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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-10012
SUNSHINE MINING AND REFINING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-2618333
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
877 W. MAIN STREET, SUITE 600 83702
BOISE, IDAHO (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(208) 345-0660
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants, expiring May 22, 2001, for the purchase of one share of Common Stock
Warrants, expiring March 9, 1999, for the purchase of one share of Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the shares of common stock held by
non-affiliates of the registrant at March 10, 1999 was $146,030,019. 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 10, 1999
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Common Stock, $0.01 par value 259,608,923
DOCUMENTS INCORPORATED BY REFERENCE
Sunshine Mining and Refining Company's Definitive Proxy Statement for
its Annual Meeting to be held May 24, 1999 (Part III).
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PART I
1. BUSINESS.
GENERAL
Sunshine Mining and Refining Company ("Sunshine" or the "Company") is
primarily engaged in mining silver. The Company owns the Sunshine Mine located
in the Coeur d'Alene Mining District near Kellogg, Idaho and the Pirquitas Mine
in the Ouray Province of northwest Argentina and leases the Revenue-Virginius
Mine in the Ouray District of southwest Colorado. The Sunshine Mine produced 5.8
million ounces of silver in 1998, and is forecast to produce approximately 5.5
million ounces of silver in 1999. Pirquitas is in the final stage of a bankable
feasibility study with proven and probable silver reserves presently estimated
at 101 million ounces. The Revenue-Virginius is undergoing an internal
feasibility study. Total proven and probable silver reserves at those three
properties were estimated to be 144.6 million ounces at December 31, 1998.
The Sunshine Mine began operations in 1884 and has produced in excess
of 350 million ounces of silver since that time. The mine also produces
significant amounts of copper, lead and antimony as by-products. The Sunshine
Mine has substantially increased production in recent years, achieving full
production in the fourth quarter of 1997 for the first time since 1990. This has
resulted in a substantial reduction in unit costs as fixed costs have been
spread over a larger production figure. Recent production history of the mine is
as follows:
Sunshine Mine Production
---------------------------------
1998 1997 1996 1995
------ ------ ------ ------
Ounces production (millions) 5.8 4.3 2.6 1.7
Net cash cost per ounce $ 4.43 $ 4.50 $ 6.12 $ 6.61
The decrease in net cash costs per ounce from 1997 to 1998 does not
fully reflect the improvement in operating costs attained, due to significant
declines in prices received for copper, lead and antimony by-products, whose
sales are credited against production costs for purposes of calculating net cash
cost per ounce.
At the end of the third quarter of 1998, the Company wrote off a
substantial amount of its investment ($50.4 million out of a total of $59.4
million) in the Sunshine Mine. The writedown was taken at that time due to
continued low silver prices and the decline in prices for the Company's
by-product metals, which effectively increased the net cash cost of production.
Additionally, at that time, the Company had just reduced its production forecast
for the years 1999 and 2000, due to limits on the updip extension of the West
Chance Vein, which limits had just been identified in exploration and
development work. Since that time, the Company's production forecast for those
periods has been revised significantly upwards, as downdip extensions of the
West Chance Vein have been identified as economic and other veins have been
identified as containing economic ore which can be accessed in 1999 and 2000.
Sunshine's share of silver reserves at the Sunshine Mine as of December
31, 1998 were estimated to be 1.55 million tons of ore with an average grade of
23.6 ounces of silver per ton (after adjustment for mining dilution), containing
36.6 million ounces of silver. Metallurgical recoveries at the Sunshine Mine
typically approximate 97% of the contained silver. The proven and probable
reserves at the Sunshine Mine have historically totaled approximately 4 to 7
years of annual production. Over its history, exploration and development
activities have maintained reserves by finding new ore to replace that which was
produced each year. Management believes this will continue for the foreseeable
future, as studies have delineated several areas of favorable geologic
conditions that may host significant deposits. These areas are contiguous to
delineated mineralization, and the ore-bearing structures project into favorable
lithologic units. Further exploration is necessary to quantify the contained
ore, but the magnitude of the contained ore could approximate the historic
production from the major veins.
The mine plan at the Sunshine Mine for 1999 forecasts production of
approximately 5.5 million ounces of silver, and a similar amount in 2000.
The Company acquired the Pirquitas Mine in November 1995, and since
that time has conducted an active exploration and metallurgical testwork
program. The Company commissioned a bankable feasibility study of the property
in early 1998, which is nearing completion at this time. Preliminarily, the
study has estimated that the property can be developed for approximately $120
million, and would produce annually approximately 8.2 million ounces of silver
and 7.1 million pounds of tin. The estimated net cash cost of production of an
ounce of silver is projected to be approximately $2.00. Assuming a $5.50 silver
price and a tin price of $2.54 per pound, proven and probable reserves are
presently estimated to be 20 million tons of ore at an average grade of 5 ounces
per ton silver (18 million tonnes at an average grade of 172 grams per tonne
silver), 0.29% tin and 0.48% zinc. The Company estimates that contained metal in
the proven and probable reserves totals 101 million ounces of silver, 116
million pounds of tin and 194 million pounds of zinc. The Company expects future
development and exploration work at the site will expand these reserves.
In January, 1999, the Company and its consultants began a process to
optimize the feasibility study which is expected to examine options to increase
production, reduce costs, and increase reserves. Upon completion of this work
the Company will evaluate its alternatives with respect to financing the
development of this property. Given current market conditions, including the
price of silver, and the Company's financial resources, no assurance as to the
availability of such financing can be given. As a result, the Company may
consider a merger with a company with greater financial resources to develop the
property, consider a sale of all or some portion of the property or defer
development until silver prices improve.
At the Revenue-Virginius Mine, the Company estimates reserves of 260
thousand tons of ore containing 6.2 million ounces of silver at a grade of 23.9
ounces per ton. The ore is also estimated to contain .06 ounces per
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ton gold and 5.89% combined lead, zinc and copper. The property was operated
from about 1880 until 1912, when it was closed due to a mill fire.
Based on work to date, the Company believes that the property can be
reopened at a production rate of approximately 2.5-3 million ounces per year
following a $12-15 million capital investment. Net cash costs of production are
estimated to be approximately $4 per ounce. Several veins carry the mineralized
values, and many of the veins have been traced for long distances onto other
properties. Therefore, the Company believes it reasonable to assume that a
significant mineralized inventory in addition to the above reserves can be
inferred. A drilling program to identify additional reserves is pending.
As more than 80% of the Company's operating revenues is derived from
the sale of silver, the Company's earnings are directly related to the price of
silver, which has been depressed since 1985. As a result, the Company has
reported operating losses and negative cash flow from operations since that
time. The Company's strategy is to add sufficient low cost silver production to
be profitable at prices for silver which have prevailed in recent years, while
also positioning the Company to benefit from an expected improvement in silver
prices. Should the Company not succeed in adding such low cost production and
there is no substantial improvement in the silver price, the Company will
continue to report operating losses and negative cash flow.
The accuracy of any forward looking statements and other similar
statements contained herein regarding production, reserves, mineralized
materials and cash costs at the Pirquitas Mine, the Sunshine Mine and the
Revenue-Virginius Mine will depend upon the actual grade, quantity and other
qualities of recoverable reserves and resources, which may differ from current
estimates. Actual results in each case could differ materially from those
currently anticipated in such statements, by reason of factors including without
limitation, actual results of exploration, silver prices, by-product prices,
imprecision of reserve estimates, future economic conditions, regulations,
competition, and other circumstances affecting anticipated revenue and costs.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement.
For information regarding Sunshine's business, certain classes of
products or services and sales to certain significant customers, see Notes 1, 11
and 12 of Notes to Consolidated Financial Statements included elsewhere herein.
Sunshine was originally incorporated in 1918 and is currently
incorporated under the laws of the state of Delaware. The Company maintains its
principal executive offices at 877 West Main Street, Suite 600, Boise, Idaho
83702.
SILVER SUPPLY, DEMAND, AND PRICES
According to studies published by the Silver Institute in its World
Silver Survey (prepared by Gold Fields Mineral Services Ltd.) and by CPM Group
(precious metal industry consultants), new silver production since 1990 has been
far below total demand for silver. This gap between new supply and demand has
been bridged by the availability of a large surplus of silver inventories
generated in the aftermath of the major increase in silver prices in 1979-1983.
The availability of these inventories has kept silver prices at depressed
levels. According to these same studies, the silver inventories worldwide have
now been greatly diminished.
In the first quarter of 1998, silver prices increased to their highest
levels in over 10 years in response to concerns about supply availability, as
Berkshire Hathaway Incorporated announced an investment in 129.7 million ounces
of silver bullion. However silver prices declined over the last three quarters
of 1998, averaging $4.92 per ounce in the fourth quarter of 1998. Based on the
above cited industry reports, the Company believes physical availability of
silver will continue to tighten as available inventories are consumed and this
will eventually have a major positive impact on the silver price.
OPERATIONS
THE SUNSHINE MINE AND REFINERY COMPLEX
The Sunshine Mine and Refinery Complex, located in the Coeur d'Alene
Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a
1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and
associated facilities. The facility is an integrated operation which can produce
refined silver with 99.99% purity. The silver refinery has a capacity to recover
up to 8 million ounces of silver and 4 million pounds of copper annually.
The Company's wholly owned subsidiary, Sunshine Precious Metals, Inc.
("SPMI"), owns substantially all of the mining claims comprising the Sunshine
Mine. Electrical power is supplied by a public utility from two sources. The
facilities are in good and operable condition and access to the property is by
paved roads maintained by the county.
The Sunshine Mine is a primary silver-producing underground mine which
began operations in 1884 and has produced over 350 million ounces of silver
since that time. The underground workings consist of multiple levels developed
off the Jewell shaft, the main production shaft. It extends from the surface to
a depth of over 4,000 feet and is complemented by other interior shafts which
develop levels as deep as 5600 feet. The mine covers over 10 square miles at the
surface, and contains more than 100 miles of underground workings. Mining
operations are currently focused in the western area of the mine, in a vein
called the West Chance, at depths from above the 2700-foot level (2700 feet
below the collar of the Jewell shaft) to below the 3700-foot level.
The ore extracted from the Sunshine Mine is introduced to the
1,000-ton-per-day flotation concentrator, which produces two concentrates, a
high-grade silver concentrate which is transferred to the antimony refinery for
antimony removal, and a lead concentrate which is shipped directly to a smelter
for further processing.
After antimony removal, the silver concentrate can be either
transferred to the Company's silver refinery for recovery of silver and copper,
or sold to a commercial smelter. Factors which influence Sunshine's decision to
refine its products internally or sell them to a smelter include levels of
production, costs of reagents and available
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smelter contract terms. The refinery was designed and built to recover up to 8.0
million ounces of silver from concentrates annually. Sunshine suspended
operations at the silver refinery in 1995 pending higher levels of available
feed, and began shipping its silver concentrate to a smelter at that time. Until
a decision is made to reopen the refinery, Sunshine will continue to sell its
silver-copper concentrates to a nearby smelter for processing. The Company's
sales to the third party smelters are under long-term contracts, generally for a
period of at least one year, cancelable by either party after one year upon
thirty days notice. The Company employs no sales force. Management believes that
suspension of refinery operations has not had a material impact on Sunshine's
results of operations or cash flows.
Ore and metals produced at the Sunshine Mine during 1998, 1997 and
1996, respectively, were as follows:
1998 1997 1996
---------- --------- ---------
Tons of Ore............... 247,866 183,404 120,910
Metals Recovered:
Ounces of Silver..... 5,806,468 4,253,315 2,577,895
Pounds of Copper..... 1,273,318 884,124 671,701
Pounds of Antimony... 1,078,460 785,897 534,013
Pounds of Lead....... 12,001,080 9,203,907 2,546,852
These metals were recovered from ore containing an average of 24.17,
23.95 and 22.04 ounces of silver per ton, in 1998, 1997 and 1996, respectively.
Metallurgical recoveries were 97% of the contained silver, 97% of the contained
copper and 92.5% of the contained lead.
Production increased substantially in 1997 and again in 1998 as the
Company completed development of the West Chance ore body. By the end of 1997,
and substantially all of 1998, the mine was operating at or near its rated
capacity of approximately 1,000 tons of ore per day. It is expected that most of
the Company's production during 1999 and 2000 will be from the West Chance, with
production being supplemented from other systems to the east.
The Sunshine Mine's proven and probable ore reserves were estimated by
the Company's technical personnel at January 1, 1999, to be 1.58 million tons of
ore containing 37.4 million ounces of silver and 14.2 million pounds of copper.
The weighted average ore grades, adjusted for mining dilution, but not adjusted
for metallurgical recoveries, are 23.6 ounces per ton silver and 0.45 percent
copper. Lead reserves are calculated only for the West Chance vein, and it
contains 23.3 million pounds of lead at a grade of 2.17 percent.
During the three years ended December 31, 1998, the Sunshine Mine
accounted for all of the Company's silver production, and approximately 26% of
the Company's silver reserves at December 31, 1998. See Note 13 of Notes to
Consolidated Financial Statements included elsewhere herein.
Exploration activity in the future will focus on a number of vein
systems in the eastern area of the mine. In particular, a plan is being prepared
to test the deep extension of three systems, the 101 Vein, the Yankee Girl Vein
and the Chester Vein. The 1995 acquisition of the ConSil property, on the
eastern flank of the workings of the Sunshine Mine, was done to facilitate
evaluation and development of these and other veins. A shaft on the property
extends from the surface to a depth of 5400 feet and connects to the Sunshine's
eastern workings on the 3100 level serving as the Sunshine Mine's secondary
escapeway. Access from this shaft to these exploration areas will be important
in their future exploration and development
The proven and probable reserves at the Sunshine Mine have
historically totaled approximately 4 to 7 years of annual production. Over the
mine's history, exploration and development activity have maintained reserves by
finding new ore to replace that which was produced each year. Management
believes this will continue for the foreseeable future as studies have
delineated several areas of favorable geologic conditions that may host
significant deposits. These areas are contiguous to delineated mineralization,
and the ore-bearing structures project into favorable lithologic units. Further
exploration is necessary to quantify the contained ore, but the magnitude of the
contained ore could approximate the historic production from the major veins.
