-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VyyKokXb6J+z7Q3g9hlAlzuZS0yvQW0s58gHvzKrhaiiFX2Mm94UAAXJTiEouCKL 8CxRofZdqJblOt7+rDGOpQ== 0000950134-00-002935.txt : 20000403 0000950134-00-002935.hdr.sgml : 20000403 ACCESSION NUMBER: 0000950134-00-002935 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNSHINE MINING & REFINING CO CENTRAL INDEX KEY: 0000833376 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 752231378 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10012 FILM NUMBER: 591187 BUSINESS ADDRESS: STREET 1: 877 WEST MAIN STREET STREET 2: SUITE 600 CITY: BOISES STATE: ID ZIP: 83702 BUSINESS PHONE: 2083450660 MAIL ADDRESS: STREET 1: 877 W MAIN STREET SUITE 600 CITY: BOISE STATE: ID ZIP: 83702 FORMER COMPANY: FORMER CONFORMED NAME: SUNSHINE MINING CO /DE DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUNSHINE HOLDINGS INC DATE OF NAME CHANGE: 19880915 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-10012 SUNSHINE MINING AND REFINING COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-2618333 (State or other jurisdiction (IRS Employer Identification of incorporation or organization) Number) 877 W. MAIN STREET, SUITE 600 BOISE, IDAHO 83702 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (208) 345-0660 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ----------------------------- ----------------------- Common Stock, $0.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Warrants, expiring May 22, 2001, for the purchase of one share of Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] (Continued on next page) 2 (Continued from previous page) The aggregate market value of the shares of common stock held by non-affiliates of the registrant at March 28, 2000 was $30,358,740. For purposes of this computation, all officers, directors and beneficial owners of 10% or more of the common stock of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are affiliates. Indicate the number of shares outstanding of the registrant's classes of common stock, as of the latest practicable date. TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AT MARCH 28, 2000 ----------------------------- ---------------------------- Common Stock, $0.01 par value 40,478,320 DOCUMENTS INCORPORATED BY REFERENCE Sunshine Mining and Refining Company's Definitive Proxy Statement for its Annual Meeting currently scheduled to be held May 10, 2000 (Part III). 3 PART I 1. BUSINESS. GENERAL Sunshine Mining and Refining Company ("Sunshine" or the "Company") is primarily engaged in mining silver. The Company owns the Sunshine Mine located in the Coeur d'Alene Mining District near Kellogg, Idaho and the Pirquitas Mine in the Jujuy Province of northwest Argentina. The Sunshine Mine produced 5.8 million and 5.2 million ounces of silver in 1998 and 1999, respectively, and is forecast to produce approximately 4.5 million ounces of silver in 2000. The Pirquitas Mine is in the development stage, and the Company is reviewing its strategic options relative to the property. Sunshine was originally incorporated in 1918 and is currently incorporated under the laws of the state of Delaware. The Company maintains its principal executive offices at 877 West Main Street, Suite 600, Boise, Idaho 83702. The Sunshine Mine began operations in 1884 and has produced in excess of 350 million ounces of silver since that time. The introduction of new mining technologies and more aggressive exploration has substantially increased production in recent years, achieving full production in the fourth quarter of 1997 for the first time since 1990. This has reduced unit costs as fixed costs have been spread over a larger production figure. Recent production and unit cost history of the mine is as follows:
Sunshine Mine Production --------------------------------------------- 1999 1998 1997 1996 1995 ----- ----- ----- ----- ----- Ounces production (millions) 5.2 5.8 4.3 2.6 1.7 Net cash cost per ounce $4.36 $4.43 $4.50 $6.12 $6.61
Sunshine's share of silver reserves at the Sunshine Mine as of December 31, 1999 were estimated to be 1.23 million tons of ore with an average grade of 23.65 ounces of silver per ton (after adjustment for mining dilution), containing 29.18 million ounces of silver. Metallurgical recoveries at the Sunshine Mine typically approximate 97% of the contained silver. The proven and probable reserves at the Sunshine Mine have historically totaled approximately 4 to 7 years of annual production. Over its history, exploration and development activities have maintained reserves by finding new ore to replace that which was produced each year. Management believes this will continue for the foreseeable future, as studies have delineated several areas of favorable geologic conditions that may host significant deposits. These areas are contiguous to delineated mineralization, and the ore-bearing structures project into favorable lithologic units. Further exploration is necessary to establish the existence of and quantify the additional mineralized material, but management believes it could exceed 100 million ounces. The Company acquired the Pirquitas Mine in November 1995, and immediately began an active exploration and metallurgical testwork program. The Company commissioned a bankable feasibility study of the property in early 1998, which estimated that the property contained metal in proven and probable reserves totaling 129 million ounces of silver, 118 million pounds of tin and 546 million pounds of zinc. The Company expects future development and exploration work at the site will expand these reserves. LIQUIDITY RISK Given current difficult silver market conditions and the Company's diminished financial resources, the Company has determined that it would not likely be able to access the capital required to service its debt or develop Pirquitas. The $26.5 million of 8% Senior Exchangeable Notes (the "Eurobonds") are due April 24, 2000 and the Company does not have the funds to retire this indebtedness. Although the Company is currently in negotiations to restructure its debt 1 4 and obtain additional financing, there is no assurance that such negotiations will be successful. If such negotiations are unsuccessful, the Company will become in default on the Eurobonds, which would create a default on the $14.9 million of 10% Senior Exchangeable Notes (the "Notes"). Such events could require, among other things, the Company to seek further modifications in its existing debt agreements, seek protection under the bankruptcy laws or cease some or all operations altogether. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.") As more than 80% of the Company's operating revenues are derived from the sale of silver, the Company's earnings are directly related to the price of silver, which has been depressed since 1985. As a result, the Company has reported operating losses and negative cash flow from operations since that time. The Company's strategy is to add sufficient low cost silver production to be profitable at prices for silver which have prevailed in recent years, while also positioning the Company to benefit from an expected improvement in silver prices. Should the Company not succeed in adding such low cost production and there is no substantial improvement in the silver price, the Company will continue to report operating losses and negative cash flow. The accuracy of any forward looking statements and other similar statements contained herein regarding production, reserves, mineralized materials and cash costs will depend upon the actual grade, quantity and other qualities of recoverable reserves and resources, which may differ from current estimates. Actual results could differ materially from those currently anticipated in such statements, by reason of factors including without limitation, actual results of exploration, silver prices, by-product prices, imprecision of reserve estimates, future economic conditions, regulations, competition, and other circumstances affecting anticipated revenue and costs. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement. For information regarding Sunshine's business, certain classes of products or services and sales to certain significant customers, see Notes 1, 2, 12 and 13 of Notes to Consolidated Financial Statements included elsewhere herein. SILVER SUPPLY, DEMAND, AND PRICES According to studies published by the Silver Institute in its World Silver Survey (prepared by Gold Fields Mineral Services Ltd.) and by CPM Group (precious metal industry consultants), since 1990 demand for silver has significantly exceeded silver production. The gap between new supply and demand has been bridged by the availability of a large surplus of silver inventories generated in the aftermath of the major increase in silver prices in 1979-1983. The availability of these inventories has kept silver prices at depressed levels. According to these same studies, silver inventories worldwide have been greatly diminished. In the first quarter of 1998, silver prices increased to their highest levels in over 10 years in response to concerns about supply availability, as Berkshire Hathaway Incorporated announced an investment in 129.7 million ounces of silver bullion. However, silver prices declined over the last three quarters of 1998, averaging $4.92 per ounce in the fourth quarter of 1998 and $5.22 for 1999. According to the above cited industry reports, physical availability of silver should continue to tighten as available inventories are consumed. OPERATIONS THE SUNSHINE MINE AND REFINERY COMPLEX The Sunshine Mine and Refinery Complex, located in the Coeur d'Alene Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a 1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and associated facilities. The facility is an integrated operation which can produce refined silver with 99.99% purity. The silver refinery has a capacity to recover up to 8 million ounces of silver and 4 million pounds of copper annually. The Company's wholly owned subsidiary, Sunshine Precious Metals, Inc. ("SPMI"), owns substantially all of the mining claims comprising the Sunshine Mine. Electrical power is supplied by a public utility from two sources. The facilities are in good and operable condition and access to the property is by paved roads maintained by the county. 