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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, 2000
[ ] 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)
5956 SHERRY LANE, SUITE 1621 83702
DALLAS, TEXAS 75225 (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(214) 265-1377
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 OTC Bulletin Board
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(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 15, 2001 was approximately $6,500,000.
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 16, 2001
------------------- ----------------------------
Common Stock, $0.01 par value 50,000,000
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PART I
1. BUSINESS.
GENERAL
Sunshine Mining and Refining Company ("Sunshine" or the "Company") has
primarily engaged in mining silver, and currently owns properties in Argentina,
Mexico and the United States with significant silver reserves and silver
resource potential. 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 3.9 million and 5.2
million ounces of silver in 2000 and 1999, respectively. The mine's primary
smelter customer announced on February 2, 2001 that it was closing and would no
longer accept deliveries. As a result, Sunshine notified employees at the mine
of a mass layoff effective February 16, 2001. The mine is being placed in a care
and maintenance status. The Sunshine Mine has been the Company's only revenue
source for the past eight years. As a result of its closure, the Company has no
other sources of revenues at the present time.
The Company's principal asset is the Pirquitas Mine. Pirquitas contains
129 million ounces of silver reserves, as well as significant tin and zinc
by-products. The mine is planned as an open-pit operation to produce 11 million
ounces of silver, 3,200 tonnes (metric tons) of tin, and 16,300 tonnes of zinc
per year. A feasibility study on the economics of developing the property was
initially completed in 1999, and enhancements to the initial study were
completed in 2000. The studies forecast $133 million of capital cost to develop
the property, and a net cash cost of production of $1.53 per ounce of silver.
REORGANIZATION UNDER CHAPTER 11
On August 23, 2000 (the "Petition Date"), Sunshine and its wholly-owned
subsidiaries, Sunshine Argentina, Inc. ("Argentina"), Sunshine Precious Metals,
Inc. ("SPMI") and Sunshine Exploration, Inc. ("Exploration"), all filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. The Third Amended
and Restated Joint Chapter 11 Plan of Reorganization as modified December 5,
2000, is referred to as the "Plan." The Plan was the subject of an Order
Confirming the Third Amended and Restated Joint Chapter 11 Plan of
Reorganization of Sunshine and its Debtor Subsidiaries (the "Confirmation
Order") and the Plan Effective Date was February 5, 2001.
The conditions precedent to the effectiveness of the Plan and
Confirmation Order, all of which were satisfied, included designation by certain
creditors of four (out of five) Directors, the New Consent Decree with Sunshine
and SPMI shall have been entered and approved by the United States District
Court for the District of Idaho in the case styled United States of America v.
Asarco Incorporated, Case Nos. 96-0122-N-EJL and 91-0342-N-EJL, substantially in
accordance with an agreement in principal annexed to the Plan and such new
consent decree shall have been approved by final order of the Idaho District
Court, and the so-called "Asarco Settlement" shall have been approved by the
Bankruptcy Court. (See Note 14 of Notes to Consolidated Financial Statements and
"Legal Proceedings - Environmental Matters.")
Pursuant to the Plan and the Confirmation Order, on the Effective Date,
all of the "old common stock" of Sunshine was canceled, retired and eliminated
with no consideration paid therefor, and Sunshine was deemed to have issued the
"New Mining Stock," which is shares of Common Stock, par value $0.01 per share.
Under the Amended and Restated Certificate of Incorporation of Sunshine filed
with the Secretary of State of Delaware on February 16, 2001, Sunshine's
authorized common stock from and after the Effective Date consists of
200,000,000 shares of Common Stock, par value $0.01 per share. Of that class of
stock, approximately 50,000,000 shares of Common Stock, par value $0.01 per
share have been issued as the "New Mining Stock" under the terms of the Plan to
those designated as recipients therefor under the Plan, which generally are
certain creditors of Sunshine and others, who have in turn gifted a portion
(approximately 3.4%) of such New Mining Stock to the former common stockholders
on a pro-rata basis, but only to accounts holding in excess of 100 shares of
"old Common Stock." Sunshine distributed certificates representing shares of
"New Mining Stock" to holders during February 2001. The CUSIP number of the "New
Mining Stock" is 867833-60-0 and its symbol on the OTC Bulletin Board is SSMR.
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As more than 80% of the Company's operating revenues have been 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 has been 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. Given continued low silver prices, the shutdown of
the Sunshine Mine, and the Company's limited available liquidity, the Company is
currently reviewing its strategic options, which may include a sale of some or
all of its assets, a merger, or joint venture for the development of Pirquitas.
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 by the shortfall of new supply to demand. Also, according to
the above cited industry reports, physical availability of silver should
continue to tighten as available inventories are consumed. The Company has
anticipated that such drawdowns of silver would eventually lead to a significant
price increase, which has yet to happen.
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 5956 Sherry Lane, Suite 1621, Dallas, Texas
75225.
For information regarding Sunshine's business, certain classes
of products or services and sales to certain significant customers, see Notes 3,
4, 14, 15 and 16 of Notes to Consolidated Financial Statements included
elsewhere herein.
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.
OPERATIONS
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 13,000 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. Pirquitas is the Company's principal asset at this
time.
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.
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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, and in that regard will consider possible sales of
some or all of the property, mergers, joint ventures, and other structures. The
independent feasibility study of the property, prepared in large part by the
firms of Jacobs Engineering, The Winters Company and Knight Piesold, estimates
that the project will require approximately $133 million of capital investment
to commence production. The study forecasts annual average production of 11
million ounces of silver, 3,200 tonnes of tin, and 16,300 tonnes of zinc over
the nine-year mine life of its proven and probable reserves. It is believed that
significant potential exists to expand reserves over those identified thus far.
Net cash costs of silver production (net of tin and zinc credits) are estimated
at $1.53 per ounce.
The Company owns or controls a significant land package at the
property. It holds title to 6,500 acres of mining concessions. It also owns
approximately 18,500 acres of surface lands upon which all facilities will be
built. Most of the property remains unexplored. Significant resources above and
beyond those identified in the feasibility study are believed to exist at the
property. Based on its own exploration, as well as a review of previous
development work, the Company believes that it can substantially increase the
mineral resources surrounding the identified reserve. Beyond these areas, the
Company feels that the favorable geologic environment will continue and believes
that new discoveries can be made.
Given the property's excellent economics, the potential for additional
mineralization, and the prospect for improved silver prices, the Company
believes Pirquitas provides a very attractive development opportunity.
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, 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.
The Sunshine Mine's primary smelter customer announced on February 2,
2001 that it was closing and would no longer accept deliveries. As a result,
Sunshine notified employees at the mine of a mass layoff effective February 16,
2001. The mine is being placed in a care and maintenance status.
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 5,600 feet. The mine covers over 10 square miles at
the surface, and contains more than 100 miles of underground workings.
The introduction of new mining technologies and more aggressive
exploration at the Sunshine Mine had substantially increased production in
recent years, achieving full production in the fourth quarter of 1997 for the
first time since 1990. This reduced unit costs as fixed costs were spread over a
larger production figure. Recent production and unit cost history of the mine is
as follows:
SUNSHINE MINE PRODUCTION
------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Ounces production (millions) 3.9 5.2 5.8 4.3 2.6
Net cash cost per ounce $4.75 $4.36 $4.43 $4.50 $6.12
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Sunshine's share of silver reserves at the Sunshine Mine as of December
31, 2000 were estimated to be 1.1 million tons of ore with an average grade of
23.6 ounces of silver per ton (after adjustment for mining dilution), containing
25.9 million ounces of silver. Metallurgical recoveries at the Sunshine Mine
have typically approximated 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. Due to cash constraints, planned exploration and development
has been significantly curtailed since the end of 1999, resulting in a reduction
in proven and probable reserves. If the mine is reopened and an adequate
exploration and development funded in the future, management believes
significant new reserves will be identified, 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 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 5,400 feet and connects to the Sunshine's eastern
workings on the 3,100 level, serving as the Sunshine Mine's secondary escapeway.
Access from this shaft to these exploration areas will be important in their
future exploration and development.
The ore extracted from the Sunshine Mine was processed by a
1,000-ton-per-day flotation concentrator, which produced two concentrates, a
high-grade silver concentrate which was transferred to the antimony refinery for
antimony removal, and a lead concentrate which was 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. Prior to the closure of its main smelter
customer, the Company's sales to the third party smelters have been 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.
Ore and metals produced at the Sunshine Mine during 2000, 1999 and
1998, respectively, were as follows:
2000 1999 1998
---- ---- ----
Tons of Ore............................................... 169,036 217,601 247,866
Metals Recovered:
Ounces of Silver..................................... 3,879,100 5,210,843 5,806,468
Pounds of Copper..................................... 1,019,305 1,235,368 1,273,318
Pounds of Antimony................................... 786,078 991,079 1,078,460
Pounds of Lead....................................... 4,839,538 6,966,645 12,001,080
These metals were recovered from ore containing an average of 23.81,
24.75 and 24.17 ounces of silver per ton, in 2000, 1999 and 1998, respectively.
Metallurgical recoveries were approximately 96.38% 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, 2001, to be 1.1 million tons of
ore containing 26.8 million ounces of silver and 10.4 million pounds of copper.
The weighted average ore grades, adjusted for mining dilution, but not adjusted
for metallurgical recoveries, are 23.6 ounces per ton silver and 0.46 percent
copper.
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During the three years ended December 31, 2000, the Sunshine Mine
accounted for all of the Company's silver production, and approximately 16% of
the Company's silver reserves at December 31, 2000. (See Note 17 of Notes to
Consolidated Financial Statements included elsewhere herein.)
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, which were extended until May 1,
2001. The Company has notified the Unions of its intent to allow the contracts
to expire.
MEXICAN OPERATIONS
The Company acquired its first Mexican property, Juanicipio, in 1999.
The property is located adjacent to the Fresnillo Mine, one of the most prolific
and low cost silver mines in the world, in the state of Zacatecas. The district
has reportedly produced more than one billion ounces of silver dating to
colonial times. The Company believes that its recently completed mapping and
geophysical work has demonstrated that structures similar to those containing
mineralization at the Fresnillo Mine may exist at Juanicipio. The surface
reflection of such structures appears to strike from Fresnillo into the
Juanicipio property. The next logical step in the evaluation of the property
would be a drilling program to quantify potential mineralization in these
structures. The Company will be reviewing options to enable such a program to go
forward.
The Company's mining concession at the property is quite large,
approximately 28,100 hectares (69,400 acres). Because of its proximity to the
Fresnillo Mine, and the evidence of the structures that are present on the
property, Juanicipio may present an attractive joint venture opportunity.
OTHER EXPLORATION
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 reserves are estimated to be
approximately 6.2 million ounces of silver.
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. At the
time of the mine shutdown, all of the concentrates were being sold to a smelter.
Given the limited reserves economically accessible at the Sunshine Mine, upon
the closure of its primary smelter customer, reactivation of the refinery was
not economic. While the Company received offers for its concentrates from other
smelters, the terms were less attractive than those it has been receiving from
its primary customer.
Prices received for the silver-copper concentrate from smelters were
based on average prices for silver, copper and lead during a quotational period
shortly after shipment. All lead-silver concentrates were 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 were
generally marketed directly to metals dealers or industrial customers, with
prices based on market prices at the time of shipment. (See Note 16 of Notes to
Consolidated Financial Statements included elsewhere herein.)
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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
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 14 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, 2000, Sunshine and its subsidiaries, including SPMI,
employed approximately 236 persons; 220 of whom are located at the Kellogg
facilities. See "Item 1. Business. The Sunshine Mine and Refinery Complex."
