liabilities 5,002 2,928
Long term debt (Note 5) 31,515 1,519
Accrued pension and other postretirement benefits (Note 8) 6,074 6,387
Other long-term liabilities and deferred credits (Note 6) 5,032 5,218
Commitments and contingencies (Notes 2, 3, 6, and 9) - -
Stockholders' equity (Notes 5 and 7):
Cumulative redeemable preferred stock - aggregate
redemption value: 1995 - $128,203 - 82,268
Common stock - par value: $0.01
Authorized shares - 400,000
Issued shares - 259,652 - 1996; 196,760 - 1995 2,597 1,968
Paid-in capital 704,343 623,337
Deficit (647,832) (622,454)
--------- ---------
59,108 85,119
Less treasury stock: 1996 - 4,671; 1995 - 3,664 shares, at cost (1,245) (37)
--------- ---------
57,863 85,082
--------- ---------
Total liabilities and stockholders' equity $ 105,486 $ 101,134
========= =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 31
Sunshine Mining and Refining Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-----------------------------------------
(In Thousands, except per share amounts)
<S> <C> <C> <C>
Operating revenues (Note 10) $ 15,315 $ 15,623 $ 17,732
Mark to market gain (loss) (1,101) 911 (320)
------------ --------- ---------
14,214 16,534 17,412
Costs and expenses:
Cost of revenues 18,041 17,633 18,530
Depreciation, depletion, and amortization (Note 3) 4,325 3,612 4,167
Exploration 10,240 6,048 1,888
Selling, general, and administrative expense 5,452 5,912 5,679
Curtailment gain on postretirement benefits other
than pension (Note 8) - - (6,936)
------------ --------- ---------
38,058 33,205 23,328
------------ --------- ---------
Operating loss (23,844) (16,671) (5,916)
Other income (expense):
Interest income 1,313 1,336 1,134
Interest and debt expense (3,313) (813) (1,222)
Other, net 957 665 1,081
------------ --------- ---------
(1,043) 1,188 993
------------ --------- ---------
Net loss (24,887) (15,483) (4,923)
Gain on retirement and exchange of preferred stock
(Note 7) 40,124 - -
Preferred dividend requirements (Note 7) (2,622) (10,089) (10,460)
------------ --------- ---------
Income (loss) applicable to common shares $ 12,615 $ (25,572) $ (15,383)
============ ========= =========
Income (loss) per common share $ 0.06 $ (0.13) $ (0.08)
============ ========= =========
Weighted average common shares outstanding 222,584 193,044 185,634
============ ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 32
Sunshine Mining and Refining Company
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
CUMULATIVE REDEEMABLE
PREFERRED STOCK COMMON STOCK
------------------------------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 7,166 $78,774 172,223 $1,722 $ 585,338
Issuance of common stock upon sale of units
(Note 7) - - 20,200 202 29,561
Issuance of common stock upon exercise of stock
options and warrants - - 84 1 141
Issuance of common stock upon redemption of
8% Silver Indexed Bonds (Note 5) - - 3,824 39 7,532
Issuance of common stock for interest on 8% Silver
Indexed Bonds - - 221 2 447
Issuance of common stock upon conversion of
Convertible Subordinated Reset Debentures - - 94 1 162
Other net - - 13 - -
Net loss - - - - -
Amortization of difference between carrying amount and
redemption value of preferred stock - 1,933 - - -
----- ------- ------- ------ ---------
Balance at December 31, 1994 7,166 80,707 196,659 1,967 623,181
Net loss - - - - -
Amortization of difference between carrying amount
and redemption value of preferred stock - 1,561 - - -
Issuance of common stock upon exercise of stock
options and warrants - - 101 1 156
Balance at December 31, 1995 7,166 82,268 196,760 1,968 623,337
----- ------- ------- ------ ---------
Net loss
Amortization of difference between carrying amount
and redemption value of preferred stock 490
Reversion of Old Silver Index Bond shares (Note 5)
Preferred Stock exchange (7,166) (82,758) 62,847 628 80,790
Issuance of Warrants 209
Other, net 45 1 7
----- ------- ------- ------ ---------
Balance at December 31, 1996 - $ - 259,652 $2,597 $ 704,343
===== ======= ======= ====== =========
<CAPTION>
TREASURY STOCK
------------------------------
DEFICIT SHARES AMOUNT TOTAL
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $(598,554) 3,664 $ (37) $ 67,243
Issuance of common stock upon sale of units
(Note 7) - - - 29,763
Issuance of common stock upon exercise of stock
options and warrants - - - 142
Issuance of common stock upon redemption of
8% Silver Indexed Bonds (Note 5) - - - 7,571
Issuance of common stock for interest on 8% Silver
Indexed Bonds - - - 449
Issuance of common stock upon conversion of
Convertible Subordinated Reset Debentures - - - 163
Other net - - - -
Net loss (4,923) - - (4,923)
Amortization of difference between carrying amount and
redemption value of preferred stock (1,933) - - -
--------- ------- -------- ----------
Balance at December 31, 1994 (605,410) 3,664 (37) 100,408
Net loss (15,483) - - (15,483)
Amortization of difference between carrying amount
and redemption value of preferred stock (1,561) - - -
Issuance of common stock upon exercise of stock
options and warrants - - - 157
--------- ------- -------- ---------
Balance at December 31, 1995 (622,454) 3,664 (37) 85,082
Net loss (24,888) - - (24,888)
Amortization of difference between carrying amount
and redemption value of preferred stock (490) - - -
Reversion of Old Silver Index Bond shares (Note 5) 1,007 (1,208) (1,208)
Preferred Stock exchange - (1,340)
Issuance of Warrants - - - 209
Other, net - - - 8
Balance at December 31, 1996 $(647,832) 4,671 $ (1,245) $ 57,863
========= ===== ======== =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 33
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (24,887) $(15,483) $ (4,923)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion, and amortization 4,325 3,612 4,167
Exploration costs charged to operations 10,240 6,048 1,888
Amortization of debt issuance costs 677
Curtailment gain on postretirement benefits other
than pension (Note 8) - - (6,936)
Realized and unrealized gains on
marketable equity securities (60) (574) -
Issuances of common stock:
Interest on 8% Silver Indexed Bonds
and other (Note 5) - - 449
Net (increase) decrease in:
Silver bullion 987 (568) 465
Accounts receivable (1,041) (1,167) (109)
Inventories (1,046) 1,674 513
Other assets (835) (310) (142)
Net increase (decrease) in:
Accounts payable and accrued expenses 1,505 445 (1,661)
Accrued pension and other postretirement
benefits (313) (424) (601)
Other liabilities and deferred credits (1,486) (218) 369
--------- ------- -------
Net cash used in operating activities (11,934) (6,965) (6,521)
--------- ------- -------
INVESTING ACTIVITIES
Additions to property, plant, and equipment and
exploration costs (12,930) (9,170) (2,113)
Other, principally sale of marketable equity securities
and investments 1,670 2,235 (175)
--------- ------- -------
Net cash used in investing activities (11,260) (6,935) (2,288)
--------- ------- -------
</TABLE>
F-5
<PAGE> 34
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of long term debt, net of
issuance costs (Note 5) $ 27,537 $ - $ -
Costs associated with conversion of Preferred stock
into common stock (864) - -
Proceeds from issuance of common stock and warrants
upon sale of units, net (Note 7) - - 29,763
Proceeds from issuance of common stock upon exercise of
stock options and warrants 1 157 142
Principal repayments and retirements of long-term debt - - (305)
Decrease in restricted cash - - 1,486
---------- ----------- ---------
Net cash provided by financing activities 26,674 157 31,086
Increase (decrease) in cash and cash investments 3,480 (13,744) 22,277
Cash and cash equivalent at beginning of year 12,837 26,581 4,304
---------- ----------- ---------
Cash and cash equivalent at end of year $ 16,317 $ 12,837 $ 26,581
========== =========== =========
Supplemental cash flow information:
Interest paid-in cash $ 2,283 $ 143 $ 329
========== ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 35
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION
Sunshine Mining and Refining Company (Sunshine or the Company) is a holding
company whose principal subsidiary is Sunshine Precious Metals, Inc. (SPMI).
