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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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
BOISE, IDAHO 83702
(Address of principal (Zip Code)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants, expiring May 22, 2001, 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 March 28, 2000 was $30,358,740. 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 MARCH 28, 2000
----------------------------- ----------------------------
Common Stock, $0.01 par value 40,478,320
DOCUMENTS INCORPORATED BY REFERENCE
Sunshine Mining and Refining Company's Definitive Proxy Statement for its
Annual Meeting currently scheduled to be held May 10, 2000 (Part III).
<PAGE> 3
PART I
1. BUSINESS.
GENERAL
Sunshine Mining and Refining Company ("Sunshine" or the "Company") is
primarily engaged in mining silver. The Company owns the Sunshine Mine located
in the Coeur d'Alene Mining District near Kellogg, Idaho and the Pirquitas Mine
in the Jujuy Province of northwest Argentina. The Sunshine Mine produced 5.8
million and 5.2 million ounces of silver in 1998 and 1999, respectively, and is
forecast to produce approximately 4.5 million ounces of silver in 2000. The
Pirquitas Mine is in the development stage, and the Company is reviewing its
strategic options relative to the property.
Sunshine was originally incorporated in 1918 and is currently incorporated
under the laws of the state of Delaware. The Company maintains its principal
executive offices at 877 West Main Street, Suite 600, Boise, Idaho 83702.
The Sunshine Mine began operations in 1884 and has produced in excess of
350 million ounces of silver since that time. The introduction of new mining
technologies and more aggressive exploration has substantially increased
production in recent years, achieving full production in the fourth quarter of
1997 for the first time since 1990. This has reduced unit costs as fixed costs
have been spread over a larger production figure. Recent production and unit
cost history of the mine is as follows:
<TABLE>
<CAPTION>
Sunshine Mine Production
---------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Ounces production (millions) 5.2 5.8 4.3 2.6 1.7
Net cash cost per ounce $4.36 $4.43 $4.50 $6.12 $6.61
</TABLE>
Sunshine's share of silver reserves at the Sunshine Mine as of December 31,
1999 were estimated to be 1.23 million tons of ore with an average grade of
23.65 ounces of silver per ton (after adjustment for mining dilution),
containing 29.18 million ounces of silver. Metallurgical recoveries at the
Sunshine Mine typically approximate 97% of the contained silver. The proven and
probable reserves at the Sunshine Mine have historically totaled approximately 4
to 7 years of annual production. Over its history, exploration and development
activities have maintained reserves by finding new ore to replace that which was
produced each year. Management believes this will continue for the foreseeable
future, as studies have delineated several areas of favorable geologic
conditions that may host significant deposits. These areas are contiguous to
delineated mineralization, and the ore-bearing structures project into favorable
lithologic units. Further exploration is necessary to establish the existence of
and quantify the additional mineralized material, but management believes it
could exceed 100 million ounces.
The Company acquired the Pirquitas Mine in November 1995, and immediately
began an active exploration and metallurgical testwork program. The Company
commissioned a bankable feasibility study of the property in early 1998, which
estimated that the property contained metal in proven and probable reserves
totaling 129 million ounces of silver, 118 million pounds of tin and 546 million
pounds of zinc. The Company expects future development and exploration work at
the site will expand these reserves.
LIQUIDITY RISK
Given current difficult silver market conditions and the Company's
diminished financial resources, the Company has determined that it would not
likely be able to access the capital required to service its debt or develop
Pirquitas.
The $26.5 million of 8% Senior Exchangeable Notes (the "Eurobonds") are due
April 24, 2000 and the Company does not have the funds to retire this
indebtedness. Although the Company is currently in negotiations to restructure
its debt
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and obtain additional financing, there is no assurance that such negotiations
will be successful. If such negotiations are unsuccessful, the Company will
become in default on the Eurobonds, which would create a default on the $14.9
million of 10% Senior Exchangeable Notes (the "Notes"). Such events could
require, among other things, the Company to seek further modifications in its
existing debt agreements, seek protection under the bankruptcy laws or cease
some or all operations altogether. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.")
As more than 80% of the Company's operating revenues are derived from the
sale of silver, 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. The Company's strategy is to add sufficient low cost silver production to
be profitable at prices for silver which have prevailed in recent years, while
also positioning the Company to benefit from an expected improvement in silver
prices. Should the Company not succeed in adding such low cost production and
there is no substantial improvement in the silver price, the Company will
continue to report operating losses and negative cash flow.
The accuracy of any forward looking statements and other similar statements
contained herein regarding production, reserves, mineralized materials and cash
costs will depend upon the actual grade, quantity and other qualities of
recoverable reserves and resources, which may differ from current estimates.
Actual results could differ materially from those currently anticipated in such
statements, by reason of factors including without limitation, actual results of
exploration, silver prices, by-product prices, imprecision of reserve estimates,
future economic conditions, regulations, competition, and other circumstances
affecting anticipated revenue and costs. Any forward-looking statement speaks
only as of the date on which such statement is made, and the Company undertakes
no obligation to update any forward-looking statement.
For information regarding Sunshine's business, certain classes of products
or services and sales to certain significant customers, see Notes 1, 2, 12 and
13 of Notes to Consolidated Financial Statements included elsewhere herein.
SILVER SUPPLY, DEMAND, AND PRICES
According to studies published by the Silver Institute in its World Silver
Survey (prepared by Gold Fields Mineral Services Ltd.) and by CPM Group
(precious metal industry consultants), since 1990 demand for silver has
significantly exceeded silver production. The gap between new supply and demand
has been bridged by the availability of a large surplus of silver inventories
generated in the aftermath of the major increase in silver prices in 1979-1983.
The availability of these inventories has kept silver prices at depressed
levels. According to these same studies, silver inventories worldwide have been
greatly diminished.
In the first quarter of 1998, silver prices increased to their highest
levels in over 10 years in response to concerns about supply availability, as
Berkshire Hathaway Incorporated announced an investment in 129.7 million ounces
of silver bullion. However, silver prices declined over the last three quarters
of 1998, averaging $4.92 per ounce in the fourth quarter of 1998 and $5.22 for
1999. According to the above cited industry reports, physical availability of
silver should continue to tighten as available inventories are consumed.
OPERATIONS
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. The silver refinery has a capacity to recover
up to 8 million ounces of silver and 4 million pounds of copper annually.
The Company's wholly owned subsidiary, Sunshine Precious Metals, Inc.
("SPMI"), owns substantially all of the mining claims comprising the Sunshine
Mine. Electrical power is supplied by a public utility from two sources. The
facilities are in good and operable condition and access to the property is by
paved roads maintained by the county.
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The Sunshine Mine is a primary silver-producing underground mine which
began operations in 1884 and has produced over 350 million ounces of silver
since that time. The underground workings consist of multiple levels developed
off the Jewell shaft, the main production shaft. It extends from the surface to
a depth of over 4,000 feet and is complemented by other interior shafts which
develop levels as deep as 5600 feet. The mine covers over 10 square miles at the
surface, and contains more than 100 miles of underground workings. Mining
operations are currently focused in the western area of the mine, in a vein
called the West Chance, at depths from above the 2700-foot level (2700 feet
below the collar of the Jewell shaft) to below the 3700-foot level.
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 Company's 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. Sunshine suspended operations at the silver refinery in
1995 pending higher levels of available feed, and began shipping its silver
concentrate to a smelter at that time. Until a decision is made to reopen the
refinery, Sunshine will continue to sell its silver-copper concentrates to a
nearby smelter for processing. The Company's sales to the third party smelters
are under long-term contracts, generally for a period of at least one year,
cancelable by either party after one year upon thirty days notice. The Company
employs no sales force. Management believes that suspension of refinery
operations has not had a material impact on Sunshine's results of operations or
cash flows.
Ore and metals produced at the Sunshine Mine during 1999, 1998 and 1997,
respectively, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Tons of Ore ................ 217,601 247,866 183,404
Metals Recovered:
Ounces of Silver ...... 5,210,843 5,806,468 4,253,315
Pounds of Copper ...... 1,235,368 1,273,318 884,124
Pounds of Antimony .... 991,079 1,078,460 785,897
Pounds of Lead ........ 6,966,645 12,001,080 9,203,907
</TABLE>
These metals were recovered from ore containing an average of 24.75, 24.17
and 23.95 ounces of silver per ton, in 1999, 1998 and 1997, respectively.
Metallurgical recoveries were approximately 97% of the contained silver, 97% of
the contained copper and 92.5% of the contained lead.
The Sunshine Mine's proven and probable ore reserves were estimated by the
Company's technical personnel at January 1, 2000, to be 1.27 million tons of ore
containing 30.0 million ounces of silver and 11.5 million pounds of copper. The
weighted average ore grades, adjusted for mining dilution, but not adjusted for
metallurgical recoveries, are 23.65 ounces per ton silver and 0.455 percent
copper. Lead reserves are calculated only for the West Chance vein, and it
contains 13.5 million pounds of lead at a grade of 2.61 percent.
During the three years ended December 31, 1999, the Sunshine Mine accounted
for all of the Company's silver production, and approximately 18% of the
Company's silver reserves at December 31, 1999. See Note 14 of Notes to
Consolidated Financial Statements included elsewhere herein.
The West Chance Vein, which has been the focus of the Company's production
in recent years, will be largely depleted by the end of 2000. Exploration
activity to replace reserves is focused on vein systems in the eastern area of
the mine, the 101 Vein, the Yankee Girl Vein and the Chester Vein. The 1995
acquisition of the ConSil property, on the eastern flank of the workings of the
Sunshine Mine, was done to facilitate evaluation and development of these and
other veins. A shaft on the ConSil property extends from the surface to a depth
of 5400 feet and connects to the Sunshine's eastern workings on the 3100 level,
and serves as the Sunshine Mine's secondary escapeway. Access from this shaft to
these exploration areas will be important in their future exploration and
development.
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The proven and probable reserves at the Sunshine Mine have historically
totaled approximately 4 to 7 years of annual production. Over the mine's
history, exploration and development activity have maintained reserves by
finding new ore to replace that which was produced each year. Management
believes this will continue for the foreseeable future as studies have
determined that these veins may continue into areas with favorable geologic
conditions that may host significant deposits. These areas are contiguous to
delineated mineralization, and the ore-bearing structures project into favorable
lithologic units. Further exploration is necessary to identify and quantify the
additional mineralized material, but the magnitude of the contained silver could
exceed 100 million ounces.