2 5 The Sunshine Mine is a primary silver-producing underground mine which began operations in 1884 and has produced over 350 million ounces of silver since that time. The underground workings consist of multiple levels developed off the Jewell shaft, the main production shaft. It extends from the surface to a depth of over 4,000 feet and is complemented by other interior shafts which develop levels as deep as 5600 feet. The mine covers over 10 square miles at the surface, and contains more than 100 miles of underground workings. Mining operations are currently focused in the western area of the mine, in a vein called the West Chance, at depths from above the 2700-foot level (2700 feet below the collar of the Jewell shaft) to below the 3700-foot level. The ore extracted from the Sunshine Mine is introduced to the 1,000-ton-per-day flotation concentrator, which produces two concentrates, a high-grade silver concentrate which is transferred to the antimony refinery for antimony removal, and a lead concentrate which is shipped directly to a smelter for further processing. After antimony removal, the silver concentrate can be either transferred to the Company's silver refinery for recovery of silver and copper, or sold to a commercial smelter. Factors which influence Sunshine's decision to refine its products internally or sell them to a smelter include levels of production, costs of reagents and available smelter contract terms. The refinery was designed and built to recover up to 8.0 million ounces of silver from concentrates annually. Sunshine suspended operations at the silver refinery in 1995 pending higher levels of available feed, and began shipping its silver concentrate to a smelter at that time. Until a decision is made to reopen the refinery, Sunshine will continue to sell its silver-copper concentrates to a nearby smelter for processing. The Company's sales to the third party smelters are under long-term contracts, generally for a period of at least one year, cancelable by either party after one year upon thirty days notice. The Company employs no sales force. Management believes that suspension of refinery operations has not had a material impact on Sunshine's results of operations or cash flows. Ore and metals produced at the Sunshine Mine during 1999, 1998 and 1997, respectively, were as follows:
1999 1998 1997 --------- ---------- --------- Tons of Ore ................ 217,601 247,866 183,404 Metals Recovered: Ounces of Silver ...... 5,210,843 5,806,468 4,253,315 Pounds of Copper ...... 1,235,368 1,273,318 884,124 Pounds of Antimony .... 991,079 1,078,460 785,897 Pounds of Lead ........ 6,966,645 12,001,080 9,203,907
These metals were recovered from ore containing an average of 24.75, 24.17 and 23.95 ounces of silver per ton, in 1999, 1998 and 1997, respectively. Metallurgical recoveries were approximately 97% of the contained silver, 97% of the contained copper and 92.5% of the contained lead. The Sunshine Mine's proven and probable ore reserves were estimated by the Company's technical personnel at January 1, 2000, to be 1.27 million tons of ore containing 30.0 million ounces of silver and 11.5 million pounds of copper. The weighted average ore grades, adjusted for mining dilution, but not adjusted for metallurgical recoveries, are 23.65 ounces per ton silver and 0.455 percent copper. Lead reserves are calculated only for the West Chance vein, and it contains 13.5 million pounds of lead at a grade of 2.61 percent. During the three years ended December 31, 1999, the Sunshine Mine accounted for all of the Company's silver production, and approximately 18% of the Company's silver reserves at December 31, 1999. See Note 14 of Notes to Consolidated Financial Statements included elsewhere herein. The West Chance Vein, which has been the focus of the Company's production in recent years, will be largely depleted by the end of 2000. Exploration activity to replace reserves is focused on vein systems in the eastern area of the mine, the 101 Vein, the Yankee Girl Vein and the Chester Vein. The 1995 acquisition of the ConSil property, on the eastern flank of the workings of the Sunshine Mine, was done to facilitate evaluation and development of these and other veins. A shaft on the ConSil property extends from the surface to a depth of 5400 feet and connects to the Sunshine's eastern workings on the 3100 level, and serves as the Sunshine Mine's secondary escapeway. Access from this shaft to these exploration areas will be important in their future exploration and development. 3 6 The proven and probable reserves at the Sunshine Mine have historically totaled approximately 4 to 7 years of annual production. Over the mine's history, exploration and development activity have maintained reserves by finding new ore to replace that which was produced each year. Management believes this will continue for the foreseeable future as studies have determined that these veins may continue into areas with favorable geologic conditions that may host significant deposits. These areas are contiguous to delineated mineralization, and the ore-bearing structures project into favorable lithologic units. Further exploration is necessary to identify and quantify the additional mineralized material, but the magnitude of the contained silver could exceed 100 million ounces. The hourly employees at the Sunshine Mine are represented by the United Steelworkers of America (the "USWA") (which represents the majority of the employees) and the International Brotherhood of Electrical Workers Union (the "IBEW") (collectively, the "Unions"). Effective May 1, 1994, the Unions and SPMI entered into new six-year labor agreements. The salient features of the agreements are (1) continuation of the flexible wage scale making wages variable with silver prices, with some increase in direct hourly wages; (2) the ability of either party to reopen negotiations on wages and benefits at the end of the third year, subject to mandatory interest arbitration if agreement is not reached; and (3) an increase in pension benefits in exchange for the elimination of Company provided retiree medical benefits for the current work force. Pursuant to its terms, the contract with the USWA was extended on March 1, 2000 until May 1, 2001. The contract with the IBEW will expire on May 1, 2000, and the Company expects to enter into negotiations regarding a new contract shortly. No assurance can be given as to the likely result of those negotiations. ARGENTINA OPERATIONS The Company commenced operations in Argentina in 1994, and the Pirquitas property was acquired by the Company in November 1995. Pirquitas is located in the Puna de Atacama of northwestern Argentina in the province of Jujuy at an elevation of over 14,000 feet. The nearest major city is the provincial capital, San Salvador de Jujuy, which is about 220 miles southeast of Pirquitas. The Chilean and Bolivian borders lie about 31 miles west and 37 miles to the north, respectively. The Company feels that recent political and economic changes in Argentina, designed to incentivize foreign investment, particularly in the mining industry, have made the country an extremely attractive target for mining investment. The country has privatized many state-owned enterprises, and has implemented reforms to many previously state-controlled activities, including mineral exploration and development. A program of fiscal stability has brought down inflation. Guarantees to foreign investors include parity of treatment with Argentine nationals, a freely-exchangeable currency, tax-stabilization programs and complete freedom to repatriate profits. The Company's most advanced project in Argentina is Pirquitas. The Company has assigned proven and probable reserves to Pirquitas totaling 129.6 million ounces of silver, along with 59 thousand tons of tin and 273 thousand tons of zinc. The Company has invested a total of approximately $20 million in the acquisition and evaluation of the property. The Company is reviewing its strategic alternatives relative to development of the property or disposition of some portion of the property to finance its development. The Company has a number of other projects in Argentina, which it plans to further evaluate in the next year. Two of these properties, Capricho and Aguas Calientes, are of particular interest due to high grade gold, silver or base metal values found in surface reconnaissance. The Company hopes to fund a limited drilling program on these two properties in 2000. MEXICAN OPERATIONS The Company has recently acquired its first Mexican property, Juanicipio. The property is located adjacent to the Fresnillo Mine, one of the most prolific silver mines in the world. OTHER EXPLORATION The Amador Canyon property, near Austin, Nevada, is in an area of historic silver production. Based on analysis of surface outcrops and geophysics, the Company believes the property may contain a strata-bound silver deposit amenable to bulk mining methods. 