SPMI mines, refines, and markets silver and certain by-product metals to
commercial customers. The consolidated financial statements include the
accounts of Sunshine and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assessments
that affect the reported amounts of assets and liabilities and 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 these estimates.
Certain previously reported amounts have been reclassified to conform to the
1996 presentation.
CASH AND CASH INVESTMENTS
Cash and cash investments include certificates of deposit and other highly
liquid investments with maturities of three months or less when purchased.
INVENTORIES AND SILVER BULLION
Precious metals inventories and silver bullion are stated at estimated net
realizable prices. Materials and supplies are carried at the lower of cost
(principally average cost) or market.
CONCENTRATION OF CREDIT RISK
The Company currently markets its products to commercial customers in the
United States. Accounts receivable terms are generally 30 days. The Company
does not require collateral. Management periodically performs reviews as to the
creditworthiness of customers. The Company has not sustained any significant
credit losses on sales of its products.
F-7
<PAGE> 36
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SILVER FINANCIAL INSTRUMENTS
The Company sells covered call options on silver bullion held for investment.
The strike price of these agreements exceeds current market prices at the time
they are entered into. Option premiums received are deferred. If the applicable
market price exceeds the strike price and option premium, the differential is
accrued and recognized as a reduction of revenues. Any remaining deferred
option premiums are recognized as a component of revenues at the end of the
option period.
The fair values of the sold call options are not included in the financial
statements.
REVENUE RECOGNITION
Sales of refined metals and concentrates are recognized as revenue at the time
of shipment to the customer. Adjustments to the carrying value of inventories
held for sale or investment are included in revenues.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation on buildings,
leasehold improvements, and equipment is provided by straight-line or
declining-balance methods at rates based on the estimated lives of the
respective assets. The principal lives range from 12 to 30 years for buildings
and from 3 to 10 years for equipment (see Note 3).
Depletion of precious metals mineral interests is computed using the
unit-of-production method based on estimated ore reserves. Mine exploration
costs are charged to expense as incurred. Costs of major mine improvements,
including interest, are capitalized and amortized in relation to the production
of estimated ore reserves.
F-8
<PAGE> 37
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes,
whereby, a deferred tax asset or liability is recognized for estimated future
tax effects attributable to temporary differences and carryforwards. The
measurement of deferred income tax assets is adjusted by a valuation allowance,
if necessary, to recognize a future tax benefit only to the extent, based on
available evidence, it is more likely than not it will be realized. The effect
on deferred taxes of a change in income tax rates is recognized in the period
that includes the enactment date.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are either
expensed or capitalized depending on the nature of the expenditure.
Expenditures that relate to an existing condition caused by past operations,
and which do not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the costs can be reasonably estimated.
Generally, the timing of these accruals will coincide with completion of a
feasibility study or the Company's commitment to a formal plan of action.
F-9
<PAGE> 38
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is computed by dividing the earnings (loss)
applicable to common stockholders by the weighted average number of common
shares and common share equivalents, represented by options and warrants, if
such common share equivalents have a dilutive effect. Fully diluted earnings
(loss) per common share computations also assume conversion of outstanding
Convertible Subordinated Reset Debentures, the Senior Exchangeable Notes, and
the previously outstanding 8% Silver Indexed Bonds, if such conversion has a
dilutive effect. For the year ended December 31, 1996, Income applicable to
common shares reflects income of approximately $40,000,000 due to the
previously allocated income (dividends) to preferred stockholders' which
because of the retirement and exchange of the preferred stock will not be paid
to the preferred stockholders'.
For the years ended December 31, 1996, 1995, and 1994, neither the common share
equivalents nor the assumed conversions of debt had a material dilutive effect
on the earnings (loss) per share calculations. Accordingly, the earnings (loss)
per share calculations for such periods are based on the weighted average
number of common shares outstanding during each year.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1996, the Company adopted the Financial Accounting
Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121).
Adoption of this statement had no impact on the Company's financial statements
as the Company's methodology for evaluating its mining properties for
impairment is consistent with FAS 121.
The Company continues to account for stock option grants under the provisions
of Accounting Principles Board Opinion No. 25 (APB 25) and adopted the
disclosure provisions of FASB Statement No. 123, "Accounting for Stock Based
Compensation" (FAS 123) in 1996.
F-10
<PAGE> 39
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
2. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-----------------------
(In Thousands)
<S> <C> <C>
Precious metals inventories:
Work in process $ 1,144 $ 512
Finished goods 405 264
Materials and supplies inventories 974 701
--------- -------
$ 2,523 $ 1,477
========= =======
</TABLE>
Beginning in 1991, management of the Company decided to hold as an investment,
a portion of SPMI's silver production, pending the recovery of silver prices.
As a result, the Company held as an investment, $8.0 million and $9.0 million
of silver bullion, in excess of normal operating requirements at December 31,
1996 and 1995, respectively.
As a means of generating current income, the Company sells covered call options
on silver bullion held for investment. Total premiums earned for the sale of
covered calls aggregated $165,000, $442,000, and $347,000 in 1996, 1995, and
1994, respectively. The Company had no sold covered call options outstanding at
December 31, 1996. At December 31, 1995, the Company had sold a covered call
option on 100,000 ounces of the silver bullion held for investment. The option
had a strike price of $6.00 per ounce and expired unexercised on February 27,
1996. The fair value of the sold call option was not significant at December
31, 1995.
F-11
<PAGE> 40
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------
(In Thousands)
<S> <C> <C>
Precious metals mineral interests $ 82,586 $ 84,586
Mine improvements 17,599 17,599
Buildings, leasehold improvements, and equipment 40,164 37,641
Land 1,060 1,060
--------- ---------
141,409 140,886
Less accumulated depreciation, depletion, and
amortization (72,124) (69,967)
--------- ---------
$ 69,285 $ 70,919
========= =========
</TABLE>
The Company's principal mineral interest is the Sunshine Mine located in
Kellogg, Idaho. The Company curtailed operations at the Sunshine Mine in 1991,
reducing production from approximately 1,000 tons of ore per day to
approximately 500 tons of ore per day. As a result of exploration and
development work at the Sunshine Mine in recent years, production increased
such that at December 31, 1996 the mine's production averaged more than 75% of
capacity (750 tons per day). The Company expects to maintain or increase this
production level during 1997.
Effective January 1, 1994, the Company extended the estimated remaining useful
lives of the buildings and equipment of the silver refinery six to ten years
based upon available technology and anticipated severity of service. The effect
of this change in accounting estimate was to decrease depreciation expense and
the net loss for the year ended December 31, 1994, by approximately $1.1
million or $.01 per common share.
F-12
<PAGE> 41
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
3. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
As a result of low through-put resulting from curtailed operations at the
Sunshine Mine, the Company temporarily suspended operation of the silver
refinery in 1995. Operations will be suspended until higher levels of
through-put are achievable either through increased production from the
Sunshine Mine or through the reopening of other mines in the Coeur d'Alene
Mining District.