The hourly employees at the Sunshine Mine are represented by the United
Steelworkers of America (the "USWA") (which represents the majority of the
employees) and the International Brotherhood of Electrical Workers Union (the
"IBEW") (collectively, 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 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 interest 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.
Pursuant to its terms, the contract with the USWA was extended on March 1, 2000
until May 1, 2001. The contract with the IBEW will expire on May 1, 2000, and
the Company expects to enter into negotiations regarding a new contract shortly.
No assurance can be given as to the likely result of those negotiations.
ARGENTINA OPERATIONS
The Company commenced operations in Argentina in 1994, and the Pirquitas
property was acquired by the Company in November 1995. 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 220 miles southeast of Pirquitas. The
Chilean and Bolivian borders lie about 31 miles west and 37 miles to the north,
respectively.
The Company feels that recent political and economic changes in Argentina,
designed to incentivize foreign investment, particularly in the mining industry,
have made the country an extremely attractive target for mining investment. The
country has privatized many state-owned enterprises, and has implemented reforms
to many previously state-controlled activities, including mineral exploration
and development. A program of fiscal stability has brought down inflation.
Guarantees to foreign investors include parity of treatment with Argentine
nationals, a freely-exchangeable currency, tax-stabilization programs and
complete freedom to repatriate profits.
The Company's most advanced project in Argentina is Pirquitas. The Company
has assigned proven and probable reserves to Pirquitas totaling 129.6 million
ounces of silver, along with 59 thousand tons of tin and 273 thousand tons of
zinc. The Company has invested a total of approximately $20 million in the
acquisition and evaluation of the property. The Company is reviewing its
strategic alternatives relative to development of the property or disposition of
some portion of the property to finance its development.
The Company has a number of other projects in Argentina, which it plans to
further evaluate in the next year. Two of these properties, Capricho and Aguas
Calientes, are of particular interest due to high grade gold, silver or base
metal values found in surface reconnaissance. The Company hopes to fund a
limited drilling program on these two properties in 2000.
MEXICAN OPERATIONS
The Company has recently acquired its first Mexican property, Juanicipio.
The property is located adjacent to the Fresnillo Mine, one of the most prolific
silver mines in the world.
OTHER EXPLORATION
The Amador Canyon property, near Austin, Nevada, is in an area of historic
silver production. Based on analysis of surface outcrops and geophysics, the
Company believes the property may contain a strata-bound silver deposit amenable
to bulk mining methods.
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The Revenue-Virginius Mine is an underground silver mine located eight
miles southwest of the town of Ouray in southwestern Colorado. It also contains
significant gold and base metals. The mine has been largely inactive since a
mill fire in 1912 resulted in the closure of the operation. Most production
records on the property are missing; however, records which remain indicate
production between 1895 and 1906 totaling 14.5 million ounces of silver, 123
thousand ounces of gold and 63 million pounds of lead from one series of veins.
Sunshine controls the property under a mining lease calling for minimal property
payments and work commitments. The property currently contains reserves
estimated to be approximately 6.2 million ounces of silver.
Several veins carry the mineralized values, and many of the veins have been
traced for long distances onto other properties. Therefore, the Company believes
it reasonable to assume that a significant mineralized inventory in addition to
the above reserves can be inferred. Based on initial pre-feasibility work, the
Company believes the property could produce 2.5-3.0 million ounces of silver
annually at a net cash cost of approximately $4.00 per ounce, following a
capital investment of $12-15 million. Repair work to access the underground
veins for exploration and development was completed in 1998. A drilling program
designed to increase the proven and probable reserves to a level which would
justify the capital commitment is pending.
MARKETING
The Company's primary product at the Sunshine Mine can be either refined
silver which is sold to industrial customers or precious metals dealers, or
silver-copper and lead-silver 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 average prices
for silver, copper and lead during a quotational period shortly after shipment.
The Company bases its decisions on whether to refine its silver-copper
concentrates internally or sell them to a smelter based on internal production
costs versus available smelter contract terms. All lead-silver concentrates are
sold to smelters, with prices for contained lead and silver based on a
quotational period shortly after shipment. The Company's refined silver,
antimony and copper products are generally marketed directly to metals dealers
or industrial customers. See Note 13 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, most new mine production of silver at the present time is from 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.
Competition among mining companies is primarily for mineral rich properties
which can be developed and produced economically; the technical expertise to
find, develop and produce such properties; labor to operate the properties; and
capital for the purpose of funding such operations. As the principal product
sold is a commodity with its price dictated by world markets upon which any
individual operator has very little influence, the competitive factors cited
above give the competitive advantage to the low cost operator.
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
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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 2000. See Note 11 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, 1999, Sunshine and its subsidiaries, including SPMI,
employed approximately 310 persons; 275 of whom are located at the Kellogg
facilities. SEE "ITEM 1. BUSINESS. THE SUNSHINE MINE AND REFINERY COMPLEX."
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GLOSSARY OF CERTAIN MINING TERMS
ASSAY - To analyze the proportions of metals in ore, to test an ore or mineral
for composition, purity, weight, or other properties of commercial interest. The
word "assay" also refers to the test or analysis itself.
CONCENTRATE - a product containing the valuable metal and from which most of the
waste material in the ore has been eliminated.
DILUTION - An estimate of the amount of waste or low-grade mineralized rock
which will be mined with the ore as part of normal mining practices in
extracting an ore body.
DRIFT - An underground horizontal passage which provides access to a mineralized
area.
DRILL INTERCEPT - The distance from the initial contact by a drill hole of a
mineralized zone or vein to the drill hole's exit from that zone or vein.
EXPLORATION - Work involved in searching for ore, usually by drilling or driving
a drift.
FAULT - A fracture or a zone of fractures along which there has been
displacement of the sides relative to one another parallel to the fracture.
FOOTWALL - The underlying side of a fault, ore body, or mine working; esp. the
wall rock beneath an inclined vein or fault.
GRADE - The metal content of ore and drill samples. With precious metals, grade
is expressed as troy ounces per ton of rock.
MILL - A processing plant that produces a concentrate of the valuable minerals
or metals contained in an ore. The concentrate must then be treated in some
other type of plant, such as a smelter, to effect recovery of the pure metal.
MINERALIZED MATERIAL/INVENTORY - A mineralized body which has been delineated by
appropriately spaced drilling and/or underground sampling to support reasonable
estimate of tonnage and average grade of metal(s). Such a deposit does not
qualify as a reserve until a comprehensive evaluation based upon unit cost,
grade, recoveries and other material factors conclude legal and economic
feasibility.
ORE BODY - An economically recoverable deposit of minerals, the extent and grade
of which has been defined through exploration and development work.
ORE RESERVE - That part of a mineral deposit which at the time of the reserve
determination could be economically and legally extracted or produced.
PROBABLE RESERVES - Resources for which tonnage and grade are computed primarily
from specific measurements, samples or production data, and partly from
projection for a reasonable distance on geologic evidence. The sites available
for inspection, measurement and sampling are too widely or otherwise
inappropriately spaced to permit the mineral bodies to be outlined completely,
or the grade established throughout.
PROVEN RESERVES - Resources for which tonnage is computed from dimensions
revealed in workings and drill holes and for which the grade is computed from
the results of detailed sampling. The sites for inspection, sampling and
measurement are spaced so closely and the geologic character is so well defined
that size, shape and mineral content are all established. The computed tonnage
and grade are judged to be accurate, within limits which are stated, and no such
limit is judged to be different from the computed tonnage or grade by more than
20%.
STOPE - An opening or workplace in an underground mine excavated for the purpose
of extracting ore.
TON - A short ton of 2,000 pounds, dry weight basis.
TONNE - Metric ton, equal to 2,204.62 pounds.
TROY OUNCE - Unit of weight measurement used for all precious metals. The
familiar 16-ounce avoirdupois pound equals 14.583 troy ounces.
VEIN - An epigenetic mineral filling of a fault or other fracture in a host
rock, in tabular or sheetlike form, often with associated replacement of the
host rock; a mineral deposit of this form and origin.
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2. 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.
3. 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 (the "Bunker Hill
Superfund Site") and the other site is located in Spokane, Washington.
At the Bunker Hill Superfund 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, 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 continue for another three to four years. The Company currently has accrued
$1.9 million for its (including SPMI's) share (12.4%) of the estimated remaining
remediation costs at December 31, 1999.
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 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 30, 1998, the United States District Court for the District of
Idaho granted the Company's Motion for Partial Summary Judgment limiting the
United State's potential natural resource damage claims in the Coeur d'Alene
River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site.
The effect of the ruling substantially limits the government's claim for
damages from a 1500 square mile site to the 21 square mile Bunker Hill Superfund
Site, within which the Company has, pursuant to a Consent Decree with other
defendants, been engaged in clean-up operations.
The United States has been granted an interlocutory appeal of the order to
the Ninth Circuit Court of Appeals.
8
<PAGE> 11
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, financial condition, cash flows 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. To date, the EPA has
not filed any action against SPMI or the Company in relation to the Spokane
Junkyard Site.
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, 1999.
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 March 28,
2000, Sunshine had approximately 30,000 holders of record of its Common Stock.
On March 28, 2000, the closing price of the Common Stock price as reported on
the New York Stock Exchange, Inc. ("NYSE") Composite Transactions was $0.75.
Presently, the Company does not intend to pay cash dividends. Also,
pursuant to restrictions imposed by the Company's outstanding debt securities at
December 31, 1999, the Company could not pay cash dividends on shares of its
Common Stock.
The following table sets forth the range of high and low sales prices for
the Common Stock as reported on the NYSE 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>
1999 QUARTERS 1998 QUARTERS
-------------------------------------------------
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter 6 3 1/2 13 1/2 7
- --------------------------------------------------------------------------
2nd Quarter 4 1/4 3 11 7
- --------------------------------------------------------------------------
3rd Quarter 3 1/4 2 8 5
- --------------------------------------------------------------------------
4th Quarter 2 1/2 1 1/4 8 4
- --------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
CONTINUED NYSE LISTING/REVERSE STOCK SPLIT
On July 17, 1999, the Company announced a 1 for 8 reverse stock split of
the Company's common stock, effective August 6, 1999. The reverse split was
previously approved by shareholders at the Annual Meeting in June 1997. The
reverse split was undertaken in order to increase the Company's stock price to
over $1 to comply with new New York Stock Exchange (the "Exchange") continued
listing requirements.
