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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ______________________ to _____________________
Commission File Number 1-10012
SUNSHINE MINING AND REFINING COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2618333
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5956 Sherry Lane, Suite 1621, Dallas, Texas 75225
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(Address of principal executive offices)
Registrant's telephone number including area code (214) 265-1377
--------------
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Former name, former address and former fiscal year,
if changed since last report
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
--- ---
<Table>
Number of Shares Outstanding
Title of Each Class of Common Stock at August 17, 2001
- ----------------------------------- -----------------------------------
Common Stock, $.01 par value 50,000,000
</Table>
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SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<Table>
<Caption>
Reorganized Predecessor
Company Company
June 30, December 31,
2001 2000
--------------- ---------------
ASSETS
Current assets:
Cash and cash investments $ 285 $ 291
Silver bullion 10 10
Accounts receivable 106 1,626
Inventories 1,174 1,500
Assets available for sale 208 1,006
Other current assets 827 731
--------------- ---------------
Total current assets 2,610 5,164
Property, plant and equipment, at cost 25,663 40,933
Less accumulated depreciation,
depletion and amortization (202) (26,262)
--------------- ---------------
25,461 14,671
Investments and other assets 1,334 2,757
--------------- ---------------
Total assets $ 29,405 $ 22,592
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 159 $ 697
Accrued expenses 1,241 1,643
--------------- ---------------
Total current liabilities 1,400 2,340
Long-term debt 5,000 1,530
Accrued pension and other postretirement benefits 5,740 5,230
Other long-term liabilities and deferred credits 696 779
Liability for call option on Sunshine Argentina, Inc. 2,740
Liabilities subject to compromise -- 48,991
Redeemable common stock (44,680 shares) 14,365
Stockholders' equity (deficit):
Common stock--$.01 par value; 75,000 shares authorized; shares issued:
June 30, 2001 - 5,320
December 31, 2000 - 49,264 53 493
Paid-in capital 2,812 729,956
Other Comprehensive loss -- (884)
Accumulated deficit (3,401) (764,733)
--------------- ---------------
(536) (35,168)
Less treasury stock, at cost:
June 30, 2001 - 0 shares
December 31, 2000 - 579 shares -- (1,110)
--------------- ---------------
(536) (36,278)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 29,405 $ 22,592
=============== ===============
</Table>
See accompanying notes.
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SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts) (Unaudited)
<Table>
<Caption>
Reorganized Predecessor Reorganized
Company Company Company
Three Months Three Months Five Months
Ended June 30, Ended June 30, Ended June 30,
2001 2000 2001
--------------- --------------- ---------------
Operating revenues $ (0) $ 6,596 $ 904
Costs and expenses:
Cost of revenues -- (6,336) (784)
Depreciation, depletion
and amortization (4) (302) (8)
Property closing and holding costs (1,069) -- (2,114)
Exploration -- (452) --
Selling, general and
administrative expense (855) (1,077) (1,393)
Net curtaiment gain on employee benefit plans 44 44
--------------- --------------- ---------------
(1,885) (8,167) (4,255)
--------------- --------------- ---------------
Other income (expense)
Interest income 1 28 6
Interest and debt expense:
Contractual interest and debt expense (250) (979) (390)
Reduction attributable to bankruptcy -- -- --
--------------- --------------- ---------------
(250) (979) (390)
Mark to market loss -- 2 0
Other, net 195 (221) 334
--------------- --------------- ---------------
(54) (1,170) (50)
--------------- --------------- ---------------
Loss before reorganization items (1,939) (2,741) (3,401)
Reorganization items:
Adjust accounts to fair value -- -- --
Professional fees -- -- --
Interest earned while in Chapter 11 -- -- --
--------------- --------------- ---------------
Net income (loss) before extraordinary item (1,939) (2,741) (3,401)
Extraordinary item:
Gain on debt discharge -- -- --
--------------- --------------- ---------------
Net income (loss) $ (1,939) $ (2,741) $ (3,401)
=============== =============== ===============
Basic and diluted loss
per common share: $ (0.04) $ (0.07)
=============== ===============
Weighted average common shares outstanding 50,000 50,000
=============== ===============
<Caption>
Predecessor Company
One Month Ended Six Months
January 31, Ended June 30,
2001 2000
--------------- ---------------
Operating revenues $ 2,015 $ 13,773
Costs and expenses:
Cost of revenues (1,714) (12,704)
Depreciation, depletion
and amortization (3) (635)
Property closing and holding costs (96) --
Exploration -- (827)
Selling, general and
administrative expense (208) (2,174)
Net curtaiment gain on employee benefit plans -- --
--------------- ---------------
(2,020) (16,340)
--------------- ---------------
Other income (expense)
Interest income -- 46
Interest and debt expense:
Contractual interest and debt expense (371) (3,915)
Reduction attributable to bankruptcy 316 --
--------------- ---------------
(55) (3,915)
Mark to market loss -- (164)
Other, net 6 (213)
--------------- ---------------
(49) (4,246)
--------------- ---------------
Loss before reorganization items (55) (6,813)
Reorganization items:
Adjust accounts to fair value 8,239 --
Professional fees (785) --
Interest earned while in Chapter 11 2 --
--------------- ---------------
Net income (loss) before extraordinary item 7,401 (6,813)
Extraordinary item:
Gain on debt discharge 28,876 --
--------------- ---------------
Net income (loss) $ 36,278 $ (6,813)
=============== ===============
Basic and diluted loss
per common share:
Weighted average common shares outstanding
</Table>
See accompanying notes.
