1
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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER
31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 75-2231378
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
877 W. MAIN STREET, SUITE 600 83702
BOISE, IDAHO (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(208) 345-0660
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
Convertible Subordinate Reset Debentures Due July New York Stock Exchange
15, 2008
Cumulative Redeemable New York Stock Exchange
Preferred Stock, $1.00 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Warrants, expiring March 9, 1999, for the purchase of one share of Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
#egistrant 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)
2
(Continued from previous page)
The aggregate market value of the shares of common stock held by
non-affiliates of the registrant at March 11, 1996, was $265,260,408. 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 11, 1996
--------------- -----------------
COMMON STOCK, $0.01 PAR VALUE 193,096,660
DOCUMENTS INCORPORATED BY REFERENCE
Sunshine Mining and Refining Company's Definitive Proxy
Statement for its Annual Meeting to be held in June 1996 (Part III).
================================
3
PART I
1. BUSINESS.
GENERAL
Sunshine, through its principal subsidiary, Sunshine Precious Metals,
Inc. ("SPMI"), owns and operates the Sunshine Mine located in the Coeur d'Alene
Mining District near Kellogg, Idaho. The Sunshine Mine began operations in 1884
and has produced in excess of 340 million ounces of silver since that time. The
mine also produces significant amounts of copper, lead and antimony as
by-products. The Sunshine Mine and Refinery Complex consists of the Sunshine
Mine, a 1,000-ton-per-day concentrator, an antimony refinery, a silver refinery
and associated facilities. These facilities form an integrated operation which
can produce refined silver with 99.99% purity. The silver refinery has a
capacity to recover up to 8 million ounces of silver and 4 million pounds of
copper annually.
SPMI estimates that, as of January 1, 1996 the proven and probable ore
reserves at the Sunshine Mine were 1,429,855 tons of ore, at a weighted average
grade of 21.5 ounces per ton silver, containing 30,810,360 ounces of silver of
which SPMI's share is approximately 97%. Significant portions of the Sunshine
Mine remain unexplored and undeveloped, and the Company is presently actively
exploring one such area, the West Chance.
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 for the last ten years.
In response to low silver prices, in June 1991 the Company curtailed its annual
silver production from approximately 1,000 tons of ore per day to approximately
450-500 tons of ore per day. At low silver prices, curtailed operations result
in lower aggregate operating losses and cash requirements than either full
operations or the maintenance and holding costs associated with a complete mine
shutdown. However, production costs per ounce of silver increased as a result
of the curtailment.
The Company is actively exploring to develop new production sources
to achieve positive earnings and cash flow. As a result of exploration of
previously undeveloped areas of the Sunshine Mine and the successful testing of
a trackless mining method in the Sunshine Mine, the Company has recently
accelerated its development program at the Sunshine Mine, and is planning to
return the mine to full production by the end of 1996. The Company has also
initiated exploration programs at locations other than the Sunshine Mine in an
attempt to develop new sources of reserves and cash flow. As a result, the
Company is presently active in exploration projects in Argentina, Peru, and
Colorado. Of particular significance are recent developments at the Company's
newly acquired property, Pirquitas, in Argentina where surface drilling and
underground sampling is encountering significant silver values supporting
previous estimates of a large disseminated silver resource.
Exploration at the Sunshine Mine is currently focused on an area
called the West Chance, where the Company has identified at least two new vein
systems. Production is taking place on two levels in those systems at the
present time. Two more production levels are being constructed and will be in
place at the end of 1996, which will be developed using trackless mining
methods.
1
4
The total proven and probable reserves developed as of January 1,
1996, in the West Chance area total 192 thousand tons at an average grade of
23 ounces per ton, containing a total of 4.4 million ounces of silver.
High-grade drill intercepts into the vein system outside of the presently
defined reserve blocks indicate the presence of significant additional
mineralization. Only a small portion of the potential ore body has been
explored at this time.
Through the use of specially built low profile front-end loaders,
commonly referred to as LHD (Load-Haul-Dump) units, those vein systems can now
be accessed more quickly, mined more productively, and at lower cost than the
Company's traditional mining methods. Sunshine successfully tested the use of
LHD units in 1995. As a result of the demonstrated success of these LHD units,
and the expected additions to production from the West Chance area in 1996, the
Company anticipates silver production to increase from approximately 1.7
million ounces in 1995 to between 2.7 and 3.2 million ounces in 1996, as the
production at the mine ramps up.
The Company is also studying the potential for the LHD units to
economically reopen, at current silver prices, the presently inactive eastern
portion of the Sunshine Mine. Production was curtailed in this portion of the
mine in June of 1991 when the Company went to its reduced operating plan. In
1995, the Company acquired the Consolidated Silver property adjacent to this
portion of the mine. The property includes the underground working of the
Silver Summit mine with its principal shaft located approximately 8500 feet due
east of the Sunshine Mine's Jewell shaft and extended to a depth of 5400 feet.
The Silver Summit mine serves as a secondary access to the Sunshine Mine and
provides the potential for an additional access to the eastern portion of the
Sunshine Mine.
The Company is also engaged in exploration in Argentina and Peru.
Both are highly prospective geologic regions. Argentina, due to political and
economic problems in this century, has not had the necessary investment in
exploration to evaluate and develop fully its mineral potential. Peru, a major
mining area since colonial times, had, until recent years, seen investments in
mine maintenance and development decline due to political and economic chaos.
Both countries are presently pursuing foreign investment, particularly in
mining, and have apparently stable, democratically elected governments.
Sunshine believes that the current political and economic environment is
conducive to foreign mining investment. Accordingly, the Company has recently
opened exploration and development offices in Mendoza, Argentina and in Lima,
Peru.
In Argentina, the majority of the Company's exploration work in 1996
will focus on the evaluation of Pirquitas, which the Company believes hosts a
very large disseminated silver resource. See "BUSINESS - OTHER EXPLORATION
PROJECTS - PIRQUITAS." In Peru, many previously nationalized properties are
being returned to the private sector through a privatization process. The
Company will be actively pursuing certain properties in future privatizations
in Peru. In addition, the Company believes its metallurgical technology may
have application in Peru to restart certain inactive properties whose ores
contain elevated levels of arsenic and antimony.
On October 19, 1995, the Board of Directors of Sunshine approved the
proposed merger of Sunshine with and into its wholly-owned subsidiary, Sunshine
Merger Company, pursuant to which Sunshine Merger Company would be the
surviving entity. The purpose of the proposed merger is to retire all of
Sunshine's outstanding $11.94 (Stated Value) Cumulative Redeemable Preferred
Stock (the "Preferred Stock"). The proposed merger requires
2
5
approval by the holders of a majority of the outstanding Common Stock, par
value $.01 (the "Common Stock") and Preferred Stock, voting separately as a
class. A special meeting of Stockholders, at which the proposed merger will be
considered, will be held on March 29, 1996 at 10:00 a.m. at the principal
executive office of the Company. The combined proxy statement/prospectus,
together with the form of proxy, with respect to this special meeting were
first mailed to Stockholders on February 9, 1996.
For information regarding Sunshine's business, certain classes of
products or services and sales to certain significant customers of Sunshine,
see Notes 10 and 11 of Notes to Consolidated Financial Statements included
elsewhere herein.
Sunshine is incorporated under the laws of the state of Delaware and
maintains its principal executive offices at 877 West Main Street, Suite 600,
Boise, Idaho 83702.
SILVER SUPPLY, DEMAND, AND PRICES
According to studies published by the Silver Institute in its World
Silver Survey and/or by CPM Group (precious metal industry consultants),
approximately 837 million ounces of silver surplus to the market's needs were
generated in the period from 1979 to 1989. These surpluses were generated in
response to high silver prices, which, in constant 1995 dollars, averaged
approximately $18.88 per ounce in the eleven year period from 1974 to 1984,
inclusive. As a result, demand for silver dropped significantly, and supplies
increased during the period, resulting in production of surplus silver.
However, according to these same sources, since 1990 demand for silver has
exceeded supply, with the surplus inventory satisfying the production
shortfalls. The availability of this inventory has contributed to the
continuing low price of silver, which, for the eleven years from 1985 through
1995 averaged approximately $6.50 (in constant 1995 dollars), and in the six
years ending 1995 averaged approximately $4.93 (in constant 1995 dollars).
According to industry data, the cumulative deficits in the silver
market from 1990 to 1995 has totaled more than 550 million ounces, with
projections for the deficit in supplies to the market to continue. The deficit
in 1995 has been estimated at between 150 to 200 million ounces by CPM Group,
and the projection for the 1996 deficit is in the same range. This data
suggests to the Company that, if deficits to the market continue in the 150
million ounce per annum range, the cumulative deficit since 1990 would
approximately equal the 837 million ounce surpluses previously generated by
approximately the fourth quarter of 1997.
The Company believes that as the silver market approaches this point,
it will be more difficult for the deficits which are being accumulated to be
supplied from above-ground stocks, and that the silver price will be forced to
increase in response, and that such an increase could be significant.
OPERATIONS
THE SUNSHINE MINE AND REFINERY COMPLEX
The Sunshine Mine and Refinery Complex located in the Coeur d'Alene
Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a
1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and
associated facilities. The facility is an integrated operation which can
produce refined silver with 99.99% purity.
3
6
SPMI owns or maintains substantially all of the mining claims
comprising the Sunshine Mine. Electrical power from a local utility is utilized
in the Sunshine Mine and Refinery Complex. The facilities are in good and
operable condition. Access to the property is by paved roads maintained by the
county.
The Sunshine Mine is a primary silver-producing underground mine
which began operations in 1884 and has produced approximately 340 million
ounces of silver since that time. Mining operations are currently focused at
depths from 3,100 feet to 4,600 feet although the Mine's workings extend to
5,600 feet.
The ore extracted from the Sunshine Mine is introduced to the
1,000-ton-per-day flotation concentrator, which produces two concentrates, a
high-grade silver concentrate which is transferred to the antimony refinery for
antimony removal, and a lead concentrate which is shipped directly to a smelter
for further processing.
After antimony removal, the silver concentrate can be either
transferred to the silver refinery for recovery of silver and copper, or sold
to a commercial smelter. Factors which influence Sunshine's decision to refine
its products internally or sell them to a smelter include levels of production,
costs of reagents and available smelter contract terms. The refinery was
designed and built to recover up to 8.0 million ounces of silver from
concentrates annually. The refinery has also processed dore' metal (an impure
alloy of silver, gold and other metals) produced by third parties. The
refinery produced approximately 2.7 and 2.5 million ounces of fine silver in
1994 and 1993, respectively, including approximately 813,000 and 426,000 ounces
of custom material. As a result of the low level of through-put in recent
years, the silver refinery operations have become less efficient than optimum.
Therefore, in 1995, Sunshine temporarily suspended operations at the silver
refinery until higher levels of through-put are achievable either through
increased production from the Sunshine Mine or through the reopening of other
mines in the district. Until the refinery reopens, Sunshine will sell its
silver-copper concentrates to a nearby smelter for processing. Suspension of
refinery operations is not expected to have a material impact on Sunshine's
results of operations or cash flows.
To minimize cash used by operations, the Sunshine Mine adopted a
curtailed operating plan on June 1, 1991, reducing annual production from
approximately 1,000 tons per day to approximately 450-500 tons per day. At
present silver prices, curtailed mining operations result in lower aggregate
operating losses and cash requirements than either full operations or
maintenance and holding costs associated with a complete mine shutdown.
Ore and metals produced during 1995, 1994 and 1993, respectively,
were as follows:
1995 1994 1993
---- ---- ----
Tons of Ore . . . . . . . . . . . . . . . . . 101,240 107,056 100,441
Metals Recovered:
Ounces of Silver . . . . . . . . . . . . 1,731,714 2,079,290 2,298,155
Pounds of Copper . . . . . . . . . . . . 731,312 826,058 770,616
Pounds of Antimony . . . . . . . . . . . 578,062 474,271 587,137
These metals were recovered from ore containing an average of 17.66,
20.08 and 23.49 ounces of silver per ton, in 1995, 1994 and 1993, respectively.
Production levels in 1993 and in 1994 were adversely affected by rock burst
activity in areas of major production.
4
7
Proven and probable ore reserves at the Sunshine Mine, as estimated by
its in-house technical personnel at January 1, 1996, were as follows:(1)
Tons of Ore . . . . . . . . . . . . . . . . . . . 1,429,855
Metals Contained:
Ounces of Silver . . . . . . . . . . . . . . 30,810,000
Pounds of Copper . . . . . . . . . . . . . . 11,166,242
- --------------
(1) Includes mining dilution but is not reduced for estimated
metallurgical recovery of 97%. The weighted average ore grades are
21.5 ounces per ton silver and .4% copper.
During the three years ended December 31, 1995, the Sunshine Mine
accounted for all of the Company's silver production, and approximately 85% of
the Company's silver reserves at December 31, 1995. See Note 11 of Notes to
Consolidated Financial Statements included elsewhere herein.
EXPLORATION ACTIVITIES AT THE SUNSHINE MINE
Significant portions of the Sunshine Mine remain unexplored and
undeveloped. Accordingly, given the nature of the mine's ore bodies, it is
believed that the proven and probable reserves set forth above do not
necessarily represent all of the economic mineralization (ore) which may be
recovered from the mine.
Historically, the largest ore bodies discovered in the Sunshine Mine
have been the Sunshine and Chester Vein systems, which have produced a total of
205 million ounces. Three other major veins have produced approximately 60
million ounces. Production from some of these areas began as early as 1884 and
all still contain ore reserves, some of which are being mined today.
The Company's geologic staff has analyzed certain unexplored areas of
the Sunshine Mine and believe the West Chance area contains geologic
characteristics analogous to the Sunshine and Chester Vein systems. This
analysis of unexplored areas included an analysis of structural and
stratigraphic controls responsible for developing the silver- rich tetrahedrite
siderite veins.
The West Chance area exploration program is being carried out
primarily from underground workings. The West Chance vein was initially
delineated by drifting operations on the 4200 Level between March 1992 and May
1993. The 4200 Level drift was advanced nearly due west from the mine's No. 12
shaft for a distance of 3,550 feet, exposing a heavily mineralized siderite
vein in excess of 800 feet in length in a previously unexplored area of the
Sunshine Mine. Core drilling from stations south of the drift established vein
continuity above, as well as below the 4200 Level. The exploration program has
expanded to five additional Levels beyond the 4200 Level and continues to
delineate the vein system between the 2700 and 4600 Levels. Drifting west from
the Jewell Shaft on the 3700, 3100, and 2700 Levels provides direct access to
the vein system on these Levels.