The Company periodically, and at least annually, evaluates its mining
properties for impairment, based on undiscounted expected future cash flows.
Such estimates are based on assumptions as to future silver prices, mining
costs, and recoverable reserves which management believes are reasonable, based
on historical silver prices and production. The Company currently believes that
the price of silver will increase to its normal historical trading range and
that additional reserves of higher grades than have been mined recently are
present in the Sunshine Mine. Accordingly, the Company does not believe that
its investment in its mining properties, including the Sunshine Mine, has been
impaired at December 31, 1996. However, unless the price of silver increases or
the cost of production per ounce is reduced from its present level, the Company
will not be able to recover its investment in the Sunshine Mine.
4. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------------
(In Thousands)
<S> <C> <C>
Compensation, vacation, and severance $ 1,171 $ 935
Interest 727 63
Taxes, other than income taxes 43 41
Environmental remediation (Note 9) 800 800
Insurance premiums 395 323
Other 879 79
------- -------
$ 4,015 $ 2,241
======= =======
</TABLE>
F-13
<PAGE> 42
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
5. LONG-TERM DEBT
The 9% Convertible Subordinated Reset Debentures due July 15, 2008 (the
Debentures) are convertible at any time prior to maturity or redemption into
shares of common stock of the Company (Common Stock) at a conversion price of
$1.66 per share, subject to adjustment.
The Debentures are redeemable, at the option of the Company, in whole or in
part, at redemption prices declining from 101% in 1997 to 100% in 1998,
together with accrued and unpaid interest. The Debentures are unsecured and
subordinated in right of payment to senior indebtedness (as defined).
The indenture governing the Debentures contains certain covenants restricting
the ability of the Company to declare or pay cash dividends and make certain
distributions on its capital stock. Pursuant to these covenants, the Company is
prohibited from paying cash dividends on shares of its common stock.
The carrying value of the Debentures ($1.5 million) approximates their fair
value.
F-14
<PAGE> 43
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
In December 1994, 3.8 million shares of the Company's common stock were issued
to redeem the remaining $7.6 million principal amount of 8% Silver Indexed
Bonds. No gain or loss was recognized in 1994 as a result of the call and
redemption of these bonds since the total amount of the loss was recognized as
an extraordinary charge in 1993 when the Company's Board of Directors
authorized and began the redemption. Interest expense for 1994 includes
interest on the outstanding bonds at their stated rate of 8% through the date
of redemption. If the loss had not been recorded until the bonds were actually
redeemed, the loss before extraordinary items and the net loss for the year
ended December 31, 1994, would have increased approximately $180,000 and $5.5
million ($0.03 per common share), respectively.
The Company, through SPMI, in March, 1996 issued $30 million aggregate
principal amount of Senior Exchangeable Notes due 2000 (the "Eurobonds"), which
are all outstanding as of December 31, 1996.
The Eurobonds bear interest at 8% per annum and mature March 21, 2000. The
Eurobonds are exchangeable into a specified number of shares of Common Stock of
the Company (the Shares) at an exchange price of $1.4375 per share (the
Exchange Price), subject to reset and adjustment in certain events. The
Eurobonds may be exchanged at the option of the holder at any time prior to
maturity, unless previously redeemed. At any time after March 21, 1997 and
prior to maturity, SPMI may force the exchange of the Eurobonds, in whole or in
part, subject to certain restrictions.
F-15
<PAGE> 44
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
If the average of the average high and low sales prices per Share reported in
the NYSE's composite transactions (the Current Market Price) for the stock
exchange business days starting January 14, 1997 and ending May 21, 1997 (the
Reset Exchange Price) is less than $1.4375, the Exchange Price will be adjusted
to the greater of the Reset Exchange Price or $1.00.
SPMI may redeem the Eurobonds at any time at the principal amount if United
States withholding taxes are imposed on payments in respect of the Eurobonds.
The Eurobonds will be guaranteed by Sunshine (and any successors thereof) and
the guarantee will rank senior to all of its unsecured and subordinated
obligations.
In the event that during the period commencing on May 1, 1996 and ending on May
1, 1999 there is not any period consisting of forty-five consecutive stock
exchange business days during which on each such stock exchange business day
the Current Market Price of the Shares is equal to or greater than 133 percent
of the Exchange Price in effect for the Shares on each such stock exchange
business day, the Company shall, no later than five business days after the
anniversary date at its option, either:
(i) pay each Eurobond holder a one time additional payment on the
Eurobonds equal to 22.5 percent (the Additional Amount) of the
principal amount of the Eurobonds held by such Eurobond holder; or
(i) Issue to such Eurobond holder Shares which have an average Current
Market Price per share for the previous ten stock exchange days
preceding the anniversary date equal to the Additional Amount.
The fair value of the Eurobonds approximates carrying value. Debt issuance
costs are being amortized over the life of the Eurobonds. Unamortized debt
issuance costs of $2.5 million are included in the Investments and other assets
in the accompanying December 31, 1996 consolidated balance sheet.
F-16
<PAGE> 45
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
6. INCOME TAXES
Revenue Canada has examined the tax returns of a former subsidiary of the
Company for various prior years and has proposed certain adjustments for
additional taxes. The proposed adjustments are being contested by the Company;
therefore, no payments have been made for the proposed additional taxes. Based
on an analysis of the proposed adjustments, the Company has accrued its
estimate of additional income taxes, plus interest at December 31, 1996.
Management believes that such provision is adequate to cover the additional
income taxes that may ultimately result from the resolution of these matters.
The Company has incurred losses during each of the three years in the period
ended December 31, 1996, and accordingly, provisions for income taxes were not
required.
The computation of the net deferred tax asset (liability) at December 31 is as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Property, plant, and equipment $ (18,660) $ (19,225)
Deferred tax assets:
Accrued pension and other postretirement benefits 2,126 2,235
Net operating loss carryforward 96,250 87,500
-------- ---------
79,716 89,735
Less valuation allowance (79,716) (70,510)
-------- ---------
$ - $ -
======== =========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $275 million. The loss
carryforwards expire principally in the years 1997 through 2011.
F-17
<PAGE> 46
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY
The Company has authorized 20.0 million shares of preferred stock, of which 7.2
million shares, designated as the $11.94 (Stated Value) Cumulative Redeemable
Preferred Stock (Preferred Stock), were issued and outstanding at December 31,
1995.
Effective May 22, 1996, Common and Preferred stockholders of Sunshine approved
the merger (the "Merger") of Sunshine with and into its wholly-owned
subsidiary, Sunshine Merger Company, pursuant to which Sunshine Merger Company
was the surviving entity and was renamed Sunshine Mining and Refining Company,
resulting in the retirement of all of Sunshine's outstanding Preferred Stock in
exchange for approximately 63 million shares of Common Stock and 7.6 million
Warrants to purchase one share of Common Stock at $1.38. As a result, the
Company recognized a $40 million gain applicable to Common Shares representing
the excess of the aggregate redemption value of the Preferred Stock
(approximately $130 million including cumulative dividends in arrears of $44.8
million) over the sum of the value of securities issued and related transaction
costs. Had the conversion occurred on January 1, 1996, earnings per share for
the year ending December 31, 1996 would have been $0.05.
The Preferred Stock accrued dividends at an annual rate of $1.19 per share,
payable quarterly. The Company did not make any dividend payments subsequent
to 1990, nor any mandatory redemption payments either in cash or in shares of
its common stock. As the Company had the unconditional right to redeem the
Preferred Stock for shares of its common stock, pursuant to the terms of the
Preferred Stock agreement, and the Company intended to make dividend and
redemption payments, when paid, through the issuance of shares of its common
stock, the Preferred Stock was included as a component of stockholders' equity
in the accompanying December 31, 1995 consolidated balance sheet.