By letter dated March 22, 2000, the Exchange notified the Company that it
was below the Exchange's continued listing standard of total market
capitalization of not less than $50 million. The letter also noted that the
Company's stock price had traded down recently and was in jeopardy of falling
below the continued listing criteria of a minimum share price of $1 over a 30
trading-day period.
The Exchange also stated that the Company must present a business plan by
May 6, 2000 that demonstrates compliance with continued listing standards within
18 months. The plan is subject to Exchange approval.
WARRANTS
The Company's common stock purchase warrants, which expire May 22, 2001,
are traded on the NASDAQ OTC Bulletin Board (symbol "SILVZ") with high and low
sales prices as reported by NASDAQ during 1999 of $0.25 and $0.016. There are
approximately 7.3 million warrants outstanding. Eight warrants may be exercised
to acquire one share of common stock at $11.04 per share.
10
<PAGE> 13
6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical financial information of
Sunshine as of the dates and the periods indicated in the table below. All
amounts are in thousands, except price and production statistics and per share
amounts.
<TABLE>
<CAPTION>
==========================================================================
YEAR ENDED DECEMBER 31, (1)
--------------------------------------------------------------------------
1999 1998(3) 1997 1996(4) 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................... $ 32,332 $ 34,668 $ 24,993 $ 15,315 $ 15,623
Mark to market gains (losses) ........................ 359 (2,588) 1,859 (1,101) 911
----------- ----------- ----------- ----------- -----------
Total revenues ................................... 32,691 32,080 26,852 14,214 16,534
Net loss ............................................. (10,843) (64,845) (19,308) (25,902) (15,483)
Income (loss) applicable to common shares ............ (10,843) (64,845) (19,308) 11,600 (25,572)
Basic and diluted income (loss) per common share ..... (.31) (2.02) (.61) .42 (1.06)
Weighted average common shares ....................... 34,682 32,109 31,892 27,823 24,131
PRICE AND PRODUCTION STATISTICS:
Average silver price received ........................ $ 5.23 $ 5.47 $ 5.02 $ 5.11 $ 5.20
Tons ................................................. 217,601 247,866 183,404 120,910 101,240
Silver grade (ounces per ton) ........................ 23.29 24.17 23.95 22.04 17.66
Silver ounces produced ............................... 5,210,843 5,806,468 4,253,315 2,577,895 1,731,714
Net cash cost per ounce(2) ........................... $ 4.36 $ 4.43 $ 4.50 $ 6.12 $ 6.61
BALANCE SHEET DATA:
Cash and cash investments ............................ $ 628 $ 1,412 $ 15,985 $ 16,317 $ 12,837
Working capital ...................................... (25,679) 9,716 26,959 25,559 23,550
Total assets ......................................... 37,020 39,897 101,601 105,486 101,134
Long-term debt and capital lease obligations ......... 11,720 42,597 42,265 25,780 1,519
Stockholders' equity (deficit):
Preferred Stock .................................. -- -- -- -- 82,268
Other............................................. (18,720) (17,466) (44,496) 63,598 2,814
Book value per common share .......................... (.48) (.54) 1.39 2.00 (1.76)
Common shares outstanding ........................ 38,672 32,426 31,904 31,873 24,137
</TABLE>
- ----------------
(1) All share and per share amounts have been adjusted to reflect the 1 for 8
reverse stock split effective August 6, 1999.
(2) Net 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
non-capital development costs, production and maintenance costs, ad valorem
taxes, insurance, and postemployment benefit costs incurred on site.
(3) During 1998 the Company recorded a $50.4 million impairment of mining
properties expense to write down the value of the Company's investment in
the Sunshine Mine.
(4) 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.
11
<PAGE> 14
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "predicts" and similar
expressions. Such statements address future plans, objectives, expectations and
events or conditions concerning various matters such as mining exploration,
capital expenditures, earnings, litigation, liquidity and capital resources and
accounting matters. Actual results in each case could differ materially from
those currently anticipated in such statements, by reason of factors including
without limitation, actual results of exploration, silver prices, imprecision of
reserve estimates, future economic conditions, regulations, competition and
other circumstances affecting anticipated revenue and costs. Any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement.
Readers are cautioned not to place undue reliance on these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred cash operating losses for the past several years,
as the price of silver has continued at levels too low to cover the Company's
direct production costs, general and administrative costs, interest expense and
exploration expenses. The Company has maintained a large exploration and
development budget relative to its size in the belief that finding new low cost
sources of production was fundamental to improving profitability. As part of
that effort, the Company has invested approximately $33 million over the past
four years to complete a feasibility study at the Pirquitas Mine and improve
operations at the Sunshine Mine.
Due to these investments, the Company has significantly improved operations
at the Sunshine Mine in recent years, and believes Pirquitas, if developed by
the Company, would generate earnings sufficient to make the Company profitable
at silver prices which have prevailed in recent years.
In the face of these improvements, the Company has seen that the level of
investor interest in mining in general and silver mining in particular has
declined significantly in recent years. Due to this unforeseen change in market
attitudes, the current difficult silver market conditions and the Company's
diminished financial resources, the Company was unable to raise the capital it
required to service its existing indebtedness or to provide the equity portion
of the development cost at Pirquitas. As a result, the Company's existing cash
balances and sources of cash are insufficient for the foreseeable future, and
its access to new sources of capital is limited. The Company had a $25.7 million
deficit in working capital at December 31, 1999 including $31.5 million for the
current portion of long term debt.
At a meeting held on March 27, 2000, the holders of its 8% Senior
Exchangeable Notes due 2000 (the "Eurobonds") passed a motion to extend the
maturity of the Eurobonds from March 21, 2000 to April 24, 2000. The meeting was
then adjourned until April 24, 2000. The Company does not have the funds to
retire the $26.5 million of Eurobonds outstanding as of December 31, 1999. Also,
because the $1.0 million interest payment due March 21, 2000 has not been made,
the Eurobonds could be declared to be in default by holders of at least 25% of
the outstanding principal giving such notice to the trustee.
The Company was required to issue, as soon as practicable after March 21,
2000, approximately 1.5 million shares of Common Stock to the holder of its 10%
Senior Convertible Notes (the "Notes") as an additional interest payment.
Pursuant to the terms of the Notes, the additional interest payment was due
because the Eurobonds were not converted into Common Stock nor refinanced with
junior debt prior to March 21, 2000. The Company has only issued 658 thousand of
these shares. At the present time, the Company is in negotiations with the
holders of the Notes with regards to a restructuring and does not expect to
issue any shares in the future for interest until such negotiations are
completed. This could result in the Company being in default on the Notes.
Additionally, if the Eurobonds are not restructured by April 25, 2000, the
Company will be in default on the Notes.
The Company is currently engaged in negotiations with holders of the
Eurobonds and the holders of the Notes with regard to a comprehensive
restructuring of the Company's balance sheet. The Company will also need to
arrange for additional capital to fund its cash requirements. There is no
assurance that these negotiations will be successful. If these
12
<PAGE> 15
negotiations are unsuccessful, the Company may be required to, among other
things, seek further modifications in its existing debt agreements, seek
protection under the bankruptcy laws or cease some or all operations altogether.
Any of these would be expected to have a significant negative impact on the
price of the Company's common stock.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
The Company continues to believe that over the long term, the best way to
add shareholder value will be by finding undeveloped properties with significant
silver, gold and base metal values. Therefore, as funds are available, it will
continue to use a portion of those funds on exploration in new areas. The
Company currently controls four properties in addition to Pirquitas and the
Sunshine Mine which it believes represent excellent opportunities to add
significantly to its mineral inventory. It hopes to begin an initial round of
drilling on some or all of these properties during 2000 if funds become
available.
EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE
Whenever circumstances or events indicate, and at least annually, the
Company 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, recoverable reserves and estimates of future
reserve potential which management believes are reasonable, based on historical
silver prices and production. If the sum of such cash flows is less than the
carrying amount of the asset, the Company would record an impairment loss
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
During the third quarter of 1998, drilling in the West Chance vein
indicated that the size of the vein might be smaller than what was previously
expected. Based on that information, along with low by-product prices and a
decline in silver prices, the Company estimated that future cash flows from the
mine would not be sufficient to recover the $59.4 million carrying amounts of
the mine. The fair value of the mine as determined by the discounted cash flow
method was approximately $9 million and an impairment charge of $50.4 million
was taken at the end of the third quarter.
Future increases in the price of silver and the presence of additional
mineralized material and resources 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.
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 11 of Notes
to Consolidated Financial Statements.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities was $5.8 million in 1999 compared with
$9.5 million in 1998 and $15.1 million in 1997. The $3.7 million improvement in
1999 was primarily due to the $3.8 million decrease in cash operating loss and
changes in other working capital items. The cash operating loss decreased in
1999 compared to 1998 primarily due to a mark to market gain of $359 thousand in
1999 compared to a $2.6 million loss in 1998, a $2.5 million reduction in
exploration costs, a $1.0 million decrease in cash interest expense and a $216
thousand decrease in general and administrative expense. These were partially
offset by a $1.6 decrease in cash operating income at the Sunshine Mine (from
$5.9 million in 1998 to $4.3 million in 1999), a $369 thousand decrease in
interest income and payment of approximately $900 thousand for fees and expenses
incurred in connection with security offerings attempted during 1999.
13
<PAGE> 16
Cash used by investing activities in 1999 was $0.8 million, including $4.2
million of additions to property, plant and equipment ($2.6 million for the
development of Pirquitas, $1.4 million in capital expenditures at the Sunshine
Mine and $200 thousand on other properties). These were offset by $1.9 million
in proceeds from the sale of certain investments and $1.5 million from the sale
of 300 thousand ounces of investment silver bullion. $5.8 million cash was used
by investing activities during 1998, including $8.3 million for the development
of the Pirquitas Mine in Argentina and $1.8 million at the Sunshine Mine,
partially offset by $4.5 million of cash proceeds from the sale of certain
investments, 300 thousand ounces of investment silver bullion, and proceeds from
settlement of certain litigation. In 1997, $2.2 million of proceeds from
investments was partially offset by $2.0 million of additions to property, plant
and equipment resulting in $0.2 million of cash provided by investing
activities.
$5.8 million in cash was provided through the issuance of the 5% Notes in
1999. Cash provided by financing activities in 1998 includes $785 thousand from
the exercise of stock options and warrants. Cash provided by financing
activities was $14.6 million in 1997 resulting from the Company's issuance of
the 10% Notes.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
The Company's net loss decreased $54.0 million in 1999 to $10.8 million
compared to $64.8 million in 1998. The improvement is primarily due to the $50.4
million impairment writedown of the Sunshine Mine in 1998.