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 interest
arbitration if agreement is not reached; and (3) an increase in pension benefits
in exchange for the elimination of Company provided retiree medical benefits for
the current work force. In February 1997, the Unions notified SPMI that they
were exercising their option to reopen negotiations on wages and benefits. The
Company and the Unions arrived at an arbitrated agreement on wages and benefits,
retroactive to May 1, 1997, in May 1998. The contract will expire on May 1,
2000.
PIRQUITAS
The Pirquitas property was acquired by the Company in November 1995.
Pirquitas is located in the Puna de Atacama of northwestern Argentina in the
province of Jujuy at an elevation of over 14,000 feet. The nearest major city is
the provincial capital, San Salvador de Jujuy, which is about 355 km southeast
of Pirquitas. The Chilean and Bolivian borders lie 50 km west and 60 km to the
north, respectively.
The Company feels that recent political and economic changes in
Argentina, designed to incentivize foreign investment, particularly in the
mining industry, have made the country an extremely attractive target for mining
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investment. The country has privatized many state-owned enterprises, and has
implemented reforms to many previously state-controlled activities, including
mineral exploration and development. A program of fiscal stability has brought
down inflation. Guarantees to foreign investors include parity of treatment with
Argentine nationals, a freely-exchangeable currency, tax-stabilization programs
and complete freedom to expatriate profits.
Pirquitas is Argentina's largest historic producer of silver and tin,
with 27 million ounces of silver production and 20 thousand tonnes (metric tons)
of tin production from its underground workings between 1936 and 1990. Historic
production was confined to a system of closely-spaced sheeted veins. The Company
is developing the property to be a large, low-cost, open-pit silver, tin and
zinc producer. The Company has only recently recognized the zinc potential of
the property, and a zinc "halo" surrounding the core silver-tin minerals will be
one of the factors addressed in the optimization review of the feasibility study
currently underway.
Pirquitas represents the southernmost known economic deposit associated
with the Bolivian tin belt which extends in an arc from Peru to Argentina. The
southernmost Bolivian tin deposits show an increase in silver content, whereas
silver is negligible in the tin occurrences of northern Bolivia. Tin belt
mineralization occurs in veins, stockworks, breccias, disseminations and mantos.
The majority of deposits are associated with small stocks 1-2 km in diameter,
exhibiting many characteristics of porphyry copper systems.
The Company is currently finalizing a feasibility study regarding the
projected financial and operating results of the property for purposes of
financing its development. The feasibility study has estimated ore reserves at
the property to be 18 million metric tonnes (20.1 million short tons) containing
171.6 grams of silver per tonne (5.01 ounces per short ton) containing 101
million ounces of silver. In addition, the ore grades 0.29% tin and 0.48% zinc,
containing 116.4 million pounds of tin and 194 million pounds of zinc. The ore
body is open to the east, west and at depth, and numerous old workings visible
from the surface indicate other mineralized areas on the property may host
additional reserves.
The reserves have been adjusted for anticipated mine dilution.
Metallurgical recoveries are estimated to be 80% for silver, 63% for tin and 45%
for zinc.
The total investment at the property to date is approximately $17.1
million, of which the $1.7 million purchase price has been capitalized, $7.1
million has been charged to exploration expense and $8.3 million has been
capitalized as development costs. In addition, $1.7 million has been paid as
recoverable Value Added Taxes, which are carried as other assets. The property
has been considered in the development stage since January 1, 1998.
The feasibility study is based on a mining rate of 5,000 metric tonnes
(5,500 short tons) per day. The estimated capital cost for the processing
facilities, pre-strip, haulage fleet, infrastructure and other capital items at
that rate of production is estimated to be approximately $120 million. At that
production rate, annual production over the mine life of the deposit to be
developed amounts to approximately 8.2 million ounces of silver, 7.1 million
pounds of tin and 8.5 million pounds of zinc. The net cash cost of producing an
ounce of silver is projected to average approximately $2.00 per ounce.
The feasibility study is currently being optimized and a higher
production rate of 6,000 metric tonnes (6,600 short tons) per day is being
evaluated. Also being examined are opportunities for adding reserves in areas
previously considered to be waste, improving metallurgical recoveries and
concentrate grades for silver and reducing capital costs by contract mining.
Upon completion of the optimization of the feasibility study, the
Company will review available options to finance development of the property. No
assurance can be given at this time with regard to the availability of such
financing. Therefore, the Company may consider other options including a merger
with a company with greater financial resources, a sale of a portion or all of
the property or a sale of a significant equity interest in the Company or the
subsidiary that holds Pirquitas. It may also defer development of the property
until silver prices improve.
The availability of professional and skilled labor is limited in the
regional market surrounding Pirquitas. It will be necessary to recruit these
workers on a national and, in some cases, an international basis. The Company
anticipates that it can fill much of its other labor requirements from the local
workforce although a significant effort in training will be needed. Argentina
requires all mine labor (non-professional) to be represented by the Argentine
Mine Workers Association (a national union). Local labor agreements must meet
minimum guidelines established through negotiation between the union and mine
owners as represented by the Argentine Association of Mine Entrepreneurs and
Argentine Chamber of Mining and Metallurgy. Sunshine has held preliminary
discussions with the Argentine Association of Mine Workers (the National Union)
and they have expressed a willingness to accommodate the special requirements
imposed by a remote work location.
There is good access to the Pirquitas mine site despite its relatively
isolated location. The project is reached via an 80 mile improved gravel road
from the town of Abra Pampa. This road is suitable for current activities but
will require some upgrading during the construction and operation phases.
It is anticipated that the 5.1 megawatt power demand at Pirquitas will
be satisfied by six medium-speed diesel generating sets, with four of these
operating at any given time. Housing for the 400-500 employees on site will be
provided in dormitory type units, with a camp kitchen and dining room, clinic,
laundry and recreational facilities also included.
The Company currently believes the operation will produce an annual
average of 17,000 tons of silver concentrate, 6,400 tons of tin concentrate and
8,000 tons of zinc concentrate over its 10-year mine life. A number of offshore
smelters have expressed an interest in the concentrates, and favorable terms
should be available.
The preliminary capital cost estimate of $120 million to develop the
project includes $80 million in direct equipment, materials and construction
labor, $15 million in construction management and temporary facilities, $10
million in engineering, procurement, freight and insurance and $15 million in
pre-stripping and other owner's costs.
REVENUE-VIRGINIUS MINE
The Revenue-Virginius Mine is an underground silver mine located eight
miles southwest of the town of Ouray in southwestern Colorado. It also contains
significant gold and base metals. The mine has been largely inactive since a
mill fire in 1912 resulted in the closure of the operation. Most production
records on the property are missing; however, records which remain indicate
production between 1895 and 1906 totaling 14.5 million
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ounces of silver, 123 thousand ounces of gold and 63 million pounds of lead from
one series of veins. Sunshine controls the property under a mining lease calling
for minimal property payments and work commitments. The property currently
contains reserves estimated to be approximately 6.2 million ounces of silver.
Several veins carry the mineralized values, and many of the veins have
been traced for long distances onto other properties. Therefore, the Company
believes it reasonable to assume that a significant mineralized inventory in
addition to the above reserves can be inferred. Based on initial pre-feasibility
work, the Company believes the property could produce 2.5-3.0 million ounces of
silver annually at a net cash cost of approximately $4.00 per ounce, following a
capital investment of $12-15 million. Repair work to access the underground
veins for exploration and development was completed in 1998. A drilling program
designed to increase the proven and probable reserves to a level which would
justify the capital commitment is pending.
OTHER EXPLORATION
The Company controls approximately 81 thousand acres of exploration
property in Argentina in addition to the above properties, and properties in the
states of Washington and Nevada which it believes are prospective for silver. As
budgets and personnel availability allow, the Company intends to do
reconnaissance work on these properties in 1999.
MARKETING
The Company's primary product at the Sunshine Mine can be either
refined silver which is sold to industrial customers or precious metals dealers,
or silver-copper and lead-silver concentrates which are sold to smelters. Prices
received for refined silver are based on market prices at the time of shipment.
Prices received for the silver-copper concentrate are based on average prices
for silver and copper during a quotational period shortly after shipment. The
Company bases its decisions on whether to refine its silver-copper concentrates
internally or sell them to a smelter based on internal production costs versus
available smelter contract terms. All lead-silver concentrates are sold to
smelters, with prices for contained lead and silver based on a quotational
period shortly after shipment. The Company's refined silver, antimony and copper
products are generally marketed directly to metals dealers or industrial
customers. See Note 12 of Notes to Consolidated Financial Statements included
elsewhere herein.
OTHER BUSINESS AND REGULATORY FACTORS
The Company's precious metals operations are intensely competitive and
subject to risks and regulations inherent in and applicable to mining generally
and the precious metals industry specifically. Competition in the precious
metals mining industry, and particularly the silver mining industry, is very
volatile. The market for gold and silver is international and there is no
significant marketing advantage in domestic production versus international
production. No single source of silver is significant to the world market, and
many of the principal sources of silver as a primary metal have been forced to
close as a result of continued low silver prices over the past several years. As
a result, the largest sources of silver at the present time are gold, copper,
lead and zinc mines which produce silver as a by-product, and whose economics
are not significantly related to the price of silver.
Competition among mining companies is primarily for mineral rich
properties which can be developed and produced economically; the technical
expertise to find, develop and produce such properties; labor to operate the
properties; and capital for the purpose of funding such operations. As the
principal product sold is a commodity with its price dictated by world markets
upon which any individual operator has very little influence, the competitive
factors cited above give the competitive advantage to the low cost operator.
ENVIRONMENTAL AND SAFETY MATTERS
In connection with its operations and properties, the Company is
subject to extensive and changing federal, state and local laws, regulations and
ordinances governing health and safety and the protection of the environment,
including, without limitation, laws and regulations relating to air and water
quality, mine reclamation, waste handling and disposal, the protection of
certain species and the preservation of certain lands. These environmental laws
and regulations may require the acquisition of permits or other authorizations
for certain activities. These laws and regulations may also limit or prohibit
activities on certain lands lying within a wilderness area, wetland area, area
providing habitat for certain species or other protected area. The recent trend
in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue in the future. The operations and
activities of the Company require compliance with such laws, regulations and
ordinances.
The Company cannot predict what environmental legislation or
regulations will be enacted or adopted in the future or how future laws and
regulations will be administered or interpreted. Compliance with more stringent
laws and regulations, as well as potentially more vigorous enforcement policies
of regulatory agencies or stricter interpretation of existing laws, may
necessitate significant capital outlays, may materially affect the Company's
operations, or may cause material changes or delays in the Company's intended
activities. Currently, the Company does not expect to incur any material capital
expenditures associated with environmental regulations (such as expenditures for
relevant control facilities) during the fiscal year 1999. See Note 10 of Notes
to Consolidated Financial Statements included elsewhere herein; and "LEGAL
PROCEEDINGS - ENVIRONMENTAL MATTERS." The Company also does not anticipate any
material effect from compliance with environmental, health and safety laws,
regulations and ordinances.
EMPLOYEES
At December 31, 1998, Sunshine and its subsidiaries, including SPMI,
employed approximately 335 persons; 306 of whom are located at the Kellogg
facilities. SEE "ITEM 1. BUSINESS. THE SUNSHINE MINE AND REFINERY COMPLEX."
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GLOSSARY OF CERTAIN MINING TERMS
ASSAY - To analyze the proportions of metals in ore, to test an ore or mineral
for composition, purity, weight, or other properties of commercial interest. The
word "assay" also refers to the test or analysis itself.
CONCENTRATE - a product containing the valuable metal and from which most of the
waste material in the ore has been eliminated.
DILUTION - An estimate of the amount of waste or low-grade mineralized rock
which will be mined with the ore as part of normal mining practices in
extracting an ore body.
DRIFT - An underground horizontal passage which provides access to a mineralized
area.
DRILL INTERCEPT - The distance from the initial contact by a drill hole of a
mineralized zone or vein to the drill hole's exit from that zone or vein.
EXPLORATION - Work involved in searching for ore, usually by drilling or driving
a drift.
FAULT - A fracture or a zone of fractures along which there has been
displacement of the sides relative to one another parallel to the fracture.
FOOTWALL - The underlying side of a fault, ore body, or mine working; esp. the
wall rock beneath an inclined vein or fault.
GRADE - The metal content of ore and drill samples. With precious metals, grade
is expressed as troy ounces per ton of rock.
MILL - A processing plant that produces a concentrate of the valuable minerals
or metals contained in an ore. The concentrate must then be treated in some
other type of plant, such as a smelter, to effect recovery of the pure metal.
MINERALIZED MATERIAL/INVENTORY - A mineralized body which has been delineated by
appropriately spaced drilling and/or underground sampling to support reasonable
estimate of tonnage and average grade of metal(s). Such a deposit does not
qualify as a reserve until a comprehensive evaluation based upon unit cost,
grade, recoveries and other material factors conclude legal and economic
feasibility.
ORE BODY - An economically recoverable deposit of minerals, the extent and grade
of which has been defined through exploration and development work.
ORE RESERVE - That part of a mineral deposit which at the time of the reserve
determination could be economically and legally extracted or produced.
PROBABLE RESERVES - Resources for which tonnage and grade are computed primarily
from specific measurements, samples or production data, and partly from
projection for a reasonable distance on geologic evidence. The sites available
for inspection, measurement and sampling are too widely or otherwise
inappropriately spaced to permit the mineral bodies to be outlined completely,
or the grade established throughout.
PROVEN RESERVES - Resources for which tonnage is computed from dimensions
revealed in workings and drill holes and for which the grade is computed from
the results of detailed sampling. The sites for inspection, sampling and
measurement are spaced so closely and the geologic character is so well defined
that size, shape and mineral content are all established. The computed tonnage
and grade are judged to be accurate, within limits which are stated, and no such
limit is judged to be different from the computed tonnage or grade by more than
20%.
STOPE - An opening or workplace in an underground mine excavated for the purpose
of extracting ore.
TON - A short ton of 2,000 pounds, dry weight basis.
TONNE - Metric ton, equal to 2,204.62 pounds.