4 7 The Revenue-Virginius Mine is an underground silver mine located eight miles southwest of the town of Ouray in southwestern Colorado. It also contains significant gold and base metals. The mine has been largely inactive since a mill fire in 1912 resulted in the closure of the operation. Most production records on the property are missing; however, records which remain indicate production between 1895 and 1906 totaling 14.5 million ounces of silver, 123 thousand ounces of gold and 63 million pounds of lead from one series of veins. Sunshine controls the property under a mining lease calling for minimal property payments and work commitments. The property currently contains reserves estimated to be approximately 6.2 million ounces of silver. Several veins carry the mineralized values, and many of the veins have been traced for long distances onto other properties. Therefore, the Company believes it reasonable to assume that a significant mineralized inventory in addition to the above reserves can be inferred. Based on initial pre-feasibility work, the Company believes the property could produce 2.5-3.0 million ounces of silver annually at a net cash cost of approximately $4.00 per ounce, following a capital investment of $12-15 million. Repair work to access the underground veins for exploration and development was completed in 1998. A drilling program designed to increase the proven and probable reserves to a level which would justify the capital commitment is pending. MARKETING The Company's primary product at the Sunshine Mine can be either refined silver which is sold to industrial customers or precious metals dealers, or silver-copper and lead-silver concentrates which are sold to smelters. Prices received for refined silver are based on market prices at the time of shipment. Prices received for the silver-copper concentrate are based on average prices for silver, copper and lead during a quotational period shortly after shipment. The Company bases its decisions on whether to refine its silver-copper concentrates internally or sell them to a smelter based on internal production costs versus available smelter contract terms. All lead-silver concentrates are sold to smelters, with prices for contained lead and silver based on a quotational period shortly after shipment. The Company's refined silver, antimony and copper products are generally marketed directly to metals dealers or industrial customers. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein. OTHER BUSINESS AND REGULATORY FACTORS The Company's precious metals operations are intensely competitive and subject to risks and regulations inherent in and applicable to mining generally and the precious metals industry specifically. Competition in the precious metals mining industry, and particularly the silver mining industry, is very volatile. The market for gold and silver is international and there is no significant marketing advantage in domestic production versus international production. No single source of silver is significant to the world market, and many of the principal sources of silver as a primary metal have been forced to close as a result of continued low silver prices over the past several years. As a result, most new mine production of silver at the present time is from gold, copper, lead and zinc mines which produce silver as a by-product, and whose economics are not significantly related to the price of silver. Competition among mining companies is primarily for mineral rich properties which can be developed and produced economically; the technical expertise to find, develop and produce such properties; labor to operate the properties; and capital for the purpose of funding such operations. As the principal product sold is a commodity with its price dictated by world markets upon which any individual operator has very little influence, the competitive factors cited above give the competitive advantage to the low cost operator. ENVIRONMENTAL AND SAFETY MATTERS In connection with its operations and properties, the Company is subject to extensive and changing federal, state and local laws, regulations and ordinances governing health and safety and the protection of the environment, including, without limitation, laws and regulations relating to air and water quality, mine reclamation, waste handling and disposal, the protection of certain species and the preservation of certain lands. These environmental laws and regulations may require the acquisition of permits or other authorizations for certain activities. These laws and regulations may also limit or prohibit activities on certain lands lying within a wilderness area, wetland area, area providing habitat for certain species or other protected area. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue in the future. The operations and 5 8 activities of the Company require compliance with such laws, regulations and ordinances. The Company cannot predict what environmental legislation or regulations will be enacted or adopted in the future or how future laws and regulations will be administered or interpreted. Compliance with more stringent laws and regulations, as well as potentially more vigorous enforcement policies of regulatory agencies or stricter interpretation of existing laws, may necessitate significant capital outlays, may materially affect the Company's operations, or may cause material changes or delays in the Company's intended activities. Currently, the Company does not expect to incur any material capital expenditures associated with environmental regulations (such as expenditures for relevant control facilities) during the fiscal year 2000. See Note 11 of Notes to Consolidated Financial Statements included elsewhere herein; and "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." The Company also does not anticipate any material effect from compliance with environmental, health and safety laws, regulations and ordinances. EMPLOYEES At December 31, 1999, Sunshine and its subsidiaries, including SPMI, employed approximately 310 persons; 275 of whom are located at the Kellogg facilities. SEE "ITEM 1. BUSINESS. THE SUNSHINE MINE AND REFINERY COMPLEX." 6 9 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. 7 10 2. PROPERTIES The information regarding the properties of Sunshine is set forth under ITEM 1. BUSINESS, above, and in the Notes to Consolidated Financial Statements included in Part II hereof. 3. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS The EPA has identified the Company and SPMI as Potentially Responsible Parties ("PRPs") at one site and SPMI as a PRP at another site under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI at one site and SPMI at the other site arranged for the disposal of hazardous substances. One of the sites is located in Kellogg, Idaho (the "Bunker Hill Superfund Site") and the other site is located in Spokane, Washington. At the Bunker Hill Superfund Site, the EPA, the State of Idaho and several of the PRPs, including the Company and SPMI, have agreed to a site-wide clean-up plan, separating the site into two distinct areas for remediation: the Bunker Hill Smelter Complex (the "Smelter Area") and the residential and certain commercial areas primarily in the cities of Kellogg, Smelterville and Pinehurst, Idaho encompassed by the Site (the "Residential Areas"). Without admitting liability, the Company and several PRPs have agreed to do the remediation work in the Residential Areas pursuant to an EPA and State of Idaho approved work plan. In exchange therefor, EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Smelter Area, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation undertaken by the Company and the PRPs is expected to continue for another three to four years. The Company currently has accrued $1.9 million for its (including SPMI's) share (12.4%) of the estimated remaining remediation costs at December 31, 1999. On November 17, 1994, the United States District Court for the District of Idaho entered a Consent Decree containing the terms of this agreement. The liability for remediation costs under the consent decree is joint and several. Thus, if any other settling party (or parties) does not comply with the consent decree, the exposure for the Company and SPMI could increase proportionately. The parties have reserved their claims and defenses with respect to natural resource damages, except for the State of Idaho which has agreed that its claim has been settled. On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed an action in the United States District Court, District of Idaho against the Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory judgment that the Tribe has five years in which to file a natural resource damage claim under CERCLA against the PRPs and others or, alternatively, for damages in an unspecified amount resulting from the loss, destruction or injury to natural resources allegedly caused by the defendants. The Company believes that a settlement by SPMI of all natural resources claims with the State of Idaho in May 1986 bars the Tribe's action. On March 22, 1996, a complaint was filed in the United States District Court for the District of Idaho on behalf of the United States Department of the Interior, United States Department of Agriculture and the Environmental Protection Agency against Sunshine, SPMI and other identified PRPs for alleged natural resource damages in the Coeur d'Alene Basin. The complaint seeks to recover natural resource damages and response costs under CERCLA and the Clean Water Act, and does not identify the amount of damages sought to be recovered. The Company believes that the settlement by SPMI of all natural resource claims with the State of Idaho in May, 1986, bars these claims, and that the complaint is without merit. On September 30, 1998, the United States District Court for the District of Idaho granted the Company's Motion for Partial Summary Judgment limiting the United State's potential natural resource damage claims in the Coeur d'Alene River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site. The effect of the ruling substantially limits the government's claim for damages from a 1500 square mile site to the 21 square mile Bunker Hill Superfund Site, within which the Company has, pursuant to a Consent Decree with other defendants, been engaged in clean-up operations. The United States has been granted an interlocutory appeal of the order to the Ninth Circuit Court of Appeals. 