Consolidated operating revenues decreased approximately $2.3 million (6.7%)
for 1999 compared to 1998, while mark to market gains on investment bullion
totaled $359 thousand in 1999 compared to a $2.6 million writedown in 1998. The
decrease in operating revenues primarily resulted from a $0.24 decrease in the
average price received per ounce of silver sold (5.5 million ounces of silver at
an average of $5.23 per ounce in 1999 compared to 5.5 million ounces at an
average of $5.47 per ounce in 1998), and a $742 thousand decrease in by-product
revenue. By-product revenue decreased primarily because of a 4.5 million-pound
reduction in lead sales, partially offset by a 125 thousand-pound increase in
copper sold. The reduction in lead sales is due to the fact that mining is now
being conducted in areas of the West Chance that contain less lead.
Cost of revenues decreased $692 thousand (2.4%) from $28.4 million in 1998
to $27.7 million in 1999 primarily due to lower per ounce operating cash cost
which decreased $.07 (1.6%) to $4.36 per ounce of silver. This reduction was
primarily due to a .58 ounce per ton (2.4%) increase in average grades from 1998
to 1999, reduced smelter costs and a reduction in development costs. Silver
production totaled 5.2 million ounces produced from 217,601 tons at 24.75 ounces
per ton in 1999 versus 5.8 million ounces from 247,866 tons at 24.17 ounces per
ton in 1998.
Depreciation, depletion and amortization decreased by approximately $3.6
million as a result of the writedown of the Sunshine Mine in the third quarter
of 1998.
Exploration expense decreased $2.5 million in 1999 compared to 1998
primarily due to a reduction of expenditures for the Sunshine Mine and other
projects in Argentina and the U.S.
Selling, general and administrative costs decreased $216 thousand (4.3%)
due to a variety of cost reductions.
Interest income decreased $370 thousand due to lower average invested cash
balances.
Interest and debt expense increased $1.2 million primarily due to the
amortization of the beneficial conversion feature associated with the 5% Notes
issued in January 1999, and higher amortization of debt discount for the
outstanding Eurobonds.
In 1999, income of $297 thousand in other, net was primarily due to $1.5
million from gains on certain investments sold and recognition of actuarial
gains on pension plans not previously recognized, partially offset by fees and
expenses related to attempting certain debt offerings. Other, net of $2.7
million in 1998 represented a $1.1 million net gain for proceeds received from
settlement of certain litigation and a reduction of the valuation reserves
previously recorded against certain investments.
14
<PAGE> 17
1998 COMPARED TO 1997
The Company's net loss increased $45.5 million to $64.8 million compared to
$19.3 million primarily due to the $50.4 million impairment writedown of the
Sunshine Mine.
Consolidated operating revenues increased approximately $9.7 million
(38.7%) for 1998 compared to 1997 primarily due to an increase in sales volume
and average price received per ounce of silver sold (5.5 million ounces of
silver at an average of $5.47 per ounce in 1998 compared to 4.1 million ounces
of silver at an average of $5.02 in 1997). The increase in sales volumes
primarily resulted from a 1.6 million ounce (36.5%) increase in production in
1998 compared to 1997.
Mark to market writedowns, primarily for silver bullion held for
investment, amounted to $2.6 million in 1998 compared to a $1.9 million gain in
1997. The writedown was due to declines in the per ounce silver price from
$5.945 to $4.988 between December 31, 1997 and December 31, 1998. The 1997 gain
was due to the increase from $4.74 to $5.945 per ounce of silver between
December 31, 1996 and December 31, 1997.
Cost of revenues increased $5.4 million (23.4%) (from $23.0 million in 1997
to $28.4 million in 1998) primarily due to the 36.5 % increase in production in
1998, partially offset by lower net unit operating costs. Net unit operating
costs decreased $.07 (1.8%) to $4.43 per ounce of silver primarily due to the
36.5% increase in silver production (5.8 million ounces produced from 247,866
tons at 24.17 ounces per ton in 1998 versus 4.25 million ounces from 183,404
tons at 23.95 ounces per ton in 1997). Reduction in operating costs per ounce of
silver was actually $0.57 but was partially offset by $0.50 reduction in
by-product credits due to lower lead, copper and antimony prices during 1998.
Depreciation, depletion and amortization decreased by approximately $873
thousand as a result of the impairment writedown of the Sunshine Mine in the
third quarter which resulted in reduced depreciation, depletion and amortization
in the fourth quarter, partially offset by increased production in the 1998
period.
The 1998 period reflects a $50.4 million charge as an impairment writedown
of the Sunshine Mine. See "LIQUIDITY AND CAPITAL RESOURCES--EVALUATION OF
RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE."
Exploration expense decreased $2.8 million in 1998 compared to 1997
primarily due to the fact that work carried out at the Pirquitas Mine in
Argentina is largely being capitalized as the property is now considered to be
in the development stage. As a result, approximately $8.3 million of development
expenditures for Pirquitas during 1998 were capitalized. This was partially
offset by increased exploration expenditures at the La Joya del Sol gold
property in Argentina, at the Sunshine Mine and other exploration projects.
Interest and debt expense increased $1.4 million due to the debt issued in
November 1997.
Other, net increased $2.65 million due to a $1.1 million net gain for
proceeds received from settlement of certain litigation and the $1.6 million
reduction of the valuation reserves previously recorded against certain
investments as a result of performance of certain investments.
UPDATE ON YEAR 2000 COMPUTER ISSUES
During 1999 we undertook initiatives to ensure that our systems were Year
2000 compliant, as well as contacting major customers and vendors to assess
their status. As of the date of this filing, we have not experienced any
disruption of our operations due to Year 2000 issues. The cost of Year 2000
modifications have not been significant and no additional Year 2000 costs are
anticipated.
15
<PAGE> 18
7a. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES.
COMMODITY PRICE RISK
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 silver prices. As
previously discussed, the price of silver in recent years has been depressed,
averaging approximately $5.00 per ounce for the 12-year period ended in 1999.
Over the prior ten year period the silver price averaged approximately $10 per
ounce.
The Company maintains an investment inventory of silver bullion which
totaled approximately 729 thousand ounces at December 31, 1999. As a result, the
Company's financial results are affected by changes in the price of silver. When
silver prices decline, the decline in value of the investment bullion is
recorded as a mark to market loss on the Company's statement of operations.
Conversely, an increase in silver prices is recorded as a mark to market gain. A
10% decrease ($0.50) in the per ounce price of silver during 2000 would result
in a $365 thousand mark to market loss for the year.
To earn current income on this investment and to mitigate a portion of its
exposure to a decline in silver prices, the Company from time to time will sell
covered calls against its silver bullion inventory. Total premiums earned for
the sale of covered calls aggregated $246,500, $316,250 and $116,500 in 1999,
1998 and 1997, respectively. At December 31, 1999, the Company had covered call
options outstanding for 300,000 ounces of silver with strike prices ranging from
$5.25 to $5.35 and expiration dates of January 27, 2000 (100,000 ounces),
February 25, 2000 (100,000 ounces) and March 28, 2000 (100,000 ounces). The fair
value of the sold calls at December 31, 1999 approximates the premiums received
when they were sold. At December 31, 1998, no covered call options were
outstanding. At December 31, 1997, the Company had covered call options
outstanding for 1.2 million ounces of silver with strike prices ranging from
$5.75 to $7.00 and expiration dates of February 26, 1998 (200,000 ounces), March
27, 1998 (900,000 ounces), and December 27, 1998 (100,000 ounces). The fair
value of the sold call options at December 31, 1997 did not materially exceed
the $202,000 of premiums received when they were sold. The Company's policy is
not to sell any uncovered calls. (See Note 1 of Notes to Consolidated Financial
Statements for information related to accounting policies for covered calls.)
INTEREST RATE RISK
The Company has outstanding debt with fixed interest rates. Therefore,
should market interest rates decline, the Company could make payments in excess
of what would be made under the reduced rates.
The following table presents the principal cash payments and related
weighted-average interest rates by expected maturity date for its debt
obligations.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
<TABLE>
<CAPTION>
Fair
There- Value at
(dollars in millions) 2000 2001 2002 after Total 12/31/99
----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed Rate $32.0 $ 5.0 $ 4.9 $ 1.5 $43.4 $43.4
Avg. Interest Rate 8.6% 8.9% 9.6% 9.0%
</TABLE>
16
<PAGE> 19
FOREIGN CURRENCY RISK
The Company has operations in Argentina and Mexico. Therefore, the Company
could be at risk for fluctuations in the relationship of U.S. dollar to the
Argentine or Mexican peso exchange rates. However, Argentina maintains a 1:1
exchange ratio by limiting the amount of pesos that are issued to the amount of
U.S. dollars held by the Argentine Central Bank. Also, it has been reported that
Argentina is considering replacing the peso with the U.S. dollar. To date, the
Company's activities in Mexico have not been significant. Thus at this time, the
Company does not feel its foreign currency market risk is significant.
At December 31, 1999, no debt was denominated in a foreign currency nor are
there any firm purchase commitments denominated in a foreign currency.
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.
On May 27, 1999, Ernst & Young LLP (E & Y) resigned as auditors of the
Company.
The reports of E & Y on the Company's financial statements for 1998 and
1997 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to audit scope or accounting principles. The reports of
E & Y for 1998 and 1997 were not modified as to uncertainty regarding the
ability of the Company to continue as a going concern.
In connection with the audits of the financial statements for each of the
two fiscal years ended December 31, 1998 and 1997, and in the subsequent interim
periods, there were no disagreements with E & Y on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which if not resolved to the satisfaction of E & Y would have caused
them to make reference to the matter in their report.
On June 11, 1999, Grant Thornton LLP was engaged by the Company's Board of
Directors as the new independent accountant of the Company.
17
<PAGE> 20
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 2000 Annual Meeting of Stockholders currently scheduled to be held on
May 10, 2000 (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.
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
3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-4, Registration
No. 33-98876, which exhibit is incorporated herein by reference.
3.2 Amendment to Certificate of Incorporation of Sunshine filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K dated May
22, 1996 (File No. 001-10012), which exhibit is incorporated
herein by reference.
3.3 Bylaws, filed as Exhibit 3.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, which
exhibit is incorporated herein by reference.
4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-4, Registration
No. 33-98876, which exhibit is incorporated herein by reference.