Substantially all the employees at the Kellogg facilities will be laid off as a
result of the closure of the Sunshine Mine.
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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
In connection with the confirmation and effectiveness of the Plan of
Reorganization, a settlement of all environmental litigation was effected.
The settlement between the Company, SPMI and the United States on
behalf of the United States Environmental Protection Agency, United States
Department of Interior and the United States Department of Agriculture (the
"Government") and the Coeur d'Alene Indian Tribe (the "Tribe") was memorialized
in a new Consent Decree in civil actions CIV96-0122-N-EJL and CIV91-0342-N-EJL
pending in the United States District Court for the District of Idaho. By entry
of the new Consent Decree all claims of the Government and the Tribe for natural
resource damages and response costs to injuries allegedly caused by the Company
and SPMI in the Coeur d'Alene Basin were dismissed by the Government and the
Tribe. The new Consent Decree was approved by the United States District Court
on January 18, 2001. In exchange for the dismissal the Company granted to the
Government and the Tribe warrants to purchase 9.95% of Sunshine's new common
stock (i) at an exercise price of $.66 per share, (ii) with a cashless exercise
feature, (iii) that are exempt from registration pursuant to 11 USC Section
1145, (iv) that are fully transferable to any other entity at any time, and (v)
are subject to ordinary terms and conditions including standard anti-dilution
language for warrants of this nature.
The Company and SPMI have also agreed to provide net smelter return
royalty payments to the Government and the Tribe based on the revenues from all
mining by SPMI anywhere in the United States and all mining by any Sunshine
entity from the Sunshine Mine or within one mile of the current boundaries of
the mine. The royalty adjusts on a sliding scale based on the average price of
silver. No royalty must be paid until the average silver price exceeds $6.00 per
ounce.
Under the new Consent Decree, SPMI is required to convey the surface
rights to timber lands it owns and uses for non-mining purposes, and to perform
certain remediation and testwork at its ConSil mine site adjacent to the
Sunshine Mine.
In connection with the settlement, the Government also agreed to
release the Company and SPMI from a 1994 Consent Decree which obligated them,
with certain other mining companies, to remediate certain property in the Bunker
Hill Superfund Site.
The Company believes that all other environmental claims, both
potential and threatened, were discharged by the effectiveness of the Plan of
Reorganization on February 5, 2001.
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, 2000.
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PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The New Common Stock has had a very limited trading history since
the Effective Date of the Plan. Since March 8, 2001, it has traded on the NASDAQ
OTC Bulletin Board under the symbol "SSMR" at high and low sales prices as
reported by NASDAQ of $2.15 and $1.00. There were approximately 5,000
stockholders of record at March 15, 2001; however, the number of beneficial
owners is believed to exceed this number.
The old common stock of Sunshine was, until February 28, 2001, traded on
the NASDAQ OTC Bulletin Board under the symbols "SSCF" and "SSCFQ." Holders of
100 or more shares of the Company's old common stock received approximately one
share of New Common Stock for every 28.4 shares of old common stock owned. The
following table shows the high and low sales prices of the old common stock over
recent periods (adjusted for the approximately one for 28.4 exchange pursuant to
the Plan):
HIGH LOW
---- ---
2001
First Quarter (until February 28, 2001)..... 3.408 1.136
2000
Fourth Quarter.............................. 2.272 1.136
Third Quarter (from July 14, 2000).......... 7.952 1.420
By letter dated July 7, 2000, the New York Stock Exchange, Inc. ("NYSE")
notified Sunshine that trading in the Sunshine old Common Stock would be
suspended on July 14, 2000, and application would be made by the NYSE to the
Securities and Exchange Commission to de-list the old Common Stock. A notice
from the NYSE advised that the decision was reached based upon an amount of
total stockholders' equity and the 30-day average share price being less than $1
per share for the old Common Stock. Sunshine did not appeal the determination.
The following table sets forth the range of high and low sales prices for the
old Common Stock as reported on the NYSE Composite for the periods indicated
(adjusted for the approximately 1 for 28.4 exchange pursuant to the Plan and the
one for eight reverse split on August 6, 1999). Such quotations represent
inter-dealer prices without retail market, mark-down or commissions and may not
necessarily represent actual transactions.
HIGH LOW
---- ---
2000
Third Quarter (until July 14, 2000)........ 10.65 7.10
Second Quarter............................. 21.30 7.10
First Quarter.............................. 49.70 17.75
1999
Fourth Quarter............................. 71.00 35.50
Third Quarter(*)........................... 92.30 56.80
Second Quarter............................. 120.70 85.20
First Quarter.............................. 170.40 99.40
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10007
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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.
YEAR ENDED DECEMBER 31,(1)
-----------------------------------------------------------------------
2000(3) 1999 1998(3) 1997 1996(4)
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................. $ 23,094 $ 32,332 $ 34,668 $ 24,993 $ 15,315
Mark to market gains (losses) ...................... (167) 359 (2,588) 1,859 (1,101)
----------- ----------- ----------- ----------- -----------
Total revenues ................................. 22,927 32,691 32,080 26,852 14,214
Net loss ........................................... (20,890) (10,843) (64,845) (19,308) (25,902)
Income (loss) applicable to common shares .......... (20,890) (10,843) (64,845) (19,308) 11,600
Basic and diluted income (loss) per common share ... (.48) (.31) (2.02) (.61) .42
Weighted average common shares ..................... 43,898 34,682 32,109 31,892 27,823
PRICE AND PRODUCTION STATISTICS:
Average silver price received ...................... $ 4.93 $ 5.23 $ 5.47 $ 5.02 $ 5.11
Tons ........................................... 169,036 217,601 247,866 183,404 120,910
Silver grade (ounces per ton) ...................... 23.81 24.75 24.17 23.95 22.04
Silver ounces produced ......................... 3,879,100 5,210,843 5,806,468 4,253,315 2,577,895
Net cash cost per ounce(2) ......................... $ 4.75 $ 4.36 $ 4.43 $ 4.50 $ 6.12
BALANCE SHEET DATA:
Cash and cash investments .......................... $ 291 $ 628 $ 1,412 $ 15,985 $ 16,317
Working capital (deficit) .......................... 2,824 (25,679) 9,716 26,959 25,559
Total assets ....................................... 22,592 37,020 39,897 101,601 105,486
Long-term debt and capital lease obligations ....... 1,530 38,238 42,597 42,265 25,780
Stockholders' equity (deficit) ..................... (36,276) (18,720) (17,466) 44,496 63,598
Book value per common share ........................ (.75) (.48) (.54) 1.39 2.00
Common shares outstanding ...................... 48,685 38,672 32,426 31,904 31,873
- ----------
(1) All share and per share amounts have been adjusted to reflect a 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 2000 and 1998 the Company recorded a $7.2 million and a $50.4
million impairment of mining properties expense, respectively, 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.
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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
From 1988 through 2000, a period of 13 years, the price of silver, the
Company's principal product, averaged approximately $5.00. In contrast, for the
10 year period prior to 1988, the price of silver averaged approximately $9.50
per ounce. While the Company significantly improved its production and unit
costs from the Sunshine Mine in recent years, the continuing low price of silver
resulted in ongoing operating losses. In addition, the Company invested
relatively heavily in new projects, particularly Pirquitas. Management believed
that establishing new, low cost production from Pirquitas and/or other
properties would be key to establishing profitability in the low price of silver
environment in which it found itself.
The Company was able to fund its operating losses and investments with
a variety of financings over this extended period, until it was unable to
refinance the Eurobond indebtedness of $26.5 million which matured in March of
2000. The inability to repay this debt as it matured triggered cross-defaults in
the Company's other indebtedness. The Company and its principal creditors
discussed various means of restructuring the Company's indebtedness outside of
bankruptcy, but ultimately determined that the best route to restructure the
indebtedness would be through Chapter 11. As a result, the Company and three of
its principal subsidiaries filed for protection under Chapter 11 on August 23,
2000. The Elliott Group and the Stonehill Group, whose affiliates were the
Company's principal creditors, were co-proponents with the Company of the Plan
of Reorganization which was filed contemporaneously with the bankruptcy filing.
Highwood Partners, L.P. and Stonehill Capital Management, LLC,
affiliates of the Elliott Group and the Stonehill Group, provided the
Debtor-in-Possession (DIP) financing which was used by the Company and its
affiliates as its principal source of funding during the bankruptcy. Upon the
Effectiveness of the Plan, on February 5, 2001, approximately $2.7 million was
borrowed under the DIP facility. The Stonehill and Elliott affiliates are also
providing the Exit Financing Facility, which repaid advances under the DIP
facility and will fund the Company upon its initial emergence from bankruptcy.
The Exit Financing Facility bears interest at a fixed rate of 15% per annum in
the maximum principal amount of $5,000,000. The facility is secured by
substantially all of the assets of Sunshine and its subsidiaries, including the
Pirquitas Mine. The proceeds of all advances under such facility are to be
utilized solely (a) to provide funds necessary to the conduct of the business of
Sunshine and its subsidiaries in the ordinary course in accordance with an
approved budget, (b) to pay fees and disbursements paid to lenders and their
professionals in accordance with the budget, and (c) as otherwise contemplated
or permitted by the budget. The Exit Financing Facility is the Company's only
source of working capital, other than asset disposals, at the present time. The
remaining availability under the Exit Financing Facility is approximately $1.8
million as of March 15, 2001.
The Company expects to have used all the availability under the Exit
Financing Facility before the end of the third quarter of 2001. The Company is
engaged in a review of its strategic options in order to address its financing
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difficulties. Among these is the consideration of a sale of some or all of its
assets, the merger of the Company with another company, or a joint venture
arrangement on some of its properties, including Pirquitas. If the Company is
unable to successfully negotiate and close any such alternative in advance of
using all the availability under the Exit Financing Facility, the Company may be
required to, among other things, seek modifications in the terms of the Exit
Financing Facility, seek protection under the bankruptcy laws, or cease
operations altogether. Any of these would be expected to have a significant
negative effect on the price of the Company's common stock.
Registration Rights Agreement. Under the Plan of Reorganization,
Sunshine entered into a Registration Rights Agreement with members of the
Stonehill Group and the Elliott Group under which the shares of new common stock
issued to them are to be registered under federal securities laws. Such
agreement provides for filing of a Registration Statement within a specified
period of time covering only the securities issued to the Elliott Group and the
Stonehill Group, the effectiveness of such Registration Statement within a
certain period of time and other matters. In the event that certain of the
commitments under such agreement are not satisfied, each of the holders has a
right to provide Sunshine with written notice thereof (a "Put Notice") which
would require Sunshine to pay to each such holder (in cash or shares of common
stock at the option of the holder) a specified amount of funds and/or in certain
instances, to repurchase the securities from the holder for a "Mandatory
Repurchase Price" equal to 115% of the Market Price on the date the holder
acquires the right to require Sunshine to repurchase such shares.