TROY OUNCE - Unit of weight measurement used for all precious metals. The
familiar 16-ounce avoirdupois pound equals 14.583 troy ounces.
VEIN - An epigenetic mineral filling of a fault or other fracture in a host
rock, in tabular or sheetlike form, often with associated replacement of the
host rock; a mineral deposit of this form and origin.
2. PROPERTIES
The information regarding the properties of Sunshine is set forth under
ITEM 1. BUSINESS, above, and in the Notes to Consolidated Financial Statements
included in Part II hereof.
3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The EPA has identified the Company and SPMI as Potentially Responsible
Parties ("PRPs") at one site and SPMI as a PRP at another site under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI at one
site and SPMI at the other site arranged for the disposal of hazardous
substances. One of the sites is located in Kellogg, Idaho (the "Bunker Hill
Superfund Site") and the other site is located in Spokane, Washington.
At the Bunker Hill Superfund Site, the EPA, the State of Idaho and
several of the PRPs, including the Company and SPMI, have agreed to a site-wide
clean-up plan, separating the site into two distinct areas for remediation: the
Bunker Hill Smelter Complex (the "Smelter Area") and the residential and certain
commercial areas primarily in the cities of Kellogg, Smelterville and Pinehurst,
Idaho encompassed by the Site (the "Residential Areas"). Without admitting
liability, the Company and several PRPs have agreed to do the
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remediation work in the Residential Areas pursuant to an EPA and State of Idaho
approved work plan. In exchange therefor, EPA and the State of Idaho released
the settling PRPs from all liability for cleanup of the Smelter Area, reduced
the EPA's claim for reimbursement of past costs from $17 million to $1 million
plus a percentage of proceeds received by the PRPs from insurance companies, if
any, and agreed that the work orders from 1990 through 1993 were deemed
satisfied and discharged. The remediation undertaken by the Company and the PRPs
is expected to continue for another three to four years. The Company currently
has accrued $2.4 million for its (including SPMI's) share (12.4%) of the
estimated remaining remediation costs at December 31, 1998.
On November 17, 1994, the United States District Court for the District
of Idaho entered a Consent Decree containing the terms of this agreement. The
liability for remediation costs under the consent decree is joint and several.
Thus, if any other settling party (or parties) does not comply with the consent
decree, the exposure for the Company and SPMI could increase proportionately.
The parties have reserved their claims and defenses with respect to natural
resource damages, except for the State of Idaho which has agreed that its claim
has been settled.
On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed an
action in the United States District Court, District of Idaho against the
Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory
judgment that the Tribe has five years in which to file a natural resource
damage claim under CERCLA against the PRPs and others or, alternatively, for
damages in an unspecified amount resulting from the loss, destruction or injury
to natural resources allegedly caused by the defendants. The Company believes
that a settlement by SPMI of all natural resources claims with the State of
Idaho in May 1986 bars the Tribe's action.
On March 22, 1996, a complaint was filed in the United States District
Court for the District of Idaho on behalf of the United States Department of the
Interior, United States Department of Agriculture and the Environmental
Protection Agency against Sunshine, SPMI and other identified PRPs for alleged
natural resource damages in the Coeur d'Alene Basin. The complaint seeks to
recover natural resource damages and response costs under CERCLA and the Clean
Water Act, and does not identify the amount of damages sought to be recovered.
The Company believes that the settlement by SPMI of all natural resource claims
with the State of Idaho in May, 1986, bars these claims, and that the complaint
is without merit.
On September 30, 1998, the United States District Court for the
District of Idaho granted the Company's Motion for Partial Summary Judgment
limiting the United State's potential natural resource damage claims in the
Coeur d'Alene River Basin of Northern Idaho to the 21 square mile Bunker Hill
Superfund Site.
The effect of the ruling substantially limits the government's claim
for damages from a 1500 square mile site to the 21 square mile Bunker Hill
Superfund Site, within which the Company has, pursuant to a Consent Decree with
other defendants, been engaged in clean-up operations.
The United States has been granted an interlocutory appeal of the order
to the Ninth Circuit Court of Appeals.
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. To date, the EPA has not filed
any action against SPMI or the Company in relation to the Spokane Junkyard Site.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of Sunshine's fiscal year ended December 31, 1998.
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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 10,
1999, Sunshine had approximately 30,000 holders of record of its Common Stock.
On March 10, 1999, the closing price of the Common Stock price as reported on
the New York Stock Exchange, Inc. ("NYSE") Composite Transactions was $0.5625.
Presently, the Company does not intend to pay cash dividends. Also,
pursuant to restrictions imposed by the Company's outstanding debt securities at
December 31, 1998, the Company could not pay cash dividends on shares of its
Common Stock.
The following table sets forth the range of high and low sales prices
for the Common Stock as reported on the NYSE composite tape for the periods
indicated. Such quotations represent inter-dealer prices without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
1998 QUARTERS 1997 QUARTERS
-------------------------------------------------
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------
1st Quarter 1 11/16 7/8 1 1/4 3/4
- --------------------------------------------------------------------------
2nd Quarter 1 7/16 7/8 15/16 5/8
- --------------------------------------------------------------------------
3rd Quarter 1 5/8 1 1/8 5/8
- --------------------------------------------------------------------------
4th Quarter 1 1/2 1 1/8 49/64
- --------------------------------------------------------------------------
CONTINUED NYSE LISTING
As a result of the impairment write down of the Sunshine Mine in the
third quarter (see Note 3 of Notes to Consolidated Financial Statements), the
Company fell below the NYSE continued listing criteria. The NYSE has requested
advice from the Company as to what definitive action it plans to take in order
to bring the Company into compliance with original listing standards. The
Company will present an action plan in April 1999 to bring it into compliance
within eighteen months. The plan is subject to NYSE approval.
WARRANTS
The Company's March 9, 1999 and May 22, 2001 common stock purchase
warrants are traded on the NASDAQ National Market System (symbols "SILVW"and
"SILVZ") with high and low sales prices as reported by NASDAQ during 1998 of
$0.75 and $0.016; and $0.8125 and $0.0625, respectively. The March 9, 1999
warrants have now expired.
RECENT FINANCING
On January 28, 1999, the Company completed a private placement of $6.0
million initial principal amount of its 5% Convertible Notes due January 28,
2001. The notes were sold to Elliott Associates, L.P. and Westgate
International, L.P. in reliance upon Section 4(2) of the Securities Act of 1933,
as amended, since the purchasers were sophisticated investors and there was no
public offering. For additional information regarding the terms of the notes,
see the discussion under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES -- RECENT
FINANCINGS."
6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical financial information
of Sunshine as of the dates and the periods indicated in the table below. All
amounts are in thousands, except price and production statistics and per share
amounts.
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YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998(2) 1997 1996(3) 1995 1994(4)
-------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................... $ 34,668 $ 24,993 $ 15,315 $ 15,623 $ 17,732
Mark to market gains (losses) ........................ (2,588) 1,859 (1,101) 911 (320)
------------ ------------ ------------ ------------ ------------
Total revenues ................................... 32,080 26,852 14,214 16,534 17,412
Net loss ............................................. (64,845) (19,308) (25,902) (15,483) (4,923)
Income (loss) applicable to common shares ............ (64,845) (19,308) 11,600 (25,572) (15,383)
Basic and diluted income (loss) per common share:
Net income (loss) ................................ (.25) (.08) .05 (.13) (.08)
Weighted average common shares ....................... 256,871 255,137 222,584 193,044 185,634
PRICE AND PRODUCTION STATISTICS:
Average silver price received ........................ $ 5.47 $ 5.02 $ 5.11 $ 5.20 $ 5.29
Tons ................................................. 247,866 183,404 120,910 101,240 107,056
Silver grade (ounces per ton) ........................ 24.17 23.95 22.04 17.66 20.08
Silver ounces ........................................ 5,806,468 4,253,315 2,577,895 1,731,714 2,079,290
Cash cost per ounce(1) ............................... $ 4.43 $ 4.50 $ 6.12 $ 6.61 $ 5.83
BALANCE SHEET DATA:
Cash and cash investments ............................ $ 1,412 $ 15,985 $ 16,317 $ 12,837 $ 26,581
Working capital ...................................... 9,716 26,959 25,559 23,550 38,537
Total assets ......................................... 39,897 101,601 105,486 101,134 116,657
Long-term debt and capital lease obligations ......... 42,597 42,265 25,780 1,519 1,519
Stockholders' equity (deficit):
Preferred Stock .................................. -- -- -- 82,268 80,707
Other ............................................ (17,466) 44,496 63,598 2,814 19,701
Book value per common share .......................... (.07) .17 .25 (.22) (.10)
Common shares outstanding ........................ 259,408 255,232 254,981 193,096 192,995
(1) Cash cost per ounce includes all expenditures (other than exploration
costs and capital expenditures) related to the operation of the
Sunshine Mine and Refinery Complex, less any by-product revenues. Such
costs include non-capital development costs, production and maintenance
costs, ad valorem taxes, insurance, and postemployment benefit costs
incurred on site.
(2) During 1998 the Company recorded a $50.4 million impairment of mining
properties expense to write down the value of the Company's investment
in the Sunshine Mine.
(3) During 1996 the Company recorded a gain applicable to common shares of
$40 million due to the retirement of all of the Company's outstanding
Preferred Stock. See Note 7 of Notes to Consolidated Financial
Statements.
(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.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain matters discussed in this report are "forward-looking
statements" intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are all statements other than statements of historical fact,
including without limitation those that are identified by the use of the words
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"predicts" and similar expressions. Such statements address future plans,
objectives, expectations and events or conditions concerning various matters
such as mining exploration, capital expenditures, earnings, litigation,
liquidity and capital resources and accounting matters. Actual results in each
case could differ materially from those currently anticipated in such
statements, by reason of factors including without limitation, actual results of
exploration, silver prices, imprecision of reserve estimates, future economic
conditions, regulations, competition and other circumstances affecting
anticipated revenue and costs. Any forward-looking statement speaks only as of
the date on which such statement is made, and the Company undertakes no
obligation to update any forward-looking statement. Readers are cautioned not to
place undue reliance on these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have generated losses in each of the last
three years, and a net use of cash from operations in the last three years. The
decline in silver and by-products prices during the last half of 1998 caused the
Company's operating cash flows to decline below the levels it had anticipated.
The Company ended 1998 with working capital of $9.7 million, including cash and
silver bullion held for investment of $6.6 million and a $17.5 million
stockholders' deficit.
The Company has taken specific actions in attempts to ensure its
ability to continue operations. Specifically, the Company has reduced operations
in Argentina primarily to the level required to complete the feasibility study
for the Pirquitas Mine, implemented cost reduction and cash conservation plans
and initiatives to reduce its work-in-process inventory. Also, in January 1999,
the Company raised an additional $6 million in the form of 5% Convertible Notes,
due January 28, 2001. With these funds, the Company considers its cash and
working capital to be adequate for the foreseeable future.
The Company's strategy to return to profitability is focused on finding
additional low-cost silver reserves which can be economically developed and
operated. During 1998, the Company invested a total of $12.8 million in
exploration and development projects, principally at Pirquitas.
Future spending on exploration projects is contingent on future cash
flow from the Sunshine Mine and the Company's ability to raise new funding. The
Company believes its past success in finding and developing new properties will
assist it in raising the funds required to continue its exploration program as
well as in funding the development of the
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properties it has already identified. However, no assurance can be given that
the necessary exploration and development funds can be obtained.
The West Chance ore body was discovered in 1992 in the previously
undeveloped western section of the Sunshine Mine. The Company has completed
development of the West Chance, producing approximately 5.8 million ounces of
silver from the area in 1998, a significant increase over prior years. The
Company's cash production cost per ounce has been substantially reduced as
production increased. The improvements did not restore the Company to
profitability at silver prices which prevailed in 1998, as the cash operating
margin from the Sunshine Mine does not exceed other expenses (depreciation,
depletion, exploration, general and administrative and interest expenses). The
Company expects production from the Sunshine Mine in 1999 and 2000 to continue
at approximately 5.5 million ounces per year, most of which is anticipated to be
from the West Chance area, but it will be supplemented by production from other
reserve areas which are to be developed as the focus of mining operations shifts
to the eastern portion of the Sunshine Mine. Absent an increase in silver or
by-product prices, the cash flow from these operations will not cover all
anticipated non-cash or administrative expenses.
The Company is planning a major exploration and development project to
access reserves in the eastern area of the mine. This project will provide a
major exploration platform for evaluating a number of undeveloped areas in the
eastern portion of the mine which are considered highly prospective. If
successful in developing major new ore bodies, the total cost of the project is
expected to be between $2 million and $4 million over two years. In addition to
providing an exploration platform, the project will provide mechanized access to
existing reserves for development and production, while allowing the abandonment
of the internal 10-Shaft. The Company believes this project can be funded from
available working capital.
If reserves in sufficient quantities are established in the target
areas, the Company will rehabilitate the ConSil Shaft, increasing production
capacity of the mine by approximately 50%. The cost of this rehabilitation is
estimated to be $2 million. Such an increase in capacity would be expected to
further reduce unit operating costs.
The Company's next major project is the development of the Pirquitas
Mine in northwest Argentina. The Company invested $8.3 million at the property
in 1998, and has projected approximately $2.0 million for general exploration
and development in 1999 (prior to obtaining financing for mine construction).
The Company has invested a total of $17.1 million in the property since its
acquisition in November 1995, together with approximately $1.7 million in
recoverable Value Added Taxes. The Pirquitas investment has allowed the Company
to develop a major ore reserve, the economics of which are being confirmed by a
feasibility study commissioned in 1997.
Preliminarily, the study has estimated the property can be developed
for approximately $120 million, and will produce annually approximately 8.2
million ounces of silver and 7.1 million pounds of tin. The estimated net cash
cost of production of an ounce of silver is projected to be approximately $2.00
net of tin by-product credits. Assuming a $5.50 silver price and a tin price of
$2.54 per pound, proven and probable reserves are presently estimated to be 20.1
million tons of ore at an average grade of 5.01 ounces per ton silver (18.3
million tonnes at an average grade of 171.6 grams per tonne silver), 0.29% tin,
and 0.48% zinc. Contained metal in the proven and probable reserves totals 101
million ounces of silver, 116.4 million pounds of tin and 194 million pounds of
zinc. The Company expects future development and exploration work at the site to
expand reserves.