4.2 Amendment to Certificate of Incorporation of Sunshine, filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
May 22, 1996 (File No. 001-10012), which exhibit is incorporated
herein by reference.
18
<PAGE> 21
4.3 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, which exhibit
is incorporated herein by reference.
4.4 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, which exhibit is
incorporated herein by reference.
4.5 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, which exhibit is incorporated herein by reference.
4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876,
which exhibit is incorporated herein by reference.
4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's
Registration Statement on Form S-1 Registration No. 33-73608, as
amended, which exhibit is incorporated herein by reference.
4.8 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,
which exhibit is incorporated herein by reference.
4.9 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, which exhibit is
incorporated herein by reference.
4.10 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, between the
Company and Ameritrust Texas, N.A., the successor to MTrust
Corp., National Association relating to the issuance of the
Convertible Subordinated Debentures filed as Exhibit 4.3 to
Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, which exhibit is incorporated herein by
reference.
4.11 Form of Fourth Supplemental Indenture, 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, which exhibit is incorporated herein by reference.
4.12 Trust Deed, dated as of March 21, 1996, between Sunshine,
Sunshine Precious Metals, Inc. and Marine Midland Bank and Form
of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration
Statement on Form S-3, Registration No. 333-06537, which exhibits
are incorporated herein by reference.
4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine,
Rauscher, Pierce & Clark and HSBC Investment Banking Limited and
Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to
Sunshine's Registration Statement on Form S-3, Registration No.
333-06537, which exhibits are incorporated herein by reference.
4.14 Specimen form of Warrant to Purchase Common Stock issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.12 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
4.15 Specimen form of Senior Convertible Promissory Note issued on
November 24, 1997 to affiliates of
19
<PAGE> 22
Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's
Registration Statement on Form S-3, Registration No. 333-41641,
which exhibit is incorporated herein by reference.
4.16 Amendment, dated December 11, 1998, to Warrants to Purchase
Common Stock issued on November 24, 1997, filed as Exhibit 4.16
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, which exhibit is incorporated
herein by reference.
4.17 Specimen form of 5% Convertible Promissory Note, due January 28,
2001, filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated January 28, 1999 (File No. 001-10012), which
exhibit is incorporated herein by reference.
4.18 Letter Agreement dated September 22, 1999 by and between Sunshine
Mining and Refining Company, on the one hand, and Westgate
International, L.P. and Elliott Associates, L.P., on the other
hand, filed as Exhibit 4.20 to the Registrant's Registration
Statement on Form S-3 (Registration No. 333-88293), which exhibit
is incorporated herein by reference.
o10.1 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, which exhibit is
incorporated herein by reference.
o10.2 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,
which exhibit is incorporated herein by reference.
o10.3 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, which
exhibit is incorporated herein by reference.
o10.4 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, which exhibit is
incorporated herein by reference.
o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as
Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, which exhibit is
incorporated herein by reference.
o10.6 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, which exhibit is incorporated herein by
reference.
o10.7 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, which exhibit is incorporated herein by
reference.
o10.8 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, which exhibit is incorporated
herein by reference.
10.9 Mining Lease, dated as of March 15, 1994, 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, which exhibit is incorporated herein by
reference.
10.10 Agreement, dated as of 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 10, 1995, which exhibit is incorporated herein
by reference.
20
<PAGE> 23
10.11 Registration Rights Agreement, dated as of November 24, 1997,
between the Company and Stonehill Partners, L.P., GRS Partners,
Aurora Limited Partnership and Stonehill Offshore Partners
Limited filed as Exhibit 10.11 to Sunshine's Registration
Statement on Form S-3, Registration No. 333-41641, which exhibit
is incorporated herein by reference.
10.12 Specimen form of Warrant to Purchase Common Stock issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.12 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
10.13 Amendment, dated December 11, 1998, to Warrants to Purchase
Common Stock issued on November 24, 1997, filed as Exhibit 4.16
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, which exhibit is incorporated
herein by reference.
10.14 Specimen form of Senior Convertible Promissory Note issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.13 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
10.15 Registration Rights Agreement, dated as of January 28, 1999,
between the Company, Westgate International, L.P. and Elliott
Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current
Report on Form 8-K (File No. 001-10012), which exhibit is
incorporated herein by reference.
10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit
4.2 to Sunshine's Current Report on Form 8-K dated January 28,
1999 (File No. 001-10012), which exhibit is incorporated herein
by reference.
10.17 Convertible Note Investment Agreement, dated as of January 27,
1999, between the Company, Westgate International, L.P. and
Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's
Current Report on Form 8-K (File No. 001-10012), which exhibit is
incorporated herein by reference.
10.18 Letter Agreement dated September 22, 1999 by and between Sunshine
Mining and Refining Company, on the one hand, and Westgate
International, L.P. and Elliott Associates, L.P., on the other
hand, filed as Exhibit 4.20 to the Registrant's Registration
Statement on Form S-3 (Registration No. 333-88293), which exhibit
is incorporated herein by reference.
21.1 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, which exhibit is incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Grant Thornton 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
o 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: None
21
<PAGE> 24
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 31st day of March, 2000.
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, 1999, 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.
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 31st day of March, 2000.
<TABLE>
<CAPTION>
NAME CAPACITIES
- ---- ----------
<S> <C>
/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
</TABLE>
22
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C>
3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference.
3.2 Amendment to Certificate of Incorporation of Sunshine filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by
reference.
3.3 Bylaws, filed as Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which exhibit is incorporated herein by reference.
4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference.
4.2 Amendment to Certificate of Incorporation of Sunshine, filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by
reference.
4.3 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, which exhibit is incorporated herein by reference.
4.4 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, which exhibit is incorporated herein by reference.
4.5 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, which exhibit is incorporated herein
by reference.
4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4,
Registration No. 33-98876, which exhibit is incorporated herein by reference.
4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1
Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference.
4.8 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, which exhibit is
incorporated herein by reference.
4.9 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, which
exhibit is incorporated herein by reference.
4.10 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, between the Company
and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the
issuance of the Convertible Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990, which exhibit is incorporated herein by
reference.
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
4.11 Form of Fourth Supplemental Indenture, 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, which exhibit is incorporated herein by reference.
4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine
Midland Bank and Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference.
4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC
Investment Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to
Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are
incorporated herein by reference.
4.14 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of
Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3,
Registration No. 333-41641, which exhibit is incorporated herein by reference.
4.15 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of
Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3,
Registration No. 333-41641, which exhibit is incorporated herein by reference.
4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997,
filed as Exhibit 4.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which exhibit is incorporated herein by reference.
4.17 Specimen form of 5% Convertible Promissory Note, due January 28, 2001, filed as Exhibit 4.2 to the
Registrant's Current Report on Form 8-K, dated January 28, 1999 (File No. 001-10012), which exhibit
is incorporated herein by reference.
4.18 Letter Agreement dated September 22, 1999 by and between Sunshine Mining and Refining Company, on the
one hand, and Westgate International, L.P. and Elliott Associates, L.P., on the other hand, filed as
Exhibit 4.20 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-88293),
which exhibit is incorporated herein by reference.
o10.1 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, which exhibit is incorporated herein
by reference.
o10.2 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, which
exhibit is incorporated herein by reference.
o10.3 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, which exhibit is
incorporated herein by reference.
o10.4 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, which exhibit is incorporated herein by
reference.
o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.5 to Sunshine's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein
by reference.
</TABLE>
<PAGE> 27
<TABLE>
<S> <C>
o10.6 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, which exhibit is incorporated herein by reference.
o10.7 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, which exhibit is incorporated herein by reference.
o10.8 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, which exhibit is incorporated herein by reference.
10.9 Mining Lease, dated as of March 15, 1994, 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, which exhibit is incorporated herein by
reference.
10.10 Agreement, dated as of 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 10, 1995, which exhibit is
incorporated herein by reference.
10.11 Registration Rights Agreement, dated as of November 24, 1997, between the Company and Stonehill
Partners, L.P., GRS Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited
filed as Exhibit 10.11 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641,
which exhibit is incorporated herein by reference.
10.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of
Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3,
Registration No. 333-41641, which exhibit is incorporated herein by reference.
10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997,
filed as Exhibit 4.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which exhibit is incorporated herein by reference.
10.14 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of
Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3,
Registration No. 333-41641, which exhibit is incorporated herein by reference.
10.15 Registration Rights Agreement, dated as of January 28, 1999, between the Company, Westgate
International, L.P. and Elliott Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report on
Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference.
10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit 4.2 to Sunshine's Current Report on
Form 8-K dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by
reference.
10.17 Convertible Note Investment Agreement, dated as of January 27, 1999, between the Company, Westgate
International, L.P. and Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's Current Report
on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference.
10.18 Letter Agreement dated September 22, 1999 by and between Sunshine Mining and Refining Company, on the
one hand, and Westgate International, L.P. and Elliott Associates, L.P., on the other hand, filed as
Exhibit 4.20 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-88293),
which exhibit is incorporated herein by reference.
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
21.1 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, which exhibit is incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Grant Thornton 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
</TABLE>
- --------------------------
* Filed herewith
o Management contract or compensatory plan or arrangement.