The difference between the carrying amount and the stated value of the
Preferred Stock was being accrued ratably over the period the Preferred Stock
was expected to be outstanding under the provisions of the mandatory redemption
requirements. Accordingly, $0.5 million, $1.6 million, and $1.9 million has
been charged to the deficit for the years ended December 31, 1996, 1995, and
1994, respectively, and added to the carrying amount of the Preferred Stock.
F-18
<PAGE> 47
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
In February 1994, the Company distributed to holders of its common stock,
transferable rights to purchase units, each unit consisting of two shares of
the Company's common stock and one warrant to purchase one share of common
stock. Stockholders received one right for each 17 shares of common stock
held. Pursuant to the offering, the Company issued 20.2 million shares of
common stock and 10.1 million warrants and received net proceeds of
approximately $29.8 million. The initial exercise price of the warrants is
$2.12 per share. The exercise price and number of shares purchasable upon
exercise of the warrants are subject to antidilution adjustments. The warrants
expire on March 9, 1999 and may be redeemed at the option of the Company, in
whole or in part, at any time on or after March 9, 1996, at a redemption price
of $0.50 per warrant.
The Company has three stock option plans under which options may be granted to
key members of management. The stock option plans, as amended, cover a total of
13.0 million shares of the Company's common stock, with 7.9 million options
being available for grant at December 31, 1996. The option price may not be
less than the market price of the common stock on the date granted. Payment of
the exercise price may be made in cash or by delivery of shares of the
Company's common stock, having a market value equal to the exercise price.
At the Company's 1996 Annual Meeting, shareholders approved the 1995 Employee
Nonqualified Stock Option Plan of Sunshine Mining and Refining Company (the
1995 Plan). In December 1995, the Company's Board of Directors had approved
the 1995 Plan, subject to shareholder approval, and awarded 3,160,000 options
to key employees and directors. The 1995 Plan provides for the granting from
time to time of options to purchase shares of Common Stock to key employees or
potential key employees of the Company and, on December 7 each year, automatic
grants of 25,000 options to each non-employee director. The total number of
shares of Common Stock which may be purchased pursuant to options granted under
the 1995 Plan may not exceed 10,000,000 shares. When the 1995 Plan was approved
by shareholders, 750,000 options granted in 1995 under the 1987 Employee
Nonqualified Plan (the 1987 Plan) with an exercise price of $1.50 were
cancelled. The grants under the 1995 Plan were granted with an exercise price
of $1.50, which exceeded the fair market value of a share of Common Stock on
that date.
F-19
<PAGE> 48
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Under the 1995 Plan and 1987 Plan, vesting for options granted to employees is
determined by the directors when granted. Options granted under the 1993
Incentive Stock Option Plan vest one year following date of grant. All options
granted expire 10 years following date of grant. The exercise price for options
granted shall not be less than the fair market value of Common Stock on the
date of grant.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively; risk-free interest rates of 5.47%
and 6.02%, and 5.82% and 6.51%; dividend yields of 0%; volatility factors of
the expected market price of the Company's common stock of .366 and .422; and a
weighted-average expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-20
<PAGE> 49
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information) for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Pro forma net income (loss) applicable to
common shares $11,682 $(26,005)
Pro forma earnings (loss) per share $ 0.05 $ (0.13)
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year
2,445 $ 1.58 1,340 $ 1.67 881 $ 1.70
Granted 3,390 1.47 1,262 1.97 605 1.92
Exercised - - (97) 1.54 (70) 1.61
Forfeited (863) 1.51 (60) 1.51 (76) 1.64
----- -------- ----- ----------- ----- ----------
Outstanding,
end of year 4,972 $ 1.52 2,445 $ 1.58 1,340 $ 1.67
===== ======== ===== =========== ===== ==========
Exercisable at end of
year 4,892 $ 1.52 2,396 $ 1.58 724 $ 1.69
Weighted-average fair
value of options
granted during the
year
$ 0.28 $ 0.52
</TABLE>
F-21
<PAGE> 50
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.875 to $2.875. The weighted-average remaining contractual life of those
options is approximately nine years.
8. EMPLOYEE BENEFIT PLANS
The pension plan for hourly employees covered by a collective bargaining
agreement (the Negotiated Plan) is a trusteed defined benefit plan. The
benefits under the plan are based on years of service. The Negotiated Plan
also includes provisions that would apply in the event of the permanent
shutdown of the Sunshine Mine for present employees who were also covered by a
predecessor plan terminated in 1986. The Company's trusteed defined benefit
pension plan for employees not covered by a collective bargaining agreement was
amended to freeze all participant's benefits as of December 31, 1993.
Net periodic pension costs relating to continuing operations for the Company's
defined benefit plans consist of the following for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 214 $ 182 $ 294
Interest cost 334 286 343
Actual return on plan assets (427) (545) 162
Net amortization and deferrals 274 388 (230)
--------- ----- -----
Net periodic pension cost $ 395 $ 311 $ 569
</TABLE> ========= ===== =====
F-22
<PAGE> 51
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the Company's trusteed
defined benefit plans and the related amounts included in other long-term
liabilities and deferred credits at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------
(In Thousands)
<S> <C> <C>
Plan assets at fair value $ 3,710 $ 2,794
Actuarial present value of projected benefit obligation:
Vested 4,780 4,715
Nonvested 181 170
------- -------
Projected benefit obligation 4,961 4,885
------- -------
Plan assets less than projected benefit obligation (1,251) (2,091)
Unrecognized prior service cost 792 924
Unrecognized net (gain) loss (62) 401
Unrecognized transition net asset (114) (142)
Additional minimum liability (270) (730)
------- -------
Accrued pension liability recognized in the consolidated balance sheets $ (905) $(1,638)
======= =======
</TABLE>
The following significant assumptions were used in computing pension costs for
the Company's trusteed defined benefit plans for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Discount rate 7.00% 8.25% 8.25%
Rate increase in compensation 0% 0% 0%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
The Company's funding policy, with respect to trusteed defined benefit plans,
is to make contributions annually equal to, or in excess of, the minimum
funding requirements of the Employee Retirement Income Security Act of 1974.
Trusteed assets of the plans consist of pooled fixed income securities, pooled
equity securities, and cash or cash equivalents.
F-23
<PAGE> 52
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company also has a defined contribution plan for employees not covered by a
collective bargaining agreement. The Company's Board of Directors will
determine annually if a contribution will be made, and if so, what percentage
will be contributed. Company contributions charged to operations during 1996,
1995 and 1994 were $183,000, $199,000 and $164,000, respectively.
In addition, the Company also sponsors a plan to provide retirement benefits
under the provision of Section 401(k) of the Internal Revenue Code (the 401(k)
Plan) for all employees not covered by a collective bargaining agreement who
have completed a specified term of service. Company contributions may range
from 0% to 100% of employee contributions, up to a maximum 6% of eligible
employee compensation, as defined. Employees may elect to contribute up to 10%
of their eligible compensation on a pretax basis. Benefits under the 401(k)
Plan are limited to the assets of the 401(k) Plan. Company contributions
charged to operations during 1996, 1995, and 1994 were $84,000, $72,000, and
$64,000, respectively.
As a result of the termination of postretirement medical and dental benefits
for the Company's existing hourly work force and certain retired hourly
employees and the elimination of such benefits for salaried employees, the
Company recognized net curtailment gains aggregating $6.9 million in 1994.