In January 1999, the Company and its consultants began a process
designed to optimize the feasibility study to examine options to increase
production, reduce costs and increase reserves. Upon completion of this work,
the Company will evaluate its alternatives with respect to financing the
development of the property. Given current market conditions, including the
price of silver and the Company's financial resources, no assurances can be
given regarding the availability of such financing. As a result, the Company may
consider other options, including a merger with a company with greater financial
resources, a sale of a portion or all of the property or a sale of a significant
equity interest in the Company or the subsidiary that holds Pirquitas. It may
also defer development until silver prices improve.
The Company has performed certain evaluation work on its
Revenue-Virginius property which indicates it can be placed into production with
a capital investment of approximately $12-15 million. The Company believes that
the property could produce approximately 2.5 to 3 million ounces of silver
annually at a net cash cost of approximately $4.00 per ounce. A drilling program
to add sufficient proven and probable reserves to justify financing for the
development of the Revenue-Virginius Mine is pending. No assurance can be given
that adequate financing will be available to fund such development.
RECENT FINANCINGS
On January 28, 1999, the Company completed a private placement of $6.0
million initial principal amount of its 5% Convertible Notes due January 28,
2001. The interest will be paid by adding the amount of interest to the
principal amount of the Notes. The Notes may generally be converted into common
stock at a per share price based on the average of the lowest average high and
low trading prices for five of the twenty consecutive trading days prior to
conversion. The conversion price for one-half of the Notes has been fixed at a
maximum of $0.6875. The funds were added to working capital.
In November 1997, the Company completed a private placement of
five-year convertible promissory notes for $15 million ("10% Notes"). The 10%
Notes are convertible into 15.8 million shares of Common Stock at $.95 per
share, and bear a 10% coupon with principal and interest payable in either cash
or common stock at the Company's option. In certain events, the conversion price
of the 10% Notes can be reset to a lower level. The funds were used principally
to continue the Company's exploration and development program at the Pirquitas
Mine in northwest Argentina and its exploration program in southern Argentina
and for general corporate purposes.
In March 1996, SPMI issued $30 million aggregate principal amount of
Senior Exchangeable Notes due 2000 (the "Eurobonds"), which were offered in
Europe only to non-U.S. persons pursuant to Regulation S of the Securities Act
of 1933, as amended. The net proceeds, approximately $27 million, were used to
fund development and exploration
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opportunities and to fund general, administrative and other costs. During the
first half of 1998, $1.5 million principal amount of Eurobonds was exchanged for
1.5 million shares of stock.
The Eurobonds bear interest at 8% per annum and mature March 21, 2000.
The remaining outstanding Eurobonds are exchangeable into an aggregate of 28.5
million common shares at an exercise price of $1.00 per share. The Eurobonds are
guaranteed by Sunshine. If during the period May 1, 1996 to March 21, 1999 the
Company's common stock does not trade at $1.33 or more (average of high and low
prices) for 45 consecutive stock exchange trading days, the Company will be
required to make a payment in cash or stock equal to 22.5% of the then
outstanding principal amount. The Company currently intends to make this payment
in stock. The Eurobonds are callable if the Company's average common stock high
and low sales prices exceed $1.50 over 30 consecutive stock exchange trading
days.
EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE
Whenever circumstances or events indicate, and at least annually, the
Company evaluates its mining properties for impairment, based on undiscounted
expected future cash flows. Such estimates are based on assumptions as to future
silver prices, mining costs, recoverable reserves and estimates of future
reserve potential which management believes are reasonable, based on historical
silver prices and production. If the sum of such cash flows was less than the
carrying amount of the asset, the Company would record an impairment loss
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
During the third quarter of 1998, drilling in the West Chance vein
indicated that the size of the vein might be smaller than what was previously
expected. Based on that information, the Company felt that production from the
West Chance could decline to 4 million ounces in 1999. As a result, combined
with low by-product prices and a decline in silver prices, the Company estimated
that future cash flows from the mine would not be sufficient to recover the
$59.4 million carrying amounts of the mine. The fair value of the mine as
determined by the discounted cash flow method was approximately $9 million and
an impairment charge of $50.4 million was taken at the end of the third quarter.
Since that time, the Company's production forecast for those periods
has been revised significantly upwards, as downdip extensions of the West Chance
Vein have been identified as economic and other veins have been identified as
containing economic ore which can be accessed in 1999 and 2000.
Future increases in the price of silver and the presence of additional
mineralized material and resources are forward-looking statements regarding
matters over which the Company has no control. Actual future silver prices and
the results of current exploration may differ from anticipated values.
OTHER
The Company and SPMI have been identified by the EPA as a PRP at the
Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane
Junkyard Site. The Company believes that its status as a PRP will not have a
material adverse effect on its consolidated financial position or results of
operations. See "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS" and Note 10 of Notes
to Consolidated Financial Statements.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities was $9.5 million in 1998 compared
with $15.1 million in 1997 and $22.2 million in 1996. The 1998 $5.6 million
improvement was due to the $2.15 million decrease in cash operating loss and
changes in other working capital items. The cash operating loss decreased in
1998 compared to 1997 due to a $4.3 million improvement in cash operating income
at the Sunshine Mine (from $1.6 million in 1997 to $5.9 million in 1998), a $2.8
million decrease in exploration expense and $750 thousand of interest expense
being paid in common stock. These were partially offset by a $2.6 million mark
to market loss in 1998 compared to a $1.85 million gain in 1997 and a $1.3
million increase in interest costs in 1998 compared to 1997.
Cash used by investing activities during 1998 was $5.8 million,
including $8.3 million for the development of the Pirquitas Mine in Argentina
and $1.8 million at the Sunshine Mine, partially offset by $4.5 million of cash
proceeds from the sale of certain investments and 300 thousand ounces of
investment silver bullion, and proceeds from settlement of certain litigation.
In 1997, $2.2 million of proceeds from investments was partially offset
by $2.0 million of additions to property, plant and equipment resulting in $0.2
million of cash provided by investing activities. One million of cash was used
by investing activities during 1996, including $2.7 million for additions to
property, plant and equipment, partially offset by proceeds from investments of
$1.7 million.
Cash provided by financing activities in 1998 includes $785 thousand
from the exercise of stock options and warrants. Cash provided by financing
activities was $14.6 million in 1997 resulting from the Company's issuance of
the 10% Notes. Cash provided by financing activities was $26.7 million in 1996
resulting from the Company's Notes Offering, partially offset by the cost
associated with the exchange of common stock for preferred stock.
IMPACT OF YEAR 2000
The Company has completed its review of all hardware and software
systems operated or licensed in the Company's business. Only one computer
program was identified that would recognize a date using "00" as the year 2000,
but "01" as the year 1901 rather than 2001. The Company has reviewed its options
to remedy this problem and believes this can be accomplished timely and at a
cost that is not material.
The Company has contacted its significant vendors, suppliers, customers
and other third parties as to their Year 2000 exposure and compliance. To date,
the Company is not aware of any third parties with a Year 2000 issue that would
materially affect the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of third parties to complete their Year
2000
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resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by third parties is not determinable.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The Company's net loss increased $45.5 million to $64.8 million
compared to $19.3 million primarily due to the $50.4 million impairment
writedown of the Sunshine Mine.
Consolidated operating revenues increased approximately $9.7 million
(38.7%) for 1998 compared to 1997 primarily due to an increase in sales volume
and average price received per ounce of silver sold (5.5 million ounces of
silver at an average of $5.47 per ounce in 1998 compared to 4.1 million ounces
of silver at an average of $5.02 in 1997). The increase in sales volumes
primarily resulted from a 1.6 million ounce (36.5%) increase in production in
1998 compared to 1997.
Mark to market writedown of work-in-process silver inventories and
silver bullion held for investment amounted to $2.6 million in 1998 compared to
a $1.9 million gain in 1997. The writedown was due to declines in the per ounce
silver price from $5.945 to $4.988 between December 31, 1997 and December 31,
1998. The 1997 gain was due to the increase from $4.74 to $5.945 per ounce of
silver between December 31, 1996 and December 31, 1997.
Cost of revenues increased $5.4 million (23.4%) (from $23.0 million in
1997 to $28.4 million in 1998) primarily due to the 36.5 % increase in
production in 1998, partially offset by lower net unit operating costs. Net unit
operating costs decreased $.07 (1.8%) to $4.43 per ounce of silver primarily due
to the 36.5% increase in silver production (5.8 million ounces produced from
247,866 tons at 24.17 ounces per ton in 1998 versus 4.25 million ounces from
183,404 tons at 23.95 ounces per ton in 1997). Reduction in operating costs per
ounce of silver was actually $0.57 but was partially offset by $0.50 reduction
in by-product credits due to lower lead, copper and antimony prices during 1998.
Depreciation, depletion and amortization decreased by approximately
$873 thousand as a result of the impairment writedown of the Sunshine Mine in
the third quarter which resulted in reduced depreciation, depletion and
amortization in the fourth quarter, partially offset by increased production in
the 1998 period.
The 1998 period reflects a $50.4 million charge as an impairment
writedown of the Sunshine Mine. See "LIQUIDITY AND CAPITAL RESOURCES--EVALUATION
OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE."
Exploration expense decreased $2.8 million in 1998 compared to 1997
primarily due to the fact that work carried out at the Pirquitas Mine in
Argentina is largely being capitalized as the property is now considered to be
in the development stage. As a result, approximately $8.3 million of development
expenditures for Pirquitas during 1998 were capitalized. This was partially
offset by increased exploration expenditures at the La Joya del Sol gold
property in Argentina, at the Sunshine Mine and other exploration projects.
Interest and debt expense increased $1.4 million due to the debt issued
in November 1997.
Other, net increased $2.65 million due to a $1.1 million net gain for
proceeds received from settlement of certain litigation and the $1.6 million
reduction of the valuation reserves previously recorded against certain
investments as a result of performance of certain investments.
1997 COMPARED TO 1996
The Company's net loss decreased $6.6 million in 1997 to $19.3 million
compared to $25.9 million in 1996. This decreased loss resulted primarily from a
$4.8 million improvement in operating margin, a $2.9 million decrease in
exploration expense, a $3 million improvement in mark-to-market gain (loss) and
a $0.4 million decrease in general and administrative expense partially offset
by a $1.5 million increase in depreciation, depletion and amortization, a $1.3
million increase in interest expense, a $0.7 million reduction in interest
income and a $0.8 million reduction in other, net.
Consolidated operating revenues increased approximately $9.7 million
(63.2%) for 1997 compared to 1996 primarily due to an increase in sales volume
(4.1 million ounces of silver in 1997 compared to 2.7 million ounces of silver
in 1996) and the associated $2.4 million increase in by-product revenue,
partially offset by lower average silver prices received ($5.02 in 1997 compared
to $5.11 in 1996). The increase in sales volumes primarily resulted from a 1.7
million ounce (65%) increase in production in 1997 compared to 1996, and a 65
thousand ounce increase in sales volume of finished silver. Mark to market gains
on work-in-process silver inventories and silver bullion held for investment
amounted to $1.9 million in 1997 compared to a loss of $1.1 million in 1996. The
gains in 1997 were due to increases in the per ounce silver price during the
period, from $4.74 to $5.95 between December 31, 1996 and December 31, 1997
Cost of revenues increased $4.9 million (27.4%) (from $18.1 million in
1996 to $23.0 million in 1997) primarily due to the 65% increase in production
in 1997, partially offset by lower unit production costs. Unit production costs
decreased $1.62 (26%) to $4.50 per ounce of silver primarily due to the 65%
increase in silver production (4.3 million ounces produced from 183,404 tons at
23.95 ounces per ton in 1997 versus 2.6 million ounces from 120,910 tons at
22.04 ounces per ton in 1996).
Depreciation, depletion and amortization increased by approximately
$1.5 million (35%) as a result of increased production figures in the 1997
period.
Exploration expenditures declined $2.9 million primarily due to the
completion of the required drilling for the pre-feasibility analysis at the
Pirquitas mine in the second quarter of this year.
Interest income decreased by $719 thousand due to lower average
invested cash balances.
Interest and debt expense increased $1.3 million due to the debt issued
in March 1996.
12
14
7A. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES.
COMMODITY PRICE RISK
Substantially all of the Company's revenues are from sales of silver.
Volatility in the price of silver causes substantial fluctuations in the
Company's revenues and financial condition. There are many factors which
influence the volatility of silver prices. Changes in supply and demand,
worldwide economic and political conditions, expectations as to inflation and
speculative activity in the market all cause fluctuations in silver prices. As
previously discussed, the price of silver in recent years has been depressed,
averaging approximately $5.00 per ounce for the 11-year period ended in 1998.
The Company maintains an investment inventory of silver bullion which
totaled approximately 1.0 million ounces at December 31, 1998. As a result, the
Company's financial results are affected by changes in the price of silver. When
silver prices decline, the decline in value of the investment bullion is
recorded as a mark to market loss on the Company's statement of operations.
Conversely, an increase in silver prices is recorded as a mark to market gain. A
10% decrease ($0.50) in the per ounce price of silver during 1999 would result
in a $500 thousand mark to market loss for the year.
To earn current income on this investment and to mitigate a portion of
its exposure to a decline in silver prices, the Company from time to time will
sell covered calls against its silver bullion inventory. Total premiums earned
for the sale of covered calls aggregated $316,000, $116,000, and $165,000 in
1998, 1997 and 1996, respectively. At December 31, 1998, no covered call options
were outstanding. At December 31, 1997, the Company had covered call options
outstanding for 1.2 million ounces of silver with strike prices ranging from
$5.75 to $7.00 and expiration dates of February 26, 1998 (200,000 ounces), March
27, 1998 (900,000 ounces), and December 27, 1998 (100,000 ounces). The fair
value of the sold call options at December 31, 1997 would not materially exceed
the $202,000 of premiums received when they were sold. The Company's policy is
not to sell any uncovered calls. (See Note 1 of Notes to Consolidated Financial
Statements for information related to accounting policies for covered calls.)