<PAGE> 29
Consolidated Financial Statements
Sunshine Mining and Refining Company
Years ended December 31, 1999 and 1998
with Report of Independent Auditors
<PAGE> 30
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Sunshine Mining and Refining Company
We have audited the accompanying consolidated balance sheet of Sunshine Mining
and Refining Company as of December 31, 1999, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunshine Mining
and Refining Company as of December 31, 1999, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements, the Company incurred a net loss of $10,843,000 and used $5,812,000
of cash in operating activities in the year ended December 31, 1999, and, as of
that date, the Company's total liabilities exceeded its total assets by
$18,720,000 and its current liabilities exceeded its current assets by
$25,679,000. Additionally, the $26,518,000 of 8% Senior Exchangeable Notes
outstanding as of December 31, 1999 are due on April 24, 2000, and the Company
does not have a refinancing or debt restructuring agreement, nor does it have
the funds necessary to retire this indebtedness. These factors, among others, as
discussed in Note 2 to the consolidated financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
GRANT THORNTON LLP
Dallas, Texas
February 25, 2000 (except for Notes 2 and 6, as to
which the date is March 27, 2000)
F-1
<PAGE> 31
Report of Independent Auditors
The Board of Directors
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, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1998. 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 auditing standards generally accepted
in the United States. 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, 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Dallas, Texas
February 26, 1999
F-2
<PAGE> 32
Sunshine Mining and Refining Company
Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash investments $ 628 $ 1,412
Silver bullion (Note 3) 4,117 5,203
Accounts receivable 2,677 2,801
Inventories (Note 3) 2,826 4,236
Other current assets 787 1,845
--------- ---------
Total current assets 11,035 15,497
Property, plant, and equipment, at cost (Note 4) 60,720 57,114
Less accumulated depreciation, depletion, and amortization (37,623) (36,700)
--------- ---------
23,097 20,414
Investments and other assets 2,888 3,986
--------- ---------
Total assets $ 37,020 $ 39,897
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,634 $ 1,413
Accrued expenses (Note 5) 3,562 4,368
Current portion, long term debt (Note 6) 31,518 --
--------- ---------
Total current liabilities 36,714 5,781
Long term debt (Note 6) 11,720 42,597
Accrued pension and other postretirement benefits (Note 10) 4,445 5,498
Other long-term liabilities and deferred credits (Note 11) 2,861 3,487
Commitments and contingencies (Notes 2, 3, 11 and 12) -- --
Stockholders' equity (deficit) (Notes 6 and 8):
Common stock, $0.01 par value:
Authorized shares - 75,000
Issued shares - 39,252 in 1999; 32,996 in 1998 393 2,640
Paid-in capital 725,840 714,004
Deficit (743,843) (733,000)
--------- ---------
(17,610) (16,356)
Less treasury stock: 579 in 1999; 570 shares
in 1998, at cost (1,110) (1,110)
--------- ---------
(18,720) (17,466)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 37,020 $ 39,897
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
Sunshine Mining and Refining Company
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating revenues (Note 13) $ 32,332 $ 34,668 $ 24,993
Mark to market gain (loss) 359 (2,588) 1,859
-------- -------- --------
32,691 32,080 26,852
Costs and expenses:
Cost of revenues (27,673) (28,365) (22,989)
Depreciation, depletion, and amortization (1,328) (4,944) (5,817)
Impairment of mining properties (Note 4) -- (50,425) --
Exploration (2,015) (4,512) (7,352)
Selling, general, and administrative
expense (4,800) (5,016) (5,072)
-------- -------- --------
(35,816) (93,262) (41,230)
Other income (expense):
Interest income 198 567 594
Interest and debt expense (8,213) (6,979) (5,628)
Other, net 297 2,749 104
-------- -------- --------
(7,718) (3,663) (4,930)
-------- -------- --------
Net loss $(10,843) $(64,845) $(19,308)
======== ======== ========
Basic and diluted loss per
common share (Note 9) $ (0.31) $ (2.02) $ (0.61)
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 34
Sunshine Mining and Refining Company
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ PAID-IN -----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ --------- --------- --------- ------ --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 (Note 8) 32,498 $ 325 $ 713,365 $(648,847) 584 $ (1,245) $ 63,598
Net loss -- -- -- (19,308) -- -- (19,308)
Issuance of Warrants -- -- 100 -- -- -- 100
Other, net (21) -- -- -- (11) 106 106
------ --------- --------- --------- --- --------- ---------
Balance at December 31, 1997 32,477 $ 325 $ 713,465 $(668,155) 573 $ (1,139) $ 44,496
Net loss -- -- -- (64,845) -- -- (64,845)
Issuance of common stock upon conversion of
Senior Exchangeable Notes 191 2 1,317 -- -- -- 1,319
Issuance of common stock for interest on Senior
Convertible Notes 134 1 749 -- -- -- 750
Issuance of common stock upon exercise of stock
options and warrants 194 2 783 -- -- -- 785
Other, net -- -- -- -- (3) 29 29
------ --------- --------- --------- --- --------- ---------
Balance at December 31, 1998 32,996 $ 330 $ 716,314 $(733,000) 570 $ (1,110) $ (17,466)
Net loss -- -- -- (10,843) -- -- (10,843)
Issuance of common stock upon conversion of:
Senior Exchangeable Notes 337 3 1,178 -- -- -- 1,181
5% Notes 3,451 35 5,632 -- -- -- 5,667
Senior Convertible Notes 37 -- 129 -- -- -- 129
Beneficial conversion feature on 5% Notes -- -- 962 -- -- -- 962
Issuance of common stock for interest on:
Senior Exchangeable Notes 1,587 16 (16) -- -- -- --
5% Notes 112 1 150 -- -- -- 151
Senior Convertible Notes 730 8 1,486 -- -- -- 1,494
Other, net 2 -- 5 -- 9 0 5
------ --------- --------- --------- --- --------- ---------
Balance at December 31, 1999 39,252 $ 393 $ 725,840 $(743,843) 579 $ (1,110) $ (18,720)
====== ========= ========= ========= === ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 35
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(10,843) $(64,845) $(19,308)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization 1,328 4,944 5,817
Impairment of mining properties -- 50,425 --
Amortization of debt issuance costs and accretion of debt
discount 3,806 2,480 2,300
Gains on sales of investments and other (1,138) (2,795) --
Common Stock issued for interest on Senior Convertible
Notes and 5% Notes 1,645 750 --
Net (increase) decrease in:
Silver bullion (430) 1,097 (1,625)
Accounts receivable 124 -- (177)
Inventories 1,410 (609) (1,104)
Other assets 547 (947) (173)
Net increase (decrease) in:
Accounts payable and accrued expenses (585) 855 260
Accrued pension and other
postretirement benefits (1,053) (174) (401)
Other liabilities and deferred credits (623) (720) (691)
-------- -------- --------
Net cash used in operating activities (5,812) (9,539) (15,102)
-------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant, and equipment (4,183) (10,318) (1,997)
Other, principally sale of investments 3,411 4,506 2,154
-------- -------- --------
Net cash provided by (used in) investing activities (772) (5,812) 157
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long term debt,
net of issuance costs $ 5,827 $ (7) $ 14,613
Proceeds from issuance of common stock upon exercise of
warrants and other transactions (27) 785 --
-------- -------- --------
Net cash provided by financing activities 5,800 778 14,613
-------- -------- --------
Increase (decrease) in cash and cash investments (784) (14,573) (332)
Cash and cash investments at beginning of year 1,412 15,985 16,317
-------- -------- --------
Cash and cash investments at end of year $ 628 $ 1,412 $ 15,985
======== ======== ========
Supplemental cash flow information:
Interest paid in cash $ 2,526 $ 3,367 $ 2,817
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 36
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements
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 subsidiaries are Sunshine Precious Metals, Inc. (SPMI)
and Sunshine Argentina, Inc. and Sunshine Exploration, Inc. (SEI). SPMI mines,
refines and markets concentrates containing silver and certain by-product metals
to commercial customers. SPMI's principal operating property is the Sunshine
Mine, located near Kellogg, Idaho. The Sunshine Mine accounted for all of the
Company's operating revenues during 1999, 1998 and 1997. As a result, the
Company has only one operating segment. SEI and SPMI are also engaged in
exploration in other parts of the United States. Sunshine Argentina, Inc. owns
the Pirquitas Mine, which is currently in the development stage. (See Note 12.)
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
1999 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
Investment silver bullion is stated at estimated net realizable prices.
Adjustments to the carrying value of investment silver bullion is included in
revenues. Precious metals inventories, materials and supplies are carried at the
lower of cost (principally average cost) or market.
CONCENTRATION OF CREDIT RISK
The Company currently markets its concentrates to a commercial smelter in the
United States. Ninety percent of the estimated sales proceeds are due by the
15th of the month following shipment of the concentrates. Final payments are
received by the 10th business day of the fourth month following shipment. The
Company does not require collateral. Management periodically
F-7
<PAGE> 37
performs reviews as to the creditworthiness of its customer(s). The Company has
not sustained any significant credit losses on sales of its products.
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.
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 4).
Depletion of precious metal 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.
Whenever circumstances or events indicate, and at least annually, the Company
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, recoverable mineral reserves, and estimates of future
reserve potential which management believes are reasonable, based on historical
silver prices and production. If the sum of such cash flows is less than the
carrying amount of the asset, the Company records an impairment loss measured as
the amount by which the carrying amount of the asset exceeds the fair value of
the asset.
MINERAL EXPLORATION AND MINE DEVELOPMENT
Exploration costs and development costs for projects not yet determined by
management to be commercially feasible are charged to expense as incurred.
Expenditures for new mine development are capitalized when the properties are
determined to have development potential but are not yet producing. Development
costs incurred to access reserves on existing producing mines are expensed as
incurred.
F-8
<PAGE> 38
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.
2. LIQUIDITY MATTERS AND REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has
sustained substantial losses from operations in recent years. . These financial
results are primarily attributable to depressed silver prices and lower
by-product prices, resulting in margins insufficient to cover the Company's
fixed expenses. In addition, the Company has used, rather than provided, cash in
its operations and at 12/31/99 had a $25.7 million deficit in working capital.
The $26.5 million of 8% Senior Exchangeable Notes (the "Eurobonds") are due on
April 24, 2000 and the Company does not have the funds to retire this
indebtedness. Although the Company is currently in negotiations to restructure
its debt, as described below, and obtain additional financing, there is no
assurance that such negotiations will be successful. If such negotiations are
unsuccessful, the Company will become in default on the Eurobonds, which would
create a default on the $14.9 million of 10% Senior Convertible Notes. Such
events could require, among other things, the Company to seek further
modifications in its existing debt agreements, seek protection under the
bankruptcy laws or cease some or all operations altogether.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, secure additional financing and to
succeed in its future operations. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence.
F-9
<PAGE> 39
Management has taken the following steps to revise its operating and financial
requirements, which it believes will enhance the Company's ability to continue
in existence:
o During the first quarter of 2000, the Company began discussions with
holders of the Eurobonds to modify certain terms and extend the
maturity date. At a March 27, 2000 meeting of the holders, the
maturity date was extended from March 21, 2000 to April 24, 2000. (See
Note 6.)
o The Company is engaged in ongoing negotiations with holders of the
Eurobonds and the 10% Senior Convertible Notes with regard to a
comprehensive restructuring of its balance sheet.
o The Company is also attempting to obtain additional funds. No
assurance can be given that such funds will be raised or that any such
funds raised will be sufficient to fund the Company's cash
requirements. The Company will continue to explore alternatives for
its Pirquitas Mine in Argentina, including project financing, aligning
with a joint venture finance partner for development of the mine or
sale of the property.
3. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In Thousands)
<S> <C> <C>
Precious metals inventories:
Work in process $1,376 $2,831
Finished goods 107 49
Materials and supplies inventories 1,343 1,356
------ ------
$2,826 $4,236
====== ======
</TABLE>
The Company held as an investment, $4.1 million and $5.2 million of silver
bullion, in excess of normal operating requirements at December 31, 1999 and
1998, respectively.
The Company sells covered call options on silver bullion held for investment.
Total premiums earned from the sale of covered calls aggregated $246,500,
$316,250, and $116,500 in 1999, 1998, and 1997, respectively. At December 31,
1999, the Company had covered call options outstanding for 300,000 ounces of
silver with strike prices ranging from $5.25 to $5.35 and expiration dates of
January 27, 2000 (100,000 ounces), February 25, 2000 (100,000 ounces) and March
28, 2000 (100,000 ounces). The fair value of the sold calls at December 31, 1999
approximates the $34,000 of premiums received when they were sold. At December
31, 1998, no sold covered call options were outstanding. At December 31, 1997,
the Company had covered call options outstanding for 1.2 million ounces of
silver with strike prices ranging from $5.75 to $7.00 and expiration dates of
February 26, 1998 (200,000 ounces), March 27, 1998 (900,000 ounces), and
December 27, 1998 (100,000 ounces).
F-10
<PAGE> 40
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Precious metals mineral interests $ 8,151 $ 8,095
Mine improvements 12,495 9,866
Buildings, leasehold improvements, and equipment 39,295 38,374
Land 779 779
------- -------
60,720 57,114
Less accumulated depreciation, depletion, and
amortization 37,623 36,700
------- -------
$23,097 $20,414
======= =======
</TABLE>
During the third quarter of 1998, drilling in the West Chance vein of the
Sunshine Mine indicated that the size of the vein might be smaller than what was
previously expected. Based on that information, the Company believed that
production from the West Chance could decline to 4 million ounces in 1999. As a
result, combined with low by-product prices and a decline in silver prices, the
Company estimated that future cash flows from the mine would not be sufficient
to recover the $59.4 million carrying amounts of the mine. The fair value of the
mine determined by the discounted cash flow method was approximately $9 million
and an impairment charge of $50.4 million was taken at the end of the third
quarter of 1998.
5. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In Thousands)
<S> <C> <C>
Compensation, vacation, and severance $1,119 $1,163
Interest 1,027 1,064
Taxes, other than income taxes 298 280
Environmental remediation (Note 11) 700 700
Insurance premiums 270 346
Other 148 815
------ ------
$3,562 $4,368
====== ======
</TABLE>
F-11
<PAGE> 41
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
8% Senior Exchangeable Notes due March 21, 2000 $26,518 $26,082
10% Senior Convertible Notes due November 24, 2002 14,871 15,000
9% Convertible Subordinated Debentures due July 15, 2008 1,515 1,515
Other 334 --
------- -------
$43,238 $42,597
Less current portion 31,518 --
------- -------
$11,720 $42,597
======= =======
</TABLE>
8% Senior Exchangeable Notes
In March 1996, SPMI issued $30 million aggregate principal amount of 8% Senior
Exchangeable Notes due 2000 (the "Eurobonds"). In 1999 and 1998, a total of $3.0
million of the Eurobonds were exchanged and canceled for 525 thousand shares of
common stock.
The Eurobonds bear interest at 8% per annum and were initially scheduled to
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 $8.00 per share,
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. SPMI may force the exchange of the Eurobonds, in whole or
in part, subject to certain restrictions.
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 are guaranteed by Sunshine and the guarantee ranks senior to all
of its unsecured and subordinated obligations.
In March 1999, the Company issued 1.6 million shares to holders of the
Eurobonds. Such shares were issuable in settlement of the additional amount to
be paid if the Company's stock did not trade at a price 33% above the conversion
price of the Eurobonds for a period of 45 consecutive trading days. Debt
issuance costs are being amortized over the life of the Eurobonds. Unamortized
debt issuance costs of $92 thousand and $935 thousand are included in
Investments and other assets at December 31, 1999 and 1998, respectively.
In the first quarter of 2000, the Company began discussions with holders of the
Eurobonds to modify certain terms and extend the maturity date. At a meeting of
the holders held on March 27, 2000, the maturity date was extended from March
21, 2000 to April 24, 2000. The $1.0 million interest payment due March 21, 2000
has not been made. Thus the Eurobonds could be declared to be in default by
holders of at least 25% of the outstanding principal giving such notice to the
F-12
<PAGE> 42
trustee. The Company is engaged in ongoing negotiations with the holders of the
Eurobonds and its other debt securities with regard to a comprehensive
restructuring.
10% Senior Convertible Notes
In November 1997, the Company completed a private placement of Senior
Convertible Promissory Notes totaling $15 million aggregate principal amount due
November 24, 2002 (the "Notes"). The Notes are currently convertible into a
specific number of shares of Common Stock of the Company at $1.80 per share,
subject to adjustment in certain events, and bear interest at 10% per annum.
Pursuant to the terms of the Notes, the conversion price is subject to being
reset in April and September 2000. Beginning in February 2000 and quarterly
thereafter, $1.25 million principal amount is required to be redeemed by the
Company. Principal and interest are payable either in cash or common stock of
Sunshine at the Company's option.
The Company was required to issue, as soon as practicable after March 21, 2000,
approximately 1.5 million shares of Common Stock to the holder of the Notes as
an additional interest payment. Pursuant to the terms of the Notes, the
additional interest payment was due because the Eurobonds were not converted
into Common Stock nor refinanced with junior debt prior to March 21, 2000. The
Company has only issued 658 thousand shares of these shares. At the present
time, the Company is in negotiations with the holders of these Notes with
regards to a comprehensive restructuring and does not expect to issue any shares
in the future for interest until such negotiations are completed. This could
result in the Company being in default on the Notes.
Also, if the Eurobonds are not restructured by April 25, 2000, the Company will
be in default on the Notes.
The purchaser of the Notes was issued 188 thousand warrants to purchase common
stock of Sunshine at 110% of the conversion price of the Notes. The exercise
price of these warrants was reduced to $3.92 in December 1998, at which time all
188 thousand warrants were exercised.
9% Convertible Subordinated Debentures
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
$13.28 per share, subject to adjustment.
The Debentures are currently redeemable, at the option of the Company, in whole
or in part, at 100% of the principal amount, 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.
F-13
<PAGE> 43
5% Convertible Notes
In January 1999, the Company completed a private placement of 5% Convertible
Notes due January 28, 2001 (the "5% Notes") totaling $6 million. The notes were
convertible into common stock of the Company at a per-share price based on the
average of the lowest average high and low trading prices for five of the twenty
consecutive trading days prior to conversion. The beneficial conversion feature
resulted in a debt discount of $962 thousand, which was amortized over the five
months ended June 1999. During 1999, the notes were converted into 3.6 million
shares of common stock, the maximum number of shares that could be issued under
the terms of the 5% Notes.
Fair Value of Long-Term Debt
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Consequently, given the unique
conversion and payment features present in each of the Company's debt issues,
the Company believes the aggregate carrying value of its debt approximates fair
value.
7. INCOME TAXES
The Company has incurred losses during each of the three years in the period
ended December 31, 1999, 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>
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Property, plant, and equipment $ 9,031 $ 8,414
Accrued pension and other postretirement benefits 1,791 1,924
Net operating loss carryforward 99,750 96,250
--------- ---------
110,572 106,588
Less valuation allowance (110,572) (106,588)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $285 million. The loss
carryforwards expire principally in the years 2000 through 2019.
8. STOCKHOLDER'S EQUITY (DEFICIT)
Effective August 6, 1999, the Company effected a one-for-eight reverse stock
split of its Common Stock. All historical share and per share amounts reported
in this filing have been adjusted to reflect the reverse stock split.
F-14
<PAGE> 44
The Company has authorized 20.0 million shares of preferred stock, of which no
shares were issued and outstanding at December 31, 1999 or 1998.
As part of the Eurobond issuance, 261 thousand warrants to purchase one share of
common stock were issued. Approximately 60% of these warrants are exercisable at
$3.75 per share. The balance are exercisable at $23.00 per share. These warrants
expire on March 20, 2001. The Company also has 7.2 million warrants to purchase
one-eighth of share of Common Stock at $1.38 through May 22, 2001. These
warrants were issued in 1996 in connection with retirement of Preferred Stock.
The Company has two stock option plans under which options may be or have been
granted to members of management. The stock option plans cover a total of 1.6
million shares with 870 thousand options being available for grant at December
31, 1999. 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 common stock, having a market value equal to the
exercise price.
The 1995 Employee Nonqualified Stock Option Plan (the 1995 Plan) provides for
the granting of options to key employees or potential key employees and, on
December 7 each year, automatic grants of 3,125 options to each non-employee
director. The total number of shares available for issuance under the 1995 Plan
is 807 thousand.
Under the 1995 Plan, vesting of options is determined by the directors when
granted. Options under the 1993 Incentive Stock Option Plan vest one year
following date of grant. All options expire 10 years following 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 1999,
1998 and 1997, respectively: risk-free interest rates of 6.42%, 4.47%, and
5.79%; dividend yields of 0%; volatility factors of the expected market price of
the Company's common stock of .617, .572 and .438; 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
F-15
<PAGE> 45
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.
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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss applicable to common shares $ (10,854) $ (64,929) $ (19,412)
Pro forma basic and diluted loss per share $ (0.31) $ (2.02) $ (0.61)
</TABLE>
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------- -------------------
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 605 $11.68 607 $11.92 622 $12.16
Granted 18 1.50 19 5.04 55 9.04
Exercised -- -- (6) 7.28 -- --
Forfeited (2) 12.00 (15) 12.08 (70) 12.00
---- ------ ---- ------ ---- ------
Outstanding,
end of year 621 $11.40 605 $11.68 607 $11.92
==== ====== ==== ====== ==== ======
Exercisable at end of year 621 $11.40 605 $11.68 587 $12.00
Weighted-average fair value
of options granted during
the year $ 0.65 $ 2.08 $ 2.24
</TABLE>
Exercise prices for options outstanding as of December 31, 1999, ranged from
$1.50 to $23.00. The weighted-average remaining contractual life of those
options is approximately six years.