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SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, except per share amounts) (Unaudited)
<Table>
<Caption>
Reorganized
Company Predecessor Company
Five Months One Month Six Months
Ended Ended Ended
June 30, January 31, June 31,
2001 2001 2000
--------------- --------------- ---------------
Cash used by operating activities:
Net loss $ (3,401) $ 36,278 $ (6,814)
Adjustments to reconcile net loss
to net cash used by operations:
Depreciation, depletion and amortization 8 3 635
Gain on sale of property and equipment (315) 0 0
Interest on Senior Conv & 10% Notes paid
or payable in stock -- -- 1,706
Common stock issued for interest on
Senior Convertible Notes -- -- 573
Adjust accounts to fair value -- (8,239) --
Gain on debt discharge -- (28,876) --
Net curtailment gain (44) -- --
Net (increase) decrease in:
Silver bullion -- -- 152
Accounts receivable 1,839 (631) (309)
Inventories 146 193 768
Other assets and deferred charges (233) (30) 232
Net increase (decrease) in:
Accounts payable and accrued expenses (1,563) 582 1,084
Accrued pension and other postretirement benefits (32) (46) (77)
Other liabilities and deferred credits (162) 84 (113)
--------------- --------------- ---------------
Net cash used by operations (3,756) (682) (2,163)
--------------- --------------- ---------------
Cash provided (used) by investing activities:
Additions to property, plant and equipment -- -- (1,099)
Sale of property, plant and equipment 1,113 -- --
Sale of silver bullion -- -- 3,840
--------------- --------------- ---------------
Net cash provided by investing activities 1,113 -- 2,741
--------------- --------------- ---------------
Cash provided by financing activities:
Proceeds from issuance of long term debt 2,770 550 0
--------------- --------------- ---------------
Increase (decrease) in cash and cash investments 127 (132) 578
Cash and cash investments, beginning of period 158 291 628
--------------- --------------- ---------------
Cash and cash investments, end of period $ 285 $ 159 $ 1,206
=============== =============== ===============
Supplemental cash flow information -
Interest paid in cash $ 99 $ 38 $ 92
=============== =============== ===============
Noncash financing transactions:
Common stock issued upon conversion of debt -- -- 1,031
Common stock issued for
mandatory prepayment of debt -- -- 1,250
Common stock issued for payment of interest -- -- 544
Cash flows related to reorganization items:
Operations activities:
Interest received on accumulated cash -- 2 --
Payment of professional fees 1,066 102 --
Financing activities -- -- --
Investing activities -- -- --
</Table>
See accompanying notes.
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SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
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)).
The Third Amended and Restated Joint Chapter 11 Plan of
Reorganization as modified (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, all of which
were satisfied. 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").
2. PLAN OF REORGANIZATION
The Plan, cosponsored by four of the Company's major
creditors, 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.