Parallel and adjacent to the West Chance structure is a footwall vein
system. The initial stope cut (I-drift) exposed two very high-grade veins
above the 4400 Level and below the 4200 Level. This cut from the 44-CF4 raise
has delineated an ore body consisting of a narrow vein system with vein widths
from a few inches to nearly two feet. Reserves in the 44-CF4 are estimated to
be approximately 700,000 ounces, contained in 16,400 tons at an
5
8
average grade of 43 ounces per ton. Preliminary drilling suggests that
additional sub-parallel mineralized structures may be present.
The 3100 level drift, commenced in the latter part of 1993, has been
completed after driving 3100 feet and remains approximately 250 feet from the
Sunshine Mine western property boundary. Two stopes, 31-E9 and 31-E10, have
been developed and commenced production in September and November, 1995. Close
spaced core drilling of the E10 ore block and initial I-drifting of the E9
block has delineated an ore reserve of 131,000 tons containing 2,800,000 ounces
of silver with an average grade of 21.3 ounces per ton.
Three drill stations have been constructed on the 3100 Level, and
drilling from these stations above and below the level is continuing.
Two new drifts on the 2700 foot and 3700 foot Levels were commenced in
July/August of 1995. Based on values recovered from drill intercepts and the
demonstrated success of LHD mining methods, the Company expects significant
production increases in the areas between the 2700 and 3700 Levels upon the
completion of the drifts and ramp development in late 1996 and early 1997.
The Company has also drilled five exploration holes from the surface
into the West Chance to determine if the vein extends into the areas nearer the
surface. No mineralization in the West Chance area was encountered in this
effort, which has been discontinued.
At January 1, 1996, total reserves confirmed by the Company's efforts
in the West Chance area total approximately 4.4 million ounces of proven and
probable silver with mine grades of 23 ounces of silver per ton of ore.
Although the Company's drilling program and drifting operations have
yielded encouraging results to date, including samples containing significant
ore concentrations, the Company's exploration program in the West Chance area
is still considered to be in the preliminary stage. No assurance can be given
that significant ore bodies of a consistent high grade will be discovered and
available for profitable commercial production.
OTHER EXPLORATION PROJECTS
PIRQUITAS
The Company acquired the Pirquitas property, located in the Jujuy
province of northwest Argentina, in November, 1995 for $1.7 million. Pirquitas
is Argentina's largest historic producer of silver and tin, producing 27
million ounces of silver and 20 thousand tonnes (metric tons) of tin from its
underground workings from 1936 to 1990. Historic production was confined to a
system of closely-spaced sheeted veins. The property has been inactive since
1990.
Initial results of the drilling and sampling program at the newly
acquired Pirquitas property in northwest Argentina is confirming evidence of a
large disseminated silver and tin ore body, that could be developed by standard
low-cost open pit techniques.
A 1992 report on the property, supported by extensive underground
sampling data, estimated a resource of some 39 million short tons containing
3.50 to 5.25 ounces of silver per ton and between 0.2 and 0.4% tin, for a total
contained metal content of 134 to 202 million ounces of silver and between 154
and 308 million pounds of tin
6
9
(equivalent to 2.9 to 4.9 million ounces of gold at current prices). The same
report also suggested the potential for the area to host significantly greater
tonnages of similar mineralization.
Work is currently underway to verify previously reported grades and
establish ore reserves. The first part of this program is expected to be
completed by mid-year. Selected assay results for the first three reverse
circulation drill holes from surface, shown on the cross-section on the
following page, are as follows:
Drill Hole Interval Length Silver Assay Tin Assay
---------- -------- ------ ------------ ---------
AR-1 P 305-440 135 ft. 9.3 oz/ton 0.69%
AR-2 P 105-463 358 ft. 18.1 oz/ton 0.55%
AR-3 P 230-358 128 ft. 9.3 oz/ton 0.24%
In addition to the above drill results, the Company has received
assays from the re-sampling of certain workings located above the water level
in the mine, also shown on the cross-section. While initially not expected to
be heavily mineralized, areas of considerable length contain significantly
higher values than anticipated, as described below:
Adit Length Silver Assay Tin Assay
---- ------ ------------ ---------
Oploca-2 62 ft. 42.9 oz/ton 0.85%
Oploca-2 98 ft. 5.1 oz/ton 0.07%
Potosi-2 125 ft. 6.0 oz/ton 0.12%
Because of the better than expected results of this initial drilling
and sampling work, the Company is very encouraged about the property's
potential to host an ore deposit of more than 130 million ounces of silver and
150 million pounds of tin. The underground workings of the mine are now being
dewatered and are being re-sampled as they become accessible to verify the data
supporting the 1992 report. Underground core drilling to test for
mineralization below the limits of the surface drilling will commence shortly
thereafter.
The Company will conduct metallurgical testing on sample material
recovered from underground. Additional work is planned to determine optimum
extraction methods, but the Company anticipates that, should development
proceed, it could develop the deposit using low cost open pit methods. A
significant amount of work remains to define processing economics and to
determine if the material can be recovered economically.
The Pirquitas property will receive the bulk of the Company's
exploration emphasis away from the Sunshine Mine in 1996, with a budget of
approximately $2 million allocated to evaluate the property.
7
10
RC DRILL PROGRAM
PIRQUITAS FEBRUARY, 1996
SUNSHINE
ARGENTINA, INC.
[MAP]
8
11
REVENUE-VIRGINIUS
The Revenue-Virginius project is located eight miles southwest of the
town of Ouray in southwestern Colorado. Primarily an underground silver
property, it also contains values in gold, base metals and antimony in narrow
veins in volcanics. Sunshine controls the property by virtue of a mining lease
which calls for minimal property payments and work commitment, with a sliding
scale net smelter revenue royalty to the owner based on silver price. The
property currently reports reserves of over five million ounces of silver, with
excellent potential existing for expanding this figure.
MISHKI
Sunshine was recently chosen as the successful bidder on the Mishki
property, located about 115 miles northwest of Arequipa in Southern Peru.
Mishki is a former producing underground gold mine and currently reports a
resource of some 100,000 ounces in narrow, high grade veins. Sunshine has the
right to purchase the property at any time during a three-year period from
Minera Peru for $1.0 million, during which time certain work requirements will
have to be met. An underground exploration program is planned for the property.
HUEMULES
The Huemules project is located 17 miles northwest of the town of
Esquel, Province of Chubut, in southern Argentina. Included in the large land
position (25,700 acres) is an underground gold property which has produced a
small quantity of very high grade ore in the past from veins in volcanics. The
project is a joint venture with an Argentine company and requires that Sunshine
spend $2.1 million over three years to earn a 50% interest in the joint
venture. Trenching and drilling conducted by Sunshine in 1994 has uncovered
previously unknown gold-bearing structures with ore- grade mineralization, and
the results of this work are presently being evaluated. Sunshine has spent
approximately $1 million on the project to date.
RINCONADA
The Rinconada project is located near the town of the same name,
Province of Jujuy, in northern Argentina. The property is a gold exploration
project with significant past production from both placer and vein workings.
Potential is believed to exist here for a large, open pit as well as a high
grade underground vein deposit. The central portion of the property is
controlled by way of a three-year, $300,000 purchase option with the owner.
Sunshine also holds two concessions adjacent to this central parcel. Detailed
geological mapping and sampling work followed by initial drilling is planned.
OTHER EXPLORATION IN ARGENTINA AND PERU
Sunshine has obtained seven additional concessions in Argentina it
believes could host economic gold mineralization. Four of these, Cerro Choique,
Loma Blanca, Don Gregorio and Maria Sol are located in Rio Negro Province. Two
concessions, Abra Rabon and Abra Huacar are located in Jujuy Province, while
one known as Cobre is located in Salta Province. Evaluation work is currently
being conducted on these concessions, which cover a total of approximately
121,700 acres.
9
12
In Peru, the Company is aware of properties scheduled for
privatization in 1996, on which it has an interest in bidding. It is also
evaluating other previously producing properties which have been inactive due
to lack of access to capital and technology. Both privatizations and reopening
other inactive properties may present significant turnaround opportunities.
In addition to exploration at the Sunshine Mine, the Company expects
to spend approximately $5 million annually for exploration in Peru, Argentina
and other exploration projects, in 1996 and 1997.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." REFINING TECHNOLOGY
Numerous ore bodies worldwide contain antimony and arsenic which, due
to environmental concerns, often must be removed before shipment to a smelter
for processing or the ore will be subject to significantly increased processing
costs. The Company possesses patented technology to safely remove these
materials, and in the case of antimony, to produce a marketable product. The
Company believes this technology may give it an advantage as a joint venture
partner in such mining operations. The Company is presently evaluating mining
projects which would make use of this technology in Peru.
MARKETING
The Company's primary product can be either refined silver which is
sold to industrial customers or precious metals dealers, or silver-copper and
lead concentrates which are sold to smelters. Prices received for refined
silver are based on market prices at the time of shipment. Prices received for
the silver-copper concentrate are based on prices for silver and copper during
a quotational period shortly after shipment. The Company bases its decisions on
whether to refine its products internally or sell them to a smelter based on
internal production costs versus available smelter contract terms. The
Company's refined antimony and copper products are generally marketed directly
to industrial customers. See Note 10 of Notes to Consolidated Financial
Statements included elsewhere herein.
OTHER BUSINESS AND REGULATORY FACTORS
The Company's precious metals operations are intensely competitive and
subject to risks and regulations inherent in and applicable to mining generally
and the precious metals industry specifically. Competition in the precious
metals mining industry, and particularly the silver mining industry, is very
volatile. The market for gold and silver is international and there is no
significant marketing advantage in domestic production versus international
production. No single source of silver is significant to the world market, and
many of the principal sources of silver as a primary metal have been forced to
close as a result of continued low silver prices over the past several years.
As a result, the largest sources of silver are presently gold, copper, lead,
and zinc mines which produce silver as a by- product.
In connection with its mining and other operations, the Company is
subject to a variety of extensive and changing federal, state and local laws,
regulations and ordinances. These laws and regulations control exploration and
mining and the actual and potential effects of the Company's activities on the
environment, which directly and
10
13
indirectly affect the operations of the Company and could result in potential
liability to the Company. No material effect on the Company is currently
anticipated from compliance with any such provisions or controls.
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.
One example of an environmental law affecting the Company is the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"). CERCLA imposes liability (without
regard to fault) on certain categories of persons for response and certain
costs related to releases of hazardous substances at a facility into the
environment, and for liability for natural resource damages. Liability under
CERCLA is strict and generally is joint and several. In addition to CERCLA,
similar state or other laws and regulations may impose the same or even broader
liability for discharges, releases, or the mere presence of certain substances
into and in the environment. For a discussion of potential liability under
CERCLA at specific sites, see "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS."
Another example of an environmental law that affects the Company is the federal
Resource Conservation and Recovery Act ("RCRA"), which is the primary federal
statute governing the management of solid wastes and which includes stringent
regulation of solid waste that is considered hazardous waste. The Company's
operations generate solid wastes, including certain mining waste streams.
Currently, certain solid wastes generated from particular activities related to
the extraction and processing of ores and minerals are excluded from regulation
as hazardous wastes under RCRA.
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 1996. See
Note 9 of Notes to Consolidated Financial Statements included elsewhere herein;
and "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." The
11
14
Company also does not anticipate any material effect from compliance with
environmental, health, and safety laws, regulations and ordinances.
EMPLOYEES
At December 31, 1995 Sunshine and its subsidiaries, including SPMI,
employed approximately 240 persons; 217 of whom are located at the Kellogg
facilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES."
2. PROPERTIES.
The information regarding the properties of Sunshine is set forth
under Item 1. Business, above, and in the Notes to Consolidated Financial
Statements included in Part II hereof.
3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The EPA has identified the Company and SPMI as Potentially Responsible
Parties ("PRPs") at one site and SPMI as a PRP at another site under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI
at one site and SPMI at the other site arranged for the disposal of hazardous
substances. One of the sites is located in Kellogg, Idaho and the other site is
located in Spokane, Washington.
The EPA has named the Company and SPMI as PRPs at the Bunker Hill
Superfund Site in Kellogg, Idaho ("Bunker Hill"). Bunker Hill is on EPA's
National Priorities List under CERCLA. During 1990 and 1991, the Company and
other PRPs, without admitting liability, funded soil removal and remediation
programs at the site. The Company's share of these programs totaled
approximately $239,000.
EPA, the State of Idaho and several of the PRPs, including the Company
and SPMI, have agreed to a site-wide clean-up plan, separating the site into
two distinct areas for remediation: the Bunker Hill Smelter Complex (the
"Smelter Area") and the residential and certain commercial areas primarily in
the cities of Kellogg, Smelterville and Pinehurst, Idaho encompassed by the
Site (the "Residential Areas"). Without admitting liability, the Company and
several PRPs have agreed to do the remediation work in the Residential Areas
pursuant to an EPA and State of Idaho approved work plan. In exchange therefor,
EPA and the State of Idaho released the settling PRPs from all liability for
cleanup of the Smelter Area, reduced the EPA's claim for reimbursement of past
costs from $17 million to $1 million plus a percentage of proceeds received by
the PRPs from insurance companies, if any, and agreed that the work orders from
1990 through 1993 were deemed satisfied and discharged. The remediation
undertaken by the Company and the PRPs is expected to take approximately seven
years and the Company estimates its (including SPMI's) share (12.4%) of the
remediation costs will be approximately $3 million, of which approximately $1.2
million has been spent through December 31, 1995.
On November 17, 1994, the United States District Court for the
District of Idaho entered a Consent Decree containing the terms of this
agreement. The liability for remediation costs under the consent decree is
joint and several. Thus, if any other settling party or parties does not comply
with the consent decree, the exposure for
12
15
the Company and SPMI could increase proportionately. The parties have reserved
their claims and defenses with respect to natural resource damages, except for
the State of Idaho which has agreed that its claim has been settled.
On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed
an action in the United States District Court, District of Idaho against the
Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory
judgment that the Tribe has five years in which to file a natural resource
damage claim under CERCLA against the PRPs and others or, alternatively, for
damages in an unspecified amount resulting from the loss, destruction or injury
to natural resources allegedly caused by the defendants. The Company believes
that a settlement by SPMI of all natural resources claims with the State of
Idaho in May 1986 bars the Tribe's action.