Postretirement medical and dental benefits are currently provided only to
certain employees who retired before 1987. The Company's policy is to fund the
cost of these plans as claims are incurred.
F-24
<PAGE> 53
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 4,450 $ 4,835
Fully eligible active participants 71 70
Other active plan participants 89 84
-------- --------
4,610 4,989
Unrecognized net gain (loss) 559 (240)
-------- --------
Accrued postretirement benefit cost $ 5,169 $ 4,749
======== ========
</TABLE>
Net periodic postretirement benefit cost for these plans includes the following
components for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 7 $ 6 $ 115
Interest cost 340 427 608
------- ------ ------
Net period cost $ 347 $ 433 $ 723
======= ====== ======
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost of
covered medical and dental benefits is 7.75% for 1997 (8.25% for 1996) and is
assumed to decrease gradually to 5% for 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, changing the assumed health care
cost trend rates by one percentage point each year would change the accumulated
postretirement benefit obligation as of December 31, 1996, by $257,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1996 by $19,500. The weighted-average discount
rate used in determining the accumulated postretirement benefit obligation was
7.5% at December 31, 1996 and 7.0% at December 31, 1995.
F-25
<PAGE> 54
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
Interest costs on the projected benefit obligations and the actual returns on
plan assets of the postretirement benefit plans are included in interest
expense and other income, respectively, in the accompanying consolidated
statements of operations.
9. COMMITMENTS AND CONTINGENCIES
In December 1989, the United States Environmental Protection Agency (EPA)
notified SPMI that it is a "Potentially Responsible Party" (PRP) at the Bunker
Hill Superfund Site in Kellogg, Idaho. During 1990 and 1991, the Company and
other PRPs without admitting liability, funded soil removal and remediation
programs at the site. The Company's share of the cost of these programs totaled
approximately $239,000.
Without admitting liability, the Company and several PRPs have agreed to do
remediation work in the residential and certain commercial areas encompassed by
the Bunker Hill Superfund Site pursuant to an EPA and State of Idaho approved
work plan. In exchange, the EPA and the State of Idaho released the settling
PRPs from all liability for cleanup of the Bunker Hill Smelter Complex, reduced
the EPAs claim for reimbursement of past costs from $17 million to $1 million,
plus a percentage of proceeds received by the PRPs from insurance companies, if
any, and agreed that the work orders from 1990 through 1993 were deemed
satisfied and discharged. The remediation to be undertaken by the Company and
the PRPs is expected to take approximately seven years.
On November 17, 1994, the United States District Court for the District of
Idaho entered a Consent Decree containing the terms of this agreement. At
December 31, 1996, the Company has accrued $1.1 million representing
management's estimate of the remaining liability for its share (12.4%) of the
remediation costs at the Bunker Hill Superfund Site. The liability for
remediation costs under the Consent Decree is, however, joint and several.
Thus, if any other settling party or parties does not comply with the Consent
Decree, the exposure for the Company and SPMI could increase. Management does
not believe that the ultimate liability that may result from this matter will
have a material adverse effect on the Company's consolidated financial position
or results of operations.
F-26
<PAGE> 55
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In November 1988, the EPA notified SPMI that it is a PRP at the Spokane
Junkyard site near Spokane, Washington. The Company does not believe it will be
required to pay any cleanup costs at the Spokane Junkyard site. No records of
SPMI have been discovered by it or the EPA showing that SPMI ever transmitted
any material to the site.
The Company has entered into joint venture agreements on various properties
which allow the Company to earn interests in such properties in exchange for
specified cash commitments for exploration and development of the properties.
The Company can terminate these agreements at any time.
The Company is subject to certain other legal proceedings and claims that arise
in the conduct of its business. Although it is not possible to predict the
outcome of such matters, in the opinion of management, the ultimate outcomes of
these matters will not have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations.
10. OPERATIONS
The Company's principal operating property is the Sunshine Mine, located near
Kellogg, Idaho. The Sunshine Mine accounted for all of the Company's production
revenues during 1996 and 85% of proven and probable reserves at December 31,
1996. The Company is also engaged in exploration in Argentina and Peru, as well
as other parts of the United States.
In 1996, one customer accounted for sales of concentrate aggregating
approximately $13.8 million. In 1995, two customers accounted for sales of
concentrate and refined silver aggregating approximately $12.9 million. In
1994, two customers accounted for sales of refined silver aggregating
approximately $12.5 million. Management believes that the loss of these
purchasers would not have a material impact on the Company's consolidated
financial condition or consolidated results of operations.
F-27
<PAGE> 56
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
11. PRECIOUS METALS RESERVES (UNAUDITED)
The table below presents data on proved and probable ore reserves, production
and average prices for each of the years in the five-year period ended December
31, 1996 (in thousands, except average prices):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUNSHINE MINE
Reserves at December 31:
Ounces of silver 36,241 30,810 27,908 29,961 29,461
Production:
Tons of ore 121 101 107 100 105
Ounces of silver 2,578 1,731 2,079 2,298 2,540
REVENUE - VIRGINIUS MINE
Reserves at December 31:
Ounces of silver 6,208 5,098 5,098 - -
AVERAGE PRICES:
Ounce of silver $5.11 $5.20 $5.29 $4.34 $3.95
</TABLE>
The ore reserve estimates presented in the table are estimates of proven and
probable reserves by the Company's geologic personnel. No assurance can be
given that the indicated quantity of in situ silver will be realized. Reserve
estimates are expressions of judgment based largely on data from diamond drill
holes and underground openings, such as drifts or raises, which expose the
mineralization on one, two or three sides, sampling and similar examinations.
Reserve estimates may change as ore bodies are mined and additional data is
derived.
F-28
<PAGE> 57
Sunshine Mining and Refining Company
Notes to Financial Statements (continued)
11. PRECIOUS METALS RESERVES (UNAUDITED) (CONTINUED)
The ore reserves and production information relate to mines in operation or
development. In June 1991, the Company curtailed its mining operations at the
Sunshine Mine, reducing production from approximately 1,000 tons per day to
approximately 500 tons of ore per day. Production increased to more than 75%
of capacity (750 tons per day) by the end of 1996.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
-----------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Operating revenues $ 3,797 $ 2,951 $ 3,678 $ 3,787
Operating loss (4,564) (6,007) (6,506) (6,767)
Net loss (4,621) (6,543) (6,991) (6,732)
Income (loss) applicable to common shares (7,092) 33,581 (6,991) (6,732)
Income (loss) per common share $ (.04) $ .15 $ (.03) $ (.03)
1995:
Operating revenues $ 4,564 $ 3,466 $ 5,149 $ 3,355
Operating loss (3,898) (4,940) (3,219) (4,614)
Loss applicable to common shares (6,184) (7,138) (5,400) (6,850)
Loss per common share $ (.03) $ (.04) $ (.03) $ (.04)
</TABLE>
Income applicable to common shares for the three months ended June 30, 1996
includes a gain of $40 million representing the excess of the aggregate
redemption value of the Preferred stock over the sum of the value of securities
issued and related transaction costs.
F-29
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -------
<S> <C>
2.1 Form of Agreement and Plan of Merger to be entered into by and among
Sunshine and Sunshine Merger Company, Exhibit 2.1 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876 and incorporated herein by reference.
3.1 Certificate of Incorporation of Sunshine to the Company's Registration
Statement on Form S-4, Registration No. 22-98876 and
incorporated herein by reference.