F-16
<PAGE> 46
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per share to common
shareholders $(10,843) $(64,845) $(19,308)
Denominator:
Denominator for basic and diluted earnings per
share -- weighted-average shares 34,682 32,109 31,892
Basic and diluted loss per share $ (0.31) $ (2.02) $ (0.61)
</TABLE>
All stock options and warrants were excluded from the calculation of diluted
earnings (loss) per share because including them would have been antidilutive.
10. EMPLOYEE BENEFIT PLANS
The pension plan for hourly employees covered by a collective bargaining
agreement (the Negotiated Plan) is a trusteed defined benefit plan. Benefits
under the plan are based on years of service and 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.
F-17
<PAGE> 47
The following table sets forth the funded status of the Company's trusteed
defined benefit plans and the related amounts included in accrued pension and
other postretirement benefits at December 31 (in thousands):
<TABLE>
<CAPTION>
COMBINED
--------------------
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,104 $ 5,398
Service cost 238 227
Interest cost 417 380
Amendments -- 86
Actuarial (gains) losses (349) 256
Benefit payments (295) (243)
------- -------
Benefit obligation at end of year 6,115 6,104
Change in plan assets:
Fair value of plan assets at beginning of year 5,842 4,945
Actual return on plan assets 1,036 744
Employer contributions 300 396
Benefit payments (295) (243)
------- -------
Fair value of plan assets at end of year 6,883 5,842
------- -------
Funded (underfunded) status 768 (262)
Unrecognized prior service cost 474 614
Unrecognized net (gains)/losses (1,189) (387)
Unrecognized transition asset (28) (57)
Additional minimum liability -- (477)
------- -------
Prepaid (accrued) benefit cost $ 25 $ (569)
======= =======
</TABLE>
Net periodic pension costs relating to the Company's defined benefit plans
consist of the following for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Service cost $ 238 $ 227 $ 236
Interest cost 417 380 358
Actual return on plan assets (531) (743) (807)
Net amortization and deferrals 58 345 515
----- ----- -----
Net periodic pension cost $ 182 $ 209 $ 302
===== ===== =====
</TABLE>
In the fourth quarter of 1999, the Company recognized a $475,000 reduction in
its accrued pension costs, which related to actuarial gains not recognized in
prior years.
F-18
<PAGE> 48
The benefit obligation and fair value of plan assets by plan at December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
NEGOTIATED FROZEN
PLAN PLAN
------ ------
<S> <C> <C>
Benefit obligation $5,068 $1,047
Fair value of plan assets 5,273 $1,610
</TABLE>
The following weighted average assumptions were used in computing pension costs
for the Company's trusteed defined benefit plans for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.00% 7.25% 7.50%
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. Assets of
the plans consist of pooled fixed income securities, pooled equity securities,
and cash or cash equivalents.
The Company also has a defined contribution plan for employees not covered by a
collective bargaining agreement. The Company's Board of Directors determines
annually if a contribution will be made, and if so, in what amount.
Contributions charged to operations during 1999, 1998 and 1997 were $157,000,
$151,000 and $176,000, respectively.
The Company also sponsors a plan 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. 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 1999, 1998 and 1997 were $108,000, $115,000 and $90,000, respectively.
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-19
<PAGE> 49
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31 (in
thousands):
<TABLE>
<CAPTION>
COMBINED
---------------------
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,930 $ 4,626
Service cost 7 7
Interest cost 257 343
Participants' contributions 11 11
Amendments -- (862)
Actuarial (gains) losses (189) 430
Benefit payments (426) (625)
------- -------
Benefit obligation at end of year $ 3,590 $ 3,930
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 426 614
Participants' contributions 11 11
Benefit payments (437) (625)
------- -------
Fair value of plan assets at end of year -- --
------- -------
Funded (underfunded) status (3,590) (3,930)
Unrecognized prior service cost (1,160) (1,259)
Unrecognized net (gains)/losses 280 499
------- -------
Prepaid (accrued) benefit cost $(4,470) $(4,690)
======= =======
Weighted average assumptions for end of year disclosure:
Discount rate 8.00% 7.00%
Initial trend rate 6.75% 7.25%
Ultimate trend rate 5.00% 5.00%
Number of years from initial to ultimate trend 2 3
</TABLE>
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 have the following effects on the latest
actuarial calculations (in thousands):
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components $ 17 $ (15)
Effect on postretirement benefit obligation $215 $(198)
</TABLE>
F-20
<PAGE> 50
Net periodic postretirement benefit cost for these plans includes the following
components for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost $ 7 $ 7 $ 6
Interest cost 257 343 325
Net amortization (69) (6) (30)
----- ----- -----
Net periodic cost $ 195 $ 344 $ 301
===== ===== =====
</TABLE>
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.
11. COMMITMENTS AND CONTINGENCIES
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, 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 continue for
another three to four years, and the Company has accrued $1.9 million for its
(including SPMI's) share (12.4%) of the estimated remaining remediation costs at
December 31, 1999.
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.
F-21
<PAGE> 51
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 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 Tribe's
action was consolidated with this proceeding. 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 complaints are without merit.
On September 30, 1998, the United States District Court for the District of
Idaho granted the Company's Motion for Partial Summary Judgment limiting the
United State's potential natural resource damage claims in the Coeur d'Alene
River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site.
The effect of the ruling substantially limits the government's claim for damages
from a 1500 square mile site to the 21 square mile Bunker Hill Superfund Site,
within which the Company has, pursuant to a Consent Decree with other
defendants, been engaged in clean-up operations. The United States has been
granted an interlocutory appeal of the order to the Ninth Circuit Court of
Appeals.
The second site where EPA has identified SPMI as a PRP under CERCLA is the
Spokane Junkyard Site near Spokane, Washington. No records of SPMI have been
discovered by it or the EPA showing SPMI ever sent any material to the site.
SPMI does not believe it will be required to pay any clean-up costs at the
Spokane Junkyard Site. 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, financial condition or on its liquidity or
capital resources.
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, consolidated results of operations or cash
flows.
12. FOREIGN OPERATIONS
The Company has mining projects in Argentina, primarily the Pirquitas Mine which
is in the development stage. The Company began to capitalize development
expenditures at the Pirquitas Mine in 1998 after proven and probable reserves
were established at the end of 1997. Exploration expense for the Company's
Argentina operations totaled $0.7 million, $1.6 million and $4.4
F-22
<PAGE> 52
million for years ended December 31, 1999, 1998, and 1997, respectively. At
December 31, 1999, amounts capitalized as property, plant, and equipment totaled
$10.9 million.
Approximately $2.2 million for Value Added Taxes paid in Argentina are included
in other assets. These taxes are recoverable from future exports of products
produced from Argentina.
The recoverability of the assets related to the Pirquitas Mine is dependent upon
the ability of the Company to: (a) raise sufficient funding for development of
the Pirquitas property, or (b) sell all or a portion of the Company's interest
in the property, or (c) merge with or form a joint venture with a company with
greater financial resources to develop the properties.
13. SIGNIFICANT CUSTOMER
In 1999, 1998, and 1997, one customer accounted for sales of concentrate
aggregating approximately $31.5 million, $30.7 million, and $24.2 million,
respectively. Management believes that the loss of this purchaser would not have
a material impact on the Company's consolidated financial condition or
consolidated results of operations.
14. PRECIOUS METALS RESERVES (UNAUDITED)
The table below presents data on proven and probable ore reserves, production
and average prices for each of the years in the five-year period ended December
31, 1999 (in thousands, except average prices):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SUNSHINE MINE
Reserves at December 31:
Ounces of silver 29,992 37,383 39,808 36,241 30,810
Production:
Tons of ore 218 248 183 121 101
Ounces of silver 5,211 5,806 4,253 2,578 1,731
PIRQUITAS MINE
Reserves at December 31:
Ounces of silver 129,333 101,000 72,800 -- --
REVENUE - VIRGINIUS MINE
Reserves at December 31:
Ounces of silver 6,208 6,208 6,208 6,208 5,098
AVERAGE PRICES:
Ounce of silver $ 5.23 $ 5.47 $ 5.02 $ 5.11 $ 5.20
</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
F-23
<PAGE> 53
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.
15. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1999:
Operating revenues $ 9,651 $ 7,957 $ 8,106 $ 6,618
Cost of revenues 8,693 6,564 6,649 5,767
Loss applicable to common shares (2,866) (2,125) (2,022) (3,830)
Basic and diluted loss per common share
$ (.09) $ (.06) $ (.06) $ (.10)
1998:
Operating revenues $ 9,740 $ 8,553 $ 8,186 $ 8,189
Cost of revenues 6,950 7,455 7,130 6,830
Income (loss) applicable to common shares 71 (6,612) (54,494)(a) (3,810)
Basic and diluted loss per common share $ (.00) $ (.21) $ (1.70) $ (.11)
</TABLE>
(a) includes an impairment charge of $50,425
F-24
<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, 33-18435 and 333-09475; Form S-3 Nos. 333-06537,
33-98876, 333-41641, 333-74437, 333-86327, 333-88293 and 333-94193) of Sunshine
Mining and Refining Company and in the related Prospectuses of our report dated
February 26, 1999, with respect to the 1997 and 1998 consolidated financial
statements included in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
ERNST & YOUNG LLP
Dallas, Texas
March 31, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated February 25, 2000 (March 27, 2000 with respect
to Notes 2 and 6), accompanying the 1999 consolidated financial statements
included in the Annual Report of Sunshine Mining and Refining Company on Form
10-K for the year ended December 31, 1999. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
Sunshine Mining and Refining Company on Forms S-3 (File Nos. 333-06537,
33-98876, 333-41641, 333-74437, 333-86327, 333-88293 and 333-94193) and on Forms
S-8 (File Nos. 33-16342, 33-18435 and 333-09475).
GRANT THORNTON LLP
Dallas, Texas
March 31, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DEC. 31, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DEC. 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 628
<SECURITIES> 0
<RECEIVABLES> 2,677
<ALLOWANCES> 0
<INVENTORY> 6,943
<CURRENT-ASSETS> 11,034
<PP&E> 60,720
<DEPRECIATION> 37,623
<TOTAL-ASSETS> 37,020
<CURRENT-LIABILITIES> 36,714
<BONDS> 11,720
393
0
<COMMON> 0
<OTHER-SE> (19,113)
<TOTAL-LIABILITY-AND-EQUITY> 37,020
<SALES> 32,332
<TOTAL-REVENUES> 32,691
<CGS> 27,623
<TOTAL-COSTS> 33,801
<OTHER-EXPENSES> 2,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,213
<INCOME-PRETAX> (10,843)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,843)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,843)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