Argentina Transaction; Call Option Agreement. Under the terms of the
Plan and the Confirmation Order on the Effective Date, the capital stock of
Argentina was cancelled and Argentina issued the "New Argentina Stock." Sunshine
caused the incorporation and organization of Sunshine International Mining,
Inc., a Delaware corporation ("International"), all of the issued and
outstanding stock of which is owned by Sunshine. Sunshine contributed to the
capital of International all of the New Argentina Stock such that Argentina
became a wholly-owned subsidiary of International which in turn is a
wholly-owned subsidiary of Sunshine. Simultaneously Sunshine, International and
Argentina entered into a Call Option Agreement dated February 2001, with the
Elliott Group and the Stonehill Group, pursuant to which International granted
(i) a call option to each holder within the Elliott Group and the Stonehill
Group to purchase, collectively, up to 100% of the shares of New Argentina Stock
and (ii) a first priority perfected security interest in the New Argentina
Stock. Such call option(s) was granted to purchase a maximum number of shares of
New Argentina Stock at a specified purchase price which option is to be reduced
proportionately in the event the Elliott Group holders and/or the Stonehill
Group holders sell more than 50% of their shares of New Common Stock of Sunshine
received. For example, if the Elliott Group holders were to sell 55% of their
shares of Sunshine Common Stock initially received, then the maximum number of
New Argentina Stock that the Elliott Group holders could purchase in the
aggregate upon exercise of their Call Options would be reduced by a percentage
equal to (55% - 50%) x 2, or 10%. The term of each Call Option expires at the
time of exercise in full of such Call Option, or if the market capitalization of
Sunshine shall exceed $150,000,000 for at least 60 consecutive days or on the
tenth anniversary of the Effective Date of the Plan. The Call Option becomes
exercisable upon the occurrence of any one or more of nine separate events,
including (i) the de-listing of the Sunshine New Common Stock from an "Approved
Market," (ii) suspension of the Sunshine New Common Stock from trading on an
Approved Market for at least seven consecutive calendar days, (iii) reduction in
the overall market capitalization of Sunshine to less than $15,000,000 for at
least fifteen consecutive calendar days, (iv) a bankruptcy proceeding occurring
with respect to Sunshine or one of its subsidiaries, (v) Sunshine fails to
comply with its obligations in the Call Option Agreement, and (vi) other events,
including any default under the "Exit Financing Facility." The Call Option, once
exercisable, may be exercised at any time by any of the holders thereof. The
effect of the Call Option(s) is to potentially allow the Elliott Group holders
and the Stonehill Group holders (and certain of their successors and assigns) to
acquire Sunshine Argentina which in turns owns the Pirquitas Mine and other
assets. Should such an event occur, Sunshine's investment of approximately
$20,400,000 in the acquisition and evaluation of that property can no longer be
an asset of Sunshine, nor would the assigned proven and probable reserves
totaling 129.6 million ounces of silver, along with 59,000 tons of tin and
273,000 tons of zinc. The New Argentina Stock has been pledged under the Call
Option Agreement under a separate Pledge Agreement to the Elliott Group holders
and the Stonehill Group holders and delivered to Wells Fargo Bank Minnesota,
N.A. as administrative and pledge agent.
Failure to comply with the terms of the Registration Rights Agreement
or the Call Option Agreement would result in significant adverse impacts on the
Company, including further impairing its limited available liquidity and the
loss of its principal asset. These would be expected to adversely effect the
ability of the Company to achieve any of the strategic options it intends to
pursue, and could lead to a bankruptcy filing or the cessation of operations
altogether. Such events would be expected to have a significant negative effect
on the price of the common stock.
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On February 2, 2001, Sunshine received Notice that the smelter to which
the Sunshine Mine shipped concentrates was closing and would no longer accept
any deliveries. Management sought alternatives for the production from the
Sunshine Mine but has not been successful in securing an economically viable
alternate arrangement. As a result, Sunshine notified employees that a mass
lay-off of the majority of the Sunshine Mine employees would occur on February
16, 2001, and the mine was placed on a care and maintenance status.
As a result of the closure of the Sunshine Mine, the Company will have
no revenues from operations for the foreseeable future. It is expected that the
reopening of the mine would require a substantial improvement in silver prices.
However, due to lack of available funds, the Company has significantly cut back
exploration and development since the end of 1999, including stopping the
so-called ConSil ramp project. Therefore, access to economically recoverable
reserves will be limited upon any reopening of the mine, and, before commercial
operations can be restarted, a substantial exploration and development effort
will be required.
The opinion of the Company's independent certified public accountants
covering the 2000 year expressed substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
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.
A further similar review during the fourth quarter of 2000, in light of
the shutdown of the mine, determined that the fair value of the equipment and
real property at the mine was approximately $1.4 million and an impairment
charge of $7.2 million was taken.
Discussion of potential 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.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities for the year ended 2000 was $4.9
million compared to $5.8 million in 1999. The $900 thousand improvement was
primarily due to changes in working capital items partially offset by a $2.6
million increase in cash operating loss. The cash operating loss increased
primarily due to a $4.1 million decrease in cash operating income at the
Sunshine Mine and $2.0 million in reorganization costs, partially offset by a
$2.4 million decrease in cash interest expense and a $1.3 million decrease in
general and administrative expense.
Cash provided by investing activities during 2000 included proceeds of
$3.9 million from the sale of investment silver bullion and $0.9 million from
the sale of the La Joya Mine in Argentina. Cash used by investing activities was
$1.6 million for additions to property, plant and equipment primarily consisting
of $1.0 million for the development of
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Pirquitas and $354 thousand in capital expenditures at the Sunshine Mine. 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,
the sale of 300 thousand ounces of investment silver bullion, and proceeds from
settlement of certain litigation.
Cash provided by financing activities in 2000 consisted of $1.5 million
of borrowings under the DIP Facility less a $150 thousand commitment fee. $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.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
Consolidated operating revenues decreased approximately $9.2 million
(28.6%) for the year ended 2000 compared to the year ended 1999, while
mark-to-market losses on investment bullion totaled $167 thousand in 2000
compared to a $359 thousand gain in 1999. The decrease in operating revenues
primarily resulted from a decrease in the average price received per ounce of
silver sold and a decrease in ounces sold (4.2 million ounces of silver at an
average of $4.93 per ounce in the 2000 period compared to 5.5 million ounces at
an average of $5.23 per ounce in the 1999 period), a $734 thousand decrease in
by-product revenue and a $213 thousand decrease in recognized premium income on
the sale of covered calls on silver bullion held as an investment. Silver
production totaled 3,879,100 ounces produced from 169,036 tons at 23.81 ounces
per ton in 2000 versus 5,210,843 ounces from 217,601 tons at 24.75 ounces per
ton in 1999. The decrease in production was primarily due to fewer productive
stopes being available as mining proceeds to the outskirts of the West Chance
area. By-product revenue decreased primarily because of decreased production of
lead and copper.
Cost of revenues decreased $5.1 million (18.4%) from $27.7 million in
1999 to $22.6 million in 2000, primarily due to lower smelter, mining, and
metallurgical costs as a result of the lower production and sales, and also, due
to reduction in tons and ounces of silver produced during the 2000 period. Net
operating cash production costs increased $0.39 to $4.75 per ounce of silver.
This increase was primarily due to fixed costs being spread over fewer ounces of
silver produced.
The 2000 period includes a $7.2 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 increased $359 thousand in 2000 compared to 1999
primarily due to expenditures on certain Argentina properties and Juanicipio in
Mexico.
Interest income decreased $112 thousand due to lower average invested
cash balances.
Selling, general and administrative expense declined $1.3 million due
to a variety of cost reductions.
Interest and debt expense decreased $1.3 million primarily due to the
amortization in 1999 of 100% of the discount feature associated with the 5%
Convertible Notes issued in January 1999, the amortization of debt discount and
issuance costs for the Eurobonds for the full year in 1999 as compared to one
quarter in 2000, the cessation of interest accruals as discussed in Note 8 of
the Consolidated Financial Statements and lower outstanding balances on the
Company's debt. These were partially offset by $1.4 million of additional
interest on the 10% Notes.
Other, net of $193 thousand for the 2000 period includes the gain from
the sale of the La Joya Mine in Argentina, partially offset by the write down of
certain other investments. Other, net of $297 thousand in 1999 was
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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.
Reorganization items - professional fees are primarily the costs of
legal counsel and other professionals in the preparation and solicitation of
approval of the Company's Chapter 11 Plan of Reorganization and the associated
financing documents. These fees include pre-petition fees of counsel for the
Cosponsoring Bondholders.
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 began to move to areas of the Sunshine Mine 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.
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
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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 13-year period ended in 2000.
Over the prior ten year period the silver price averaged approximately $9.50 per
ounce.
During 1999 and 1998, the Company from time to time sold covered calls
against its silver bullion inventory. Total premiums earned for the sale of
covered calls aggregated $246,500 and $316,250 in 1999 and 1998, 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. No covered call options were sold during 2000. The Company's policy is not
to sell any uncovered calls. (See Note 3 of Notes to Consolidated Financial
Statements for information related to accounting policies for covered calls.)
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, 2000, 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.
Ernst & Young, LLP (Sunshine's auditors for many years) abruptly
resigned on May 27, 1999, immediately before the commencement of an offering to
raise capital to refinance indebtedness and finance the equity requirement of
the Pirquitas Mine. Representatives of Ernst & Young, LLP stated to
representatives of Sunshine that their resignation was for internal business
reasons of the auditing firm and was not due to concerns about the accuracy of
Sunshine's financial statements or Management's integrity.
The reports of Ernst & Young, LLP on Sunshine'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 Ernst & Young LLP for 1998 and 1997 were not modified as to
uncertainty regarding the ability of Sunshine to continue as a going concern. In
connection with the audits of the financial statements of Sunshine for each of
the two fiscal years ended December 31, 1998 and 1997, and in the subsequent
interim periods, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures which, if not resolved to the satisfaction of
Ernst & Young, LLP would have caused them to make reference to the matter in
their report. On June 11, 1999, Grant Thornton, LLP was engaged by Sunshine's
Board of Directors as the new independent accountant for Sunshine.
On May 23, 2000, Sunshine filed its original petition against Ernst &
Young, LLP in the case styled Sunshine Mining and Refining Company v. Ernst &
Young, LLP, Cause No. CC-00-06081-A, in the County Court at Law No. 1 of Dallas
County, Texas. Sunshine's complaint alleges that it has sustained substantial
direct and consequential damages in addition to more than $1 million in out of
pocket costs and expenses associated with the failed offering. These damages
arose out of Ernst & Young, LLP's wrongful conduct connected to its cessation of
the auditor-client relationship. Sunshine alleges that Ernst and Young's failure
to earlier disclose its planned termination constituted fraud and/or negligent
misrepresentation. In addition, it is alleged that the termination itself was an
act of negligence, progessional
16
19
misconduct and breach of contract. Ernst and Young's abrupt resignation at the
commencement of Sunshine's offering had the foreseeable effect of alarming the
investment community about the integrity of Sunshine's management and of
Sunshine's financial information.
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
At Sunshine's 1999 Annual Meeting of Stockholders seven individuals
were each elected as a member of the Board of Directors of Sunshine, each of
which has been a member of the Board of Directors of Sunshine for more than five
calendar years. The directors were G. Chris Andersen (May 1983), V. Dale Babbitt
(December 1992), George M. Elvin (June 1994), Daniel D. Jackson (May 1983), Oren
G. Shaffer (June 1993), John S. Simko (December 1992) and Robert B. Smith (June
1993).
On the Effective Date of the Plan, the operational management of
Sunshine became the responsibility of "Reorganized Board of Directors" selected
in accordance with the Plan. The directors listed above ceased to be Directors
of Sunshine on the Effective Date of the Plan and were deemed removed (without
cause) pursuant to the Confirmation Order. In accordance with the terms of the
Plan, four "Creditor Directors" were selected and one "Management Director" was
selected to comprise the Board of Directors of Sunshine from and after the
Effective Date. John S. Simko continues as a Director as the Management
Director, and George M. Elvin was selected as one of the Creditor Directors by
Elliott International, L.P. The other three "Creditor Directors" selected are
Arnold Kastenbaum (Designee of Stonehill Offshore Partners Limited), Keith
McCandlish (Designee of Elliott International, L.P.), and Charles Reardon
(Designee of Stonehill Institutional Partners, L.P.)