INTEREST RATE RISK
The Company has outstanding debt with fixed interest rates. Therefore,
should market interest rates decline, the Company could make payments in excess
of what would be made under the reduced rates.
The following table presents the principal cash payments and related
weighted-average interest rates by expected maturity date for its debt
obligations.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
Fair
There- Value at
(dollars in millions) 1999 2000 2001 2002 after Total 12/31/98
- ------------------------------------------------------------------------------------------------
Long-term Debt
Fixed Rate $ 0 $ 33.5 $ 5 $ 5 $1.5 $45.0 $45.0
Avg. Interest Rate 8.7% 9.3% 9.8% 9.6% 9.0%
FOREIGN CURRENCY RISK
The Company is developing the Pirquitas Mine in Argentina. Therefore,
the Company could be at risk for fluctuations in the U.S. dollar/Argentine peso
exchange rate. However, Argentina maintains a 1:1 exchange ratio by limiting the
amount of pesos that are issued to the amount of U.S. dollars held by the
Argentine Central Bank. Also, it has been reported that Argentina is considering
replacing the peso with the U.S. dollar. Thus at this time, the Company does not
feel its foreign currency market risk is significant.
At December 31, 1998, no debt was denominated in a foreign currency nor
are there any firm purchase commitments denominated in a foreign currency.
STOCK PRICE RISK
The provisions of one of the Company's debt agreements includes a
requirement to pay additional interest if the Company's stock price does not
trade at more than $1.33 for a specified time. As the Company's stock has not
traded above $1.33 for the specified time, the Company intends to issue
additional shares of Common Stock to make the required payment. An increase of
10% from the year-end closing per share price of $0.50 would reduce the number
of shares to be issued by 1.2 million. A 10% decline would increase the number
of shares to be issued by 1.4 million.
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.
13
15
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to the Company's directors and nominees for
election as directors and information relating to the executive officers of the
Company is incorporated herein by reference from the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders to be held on May 24, 1999 (the
"Proxy Statement").
11. EXECUTIVE COMPENSATION.
The discussion under "Management Remuneration and Transactions" in the
Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated
herein by reference.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement for its Annual Meeting of
Stockholders is incorporated herein by reference.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under "Management Remuneration and Transactions -
Employment Contracts" in the Company's Proxy Statement for its Annual Meeting of
Stockholders is incorporated herein by reference.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements. See Index to Financial
Statements and Financial Statements Schedules on page F-1
hereof.
2. Consolidated Financial Statement Schedules. All schedules for
which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable
and therefore have been omitted.
3. Exhibits.
EXHIBIT
NO. EXHIBIT
------- -------
3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
3.2 Amendment to Certificate of Incorporation of Sunshine filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K dated May
22, 1996 (File No. 001-10012), which exhibit is incorporated
herein by reference.
*3.3 Bylaws of Sunshine.
4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.2 Amendment to Certificate of Incorporation of Sunshine, filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May
22, 1996 (File No. 001-10012), which exhibit is incorporated
herein by reference.
4.3 Warrant Agreement, dated as of February 1, 1996, between Sunshine
Merger Company and American Stock Transfer & Trust Company, as
Warrant Agent, filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-4, Registration No. 33-98876, which exhibit is
incorporated herein by reference.
4.4 Warrant Agreement, dated as of February 3, 1994, between Sunshine
and American Stock Transfer & Trust Company, as Warrant Agent,
filed as Exhibit 4.3 to Sunshine's Registration Statement on Form
S-1, Registration No. 33-73608, as amended, which exhibit is
incorporated herein by reference.
4.5 Form of Supplemental Warrant Agreement, dated as of February 1,
1996, between Sunshine Merger Company and American Stock Transfer
& Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876,
which exhibit is incorporated herein by reference.
14
16
4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's
Registration Statement on Form S-1 Registration No. 33-73608, as
amended, which exhibit is incorporated herein by reference.
4.8 Specimen Stock Certificate of the Common Stock, $0.01 par value,
of Sunshine filed as Exhibit 4.2 to Sunshine's Registration
Statement on Form S-1, Registration No. 33-63446 as amended, which
exhibit is incorporated herein by reference.
4.9 Form of Indenture, dated as of July 15, 1988, between Sunshine and
MTrust Corp., National Association, with respect to Sunshine's
Convertible Subordinated Debentures due July 15, 2008 filed as
Exhibit 4.25 to Sunshine's Registration Statement on Form S-3,
Registration No. 33-21159, which exhibit is incorporated herein by
reference.
4.10 First Supplemental Indenture, dated as of August 8, 1988, Second
Supplemental Indenture, dated as of November 10, 1988, and Third
Supplemental Indenture, dated as of April 10, 1991, between the
Company and Ameritrust Texas, N.A., the successor to MTrust Corp.,
National Association relating to the issuance of the Convertible
Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990,
which exhibit is incorporated herein by reference.
4.11 Form of Fourth Supplemental Indenture, between the Company and
Texas Commerce Bank National Association, as successor to
Ameritrust Texas, National Association, formerly known as MTrust
Corp., National Association, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine
Precious Metals, Inc. and Marine Midland Bank and Form of Note
filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement
on Form S-3, Registration No. 333-06537, which exhibits are
incorporated herein by reference.
4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine,
Rauscher, Pierce & Clark and HSBC Investment Banking Limited and
Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to
Sunshine's Registration Statement on Form S-3, Registration No.
333-06537, which exhibits are incorporated herein by reference.
4.14 Specimen form of Warrant to Purchase Common Stock issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.12 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
4.15 Specimen form of Senior Convertible Promissory Note issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.13 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
*4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common
Stock issued on November 24, 1997 to affiliates of Stonehill
Investment Corp.
4.17 Specimen form of 5% Convertible Promissory Note, due January 28,
2001, filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated January 28, 1999 (File No. 001-10012), which
exhibit is incorporated herein by reference.
*4.18 Bylaws of Sunshine, filed herein as Exhibit 3.3.
o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as
Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986, which exhibit is incorporated
herein by reference.
o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option
Plan of Sunshine filed as Exhibit 10.8 to Sunshine's Registration
Statement on Form S-1, Registration No. 33-63446, as amended,
which exhibit is incorporated herein by reference.
o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option
Plan of Sunshine filed as Exhibit 10.1 to Sunshine's Quarterly
Report on Form 10-Q for the period ended June 30, 1994, which
exhibit is incorporated herein by reference.
o10.4 1993 Incentive Stock Option Plan of Sunshine filed as Exhibit
10.18 to Sunshine's Registration Statement on Form S-1,
Registration No. 33-63446, as amended, which exhibit is
incorporated herein by reference.
o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as
Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, which exhibit is incorporated
herein by reference.
15
17
o10.6 Form of Executive Employment Agreement entered into as of January
1, 1994, between Sunshine and John S. Simko filed as Exhibit 10.8
to Sunshine's Registration Statement on Form S-1, Registration No.
33-73608, as amended, which exhibit is incorporated herein by
reference.
o10.7 Executive Employment Agreement entered into as of January 1, 1994,
between Sunshine and William W. Davis filed as Exhibit 10.9 to
Sunshine's Registration Statement on Form S-1, Registration No.
33-73608, as amended, which exhibit is incorporated herein by
reference.
o10.8 Form of Executive Employment Agreement entered into as of January
1, 1994, between Sunshine and Harry F. Cougher filed as Exhibit
No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, which exhibit is incorporated herein
by reference.
10.9 Mining Lease, dated as of March 15, 1994, between
Revenue-Virginius Mines Corporation, a Colorado corporation, as
lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended
March 31, 1994, which exhibit is incorporated herein by reference.
10.10 Agreement, dated as of July 1, 1995 by and between Consolidated
Silver Corporation and Sunshine Precious Metals, Inc., as
purchaser, for the purchase of a certain mining property filed as
Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the
period ended June 10, 1995, which exhibit is incorporated herein
by reference.
10.11 Registration Rights Agreement, dated as of November 24, 1997,
between the Company and Stonehill Partners, L.P., GRS Partners,
Aurora Limited Partnership and Stonehill Offshore Partners Limited
filed as Exhibit 10.11 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
10.12 Specimen form of Warrant to Purchase Common Stock issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.12 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
*10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common
Stock issued on November 24, 1997 to affiliates of Stonehill
Investment Corp., filed herewith as Exhibit 4.16
10.14 Specimen form of Senior Convertible Promissory Note issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.13 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
10.15 Registration Rights Agreement, dated as of January 28, 1999,
between the Company, Westgate International, L.P. and Elliott
Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report
on Form 8-K (File No. 001-10012), which exhibit is incorporated
herein by reference.
10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit
4.2 to Sunshine's Current Report on Form 8-K dated January 28,
1999 (File No. 001-10012), which exhibit is incorporated herein by
reference.
10.17 Convertible Note Investment Agreement, dated as of January 27,
1999, between the Company, Westgate International, L.P. and
Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's
Current Report on Form 8-K (File No. 001-10012), which exhibit is
incorporated herein by reference.
21.1 Subsidiaries of Sunshine filed as Exhibit 22.1 to Sunshine's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992, which exhibit is incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*24.1 Power of attorney of the officers and directors of the Company,
included on the signature page hereof.
*27.1 Financial Data Schedules
- ----------
* Filed herewith
o Management contract or compensatory plan or arrangement.
Schedules other than those included in the Consolidated Financial
Statements, if any, are omitted for the reason that they are either not
required, not applicable or the required information is included in the
Consolidated Financial Statements or Notes thereto.
(a) Reports on Form 8-K:
On February 4, 1999, the Company filed a Form 8-K reporting the
completion of a $6,000,000 private placement of 5% Convertible
Notes due January 8, 2001.
16
18
Consolidated Financial Statements
Sunshine Mining and Refining Company
Years ended December 31, 1998 and 1997
with Report of Independent Auditors
19
Sunshine Mining and Refining Company
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
Report of Independent Auditors......................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Operations.................................. 3
Consolidated Statements of Stockholders' Equity (Deficit).............. 4
Consolidated Statements of Cash Flows.................................. 5
Notes to Consolidated Financial Statements............................. 7
20
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 26, 1999
F-1
21
Sunshine Mining and Refining Company
Consolidated Balance Sheets
DECEMBER 31
1998 1997
------------ ------------
(In Thousands)
ASSETS
Current assets:
Cash and cash investments $ 1,412 $ 15,985
Silver bullion (Note 2) 5,203 7,739
Accounts receivable 2,801 2,801
Inventories (Note 2) 4,236 3,627
Other current assets 1,845 1,739
------------ ------------
Total current assets 15,497 31,891
Property, plant, and equipment, at cost (Note 3) 57,114 143,192
Less accumulated depreciation, depletion, and amortization (36,700) (77,727)
------------ ------------
20,414 65,465
Investments and other assets 3,986 4,245
------------ ------------
Total assets $ 39,897 $ 101,601
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,413 $ 1,351
Accrued expenses (Note 4) 4,368 3,581
------------ ------------
Total current liabilities 5,781 4,932
Long term debt (Note 5) 42,597 42,265
Accrued pension and other postretirement benefits (Note 9) 5,498 5,672
Other long-term liabilities and deferred credits (Note 10) 3,487 4,236
Commitments and contingencies (Notes 2, 10 and 11) -- --
Stockholders' equity (deficit)(Notes 5 and 7): Common stock, $0.01 par value:
Authorized shares - 600,000
Issued shares - 263,971 in 1998; 259,818 in 1997 2,640 2,598
Paid-in capital 714,004 711,192
Deficit (733,000) (668,155)
------------ ------------
(16,356) 45,635
Less treasury stock: 4,563 in 1998; 4,586 shares
in 1997, at cost (1,110) (1,139)
------------ ------------
(17,466) 44,496
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 39,897 $ 101,601
============ ============
See accompanying notes.
F-2
22
Sunshine Mining and Refining Company
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
(In Thousands, except
per share amounts)
Operating revenues (Note 12) $ 34,668 $ 24,993 $ 15,315
Mark to market gain (loss) (2,588) 1,859 (1,101)
------------ ------------ ------------
32,080 26,852 14,214
Costs and expenses:
Cost of revenues (28,365) (22,989) (18,041)
Depreciation, depletion, and amortization (4,944) (5,817) (4,325)
Impairment of mining properties (Note 3) (50,425) -- --
Exploration (4,512) (7,352) (10,240)
Selling, general, and administrative
expense (5,016) (5,072) (5,452)
------------ ------------ ------------
(93,262) (41,230) (38,058)
Other income (expense):
Interest income 567 594 1,313
Interest and debt expense (6,979) (5,628) (4,328)
Other, net 2,749 104 957
------------ ------------ ------------
(3,663) (4,930) (2,058)
------------ ------------ ------------
Net loss (64,845) (19,308) (25,902)
Gain on retirement and exchange of preferred stock (Note 7) -- -- 40,124
Preferred dividend requirements (Note 7) -- -- (2,622)
------------ ------------ ------------
Income (loss) applicable to common shares $ (64,845) $ (19,308) $ 11,600
============ ============ ============
Basic and diluted income (loss)
per common share (Note 8) $ (0.25) $ (0.08) $ 0.05
============ ============ ============
See accompanying notes.