On October 30, 1992, the United States District Court for the District
of Idaho issued an Order of Administrative Termination in the Tribe's action.
The case was administratively terminated because of the court's ruling in a
prior action that the State of Idaho has title to the beds and banks of all
navigable water courses and that the Tribe had no claim thereto. The decision
in the prior action between the State of Idaho and the Tribe, which was adverse
to the Tribe, was appealed to the Ninth Circuit Court of Appeals, which
affirmed in part and reversed in part the decision of the district court. The
Tribe's action against Sunshine, however, remains administratively terminated.
By letter dated July 17, 1995, Sunshine and SPMI were notified that
they have been identified by the United States Department of the Interior, Fish
and Wildlife Service, as PRPs for alleged natural resource damage in the Coeur
d'Alene Basin. The letter further served as notice that the Department of the
Interior intends to bring suit against Sunshine, SPMI and other identified PRPs
to recover natural resource damages under CERCLA. The Department of Interior
has not set forth any amount of damages. The Company believes that the
settlement by SPMI of all natural resource claims with the State of Idaho in
May, 1986, bars these claims.
The second site where EPA has identified SPMI as a PRP under CERCLA is
the Spokane Junkyard Site near Spokane, Washington. In November 1988, the EPA
notified SPMI that it is a PRP at that site. The EPA has documented the
threatened release of hazardous substances at the site and has initiated
response actions under CERCLA.
The Company does not believe that the designation of SPMI as a PRP at
the Spokane Junkyard Site will have a material impact on the Company's results
of operations and financial condition or on its liquidity or capital resources.
SPMI does not believe it will be required to pay any clean-up costs at the
Spokane Junkyard Site. No records of SPMI have been discovered by it or the EPA
showing SPMI ever sent any material to the site. The EPA's designation of SPMI
as a PRP was based on the oral statement of a former employee at the junkyard
that sometime in the 1940's or 1950's, he recalled a SPMI truck on the site. To
date, the EPA has not filed any action against SPMI or the Company in relation
to the Spokane Junkyard Site.
OTHER LITIGATION
On January 25, 1995, a complaint was filed against the Company in The
United States District Court for the District of Delaware by Grace Holdings,
L.P., a major holder of the Company's Preferred Stock, alleging that the rights
issued incident to the Company's rights offering were an impermissible
distribution or dividend under
13
16
the Certificate of Designation, Rights, and Preferences (the "Certificate")
governing the Preferred Stock. Grace Holdings, L.P. alleges damages of $3
million. The Company believes that the rights issued were not a prohibited
distribution or dividend under the terms of the Certificate, and that the
complaint is without merit. Grace Holdings, L.P. has agreed with the Company
that this litigation will be dismissed, with prejudice, upon consummation of
the proposed merger. (See, ITEM 1. BUSINESS, above.)
On March 29, 1995, a similar complaint was filed against the Company
in Delaware Chancery Court, New Castle County, by Harbor Finance Partners, a
Colorado Partnership, requesting class action status and alleging that the
rights and warrants issued incident to the Company's rights offering were an
impermissible distribution or dividend under the Certificate. Harbor Finance
seeks injunctive relief to compel the Company to pay dividends to holders of
Preferred Stock and to otherwise comply with the Certificate, and to prohibit
any further distribution to holders of Common Stock. The Company believes that
the rights and warrants issued were not a prohibited distribution or dividend
under the terms of the Certificate, and that the complaint is without merit.
Grace Holdings, L.P., Elliott Associates, L.P., and Lloyd J. Miller, III, the
three largest holders of Preferred Stock, have agreed not to join, participate
in nor benefit from this lawsuit if the proposed merger is consummated. (See,
Item 1. Business, above.) On February 16, 1996, the Court ordered this action
stayed pending resolution of the Grace Holdings, L.P. litigation.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of Sunshine's fiscal year ended December 31, 1995.
14
17
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Sunshine's Common Stock is listed for trading on the New York Stock
Exchange (symbol "SSC"). Sunshine currently does not pay cash dividends on its
Common Stock and has not paid any since the third quarter of 1981. At March
11, 1996, Sunshine had approximately 27,000 holders of record of its Common
Stock. On March 11, 1996, the closing price of the Common Stock price as
reported on the New York Stock Exchange, Inc. composite transactions was
$1.375.
The following table sets forth the range of high and low sales prices
for the Common Stock as reported on the New York Stock Exchange, Inc.,
composite tape for the periods indicated. Such quotations represent
inter-dealer prices without retail markup, markdown or commission, and may not
necessarily represent actual transactions.
1995 QUARTERS 1994 QUARTERS
----------------------------------------
HIGH LOW HIGH LOW
----------------------------------------
1st Quarter 2 1 1/2 3 1/8 1 3/4
- ------------------------------------------------------------------
2nd Quarter 2 3/8 1 3/4 2 1/4 1 5/8
- ------------------------------------------------------------------
3rd Quarter 2 1/8 1 5/8 2 1/2 1 1/2
- ------------------------------------------------------------------
4th Quarter 1 7/8 1 1/4 2 1/2 1 5/8
- ------------------------------------------------------------------
Sunshine's $11.94 (Stated Value) Cumulative Redeemable Preferred Stock
(the "Preferred Stock") is also traded on the New York Stock Exchange (symbol
"SSC Pr") with high and low sales prices as reported on the New York Stock
Exchange, Inc., composite tape during 1995, of $10.375 and $6.375,
respectively. At March 11, 1996, Sunshine had approximately 2,600 holders of
record of its Preferred Stock. The Company's common stock purchase warrants
are traded on the NASDAQ National Market System (symbol "SILVW") with high and
low sales prices as reported by NASDAQ during 1995 of $1.063 and $.50.
The indenture governing Sunshine's outstanding Convertible
Subordinated Reset Debentures due July 15, 2008, imposes certain restrictions
on Sunshine's ability to declare or pay cash dividends and make certain
distribution on its capital stock (including Sunshine's Common Stock). Pursuant
to these restrictions, at December 31, 1995, the Company was prohibited from
paying cash dividends on shares of its Common Stock and its Preferred Stock.
15
18
6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical financial
information of Sunshine as of the dates and the periods set forth in the table
below. All amounts are in thousands, except price and production statistics and
per share amounts.
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994(4) 1993(3) 1992(2) 1991
-------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Operating revenues . . . . . . . . . . . . . $16,534 $17,412 $17,581 $12,926 $13,344
Loss from continuing operations . . . . . . . (15,483) (4,923) (28,611) (40,261) (39,917)
Loss before extraordinary item and
cumulative effect of change in
accounting principle . . . . . . . . . . (15,483) (4,923) (28,611) (40,664) (40,128)
Net loss . . . . . . . . . . . . . . . . . . (15,483) (4,923) (42,257) (13,372) (40,128)
Loss applicable to common shares . . . . . . (25,572) (15,383) (53,077) (24,860) (52,721)
Loss per common share:
Continuing operations . . . . . . . . . . (.13) (.08) (.25) (.44) (.47)
Extraordinary item . . . . . . . . . . . --- --- (.09) .33 ---
Cumulative effect of change in
accounting principle . . . . . . . . . --- --- --- (.10) ---
Net loss . . . . . . . . . . . . . . . . (.13) (.08) (.34) (.21) (.47)
Weighted average common shares . . . . . . . 193,044 185,634 155,383 118,740 111,258
PRICE AND PRODUCTION STATISTICS:
Average Silver prices received . . . . . . . $5.20 $5.29 $4.34 $3.95 $4.06
Tons . . . . . . . . . . . . . . . . . . 101,240 107,056 100,441 104,602 159,907
Silver grade (ounces per ton) . . . . . . 17.66 20.08 23.49 24.77 22.54
Silver ounces . . . . . . . . . . . . . . 1,731,714 2,079,290 2,298,155 2,540,363 3,495,885
Cash cost per ounce(1)(5) . . . . . . . . . . $6.61 $5.83 $5.10 $4.40 $4.76
BALANCE SHEET DATA:
Cash and cash investments . . . . . . . . . . $12,837 $26,581 $4,304 $4,654 $14,330
Working capital . . . . . . . . . . . . . . . 23,550 38,537 15,651 13,399 22,389
Total assets . . . . . . . . . . . . . . . . 101,134 116,657 100,360 113,036 154,004
Long-term debt and capital lease obligations 1,519 1,519 9,493 19,669 71,012
Stockholders' equity:
Preferred Stock . . . . . . . . . . . . . 82,268 80,707 78,774 76,482 75,590
Other . . . . . . . . . . . . . . . . . . 2,814 19,701 (11,531) (9,282) (20,177)
Book value per common share . . . . . . . . . (.22) (.10) (.26) (.24) (.36)
Common shares outstanding . . . . . . . . . . 193,096 192,995 168,559 146,478 115,080
________________
(1) Cash cost per ounce includes all 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.
16
19
Cash costs increased in 1993 and 1994 due primarily to rock bursts at
the Sunshine Mine which reduced production in each year.
(2) In 1992, the Company recorded an extraordinary gain of $38.6 million
on the extinguishment of eight series of silver indexed bonds issued
between 1980 and 1986 by SPMI (the "Old Silver Indexed Bonds") and an
$11.3 million charge due to the cumulative effect on prior years of a
change in the method of accounting for postretirement benefits other
than pensions.
(3) In 1993, the Company recorded a charge of $12.5 million resulting from
an induced conversion of the 8% Silver Indexed Bonds, and
extraordinary losses aggregating $13.6 million resulting from
redemptions of the 8% Silver Indexed Bonds. See Note 5 of Notes to
Consolidated Financial Statements.
(4) In 1994, the Company recorded gains totaling $6.9 million due to the
curtailment of postretirement medical benefits for certain of its
employees and retirees. See Note 8 of Notes to Consolidated Financial
Statements.
(5) Cash costs per ounce increased from 1994 to 1995 primarily due to a
decline in silver production. Production declined due to a reduction
in mill head grades as a result of extensive underground development
activities and adverse mining conditions in many of the mine's
productive stopes.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had approximately $23.5 million of
working capital, including approximately $21.8 million of cash and silver
bullion held for investment. While these balances are deemed adequate to fund
the Company's expected cash requirements for several years, the Company,
through SPMI, is making an offering conducted in Europe on a best efforts basis
(the "Notes Offering") only to non-U.S. persons pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended. It is currently
anticipated that the Notes Offering will be consummated on or about March 21,
1996. SPMI anticipates that it will issue $30 million aggregate principal
amount of Senior Exchangeable Notes due 2000 (the "Notes") pursuant to the
Notes Offering. The net proceeds from the Notes Offering (currently estimated
to be approximately $27.25 million) will be used to fund development and
exploration opportunities of the Company, and for working capital requirements
of the Company.
Set forth below are certain terms and provisions of the Notes and the
Notes Offering as currently contemplated. The Notes will bear interest at 8%
per annum and will mature four years after their issuance. The Notes may be
exchanged at the option of the holder at any time after 40 days following the
date of issuance and prior to maturity, unless previously redeemed. At any
time after one year from the date of issuance and prior to maturity, SPMI may
force the exchange of the Notes, in whole or in part, subject to certain
restrictions. The Notes will initially be exchangeable into a specified number
of shares of Common Stock of the Company at an exchange price of $1.4375 per
share, subject to reset and adjustment in certain events. SPMI may redeem the
Notes at any time at their principal amount if United States withholding taxes
are imposed on payments in respect of the Notes.
17
20
The Notes will be guaranteed by Sunshine (and any successors thereof) and the
guarantee will rank senior to all of its unsecured and subordinated
obligations, including the currently outstanding Convertible Subordinated Reset
Debentures due July 15, 2008. The Notes Offering is subject to certain
conditions and there can be no assurance that the net proceeds set forth above
will be received.
FUTURE CAPITAL AND EXPLORATION EXPENDITURES
Subject to positive confirmation of economic mineralization in the
West Chance area of the Sunshine Mine, the Company plans to return the Sunshine
Mine to full production by the end of 1996. This advances the schedule about
one year ahead of when the Company previously expected to return to full
production. The expedited schedule is the result of the successful testing of
a trackless mining method in the Sunshine Mine using specially built low
profile front-end loaders commonly referred to as LHD (Load-Haul-Dump) units.
Testing indicated that the cut-and-fill method utilizing LHD units allows for
greater productivity and quicker reserve access than the traditional raise-up
cut-and-fill mining method utilized at the Sunshine Mine.
As a result of the expedited schedule, the Company expects to spend
approximately $3.0 million in 1996 at the Sunshine Mine to acquire the
necessary LHD units and develop ventilation and ore passes in the West Chance
area. Additionally, $2.5 million is expected to be spent on exploration
activities involving completion of the 2700 and 3700 Level Drifts, commencement
of a new drift on the 2300 Level, and drilling 50,000 feet of new core drill
holes into the West Chance area.
An important assumption in the plan to return the mine to full
production is that the 2700 and 3700 Level drifts will encounter significant
quantities of ore grade mineralization when they reach the target areas. While
assays from core drilling indicate the presence of ore-grade mineralization,
there can be no assurance that the mineralization will be present in sufficient
quantity or with sufficient continuity to support the return to full production
in the time frame called for. In that event, certain of the capital
expenditures outlined above would be delayed or canceled.
The Company has budgeted $5 million in other exploration expenditures
for 1996. Of that amount, approximately $2 million is allocated to the
evaluation of the Pirquitas property in Argentina, which was purchased for $1.7
million in November, 1995. It is expected that this will allow the Company to
do the necessary work to confirm or refute the presence of the large
disseminated silver resource which appears to be present, and to do the
necessary engineering and metallurgical testing to determine if the property
can be economically placed into production. If the property is determined to
be commercially viable, a significant capital expenditure, currently estimated
at in excess of $50 million, will be required for development. This would
require the Company to raise additional funds through debt or equity financing
and/or joint venture with industry partners to develop the property. See
"Business - Other Exploration Projects - Pirquitas."
EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE.
As the price of silver since 1985 has been only slightly in excess of,
or less than, the Company's cash cost to produce an ounce of silver, the
Company's operations have not been able to generate cash flow sufficient to
cover
18
21
its costs of exploration, research, general and administrative expenses, and
interest, as well as non-cash charges such as depreciation, depletion, and
amortization.