3.2 Bylaws of Sunshine filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-4, Registration No. 33--98876 and
incorporated herein by reference.
4.1 Warrant Agreement dated as of February 1, 1996, between Sunshine
Merger Company and American Stock Transfer & Trust Company, as
Warrant Agent, filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876
and incorporated herein by reference.
4.2 Warrant Agreement, dated as of February 3, 1994, between Sunshine and
American Stock Transfer & Trust Company, as Warrant Agent,
filed as Exhibit 4.3 to Sunshine's Registration Statement on
Form S-1 (Registration No. 33-73608), as amended and
incorporated herein by reference.
4.3 Form of Supplemental Warrant Agreement dated as of February 1, 1996
between Sunshine Merger Company and American Stock Transfer &
Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4 (Registration No.
33-98876) and incorporated herein by reference.
4.4 Warrant Certificate, filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876
and incorporated herein by reference.
4.5 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's
Registration Statement on Form S-1 (Registration No.
33-73608), as amended and incorporated herein by reference.
4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of
Sunshine, filed as Exhibit 4.2 to Sunshine's Registration
Statement on Form S-1 (Registration No. 33-63446) as amended,
and incorporated herein by reference.
4.7 Form of Indenture dated as of July 15, 1988, between Sunshine
and MTrust Corp., National Association, with respect to
Sunshine's Convertible Subordinated Debentures due July 15,
2008, filed as Exhibit 4.25 to Sunshine's Registration
Statement on Form S-3 (Registration No. 33-21159) and
incorporated herein by reference.
4.8 First Supplemental Indenture, dated as of August 8, 1988, Second
Supplemental Indenture dated as of November 10, 1988, and Third
Supplemental Indenture, dated as of April 10, 1991, by and
between the Company and Ameritrust Texas, N.A., the successor
to MTrust Corp., National Association relating to the issuance
of the Debentures, filed as Exhibit 4.3 to Sunshine's Annual
Report on Form 10-K for the fiscal year ended December 31,
1990, and incorporated herein by reference.
</TABLE>
<PAGE> 59
<TABLE>
<S> <C>
4.9 Form of Fourth Supplemental Indenture, by and between the Company and
Texas Commerce Bank National Association, as successor to
Ameritrust Texas National Association formerly known as MTrust
Corp., National Association, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876, and incorporated herein by reference.
-10.01 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as
Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986, and incorporated herein
by reference.
-10.3 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of
Sunshine, filed as Exhibit 10.8 to Sunshine's Registration
Statement on Form S-1 (Registration No. 33-63446), as amended
and incorporated herein by reference.
-10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of
Sunshine, filed as Exhibit 10.1 to Sunshine's Quarterly Report
on Form 10-Q for the period ended June 30, 1994, and
incorporated herein by reference.
-10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18
to Sunshine's Registration Statement on Form S-1 (Registration
No. 33-63446), as amended and incorporated herein by
reference.
*-10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine.
-10.6 Form of Executive Employment Agreement entered into as of January 1,
1994, between Sunshine and John S. Simko, filed as Exhibit
10.8 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated
herein by reference.
-10.7 Form of Executive Employment Agreement entered into as of January 1,
1994, between Sunshine and William W. Davis, filed as Exhibit
10.9 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated
herein by reference.
-10.8 Form of Executive Employment Agreement entered into as of January 1,
1994, between Sunshine and Harry F. Cougher, filed as Exhibit
No. 10.10 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, and incorporated herein
by reference.
10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius
Mines Corporation, a Colorado corporation, as lessor, and
Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's
Quarterly Report on Form 10-Q for the period ended March 31,
1994, and incorporated herein by reference.
10.10 Agreement dated July 1, 1995 by and between Consolidated Silver
Corporation and Sunshine Precious Metals, Inc., as purchaser,
for the purchase of a certain mining property, filed as
Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for
the period ended June 30, 1995, and incorporated herein by
reference.
22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, and incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 60
<TABLE>
<S> <C>
*24.1 Power of attorney of the officers and directors of the Company,
included on the signature page hereof.
*27.1 Financial Data Schedules
</TABLE>
- ----------
* Filed herewith
- - Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 10.5
1995
EMPLOYEE NONQUALIFIED STOCK OPTION PLAN OF
SUNSHINE MINING & REFINING COMPANY
1. PURPOSE.
This 1995 Employee Nonqualified Stock Option Plan (the "Plan") is
intended as an employment incentive; to encourage stock ownership by key
employees or individuals who may become key employees of Sunshine Mining &
Refining Company (the "Corporation") and its Subsidiaries in order to increase
their proprietary interest in the Corporation's success and to encourage stock
ownership by Directors who are not employees by providing such Directors with
an incentive to serve the Corporation by an annual grant of options. Options
granted under the Plan are not intended to qualify as "Qualified Stock Options"
under the Internal Revenue Code of 1986, as amended.
2. ELIGIBILITY.
The individuals who shall be eligible to participate in the Plan shall
be key or potential key employees of the Corporation or of its Subsidiaries.
Such key or potential key employees shall be (or expect to become) personnel of
the Corporation or of any Subsidiary who have or will have responsibility for
the management, direction and financial success of the Corporation. More than
one option may be granted from time to time to any employee.
In addition, Directors of the Corporation who are not employees of it
or any Subsidiary shall be eligible to participate in the Plan. For all
purposes of this Plan, any Director who is not also a common law employee and
is granted an option under this Plan shall be considered an "employee" until
the effective date of such Director's resignation or removal from the
Corporation's Board of Directors (including removal as a result of death or
disability); the Employment Date of such a Director shall be the date of such
Director's election to the Board of Directors.
On December 7 of each year of the term of the Plan, each Director who
is an employee solely by virtue of the Plan and not otherwise a common law
employee ("Outside Director") shall automatically, and without further action
of the Committee or the Board of Directors, be granted an option for 25,000
shares of Common Stock. Such options shall be the only options granted to any
Outside Director hereunder, unless and until such Outside Director becomes a
common law employee.
The holders of Options shall not be, or have any of the rights or
privileges of, a shareholder of the Corporation in respect of any shares
purchasable upon the exercise of any part of an option unless and until
certificates representing such shares shall have been issued by the Corporation
to such holders.
3. STOCK.
Stock subject to options and other provisions of this Plan shall be
shares of authorized and unissued or re-acquired $0.01 par value Common Stock
of the Corporation ("Common Stock"). Subject to adjustment in accordance with
the provisions of Section 10 hereof, the total number of shares of Common Stock
of the Corporation which may be purchased pursuant to options granted under the
Plan shall not exceed in the aggregate 10,000,000 shares.
In the event that any outstanding option under the Plan expires or is
terminated for any reason prior to the end of the period during which options
may be granted hereunder, the shares of Common Stock allocable to the
unexercised portion of such option may again be subjected to an option under
the Plan.
-1-
<PAGE> 2
4. TERMS AND CONDITIONS OF OPTIONS.
Stock options granted pursuant to the Plan shall be evidenced by
agreements in such form as the Compensation Committee of the Corporation (the
"Committee"), shall, from time to time, approve, which agreements shall comply
with and be subject to the following terms and conditions:
a. Option Price:
The option price shall not be less than the fair market value,
as defined in Section 21 hereof, of the shares of Common Stock of the
Corporation.
b. Number of Shares:
The option shall state the total number of shares (subject to
adjustment as provided herein) to which it pertains.
c. Term of Options:
Each option granted under the Plan shall be for a term not in
excess of 10 years from the date the option is granted.
d. Payment for Shares:
Payment for shares of Common Stock purchased shall be made in
such manner as the Committee shall determine, but in any event may be
made in cash or by the optionee's delivery to the Corporation of
shares of Common Stock which have a fair market value, as defined in
Section 21 hereof, equal to the option price, or any combination of
cash and shares of Common Stock having an aggregate fair market value
equal to the option price.
e. Date of Exercise:
The Committee shall have the discretion to determine when an
option granted hereunder may be exercised.