DIRECTOR NAME, AGE, PRINCIPAL OCCUPATIONS, BUSINESS EXPERIENCE AND DIRECTORSHIPS
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------------------------------
John S. Simko 62 Director (since December 1992), Chief Executive
Officer (December 1996 to January 2001), Chairman of
the Board (since December 1996), President (December
1992 to January 2001); previously (since 1984) served
the Company as Senior Vice President and General
Counsel.
George M. Elvin(1) 56 Director (since June 1994). Since 1998 he has been
president and owner of Barrington Associates, LLC., a
financial consulting business. From 1992 through 2000
he was the president and owner of Windsor IBC, Inc.,
a brokerage firm member of the NASD. Mr. Elvin is a
designee of Elliott International, LP.
Charles C. Reardon 44 Director (since January 2001). Since 1998, he has
been Of Counsel to Westerman, Ball, Ederer & Miller
LLP, and the firm of Goldburg & Smith, each a Long
Island, New York law firm. During the five years
prior thereto, Mr. Reardon also served as a business
consultant and/or independent contractor for Karamar
Publications, a privately-held publication firm, The
Oxford Insurance Agency Group, a Long Island, New
York based casualty insurance agency, and Allen &
Company, a New York merchant banking firm. Since
1982, he has been a member of the New York State Bar
Association and is a practicing attorney. Mr. Reardon
is a Designee of Stonehill Institutional Partners,
LP.
17
20
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------------------------------
Arnold Kastenbaum(1) 47 Director (since January 2001). Since 1999, he has
been President of Chodan Advisors, Inc., a New York
firm specializing in financial restructuring
consulting. From 1997 through 1999, he was
Director/Distress Securities/Special Situations
(similar to a Vice President) of UBS Warburg; prior
thereto, from 1994 until 1997, he was Director of
Research/Senior Research Analyst of MJ Whitman, Inc.
Mr. Kastenbaum is a member of the Board of Directors
of Willcox & Gibbs, Inc., a publicly-held corporation
which distributed machinery parts to the garment
industry. Mr. Kastenbaum is a Designee of Stonehill
Offshore Partners Ltd.
Keith McCandlish 43 Director (since January 2001). He is a Canadian
citizen and the Manager of Mineral Services at
Associated Mining Consultants, Ltd., and has been
employed by Associated Mining Consultants, Ltd. since
1988 in various capacities. Mr. McCandlish is a
Registered Professional Geologist with over twenty
years of consulting geological and engineering
experience in minerals, oil, sands/heavy oil,
precious stones, coal and industrial minerals. Mr.
McCandlish is a Designee of Elliott International,
LP.
Directors are normally elected annually to serve until the next annual
meeting of stockholders or until their respective successors are elected.
CERTAIN OTHER MATTERS
No family relationships exist between any director or executive
officer.
Mr. Kastenbaum is a Director of Willcox & Gibbs, which has a class of
securities registered pursuant to Section 12 of the Securities and Exchange Act
of 1934.
The following are the executive officers (the "Named Executive
Officers") of the Company:
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------------------------------
John S. Simko 62 Director (since December 1992), Chief Executive
Officer (December 1996 to January 2001), Chairman of
the Board (since December 1996), President (December
1992 to January 2001); previously (since 1984) served
the Company as Senior Vice President and General
Counsel.
William W. Davis 47 President and Chief Operating Officer (since February
2001) and Chief Financial Officer (since September
1992); Executive Vice President (December 1995 to
January 2001), and Senior Vice President and Chief
Financial Officer of the Company (September 1992 to
November 1995); previously (from 1983) served in
various capacities as an employee of the Company.
Harry F. Cougher 58 Senior Vice President and Chief Operating
Officer-Mining since January 1994. Previously, since
1984, served in various capacities as an employee of
the Company.
18
21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes based on its review of Forms 3, 4 and 5, furnished
to the Company for the fiscal year ended December 31, 2000 and written
representations that no other reports were required for such fiscal year that
all Section 16(a) filing requirements applicable to its officers and directors
were complied with.
11. EXECUTIVE COMPENSATION.
The following table sets forth the total compensation paid by the
Company, or accrued for the account of each of the "Named Executive Officers"
for calendar years 2000, 1999 and 1998. There were no other executive officers
whose salary and bonus for the year ended December 31, 2000, exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
- --------------------------------------------------------------------- ----------- ----------------------
(A) (B) (C) (D) (G) (H) (I)
SECURITIES
UNDERLYING LTIP ALL OTHER
SALARY BONUS OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)(1)
--------------------------- ---- ------ ----- ------------ ------- ------------
John S. Simko, 2000 361,844 0 0 0 0
Chairman & Chief Executive 1999 361,843 0 0 0 11,439
Officer 1998 360,031 55,000 0 0 10,798
William W. Davis, 2000 242,548 0 0 0 0
Exec. Vice Pres. & Chief 1999 242,548 50,000 0 0 11,439
Financial Officer 1998 242,547 26,400 0 0 10,798
Harry F. Cougher 2000 145,026 0 0 0 0
Sr. Vice Pres. & 1999 145,026 0 0 0 10,369
Chief Operating Officer-Mining 1998 145,025 10,200 0 0 10,476
- ----------
(1) Includes income received pursuant to the Company's Employees Savings and
Security Plan (the "Savings Plan") in which all employees of the Company, other
than those covered by collective bargaining agreement, may participate, and the
Sunshine Defined Contribution Plan (the "DC Plan"). Payments to Mr. Simko under
the Savings Plan were $4,800 and $4,800 in 1999 and 1998, respectively; and
under the DC Plan were $6,639 and $5,998 in 1999, and 1998, respectively.
Payments to Mr. Davis under the Savings Plan were $4,800 and $4,800 in 1999 and
1998, respectively; and under the DC Plan were $6,639 and $5,998 in 1999 and
1998, respectively. Payments to Mr. Cougher under the Savings Plan were $4,351
and $4,657 for 1999 and 1998, respectively; and under the DC Plan were $6,018
and $5,819 for 1999 and 1998, respectively. The Savings Plan is an individual
account plan which provides for deferred compensation as described in Section
401(k) of the Internal Revenue Code and is subject to and complies with all of
the principal protective provisions of Titles I and II of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The DC Plan replaced the
Company's Defined Benefit Pension Plan as of January 1, 1994, and is subject to
and complies with ERISA.
OPTIONS GRANTS IN LAST FISCAL YEAR
No stock options were granted to the Named Executive Officers in the
year ended December 31, 2000.
19
22
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
As of February 5, 2001, the Effective Date for the Plan, all
outstanding options were cancelled. The following table provides information on
option exercises in fiscal 2000 by the Named Executive Officers and the value
of such officers' unexercised options at December 31, 2000.
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
SHARES VALUE OPTIONS/SARS AT FY-END(#) AT FY-END($)
ACQUIRED ON REALIZED ------------------------------ --------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
John S. Simko, CEO 0 0 108,125 0 0 0
William W. Davis 0 0 75,000 0 0 0
Harry F. Cougher 0 0 37,500 0 0 0
- ----------
PENSION PLANS
On December 31, 1993, the Company froze its Defined Benefit Pension
Plan (the "Pension Plan"), which was replaced as of January 1, 1994, by the
Company's DC Plan. The Pension Plan was maintained for the benefit of employees,
except those covered by a collective bargaining agreement. Benefits under the
Pension Plan ceased to accrue after December 31, 1993.
Annual benefits at age 65 for Messrs. Simko, Davis and Cougher under
the Pension Plan are frozen at $36,186, $33,500 and $15,901, respectively. The
years of credited service at December 31, 1993, for Mr. Simko, Mr. Davis and Mr.
Cougher were ten, eleven and ten years, respectively. Employees who are age 55
and who have fifteen or more years of employment with the Company are eligible
for early retirement, and will receive approximately 75% of the accrued benefits
they would have received at age 65.
COMPENSATION OF DIRECTORS
Directors who are not employees receive an annual retainer of $25,000
and $1,250 per day for each board and committee meeting attended. Directors who
so elect are covered by the Sunshine Mining Health Insurance Plan. During 2000,
directors received compensation as follows in cash and/or health benefits:
Messrs. Andersen $13,750, Babbitt $20,570, Elvin $20,570, Jackson $17,419,
Shaffer $13,750 and Smith $20,570.
EMPLOYMENT CONTRACTS
Effective January 1, 1994, each of Messrs. Simko, Davis and Cougher
entered into written employment agreements (the "Old Employment Agreements")
with the Company for a term of three years. In December 1995, the Employment
Agreements for Messrs. Simko, Davis and Cougher were amended to extend the term
to December 31, 1999, and again in September 1998 to extend the term to December
31, 2002. Pursuant to the Plan and the Confirmation Order, each of such
agreements was rejected by Sunshine and deemed terminated.
Pursuant to the Plan and the Confirmation Order, Sunshine, effective as
of February 5, 2001, intends to enter into new written employment agreements
with Messrs. Simko and Davis (the "New Employment Agreements") covering a term
of three years.
In the event of disability or death, the New Employment Agreements will
provide for the continued payment of the base compensation for the remaining
term, subject to reduction for disability payments separately provided by the
Company. The employees will receive such annual incentive compensation based on
the performance of the Company or other criteria as may be awarded in the
discretion of the Board of Directors, and will participate in any employee
benefit, welfare, deferred compensation, stock option plan, or any other plan or
arrangement of the Company now or hereafter adopted for the benefit of officers
or employees generally.
20
23
If within three years of a "change of control" of the Company,
employment of Messrs. Simko or Davis is voluntarily or involuntarily terminated,
he will be entitled to receive in a single payment an amount from one-half to
two times his base salary, dependent upon the total consideration involved in
the change of control. All benefits under any employee benefit plan would
immediately vest and continue for the balance of the term of his agreement.
The maximum amount of compensation based on current base salaries which
would be required to be paid to each individual if his employment was terminated
upon a "change of control" of the Company would be $400,000 or $480,000 to
Messrs. Simko, and/or Davis, respectively. Payments required upon a "change of
control" of the Company may be considered to have certain anti-takeover effects
in that they would make an acquisition of the Company more costly.
Pursuant to the New Employment Agreements, the Company will indemnify
each employee in the event that he is made, or threatened to be made, a party to
any action or proceeding, including any action by or in the right of the Company
by reason of the provision of services by him to the Company. Claims or
controversies arising under the New Employment Agreements will be resolved
through arbitration, and all resulting legal and accounting fees and other
expenses will be paid by the Company.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
To the knowledge of the Company, the following persons own five percent
(5%) or more of the Company's Common Stock:
(1) (2) (3) (4)
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
CLASS BENEFICIAL OWNER OF BENEFICIAL OWNER CLASS(a)
-------- ------------------- --------------------- ----------
Common Stock The Liverpool Limited Partnership )
c/o Liverpool Associates, Ltd., General Partner )
) 25,490,000 50.98%
Elliott International, L.P. )
c/o Elliott International Capital Advisers, )
Inc., )
712 Fifth Avenue, 36th Floor )
New York NY 10019 )
Stonehill Institutional Partners, L.P.
c/o John Motulsky, General Partner 6,690,275 13.38%
c/o Stonehill Capital Management
126 East 56th Street, 9th Floor
New York NY 10022
Stonehill Offshore Partners Limited
c/o Citco Fund Services (Cayman Islands) 12,814,725 25.63%
Limited, Corporate Center
West Bay Road, Box 31106SMB
Grand Cayman Islands, B.W.I.