In order to minimize losses at the Sunshine Mine, in June of 1991 the
Company reduced ore tonnage produced from the Mine to about one-half its 1,000
tons-per-day capacity. While this reduction in output has caused an increase
in the per-unit cash cost of silver production due to certain fixed costs which
are not variable with production, it has served to minimize the aggregate
losses at the Sunshine Mine, while allowing the Company to pursue its new
exploration program in the western sections of the Mine. The Company plans to
return the Sunshine Mine to full production by the end of 1996.
The Company periodically, and at least annually, evaluates its mining
properties for permanent impairment based on undiscounted expected future cash
flows. Such estimates are based on assumptions as to future silver prices,
mining costs, and recoverable reserves which management believes are reasonable
based on historical silver prices and production. In constant 1995 dollars,
the price of silver averaged approximately $11.66 per ounce over the 28 year
period since silver has been allowed to trade on an essentially free market
basis, including the most recent six-year period during which the price of
silver averaged only $4.93 per ounce (in constant 1995 dollars). The Company
currently believes that the price of silver will increase to a more normal
historical trading range in constant dollars and that additional reserves of
higher grades than have been mined recently are present in the Sunshine Mine.
Accordingly, the Company does not believe it is probable that its investment in
the Sunshine Mine has been permanently impaired at December 31, 1995. However,
unless the price of silver increases or the cost of production per ounce is
reduced, the Company will not be able to recover its investment in the Sunshine
Mine.
Beginning in 1996, the Company will be subject to the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets, and for Long-Lived Assets to be Disposed of"
("SFAS 121"). The adoption of SFAS 121 will have no impact on the Company's
financial condition as the Company's methodology for evaluating its mining
properties for impairment is consistent with SFAS 121.
LABOR AGREEMENTS AT THE SUNSHINE MINE
The hourly employees at the Sunshine Mine are represented by the
United Steelworkers of America (which represents the majority of the employees)
and the International Brotherhood of Electrical Workers Union (the "Unions").
Effective May 1, 1994, the Unions and SPMI entered into new six-year labor
agreements. The salient features of the agreements are (1) continuation of the
flexible wage scale making wages variable with silver prices, with some
increase in direct hourly wages; (2) the ability of either party to reopen
negotiations on wages and benefits at the end of the third year, subject to
mandatory arbitration if agreement is not reached; and (3) an increase in
pension benefits in exchange for the elimination of Company provided retiree
medical benefits for the current work force.
As a result of the elimination of the Company's obligation to provide
retiree medical benefits for the current employees, the Company realized a gain
of $6.2 million. Pursuant to the labor agreements with the Unions,
19
22
this gain resulted in a profit sharing payment and related expenses for the
hourly work force of approximately $675 thousand, and a net gain to the Company
of $5.5 million in the first quarter of 1994. See "Results of Operations."
The Company believes that the agreements with the Unions will result
in no significant increase or decrease in its future cost of production.
Union-represented employees will realize an increase in direct wages and
pension benefits, but these will be largely offset by the reduction in future
medical costs. The Company also believes the agreement will produce the basis
for a stable working relationship with its employees for its six year term.
OTHER POSTRETIREMENT MEDICAL BENEFITS
In the second quarter of 1994, the Company eliminated its commitment
to provide postemployment retiree medical benefits for its staff employees,
resulting in a net gain of $580 thousand. The commitment to provide such
benefits by the Company was not contractual and was done unilaterally by the
Company.
The Company's Union retirees since 1987 have retired under bargaining
agreements which limit the Company's obligation to provide postemployment
medical benefits to the period of time covered under each successive bargaining
agreement. These retirees were offered the option to eliminate retiree medical
coverage in exchange for increased pension benefits. Of the total 36 eligible
personnel, 19 elected to eliminate such coverage in exchange for the increased
pension benefits, resulting in a gain to the Company of $1 million in 1994.
Preferred Stock
The dividend on Sunshine's $11.94 (Stated Value) Cumulative Redeemable
Preferred Stock (the "Preferred Stock") has neither been declared nor paid
since December 31, 1990. Given current silver prices, the Company does not
expect any resumption of dividends in the foreseeable future. Dividends are
cumulative. The amount of aggregate redemption value disclosed on the December
31, 1995, balance sheet includes $42.6 million in dividends in arrears.
The Certificate governing the Preferred Stock prohibits partial
redemptions while dividends are in arrears. Therefore, the Company has not
made annual redemptions of approximately 808 thousand shares of the Preferred
Stock since 1991. Holders of Preferred Stock are currently entitled to elect
three directors to the Company's board of directors.
Pursuant to the Certificate, the Company may make dividend payments
and redemptions of the Preferred Stock using cash or by issuing shares of its
Common Stock valued in accordance with a specified formula. The Company has
stated that it intends to make dividend and redemption payments, when and if
resumed, using shares of its Common Stock. There are no penalties for the
Company failing to make dividend payments or partial redemptions.
On October 19, 1995, the Board of Directors of Sunshine approved the
proposed merger of Sunshine with and into its wholly-owned subsidiary, Sunshine
Merger Company, pursuant to which Sunshine Merger Company would be the
surviving entity. The purpose of the proposed merger is to retire all of
Sunshine's outstanding Preferred Stock. The proposed merger requires approval
by the holders of a majority of the outstanding Common
20
23
Stock and Preferred Stock, voting separately as a class. A special meeting of
Stockholders, at which the proposed merger will be considered, will be held on
March 29, 1996.
OTHER
The Company and SPMI have been identified by the EPA as a PRP at the
Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane
Junkyard Site. The Company believes that its status as a PRP will not have a
material adverse effect on its consolidated financial position or results of
operations. See "Legal Proceedings - Environmental Matters" and Note 9 of
Notes to Consolidated Financial Statements.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities was $6.9 million in 1995 compared
with $6.5 million in 1994 and $6.1 million in 1993. The increases resulted
from increases in cash operating losses of $1.0 million in 1995 and $1.9
million in 1994, which were partially offset by changes in working capital.
Cash used by investing activities during 1995 was $6.9 million,
including $6 million for exploration expenditures and $2.5 million for the
acquisition of the Pirquitas property in Argentina and the ConSil property
adjacent to the Sunshine Mine, offset by $2.2 million of cash proceeds from the
sale of certain marketable securities. In 1994, cash used by investing
activities was $2.3 million, including $1.9 million for exploration
expenditures. In 1993, investing activities provided $3.7 million of cash
through the liquidation of certain marketable securities, offset by investment
of approximately $1 million in new plant and equipment and $1.5 million for
exploration expenditures.
Cash provided by financing activities was $31.1 million in 1994
principally as a result of the Company's rights offering. Financing activities
provided $2.0 million of cash in 1993 as a result of the release of
approximately $3.0 million of previously restricted cash, offset by the
retirement of approximately $1.0 million of debt.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The Company's net loss increased $10.6 million in 1995 to $15.5
million compared with the net loss of $4.9 million in 1994. This increase
resulted primarily from the $4.2 million increase in exploration expenditures
pursuant to the Company's plan to increase exploration at the Sunshine Mine and
other sites in Argentina, Peru and the United States, and the $6.9 million gain
from curtailment of postretirement medical benefits in 1994.
Consolidated operating revenues decreased approximately $878 thousand
(5%) for 1995 compared to 1994 due to lower sales volume (2.5 million ounces in
1995 compared to 2.9 million ounces in 1994) offset by mark-to-market
adjustments in the value of the Company's in-process inventories and silver
bullion held for investment.
During 1995, due to the increase in silver prices from the beginning
of the year, the Company realized a mark- to-market increase of $.9 million on
its silver inventories and silver bullion held for investment. In 1994,
21
24
due to the decline in silver prices from the beginning of the year of $5.09 per
ounce to the year end price of $4.88, the Company realized a mark-to-market
writedown of $.3 million.
During the first quarter of 1995, the Company suspended operation of
its silver refinery. As a result, the Company began selling silver and copper
concentrate to a third-party smelter instead of refining silver bullion and
copper metal for sale to commercial and industrial customers. This resulted in
a shorter processing time before sales recognition, causing a $2.4 million
drawdown of work-in-process inventories. Cost of sales decreased $900 thousand
in 1995 compared to 1994, due to lower sales volume of custom material (375
thousand ounces in 1995 versus 813 thousand ounces in 1994) resulting in $1.8
million reduction in cost of sales and a decrease in ounces of silver produced,
partially offset by the inventory drawdowns and higher unit production costs.
Unit production costs increased primarily due to declines in silver production
from 1994 to 1995 (1.7 million ounces produced from 101,000 tons at 17.7 ounces
per ton in 1995 versus 2.1 million ounces from 107,000 tons at 20.1 ounces per
ton in 1994). Mine production declined due to a reduction in mill head grades
as a result of extensive underground development activities. Additionally, the
operations at the Sunshine Mine experienced earlier than expected mineout and
adverse mining conditions in many of the mine's productive stopes.
Depreciation, depletion, and amortization declined by approximately
$555 thousand as a result of lower production in 1995.
Interest income increased by $202 thousand (18%) due to higher cash
balances after the Company's rights offering in March, 1994.
Interest expense was reduced $409 thousand (34%) due to the reduction
of approximately $8 million (84%) in the aggregate principal amount of debt
outstanding in the first quarter of 1994.
Other, net declined $416 thousand due to a $1.0 million gain from a
litigation settlement in 1994, partially offset by $.6 million gain on sale of
marketable securities in 1995.
1994 COMPARED TO 1993
The Company's net loss decreased $37.3 million in 1994 to $4.9 million
compared with $42.2 million in 1993. This decrease resulted primarily from the
$12.5 million charge for the loss associated with the modified "put" terms of
the 8% Silver Indexed Bonds which were offered to induce conversion of the
Bonds to Common Stock, and an extraordinary charge of $13.6 million related to
the Company's decision to call the remaining Bonds in 1993; the $6.9 million
gain from the curtailment of post retirement medical benefits for certain of
its employees and retirees in 1994; and the $4.2 million (77%) reduction in
interest expense in 1994 primarily due to elimination of the 8% Silver Indexed
Bonds.
Consolidated operating revenues decreased approximately $.2 million
(1%) in 1994 compared to 1993. Price increases on silver sold ($5.29 per ounce
in the 1994 period versus $4.34 per ounce in 1993), which increased revenues by
$2.0 million, and increased sales of custom material (813 thousand ounces in
1994 versus 426 thousand in 1993), which increased revenues by $1.9 million,
were offset by reductions in sales volumes of Sunshine Mine material (2.1
million ounces in 1994 versus 2.3 million ounces in 1993), which decreased
revenues
22
25
by $1.2 million, and by mark-to-market adjustments in the value of the
Company's in-process inventories and silver bullion held for investment.
In 1994, due to the decline in silver prices from the beginning of the
year of $5.09 per ounce to the year end price of $4.88, the Company posted a
mark-to-market writedown of $.3 million. During 1993, due to an increase in
silver prices from $3.67 to $5.09, the Company posted a favorable
mark-to-market adjustment of $3.3 million.
Consolidated operating costs increased $2.7 million from 1993 due
primarily to increases in sales volumes of custom materials as discussed above.
Depreciation, depletion and amortization declined by approximately
$1.8 million principally as a result of increasing the remaining useful life of
the Company's silver refinery. Selling, general and administrative expense
increased approximately $400 thousand over the 1993 period due primarily to
expenses incurred in studying potential foreign joint venture opportunities.
Interest income increased $800 thousand due to higher cash balances
after the Company's Rights Offering.
THE EFFECTS OF CHANGING PRICES
Substantially all of the Company's revenues are from sales of silver.
Volatility in the price of silver causes substantial fluctuations in the
Company's revenues and financial condition. There are many factors which
influence the volatility of silver prices. Changes in supply and demand,
worldwide economic and political conditions, expectations as to inflation and
speculative activity in the market all cause fluctuations in prices received.
As previously discussed, the price of silver in recent years has been
depressed.
The Company maintains an investment inventory of silver bullion
totaling approximately 1.7 million ounces. To earn current income on this
investment the Company from time to time will sell covered calls against this
inventory. As of February 28, 1996, the Company had outstanding calls on this
inventory aggregating 800,000 ounces at strike prices from $6.00 to $6.50,
expiring between February and May, 1996. Premiums received from the sale of
these calls were from $.10 to $.15 per ounce. Total premiums earned for the
sale of covered calls aggregated $442,250 and $347,000 in 1995 and 1994,
respectively. The Company's policy is not to sell any uncovered calls.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed herewith begin on page F-1 hereof.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
23
26
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Board of Directors of Sunshine consists of the following ten
directors each of whom holds office until the next annual meeting of
stockholders or until their successors are elected and qualified. If the
proposed merger is approved (see Item 1. Business and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capitol Resources - Preferred Stock), the Board of Directors of
Sunshine Merger Company will consist of the same directors, with the exception
of Messrs. Elvin, Kaback and Stewart, who were elected to the Company's Board
of Directors by holders of Preferred Stock and who, incident to the elimination
of the Preferred Stock, will not be directors of Sunshine Merger Company.
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------
G. Chris Andersen . . 57 Director since May 1983; until August 1995, was Vice Chairman -- PaineWebber
Incorporated for more than five years prior thereto.
V. Dale Babbitt . . . 59 Director since December 1992; President (for more than the past five years) and
CEO of N.L. Terteling Family Interest, Inc. (dba) J.A. Terteling & Sons Co., the
Managing General Partner for investments consisting of mining interests, oil &
gas, real estate and securities.
Fred C. Humphreys . . 72 Director since May 1981; Previously was Chairman of the Board and Chief Executive
Officer (1984 to 1987) of West One Bancorp, a regional bank holding company with
operations in Idaho, Utah, Oregon and Washington.
Daniel D. Jackson . . 67 Director since May 1983; Managing Director of Hambrecht & Quist, Inc., a San
Francisco, California based investment banking firm since February 1990.
Oren G. Shaffer . . . 53 Director since June 1993. Since October 1994, Executive Vice-President and Chief
Financial Officer of Ameritech; previously was President of Vigrocap, a venture
capital company (October 1991 to October 1994); and was Executive Vice
President, Chief Financial Officer and Director of Goodyear Tire and Rubber Co.
from January, 1990 to October 1992.
John S. Simko . . . . 56 Director and President since October 1992, and Chief Executive Officer of the
Company since December, 1992; previously (since 1984) served the Company as
Senior Vice President and General Counsel.
Robert B. Smith, Jr . 58 Director since June 1993. Mr. Smith has been a private investor since 1984 and
Trustee of the Dalkon Shield Trust since 1989.