5. OTHER PROVISIONS:
Agreements or documents concerning grants of options under the Plan
may contain such other provisions as the Committee, in its discretion, deems
advisable. The Committee may grant options to individuals which are
conditioned upon such individuals' becoming employees of the Corporation and
remaining employees of the Corporation for a certain period.
6. ASSIGNABILITY:
No option shall be assignable or transferable except by will or by the
laws of descent and distribution. During the lifetime of the optionee, an
option shall be exercisable only by him.
7. EXERCISE UPON DEATH, RETIREMENT, AND ON TERMINATION OF EMPLOYMENT.
No option granted under the Plan may be exercised at any time after
its term.
a. In the event of death of an optionee while an employee of the
Corporation, all unexercised options shall accelerate and be
exercisable by the personal representative of such optionee within the
remaining term of the option.
-2-
<PAGE> 3
b. In the event of the retirement or total disability of an
optionee while an employee, all unexercised stock options shall
accelerate and be exercisable by the optionee within the remaining
term of the option.
"Retirement" means:
(i) For optionees who are employees, their normal
retirement date under a Corporation plan or if no plan exists,
as the same may be determined by the committee; and
(ii) For optionees who are outside directors, the date
they cease to be a director.
The "total disability" of an optionee shall be deemed to mean
total disability as defined pursuant to any disability plan or
disability policy of the Corporation; if no such plan or policy is in
effect, total disability shall be deemed to occur whenever an optionee
is rendered permanently unable to perform his duties for the
Corporation on a full-time basis, as a result of personal injury,
disabilities or illness.
c. On the optionee's termination of employment with the
Corporation for any reason other than death, retirement or disability
as set forth in sub-sections 7a and b hereinabove, all unexercised
stock options granted to such optionee shall terminate and expire.
Provided, however, that prior to termination of employment, the
optionee may exercise the unexercised portions of his stock options to
the extent that such options are, as of such date of exercise,
otherwise eligible to be exercised in accordance with the provisions
of this Plan.
d. Employment by the Corporation shall be deemed to include
employment by a Subsidiary. The Committee shall have the authority to
determine whether or not an optionee has terminated his employment
with the Corporation.
8. ADMINISTRATION:
Unless otherwise provided for as set forth in Section 8 hereof, the
Plan shall be administered by the Committee, all of whom are "disinterested
administrators" as the term is defined under the Securities Exchange Act of
1934, and the rules promulgated thereunder.
The Committee is authorized, in its discretion from time to time to
grant options under the Plan, to establish such rules and regulations as it
deems necessary for the proper administration of the Plan, and to make such
determinations and interpretations and to take such steps in connection with
the Plan or the options granted thereunder as it deems necessary or advisable.
All such action by the Committee under the Plan or with respect to the options
granted thereunder shall be final and binding on all parties. No director or
Committee member shall be liable for any action taken or determination made in
good faith.
In addition to such other rights of indemnification as they may have
as directors, the Board of Directors and the members of the Committee acting
pursuant to the provisions hereof shall be indemnified by the Corporation
against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal thereof, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Corporation) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding, that such director(s), the Committee or member thereof is
liable for negligence or misconduct in the performance of their or his duties;
provided that within sixty (60) days after the institution of such action, suit
or proceeding, the director(s) or Committee shall, in writing signed by at
least one member, offer the Corporation the opportunity, at its own expense, to
handle and defend the same.
-3-
<PAGE> 4
9. RECAPITALIZATION, MERGER AND CONSOLIDATION.
(a) The existence of this Plan and options granted hereunder shall
not affect in any way the right or power of the Corporation or its
shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the
Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issue of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Common
Stock or the rights thereof, or the dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets
or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) The aggregate number of shares of Common Stock which may be
purchased pursuant to options granted under the Plan, and the
consideration payable per share upon exercise, shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a subdivision or
consolidation of shares or other capital adjustment, or the payment of
a stock dividend or other increase or decrease in such shares,
effected without receipt of consideration by the Corporation;
provided, however, that any fractional shares resulting from any such
adjustment shall be eliminated for the purposes of such adjustment.
(c) Subject to any required action by the shareholders, if the
Corporation shall be the surviving or resulting corporation in any
merger or consolidation, any option granted hereunder shall pertain to
and apply to the securities or rights (including cash, property or
assets) to which a holder of the number of shares of Common Stock
subject to the option would have been entitled.
(d) In the event of any merger or consolidation pursuant to which
the Corporation is not the surviving or resulting corporation, there
shall be substituted for each share of Common Stock subject to the
unexercised portions of such outstanding options, that number of
shares of each class of stock or other securities or that amount of
cash, property or assets of the surviving or consolidated corporation
which were distributed or distributable to the shareholders of the
Corporation in respect of each share of Common Stock held by them,
such outstanding options to be thereafter exercisable or such stock,
securities, cash or property in accordance with their terms.
Notwithstanding the foregoing, however, all such options may be
canceled by the Corporation as of the effective date of any such
reorganization, merger or consolidation or of any dissolution or
liquidation of the Corporation by giving notice to each holder thereof
or his personal representative of its intention to do so and by
permitting the purchase during the thirty (30) day period next
preceding such effective date of all of the shares subject to such
outstanding options.
(e) In the event that either sufficient shares of the
Corporation's Common Stock are purchased, or any lender, exchange or
similar offer is commenced which would, if successful (i) result in
any of the events described in paragraphs (c) and (d) of this Section
9, (ii) materially alter the structure or business of the Corporation,
or (iii) result in a change of control of the Corporation, then,
notwithstanding any other provisions in this Plan to the contrary, all
unmatured installments of options outstanding shall thereupon
automatically be accelerated and exercisable in full. The
determination of the Committee that any of the foregoing conditions
has been set shall be binding and conclusive on all parties.
(10) NON-ADJUSTMENT.
Except as hereinbefore expressly provided, the issue by the
Corporation of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property, or for labor or services
either upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Corporation
convertible into such shares or other securities, shall not effect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to options granted pursuant to this Plan.
-4-
<PAGE> 5
(11) COMPUTATION OF ADJUSTMENT.
Upon the occurrence of each event requiring an adjustment of the
exercise price and/or the number of shares purchasable pursuant to options
granted pursuant to the terms of this Plan, the Corporation shall mail
forthwith to each optionee a copy of its computation of such adjustment, which
shall be conclusive and shall be binding upon each such optionee, except as to
any optionee who contests such computation by written notice to the Corporation
within thirty (30) days after receipt thereof of such optionee.
(12) RECORD DATES, ETC..
In case at any time after date of grant of options hereunder:
(a) the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend
payable otherwise than in cash, or any distribution in respect of the
Common Stock (including cash), pursuant to, without limitation, any
spin-off, split-off or distribution of the Corporation's assets; or
(b) the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to subscribe for or
purchase any shares of stock of any class or to receive any other
rights; or
(c) of any classification, reclassification or other
reorganization of the capital stock of the Corporation, consolidation
or merger of the Corporation with or into another corporation, or
conveyance of all or substantially all of the assets of the
Corporation; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation; and in any such case, the Corporation
shall mail to each optionee, at least thirty (30) days prior thereto,
a notice stating the date or expected date on which a record is to be
taken for the purpose of such dividend, distribution or rights, or the
date on which such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding
up is to take place, as the case may be. Such notice shall also
specify the date or expected date, if any is to be fixed, as of which
holders of Common Stock of record shall be entitled to participate in
said dividend, distribution or rights, or shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such classification, merger, conveyance, dissolution,
liquidation or winding up, as the case may be.