F-3
23
Sunshine Mining and Refining Company
Consolidated Statements of Stockholders' Equity (Deficit)
CUMULATIVE REDEEMABLE
PREFERRED STOCK COMMON STOCK
--------------------------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------------------------------------------------------------
(In Thousands)
Balance at December 31, 1995 7,166 $ 82,268 196,760 $ 1,968 $ 623,337
Net loss -- -- -- -- --
Amortization of difference between carrying
amount and redemption value of preferred stock -- 490 -- -- --
Additional capital resulting from issuance of
Senior Exchangeable Notes -- -- -- -- 6,750
Reversion of Old Silver Index Bond (SIB) shares -- -- -- -- --
Preferred stock exchange (7,166) (82,758) 62,847 628 80,790
Issuance of warrants -- -- -- -- 209
Other, net -- -- 45 1 7
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 -- -- 259,652 2,597 711,093
Net loss -- -- -- -- --
Issuance of Warrants -- -- -- -- 100
Other, net -- -- 166 1 (1)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 -- -- 259,818 2,598 711,192
Net loss
Issuance of common stock upon conversion of Senior
Exchangeable Notes 1,525 15 1,304
Issuance of common stock for interest on Senior
Convertible Notes 1,076 11 739
Issuance of common stock upon exercise of stock
options and warrants 1,552 16 769
Other, net -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 -- $ -- 263,971 $ 2,640 $ 714,004
========== ========== ========== ========== ==========
TREASURY STOCK
-------------------
DEFICIT SHARES AMOUNT TOTAL
-----------------------------------------------------
(In Thousands)
Balance at December 31, 1995 $ (622,454) 3,664 $ (37) $ 85,082
Net loss (25,903) -- -- (25,903)
Amortization of difference between carrying
amount and redemption value of preferred stock (490) -- -- --
Additional capital resulting from issuance of
Senior Exchangeable Notes -- -- -- 6,750
Reversion of Old Silver Index Bond (SIB) shares -- 1,007 (1,208) (1,208)
Preferred stock exchange -- -- -- (1,340)
Issuance of warrants -- -- -- 209
Other, net -- -- -- 8
---------- ---------- ---------- ----------
Balance at December 31, 1996 (648,847) 4,671 (1,245) 63,598
Net loss (19,308) -- -- (19,308)
Issuance of Warrants -- -- -- 100
Other, net -- (85) 106 106
---------- ---------- ---------- ----------
Balance at December 31, 1997 (668,155) 4,586 (1,139) 44,496
Net loss (64,845) -- -- (64,845)
Issuance of common stock upon conversion of Senior
Exchangeable Notes -- -- -- 1,319
Issuance of common stock for interest on Senior
Convertible Notes -- -- -- 750
Issuance of common stock upon exercise of stock
options and warrants -- -- -- 785
Other, net -- (23) 29 29
---------- ---------- ---------- ----------
Balance at December 31, 1998 $ (733,000) 4,563 $ (1,110) $ (17,466)
========== ========== ========== ==========
See accompanying notes.
F-4
24
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
(In Thousands)
OPERATING ACTIVITIES
Net loss $ (64,845) $ (19,308) $ (25,902)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization 4,944 5,817 4,325
Impairment of mining properties 50,425 -- --
Amortization of debt issuance costs and accretion of
debt discount 2,480 2,300 1,692
Gains on sales of investments (2,795) -- (60)
Common Stock issued for interest on Senior Convertible
Notes 750 -- --
Net (increase) decrease in:
Silver bullion 1,097 (1,625) 987
Accounts receivable -- (177) (1,041)
Inventories (609) (1,104) (1,046)
Other assets (947) (173) (835)
Net increase (decrease) in:
Accounts payable and accrued expenses 855 260 1,505
Accrued pension and other
postretirement benefits (174) (401) (313)
Other liabilities and deferred credits (720) (691) (1,486)
------------ ------------ ------------
Net cash used in operating activities (9,539) (15,102) (22,174)
------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant, and equipment (10,318) (1,997) (2,690)
Other, principally sale of investments 4,506 2,154 1,670
------------ ------------ ------------
Net cash provided by (used in) investing activities
(5,812) 157 (1,020)
------------ ------------ ------------
F-5
25
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
(In Thousands)
FINANCING ACTIVITIES
Proceeds from issuance of long term debt,
net of issuance costs $ (7) $ 14,613 $ 27,537
Costs associated with conversion of preferred stock into
common stock -- -- (864)
Proceeds from issuance of common stock upon exercise of
stock options and warrants 785 -- 1
------------ ------------ ------------
Net cash provided by financing activities 778 14,613 26,674
------------ ------------ ------------
Increase (decrease) in cash and cash investments (14,573) (332) 3,480
Cash and cash investments at beginning of year 15,985 16,317 12,837
------------ ------------ ------------
Cash and cash investments at end of year $ 1,412 $ 15,985 $ 16,317
============ ============ ============
Supplemental cash flow information:
Interest paid in cash $ 3,367 $ 2,817 $ 2,283
============ ============ ============
See accompanying notes.
F-6
26
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION
Sunshine Mining and Refining Company (Sunshine or the Company) is a holding
company whose principal subsidiaries are Sunshine Precious Metals, Inc. (SPMI)
and Sunshine Argentina, Inc. SPMI mines, refines, and markets silver and certain
by-product metals to commercial customers. SPMI's principal operating property
is the Sunshine Mine, located near Kellogg, Idaho. The Sunshine Mine accounted
for all of the Company's operating revenues during 1998, 1997 and 1996. As a
result, the Company has only one operating segment. SPMI is also engaged in
exploration in other parts of the United States. Sunshine Argentina, Inc. owns
the Pirquitas Mine, which is currently in the development stage. (See Note 11.)
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
1998 presentation.
OPERATIONS
The Company's operations have generated losses and a net use of cash from
operations in each of the last three years. The Company ended 1998 with working
capital of $9.7 million, including cash and silver bullion held for investment
of $6.6 million and a $17.5 million stockholders' deficit. These financial
results are primarily a result of continued depressed silver prices and lower
by-product prices resulting in margins that are insufficient to cover the
Company's other expenses.
F-7
27
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATIONS (CONTINUED)
The Company has taken specific actions in attempts to ensure its ability to
continue operations at least through December 31, 1999. Specifically, the
Company has reduced exploration and development expenditures at its Argentina
subsidiary primarily to the level required to complete the feasibility study for
the Pirquitas Mine (See Note 11), implemented cost reduction and cash
conservation plans and initiatives to reduce its work-in-process inventory.
Furthermore, in January 1999, the Company raised an additional $6 million in the
form of 5% Convertible Notes, due January 28, 2001 (See Note 5).
The Company expects that the above-described steps should be sufficient to fund
operations at least through December 31, 1999. However, the Company's inability
to successfully implement the above described actions or a further decrease in
the price of silver could materially adversely impact the Company's ability to
continue operating through December 31, 1999.
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 concentrates to a commercial smelter in the
United States. Ninety percent of the estimated sales proceeds are due by the
15th of the month following shipment of the concentrates. Final payments are
received by the 10th business day of the fourth month following shipment. The
Company does not require collateral. Management periodically performs reviews as
to the creditworthiness of its customer(s). The Company has not sustained any
significant credit losses on sales of its products.
F-8
28
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SILVER FINANCIAL INSTRUMENTS
The Company sells covered call options on silver bullion held for investment.
The strike price of these agreements exceeds current market prices at the time
they are entered into. Option premiums received are deferred. If the applicable
market price exceeds the strike price and option premium, the differential is
accrued and recognized as a reduction of revenues. Any remaining deferred option
premiums are recognized as a component of revenues at the end of the option
period.
The fair values of the sold call options are not included in the financial
statements.
REVENUE RECOGNITION
Sales of refined metals and concentrates are recognized as revenue at the time
of shipment to the customer. Adjustments to the carrying value of inventories
held for sale or investment are included in revenues.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation on buildings,
leasehold improvements, and equipment is provided by straight-line or
declining-balance methods at rates based on the estimated lives of the
respective assets. The principal lives range from 12 to 30 years for buildings
and from 3 to 10 years for equipment (see Note 3).
Depletion of precious metal mineral interests is computed using the
unit-of-production method based on estimated ore reserves. Mine exploration
costs are charged to expense as incurred. Costs of major mine improvements,
including interest, are capitalized and amortized in relation to the production
of estimated ore reserves.
Whenever circumstances or events indicate, and at least annually, the Company
evaluates its mining properties for impairment, based on undiscounted expected
future cash flows. Such estimates are based on assumptions as to future silver
prices, mining costs, recoverable reserves, and estimates of future reserve
potential which management believes are reasonable, based on historical silver
prices and production. If the sum of such cash flows is less than the carrying
amount of the asset, the Company records an impairment loss measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset.
F-9
29
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MINERAL EXPLORATION AND MINE DEVELOPMENT
Exploration costs and development costs for projects not yet determined by
management to be commercially feasible are charged to expense as incurred.
Expenditures for new mine development are capitalized when the properties are
determined to have development potential but are not yet producing. Development
costs incurred to access reserves on existing producing mines are expensed as
incurred.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes,
whereby, a deferred tax asset or liability is recognized for estimated future
tax effects attributable to temporary differences and carryforwards. The
measurement of deferred income tax assets is adjusted by a valuation allowance,
if necessary, to recognize a future tax benefit only to the extent, based on
available evidence, it is more likely than not it will be realized. The effect
on deferred taxes of a change in income tax rates is recognized in the period
that includes the enactment date.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are either expensed
or capitalized depending on the nature of the expenditure. Expenditures that
relate to an existing condition caused by past operations, and which do not
contribute to current or future revenue generation, are expensed. Liabilities
are recorded when environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated. Generally, the timing of
these accruals will coincide with completion of a feasibility study or the
Company's commitment to a formal plan of action.
F-10
30
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories consist of the following at December 31:
1998 1997
---------- ----------
(In Thousands)
Precious metals inventories:
Work in process $ 2,831 $ 2,171
Finished goods 49 264
Materials and supplies inventories 1,356 1,192
========== ==========
$ 4,236 $ 3,627
========== ==========
The Company held as an investment, $5.2 million and $7.7 million of silver
bullion, in excess of normal operating requirements at December 31, 1998 and
1997, respectively.
The Company sells covered call options on silver bullion held for investment.
Total premiums earned from the sale of covered calls aggregated $316,000,
$116,000, and $165,000 in 1998, 1997, and 1996, respectively. At December 31,
1998, no sold covered call options were outstanding. At December 31, 1997, the
Company had covered call options outstanding for 1.2 million ounces of silver
with strike prices ranging from $5.75 to $7.00 and expiration dates of February
26, 1998 (200,000 ounces), March 27, 1998 (900,000 ounces), and December 27,
1998 (100,000 ounces). The fair value of the sold call options at December 31,
1997, would not exceed the $202,000 of premiums received when they were sold.
All of these sold call options either expired unexercised or were exchanged for
calls with a later expiration date that also expired unexercised. The Company
had no sold covered call options outstanding at December 31, 1996.
F-11
31
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
1998 1997
-------- --------
(In Thousands)
Precious metals mineral interests $ 2,394 $ 83,041
Mine improvements 10,641 17,701
Buildings, leasehold improvements, and equipment 43,300 41,390
Land 779 1,060
-------- --------
57,114 143,192
Less accumulated depreciation, depletion, and
amortization 36,700 77,727
======== ========
$ 20,414 $ 65,465
======== ========
During the third quarter of 1998, drilling in the West Chance vein of the
Sunshine Mine indicated that the size of the vein might be smaller than what was
previously expected. Based on that information, the Company believed that
production from the West Chance could decline to 4 million ounces in 1999. As a
result, combined with low by-product prices and a decline in silver prices, the
Company estimated that future cash flows from the mine would not be sufficient
to recover the $59.4 million carrying amounts of the mine. The fair value of the
mine determined by the discounted cash flow method was approximately $9 million
and an impairment charge of $50.4 million was taken at the end of the third
quarter of 1998.
F-12
32
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
4. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
1998 1997
---------- ----------
(In Thousands)
Compensation, vacation, and severance $ 1,163 $ 1,404
Interest 1,064 873
Taxes, other than income taxes 280 2
Environmental remediation (Note 10) 700 496
Insurance premiums 346 401
Other 815 405
---------- ----------
$ 4,368 $ 3,581
========== ==========
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1998 1997
---------- ----------
(In Thousands)
8% Senior Exchangeable Notes due March 21, 2000 $ 26,082 $ 25,750
10% Senior Convertible Notes due November 24, 2002 15,000 15,000
9% Convertible Subordinated Debentures due July 15, 2008 1,515 1,515
---------- ----------
$ 42,597 $ 42,265
========== ==========
In March 1996, SPMI issued $30 million aggregate principal amount of Senior
Exchangeable Notes due 2000 (the "Eurobonds"). In 1998, $1.5 million of the
Eurobonds were exchanged and canceled for 1.5 million shares of common stock.
The Eurobonds bear interest at 8% per annum and mature March 21, 2000. The
Eurobonds are exchangeable into a specified number of shares of Common Stock of
the Company at an exchange price of $1.00 per share, subject to reset and
adjustment in certain events. The Eurobonds may be exchanged at the option of
the holder at any time prior to maturity, unless previously redeemed. At any
time after March 21, 1997, and prior to maturity, SPMI may force the exchange of
the Eurobonds, in whole or in part, subject to certain restrictions.
F-13
33
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
SPMI may redeem the Eurobonds at any time at the principal amount if United
States withholding taxes are imposed on payments in respect of the Eurobonds.
The Eurobonds are guaranteed by Sunshine and the guarantee ranks senior to all
of its unsecured and subordinated obligations.
If during the period between May 1, 1996 and March 21, 1999, the Company's
common stock does not trade at $1.33 or more for 45 consecutive stock exchange
trading days, the Company shall, at its option:
(i) pay each Eurobond holder a one-time additional payment equal to
22.5% (the "Additional Amount") of the principal amount of the
Eurobonds held by such Eurobond holder; or
(ii) Issue to such Eurobond holder a number of Shares at the average
market price per share for the previous ten stock exchange days
equal to the Additional Amount.
As the Company's Common Stock has not traded at more than $1.33 for 45
consecutive trading days, the Company intends to issue shares as provided for in
(ii) above.
Debt issuance costs are being amortized over the life of the Eurobonds.
Unamortized debt issuance costs of $0.9 and $1.8 million are included in
Investments and other assets at December 31, 1998 and 1997, respectively.
In November 1997, the Company completed a private placement of Senior
Convertible Promissory Notes totaling $15 million aggregate principal amount due
November 24, 2002 (Notes). The Notes are convertible into a specific number of
shares of Common Stock of the Company at $.95 per share, subject to adjustment
in certain events, and bear interest at 10% per annum. Principal and interest
are payable either in cash or common stock of Sunshine at the Company's option.
The purchaser of the Notes was issued 1.5 million warrants to purchase common
stock of Sunshine at 110% of the conversion price of the Notes. The exercise
price of these warrants was reduced to $0.49 in December 1998, at which time all
1.5 million warrants were exercised.