George M. Elvin . . . 53 Director since June 1994. Financial Consultant (for more than the past five years)
and since August 1992 is the owner and President of Windsor IBC, Inc., a
brokerage firm member of the NASD.
24
27
Hoffer Kaback . . . . 46 Director since June, 1994. President (for more than the past five years) of
Gloucester Capital Corporation (financial consulting); and General Partner,
Bosworth Partners (investments).
Douglas K. Stewart . . 44 Director since June, 1994. President (for more than five years) of Stewart & Smith,
Inc., a consulting firm providing securities analysis for institutional
investors.
No family relationship exists among the directors or executive
officers of the Company or its subsidiaries or divisions.
Mr. Andersen is a director of Terex Corporation; Mr. Jackson is a
director of InfoVest Corporation; Mr. Kaback is a director of Biotechnology
General Corporation and Lewis Galoob Toys, Inc.; Mr. Shaffer is a director of
Taiwan Equity Fund, Inc.; and Mr. Stewart is a director of Grant Geophysical,
Inc. Each of these companies has a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934.
The following are the executive officers of the Company.
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------
John S. Simko 56 Director and President since October 1992, and Chief Executive Officer of the
Company since December 1992; previously (since 1984) served the Company as
Senior Vice President and General Counsel.
William W. Davis 42 Executive Vice President and Chief Financial Officer since December, 1995, and
Senior Vice President and Chief Financial Officer of the Company since
September 1992. Previously, from 1983, served in various capacities as an
employee of the Company.
Robert H. Peterson 58 Senior Vice President and Chief Operating Officer-Refining of the Company since
September 1992. Previously since 1980, served in various capacities as an
employee of the Company.
Harry F. Cougher 53 Senior Vice President and Chief Operating Officer-Mining since January 1994.
Previously, since 1984, served in various capacities as an employee of the
Company.
To the Company's knowledge, based solely on its review of Forms 3, 4
and 5, and amendments thereto, furnished to the Company for the fiscal year
ended December 31, 1995, and written representations that no other reports were
required for the fiscal year ended December 31, 1995, all Section 16(a) filing
requirements applicable to its officers and directors were complied with.
11. EXECUTIVE COMPENSATION.
The discussion under "Management Remuneration and Transactions" in the
Company's Proxy Statement for its Annual Meeting of Stockholders is
incorporated herein by reference.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement for its Annual Meeting of
Stockholders is incorporated herein by reference.
25
28
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under "Certain Relationships and Related Transactions"
in the Company's Proxy Statement for its Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements. See Index to Financial
Statements and Financial Statements Schedules on page F-1
hereof.
2. Consolidated Financial Statement Schedules.
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
3. Exhibits.
EXHIBIT
NO. EXHIBIT
--------- -------
2.1 Agreement and Plan of Merger to be entered into by and among Sunshine and Sunshine Merger Company, filed as
Exhibit 2.1 to Sunshine Merger Company's Registration Statement on Form S-4, Registration No. 33-98876 and
incorporated herein by reference.
3.1 Certificate of Incorporation of Sunshine, as amended, filed as Exhibit 3.1 to Sunshine's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference.
3.2 Bylaws of Sunshine filed as Exhibit 3.2 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, as amended and incorporated herein by reference.
4.1 Warrant Agreement dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer &
Trust Company, as Warrant Agent, filed as Exhibit 4.1 to Sunshine's Registration Statement on Form S-4
(Registration No. 33-98876) and incorporated herein by reference.
4.2 Form of Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust
Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated herein by reference.
4.3 Form of Warrant Certificate, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-4
(Registration No. 33-98876) and incorporated herein by reference.
4.4 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated herein by reference.
4.5 Certificate of Designation, Rights and Preferences of $11.94 Cumulative Redeemable Preferred Stock of
Sunshine, filed as Exhibit 3.3 to Sunshine's Registration Statement on Form S-4 (Registration No.
33-22250) and incorporated herein by reference.
26
29
4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine, filed as Exhibit 4.2 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446) as amended, and incorporated
herein by reference.
4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with
respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008, filed as Exhibit 4.25 to
Sunshine's Registration Statement on Form S-3 (Registration No. 33-21159) and incorporated herein by
reference.
4.8 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture dated as of November
10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, by and between the Company and
Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of
the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, and incorporated herein by reference.
4.9 Form of Supplemental Warrant Agreement dated as of February 1, 1996 between Sunshine Merger Company and
American Stock Transfer & Trust Company, as Warrant Agent, relating to the Warrants ($2.12 exercise
price), filed as Exhibit to Sunshine Merger Company's Registration Statement on Form S-4, Registration No.
33-98876, and incorporated herein by reference.
4.10 Form of Fourth Supplemental Indenture, by and between the Company and Texas Commerce Bank National
Association, as successor to Ameritrust Texas National Association formerly known as MTrust Corp.,
National Association, relating to the issuance of the Debentures, filed as Exhibit 4.10 to Sunshine Merger
Company's Registration Statement on Form S-4, Registration No. 33-98876, and incorporated herein by
reference..
o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.9 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986, and incorporated herein by reference.
o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.8 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended and incorporated
herein by reference.
o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, and incorporated herein by
reference.
o10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18 to Sunshine's Registration Statement on
Form S-1 (Registration No. 33-63446), as amended and incorporated herein by reference.
o10.5 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko, filed
as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33- 73608), and
incorporated herein by reference.
*o10.5.1 Amendment to Executive Employment Agreement between Sunshine and John S. Simko, dated December 13, 1995.
o10.6 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis,
filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), and
incorporated herein by reference.
27
30
*o1.6.1 Amendment to Executive Employment Agreement between Sunshine and William W. Davis, dated December 13, 1995.
*1.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Robert H. Peterson,
filed as Exhibit 10.10 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as
amended and incorporated herein by reference.
*1.8 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher,
filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-k for the fiscal year ended December 31,
1993, and incorporated herein by reference.
*o1.8.1 Amendment to Executive Employment Agreement between Sunshine and Harry F. Cougher, dated December 13, 1995.
1.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius Mines Corporation, a Colorado
corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report
on Form 10-Q for the period ended March 31, 1994, and incorporated herein by reference.
1.10 Agreement dated March 24, 1994, by and between Diamond Field Resources, Inc., and Sunshine, filed as Exhibit
No. 10.2 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, and incorporated
herein by reference.
1.11 Mining Lease, dated August 18, 1994, by and between American Gold Resources Corporation, a Delaware
corporation, as lessor, and Sunshine Precious Metals, Inc., as lessee, filed as Exhibit No. 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended September 30, 1994, and incorporated herein
by reference.
1.12 Agreement dated September 23, 1994 by and between Sunshine Argentina, Inc. and Empresa Argentina de Cemento
Armado S.A., filed as Exhibit No. 10.12 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, and incorporated herein by reference.
1.13 Agreement dated July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals,
Inc., as purchaser, for the purchase of a certain mining property, filed as Exhibit 10.1 to Sunshine's
Quarterly Report on Form 10-Q for the period ended June 30, 1995, and incorporated herein by reference.
1.14 Agreement dated October 19, 1995, by and between Sunshine and Elliott Associates, L.P., filed as Exhibit 99.1
to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated
herein by reference.
10.15 Agreement dated October 23, 1995, by and between Sunshine and Grace Holdings, L.P., filed as Exhibit 99.2 to
Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein
by reference.
10.16 Agreement dated October 20, 1995, by and between Sunshine and Lloyd I. Miller, III, filed as Exhibit 99.3 to
Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein
by reference.
22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
28
31
*24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof.
___________
* Filed herewith
o Management contract or compensatory plan or arrangement.
Schedules other than those included in the Consolidated Financial
Statements, if any, are omitted for the reason that they are either not
required, not applicable or the required information is included in the
Consolidated Financial Statements or Notes thereto.
(a) Reports on Form 8-K:
None.
29
32
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 13th day of March, 1996.
SUNSHINE MINING AND REFINING COMPANY
By /s/ WILLIAM W. DAVIS
-------------------------------
William W. Davis, Executive Vice
President, Chief Financial Officer
and Chief Accounting 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, 1995, 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.
30
33
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 13th day of March,
1996.
NAME CAPACITIES
---- ----------
/s/ JOHN S. SIMKO Director, President, and
- -------------------------------------------- Chief Executive Officer
John S. Simko
/s/ G. CHRIS ANDERSEN Director
- --------------------------------------------
G. Chris Andersen
/s/ FRED C. HUMPHREYS Director, Vice Chairman
- -------------------------------------------- of the Board
Fred C. Humphreys
/s/ DANIEL D. JACKSON Director
- --------------------------------------------
Daniel D. Jackson
/s/ V. DALE BABBITT Director
- --------------------------------------------
V. Dale Babbitt
/s/ WILLIAM W. DAVIS Executive Vice President,
- -------------------------------------------- Chief Financial Officer
William W. Davis and Chief Accounting Officer
/s/ ROBERT B. SMITH, JR. Director
- --------------------------------------------
Robert B. Smith, Jr.
/s/ OREN G. SHAFFER Director
- --------------------------------------------
Oren G. Shaffer
/s/ HOFFER KABACK Director
- --------------------------------------------
Hoffer Kaback
Director
- --------------------------------------------
Douglas K. Stewart
/s/ GEORGE M. ELVIN Director
- --------------------------------------------
George M. Elvin
31
34
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of independent auditors........................................................ F-2
Consolidated financial statements:
Consolidated balance sheets at December 31, 1995 and 1994........................... F-3
Consolidated statements of operations for the years ended December 31, 1995, 1994,
and 1993......................................................................... F-5
Consolidated statements of cash flows for the years ended December 31, 1995, 1994,
and 1993......................................................................... F-6
Consolidated statements of stockholders' equity for the years ended
December 31, 1995, 1994, and 1993................................................ F-8
Notes to consolidated financial statements.......................................... F-10
F-1
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sunshine Mining and Refining Company
We have audited the accompanying consolidated balance sheets of Sunshine
Mining and Refining Company (the "Company") as of December 31, 1995 and 1994,
and the related consolidated statements of operations, cash flows, and
stockholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sunshine Mining and Refining Company at December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 28, 1996
F-2
36
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1995 1994
-------- --------
Current assets:
Cash and cash investments............................................ $ 12,837 $ 26,581
Silver bullion (Note 2).............................................. 8,976 8,408
Accounts receivable.................................................. 1,583 416
Inventories (Note 2)................................................. 1,477 3,151
Marketable securities................................................ 13 1,097
Other current assets................................................. 1,592 1,367
-------- --------
Total current assets......................................... 26,478 41,020
Property, plant, and equipment, at cost (Note 3)....................... 140,886 137,798
Less accumulated depreciation, depletion, and amortization........... (69,967) (66,390)
-------- --------
70,919 71,408
Investments and other assets........................................... 3,737 4,229
-------- --------
Total assets................................................. $101,134 $116,657
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 687 $ 435
Accrued expenses (Note 4)............................................ 2,241 2,048
-------- --------
Total current liabilities.................................... 2,928 2,483
Convertible Subordinated Reset Debentures due July 15, 2008 (Note 5)... 1,519 1,519
Accrued pension and other postretirement benefits (Note 8)............. 6,387 6,811
Other long-term liabilities and deferred credits (Notes 6 and 12)...... 5,218 5,436
Commitments and contingencies (Notes 2, 3, 6, and 9)................... -- --
Stockholders' equity (Notes 5 and 7):
Cumulative redeemable preferred stock -- aggregate redemption
value: 1995 -- $128,203; 1994 -- $119,675......................... 82,268 80,707
Common stock -- par value: $0.01; 400,000 shares authorized; shares
issued: 1995 -- 196,760; 1994 -- 196,659.......................... 1,968 1,967
Paid-in capital...................................................... 623,337 623,181
Deficit.............................................................. (622,454) (605,410)
-------- --------
85,119 100,445
Less treasury stock, 3,664 shares, at cost........................... 37 (37)
-------- --------
85,082 100,408
-------- --------
Total liabilities and stockholders' equity................... $101,134 $116,657
======== ========
The accompanying notes are an integral part of the financial statements.
F-3
37
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
-------- -------- --------
Operating revenues (Note 10)................................. $ 16,534 $ 17,412 $ 17,581
Costs and expenses:
Cost of revenues........................................... 17,633 18,530 15,817
Depreciation, depletion, and amortization (Note 3)......... 3,612 4,167 5,916
Exploration................................................ 6,048 1,888 1,480
Selling, general, and administrative expense............... 5,912 5,679 5,281
Curtailment gain on postretirement benefits other
than pensions (Note 8).................................. -- (6,936) --
-------- -------- --------
33,205 23,328 28,494
-------- -------- --------
Operating loss............................................... (16,671) (5,916) (10,913)
Other income (expense):
Interest income............................................ 1,336 1,134 338
Interest expense........................................... (813) (1,222) (5,401)
Loss on induced conversion of 8% Silver Indexed Bonds (Note
5)...................................................... -- -- (12,467)
Other, net................................................. 665 1,081 (168)
-------- -------- --------
1,188 993 (17,698)
-------- -------- --------
Loss before extraordinary item............................... (15,483) (4,923) (28,611)
Extraordinary item -- loss on extinguishment of
Silver Indexed Bonds (Note 5).............................. -- -- (13,646)
-------- -------- --------
Net loss..................................................... (15,483) (4,923) (42,257)
Preferred dividend requirements (Note 7)..................... 10,089 10,460 10,820
-------- -------- --------
Loss applicable to common shares............................. $(25,572) $(15,383) $(53,077)
======== ======== ========
Loss per common share:
Loss before extraordinary item............................. $ (0.13) $ (0.08) $ (0.25)
Extraordinary item......................................... -- -- (0.09)
-------- -------- --------
Loss per common share...................................... $ (0.13) $ (0.08) $ (0.34)
======== ======== ========
Weighted average common shares outstanding................... 193,044 185,634 155,383
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-4
38
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS)
1995 1994 1993
-------- ------- --------
Cash used by operating activities:
Loss before extraordinary item...................................... $(15,483) $(4,923) $(28,611)
Adjustments to reconcile loss from continuing operations to
net cash used by continuing operations:
Depreciation, depletion, and amortization......................... 3,612 4,167 5,916
Exploration costs charged to operations........................... 6,048 1,888 1,480
Curtailment gain on postretirement benefits other than pension
(Note 8)........................................................ -- (6,936) --
Amortization of discount on Silver Indexed Bonds.................. -- -- 682
Loss on induced conversion of 8% Silver Indexed Bonds (Note 5).... -- -- 12,467
Realized and unrealized (gains) losses on marketable equity
securities...................................................... (574) -- 324
Issuances of common stock:
Interest on 8% Silver Indexed Bonds............................. -- 449 3,519
Services provided and other..................................... -- -- 780
Net (increase) decrease in:
Silver bullion.................................................. (568) 465 (2,051)
Accounts receivable............................................. (1,167) (109) 1,146
Inventories..................................................... 1,674 513 (704)
Other current assets............................................ (310) (142) (578)
Net increase (decrease) in:
Accounts payable................................................ 252 (600) 232
Accrued expenses................................................ 193 (1,061) 266
Accrued pension and other postretirement benefits............... (424) (601) 595
Other liabilities and deferred credits.......................... (218) 369 (1,581)
-------- ------- --------
Net cash used by operating activities........................... (6,965) (6,521) (6,118)
-------- ------- --------
Cash provided (used) by investing activities:
Additions to property, plant, and equipment and exploration costs... (9,170) (2,113) (2,527)
Other, principally sale of marketable equity securities and
investments....................................................... 2,235 (175) 6,258
-------- ------- --------
Net cash provided (used) by investing activities................ (6,935) (2,288) 3,731
-------- ------- --------
Cash provided (used) by financing activities:
Proceeds from issuance of common stock and warrants
upon sale of units, net (Note 7).................................. -- 29,763 --
Proceeds from issuance of common stock upon exercise of
stock options and warrants........................................ 157 142 --
Principal repayments and retirements of long-term debt.............. -- (305) (1,026)
Decrease (increase) in restricted cash.............................. -- 1,486 3,063
-------- ------- --------
Net cash provided by financing activities....................... 157 31,086 2,037
-------- ------- --------
Increase (decrease) in cash and cash investments...................... (13,744) 22,277 (350)
Cash and cash investments, January 1.................................. 26,581 4,304 4,654
-------- ------- --------
Cash and cash investments, December 31................................ $ 12,837 $26,581 $ 4,304
======== ======= ========
Supplemental cash flow information:
Interest paid in cash -- continuing operations...................... $ 143 $ 329 $ 425
======== ======= ========
The accompanying notes are an integral part of the financial statements.