8 11 The second site where EPA has identified SPMI as a PRP under CERCLA is the Spokane Junkyard Site near Spokane, Washington. In November 1988, the EPA notified SPMI that it is a PRP at that site. The EPA has documented the threatened release of hazardous substances at the site and has initiated response actions under CERCLA. The Company does not believe that the designation of SPMI as a PRP at the Spokane Junkyard Site will have a material impact on the Company's results of operations, financial condition, cash flows or on its liquidity or capital resources. SPMI does not believe it will be required to pay any clean-up costs at the Spokane Junkyard Site. No records of SPMI have been discovered by it or the EPA showing SPMI ever sent any material to the site. To date, the EPA has not filed any action against SPMI or the Company in relation to the Spokane Junkyard Site. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of Sunshine's fiscal year ended December 31, 1999. PART II 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Sunshine's Common Stock is listed for trading on the New York Stock Exchange (symbol "SSC"). Sunshine currently does not pay cash dividends on its Common Stock and has not paid any since the third quarter of 1981. At March 28, 2000, Sunshine had approximately 30,000 holders of record of its Common Stock. On March 28, 2000, the closing price of the Common Stock price as reported on the New York Stock Exchange, Inc. ("NYSE") Composite Transactions was $0.75. Presently, the Company does not intend to pay cash dividends. Also, pursuant to restrictions imposed by the Company's outstanding debt securities at December 31, 1999, the Company could not pay cash dividends on shares of its Common Stock. The following table sets forth the range of high and low sales prices for the Common Stock as reported on the NYSE composite tape for the periods indicated. Such quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
1999 QUARTERS 1998 QUARTERS ------------------------------------------------- HIGH LOW HIGH LOW - -------------------------------------------------------------------------- 1st Quarter 6 3 1/2 13 1/2 7 - -------------------------------------------------------------------------- 2nd Quarter 4 1/4 3 11 7 - -------------------------------------------------------------------------- 3rd Quarter 3 1/4 2 8 5 - -------------------------------------------------------------------------- 4th Quarter 2 1/2 1 1/4 8 4 - --------------------------------------------------------------------------
9 12 CONTINUED NYSE LISTING/REVERSE STOCK SPLIT On July 17, 1999, the Company announced a 1 for 8 reverse stock split of the Company's common stock, effective August 6, 1999. The reverse split was previously approved by shareholders at the Annual Meeting in June 1997. The reverse split was undertaken in order to increase the Company's stock price to over $1 to comply with new New York Stock Exchange (the "Exchange") continued listing requirements. By letter dated March 22, 2000, the Exchange notified the Company that it was below the Exchange's continued listing standard of total market capitalization of not less than $50 million. The letter also noted that the Company's stock price had traded down recently and was in jeopardy of falling below the continued listing criteria of a minimum share price of $1 over a 30 trading-day period. The Exchange also stated that the Company must present a business plan by May 6, 2000 that demonstrates compliance with continued listing standards within 18 months. The plan is subject to Exchange approval. WARRANTS The Company's common stock purchase warrants, which expire May 22, 2001, are traded on the NASDAQ OTC Bulletin Board (symbol "SILVZ") with high and low sales prices as reported by NASDAQ during 1999 of $0.25 and $0.016. There are approximately 7.3 million warrants outstanding. Eight warrants may be exercised to acquire one share of common stock at $11.04 per share. 10 13 6. SELECTED FINANCIAL DATA. The following table sets forth summary historical financial information of Sunshine as of the dates and the periods indicated in the table below. All amounts are in thousands, except price and production statistics and per share amounts.
========================================================================== YEAR ENDED DECEMBER 31, (1) -------------------------------------------------------------------------- 1999 1998(3) 1997 1996(4) 1995 ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Operating revenues ................................... $ 32,332 $ 34,668 $ 24,993 $ 15,315 $ 15,623 Mark to market gains (losses) ........................ 359 (2,588) 1,859 (1,101) 911 ----------- ----------- ----------- ----------- ----------- Total revenues ................................... 32,691 32,080 26,852 14,214 16,534 Net loss ............................................. (10,843) (64,845) (19,308) (25,902) (15,483) Income (loss) applicable to common shares ............ (10,843) (64,845) (19,308) 11,600 (25,572) Basic and diluted income (loss) per common share ..... (.31) (2.02) (.61) .42 (1.06) Weighted average common shares ....................... 34,682 32,109 31,892 27,823 24,131 PRICE AND PRODUCTION STATISTICS: Average silver price received ........................ $ 5.23 $ 5.47 $ 5.02 $ 5.11 $ 5.20 Tons ................................................. 217,601 247,866 183,404 120,910 101,240 Silver grade (ounces per ton) ........................ 23.29 24.17 23.95 22.04 17.66 Silver ounces produced ............................... 5,210,843 5,806,468 4,253,315 2,577,895 1,731,714 Net cash cost per ounce(2) ........................... $ 4.36 $ 4.43 $ 4.50 $ 6.12 $ 6.61 BALANCE SHEET DATA: Cash and cash investments ............................ $ 628 $ 1,412 $ 15,985 $ 16,317 $ 12,837 Working capital ...................................... (25,679) 9,716 26,959 25,559 23,550 Total assets ......................................... 37,020 39,897 101,601 105,486 101,134 Long-term debt and capital lease obligations ......... 11,720 42,597 42,265 25,780 1,519 Stockholders' equity (deficit): Preferred Stock .................................. -- -- -- -- 82,268 Other............................................. (18,720) (17,466) (44,496) 63,598 2,814 Book value per common share .......................... (.48) (.54) 1.39 2.00 (1.76) Common shares outstanding ........................ 38,672 32,426 31,904 31,873 24,137
- ---------------- (1) All share and per share amounts have been adjusted to reflect the 1 for 8 reverse stock split effective August 6, 1999. (2) Net cash cost per ounce includes all expenditures (other than exploration costs and capital expenditures) related to the operation of the Sunshine Mine and Refinery Complex, less any by-product revenues. Such costs include non-capital development costs, production and maintenance costs, ad valorem taxes, insurance, and postemployment benefit costs incurred on site. (3) During 1998 the Company recorded a $50.4 million impairment of mining properties expense to write down the value of the Company's investment in the Sunshine Mine. (4) During 1996 the Company recorded a gain applicable to common shares of $40 million due to the retirement of all of the Company's outstanding Preferred Stock. 11 14 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical fact, including without limitation those that are identified by the use of the words "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts" and similar expressions. Such statements address future plans, objectives, expectations and events or conditions concerning various matters such as mining exploration, capital expenditures, earnings, litigation, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors including without limitation, actual results of exploration, silver prices, imprecision of reserve estimates, future economic conditions, regulations, competition and other circumstances affecting anticipated revenue and costs. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement. Readers are cautioned not to place undue reliance on these forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred cash operating losses for the past several years, as the price of silver has continued at levels too low to cover the Company's direct production costs, general and administrative costs, interest expense and exploration expenses. The Company has maintained a large exploration and development budget relative to its size in the belief that finding new low cost sources of production was fundamental to improving profitability. As part of that effort, the Company has invested approximately $33 million over the past four years to complete a feasibility study at the Pirquitas Mine and improve operations at the Sunshine Mine. Due to these investments, the Company has significantly improved operations at the Sunshine Mine in recent years, and believes Pirquitas, if developed by the Company, would generate earnings sufficient to make the Company profitable at silver prices which have prevailed in recent years. In the face of these improvements, the Company has seen that the level of investor interest in mining in general and silver mining in particular has declined significantly in recent years. Due to this unforeseen change in market attitudes, the current difficult silver market conditions and the Company's diminished financial resources, the Company was unable to raise the capital it required to service its existing indebtedness or to provide the equity portion of the development cost at Pirquitas. As a result, the Company's existing cash balances and sources of cash are insufficient for the foreseeable future, and its access to new sources of capital is limited. The Company had a $25.7 million deficit in working capital at December 31, 1999 including $31.5 million for the current portion of long term debt. At a meeting held on March 27, 2000, the holders of its 8% Senior Exchangeable Notes due 2000 (the "Eurobonds") passed a motion to extend the maturity of the Eurobonds from March 21, 2000 to April 24, 2000. The meeting was then adjourned until April 24, 2000. The Company does not have the funds to retire the $26.5 million of Eurobonds outstanding as of December 31, 1999. Also, because the $1.0 million interest payment due March 21, 2000 has not been made, the Eurobonds could be declared to be in default by holders of at least 25% of the outstanding principal giving such notice to the trustee. The Company was required to issue, as soon as practicable after March 21, 2000, approximately 1.5 million shares of Common Stock to the holder of its 10% Senior Convertible Notes (the "Notes") as an additional interest payment. Pursuant to the terms of the Notes, the additional interest payment was due because the Eurobonds were not converted into Common Stock nor refinanced with junior debt prior to March 21, 2000. The Company has only issued 658 thousand of these shares. At the present time, the Company is in negotiations with the holders of the Notes with regards to a restructuring and does not expect to issue any shares in the future for interest until such negotiations are completed. This could result in the Company being in default on the Notes. Additionally, if the Eurobonds are not restructured by April 25, 2000, the Company will be in default on the Notes. The Company is currently engaged in negotiations with holders of the Eurobonds and the holders of the Notes with regard to a comprehensive restructuring of the Company's balance sheet. The Company will also need to arrange for additional capital to fund its cash requirements. There is no assurance that these negotiations will be successful. If these 12 15 negotiations are unsuccessful, the Company may be required to, among other things, seek further modifications in its existing debt agreements, seek protection under the bankruptcy laws or cease some or all operations altogether. Any of these would be expected to have a significant negative impact on the price of the Company's common stock. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company continues to believe that over the long term, the best way to add shareholder value will be by finding undeveloped properties with significant silver, gold and base metal values. Therefore, as funds are available, it will continue to use a portion of those funds on exploration in new areas. The Company currently controls four properties in addition to Pirquitas and the Sunshine Mine which it believes represent excellent opportunities to add significantly to its mineral inventory. It hopes to begin an initial round of drilling on some or all of these properties during 2000 if funds become available. EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE Whenever circumstances or events indicate, and at least annually, the Company evaluates its mining properties for impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, recoverable reserves and estimates of future reserve potential which management believes are reasonable, based on historical silver prices and production. If the sum of such cash flows is less than the carrying amount of the asset, the Company would record an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the third quarter of 1998, drilling in the West Chance vein indicated that the size of the vein might be smaller than what was previously expected. Based on that information, along with low by-product prices and a decline in silver prices, the Company estimated that future cash flows from the mine would not be sufficient to recover the $59.4 million carrying amounts of the mine. The fair value of the mine as determined by the discounted cash flow method was approximately $9 million and an impairment charge of $50.4 million was taken at the end of the third quarter. Future increases in the price of silver and the presence of additional mineralized material and resources are forward-looking statements regarding matters over which the Company has no control. Actual future silver prices and the results of current exploration may differ from anticipated values. OTHER The Company and SPMI have been identified by the EPA as a PRP at the Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane Junkyard Site. The Company believes that its status as a PRP will not have a material adverse effect on its consolidated financial position or results of operations. See "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS" and Note 11 of Notes to Consolidated Financial Statements. OPERATING, INVESTING AND FINANCING ACTIVITIES Cash used in operating activities was $5.8 million in 1999 compared with $9.5 million in 1998 and $15.1 million in 1997. The $3.7 million improvement in 1999 was primarily due to the $3.8 million decrease in cash operating loss and changes in other working capital items. The cash operating loss decreased in 1999 compared to 1998 primarily due to a mark to market gain of $359 thousand in 1999 compared to a $2.6 million loss in 1998, a $2.5 million reduction in exploration costs, a $1.0 million decrease in cash interest expense and a $216 thousand decrease in general and administrative expense. These were partially offset by a $1.6 decrease in cash operating income at the Sunshine Mine (from $5.9 million in 1998 to $4.3 million in 1999), a $369 thousand decrease in interest income and payment of approximately $900 thousand for fees and expenses incurred in connection with security offerings attempted during 1999. 13 16 Cash used by investing activities in 1999 was $0.8 million, including $4.2 million of additions to property, plant and equipment ($2.6 million for the development of Pirquitas, $1.4 million in capital expenditures at the Sunshine Mine and $200 thousand on other properties). These were offset by $1.9 million in proceeds from the sale of certain investments and $1.5 million from the sale of 300 thousand ounces of investment silver bullion. $5.8 million cash was used by investing activities during 1998, including $8.3 million for the development of the Pirquitas Mine in Argentina and $1.8 million at the Sunshine Mine, partially offset by $4.5 million of cash proceeds from the sale of certain investments, 300 thousand ounces of investment silver bullion, and proceeds from settlement of certain litigation. In 1997, $2.2 million of proceeds from investments was partially offset by $2.0 million of additions to property, plant and equipment resulting in $0.2 million of cash provided by investing activities. $5.8 million in cash was provided through the issuance of the 5% Notes in 1999. Cash provided by financing activities in 1998 includes $785 thousand from the exercise of stock options and warrants. Cash provided by financing activities was $14.6 million in 1997 resulting from the Company's issuance of the 10% Notes. RESULTS OF OPERATIONS 1999 COMPARED TO 1998 The Company's net loss decreased $54.0 million in 1999 to $10.8 million compared to $64.8 million in 1998. The improvement is primarily due to the $50.4 million impairment writedown of the Sunshine Mine in 1998. Consolidated operating revenues decreased approximately $2.3 million (6.7%) for 1999 compared to 1998, while mark to market gains on investment bullion totaled $359 thousand in 1999 compared to a $2.6 million writedown in 1998. The decrease in operating revenues primarily resulted from a $0.24 decrease in the average price received per ounce of silver sold (5.5 million ounces of silver at an average of $5.23 per ounce in 1999 compared to 5.5 million ounces at an average of $5.47 per ounce in 1998), and a $742 thousand decrease in by-product revenue. By-product revenue decreased primarily because of a 4.5 million-pound reduction in lead sales, partially offset by a 125 thousand-pound increase in copper sold. The reduction in lead sales is due to the fact that mining is now being conducted in areas of the West Chance that contain less lead. Cost of revenues decreased $692 thousand (2.4%) from $28.4 million in 1998 to $27.7 million in 1999 primarily due to lower per ounce operating cash cost which decreased $.07 (1.6%) to $4.36 per ounce of silver. This reduction was primarily due to a .58 ounce per ton (2.4%) increase in average grades from 1998 to 1999, reduced smelter costs and a reduction in development costs. Silver production totaled 5.2 million ounces produced from 217,601 tons at 24.75 ounces per ton in 1999 versus 5.8 million ounces from 247,866 tons at 24.17 ounces per ton in 1998. Depreciation, depletion and amortization decreased by approximately $3.6 million as a result of the writedown of the Sunshine Mine in the third quarter of 1998. Exploration expense decreased $2.5 million in 1999 compared to 1998 primarily due to a reduction of expenditures for the Sunshine Mine and other projects in Argentina and the U.S. Selling, general and administrative costs decreased $216 thousand (4.3%) due to a variety of cost reductions. Interest income decreased $370 thousand due to lower average invested cash balances. Interest and debt expense increased $1.2 million primarily due to the amortization of the beneficial conversion feature associated with the 5% Notes issued in January 1999, and higher amortization of debt discount for the outstanding Eurobonds. In 1999, income of $297 thousand in other, net was primarily due to $1.5 million from gains on certain investments sold and recognition of actuarial gains on pension plans not previously recognized, partially offset by fees and expenses related to attempting certain debt offerings. Other, net of $2.7 million in 1998 represented a $1.1 million net gain for proceeds received from settlement of certain litigation and a reduction of the valuation reserves previously recorded against certain investments. 