F-14
34
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
The 9% Convertible Subordinated Reset Debentures due July 15, 2008 (the
Debentures), are convertible at any time prior to maturity or redemption into
shares of common stock of the Company (Common Stock) at a conversion price of
$1.66 per share, subject to adjustment.
The Debentures are currently redeemable, at the option of the Company, in whole
or in part, at 100% of the principal amount, together with accrued and unpaid
interest. The Debentures are unsecured and subordinated in right of payment to
senior indebtedness (as defined).
The indenture governing the Debentures contains certain covenants restricting
the ability of the Company to declare or pay cash dividends and make certain
distributions on its capital stock. Pursuant to these covenants, the Company is
prohibited from paying cash dividends on shares of its common stock.
Based on recent borrowings and negotiating terms of proposed financing, the
Company believes that the aggregate fair value of its debt approximates the
carrying value.
On January 28, 1999, the Company completed a private placement of $6.0 million
initial principal amount of its 5% Convertible Notes due January 28, 2001. The
interest will be added to the principal amount of the Notes. The Notes may
generally be converted into common stock at a per share price based on the
average of the lowest average high and low trading prices for five of the twenty
consecutive trading days prior to conversion. The conversion price for one-half
of the Notes has been fixed at a maximum of $0.6875. The funds were added to
working capital.
F-15
35
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The Company has incurred losses during each of the three years in the period
ended December 31, 1998, and accordingly, provisions for income taxes were not
required.
The computation of the net deferred tax asset (liability) at December 31 is as
follows:
1998 1997
---------- ----------
(In Thousands)
Deferred tax liabilities:
Property, plant, and equipment $ -- $ (17,260)
Deferred tax assets:
Property, plant, and equipment 1,414 --
Accrued pension and other postretirement benefits
1,924 1,985
Net operating loss carryforward 96,250 98,000
---------- ----------
99,588 82,725
Less valuation allowance (99,588) (82,725)
---------- ----------
$ -- $ --
========== ==========
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $275 million. The loss
carryforwards expire principally in the years 2000 through 2018.
F-16
36
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDER'S EQUITY (DEFICIT)
The Company has authorized 20.0 million shares of preferred stock, of which no
shares were issued and outstanding at December 31, 1998 or 1997.
Effective May 22, 1996, Common and Preferred stockholders of Sunshine approved
the merger (the Merger) of Sunshine with and into its wholly-owned subsidiary,
Sunshine Merger Company, pursuant to which Sunshine Merger Company was the
surviving entity and was renamed Sunshine Mining and Refining Company, resulting
in the retirement of all of Sunshine's outstanding Preferred Stock in exchange
for approximately 63 million shares of Common Stock and 7.3 million warrants to
purchase one share of Common Stock at $1.38 through May 22, 2001. As a result,
the Company recognized a $40 million gain applicable to Common Shares
representing the excess of the aggregate redemption value of the Preferred Stock
(approximately $130 million including cumulative dividends in arrears of $44.8
million) over the sum of the value of securities issued and related transaction
costs.
The difference between the carrying amount and the stated value of the Preferred
Stock was being accrued ratably over the period the Preferred Stock was expected
to be outstanding under the provisions of the mandatory redemption requirements.
Accordingly, $0.5 million was charged to the deficit for the year ended December
31, 1996 and added to the carrying amount of the Preferred Stock.
As part of the Eurobond issuance, 2.1 million warrants to purchase one share of
common stock at $2.875 were issued. These warrants expire on March 20, 2001.
The Company has 10.1 million warrants outstanding which were issued in a rights
offering to stockholders in July 1994. The exercise price of the warrants is
$2.12 per share subject to antidilution adjustments. The warrants expire on
March 9, 1999, and may be redeemed at the option of the Company, in whole or in
part, at any time on or after March 9, 1996, at a redemption price of $0.50 per
warrant.
The Company has three stock option plans under which options may be or have been
granted to members of management. The stock option plans cover a total of 13.0
million shares with 7.2 million options being available for grant at December
31, 1998. The option price may not be less than the market price of the common
stock on the date granted. Payment of the exercise price may be made in cash or
by delivery of shares of common stock, having a market value equal to the
exercise price.
F-17
37
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDER'S EQUITY (DEFICIT)(CONTINUED)
The 1995 Employee Nonqualified Stock Option Plan (the 1995 Plan) provides for
the granting of options to key employees or potential key employees and, on
December 7 each year, automatic grants of 25,000 options to each non-employee
director. The total number of shares available for issuance under the 1995 Plan
is 10,000,000.
Under the 1995 Plan, vesting of options is determined by the directors when
granted. Options under the 1993 Incentive Stock Option Plan vest one year
following date of grant. All options expire 10 years following date of grant.
The Company has elected to follow APB 25, and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 4.47%, 5.79% and 6.43%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of .572, .438 and .366; and a weighted-average expected
life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-18
38
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDER'S EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information) for the year ended December 31:
1998 1997 1996
-------- -------- -------
Pro forma net income (loss) applicable to common
shares $(64,929) $(19,412) $10,667
Pro forma basic and diluted earnings (loss) per share $ (0.25) $ (0.08) $ 0.05
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding, beginning of
year 4,854 $ 1.49 4,972 $ 1.52 2,445 $ 1.58
Granted 150 0.63 442 1.13 3,390 1.47
Exercised (50) 0.91 -- -- -- --
Forfeited (115) 1.51 (560) 1.50 (863) 1.51
---------- ---------- ---------- ---------- ---------- ----------
Outstanding,
end of year 4,839 1.46 4,854 $ 1.49 4,972 $ 1.52
========== ========== ========== ========== ========== ==========
Exercisable at end of
year 4,839 1.46 4,697 $ 1.50 4,892 $ 1.52
Weighted-average fair
value of options
granted during the year
$ 0.26 $ 0.28 $ 0.28
F-19
39
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDER'S EQUITY (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998, ranged from
$0.625 to $2.875. The weighted-average remaining contractual life of those
options is approximately seven years.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1998 1997 1996
-------- --------- ---------
(In thousands, except
per share amounts)
Numerator:
Net loss $(64,845) $ (19,308) $ (25,902)
Gain on retirement and exchange of preferred stock
- - 40,124
Preferred stock dividends - - (2,622)
-------- --------- ---------
Numerator for basic earnings per share - income (loss)
available to common shareholders
(64,845) (19,308) 11,600
Denominator:
Denominator for basic and diluted earnings per share
-weighted-average shares 256,871 255,137 222,584
Basic and diluted earnings (loss) per share $ (0.25) $ (0.08) $ 0.05
-------- --------- ---------
All stock options and warrants were excluded from the calculation of diluted
earnings (loss) per share because including them would have been antidilutive.
9. EMPLOYEE BENEFIT PLANS
The pension plan for hourly employees covered by a collective bargaining
agreement (the Negotiated Plan) is a trusteed defined benefit plan. Benefits
under the plan are based on years of service and includes provisions that would
apply in the event of the permanent shutdown of the Sunshine Mine for present
employees who were also covered by a predecessor plan terminated in 1986. The
Company's trusteed defined benefit pension plan for employees not covered by a
collective bargaining agreement (the Frozen Plan) was amended to freeze all
participant's benefits as of December 31, 1993.
F-20
40
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the Company's trusteed
defined benefit plans and the related amounts included in accrued pension and
other postretirement benefits at December 31:
COMBINED
------------------------
1998 1997
---------- ----------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,398 $ 4,961
Service cost 227 236
Interest cost 380 358
Amendments 86 --
Actuarial (gains) losses 256 72
Benefit payments (243) (229)
---------- ----------
Benefit obligation at end of year 6,104 5,398
Change in plan assets:
Fair value of plan assets at beginning of year 4,945 3,710
Actual return on plan assets 744 807
Employer contributions 396 657
Benefit payments (243) (229)
---------- ----------
Fair value of plan assets at end of year 5,842 4,945
---------- ----------
Funded (underfunded) status (262) (453)
Unrecognized prior service cost 614 660
Unrecognized net (gains)/losses (387) (402)
Unrecognized transition asset (57) (85)
Additional minimum liability (477) (367)
---------- ----------
Prepaid (accrued) benefit cost $ (569) $ (647)
========== ==========
F-21
41
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension costs relating to the Company's defined benefit plans
consist of the following for the year ended December 31:
1998 1997 1996
---------- ---------- ----------
(In thousands)
Service cost $ 227 $ 236 $ 214
Interest cost 380 358 334
Actual return on plan assets (743) (807) (427)
Net amortization and deferrals 345 515 274
---------- ---------- ----------
Net periodic pension cost $ 209 $ 302 $ 395
========== ========== ==========
The benefit obligation and fair value of plan assets by plan at December 31,
1998 (in thousands):
NEGOTIABLE FROZEN
PLAN PLAN
----------- ----------
Benefit obligation $ 4,931 $ 1,173
Fair value of plan assets $ 4,378 $ 1,464
The following weighted average assumptions were used in computing pension costs
for the Company's trusteed defined benefit plans for the year ended December 31:
1998 1997 1996
---- ---- ----
Discount rate 7.00% 7.50% 7.00%
Rate increase in compensation 0% 0% 0%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
The Company's funding policy, with respect to trusteed defined benefit plans, is
to make contributions annually equal to, or in excess of, the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. Assets of
the plans consist of pooled fixed income securities, pooled equity securities,
and cash or cash equivalents.
F-22
42
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company also has a defined contribution plan for employees not covered by a
collective bargaining agreement. The Company's Board of Directors determines
annually if a contribution will be made, and if so, in what amount.
Contributions charged to operations during 1998, 1997, and 1996 were $151,000,
$176,000, and $183,000, respectively.
The Company also sponsors a plan under the provision of Section 401(k) of the
Internal Revenue Code (the 401(k) Plan) for all employees not covered by a
collective bargaining agreement. Company contributions may range from 0% to 100%
of employee contributions, up to a maximum 6% of eligible employee compensation,
as defined. Employees may elect to contribute up to 10% of their eligible
compensation on a pretax basis. Benefits under the 401(k) Plan are limited to
the assets of the 401(k) Plan. Company contributions charged to operations
during 1998, 1997, and 1996 were $115,000, $90,000, and $84,000, respectively.
Postretirement medical and dental benefits are currently provided only to
certain employees who retired before 1987. The Company's policy is to fund the
cost of these plans as claims are incurred.
F-23
43
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31:
COMBINED
-------------------
1998 1997
------- -------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,626 $ 4,611
Service cost 7 6
Interest cost 343 325
Participants' contributions 11 --
Amendments (862) --
Actuarial (gains) losses 430 193
Benefit payments (625) (509)
------- -------
Benefit obligation at end of year $ 3,930 $ 4,626
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 614 509
Participants' contributions 11 --
Benefit payments (625) (509)
------- -------
Fair value of plan assets at end of year -- --
------- -------
Funded (underfunded) status (3,930) (4,626)
Unrecognized prior service cost (1,259) (429)
Unrecognized net (gains)/losses 499 94
------- -------
Prepaid (accrued) benefit cost $(4,690) $(4,961)
======= =======
Weighted average assumptions for end of year disclosure:
Discount rate 7.00% 7.25%
Initial trend rate 7.25% 7.75%
Ultimate trend rate 5.00% 5.00%
Number of years from initial to ultimate trend 3 4
F-24
44
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, changing the assumed health care cost trend rates
by one percentage point each year would have the following effects on the latest
actuarial calculations:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components $ 21 $ (18)
Effect on postretirement benefit obligation $ 217 $ (192)
Net periodic postretirement benefit cost for these plans includes the following
components for the year ended December 31:
1998 1997 1996
-------- -------- --------
(In Thousands)
Service cost $ 7 $ 6 $ 7
Interest cost 343 325 340
Net amortization (6) (30) --
-------- -------- --------
Net periodic cost $ 344 $ 301 $ 347
======== ======== ========
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.
10. COMMITMENTS AND CONTINGENCIES
The EPA has identified the Company and SPMI as Potentially Responsible Parties
(PRPs) at one site and SPMI as a PRP at another site under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA or Superfund), alleging that the Company and SPMI at one site
and SPMI at the other site arranged for the disposal of hazardous substances.
One of the sites is located in Kellogg, Idaho, and the other site is located in
Spokane, Washington.
F-25
45
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At the first site, the EPA, the State of Idaho and several of the PRPs,
including the Company and SPMI, have agreed to a site-wide clean-up plan,
separating the site into two distinct areas for remediation: the Bunker Hill
Smelter Complex (the Smelter Area) and the residential and certain commercial
areas primarily in the cities of Kellogg, Smelterville, and Pinehurst, Idaho,
encompassed by the Site (the Residential Areas). Without admitting liability,
the Company and several PRPs have agreed to do the remediation work in the
Residential Areas pursuant to an EPA and State of Idaho approved work plan. In
exchange therefor, EPA and the State of Idaho released the settling PRPs from
all liability for cleanup of the Smelter Area, reduced the EPA's claim for
reimbursement of past costs from $17 million to $1 million plus a percentage of
proceeds received by the PRPs from insurance companies, if any, and agreed that
the work orders from 1990 through 1993 were deemed satisfied and discharged. The
remediation undertaken by the Company and the PRPs is expected to continue for
another three to four years, and the Company has accrued $2.4 million for its
(including SPMI's) share (12.4%) of the estimated remaining remediation costs at
December 31, 1998.
On November 17, 1994, the United States District Court for the District of Idaho
entered a Consent Decree containing the terms of this agreement. The liability
for remediation costs under the consent decree is joint and several. Thus, if
any other settling party or parties does not comply with the consent decree, the
exposure for the Company and SPMI could increase proportionately. The parties
have reserved their claims and defenses with respect to natural resource
damages, except for the State of Idaho which has agreed that its claim has been
settled.
On July 31, 1991, the Coeur d'Alene Indian Tribe (the Tribe) filed an action in
the United States District Court, District of Idaho against the Company and
seven other Bunker Hill Superfund Site PRPs seeking a declaratory judgment that
the Tribe has five years in which to file a natural resource damage claim under
CERCLA against the PRPs and others or, alternatively, for damages in an
unspecified amount resulting from the loss, destruction or injury to natural
resources allegedly caused by the defendants. The Company believes that a
settlement by SPMI of all natural resources claims with the State of Idaho in
May 1986 bars the Tribe's action.