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") who have
appointed four members to the Company's five-member Board of
Directors. The Principal Shareholders also hold a Call Option
which, upon the occurrence of certain adverse events, may
allow the holders to
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acquire Sunshine Argentina, the owner of the Pirquitas Mine in
Argentina, the Company's principal asset.
o Prior to the Effective Date, the Company obtained 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
Company also reached agreement 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 issued 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; deeded to the plaintiffs certain timberland
in North Idaho; agreed to pay a sliding scale royalty
commencing at silver prices in excess of $6.00 per ounce on
production from the Sunshine Mine; and performed certain test
work and remediation at the ConSil mine site.
3. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements of Sunshine Mining and Refining Company ("Sunshine" or the
"Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the quarter
and six months ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2001.
For further information, refer to the consolidated financial statements
and footnotes thereto included in Sunshine's report on Form 10-K for
the year ended December 31, 2000.
The financial statements for the period ended June 30, 2001
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 adopted "fresh start" reporting as of
January 31, 2001. Under "fresh start" reporting, the reorganization
value of the entity is allocated to the entity's assets. The net effect
of all fresh start reporting adjustments resulted in income of $8.2
million, which is reflected in the Statement of Operations for the one
month ended January 31, 2001 in accordance with SOP 90-7. The effective
date is considered to be the close of business on January 31, 2001 for
financial reporting purposes. The periods presented prior to January
31, 2001 have been designated "Predecessor Company"
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and the periods subsequent to January 31, 2001 have been designated
"Successor Company." As a result of the implementation of fresh start
reporting, the financial statements of the Company after the effective
date are not comparable to the Company's financial statements for prior
periods.
Net income (loss) per share data is not presented for periods
prior to January 31, 2001 because of the general lack of comparability
as a result of the reorganization of the Company and implementation of
fresh start reporting by the Company.
The reorganization and the adoption of fresh start reporting
resulted in the following adjustments to the Company's Condensed
Consolidated Balance Sheet as of January 31, 2001:
<Table>
<Caption>
Predecessor Reorganization and Reorganized
Company Fresh Start Adjustments Company
------------ -------------------------------- ------------
January 31, January 31,
(In thousands) 2001 Debit Credit 2001
------------ ------------ ------------ ------------
ASSETS
Total current assets $ 5,195 $ -- $ 71(a) $ 5,124
Property, plant and equipment, net 14,669 10,794(a) -- 25,463
Other assets 2,780 -- 1,530(a) 1,250
------------ ------------ ------------ ------------
$ 22,644 $ 10,794 $ 1,601 $ 31,837
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Total current liabilities $ 2,641 $ -- $ 321(a) $ 2,962
Noncurrent liabilities 57,118 48,846(b) 633(a) 8,905
Liability for call option on Sunshine
Argentina, Inc. -- -- 2,740(c) 2,740
------------ ------------ ------------ ------------
Total Liabilities 59,759 48,846 3,694 14,607
Redeemable common stock -- -- 14,467(d) 14,467
Stockholders' equity (deficit):
Common stock 492 492(e) 50(f) 50
Paid in capital 729,957 729,957(e) 2,713(f) 2,713
Accumulated other comprehensive
loss (884) -- 884(e) --
Accumulated deficit (765,570) -- 765,570(e) --
Less treasury stock at cost (1,110) -- 1,110(e) --
------------ ------------ ------------ ------------
(37,115) 730,449 769,289 1,725
------------ ------------ ------------ ------------
$ 22,644 $ 779,295 $ 788,488 $ 31,837
============ ============ ============ ============
</Table>
Explanations of reorganization and fresh start adjustment columns of the balance
sheet are as follows:
(a) To adjust property, plant and equipment, other assets and liabilities to
estimated current fair value. The book value for the Pirquitas Mine is
increased by approximately $11 million and the book value of other
properties is reduced by approximately $200 thousand. Property, plant and
equipment after adjustments consists of the following:
<Table>
Pirquitas Mine $24,750
Land 380
Other mining interests 333
-------
$25,463
</Table>
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(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 and warrants to other than
Principal Shareholders.
4. RECOVERABILITY OF INVESTMENT IN THE PIRQUITAS MINE
Under the terms of the Plan and the Confirmation Order on the
Effective Date, the capital stock of Sunshine Argentina, Inc.
("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 5, 2001, with the Elliott Group
and the Stonehill Group, pursuant to which International granted (i) a
contingent 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 for $1 million 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
Credit 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
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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 turn owns the Pirquitas Mine and other
assets. Should such an event occur, Sunshine's investment in the
property, carried on the balance sheet at $24,750,000, would 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.