F-5
39
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS)
CUMULATIVE
REDEEMABLE COMMON STOCK
PREFERRED STOCK ------------------------------------------ TREASURY STOCK
---------------- PAID-IN ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------- ------- -------- -------- --------- ------ ------ -------
Balances at December 31, 1992....... 7,166 $76,482 146,484 $ 73,242 $471,506 $(554,005) 7 $(25) $67,200
Decrease in par value of common
stock from $0.50 per share to
$0.01 per share (Note 7).......... -- -- -- (71,777) 71,777 -- -- -- --
Issuance of common stock upon
redemption of 8% Silver Indexed
Bonds (Note 5).................... -- -- 16,921 169 33,290 -- -- -- 33,459
Issuance of common stock for
interest on 8% Silver Indexed
Bonds............................. -- -- 2,747 28 3,491 -- -- -- 3,519
Issuance of common stock upon
conversion of Convertible
Subordinated Reset Debentures..... -- -- 922 9 1,604 -- -- -- 1,613
Issuance of common stock to retire
notes payable..................... -- -- 4,825 48 2,917 -- 3,613 (36) 2,929
Issuance of common stock for
services and other, net........... -- -- 324 3 753 -- 44 24 780
Net loss............................ -- -- -- -- -- (42,257) -- -- (42,257)
Amortization of difference between
carrying amount and redemption
value of preferred stock.......... -- 2,292 -- -- -- (2,292) -- -- --
----- ------- ------- ------ -------- --------- ----- ---- -------
Balances at December 31, 1993....... 7,166 78,774 172,223 1,722 585,338 (598,554) 3,664 (37) 67,243
----- ------- ------- ------ -------- --------- ----- ---- -------
Issuance of common stock upon sale
of units (Note 7)................. -- -- 20,200 202 29,561 -- -- -- 29,763
Issuance of common stock upon
exercise
of stock options and warrants..... -- -- 84 1 141 -- -- -- 142
Issuance of common stock upon
redemption of
8% Silver Indexed Bonds (Note
5)................................ -- -- 3,824 39 7,532 -- -- -- 7,571
----- ------- ------- ------ -------- --------- ----- ---- -------
Issuance of common stock for
interest on 8% Silver Indexed
Bonds............................. -- -- 221 2 447 -- -- -- 449
Issuance of common stock upon
conversion of Convertible
Subordinated Reset Debentures..... -- -- 94 1 162 -- -- -- 163
Other net........................... -- -- 13 -- -- -- -- -- --
Net loss............................ -- -- -- -- -- (4,923) -- (4,923)
Amortization of difference between
carrying amount and redemption
value of preferred stock.......... -- 1,933 -- -- -- (1,933) -- -- --
----- ------- ------- ------ -------- --------- ----- ---- -------
Balances at December 31, 1994....... 7,166 80,707 196,659 1,967 623,181 (605,410) 3,664 (37) 100,408
Net loss............................ -- -- -- -- -- (15,483) -- -- (15,483)
Amortization of difference between
carrying amount and redemption
value of preferred stock.......... -- 1,561 -- -- -- (1,561) -- -- --
Issuance of common stock upon
exercise of
stock options and warrants........ -- -- 101 1 156 -- -- -- 157
----- ------- ------- ------ -------- --------- ----- ---- -------
Balances at December 31, 1995....... 7,166 $82,268 196,760 $ 1,968 $623,337 $(622,454) 3,664 $(37) $85,082
===== ======= ======= ====== ======== ========= ===== ==== =======
The accompanying notes are an integral part of the financial statements.
F-6
40
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Statement Presentation
Sunshine Mining and Refining Company ("Sunshine" or the "Company") is a
holding company whose principal subsidiary is Sunshine Precious Metals, Inc.
("Sunshine Precious Metals"). Sunshine Precious Metals mines, refines, and
markets silver and certain byproduct metals to commercial customers. The
consolidated financial statements include the accounts of Sunshine and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assessments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain previously reported amounts have been reclassified to conform to
the 1995 presentation.
Cash and Cash Investments
Cash and cash investments include certificates of deposit and other highly
liquid investments with maturities of three months or less when purchased.
Inventories and Silver Bullion
Precious metals inventories and silver bullion are stated at estimated net
realizable prices. Materials and supplies are carried at the lower of cost
(principally average cost) or market.
Concentration of Credit Risk
The Company currently markets its products to commercial customers in the
United States. Accounts receivable terms are generally for 30 days. The Company
does not require collateral. Management periodically performs reviews as to the
creditworthiness of customers. The Company has not sustained any significant
credit losses on sales of its products.
Silver Financial Instruments
The Company sells covered call options on silver bullion held for
investment. The strike price of these agreements exceeds current market prices
at the time they are entered into. Option premiums received are deferred. If the
applicable market price exceeds the strike price and option premium, the
differential is accrued and recognized as a reduction of revenues. Any remaining
deferred option premiums are recognized as a component of revenues at the end of
the option period.
The fair values of the sold call options are not included in the financial
statements.
Revenue Recognition
Sales of refined metals and concentrates are recognized as revenue at the
time of shipment to the customer. Adjustments to the carrying value of
inventories held for sale or investment are included in revenues.
F-7
41
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Marketable Securities and Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). Adoption of SFAS No. 115 did not have a
significant effect on the Company's financial position at January 1, 1994, or
the results of its operations for the year ended December 31, 1994.
All marketable securities are classified as available-for-sale securities
under SFAS No. 115. Unrealized holding gains and losses on securities
available-for-sale have not been significant.
Other investments are carried at cost, which does not exceed net realizable
value.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Depreciation on
buildings, leasehold improvements, and equipment is provided by straight-line or
declining-balance methods at rates based on the estimated lives of the
respective assets. The principal lives range from 12 to 30 years for buildings
and from 3 to 10 years for equipment. See Note 3.
Depletion of precious metal mineral interests is computed using the
unit-of-production method based on estimated mineral 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.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires the use of
the asset and liability method of accounting for income taxes. Under the asset
and liability method, 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 expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated. Generally, the timing of these accruals will coincide with
completion of a feasibility study or the Company's commitment to a formal plan
of action.
Earnings (Loss) Per Share
Earnings (loss) per common share is computed by dividing the loss
applicable to common stockholders by the weighted average number of common
shares and common share equivalents, represented by options and warrants, if
such common share equivalents have a dilutive effect. Fully diluted earnings
(loss) per common share computations also assume conversion of outstanding
Convertible Subordinated Reset Debentures and 8% Silver Indexed Bonds, if such
conversion has a dilutive effect.
For the years ended December 31, 1995, 1994, and 1993, neither the common
share equivalents nor the assumed conversions of debt had a dilutive effect on
the loss per share calculations. Accordingly, the loss per
F-8
42
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share calculations for such periods are based on the weighted average number of
common shares outstanding during each year.
New Accounting Pronouncements
In the first quarter of 1996, the Company will adopt the Financial
Accounting Standards Board ("FASB") Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("FAS 121"). Adoption of this statement will not have a material effect on the
Company's financial statements.
In October 1995, the FASB issued its Statement No. 123, "Accounting for
Stock Based Compensation" ("FASB 123") which establishes an alternative method
of accounting for stock based compensation to the method set forth in Accounting
Principles Board Opinion No. 25 ("APB 25"). FAS 123 encourages, but does not
require, adoption of a fair valued based method of accounting for stock options
and similar equity instruments granted to employees. The Company will continue
to account for such grants under the provisions of APB No. 25 and will adopt the
disclosure provisions of FAS 123 in 1996. Accordingly, adoption of FAS 123 will
not effect the Company's financial statements.
2. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories at December 31 consist of the following (in thousands):
1995 1994
------ ------
Precious metals inventories:
Work in process................................................... $ 512 $2,241
Finished goods.................................................... 264 173
Materials and supplies inventories.................................. 701 737
------ ------
$1,477 $3,151
====== ======
Beginning in 1991, management of the Company decided to hold as an
investment, a portion of Sunshine Precious Metals' silver production, pending
the recovery of silver prices. As a result, the Company held as an investment,
$9.0 million and $8.4 million of silver bullion, in excess of normal operating
requirements at December 31, 1995 and 1994, respectively.
As a means of generating current income, the Company sells covered call
options on silver bullion held for investment. Total premiums earned for the
sale of covered calls aggregated $442,250, $347,000 and $16,000 in 1995, 1994
and 1993, respectively. At December 31, 1995, the Company had sold a covered
call option on 100,000 ounces of the silver bullion held for investment. The
option had a strike price of $6.00 per ounce and expired unexercised on February
27, 1996. The fair value of the sold call option was not significant at December
31, 1995.
F-9
43
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 are summarized as follows (in
thousands):
1995 1994
-------- --------
Precious metals mineral interests.............................. $ 84,586 $ 82,847
Mine improvements.............................................. 17,599 16,849
Buildings, leasehold improvements, and equipment............... 37,641 37,052
Land........................................................... 1,060 1,050
-------- --------
140,886 137,798
Less accumulated depreciation, depletion, and amortization..... (69,967) (66,390)
-------- --------
$ 70,919 $ 71,408
======== ========
The principal mineral interest of the Company at December 31, 1995, is the
Sunshine Mine located in Kellogg, Idaho. The Company curtailed operations at the
Sunshine Mine in 1991, reducing production from approximately 1,000 tons of ore
per day to approximately 500 tons of ore per day. The Company is presently
exploring new areas of the Sunshine Mine with the intent of significantly
increasing reserves and production.
Effective January 1, 1994, the Company extended the estimated remaining
useful lives of the buildings and equipment of the silver refinery six to ten
years based upon available technology and anticipated severity of service. The
effect of this change in accounting estimate was to decrease depreciation
expense and the net loss for the year ended December 31, 1994, by approximately
$1.1 million or $.01 per common share.
The Company periodically, and at least annually, evaluates its mining
properties for permanent impairment, based on undiscounted expected future cash
flows. Such estimates are based on assumptions as to future silver prices,
mining costs, and recoverable reserves which management believes are reasonable,
based on historical silver prices and production. The Company currently believes
that the price of silver will increase to its normal historical trading range
and that additional reserves of higher grades than have been mined recently are
present in the Sunshine Mine. Accordingly, the Company does not believe it is
probable that its investment in its mining properties, including the Sunshine
Mine, has been permanently impaired at December 31, 1995. However, unless the
price of silver increases or the cost of production per ounce is reduced, the
Company will not be able to recover its investment in the Sunshine Mine.
As a result of low through-put resulting from curtailed operations at the
Sunshine Mine, the Company temporarily suspended operation of the silver
refinery in 1995. Operations will be suspended until higher levels of
through-put are achievable either through increased production from the Sunshine
Mine or through the reopening of other mines in the Coeur d'Alene Mining
District.
4. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following (in thousands):
1994 1995
------ ------
Compensation, vacation, and severance.............................. $ 935 $ 788
Interest........................................................... 63 63
Taxes, other than income taxes..................................... 41 182
Environmental remediation (Note 9)................................. 800 400
Other.............................................................. 402 615
------ ------
$2,241 $2,048
====== ======
F-10
44
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
The Convertible Subordinated Reset Debentures due July 15, 2008 (the
"Debentures") are convertible at any time prior to maturity or redemption into
shares of common stock of the Company ("Common Stock") at a conversion price of
$1.66 per share, subject to adjustment.
The Debentures are redeemable, at the option of the Company, in whole or in
part, at redemption prices declining from 102% in 1996 to 100% in 1998, together
with accrued and unpaid interest. The Debentures are unsecured and subordinated
in right of payment to senior indebtedness (as defined).
The indenture governing the Debentures contains certain covenants
restricting the ability of the Company to declare or pay cash dividends and make
certain distributions on its capital stock. Pursuant to these covenants, the
Company is prohibited from paying cash dividends on shares of its common stock
and its preferred stock.
The carrying value of the Debentures approximates their fair value.
During 1993 and 1994, the Company retired all of its outstanding 8% Silver
Indexed Bonds through various redemption transactions for the Company's common
stock, which are described below. As a result of these transactions, in 1993,
the Company recorded a charge of $12.5 million, representing the loss on an
induced conversion, and an extraordinary charge of $13.6 million, relating to
the redemption of the remaining outstanding bonds.