F-26
46
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On March 22, 1996, a complaint was filed in the United States District Court for
the District of Idaho on behalf of the United States Department of the Interior,
United States Department of Agriculture, and the Environmental Protection Agency
against Sunshine, SPMI, and other identified PRPs for alleged natural resource
damages in the Coeur d'Alene Basin. The complaint seeks to recover natural
resource damages and response costs under CERCLA and the Clean Water Act, and
does not identify the amount of damages sought to be recovered. The Tribe's
action was consolidated with this proceeding. The Company believes that the
settlement by SPMI of all natural resource claims with the State of Idaho in May
1986 bars these claims, and that the complaints are without merit.
On September 30, 1998, the United States District Court for the District of
Idaho granted the Company's Motion for Partial Summary Judgment limiting the
United State's potential natural resource damage claims in the Coeur d'Alene
River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site.
The effect of the ruling substantially limits the government's claim for damages
from a 1500 square mile site to the 21 square mile Bunker Hill Superfund Site,
within which the Company has, pursuant to a Consent Decree with other
defendants, been engaged in clean-up operations.
The United States has been granted an interlocutory appeal of the order to the
Ninth Circuit Court of Appeals.
The second site where EPA has identified SPMI as a PRP under CERCLA is the
Spokane Junkyard Site near Spokane, Washington. No records of SPMI have been
discovered by it or the EPA showing SPMI ever sent any material to the site.
SPMI does not believe it will be required to pay any clean-up costs at the
Spokane Junkyard Site. The Company does not believe that the designation of SPMI
as a PRP at the Spokane Junkyard Site will have a material impact on the
Company's results of operations, financial condition or on its liquidity or
capital resources.
The Company is subject to certain other legal proceedings and claims that arise
in the conduct of its business. Although it is not possible to predict the
outcome of such matters, in the opinion of management, the ultimate outcomes of
these matters will not have a material adverse effect on the Company's
consolidated financial position or consolidated results of operations.
F-27
47
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
11. FOREIGN OPERATIONS
The Company has mining projects in Argentina, primarily the Pirquitas Mine which
is in the development stage. The Company began to capitalize development
expenditures at the Pirquitas Mine in 1998 after proven and probable reserves
were established at the end of 1997. Exploration expense for the Company's
Argentina operations totaled $1.6 million, $4.4 million and $5.3 million for
years ended December 31, 1998, 1997, and 1996, respectively. At December 31,
1998, amounts capitalized as property, plant, and equipment totaled $10.4
million.
Approximately $2.1 million for Value Added Taxes paid in Argentina are included
in other assets. These taxes are recoverable from future exports of products
produced from Argentina.
The recoverability of these amounts is dependent upon the ability of the Company
to: (a) raise sufficient funding for development of the Pirquitas property, or
(b) sell all or a portion of the Company's interest in the property, or (c)
merge with or form a joint venture with a company with greater financial
resources to develop the properties.
The Company has engaged a professional engineering firm to conduct a bankable
feasibility study on the Pirquitas property. The firm is in the process of
completing a final optimization of the feasibility study, which will be used by
the Company to attempt to raise funds for development of the property. Should
the Company be unsuccessful in raising the necessary funds, it believes that
Pirquitas could be sold for an amount in excess of the carrying value of the
property and the tax receivable
12. SIGNIFICANT CUSTOMER
In 1998, 1997, and 1996, one customer accounted for sales of concentrate
aggregating approximately $30.7 million, $24.2 million, and $13.8 million,
respectively. Management believes that the loss of this purchaser would not have
a material impact on the Company's consolidated financial condition or
consolidated results of operations.
F-28
48
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
13. PRECIOUS METALS RESERVES (UNAUDITED)
The table below presents data on proven and probable ore reserves, production
and average prices for each of the years in the five-year period ended December
31, 1998 (in thousands, except average prices):
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
SUNSHINE MINE
Reserves at December 31:
Ounces of silver 37,383 39,808 36,241 30,810 27,908
Production:
Tons of ore 248 183 121 101 107
Ounces of silver 5,806 4,253 2,578 1,731 2,079
PIRQUITAS MINE
Reserves at December 31 101,000 72,800 -- -- --
REVENUE - VIRGINIUS MINE
Reserves at December 31:
Ounces of silver 6,208 6,208 6,208 5,098 5,098
AVERAGE PRICES:
Ounce of silver $ 5.47 $ 5.02 $ 5.11 $ 5.20 $ 5.29
The ore reserve estimates presented in the table are estimates of proven and
probable reserves by the Company's geologic personnel. No assurance can be given
that the indicated quantity of in situ silver will be realized. Reserve
estimates are expressions of judgment based largely on data from diamond drill
holes and underground openings, such as drifts or raises, which expose the
mineralization on one, two or three sides, sampling and similar examinations.
Reserve estimates may change as ore bodies are mined and additional data is
derived.
F-29
49
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements (continued)
14. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
----------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
---------- ---------- ---------- ----------
1998:
Operating revenues $ 9,740 $ 8,553 $ 8,484 $ 8,189
Cost of revenues 6,950 7,455 7,130 6,830
Income (loss) applicable to common shares 71 (6,612) (54,494)(a) (3,810)
Basic income (loss) per common share $ (.00) $ (.03) $ (.21) $ (.01)
Diluted income (loss) per common and
common equivalent share $ (.00) $ (.03) $ (.21) $ (.01)
1997:
Operating revenues $ 5,732 $ 4,320 $ 7,626 $ 7,315
Cost of revenues 5,756 5,101 6,663 5,469
Loss applicable to common shares (5,933) (6,980) (3,328) (3,067)
Basic loss per common share $ (.02) $ (.03) $ (.01) $ (.01)
Diluted loss per common and
common equivalent share $ (.02) $ (.03) $ (.01) $ (.01)
(a) Includes an impairment charge of $50,425
F-30
50
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 12th day of March, 1999.
SUNSHINE MINING AND REFINING COMPANY
By /s/ WILLIAM W. DAVIS
------------------------------------------
William W. Davis, Executive Vice President
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of Sunshine Mining and Refining Company (the "Company") hereby
constitutes and appoints John S. Simko, William W. Davis, and Robert H.
Peterson, or any of them (with full power to each of them to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution, for
him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute and file any and all documents relating to the
Company's Form 10-K for the year ended December 31, 1998, 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.
51
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 4th day of March, 1999.
NAME CAPACITIES
- ---- ----------
/s/ JOHN S. SIMKO Director, Chairman of the Board, and
- ------------------------------------ Chief Executive Officer
John S. Simko
/s/ G. CHRIS ANDERSEN Director
- ------------------------------------
G. Chris Andersen
/s/ DANIEL D. JACKSON Director
- ------------------------------------
Daniel D. Jackson
/s/ V. DALE BABBITT Director
- ------------------------------------
V. Dale Babbitt
/s/ WILLIAM W. DAVIS Executive Vice President
- ------------------------------------ and Chief Financial Officer
William W. Davis
/s/ ROBERT B. SMITH, JR. Director
- ------------------------------------
Robert B. Smith, Jr.
/s/ OREN G. SHAFFER Director
- ------------------------------------
Oren G. Shaffer
/s/ GEORGE M. ELVIN Director
- ------------------------------------
George M. Elvin
52
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
------- -------
3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
3.2 Amendment to Certificate of Incorporation of Sunshine filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K dated May
22, 1996 (File No. 001-10012), which exhibit is incorporated
herein by reference.
*3.3 Bylaws of Sunshine.
4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.2 Amendment to Certificate of Incorporation of Sunshine, filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May
22, 1996 (File No. 001-10012), which exhibit is incorporated
herein by reference.
4.3 Warrant Agreement, dated as of February 1, 1996, between Sunshine
Merger Company and American Stock Transfer & Trust Company, as
Warrant Agent, filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-4, Registration No. 33-98876, which exhibit is
incorporated herein by reference.
4.4 Warrant Agreement, dated as of February 3, 1994, between Sunshine
and American Stock Transfer & Trust Company, as Warrant Agent,
filed as Exhibit 4.3 to Sunshine's Registration Statement on Form
S-1, Registration No. 33-73608, as amended, which exhibit is
incorporated herein by reference.
4.5 Form of Supplemental Warrant Agreement, dated as of February 1,
1996, between Sunshine Merger Company and American Stock Transfer
& Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-98876,
which exhibit is incorporated herein by reference.
4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's
Registration Statement on Form S-1 Registration No. 33-73608, as
amended, which exhibit is incorporated herein by reference.
4.8 Specimen Stock Certificate of the Common Stock, $0.01 par value,
of Sunshine filed as Exhibit 4.2 to Sunshine's Registration
Statement on Form S-1, Registration No. 33-63446 as amended, which
exhibit is incorporated herein by reference.
4.9 Form of Indenture, dated as of July 15, 1988, between Sunshine and
MTrust Corp., National Association, with respect to Sunshine's
Convertible Subordinated Debentures due July 15, 2008 filed as
Exhibit 4.25 to Sunshine's Registration Statement on Form S-3,
Registration No. 33-21159, which exhibit is incorporated herein by
reference.
4.10 First Supplemental Indenture, dated as of August 8, 1988, Second
Supplemental Indenture, dated as of November 10, 1988, and Third
Supplemental Indenture, dated as of April 10, 1991, between the
Company and Ameritrust Texas, N.A., the successor to MTrust Corp.,
National Association relating to the issuance of the Convertible
Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990,
which exhibit is incorporated herein by reference.
4.11 Form of Fourth Supplemental Indenture, between the Company and
Texas Commerce Bank National Association, as successor to
Ameritrust Texas, National Association, formerly known as MTrust
Corp., National Association, filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine
Precious Metals, Inc. and Marine Midland Bank and Form of Note
filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement
on Form S-3, Registration No. 333-06537, which exhibits are
incorporated herein by reference.
4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine,
Rauscher, Pierce & Clark and HSBC Investment Banking Limited and
Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to
Sunshine's Registration Statement on Form S-3, Registration No.
333-06537, which exhibits are incorporated herein by reference.
53
4.14 Specimen form of Warrant to Purchase Common Stock issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.12 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
4.15 Specimen form of Senior Convertible Promissory Note issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.13 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
*4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common
Stock issued on November 24, 1997 to affiliates of Stonehill
Investment Corp.
4.17 Specimen form of 5% Convertible Promissory Note, due January 28,
2001, filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated January 28, 1999 (File No. 001-10012), which
exhibit is incorporated herein by reference.
*4.18 Bylaws of Sunshine, filed herein as Exhibit 3.3.
o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as
Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986, which exhibit is incorporated
herein by reference.
o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option
Plan of Sunshine filed as Exhibit 10.8 to Sunshine's Registration
Statement on Form S-1, Registration No. 33-63446, as amended,
which exhibit is incorporated herein by reference.
o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option
Plan of Sunshine filed as Exhibit 10.1 to Sunshine's Quarterly
Report on Form 10-Q for the period ended June 30, 1994, which
exhibit is incorporated herein by reference.
o10.4 1993 Incentive Stock Option Plan of Sunshine filed as Exhibit
10.18 to Sunshine's Registration Statement on Form S-1,
Registration No. 33-63446, as amended, which exhibit is
incorporated herein by reference.
o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as
Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, which exhibit is incorporated
herein by reference.
o10.6 Form of Executive Employment Agreement entered into as of January
1, 1994, between Sunshine and John S. Simko filed as Exhibit 10.8
to Sunshine's Registration Statement on Form S-1, Registration No.
33-73608, as amended, which exhibit is incorporated herein by
reference.
o10.7 Executive Employment Agreement entered into as of January 1, 1994,
between Sunshine and William W. Davis filed as Exhibit 10.9 to
Sunshine's Registration Statement on Form S-1, Registration No.
33-73608, as amended, which exhibit is incorporated herein by
reference.
o10.8 Form of Executive Employment Agreement entered into as of January
1, 1994, between Sunshine and Harry F. Cougher filed as Exhibit
No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, which exhibit is incorporated herein
by reference.
10.9 Mining Lease, dated as of March 15, 1994, between
Revenue-Virginius Mines Corporation, a Colorado corporation, as
lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended
March 31, 1994, which exhibit is incorporated herein by reference.
10.10 Agreement, dated as of July 1, 1995 by and between Consolidated
Silver Corporation and Sunshine Precious Metals, Inc., as
purchaser, for the purchase of a certain mining property filed as
Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the
period ended June 10, 1995, which exhibit is incorporated herein
by reference.
10.11 Registration Rights Agreement, dated as of November 24, 1997,
between the Company and Stonehill Partners, L.P., GRS Partners,
Aurora Limited Partnership and Stonehill Offshore Partners Limited
filed as Exhibit 10.11 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
10.12 Specimen form of Warrant to Purchase Common Stock issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.12 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
*10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common
Stock issued on November 24, 1997 to affiliates of Stonehill
Investment Corp., filed herewith as Exhibit 4.16
54
10.14 Specimen form of Senior Convertible Promissory Note issued on
November 24, 1997 to affiliates of Stonehill Investment Corp.
filed as Exhibit 10.13 to Sunshine's Registration Statement on
Form S-3, Registration No. 333-41641, which exhibit is
incorporated herein by reference.
10.15 Registration Rights Agreement, dated as of January 28, 1999,
between the Company, Westgate International, L.P. and Elliott
Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report
on Form 8-K (File No. 001-10012), which exhibit is incorporated
herein by reference.
10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit
4.2 to Sunshine's Current Report on Form 8-K dated January 28,
1999 (File No. 001-10012), which exhibit is incorporated herein by
reference.
10.17 Convertible Note Investment Agreement, dated as of January 27,
1999, between the Company, Westgate International, L.P. and
Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's
Current Report on Form 8-K (File No. 001-10012), which exhibit is
incorporated herein by reference.
21.1 Subsidiaries of Sunshine filed as Exhibit 22.1 to Sunshine's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992, which exhibit is incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*24.1 Power of attorney of the officers and directors of the Company,
included on the signature page hereof.
*27.1 Financial Data Schedules
- ----------
* Filed herewith
o Management contract or compensatory plan or arrangement.