(13) LIQUIDATION, DISSOLUTION.
In case the Corporation shall at any time while any option under this
Plan shall be in force and remain unexpired, sell all or substantially all its
property or dissolve, liquidate or wind up its affairs, each optionee may
thereafter receive upon exercise hereof in lieu of each share of Common Stock
of the Corporation which such optionee would have been entitled to receive, the
same kind and amount of any securities or assets as may be issuable,
distributable or payable upon any such sale, dissolution, liquidation or
winding up with respect to each share of Common Stock of the Corporation. In
the event that the Corporation shall at any time prior to the expiration of any
option make any partial distribution of its assets, if the nature of a partial
liquidation, whether payable in cash or in kind (but excluding the distribution
of a cash dividend payable out of earned surplus and designated as such) then
in such event the exercise prices then in effect with respect to each option,
shall be reduced, on the payment date of such distribution, in proportion to
the percentage reduction in the tangible book value of the shares of the
Corporation's Common Stock (determined in accordance with generally accepted
accounting principles) resulting by reason of such distribution.
-5-
<PAGE> 6
(14) CORPORATION COVENANTS AND PERFORMANCE.
The Corporation will not, by amendment of its Articles of
Incorporation or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act or deed, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Corporation, but will
at all times in good faith assist, insofar as it is able, in the carrying out
of all provisions hereof, and in the taking of all other legally available
action which may be necessary in order to protect the rights of each optionee
against dilution, subject to the terms hereof. Without limiting the generality
of the foregoing, the Corporation agrees that it will not increase the par
value of shares of its Common Stock above the lowest exercise price then in
effect, and that, before taking any action which would cause an adjustment
reducing any such exercise price below the then par value of the shares of
Common Stock, the Corporation will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and nonassessable shares of its Common Stock at
the exercise price as so adjusted.
The Corporation further agrees:
(a) To the extent the exercise price per share of Common Stock
covered by options pursuant to this Plan equals or exceeds par value
per share, all shares issued upon exercise of options granted pursuant
to this Plan and in accordance with the terms hereof, will be, upon
issuance and payment therefor, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof
(other than taxes in respect of any transfer occurring
contemporaneously with such issue).
(b) During the term of the Plan, the Corporation will at all times
have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of all shares under options granted
pursuant to this Plan.
(c) So long as any Common Stock of the Corporation is listed on
the New York Stock Exchange or any other national securities exchange,
the Corporation shall use its best efforts to list on such exchange,
upon official notice of issuance upon exercise of options granted
under the Plan, and to maintain the listing of, all shares of Common
Stock issuable upon the exercise of options granted pursuant to the
Plan; and the Corporation will use its best efforts to so list on the
New York Stock Exchange or any such other national securities
exchange, and to maintain such listing, of any other securities of the
Corporation which may be acquired upon exercise of this option, if so
adjusted or modified pursuant to the terms of Section 9 hereof.
(15) OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS.
Stock options may be granted under the Plan from time to time in
substitution for such options held by employees of a corporation who become or
are about to become key employees of the Corporation or a parent or subsidiary
corporation as the result of a merger or consolidation of the employing
corporation with the Corporation or a parent or subsidiary corporation or the
acquisition by either of the foregoing of stock of the employing corporation as
the result of which it becomes a parent or subsidiary corporation. The terms
and conditions of the substitute options so granted may vary from the terms and
conditions set forth in Section 4 of this Plan to such extent as the Committee
at the time of grant may deem appropriate to conform, in whole or in part, to
the provisions of the options in substitution for which they are granted.
(16) TERM OF GRANTS.
No stock option shall be granted pursuant to the Plan after ten (10)
years from the date of adoption of the Plan, but options theretofore granted
may extend beyond that date.
-6-
<PAGE> 7
(17) AMENDMENTS.
The shareholders of the Corporation or the Committee or the Board of
Directors of the Corporation may at any time, without the consent of the
optionees, alter, amend, revise, suspend, or discontinue the Plan, provided
that such action shall not materially affect options theretofore granted under
the Plan.
(18) APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Common Stock
pursuant to options will be used for general corporate purposes.
(19) NO OBLIGATION TO EXERCISE OPTION.
The granting of an option shall impose no obligation upon any optionee
to exercise such option.
(20) INVESTMENT INTENT.
The Corporation may require that there be presented to and filed with
it by any optionee(s) under the Plan, such evidence as it may deem necessary to
establish that the options granted or the shares of Common Stock to be
purchased or transferred are being acquired for investment and not with a view
to their distribution.
(21) FAIR MARKET VALUE.
For the purposes of this Plan, "fair market value" of the
Corporation's shares of Common Stock shall be (i) the closing price per share
on any stock exchange on which the Common Stock is traded, or (ii) the mean
between the closing or average (as the case may be) bid and asked prices per
share of Common Stock on the over-the-counter market, whichever is applicable,
on the last trading day immediately preceding the grant of the option.
(22) APPROVAL OF SHAREHOLDERS.
The Plan shall be effective December 7, 1995, but subject to its
approval by the shareholders of the Corporation, at their meeting held
subsequent to the effective date of this Plan. In the event shareholder
approval is not obtained, this Plan shall thereupon terminate and be rendered
null and void. No shares of Common Stock shall be issued pursuant to an
option, prior to compliance with requirements under applicable laws and
regulations.
(23) GOVERNMENTAL REGULATIONS.
Notwithstanding any of the provisions hereof, or of any option granted
hereunder, the obligation of the Corporation to sell and deliver shares under
such options shall be subject to all applicable laws, rules and regulations and
to such approvals by any governmental agencies or national securities exchanges
as may be required, and the optionee shall agree that he will not exercise any
option granted hereunder, and that the Corporation will not be obligated to
issue any shares under any such option, if the exercise thereof or if the
issuance of such shares shall constitute a violation by the optionee or the
Corporation of any provision of any law or regulation of any governmental
authority.
-7-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-16342 and 33-18435; Form S-3 Nos. 2-90723, 2-97601, 33-2268,
33-06537, 33-13432, 33-25050, 33-09875, 33-184535, and 33-32244; Form S-4 Nos.
33-22250 and 33-98876; and Form S-1 Nos. 33-09612, 33-63446, and 33-73608) of
Sunshine Mining and Refining Company and in the related Prospectuses of our
report dated February 21, 1997, with respect to the consolidated financial
statements of Sunshine Mining and Refining Company included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
February 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,317
<SECURITIES> 0
<RECEIVABLES> 2,624
<ALLOWANCES> 0
<INVENTORY> 2,523
<CURRENT-ASSETS> 30,561
<PP&E> 141,409
<DEPRECIATION> 72,124
<TOTAL-ASSETS> 105,486
<CURRENT-LIABILITIES> 5,002
<BONDS> 31,515
0
0
<COMMON> 2,597
<OTHER-SE> 55,266
<TOTAL-LIABILITY-AND-EQUITY> 105,486
<SALES> 15,315
<TOTAL-REVENUES> 14,214
<CGS> 18,041
<TOTAL-COSTS> 22,366
<OTHER-EXPENSES> 10,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,313
<INCOME-PRETAX> (24,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,615
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