The Company's market capitalization in recent weeks has been
only slightly in excess of or below $15 million, the level that could
trigger exercise of the Call Option. The Elliott Group and the
Stonehill Group have agreed to a forbearance of exercising the Call
Option as part of a refinancing of the Credit Facility. See Note 7.
5. EXTRAORDINARY ITEM
The extraordinary items recorded for the one month ended
January 31, 2001 are comprised of the write-off of the unamortized debt
issuance costs and the extraordinary gain on debt discharge recognized
as a result of the consummation of the Plan as follows (in thousands):
<Table>
Write off of unamortized debt issuance costs $ (92)
Discharge of debt, liabilities and associated accrued interest 48,938
Value of securities issued (19,970)
------------
Extraordinary gain $ 28,876
</Table>
6. INVENTORIES
The components of inventory consist of the following:
<Table>
<Caption>
June 30 December 31
2001 2000
------------ ------------
Precious metals inventories:
Work in process $ 0 $ 187
Finished goods 28 28
Materials and supplies inventories 1,146 1,285
------------ ------------
$ 1,174 $ 1,500
============ ============
</Table>
7. DEBTOR-IN-POSSESSION FINANCING/REPLACEMENT CREDIT FACILITY/AMENDED
CREDIT 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, was the borrower under the DIP Facility, and
the Company and its other subsidiaries were guarantors. The base rate
of interest under the DIP Facility was 15% per annum with a $150
thousand commitment fee that was expensed in 2000. Borrowings under the
DIP Facility were secured by substantially all of the Company's assets.
After the Plan became effective, the outstanding balance under the DIP
facility of approximately $2.7 million was rolled into a replacement
secured Credit Facility
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with the same lenders with repayment due within eighteen months. The
Credit Facility has a maximum commitment of $5 million, an interest
rate of 15% and a commitment fee of $150 thousand. As of June 30, 2001,
the Company had borrowed the full $5 million under the Credit Facility.
In July, 2001, the lenders advanced an additional $420 thousand under a
secured demand note with the same interest rate and fees as the Credit
Facility. The Company and the lenders have agreed to enter into the
Second Amended and Restated Credit Agreement (the "Amended Credit
Facility") to supply the Company with sufficient financing to maintain
the Pirquitas property, complete the closing and securing of the
Sunshine Mine pending a substantial recovery in silver prices, and fund
necessary corporate overhead for a period of time. The Company expects
to enter into the Amended Credit Facility in the near future.
The Amended Credit Facility will refinance the entire $5.42
million of advances made to date and commit to advance another $1.08
million for a total commitment of $6.5 million, subject to a $325
thousand commitment fee. At the option of the lenders, an additional
$1.5 million of advances may be available, which if exercised would
bring the total borrowing to $8 million. Based on current projections,
we estimate that if the full amount of the facility is made available,
it would fund the Company's cash requirements through at least the
second quarter of 2002.
The principal amount of the advances are to be repaid on the
earlier of December 31, 2002 or the occurrence of an event of default
that shall be continuing as defined in the Amended Credit Facility.
Interest will continue to accrue at 15% per annum.
In consideration for the increase in the commitment, the
extension of the maturity date of the Credit Facility and the
forbearance of affiliates of the lenders from exercising either penalty
and repurchase provisions of the Registration Rights Agreement or the
Call Option, the lenders were granted a "Participation." The
Participation provides that the lenders will be entitled to the first
$10 million above the outstanding loan balance in certain future sales
(other than operating revenues), security offerings or receipts of
judgments or awards. The Company can, within 90 days of the date of the
Amended Credit Facility, refinance these loans, if more favorable terms
can be found, without paying the Participation.
8. CLOSURE OF THE SUNSHINE MINE
On February 2, 2001, Sunshine's wholly owned subsidiary,
Sunshine Precious Metals, Inc. ("SPMI"), received notice that the
smelter to which the Sunshine Mine shipped concentrates was closing and
would no longer accept deliveries. Management sought alternatives for
the production from the Sunshine Mine but was not successful in
securing an economically viable alternate arrangement. As a result,
SPMI notified employees that a mass lay-off of the majority of the
Sunshine Mine employees would occur on February 16, 2001, and
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the mine was then placed on a care and maintenance status.