The following table presents certain information regarding the
number of shares of Common Stock beneficially owned by each director, nominee,
Named Executive Officer, and by all directors and officers as a group as of the
Record Date. All individuals have sole voting and investment power with respect
to the shares owned.
21
24
AMOUNT AND NATURE OF PERCENT
NAME OF INDIVIDUAL TITLE OF CLASS BENEFICIAL OWNERSHIP OF CLASS
- ------------------ -------------- -------------------- --------
William W. Davis Common Stock 750,000(b) 1.5%
George M. Elvin Common Stock -0- -0-
Arnold Kastenbaum Common Stock -0- -0-
Keith McCandlish Common Stock -0- -0-
Charles C. Reardon Common Stock -0- -0-
John S. Simko Common Stock 500,000(b) 1%
All Directors and Executive Officers as
a Group
(seven individuals) Common Stock 1,250,000(b) 2.5%
- ----------
(a) Percentages are based upon estimated 50,000,000 shares of Common Stock
outstanding at March 15, 2001.
(b) Includes the following shares subject to purchase pursuant to stock
options exercisable within 60 days - Messrs. Davis, 750,000 shares;
Simko, 500,000 shares.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
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
DESIGNATION EXHIBIT DESCRIPTION
2.1 Third Amended Joint Chapter 11 Plan of Reorganization dated as
of December 4, 2000, bench-filed in the case styled In Re:
Sunshine Mining and Refining Company, Chapter 11, Case No.
00-3409 (MWF), filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K for event reported February 5, 2001.
2.2 Order confirming the Third Amended Joint Chapter 11 Plan of
Reorganization of Sunshine Mining and Refining Company and its
Debtor Subsidiaries as entered December 5, 2000, filed as
Exhibit 2.2 to the Registrant's Current Report on Form 8-K for
event reported February 5, 2001.
22
25
EXHIBIT
DESIGNATION EXHIBIT DESCRIPTION
2.3 Partial Consent Decree with Sunshine Mining and Refining Company
and Sunshine Precious Metals, Inc. in the case styled United
States of America v. Asarco Incorporated, et al., a Consolidated
Case Nos. 96-0122-N-EJL and 91-0342-N-EJL in the United States
District Court for the District of Idaho, filed as Exhibit 2.3
to the Registrant's Current Report on Form 8-K for event
reported February 5, 2001.
2.4 Notice of Effective Date of Third Amended Joint Chapter 11 Plan
of Reorganization, filed as Exhibit 2.4 to the Registrant's
Current Report on Form 8-K for event reported February 5, 2001.
3.1 Amended and Restated Certificate of Incorporation filed with and
approved by the Secretary of State of Delaware on February 23,
2001, filed as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K for event reported February 5, 2001.
3.2 Amended and Restated Bylaws as adopted February 9, 2001, filed
as Exhibit 3.2 to the Registrant's Current Report on Form 8-K
for event reported February 5, 2001.
10.1 Call Option Agreement dated February 5, 2001, among Sunshine
International Mining, Inc., Sunshine Mining and Refining
Company, Sunshine Argentina, Inc., Elliott International, L.P.,
The Liverpool Limited Partnership, Stonehill Institutional
Partners, L.P. and Stonehill Offshore Partners Limited, filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K for
event reported February 5, 2001.
10.2 Registration Rights Agreement dated February 5, 2001, among
Sunshine Mining and Refining Company, Stonehill Partners, L.P.,
Stonehill Offshore Partners Limited, Elliott International, L.P.
and The Liverpool Limited Partnership, filed as Exhibit 10.2 to
the Registrant's Current Report on Form 8-K for event report
February 5, 2001.
*21.0 Subsidiaries of Sunshine.
24.1 Power of Attorney (set forth on signature page hereof).
* Filed herewith.
Schedules other than those included in the Consolidated Financial
Statements, if any, are omitted for the reason that they are either not
required, not applicable or the required information is included in the
Consolidated Financial Statements or Notes thereto.
(a) Reports on Form 8-K:
On February 20, 2001, the Company filed a report on Form 8-K
reporting that February 5, 2001 was the effective date of its
Chapter 11 Plan of Reorganization and that a change of
ownership occurred on that date.
23
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Sunshine Mining and Refining Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATED this 16th day of March, 2001.
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 16th day of March, 2001.
NAME CAPACITIES
- ---- ----------
/s/ JOHN S. SIMKO Director and Chairman of the Board
- ----------------------------------
John S. Simko
/s/ GEORGE M. ELVIN Director
- ----------------------------------
George M. Elvin
/s/ ARNOLD KASTENBAUM Director
- ----------------------------------
Arnold Kastenbaum
/s/ KEITH McCANDLISH Director
- ----------------------------------
Keith McCandlish
/s/ CHARLES C. REARDON Director
- ----------------------------------
Charles C. Reardon
/s/ WILLIAM W. DAVIS President, Chief Operating Officer
- ---------------------------------- and Chief Financial Officer
William W. Davis
24
27
Consolidated Financial Statements
Sunshine Mining and Refining Company
Years ended December 31, 2000, 1999 and 1998
with Report of Independent Certified Public Accountants
28
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Sunshine Mining and Refining Company
We have audited the accompanying consolidated balance sheets of Sunshine Mining
and Refining Company and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2000. 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 of America. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunshine Mining
and Refining Company and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
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 $20,890,000 and used $4,932,000
of cash in operating activities in the year ended December 31, 2000. As
discussed in Note 4 to the consolidated financial statements, the Company closed
the Sunshine Mine in February 2001 and will have no revenues from operations for
the forseeable future. These matters 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 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, the Company and
three of its subsidiaries filed voluntary petitions for relief under Chapter 11
of the federal bankruptcy laws in the United States Bankruptcy Court of the
District of Delaware on August 23, 2000. The Company emerged from bankruptcy on
February 5, 2001.
GRANT THORNTON LLP
Dallas, Texas
February 22, 2001
F-1
29
Sunshine Mining and Refining Company
Consolidated Balance Sheets
(in thousands, except per share amounts)
DECEMBER 31
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash investments $ 291 $ 628
Silver bullion 10 4,117
Accounts receivable 1,626 2,677
Inventories 1,500 2,826
Equipment held for sale 1,006 --
Other current assets 731 787
------------ ------------
Total current assets 5,164 11,035
Property, plant, and equipment, at cost 40,933 60,720
Less accumulated depreciation, depletion, and amortization (26,262) (37,623)
------------ ------------
14,671 23,097
Investments and other assets 2,757 2,888
------------ ------------
Total assets $ 22,592 $ 37,020
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 697 $ 1,634
Accrued expenses 1,643 3,562
Current portion, long term debt -- 5,000
------------ ------------
Total current liabilities 2,340 10,196
Long term debt 1,530 38,238
Accrued pension and other postretirement benefits 5,230 4,445
Other long-term liabilities and deferred credits 779 2,861
Liabilities subject to compromise 48,991 --
Stockholders' equity (deficit):
Common stock, $0.01 par value:
Authorized shares - 75,000
Issued shares - 49,264 in 2000; 39,252 in 1999 493 393
Paid-in capital 729,956 725,840
Accumulated other comprehensive loss (884) --
Accumulated deficit (764,733) (743,843)
------------ ------------
(35,168) (17,610)
Less treasury stock: 579 shares in 2000 and 1999, at cost (1,110) (1,110)
------------ ------------
(36,278) (18,720)
------------ ------------
Total liabilities and stockholders' deficit $ 22,592 $ 37,020
============ ============
See accompanying notes.
F-2
30
Sunshine Mining and Refining Company
Consolidated Statements of Operations
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31
2000 1999 1998
------------ ------------ ------------
Operating revenues $ 23,094 $ 32,332 $ 34,668
Mark to market gain (loss) (167) 359 (2,588)
------------ ------------ ------------
22,927 32,691 32,080
Costs and expenses:
Cost of revenues (22,570) (27,673) (28,365)
Depreciation, depletion, and amortization (1,198) (1,328) (4,944)
Impairment of mining properties (7,245) -- (50,425)
Exploration (2,373) (2,015) (4,512)
Selling, general, and administrative
expense (3,450) (4,800) (5,016)
------------ ------------ ------------
(36,836) (35,816) (93,262)
Other income (expense):
Interest income 85 198 567
Interest and debt expense (5,294) (8,213) (6,979)
Other, net 193 297 2,749
------------ ------------ ------------
(5,016) (7,718) (3,663)
------------ ------------ ------------
Loss before reorganization items (18,925) (10,843) (64,845)
Reorganization items - professional fees (1,965) -- --
------------ ------------ ------------
Net loss $ (20,890) $ (10,843) $ (64,845)
============ ============ ============
Basic and diluted loss per
common share $ (0.48) $ (0.31) $ (2.02)
============ ============ ============
See accompanying notes.
F-3
31
Sunshine Mining and Refining Company
Consolidated Statements of Stockholders' Equity (Deficit)
COMMON STOCK ACCUMULATED
------------------------- PAID-IN OTHER COMPRE- ACCUMULATED
SHARES AMOUNT CAPITAL HENSIVE LOSS DEFICIT
---------- ---------- ---------- -------------- ----------
(In Thousands)
Balance at December 31, 1997 32,477 $ 325 $ 713,465 $ -- $ (668,155)
Net loss -- -- -- -- (64,845)
Issuance of common stock upon conversion of
Eurobonds 191 2 1,317 -- --
Issuance of common stock for interest on 10% Notes 134 1 749 -- --
Issuance of common stock upon exercise of stock
options and warrants 194 2 783 -- --
Other, net -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 32,996 $ 330 $ 716,314 $ -- $ (733,000)
Net loss -- -- -- -- (10,843)
Issuance of common stock upon conversion of:
Eurobonds 337 3 1,178 -- --
5% Notes 3,451 35 5,632 -- --
10% Notes 37 -- 129 -- --
Beneficial conversion feature on 5% Notes -- -- 962 -- --
Issuance of common stock for interest on: Eurobonds 1,587 16 (16) -- --
5% Notes 112 1 150 -- --
10% Notes 730 8 1,486 -- --
Other, net 2 -- 5 -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 39,252 $ 393 $ 725,840 $ -- $ (743,843)
Comprehensive loss:
Net loss -- -- -- -- (20,890)
Minimum pension liability adjustment -- -- -- (884) --
---------- ---------- ---------- ---------- ----------
Total comprehensive loss -- -- -- (884) (20,890)
Issuance of common stock upon exercise of warrants 5,611 56 (52) -- --
Issuance of common stock:
Conversion of Eurobonds 756 8 1,023 -- --
Conversion of 10% Notes 1,937 19 1,288 -- --
Interest payment on 10% Notes 698 7 617 -- --
Mandatory prepayment on 10% Notes 1,010 10 1,240 -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 49,264 $ 493 $ 729,956 $ (884) $ (764,733)
========== ========== ========== ========== ==========
TREASURY STOCK
------------------------------------------
SHARES AMOUNT TOTAL
---------- ---------- ----------
(In Thousands)
Balance at December 31, 1997 573 $ (1,139) $ 44,496
Net loss -- -- (64,845)
Issuance of common stock upon conversion of
Eurobonds -- -- 1,319
Issuance of common stock for interest on 10% Notes -- -- 750
Issuance of common stock upon exercise of stock
options and warrants -- -- 785
Other, net (3) 29 29
---------- ---------- ----------
Balance at December 31, 1998 570 $ (1,110) $ (17,466)
Net loss -- -- (10,843)
Issuance of common stock upon conversion of:
Eurobonds -- -- 1,181
5% Notes -- -- 5,667
10% Notes -- -- 129
Beneficial conversion feature on 5% Notes -- -- 962
Issuance of common stock for interest on: Eurobonds -- -- --
5% Notes -- -- 151
10% Notes -- -- 1,494
Other, net 9 0 5
---------- ---------- ----------
Balance at December 31, 1999 579 $ (1,110) $ (18,720)
Comprehensive loss:
Net loss -- -- (20,890)
Minimum pension liability adjustment -- -- (884)
---------- ---------- ----------
Total comprehensive loss -- -- 21,774
Issuance of common stock upon exercise of warrants -- -- 4
Issuance of common stock:
Conversion of Eurobonds -- -- 1,031
Conversion of 10% Notes -- -- 1,307
Interest payment on 10% Notes -- -- 624
Mandatory prepayment on 10% Notes -- -- 1,250
---------- ---------- ----------
Balance at December 31, 2000 579 $ (1,110) $ (36,278)
========== ========== ==========
See accompanying notes.