14 17 1998 COMPARED TO 1997 The Company's net loss increased $45.5 million to $64.8 million compared to $19.3 million primarily due to the $50.4 million impairment writedown of the Sunshine Mine. Consolidated operating revenues increased approximately $9.7 million (38.7%) for 1998 compared to 1997 primarily due to an increase in sales volume and average price received per ounce of silver sold (5.5 million ounces of silver at an average of $5.47 per ounce in 1998 compared to 4.1 million ounces of silver at an average of $5.02 in 1997). The increase in sales volumes primarily resulted from a 1.6 million ounce (36.5%) increase in production in 1998 compared to 1997. Mark to market writedowns, primarily for silver bullion held for investment, amounted to $2.6 million in 1998 compared to a $1.9 million gain in 1997. The writedown was due to declines in the per ounce silver price from $5.945 to $4.988 between December 31, 1997 and December 31, 1998. The 1997 gain was due to the increase from $4.74 to $5.945 per ounce of silver between December 31, 1996 and December 31, 1997. Cost of revenues increased $5.4 million (23.4%) (from $23.0 million in 1997 to $28.4 million in 1998) primarily due to the 36.5 % increase in production in 1998, partially offset by lower net unit operating costs. Net unit operating costs decreased $.07 (1.8%) to $4.43 per ounce of silver primarily due to the 36.5% increase in silver production (5.8 million ounces produced from 247,866 tons at 24.17 ounces per ton in 1998 versus 4.25 million ounces from 183,404 tons at 23.95 ounces per ton in 1997). Reduction in operating costs per ounce of silver was actually $0.57 but was partially offset by $0.50 reduction in by-product credits due to lower lead, copper and antimony prices during 1998. Depreciation, depletion and amortization decreased by approximately $873 thousand as a result of the impairment writedown of the Sunshine Mine in the third quarter which resulted in reduced depreciation, depletion and amortization in the fourth quarter, partially offset by increased production in the 1998 period. The 1998 period reflects a $50.4 million charge as an impairment writedown of the Sunshine Mine. See "LIQUIDITY AND CAPITAL RESOURCES--EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE." Exploration expense decreased $2.8 million in 1998 compared to 1997 primarily due to the fact that work carried out at the Pirquitas Mine in Argentina is largely being capitalized as the property is now considered to be in the development stage. As a result, approximately $8.3 million of development expenditures for Pirquitas during 1998 were capitalized. This was partially offset by increased exploration expenditures at the La Joya del Sol gold property in Argentina, at the Sunshine Mine and other exploration projects. Interest and debt expense increased $1.4 million due to the debt issued in November 1997. Other, net increased $2.65 million due to a $1.1 million net gain for proceeds received from settlement of certain litigation and the $1.6 million reduction of the valuation reserves previously recorded against certain investments as a result of performance of certain investments. UPDATE ON YEAR 2000 COMPUTER ISSUES During 1999 we undertook initiatives to ensure that our systems were Year 2000 compliant, as well as contacting major customers and vendors to assess their status. As of the date of this filing, we have not experienced any disruption of our operations due to Year 2000 issues. The cost of Year 2000 modifications have not been significant and no additional Year 2000 costs are anticipated. 15 18 7a. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES. COMMODITY PRICE RISK Substantially all of the Company's revenues are from sales of silver. Volatility in the price of silver causes substantial fluctuations in the Company's revenues and financial condition. There are many factors which influence the volatility of silver prices. Changes in supply and demand, worldwide economic and political conditions, expectations as to inflation and speculative activity in the market all cause fluctuations in silver prices. As previously discussed, the price of silver in recent years has been depressed, averaging approximately $5.00 per ounce for the 12-year period ended in 1999. Over the prior ten year period the silver price averaged approximately $10 per ounce. The Company maintains an investment inventory of silver bullion which totaled approximately 729 thousand ounces at December 31, 1999. As a result, the Company's financial results are affected by changes in the price of silver. When silver prices decline, the decline in value of the investment bullion is recorded as a mark to market loss on the Company's statement of operations. Conversely, an increase in silver prices is recorded as a mark to market gain. A 10% decrease ($0.50) in the per ounce price of silver during 2000 would result in a $365 thousand mark to market loss for the year. To earn current income on this investment and to mitigate a portion of its exposure to a decline in silver prices, the Company from time to time will sell covered calls against its silver bullion inventory. Total premiums earned for the sale of covered calls aggregated $246,500, $316,250 and $116,500 in 1999, 1998 and 1997, respectively. At December 31, 1999, the Company had covered call options outstanding for 300,000 ounces of silver with strike prices ranging from $5.25 to $5.35 and expiration dates of January 27, 2000 (100,000 ounces), February 25, 2000 (100,000 ounces) and March 28, 2000 (100,000 ounces). The fair value of the sold calls at December 31, 1999 approximates the premiums received when they were sold. At December 31, 1998, no covered call options were outstanding. At December 31, 1997, the Company had covered call options outstanding for 1.2 million ounces of silver with strike prices ranging from $5.75 to $7.00 and expiration dates of February 26, 1998 (200,000 ounces), March 27, 1998 (900,000 ounces), and December 27, 1998 (100,000 ounces). The fair value of the sold call options at December 31, 1997 did not materially exceed the $202,000 of premiums received when they were sold. The Company's policy is not to sell any uncovered calls. (See Note 1 of Notes to Consolidated Financial Statements for information related to accounting policies for covered calls.) INTEREST RATE RISK The Company has outstanding debt with fixed interest rates. Therefore, should market interest rates decline, the Company could make payments in excess of what would be made under the reduced rates. The following table presents the principal cash payments and related weighted-average interest rates by expected maturity date for its debt obligations. Interest Rate Sensitivity Principal Amount by Expected Maturity Average Interest Rate
Fair There- Value at (dollars in millions) 2000 2001 2002 after Total 12/31/99 ----- ----- ----- ----- ----- -------- Long-term Debt Fixed Rate $32.0 $ 5.0 $ 4.9 $ 1.5 $43.4 $43.4 Avg. Interest Rate 8.6% 8.9% 9.6% 9.0%
16 19 FOREIGN CURRENCY RISK The Company has operations in Argentina and Mexico. Therefore, the Company could be at risk for fluctuations in the relationship of U.S. dollar to the Argentine or Mexican peso exchange rates. However, Argentina maintains a 1:1 exchange ratio by limiting the amount of pesos that are issued to the amount of U.S. dollars held by the Argentine Central Bank. Also, it has been reported that Argentina is considering replacing the peso with the U.S. dollar. To date, the Company's activities in Mexico have not been significant. Thus at this time, the Company does not feel its foreign currency market risk is significant. At December 31, 1999, no debt was denominated in a foreign currency nor are there any firm purchase commitments denominated in a foreign currency. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements filed herewith begin on page F-1 hereof. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On May 27, 1999, Ernst & Young LLP (E & Y) resigned as auditors of the Company. The reports of E & Y on the Company's financial statements for 1998 and 1997 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles. The reports of E & Y for 1998 and 1997 were not modified as to uncertainty regarding the ability of the Company to continue as a going concern. In connection with the audits of the financial statements for each of the two fiscal years ended December 31, 1998 and 1997, and in the subsequent interim periods, there were no disagreements with E & Y on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which if not resolved to the satisfaction of E & Y would have caused them to make reference to the matter in their report. On June 11, 1999, Grant Thornton LLP was engaged by the Company's Board of Directors as the new independent accountant of the Company. 