Since the closure of the Sunshine Mine on February 16, the
Company has no sources of revenues. In addition, the Company has been
incurring significant costs associated with the closure of the mine,
including funding severance benefits and accrued vacation liability and
costs associated with preparing the mine for an extended period of care
and maintenance. Offsetting a portion of these costs has been proceeds
from the liquidation of certain equipment at the property, including
the entire fleet of diesel equipment. The decision to liquidate the
equipment was based on, among other things, the expectation that during
an extended shutdown period, the equipment would deteriorate
significantly.
During the second quarter, the Company determined that the
costs of holding the mine under its original care and maintenance plan
would be more than it could afford. Therefore, new plans were made to
secure the property, including closing off underground access after
removal of certain equipment, including electrical transformers and
substations. Pumps have been shut off and it is anticipated that over
the next two to four years the water level at the property will rise to
about the 3100 level. The Company does not anticipate attempting to
reopen the mine until such time as a substantial increase in the price
of silver would justify the required expenditure.
The cost to reopen the mine is not known. The longer the mine
remains closed in this manner, the higher the cost to reopen will be.
Over time underground shafts and drifts will deteriorate without
regular maintenance, and eventually may become unusable.
9. EMPLOYEE BENEFIT PLANS
During the second quarter, the Company recognized the
following curtailment gain and loss:
<Table>
Curtailment gain for postretirement benefits
other than pensions $ 410
Curtailment loss for pensions (366)
------------
Net curtailment gain $ 44
============
</Table>
Curtailment Gain for post retirement benefits other than pensions
The collective bargaining agreements ("CBA's") entered into
between SPMI and United Steelworkers of America (which represents the
majority of the employees) and the International Brotherhood of
Electrical Workers Union (the "Unions") expired on April 30, 2001. As a
result, SPMI was no longer required to provide retiree life insurance
to all former employees covered by a collective bargaining agreement
("Post 87 Union Retirees") who retired after November 23, 1987. Also,
as a result of the expiration of the CBA's, SPMI is only required to
provide retiree medical benefits to qualified Post 87 Union Retirees
until April 30,
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2002. SPMI recognized a curtailment gain of $410 thousand related to
these changes in required postretirement medical and life insurance
benefits.
In July, SPMI appropriately notified all Union Employees who
retired prior to November 23, 1987 that their retiree life insurance
and medical benefits would be canceled as of August 31, 2001. Also in
July, SPMI appropriately notified employees not covered by a collective
bargaining agreement who retired prior to 1994 that their retiree life
insurance would be canceled as of August 31, 2001 and their retiree
medical benefits would be canceled as of September 30, 2001. During the
third quarter, SPMI expects to recognize a curtailment gain as a result
of these cancellations of retiree life insurance and medical. The
amount of such curtailment gain has not been determined at this time.
Curtailment Loss for Pensions
The Sunshine Negotiated Plan provides for an early retirement
benefit equal to 100% of a participant's accrued benefit if the
participant has 30 or more years of service. As a result of the closure
of the Sunshine Mine, approximately 28 Union Employees with 30 or more
years of service elected to retire and receive their early retirement
benefit unreduced despite the fact that they were not 65 years of age.
This resulted in a curtailment loss for pension plans of approximately
$366 thousand due to the acceleration of the payment of benefits
compared to prior actuarial assumptions.
The Negotiated Pension Plan also provides that certain
employees who are "laid off due to the permanent shutdown of the total
plant covered by this Plan may retire and receive a "75/80" pension."
Eligibility requirements are ten years of service, and if at least 55
years of age, his age and years of service total 75 years or more or if
younger than 55, his age and years of service total 80. If eligible for
the 75/80 retirement, a participant would receive his or her unreduced
early retirement benefit plus a $399.30 temporary monthly supplement
payable until age 65 at the latest. SPMI does not believe that there
has been "permanent shutdown of the total plant." If it were determined
that there has been a permanent shutdown of the total plant," SPMI
would incur an estimated additional curtailment loss for pension plans
of between $900 thousand and $1.2 million.