Bondholders had the right on each quarterly interest payment date to put
each $1,000 principal amount 8% Silver Indexed Bond to Sunshine Precious Metals
for, initially, 300 shares of the Company's common stock. During 1993, 2.6
million shares of the Company's common stock were issued to redeem $8.4 million
principal amount ($2.1 million carrying amount) of 8% Silver Indexed Bonds
tendered pursuant to such put option.
During 1993, the Company and Sunshine Precious Metals amended the indenture
governing the 8% Silver Indexed Bonds to allow bondholders to put the bonds to
the Company on August 16, 1993 and September 1, 1993, in exchange for $1,000 of
the Company's common stock valued pursuant to a formula in the indenture. As a
result of the modification, 10.0 million shares of the Company's common stock
were issued to redeem $30.2 million principal amount ($7.8 million carrying
amount) of 8% Silver Indexed Bonds that were put to the Company, resulting in a
loss from the induced conversion of $12.5 million.
Sunshine Precious Metals was entitled to call the 8% Silver Indexed Bonds
at par, plus accrued interest, in cash or in stock. However, no more than 20% of
the amount initially issued could be called during any 12-month period. In
December 1993, 4.2 million shares of the Company's common stock were issued to
redeem $11.0 million principal amount ($2.9 million carrying amount) of 8%
Silver Indexed Bonds that were called by Sunshine Precious Metals, resulting in
an extraordinary loss of $8.1 million. In addition, in November 1993, the
Company's Board of Directors determined that the remaining $7.6 million
principal amount of 8% Silver Indexed Bonds would be called on December 1, 1994,
and the Company communicated this decision to the bondholders. As a result, the
Company accrued an extraordinary charge of $5.5 million in 1993 related to its
obligation to call the bonds in 1994. In December 1994, 3.8 million shares of
the Company's common stock were issued to redeem the remaining $7.6 million
principal amount of 8% Silver Indexed Bonds. No gain or loss was recognized in
1994 as a result of the call and redemption of these bonds. Interest expense for
1994 includes interest on the outstanding bonds at their stated rate of 8%
through the date of redemption. If the loss had not been recorded until the
bonds were actually redeemed, the loss from continuing operations and the net
loss for the year ended December 31, 1994, would have increased
F-11
45
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $180,000 and $5.5 million ($0.03 per common share), respectively,
and the net loss for the year ended December 31, 1993 would have decreased
approximately $5.5 million ($0.04 per share).
Interest on the 8% Silver Indexed Bonds was payable quarterly in cash or,
at the option of Sunshine Precious Metals, in shares of the Company's common
stock.
6. INCOME TAXES
Revenue Canada has examined the tax returns of a former subsidiary of the
Company for various prior years and has proposed certain adjustments for
additional taxes. The proposed adjustments are being contested by the Company;
therefore, no payments have been made for the proposed additional taxes. Based
on an analysis of the proposed adjustments, the Company has accrued $1.0 million
for additional income taxes, plus interest at December 31, 1995. Management
believes that such provision is adequate to cover the additional income taxes
that may ultimately result from the resolution of these matters.
The Company has incurred losses during each of the three years in the
period ended December 31, 1995, and accordingly, provisions for income taxes
were not required.
The computation of the net deferred tax asset (liability) at December 31 is
as follows (in thousands):
1995 1994
-------- --------
Deferred tax liabilities:
Property, plant, and equipment............................... $(19,225) $(19,399)
Deferred tax assets:
Accrued pension and other postretirement benefits............ 2,235 2,384
Net operating loss carryforward.............................. 87,500 82,250
-------- --------
89,735 84,634
Less valuation allowance....................................... (70,510) (65,235)
-------- --------
$ -- $ --
======== ========
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $250 million. The loss
carryforwards expire principally in the years 1997 through 2010.
7. STOCKHOLDERS' EQUITY
The Company has authorized 20.0 million shares of preferred stock, of which
7.2 million shares, designated as the $11.94 (Stated Value) Cumulative
Redeemable Preferred Stock ("Preferred Stock"), were issued and outstanding at
December 31, 1995 and 1994.
The Preferred Stock accrues dividends at an annual rate of $1.19 per share,
payable quarterly. If a dividend is not paid in cash, the Company may issue to
the holders of Preferred Stock, shares of the Company's common stock, having a
value of 111% of the amount of the cash dividend requirement. The Company has
not made any dividend payments subsequent to 1990, either in cash or in shares
of its common stock. At December 31, 1995, dividends in arrears aggregated
approximately $42.6 million. The Preferred Stock is subject to optional
redemption at any time and mandatory annual redemptions of 808,279 shares. In
the event a mandatory redemption payment is not timely-made in cash, the Company
is required, in certain circumstances, to redeem such shares by issuance of
common stock, utilizing the same valuation method as is applied in the payment
of dividends. As a result, the Company has the unconditional right to redeem the
F-12
46
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock for shares of its common stock, pursuant to the terms of the
Preferred Stock agreement. The Company intends to make dividend and redemption
payments, when paid, through the issuance of shares of its common stock.
Accordingly, the Preferred Stock is included as a component of stockholders'
equity in the accompanying consolidated balance sheets.
The Company has not made any mandatory redemption payments either in cash
or in shares of its common stock because the terms of the Preferred Stock do not
permit such mandatory redemption if any dividends are in arrears. There are no
penalties to the Company for failing to make such mandatory redemptions.
Pursuant to the Certificate of Designation, Rights, and Preferences, the final
mandatory redemption is to be made by the Company, on or prior to, July 31,
2000. The Company takes no position as to whether dividend arrearages at July
31, 2000 would also prohibit the redemption of the Preferred Stock.
Holders of the Preferred Stock are entitled to vote as a class to elect one
director of the Company, if dividends are paid in common stock for four
consecutive dividend payments. Holders of the Preferred Stock are also entitled
to vote, as a class, to elect two additional directors upon the failure of the
Company to pay two consecutive dividend payments. As a result of the quarterly
dividends being paid in common stock through 1990 and because the Company
elected not to declare a dividend for any quarter subsequent to 1990, holders of
the Preferred Stock are entitled to elect three members of the Company's Board
of Directors.
The difference between the carrying amount and the stated value of the
Preferred Stock is being accrued ratably over the period the Preferred Stock is
expected to be outstanding under the provisions of the mandatory redemption
requirements. Accordingly, $1.6 million, $1.9 million, and $2.3 million has been
charged to the deficit for the years ended December 31, 1995, 1994, and 1993,
respectively, and added to the carrying amount of the Preferred Stock.
The Company has filed a Proxy Statement/Prospectus on Form S-4 with the
Securities and Exchange Commission for the solicitation of proxies for use at a
special meeting of stockholders to be held on March 29, 1996 with regard to the
merger of Sunshine with and into Sunshine Merger Company, a wholly owned
subsidiary of Sunshine formed solely for the purpose of effectuating the merger
(the "Merger"). The Certificate of Incorporation and Bylaws of Sunshine Merger
Company are identical in all material terms to those of Sunshine. Upon
consummation of the Merger, Sunshine Merger Company's name will be changed to
Sunshine Mining and Refining Company.
The purpose of the Merger is to convert the Preferred Stock into Common
Stock through the issuance of Common Stock and warrants to the holders of
Preferred Stock which will be canceled. Upon consummation of the Merger, the
business, properties, assets, liabilities and capital structure of Sunshine
Merger Company will be substantially identical to that of Sunshine, with the
exception that the Preferred Stock will have been retired in its entirety, and
shares of Common Stock and warrants to purchase Common Stock of the surviving
entity will have been issued in exchange for the Preferred Stock. The Company's
corporate existence and business operations will be unaffected by the Merger.
On the effective date of the Merger ("Effective Date"), each share of
Common Stock, outstanding immediately prior to the Merger will be converted, by
reason of the Merger, pursuant to the Merger Agreement and without any action by
the holder thereof, into a share of the common stock, $.01 par value of Sunshine
Merger Company (the "New Common Stock"). The relative powers, designations,
preference, rights and qualifications of the New Common Stock, as in effect on
the Effective Date, will be substantially equivalent in all material respects to
the Common Stock so converted. Holders of Preferred Stock will, upon
consummation of the Merger, receive for each share of Preferred Stock held six
shares of New Common Stock and either an additional .9 share of New Common Stock
or, at the option of the holders, two warrants, each to purchase one share of
New Common Stock. The number of shares of New Common Stock and the exercise
price of the warrants are subject to modification. On the Effective Date, the
Preferred Stock of the
F-13
47
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company will be canceled and all dividend, redemption, liquidation and voting
rights thereunder will be terminated and will cease to exist.
As a result of the Merger, the capital structure of Sunshine Merger
Company, as the surviving corporation, will be substantially identical to the
Company with the exception that the Preferred Stock will have been retired in
its entirety, and initially, up to 49,446,683 shares of New Common Stock and up
to 14,332,372 warrants to purchase up to an additional 14,332,372 shares of New
Common Stock will have been issued.
In February 1994, the Company distributed to holders of its common stock,
transferable rights to purchase units, each unit consisting of two shares of the
Company's common stock and one warrant to purchase one share of common stock.
Stockholders received one right for each 17 shares of common stock held.
Pursuant to the offering, the Company issued 20.2 million shares of common stock
and 10.1 million warrants and received net proceeds of approximately $29.8
million. The initial exercise price of the warrants is $2.12 per share. The
exercise price and number of shares purchasable upon exercise of the warrants
are subject to antidilution adjustments. The warrants expire on March 9, 1999
and may be redeemed at the option of the Company, in whole or in part, at any
time on or after March 9, 1996, at a redemption price of $0.50 per warrant.
The Company has two stock option plans under which options may be granted
to key members of management. The stock option plans, as amended, cover a total
of 3.0 million shares of the Company's common stock, with 0.4 million options
being available for grant at December 31, 1995. The option price may not be less
than the market price of the common stock on the date granted. Payment of the
exercise price may be made in cash or by delivery of shares of the Company's
common stock, having a market value equal to the exercise price.
Stock option activity for the years ended December 31, 1995, 1994, and
1993, is summarized as follows (dollar amounts in thousands, except per share
amounts):
OPTION PRICE
------------------------
NUMBER OF PRICE RANGE
SHARES PER SHARE TOTAL
--------- ------------- ------
Options outstanding, December 31, 1992
(100,000 exercisable)................................. 150,000 $0.875-$4.00 $ 435
Options canceled................................... (90,000) $0.875-$4.00 (309)
Options granted.................................... 821,000 $1.625-$2.875 1,371
--------- ------
Options outstanding, December 31, 1993
(50,000 exercisable).................................. 881,000 $0.875-$3.125 1,497
Options canceled................................... (76,000) $1.625-$3.125 (146)
Options exercised.................................. (70,000) $1.625 (113)
Options granted.................................... 605,000 $1.625-$1.875 994
--------- ------
Options outstanding, December 31, 1994
(723,750 exercisable)................................. 1,340,000 $0.875-$3.00 2,232
Options canceled................................... (60,000) $1.625-$3.00 (118)
Options exercised.................................. (97,500) $0.875-$1.625 (150)
Options granted.................................... 1,262,000 $1.50 -$1.875 1,910
--------- ------
Options outstanding, December 31, 1995
(2,395,750 exercisable).......................... 2,444,500 $0.875-$2.875 $3,874
========= ======
Subject to shareholder approval, in December 1995, the Company's Board of
Directors approved the 1995 Employee Nonqualified Stock Option Plan of Sunshine
Mining and Refining Company (the "1995
F-14
48
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan") and awarded 3,160,000 options to key employees and directors. The 1995
Plan provides for the granting from time to time of options to purchase shares
of Common Stock to key employees or potential key employees of the Company and,
on December 7 each year, automatic grants of 25,000 options to each non-employee
director. The total number of shares of Common Stock which may be purchased
pursuant to options granted under the 1995 Plan shall not exceed 20,000,000
shares. Vesting for options granted to employees is determined by the directors
when granted and expire 10 years following date of grant. The exercise price for
options granted shall not be less than the fair market value of Common Stock on
the date of grant. If the 1995 Plan is approved by shareholders at the Company's
1996 Annual Meeting, 750,000 options granted in 1995 with an exercise price of
$1.50 will become null and void. The grants under the 1995 Plan have an exercise
price of $1.50, expire December 7, 2005 and are exercisable after shareholder
approval.
8. EMPLOYEE BENEFIT PLANS
Pensions have been under trusteed defined benefit plans covering
substantially all employees. The benefits under the plans are based on years of
service and, for employees not covered by a collective bargaining agreement,
compensation levels. The plan for hourly employees covered by collective
bargaining agreements also includes provisions that would apply in the event of
the permanent shutdown of the Sunshine Mine for present employees who were also
covered by a predecessor plan terminated in 1986.
Net periodic pension costs relating to continuing operations for the
Company's defined benefit plans for the years ended December 31, 1995, 1994, and
1993, consist of the following (in thousands):
1995 1994 1993
----- ----- -----
Service cost............................................. $ 182 $ 294 $ 255
Interest cost............................................ 286 343 185
Actual return on plan assets............................. (545) 162 (123)
Net amortization and deferrals........................... 388 (230) (137)
Curtailment gain......................................... -- -- (241)
----- ----- -----
Net periodic pension cost................................ $ 311 $ 569 $ (61)
===== ===== =====
The following table sets forth the funded status of the Company's trusteed
defined benefit plans and the related amounts included in other long-term
liabilities and deferred credits at December 31 (in thousands):
1995 1994
------- -------
Plan assets at fair value....................................... $ 2,794 $ 2,165
Actuarial present value of projected benefit obligation:
Vested........................................................ 4,715 3,283
Nonvested..................................................... 170 298
------- -------
Projected benefit obligation.................................... 4,885 3,581
------- -------
Plan assets less than projected benefit obligation.............. (2,091) (1,416)
Unrecognized prior service cost................................. 924 1,461
Unrecognized net (gain) loss.................................... 401 (653)
Unrecognized transition net asset............................... (142) (171)
Additional minimum liability.................................... (730) (1,002)
------- -------
Accrued pension liability recognized in the consolidated balance
sheets........................................................ $(1,638) $(1,781)
======= =======
F-15
49
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following significant assumptions were used in computing pension costs
for the Company's trusteed defined benefit plans:
1995 1994 1993
------ ------ --------
Discount rate............................................. 8.25% 8.25% 7.00%
Rate increase in compensation............................. 0% 0% 0%-4.8%
Expected long-term rate of return on assets............... 9.0% 9.0% 9.0%
The Company's funding policy, with respect to trusteed defined benefit
plans, is to make contributions annually equal to, or in excess of, the minimum
funding requirements of the Employee Retirement Income Security Act of 1974.