17 20 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to the Company's directors and nominees for election as directors and information relating to the executive officers of the Company is incorporated herein by reference from the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders currently scheduled to be held on May 10, 2000 (the "Proxy Statement"). 11. EXECUTIVE COMPENSATION. The discussion under "Management Remuneration and Transactions" in the Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated herein by reference. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The discussion under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated herein by reference. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The discussion under "Management Remuneration and Transactions - Employment Contracts" in the Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated herein by reference. PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. The following documents are filed as a part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements. See Index to Financial Statements and Financial Statements Schedules on page F-1 hereof. 2. Consolidated Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits. EXHIBIT NO. EXHIBIT 3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 3.2 Amendment to Certificate of Incorporation of Sunshine filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. 3.3 Bylaws, filed as Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.2 Amendment to Certificate of Incorporation of Sunshine, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. 18 21 4.3 Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.4 Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.5 Form of Supplemental Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1 Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.8 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine filed as Exhibit 4.2 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446 as amended, which exhibit is incorporated herein by reference. 4.9 Form of Indenture, dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008 filed as Exhibit 4.25 to Sunshine's Registration Statement on Form S-3, Registration No. 33-21159, which exhibit is incorporated herein by reference. 4.10 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture, dated as of November 10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, between the Company and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of the Convertible Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, which exhibit is incorporated herein by reference. 4.11 Form of Fourth Supplemental Indenture, between the Company and Texas Commerce Bank National Association, as successor to Ameritrust Texas, National Association, formerly known as MTrust Corp., National Association, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine Midland Bank and Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC Investment Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.14 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 4.15 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of 19 22 Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997, filed as Exhibit 4.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 4.17 Specimen form of 5% Convertible Promissory Note, due January 28, 2001, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. 4.18 Letter Agreement dated September 22, 1999 by and between Sunshine Mining and Refining Company, on the one hand, and Westgate International, L.P. and Elliott Associates, L.P., on the other hand, filed as Exhibit 4.20 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-88293), which exhibit is incorporated herein by reference. o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, which exhibit is incorporated herein by reference. o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, which exhibit is incorporated herein by reference. o10.4 1993 Incentive Stock Option Plan of Sunshine filed as Exhibit 10.18 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. o10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, which exhibit is incorporated herein by reference. 10.9 Mining Lease, dated as of March 15, 1994, between Revenue-Virginius Mines Corporation, a Colorado corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, which exhibit is incorporated herein by reference. 10.10 Agreement, dated as of July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals, Inc., as purchaser, for the purchase of a certain mining property filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 10, 1995, which exhibit is incorporated herein by reference. 20 23 10.11 Registration Rights Agreement, dated as of November 24, 1997, between the Company and Stonehill Partners, L.P., GRS Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited filed as Exhibit 10.11 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997, filed as Exhibit 4.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 10.14 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.15 Registration Rights Agreement, dated as of January 28, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit 4.2 to Sunshine's Current Report on Form 8-K dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. 10.17 Convertible Note Investment Agreement, dated as of January 27, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 10.18 Letter Agreement dated September 22, 1999 by and between Sunshine Mining and Refining Company, on the one hand, and Westgate International, L.P. and Elliott Associates, L.P., on the other hand, filed as Exhibit 4.20 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-88293), which exhibit is incorporated herein by reference. 21.1 Subsidiaries of Sunshine filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, which exhibit is incorporated herein by reference. *23.1 Consent of Ernst & Young LLP. *23.2 Consent of Grant Thornton LLP. *24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. *27.1 Financial Data Schedules - ------------- * Filed herewith o Management contract or compensatory plan or arrangement. Schedules other than those included in the Consolidated Financial Statements, if any, are omitted for the reason that they are either not required, not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto. (a) Reports on Form 8-K: None 21 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sunshine Mining and Refining Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED this 31st day of March, 2000. SUNSHINE MINING AND REFINING COMPANY By /s/ WILLIAM W. DAVIS ------------------------------------------ William W. Davis, Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Sunshine Mining and Refining Company (the "Company") hereby constitutes and appoints John S. Simko, William W. Davis, and Robert H. Peterson, or any of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file any and all documents relating to the Company's Form 10-K for the year ended December 31, 1999, including and all amendments and supplements hereto, with any regulatory authority granting said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 31st day of March, 2000.
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
22 25 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, filed as Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.2 Amendment to Certificate of Incorporation of Sunshine, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. 4.3 Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.4 Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.5 Form of Supplemental Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1 Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.8 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine filed as Exhibit 4.2 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446 as amended, which exhibit is incorporated herein by reference. 4.9 Form of Indenture, dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008 filed as Exhibit 4.25 to Sunshine's Registration Statement on Form S-3, Registration No. 33-21159, which exhibit is incorporated herein by reference. 4.10 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture, dated as of November 10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, between the Company and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of the Convertible Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, which exhibit is incorporated herein by reference.
26 4.11 Form of Fourth Supplemental Indenture, between the Company and Texas Commerce Bank National Association, as successor to Ameritrust Texas, National Association, formerly known as MTrust Corp., National Association, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine Midland Bank and Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC Investment Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.14 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 4.15 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997, filed as Exhibit 4.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 4.17 Specimen form of 5% Convertible Promissory Note, due January 28, 2001, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. 4.18 Letter Agreement dated September 22, 1999 by and between Sunshine Mining and Refining Company, on the one hand, and Westgate International, L.P. and Elliott Associates, L.P., on the other hand, filed as Exhibit 4.20 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-88293), which exhibit is incorporated herein by reference. o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, which exhibit is incorporated herein by reference. o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, which exhibit is incorporated herein by reference. o10.4 1993 Incentive Stock Option Plan of Sunshine filed as Exhibit 10.18 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference.