F-4
32
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
2000 1999 1998
------------ ------------ ------------
(In Thousands)
OPERATING ACTIVITIES
Net loss $ (20,890) $ (10,843) $ (64,845)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization 1,198 1,328 4,944
Impairment of mining properties 7,245 -- 50,425
Amortization of debt issuance costs and accretion of debt
discount 730 3,806 2,480
Gains on sales of investments and other (345) (1,138) (2,795)
Interest on Eurobonds and 10% Notes paid or payable in
common stock 2,881 1,645 750
Net (increase) decrease in:
Silver bullion 171 (430) 1,097
Accounts receivable 1,051 124 --
Inventories 1,326 1,410 (609)
Other assets 421 547 (947)
Net increase (decrease) in:
Accounts payable and accrued expenses 3,795 (585) 855
Accrued pension and other
postretirement benefits (433) (1,053) (174)
Other liabilities and deferred credits (2,082) (623) (720)
------------ ------------ ------------
Net cash used in operating activities (4,932) (5,812) (9,539)
------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,646) (4,183) (10,318)
Other, principally sale of silver bullion 4,861 3,411 4,506
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,215 (772) (5,812)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of long term debt,
net of issuance costs 1,380 5,827 (7)
Proceeds from issuance of common stock upon exercise of
warrants and other transactions -- (27) 785
------------ ------------ ------------
Net cash provided by financing activities 1,380 5,800 778
------------ ------------ ------------
Decrease in cash and cash investments (337) (784) (14,573)
Cash and cash investments at beginning of year 628 1,412 15,985
------------ ------------ ------------
Cash and cash investments at end of year $ 291 $ 628 $ 1,412
============ ============ ============
Supplemental cash flow information:
Interest paid in cash $ 265 $ 2,526 $ 3,367
============ ============ ============
See accompanying notes.
F-5
33
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements
1. VOLUNTARY FILING UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
Sunshine's business and profitability have been negatively affected by an
extremely lengthy period of low silver prices. Since 1988, the price of silver
has averaged less than $5.00 per ounce compared to an average price of
approximately $9.50 per ounce over the prior 10 years. Given the depressed price
of silver compared to the Company's cash production costs, the Company's
operations have generated a negative cash flow for several years.
On August 23, 2000 (the "Petition Date") Sunshine Mining and Refining Company
("Sunshine" or the "Company") and three of its subsidiaries (the "Debtor
Subsidiaries" and together with the Company, the "Debtors") filed voluntary
petitions for relief under Chapter 11 of the federal bankruptcy laws in the
United States Bankruptcy Court for the District of Delaware (Case No. 00-3409
(MFW)). Under Chapter 11, certain claims against the Debtors in existence prior
to the filing of the petitions for relief under the federal bankruptcy laws are
stayed while the Debtors continue business operations as Debtors-in-possession.
These claims are reflected in the December 31, 2000 balance sheet as
"liabilities subject to compromise." Claims secured by the Debtors' assets
("secured claims") also are stayed, although the holders of such claims have the
right to move the court for relief from the stay.
The Debtors received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages and
retirement benefits and certain prepetition claims of certain critical suppliers
of goods and services.
The Third Amended and Restated Joint Chapter 11 Plan of Reorganization as
modified December 5, 2000 (the "Plan") was confirmed on December 5, 2000 (the
"Confirmation Order"). Under the terms of the Confirmation Order, certain
conditions precedent existed to the effectiveness of the Plan set forth in the
Plan and the Confirmation Order. The effective date of the Plan was February 5,
2001 (the "Effective Date"). (See Note 2 for discussion of the Plan.)
To fund continuing operations, the Company procured a $5 million
Debtor-in-possession credit facility (the "DIP Facility"). (See Note 9.)
2. PLAN OF REORGANIZATION
The Plan, cosponsored by four of the Company's major bondholders holding more
than 70% of the Company's outstanding indebtedness (the "Cosponsoring
Bondholders"), became effective on February 5, 2001 and provided that:
o The "old common stock" of Sunshine was canceled (as were all existing
issues of warrants and options). Common stockholders with 100 or more
shares of common stock as of the Effective Date received a pro rata
distribution of approximately 3.4% of the "new common stock." Of the total
new shares of stock outstanding (50 million shares) existing common stock
holders received approximately 1.7 million shares.
F-6
34
o All of the Company's pre-bankruptcy funded debt and certain other
liabilities (totaling approximately $49 million) was canceled and converted
to equity.
o Approximately 90% of the new common stock is held by affiliates of Elliott
Associates, L.P. and Stonehill Capital Management LLC (the "Principal
Shareholders"). They have appointed four members to the Company's
five-member Board of Directors. In addition, the Principal Shareholders
have a Call Option which allows them, upon the occurrence of certain
adverse events, to acquire Sunshine Argentina, the owner of the Pirquitas
Mine in Argentina, the Company's principal asset.
o The Confirmation Order required that, prior to the Effective Date, the
Company obtain approval of a new consent decree from the Idaho District
Court releasing the Company from a 1994 Consent Decree which obligated it
to remediate certain property in the Bunker Hill Superfund Site. The new
Consent Decree was entered on January 22, 2001. The Confirmation Order also
required the incorporation of the agreement reached with certain agencies
of the United States and the Coeur d'Alene Indian Tribe regarding certain
covenants not to sue the Company for potentially significant environmental
claims. In consideration for the releases and agreement not to sue, the
Company agreed to issue the plaintiffs ten-year warrants to acquire up to
4.975 million shares of the Company's New Common stock at an exercise price
of $.66 per share; to deed to the plaintiffs certain timberland it owns in
North Idaho; to pay a sliding scale royalty commencing at silver prices in
excess of $6.00 per ounce on production from the Sunshine Mine; and to
perform certain test work and remediation at the Con Sil mine site. (See
Note 14.)
3. 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 2000, 1999 and 1998. 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 15.)
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 financial statements for the year ended December 31, 2000 reflect accounting
principles and practices set forth in AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under The Bankruptcy Code"
("SOP 90-7"). Pursuant to the guidance of SOP 90-7, the Company will adopt
"fresh start" reporting as of February 5, 2001. Under "fresh start" reporting,
the reorganization value of the entity is allocated to the entity's assets. As a
result of adopting "fresh start" reporting upon emerging from Chapter 11 status,
the Company's financial statements will not be comparable with those prepared
before the Plan was effective, including the historical financial statements
included in this annual report.
F-7
35
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
2000 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.
EQUIPMENT HELD FOR SALE
Management reviewed all the equipment and property located at the Sunshine Mine
in Kellogg, Idaho and determined what equipment could be sold after the mine was
placed on care and maintenance in February 2001. After an evaluation of the
equipment that would be held for sale, the Company determined that the fair
value of the equipment held for sale was approximately $1 million. (See Note 6.)
CONCENTRATION OF CREDIT RISK
During 2000, the Company marketed 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 did not require collateral. Management periodically performs reviews as
to the creditworthiness of its customer(s). The Company has not sustained any
significant credit losses on sales of its products. In February 2001, the
Company was notified by the smelter that they were temporarily closing their
operations and would no longer accept deliveries.
SILVER FINANCIAL INSTRUMENTS
The Company sold covered call options on silver bullion held for investment
during 1999 and 1998. The strike price of these agreements exceeded current
market prices at the time they were entered into. Option premiums received were
deferred. If the applicable market price exceeded the strike price and option
premium, the differential was accrued and recognized as a reduction of revenues.
Any remaining deferred option premiums were recognized as a component of
revenues at the end of the option period. No covered call options were sold
during 2000 and $34 thousand of option premiums were recognized as income during
2000.
The fair values of the sold call options are not included in the financial
statements.
F-8
36
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 6).
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.
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
F-9
37
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.
4. LIQUIDITY MATTERS AND REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States,
which contemplate continuation of the Company as a going concern. However, the
Company has sustained substantial losses from operations in recent years. In
addition, the Company has used, rather than provided, cash in its operations.
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 February 2001, the Company placed the Sunshine Mine on care and maintenance
status after being notified that the smelter to which the Sunshine Mine shipped
its concentrates was temporarily closing their operations and would no longer
accept any deliveries. As a result of the closure of the Sunshine Mine, the
Company will have no revenues from operations for the foreseeable future.
Recoverability of a major portion of the recorded asset amounts shown in the
accompanying consolidated balance sheets is dependent upon continued operations
of the Company. 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.
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 On February 5, 2001, the Company emerged from Chapter 11 Bankruptcy.
Pursuant to the terms of the Plan, all of the claims of the Eurobonds, the
10% Notes, the 9% Notes and certain other unsecured creditors was
eliminated in exchange for approximately 96.6% of the 50 million shares of
new Common Stock.
o During the bankruptcy reorganization, the Company was released as a
defendant in certain environmental litigation and settled certain
environmental liabilities associated with a 1994 Consent Decree at the
Bunker Hill Superfund Site. (See Note 14.)
o The Company is currently reviewing its strategic options, which may include
a sale of some or all of its assets, a merger or a joint venture for the
development of Pirquitas.
5. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories consist of the following at December 31:
2000 1999
-------- --------
(In Thousands)
Precious metals inventories:
Work in process $ 187 $ 1,376
Finished goods 28 107
Materials and supplies inventories 1,285 1,343
-------- --------
$ 1,500 $ 2,826
======== ========
F-10
38
The Company held as an investment, $4.1 million of silver bullion, in excess of
normal operating requirements at December 31, 1999, which was sold during 2000.
The Company sold covered call options on silver bullion held for investment.
Total premiums earned from the sale of covered calls aggregated $34,000,
$246,500 and $316,250 in 2000, 1999 and 1998, respectively. At December 31,
2000, no sold covered call options were outstanding. 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.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
2000 1999
---------- ----------
(In Thousands)
Precious metals mineral interests $ 2,207 $ 8,151
Mine improvements 13,398 12,495
Buildings, leasehold improvements, and equipment 24,948 39,295
Land 380 779
---------- ----------
40,933 60,720
Less accumulated depreciation, depletion, and
amortization 26,262 37,623
---------- ----------
$ 14,671 $ 23,097
========== ==========
As a result of the Sunshine Mine being placed on care and maintenance status, an
extensive review of all the equipment and property at the Sunshine Mine was made
by mine management to determine their respective fair values. This review
resulted in an impairment charge of $7.2 million in the fourth quarter of 2000.
The Company intends to sell certain of the assets at the Sunshine Mine and has
classified them as "Assets held for sale" at their estimated selling price of $1
million.
7. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
2000 1999
-------- --------
(In Thousands)
Compensation, vacation, and severance $ 772 $ 1,119
Interest 28 1,027
Taxes, other than income taxes -- 298
Reorganization fees and expenses 500 --
Environmental remediation -- 700
Insurance premiums 42 270
Other 301 148
-------- --------
$ 1,643 $ 3,562
======== ========
F-11
39
8. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise on the accompanying December 31, 2000 balance
sheet consist of the following (in thousands):
Principal balance of 8% Senior Exchangeable Notes (the "Eurobonds") $25,975
Interest due on Eurobonds 1,951
Principal balance of 10% Senior Convertible Notes (the 10% Notes) 12,313
Interest due on 10% Notes 2,583
Principal balance of 9% Convertible Subordinated Debentures
(the "Debentures") 1,515
Interest due on Debentures 82
Principal and interest due on 5% Convertible Notes (the "5% Notes") 345
Deferred financing costs of 10% Notes (92)
Liabilities for unsecured nonpriority claims and provisions for
environmental liability 4,319
-------
Liabilities subject to compromise $48,991
=======
As discussed in Note 2, these liabilities were canceled and converted to equity
pursuant to the Plan as of the Effective Date.
The amounts above may be subject to future adjustment depending on Bankruptcy
Court action, further developments with respect to potential contingent and/or
disputed claims or other events.
As a result of the Chapter 11 filing, the Debtors discontinued accruing interest
as of the Petition Date on the liabilities subject to compromise. Contractual
interest on these liabilities totaled approximately $5.8 million for 2000, which
is approximately $1.6 million in excess of amounts expensed in the accompanying
financial statements. The contractual interest on the 10% Notes includes
approximately $1.4 million of additional interest that became due on March 21,
2000 and an 18% default interest rate from that date.
9. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2000 1999
------------ ------------
(In Thousands)
Debtor in Possession Financing $ 1,530 $ --
Eurobonds 25,975 26,518
10% Notes 12,313 14,871
Debentures 1,515 1,515
Other 345 334
------------ ------------
41,678 43,238
Less: Current portion -- 5,000
Liabilities subject to compromise 40,148 --
------------ ------------
$ 1,530 $ 38,238
============ ============
F-12
40
Defaults Upon Senior Securities
The Chapter 11 filing constituted a default under the terms of the Eurobonds,
the 10% Notes and the Debentures. Pursuant to the terms of the Plan all of the
claims of the Eurobonds, the 10% Notes, the Debentures, and certain other
unsecured creditors were eliminated in exchange for approximately 96.6% of the
Company's new Common Stock as of the Effective Date.
For a discussion of the Company's financial reorganization plans, see Notes 1, 2
and 4 to the Financial Statements.
Debtor in Possession Financing/Exit Financing Facility
The Company obtained a $5 million post-petition debtor-in-possession financing
facility (the "DIP Facility") with affiliates of the Cosponsoring Bondholders.
Sunshine Argentina, Inc., a wholly-owned subsidiary, is the borrower under the
DIP Facility. The base rate of interest under the DIP Facility is 15% per annum
with a $150 thousand commitment fee which was expensed in the accompanying
financials. Borrowings under the DIP Facility are secured by substantially all
of the Company's assets. After the Plan became effective on February 5, 2001,
the outstanding balance under the DIP facility of approximately $2.7 million was
rolled into an Exit Financing Facility with the same lenders with repayment due
within eighteen months. The Exit Financing Facility has a maximum commitment of
$5 million, an interest rate of 15% and a commitment fee of $150 thousand.
Eurobonds
In March 1996, SPMI issued $30 million aggregate principal amount of the
Eurobonds. The Eurobonds bore interest at 8% per annum and were initially
scheduled to mature March 21, 2000. In 2000, 1999 and 1998, a total of $4.0
million of the Eurobonds were exchanged and canceled for approximately 1.3
million shares of common stock.
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 were amortized over the life of the Eurobonds. Unamortized debt
issuance costs of $92 thousand is included in "Investments and other assets" at
December 31, 1999.
10% Notes
In November 1997, the Company completed a private placement of the 10% Notes
totaling $15 million aggregate principal amount due November 24, 2002. Beginning
in February 2000 and quarterly thereafter, $1.25 million principal amount was
required to be redeemed by the Company. Principal and interest were payable
either in cash or common stock of Sunshine at the Company's option. In February
2000, $1.25 million of the 10% Notes were prepaid and retired by the issuance of
approximately 1 million shares of common stock.
During 1999 and 2000, approximately $1.4 million of the 10% Notes were converted
and canceled for approximately 2.0 million shares of common stock.
F-13
41
In March 2000, the Company issued approximately 700 thousand shares of Common
Stock to the holder of the 10% Notes as partial payment of the quarterly
interest due. Pursuant to the terms of the Notes, a $1.4 million additional
interest payment was due because the Eurobonds were not converted into Common
Stock nor refinanced with junior debt prior to March 21, 2000. This was not
paid. Approximately 134 thousand and 730 thousand shares of common stock were
issued for interest payments in 1998 and 1999, respectively.
In connection with the issuance of the 10% notes, the purchaser was issued 188
thousand warrants to purchase common stock of Sunshine at 110% of the conversion
price of the 10% Notes. The exercise price of these warrants was reduced to
$3.92 in December 1998, at which time all 188 thousand warrants were exercised.
Debentures
The Debentures were due July 15, 2008 and were convertible at any time prior to
maturity or redemption into shares of Common Stock of the Company at a
conversion price of $13.28 per share, subject to adjustment. The Debentures were
unsecured and subordinated in right of payment to senior indebtedness (as
defined).
5% Notes
In January 1999, the Company completed a private placement of 5% Notes due
January 28, 2001 totaling $6 million. 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.
10. INCOME TAXES
The Company has incurred losses during each of the three years in the period
ended December 31, 2000, and no tax benefit was recorded because of the
uncertainty of realization of the net deferred tax asset.
The computation of the net deferred tax asset at December 31 is as follows:
2000 1999
------------ ------------
(In Thousands)
Deferred tax assets:
Property, plant, and equipment $ 11,041 $ 9,031
Accrued pension and other postretirement benefits
1,482 1,556
Net operating loss carryforward 87,500 99,750
------------ ------------
100,023 110,377
Less valuation allowance 100,023 (110,377)
------------ ------------
$ -- $ --
============ ============
At December 31, 2000, the Company had net operating loss carryforwards ("NOL's)
for federal income tax purposes of approximately $250 million. The loss
carryforwards expire principally in the
F-14
42
years 2001 through 2020. As a result of the bankruptcy, the Company's
NOL's will be reduced by any cancellation of indebtedness income and all
interest paid or accrued in the last three years on debt that was cancelled
pursuant to the Plan. This will still leave the Company with more than $200
million of NOL's.
The Company has two options regarding its NOL's after the effective date of the
Plan. The first option is to take the bankruptcy exception so that there would
be no limitations on future utilization of NOL's as a result of the ownership
change pursuant to the Plan. However, if there is a 50% change in ownership
within the next 2 years, the NOL's will be extinguished. Alternatively, the
Company may elect to recognize the ownership change pursuant to the Plan which
would limit the future utilization of the NOL's to an annual amount equal to
approximately 5.5% of the Company's market capitalization on February 5, 2001.
The Company is reviewing these alternatives and has not determined which option
will be chosen.
11. STOCKHOLDER'S EQUITY (DEFICIT)
Pursuant to the terms of the Plan, effective as of February 5, 2001, all
outstanding shares of stock, warrants and options were canceled and 50 million
shares of new Common Stock were issued.
In August 2000, the Company issued 8.3 million warrants to purchase common stock
of the Company to the holders of its 8% Senior Exchangeable Notes and its 10%
Senior Convertible Notes for extensions of maturity and for agreements to
exchange debt for equity in the reorganization. The warrants represented the
right to acquire one new share of the Company's common stock at its par value,
and had a cashless exercise feature. Prior to their cancellation, 6.1 million
warrants were exercised primarily pursuant to the cashless exercise feature.
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.
The Company had authorized 20.0 million shares of preferred stock, of which no
shares were issued and outstanding at December 31, 2000 or 1999.
The Company had two stock option plans under which options had been granted to
members of management. The stock option plans covered a total of 1.6 million
shares with 907 thousand options available for grant at December 31, 2000. The
option price could 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. No
stock options were granted in 2000. Pursuant to the Plan, as of February 5,
2001, all outstanding stock options and the two stock option plans were
canceled.
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.
F-15
43
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
and 1998, respectively: risk-free interest rates of 6.42% and 4.47%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
common stock of .617 and .572; and a weighted-average expected life of the
option of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
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:
2000 1999 1998
-------- -------- ---------
Pro forma net loss applicable to common shares $(20,890) $(10,854) $ (64,929)
Pro forma basic and diluted loss per share $ (0.48) $ (0.31) $ (2.02)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
2000 1999 1998
------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding,
beginning of year 621 $ 11.40 605 $ 11.68 607 $ 11.92
Granted -- -- 18 1.50 19 5.04
Exercised -- -- -- -- (6) 7.28
Forfeited (38) 11.92 (2) 12.00 (15) 12.08
---------- ---------- ---------- ---------- ---------- ----------
Outstanding,
end of year 583 $ 11.00 621 $ 11.40 605 $ 11.68
========== ========== ========== ========== ========== ==========
Exercisable at end of year 583 $ 11.00 621 $ 11.40 605 $ 11.68
Weighted-average fair value
of options granted during
the year -- $ 0.65 $ 2.08
Exercise prices for options outstanding as of December 31, 2000, ranged from
$1.50 to $23.00.
F-16
44
12. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
2000 1999 1998
--------- -------- ---------
(In thousands, except
per share amounts)
Numerator:
Numerator for basic loss per share -loss available to
common shareholders $ (20,890) $(10,843) $ (64,845)
Denominator:
Denominator for basic and diluted loss per share -
weighted-average shares 43,898 34,682 32,109
Basic and diluted loss per share $ (0.48) $ (0.31) $ (2.02)
All stock options and warrants were excluded from the calculation of diluted
loss per share because including them would have been antidilutive.
13. 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 include provisions that would
apply in the event of a 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.
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):
COMBINED
--------------------------
2000 1999
---------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,115 $ 6,104
Service cost 246 238
Interest cost 477 417
Actuarial (gains) losses 864 (349)
Benefit payments (650) (295)
---------- ----------
Benefit obligation at end of year 7,052 6,115
Change in plan assets:
Fair value of plan assets at beginning of year 6,883 5,842
Actual return on plan assets (168) 1,036
Employer contributions 305 300
Benefit payments (650) (295)
---------- ----------
Fair value of plan assets at end of year 6,370 6,883
---------- ----------
Funded (underfunded) status (682) 768
Unrecognized prior service cost 334 474
Unrecognized net (gains)/losses 544 (1,189)
Unrecognized transition asset -- (28)
Additional minimum liability (1,218) --
---------- ----------
Prepaid (accrued) benefit cost $ (1,022) $ 25
========== ==========
F-17
45
Net periodic pension costs relating to the Company's defined benefit plans
consist of the following for the year ended December 31:
2000 1999 1998
---------- ---------- ----------
(In thousands)
Service cost $ 246 $ 238 $ 227
Interest cost 477 417 380
Expected return on plan assets (622) (531) (743)
Net amortization and deferrals 33 58 345
---------- ---------- ----------
Net periodic pension cost $ 134 $ 182 $ 209
========== ========== ==========
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.
The benefit obligation and fair value of plan assets by plan at December 31,
2000 (in thousands):
NEGOTIATED FROZEN
PLAN PLAN TOTAL
------------ ------------ ------------
Benefit obligation $ 6,167 $ 885 $ 7,052
Fair value of plan assets $ 5,174 $ 1,195 $ 6,370
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:
2000 1999 1998
------- ------- -------
Discount rate 8.00% 7.00% 7.25%
Rate increase in compensation 0% 0% 0%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
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. The
Company's Board has not determined if a contribution for 2000 will be made.