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SUNSHINE MINING AND REFINING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the
Six Months Ended June 30, 2001 and 2000
Certain matters discussed in this report are "forward-looking
statements" intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are all statements other than statements of historical fact,
including without limitation those that are identified by the use of the words
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"predicts" and similar expressions. Such statements address future plans,
objectives, expectations and events or conditions concerning various matters
such as mining exploration, capital expenditures, earnings, litigation,
liquidity and capital resources and accounting matters. Actual results in each
case could differ materially from those currently anticipated in such
statements, by reason of factors including without limitation, actual results of
exploration, silver prices, imprecision of reserve estimates, future economic
conditions, regulations, competition and other circumstances affecting
anticipated revenue and costs. Any forward-looking statement speaks only as of
the date on which such statement is made, and the Company undertakes no
obligation to update any forward-looking statement. Readers are cautioned not to
place undue reliance on these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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. At the effective date of the Plan
of Reorganization, the Stonehill Group and the Elliott Group became the
Company's principal owners, owning approximately 90% of the Company's common
stock.
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 Credit Facility, which repaid advances under the DIP facility and
has funded the Company since its emergence from bankruptcy. The Credit 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 were 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 reimburse fees and
disbursements paid by lenders and their professionals in accordance with the
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budget, and (c) as otherwise contemplated or permitted by the budget. The Credit
Facility has been the Company's only source of working capital, other than asset
disposals. As of June 30, 2001, the Company had borrowed the full $5 million
available under the Credit Facility. In July, 2001, an additional $420 thousand
was advanced by the lenders in the form of Demand Notes. The Company and the
lenders have agreed to enter into the Second Amended and Restated Credit
Agreement (the "Amended Credit Facility") to supply the Company with sufficient
financing to maintain the Pirquitas property, complete the closing and securing
of the Sunshine Mine pending a substantial recovery in silver prices, and fund
necessary corporate overhead for a period of time. The Company expects to enter
into the Amended Credit Facility in the near future.
The Amended Credit Facility will refinance the entire $5.42 million of
advances made to date and commit to advance another $1.08 million for a total
commitment of $6.5 million, subject to a $325 thousand commitment fee. At the
option of the lenders, an additional $1.5 million of advances may be available,
which if exercised would bring the total borrowing to $8 million. Based on
current projections, we estimate that if the full amount of the facility is made
available, it would fund the Company's cash requirements through at least the
second quarter of 2002.
The principal amount of the advances are to be repaid on the earlier of
December 31, 2002 or the occurrence of an event of default that shall be
continuing as defined in the Amended Credit Facility. Interest will continue to
accrue at 15% per annum.
In consideration for the increase in the commitment, the extension of
the maturity date of the Credit Facility and the forbearance of affiliates of
the lenders from exercising either penalty and repurchase provisions of the
Registration Rights Agreement or the Call Option, the lenders were granted a
"Participation." The Participation provides that the lenders will be entitled to
the first $10 million above the outstanding loan balance in certain future sales
(other than operating revenues), security offerings or receipts of judgments or
awards. The Company can, within 90 days of the date of the Amended Credit
Facility, refinance these loans, if more favorable terms can be found, without
paying the Participation.
Assuming the Amended Credit Facility is entered into, the Company's
strategy will be to hold Pirquitas with the lowest level of possible
expenditures, pending an improvement in silver prices. The Company is presently
negotiating the sale of certain assets, including the silver refinery at the
Sunshine Mine, and its Juanicipio property in Mexico, proceeds of which will be
used to cover the Company's ongoing costs. The Company's principal costs going
forward are expected to be general and administrative costs, including the costs
of maintaining a public company, legal and other expenses associated with a
lawsuit against the Company's former auditor, costs of maintaining security at
Pirquitas, and the costs of compliance with various Argentine fiscal and mining
laws.
On February 2, 2001, Sunshine received Notice that the smelter to
which the Sunshine Mine shipped concentrates was closing and would no longer
accept deliveries. Management sought alternatives for the production from the
Sunshine Mine but was not
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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.
Since the closure of the Sunshine Mine on February 16, the Company has
no sources of revenues. In addition, we have been incurring significant costs
associated with the closure of the mine, including funding severance benefits
and accrued vacation liability and costs associated with preparing the mine for
an extended period of care and maintenance. Offsetting a portion of these costs
has been proceeds from the liquidation of equipment at the property, including
the entire fleet of diesel equipment. The decision to liquidate the equipment
was based on, among other things, the expectation that during an extended
shutdown period, the equipment would deteriorate significantly.
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 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. In addition, substantial
equipment additions will be required to replace the equipment being sold, and to
replace equipment removed since the decision to secure the mine was made.