Trusteed assets of the plans consist of pooled fixed income securities, pooled
equity securities, and cash or cash equivalents.
The Company's pension plan for employees not covered by a collective
bargaining agreement was amended to freeze all participants' benefits as of
December 31, 1993. The Company recognized a $241,000 curtailment gain as a
result of this plan amendment. In 1994, the Company negotiated the termination
of certain postretirement medical and dental benefits in exchange for amendments
to pension benefits. Such amendments resulted in an increase in pension costs in
1994 of $524,000.
Effective January 1, 1994, the Company established a defined contribution
plan ("DC Plan") for employees not covered by a collective bargaining agreement.
The Company's Board of Directors will determine annually if a contribution will
be made, and if so, what percentage will be contributed. Company contributions
charged to operations during 1995 and 1994 were $199,000 and $164,000,
respectively.
The Company also sponsors a plan to provide retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the "401(k) Plan")
for all employees not covered by a collective bargaining agreement who have
completed a specified term of service. Company contributions may range from 0%
to 100% of employee contributions, up to a maximum 6% of eligible employee
compensation, as defined. Employees may elect to contribute up to 10% of their
eligible compensation on a pretax basis. Benefits under the 401(k) Plan are
limited to the assets of the 401(k) Plan. Company contributions charged to
operations during 1995, 1994, and 1993 were $72,000, $64,000, and $59,000,
respectively.
During 1994, the Company negotiated the termination of postretirement
medical and dental benefits for the Company's existing hourly work force and
certain retired hourly employees and eliminated such benefits for salaried
employees. As a result, the Company recognized net curtailment gains aggregating
$6.9 million in 1994. Postretirement medical and dental benefits are currently
provided only to certain employees who retired before 1987. The Company's policy
is to fund the cost of these plans as claims are incurred.
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31 (in
thousands):
1995 1994
------ ------
Accumulated postretirement benefit obligation:
Retirees....................................................... $4,835 $5,368
Fully eligible active participants............................. 70 62
Other active plan participants................................. 84 93
------ ------
4,989 5,523
Unrecognized net loss............................................ (240) (493)
------ ------
Accrued postretirement benefit cost.............................. $4,749 $5,030
====== ======
F-16
50
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefit cost for these plans includes the
following components for the years ended December 31, 1995, 1994, and 1993 (in
thousands):
1995 1994 1993
---- ---- ------
Service cost............................................ $ 6 $115 $ 318
Interest cost........................................... 427 608 945
---- ---- ------
Net periodic cost....................................... $433 $723 $1,263
==== ==== ======
The weighted-average annual assumed rate of increase in the per capita cost
of covered medical and dental benefits is 8.25% for 1996 (8.5% for 1995) and is
assumed to decrease gradually to 5% for 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. For example, changing the assumed health care cost
trend rates by one percentage point each year would change the accumulated
postretirement benefit obligation as of December 31, 1995, by $278,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1995 by $26,100. The weighted-average discount
rate used in determining the accumulated postretirement benefit obligation was
7.0% at December 31, 1995 and 8.5% at December 31, 1994.
Interest costs on the projected benefit obligations and the actual returns
on plan assets of the postretirement benefit plans are included in interest
expense and other income, respectively, in the accompanying consolidated
statements of operations.
9. COMMITMENTS AND CONTINGENCIES
In December 1989, the United States Environmental Protection Agency ("EPA")
notified Sunshine Precious Metals that it is a "Potentially Responsible Party"
("PRP") at the Bunker Hill Superfund Site in Kellogg, Idaho. During 1990 and
1991, the Company and other PRPs, without admitting liability, funded soil
removal and remediation programs at the site. The Company's share of the cost of
these programs totaled approximately $239,000.
Without admitting liability, the Company and several PRPs have agreed to do
remediation work in the residential and certain commercial areas encompassed by
the Bunker Hill Superfund Site pursuant to an EPA and State of Idaho approved
work plan. In exchange, the EPA and the State of Idaho released the settling
PRPs from all liability for cleanup of the Bunker Hill Smelter Complex, reduced
the EPA's claim for reimbursement of past costs from $17 million to $1 million,
plus a percentage of proceeds received by the PRPs from insurance companies, if
any, and agreed that the work orders from 1990 through 1993 were deemed
satisfied and discharged. The remediation to be undertaken by the Company and
the PRPs is expected to take approximately seven years.
On November 17, 1994, the United States District Court for the District of
Idaho agreed to enter a Consent Decree containing the terms of this agreement.
At December 31, 1995, the Company has accrued $1.8 million representing
management's estimate of the remaining liability for its share (12.4%) of the
remediation costs at the Bunker Hill Superfund Site. The liability for
remediation costs under the Consent Decree is, however, joint and several. Thus,
if any other settling party or parties does not comply with the Consent Decree,
the exposure for the Company and Sunshine Precious Metals could increase.
However, management does not believe that the ultimate liability that may result
from this matter will have a material adverse effect on the Company's
consolidated financial position or results of operations.
In November 1988, the EPA notified Sunshine Precious Metals that it is a
PRP at the Spokane Junkyard site near Spokane, Washington. The Company does not
believe it will be required to pay any cleanup costs at the Spokane Junkyard
site. No records of Sunshine Precious Metals have been discovered by it or the
EPA showing that Sunshine Precious Metals ever transmitted any material to the
site.
F-17
51
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to certain other legal proceedings and claims that
arise in the conduct of its business. Although it is not possible to predict the
outcome of such matters, in the opinion of management, the ultimate outcomes of
these matters will not have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations.
The Company has entered into joint venture agreements on various properties
which allow the Company to earn interests in such properties in exchange for
specified cash commitments for exploration and development of the properties.
The Company can terminate these agreements at any time.
10. OPERATIONS
The Company's principle operating property is the Sunshine Mine, located
near Kellogg, Idaho. The Sunshine Mine accounted for all of the Company's
production revenues during 1995 and 85% of proven and probable reserves at
December 31, 1995. The Company is also engaged in exploration in Argentina and
Peru, as well as other parts of the United States.
In 1995, two customers accounted for sales of concentrate and refined
silver aggregating approximately $12.9 million. In 1994, two customers accounted
for sales of refined silver aggregating approximately $12.5 million. In 1993,
one customer accounted for sales of refined silver aggregating approximately
$9.9 million. Management believes that the loss of these purchasers would not
have a material impact on the Company's consolidated financial condition or
consolidated results of operations.
11. PRECIOUS METALS RESOURCES (UNAUDITED)
The table below presents data on proved and probable ore reserves,
production and average prices for each of the years in the five-year period
ended December 31, 1995 (in thousands, except average prices):
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Sunshine Mine:
Reserves at December 31:
Ounces of silver........................ 30,810 27,908 29,961 29,461 30,584
Pounds of copper........................ 11,166 10,266 10,969 10,855 11,253
Production:
Tons of ore............................. 101 107 100 105 160
Ounces of silver........................ 1,731 2,079 2,298 2,540 3,496
Pounds of copper........................ 612 722 813 883 1,272
Revenue -- Virginius Mine:
Reserves at December 31:
Ounces of silver........................ 5,098 5,098 -- -- --
East Tintic Mining District:
Reserves at December 31:
Ounces of silver........................ -- -- -- -- 24,246
Ounces of gold.......................... -- -- -- -- 7
Pounds of copper........................ -- -- -- -- 1,324
Production:
Tons of ore............................. -- -- -- 37 41
Ounces of silver........................ -- -- -- 159 201
Ounces of gold.......................... -- -- -- 6 8
Pounds of copper........................ -- -- -- 221 281
F-18
52
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Average prices:
Ounce of silver......................... $ 5.20 $ 5.29 $ 4.34 $ 3.95 $ 4.06
Ounce of gold........................... $384.16 $384.03 $359.77 $343.73 $362.08
Pound of copper......................... $ 1.34 $ 1.07 $ 0.85 $ 1.03 $ 1.06
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.
The ore reserves and production information relate to mines in operation or
development. In June 1991, the Company curtailed its mining operations at the
Sunshine Mine, reducing production from approximately 1,000 tons per day to
approximately 500 tons of ore per day. During October 1992, the Company
suspended operations at the Trixie Mine and returned all properties held in the
East Tintic Mining District, including the Burgin Mine, to the respective
lessors.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1994 is as follows (in
thousands, except per share amounts):
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1995:
Operating revenues............................. $ 4,564 $ 3,466 $ 5,149 $ 3,355
Operating loss................................. (3,898) (4,940) (3,219) (4,614)
Loss applicable to common shares............... (6,184) (7,138) (5,400) (6,850)
Loss per common share.......................... $ (.03) $ (.04) $ (.03) $ (.04)
1994:
Operating revenues............................. $ 4,026 $ 3,458 $ 5,009 $ 4,919
Operating income (loss)........................ 3,505 (1,971) (2,894) (4,556)
Income (loss) before extraordinary item........ 3,196 (1,060) (2,828) (4,231)
Income (loss) applicable to common shares...... 540 (3,715) (5,419) (6,789)
Income (loss) per common share................. $ .00 $ (.02) $ (.03) $ (.03)
Operating income for the three months ended March 31, 1994, includes a gain
of $5.5 million resulting from the negotiated termination of postretirement
medical and dental benefits for the Company's existing hourly work force. See
Note 8.
F-19
53
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--------- -----------
2.1 Agreement and Plan of Merger to be entered into by and among Sunshine and Sunshine Merger Company, filed as
Exhibit 2.1 to Sunshine Merger Company's Registration Statement on Form S-4, Registration No. 33-98876 and
incorporated herein by reference. --
3.1 Certificate of Incorporation of Sunshine, as amended, filed as Exhibit 3.1 to Sunshine's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. --
3.2 Bylaws of Sunshine filed as Exhibit 3.2 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, as amended and incorporated herein by reference. --
4.1 Warrant Agreement dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer &
Trust Company, as Warrant Agent, filed as Exhibit 4.1 to Sunshine's Registration Statement on Form S-4
(Registration No. 33-98876) and incorporated herein by reference. --
4.2 Form of Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust
Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated herein by reference. --
4.3 Form of Warrant Certificate, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-4
(Registration No. 33-98876) and incorporated herein by reference. --
4.4 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended and incorporated herein by reference. --
4.5 Certificate of Designation, Rights and Preferences of $11.94 Cumulative Redeemable Preferred Stock of
Sunshine, filed as Exhibit 3.3 to Sunshine's Registration Statement on Form S-4 (Registration No.
33-22250) and incorporated herein by reference. --
4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine, filed as Exhibit 4.2 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446) as amended, and incorporated
herein by reference. --
4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with
respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008, filed as Exhibit 4.25 to
Sunshine's Registration Statement on Form S-3 (Registration No. 33-21159) and incorporated herein by
reference. --
4.8 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture dated as of November
10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, by and between the Company and
Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of
the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, and incorporated herein by reference. --
54
4.9 Form of Supplemental Warrant Agreement dated as of February 1, 1996 between Sunshine Merger Company and
American Stock Transfer & Trust Company, as Warrant Agent, relating to the Warrants ($2.12 exercise
price), filed as Exhibit to Sunshine Merger Company's Registration Statement on Form S-4, Registration No.
33-98876, and incorporated herein by reference. --
4.10 Form of Fourth Supplemental Indenture, by and between the Company and Texas Commerce Bank National
Association, as successor to Ameritrust Texas National Association formerly known as MTrust Corp.,
National Association, relating to the issuance of the Debentures, filed as Exhibit 4.10 to Sunshine Merger
Company's Registration Statement on Form S-4, Registration No. 33-98876, and incorporated herein by
reference. --
o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.9 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986, and incorporated herein by reference. --
o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.8 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended and incorporated
herein by reference. --
o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, and incorporated herein by
reference. --
o10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18 to Sunshine's Registration Statement on
Form S-1 (Registration No. 33-63446), as amended and incorporated herein by reference. --
o10.5 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko, filed
as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33- 73608), and
incorporated herein by reference. --
*o10.5.1 Amendment to Executive Employment Agreement between Sunshine and John S. Simko, dated December 13, 1995. --
o10.6 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis,
filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), and
incorporated herein by reference. --
*o10.6.1 Amendment to Executive Employment Agreement between Sunshine and William W. Davis, dated December 13, 1995. --
o10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Robert H. Peterson,
filed as Exhibit 10.10 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as
amended and incorporated herein by reference. --
o10.8 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher,
filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-k for the fiscal year ended December 31,
1993, and incorporated herein by reference. --
55
*o10.8.1 Amendment to Executive Employment Agreement between Sunshine and Harry F. Cougher, dated December 13, 1995. --
10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius Mines Corporation, a Colorado
corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on
Form 10-Q for the period ended March 31, 1994, and incorporated herein by reference. --
10.10 Agreement dated March 24, 1994, by and between Diamond Field Resources, Inc., and Sunshine, filed as Exhibit
No. 10.2 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, and incorporated
herein by reference. --
10.11 Mining Lease, dated August 18, 1994, by and between American Gold Resources Corporation, a Delaware
corporation, as lessor, and Sunshine Precious Metals, Inc., as lessee, filed as Exhibit No. 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended September 30, 1994, and incorporated herein
by reference. --
10.12 Agreement dated September 23, 1994 by and between Sunshine Argentina, Inc. and Empresa Argentina de Cemento
Armado S.A., filed as Exhibit No. 10.12 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, and incorporated herein by reference. --
10.13 Agreement dated July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals,
Inc., as purchaser, for the purchase of a certain mining property, filed as Exhibit 10.1 to Sunshine's
Quarterly Report on Form 10-Q for the period ended June 30, 1995, and incorporated herein by reference. --
10.14 Agreement dated October 19, 1995, by and between Sunshine and Elliott Associates, L.P., filed as Exhibit 99.1
to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated
herein by reference. --
10.15 Agreement dated October 23, 1995, by and between Sunshine and Grace Holdings, L.P., filed as Exhibit 99.2 to
Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein
by reference. --
10.16 Agreement dated October 20, 1995, by and between Sunshine and Lloyd I. Miller, III, filed as Exhibit 99.3 to
Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein
by reference. --
22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by reference. --
*23.1 Consent of Ernst & Young LLP. --
*24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. --
___________
* Filed herewith
o Management contract or compensatory plan or arrangement.