Contributions made for 1999 and 1998 were $157,000 and $151,000, respectively.
F-18
46
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. The Company's Board has not determined if a
matching contribution for 2000 will be made. Company contributions made for 1999
and 1998 were $108,000 and $115,000, 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.
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31 (in
thousands):
COMBINED
-------------------------------
2000 1999
------------ ------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,590 $ 3,930
Service cost 7 7
Interest cost 286 257
Participants' contributions -- 11
Actuarial (gains) losses 862 (189)
Benefit payments (456) (426)
------------ ------------
Benefit obligation at end of year $ 4,289 $ 3,590
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 457 426
Participants' contributions -- 11
Benefit payments (457) (437)
------------ ------------
Fair value of plan assets at end of year -- --
------------ ------------
Underfunded status (4,289) (3,590)
Unrecognized prior service cost (1,081) (1,160)
Unrecognized net losses 1,142 280
------------ ------------
Accrued benefit cost $ (4,208) $ (4,470)
============ ============
Weighted average assumptions for end of year disclosure:
Discount rate 8.00% 8.00%
Initial trend rate 9.0% 6.75%
Ultimate trend rate 5.00% 5.00%
Number of years from initial to ultimate trend 10 2
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):
F-19
47
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- ---------------
Effect on total of service and interest cost
components $ 17 $ (17)
Effect on postretirement benefit obligation $ 249 $ (215)
Net periodic postretirement benefit cost for these plans includes the following
components for the year ended December 31 (in thousands):
2000 1999 1998
-------- -------- --------
Service cost $ 7 $ 7 $ 7
Interest cost 286 257 343
Net amortization (99) (69) (6)
-------- -------- --------
Net periodic cost $ 194 $ 195 $ 344
======== ======== ========
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.
14. COMMITMENTS AND CONTINGENCIES
In connection with the confirmation and effectiveness of the Plan, a settlement
of all environmental litigation was effected.
The settlement between the Company, SPMI and the United States on behalf of the
United States Environmental Protection Agency, United States Department of
Interior and the United States Department of Agriculture (the Government) and
the Coeur d'Alene Indian Tribe (the Tribe) was memorialized in a new Consent
Decree in civil actions CIV96-0122-N-EJL and CIV91-0342-N-EJL pending in the
United States District Court for the District of Idaho. By entry of the new
Consent Decree all claims of the Government and the Tribe for natural resource
damages and response costs to injuries allegedly caused by the Company and SPMI
in the Coeur d'Alene Basin were dismissed by the Government and the Tribe. The
new Consent Decree was approved by the United States District Court and entered
on January 22, 2001. In exchange for the dismissal, the Company granted warrants
to purchase 9.95% of Sunshine's new common stock (i) at an exercise price of
$.66 per share, (ii) with a cashless exercise feature, (iii) that are exempt
from registration pursuant to 11 USC Section 1145, (iv) that are fully
transferable to any other entity at any time, and (v) are subject to ordinary
terms and conditions including anti-dilution provisions.
The Company and SPMI have also agreed to provide net smelter return royalty
payments to the Government and the Tribe based on revenues from all mining by
SPMI anywhere in the United States and all mining by any Sunshine entity from
the Sunshine Mine or within one mile of the current boundaries of the mine. The
royalty adjusts on a sliding scale based on the average price of silver. No
royalty must be paid until the average silver price exceeds $6.00 per ounce.
Under the new Consent Decree, SPMI is required to convey the surface rights to
timber lands it owns and uses for non-mining purposes, and to perform certain
remediation and testwork at its ConSil mine site adjacent to the Sunshine Mine.
F-20
48
In connection with the settlement, the Government also agreed to release the
Company and SPMI from a 1994 Consent Decree which obligated them among others to
remediate certain property in the Bunker Hill Superfund Site.
The Company believes that all other environmental claims, both potential and
threatened, were discharged by the effectiveness of the Plan of Reorganization
on February 5, 2001.
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.
15. FOREIGN OPERATIONS
The Company has mining projects in Argentina and Mexico, including 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 foreign operations totaled approximately $1.3 million, $0.7 million
and $1.6 million for years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, amounts capitalized as property, plant, and equipment for
foreign operations totaled $13.9 million, net of depreciation.
Approximately $2.3 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.
16. SIGNIFICANT CUSTOMER
In 2000, 1999 and 1998, one customer accounted for sales of concentrate
aggregating approximately $22.5 million, $31.5 million and $30.7 million,
respectively. In February 2001, this customer notified the Company that it was
temporarily closing the smelter to which the Sunshine Mine shipped concentrates
and that the smelter would no longer accept deliveries.
17. 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, 2000 (in thousands, except average prices):
F-21
49
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
SUNSHINE MINE
Reserves at December 31:
Ounces of silver 25,937 29,992 37,383 39,808 36,241
Production:
Tons of ore 169 218 248 183 121
Ounces of silver 3,879 5,211 5,806 4,253 2,578
PIRQUITAS MINE
Reserves at December 31:
Ounces of silver 129,333 129,333 101,000 72,800 --
REVENUE - VIRGINIUS MINE
Reserves at December 31:
Ounces of silver 6,208 6,208 6,208 6,208 6,208
AVERAGE PRICES:
Ounce of silver $ 4.93 $ 5.23 $ 5.47 $ 5.02 $ 5.11
The ore reserve estimates presented in the table are estimates of proven and
probable reserves by the Company's geologic personnel. No assurance can be given
that the indicated quantity of in situ silver will be realized. Reserve
estimates are expressions of judgment based largely on data from diamond drill
holes and underground openings, such as drifts or raises, which expose the
mineralization on one, two or three sides, sampling and similar examinations.
Reserve estimates may change as ore bodies are mined and additional data is
derived.
18. FRESH START REPORTING PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
The unaudited Pro Forma Consolidated Balance Sheet is presented to give effect
to the consummation of the Plan as though it had taken place on December 31,
2000. The Company will adopt "fresh start" reporting as of February 5, 2001, the
date the Plan was confirmed. In general, pursuant to SOP 90-7, the Company's
assets and liabilities will be revalued to fair market value.
The fair market value of Pirquitas and the Sunshine Mine, the Company's
principal assets as well as the fair market value of the Liability for the Call
Option on Sunshine Argentina, Inc. were based on, among other things, appraisals
performed in conjunction with the bankruptcy reorganization.
F-22
50
Predecessor Reorganization and Reorganized
Company Fresh Start Adjustments Company
----------- ------------------------- ------------
December December
(In thousands) 31, 2000 Debit Credit 31, 2000
--------- --------- ----------- ---------
ASSETS
Total current assets $ 5,164 $ -- $ -- $ 5,164
Property, plant and equipment, net 14,671 10,792 (a) 25,463
Other assets 2,757 -- 1,165 (a) 1,592
--------- --------- ----------- ---------
$ 22,592 $ 10,792 $ 1,165 $ 32,219
========= ========= =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Total current liabilities $ 2,340 $ -- $ -- $ 2,340
Noncurrent liabilities 56,528 48,991 (b) -- 7,537
Liability for call option on Sunshine
Argentina, Inc. -- -- 2,740 (c) 2,740
--------- --------- ----------- ---------
Total Liabilities 58,868 48,991 2,740 12,617
Redeemable common stock -- -- 17,640 (d) 17,640
Stockholders' equity (deficit):
Common stock 493 493 (e) 50 (f) 50
Paid in capital 729,957 729,957 (e) 1,912 (f) 1,912
Accumulated other comprehensive
loss (884) -- 884 (e) --
Accumulated deficit (764,732) -- 764,732 (e) --
Less treasury stock at cost (1,110) -- 1,110 (e) --
--------- --------- ----------- ---------
(36,276) 730,450 767,893 1,962
--------- --------- ----------- ---------
$ 22,592 $ 779,441 $ 789,068 $ 32,219
========= ========= =========== =========
Explanations of reorganization and fresh start adjustment columns of the balance
sheet are as follows:
(a) To adjust property, plant and equipment and other assets to estimated
current market value. Further adjustments may be required, but are not
expected to be material.
(b) To reflect the cancellation of debt and other liabilities pursuant to the
Plan.
(c) To record the estimated fair value of the liability for the Call Option
issued pursuant to the Plan. (See Note 2.)
(d) To reflect the new common stock issued to the Principal Shareholders which,
in certain instances, the Company would be required to repurchase from the
Principal Shareholders.
(e) To eliminate the old stockholders' equity (deficit).
(f) To reflect the issuance of new common stock to other than Principal
Shareholders.
19. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
----------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
2000:
Operating revenues $ 7,177 $ 6,596 $ 5,139 $ 4,181
Cost of revenues 6,369 6,335 5,440 4,425
Loss applicable to common shares (4,072) (2,741) (3,778) (10,178)
Basic and diluted loss per common share
$ (0.10) $ (0.06) $ (0.08) $ (0.21)
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)
During the fourth quarter of 2000, an impairment charge of $7.2 million was
taken. (See Note 6.)
F-23
51
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
[S] [C]
2.1 Third Amended Joint Chapter 11 Plan of Reorganization dated as
of December 4, 2000, bench-filed in the case styled In Re:
Sunshine Mining and Refining Company, Chapter 11, Case No.
00-3409 (MWF), filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K for event reported February 5, 2001.
2.2 Order confirming the Third Amended Joint Chapter 11 Plan of
Reorganization of Sunshine Mining and Refining Company and its
Debtor Subsidiaries as entered December 5, 2000, filed as
Exhibit 2.2 to the Registrant's Current Report on Form 8-K for
event reported February 5, 2001.
2.3 Partial Consent Decree with Sunshine Mining and Refining Company
and Sunshine Precious Metals, Inc. in the case styled United
States of America v. Asarco Incorporated, et al., a Consolidated
Case Nos. 96-0122-N-EJL and 91-0342-N-EJL in the United States
District Court for the District of Idaho, filed as Exhibit 2.3
to the Registrant's Current Report on Form 8-K for event
reported February 5, 2001.
2.4 Notice of Effective Date of Third Amended Joint Chapter 11 Plan
of Reorganization, filed as Exhibit 2.4 to the Registrant's
Current Report on Form 8-K for event reported February 5, 2001.
3.1 Amended and Restated Certificate of Incorporation filed with and
approved by the Secretary of State of Delaware on February 23,
2001, filed as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K for event reported February 5, 2001.
3.2 Amended and Restated Bylaws as adopted February 9, 2001, filed
as Exhibit 3.2 to the Registrant's Current Report on Form 8-K
for event reported February 5, 2001.
10.1 Call Option Agreement dated February 5, 2001, among Sunshine
International Mining, Inc., Sunshine Mining and Refining
Company, Sunshine Argentina, Inc., Elliott International, L.P.,
The Liverpool Limited Partnership, Stonehill Institutional
Partners, L.P. and Stonehill Offshore Partners Limited, filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K for
event reported February 5, 2001.
10.2 Registration Rights Agreement dated February 5, 2001, among
Sunshine Mining and Refining Company, Stonehill Partners, L.P.,
Stonehill Offshore Partners Limited, Elliott International, L.P.
and The Liverpool Limited Partnership, filed as Exhibit 10.2 to
the Registrant's Current Report on Form 8-K for event report
February 5, 2001.
*21.0 Subsidiaries of Sunshine.
24.1 Power of Attorney (set forth on signature page hereof).
* Filed herewith.