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 requires the filing and effectiveness of a Registration Statement
within specified periods 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 penalties to each such holder (in cash or shares
of common stock at the option of the holder), 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. The Company does not have adequate
liquidity to satisfy such a put obligation.
The Registration Statement while filed has not yet been declared
effective within the time frame required by the Registration Rights Agreement.
The Company has not recorded any expense relative to penalties mandated by the
Registration Rights Agreement, nor made any provision in its financials
reflecting the potential requirement to repurchase the common stock of the
Elliott Group and the Stonehill Group. The Elliott Group and the Stonehill Group
have agreed to a forbearance of enforcing or exercising the penalties and the
repurchase requirement as part of a refinancing of the Credit Facility. See Note
7.
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
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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 5, 2001, with the Elliott Group and the Stonehill
Group, pursuant to which International granted (i) a contingent 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 for $1 million 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 Credit 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 turn owns the Pirquitas Mine and other
assets. Should such an event occur, Sunshine's investment in the property,
carried on the balance sheet at $24,750,000, would 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. If the lenders exercise the repurchase option
or fail to extend additional credit, it is likely that the Call Option would be
exercisable.
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In addition, the Company's market capitalization in recent weeks has
been only slightly in excess of or below $15 million, the level that could
trigger exercise of the Call Option. The Elliott Group and the Stonehill Group
have agreed to a forbearance of exercising the Call Option as part of a
refinancing of the Credit Facility. See Note 7.
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.
Operating, Investing, and Financing Activities
Cash used in operating activities in the first half of 2001 was $4.4
million compared to $2.2 million in the first half of 2000.
In the first half of 2001, sale of property, plant and equipment
provided $1.1 million of cash. Investing activities in the first half of 2000
included $3.8 million proceeds from sale of investment silver bullion and $1.1
million of net additions to property, plant and equipment including $462
thousand for the development of Pirquitas.
Cash provided by financing activities in 2001 primarily consists of
$3.3 million proceeds from borrowings under the DIP and Credit Facility.
RESULTS OF OPERATIONS
On December 5, 2000, the Company's Plan was confirmed by the United
States Bankruptcy Court and the Company emerged from bankruptcy on February 5,
2001. As a result of the reorganization and the recording of the restructuring
transaction and implementation of fresh start reporting, the Company's results
of operations after February 5, 2001, are not comparable to results reported in
prior periods. See Notes 2 and 3 for information on consummation of the Plan of
Reorganization and implementation of fresh start reporting.
THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
The Company had no operating revenues in the 2001 quarter due to the
closure of the Sunshine Mine on February 16, 2001. In the second quarter of
2000, the Company had $6.6 million of operating revenues solely from production
from the Sunshine Mine.
Due to the closure of the Sunshine Mine, the Company had no cost of
revenues in the 2001 quarter compared to $6.3 million of cost of revenues in the
2nd quarter of 2000.
Property shutdown and holding costs in the current quarter consisted
of approximately $850 thousand of costs incurred to place the Sunshine Mine on
care and maintenance status, or to secure the property for shutdown. The
remaining holding costs of approximately $219 thousand were primarily costs to
hold the Pirquitas Mine.
General and administrative costs decreased $223 thousand due primarily
to reductions in staff, partially offset by $154 thousand for legal and other
expenses associated with the Company's lawsuit against Ernst & Young LLP, the
Company's former auditor.
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In the 2001 quarter, the Company recognized a curtailment gain of $410
thousand for post retirement benefits other than pensions, partially offset by a
curtailment loss of $366 thousand for pensions. See Note 9.
Interest and debt expense decreased $729 thousand primarily due to the
cancellation of debt pursuant to the Plan.
In the 2001 period, other income of $195 thousand was primarily due to
gains from the sale of certain equipment. Other, net for the 2000 quarter
included fees and expenses related to attempted financing transactions and asset
sales.
THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2000
Consolidated Results of Operations:
<Table>
<Caption>
Six Months Ended Six Months Ended
(In thousands) June 30, 2001 June 30, 2000
-------------------- --------------------
Operating revenues $ 2,919 $ 13,773
Costs and expenses:
Cost of revenues (2,498) (12,704)
Depreciation, depletion and amortization (11) (635)
Property closing and holding costs (2,210) --
Exploration -- (827)
Selling, general and administrative expense (1,601) (2,174)
-------------------- --------------------
(6,320) (16,340)
-------------------- --------------------
Other income (expense)
Interest income 6 46
Interest and debt expense:
Contractual interest and debt expense (761) (3,915)
Reduction attributable to bankruptcy 316 --
-------------------- --------------------
(445) (3,915)
Mark to market loss -- (164)
Other, net 340 (213)
-------------------- --------------------
(99) (4,246)
-------------------- --------------------
Loss before reorganization items (3,500) (6,813)
Reorganization items:
Adjust accounts to fair value 8,239 --
Professional fees (785) --
Interest earned while in Chapter 11 2 --
-------------------- --------------------
Net income (loss) before extraordinary item $ 3,956 $ (6,813)
==================== ====================
</Table>
Consolidated operating revenues decreased approximately $10.9 million
for the first half of 2001 compared to the first half of 2000. The decrease in
operating revenues primarily resulted from the closure of the Sunshine Mine on
February 16, 2001.
Cost of revenues decreased $10.2 million primarily due to the closure
of the Sunshine Mine on February 16, 2001.
Property shutdown and holding costs in the first half consisted of
approximately $1.7 million of costs incurred to place the Sunshine Mine on care
and maintenance status. The remaining holding costs of approximately $569
thousand were primarily costs to hold the Pirquitas Mine.
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General and administrative costs decreased $573 thousand due primarily
to reductions in staff, partially offset by $212 thousand for legal and other
expenses associated with the Company's lawsuit against Ernst & Young LLP.
In the 2001 period, the Company recognized a curtailment gain of $410
thousand for post retirement benefits other than pensions, partially offset by a
curtailment loss of $366 thousand for pensions. See Note 9.
Interest and debt expense decreased $3.5 million primarily due to the
cancellation of debt pursuant to the Plan.
Mark-to-market loss on silver held for investment amounted to $164
thousand in the 2000 period. No silver was held for investment during the 2001
period.
In the 2001 period, other income of $340 thousand was primarily due to
gains from the sale of certain equipment. Other, net for the 2000 quarter
included fees and expenses related to attempted financing transactions and asset
sales.
SUNSHINE MINING AND REFINING COMPANY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 23, 2000 (the "Petition Date"), Sunshine Mining and Refining
Company ("Sunshine") and its wholly-owned subsidiaries, Sunshine Argentina, Inc.
("Argentina"), Sunshine Precious Metals, Inc. ("Metals"), 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 primary cause number is In Re: Sunshine Mining
and Refining Company, Case No. 00-3409(MWF). The four separate cases were
procedurally (but not substantively) consolidated for joint administration (the
"Proceeding"). During the pendency of the Proceeding, the Third Amended and
Restated Joint Chapter 11 Plan of Reorganization as modified December 5, 2000
was approved (the "Plan") by an Order Confirming the Third Amended and Restated
Joint Chapter 11 Plan of Reorganization (the "Confirmation Order"). The Plan
Effective Date was February 5, 2001. Incorporation by reference is made to
Sunshine's Current Report on Form 8-K for event reported February 5, 2001 as
filed with the Securities and Exchange Commission (the "Commission") for a
description of the effect of the Plan and Confirmation Order, cancellation of
certain securities, the issuance of new securities, entry of a new consent
decree, a settlement with Asarco, and other matters. Consistent with the
provisions of the Bankruptcy Code, on the Effective Date of the Plan, title to
all assets and property of the estates of the "debtors" passed to and invested
in the "Reorganized Debtors" (Sunshine and its subsidiaries) free and clear of
all claims, allowed interest, liens, charges and other rights of creditors or
equity holders arising prior to the Effective Date. The rights afforded under
the Plan and treatment of Claims and interests under the Plan have been in
exchange for and in complete satisfaction, discharge and release of all Claims
and termination of all interests of any nature whatsoever arising on or before
the Effective
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Date, including accrued interest on claims from the Petition Date. The
Bankruptcy Court has retained exclusive jurisdiction over the Reorganization
Cases for various matters to sort out any claims and to determine any
controversies or disputes, as well as all matters set forth in the Confirmation
Order.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
SUNSHINE MINING AND REFINING COMPANY
Dated: August 20, 2001 By: WILLIAM W. DAVIS
------------------------------------------
William W. Davis
President and Chief Financial Officer
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