27 o10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, which exhibit is incorporated herein by reference. 10.9 Mining Lease, dated as of March 15, 1994, between Revenue-Virginius Mines Corporation, a Colorado corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, which exhibit is incorporated herein by reference. 10.10 Agreement, dated as of July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals, Inc., as purchaser, for the purchase of a certain mining property filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 10, 1995, which exhibit is incorporated herein by reference. 10.11 Registration Rights Agreement, dated as of November 24, 1997, between the Company and Stonehill Partners, L.P., GRS Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited filed as Exhibit 10.11 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997, filed as Exhibit 4.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 10.14 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.15 Registration Rights Agreement, dated as of January 28, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit 4.2 to Sunshine's Current Report on Form 8-K dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. 10.17 Convertible Note Investment Agreement, dated as of January 27, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 10.18 Letter Agreement dated September 22, 1999 by and between Sunshine Mining and Refining Company, on the one hand, and Westgate International, L.P. and Elliott Associates, L.P., on the other hand, filed as Exhibit 4.20 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-88293), which exhibit is incorporated herein by reference.
28 21.1 Subsidiaries of Sunshine filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, which exhibit is incorporated herein by reference. *23.1 Consent of Ernst & Young LLP. *23.2 Consent of Grant Thornton LLP. *24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. *27.1 Financial Data Schedules
- -------------------------- * Filed herewith o Management contract or compensatory plan or arrangement. 29 Consolidated Financial Statements Sunshine Mining and Refining Company Years ended December 31, 1999 and 1998 with Report of Independent Auditors 30 Report of Independent Certified Public Accountants Board of Directors and Stockholders Sunshine Mining and Refining Company We have audited the accompanying consolidated balance sheet of Sunshine Mining and Refining Company as of December 31, 1999, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunshine Mining and Refining Company as of December 31, 1999, and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $10,843,000 and used $5,812,000 of cash in operating activities in the year ended December 31, 1999, and, as of that date, the Company's total liabilities exceeded its total assets by $18,720,000 and its current liabilities exceeded its current assets by $25,679,000. Additionally, the $26,518,000 of 8% Senior Exchangeable Notes outstanding as of December 31, 1999 are due on April 24, 2000, and the Company does not have a refinancing or debt restructuring agreement, nor does it have the funds necessary to retire this indebtedness. These factors, among others, as discussed in Note 2 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GRANT THORNTON LLP Dallas, Texas February 25, 2000 (except for Notes 2 and 6, as to which the date is March 27, 2000) F-1 31 Report of Independent Auditors The Board of Directors Sunshine Mining and Refining Company We have audited the accompanying consolidated balance sheets of Sunshine Mining and Refining Company (the Company) as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunshine Mining and Refining Company at December 31, 1998, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Dallas, Texas February 26, 1999 F-2 32 Sunshine Mining and Refining Company Consolidated Balance Sheets (in thousands, except per share amounts)
DECEMBER 31 1999 1998 --------- --------- ASSETS Current assets: Cash and cash investments $ 628 $ 1,412 Silver bullion (Note 3) 4,117 5,203 Accounts receivable 2,677 2,801 Inventories (Note 3) 2,826 4,236 Other current assets 787 1,845 --------- --------- Total current assets 11,035 15,497 Property, plant, and equipment, at cost (Note 4) 60,720 57,114 Less accumulated depreciation, depletion, and amortization (37,623) (36,700) --------- --------- 23,097 20,414 Investments and other assets 2,888 3,986 --------- --------- Total assets $ 37,020 $ 39,897 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 1,634 $ 1,413 Accrued expenses (Note 5) 3,562 4,368 Current portion, long term debt (Note 6) 31,518 -- --------- --------- Total current liabilities 36,714 5,781 Long term debt (Note 6) 11,720 42,597 Accrued pension and other postretirement benefits (Note 10) 4,445 5,498 Other long-term liabilities and deferred credits (Note 11) 2,861 3,487 Commitments and contingencies (Notes 2, 3, 11 and 12) -- -- Stockholders' equity (deficit) (Notes 6 and 8): Common stock, $0.01 par value: Authorized shares - 75,000 Issued shares - 39,252 in 1999; 32,996 in 1998 393 2,640 Paid-in capital 725,840 714,004 Deficit (743,843) (733,000) --------- --------- (17,610) (16,356) Less treasury stock: 579 in 1999; 570 shares in 1998, at cost (1,110) (1,110) --------- --------- (18,720) (17,466) --------- --------- Total liabilities and stockholders' equity (deficit) $ 37,020 $ 39,897 ========= =========
See accompanying notes. F-3 33 Sunshine Mining and Refining Company Consolidated Statements of Operations (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- Operating revenues (Note 13) $ 32,332 $ 34,668 $ 24,993 Mark to market gain (loss) 359 (2,588) 1,859 -------- -------- -------- 32,691 32,080 26,852 Costs and expenses: Cost of revenues (27,673) (28,365) (22,989) Depreciation, depletion, and amortization (1,328) (4,944) (5,817) Impairment of mining properties (Note 4) -- (50,425) -- Exploration (2,015) (4,512) (7,352) Selling, general, and administrative expense (4,800) (5,016) (5,072) -------- -------- -------- (35,816) (93,262) (41,230) Other income (expense): Interest income 198 567 594 Interest and debt expense (8,213) (6,979) (5,628) Other, net 297 2,749 104 -------- -------- -------- (7,718) (3,663) (4,930) -------- -------- -------- Net loss $(10,843) $(64,845) $(19,308) ======== ======== ======== Basic and diluted loss per common share (Note 9) $ (0.31) $ (2.02) $ (0.61) ======== ======== ========
See accompanying notes. F-4 34 Sunshine Mining and Refining Company Consolidated Statements of Stockholders' Equity (Deficit)
COMMON STOCK TREASURY STOCK ------------------ PAID-IN ----------------- SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL ------ --------- --------- --------- ------ --------- --------- (In Thousands) Balance at December 31, 1996 (Note 8) 32,498 $ 325 $ 713,365 $(648,847) 584 $ (1,245) $ 63,598 Net loss -- -- -- (19,308) -- -- (19,308) Issuance of Warrants -- -- 100 -- -- -- 100 Other, net (21) -- -- -- (11) 106 106 ------ --------- --------- --------- --- --------- --------- Balance at December 31, 1997 32,477 $ 325 $ 713,465 $(668,155) 573 $ (1,139) $ 44,496 Net loss -- -- -- (64,845) -- -- (64,845) Issuance of common stock upon conversion of Senior Exchangeable Notes 191 2 1,317 -- -- -- 1,319 Issuance of common stock for interest on Senior Convertible Notes 134 1 749 -- -- -- 750 Issuance of common stock upon exercise of stock options and warrants 194 2 783 -- -- -- 785 Other, net -- -- -- -- (3) 29 29 ------ --------- --------- --------- --- --------- --------- Balance at December 31, 1998 32,996 $ 330 $ 716,314 $(733,000) 570 $ (1,110) $ (17,466) Net loss -- -- -- (10,843) -- -- (10,843) Issuance of common stock upon conversion of: Senior Exchangeable Notes 337 3 1,178 -- -- -- 1,181 5% Notes 3,451 35 5,632 -- -- -- 5,667 Senior Convertible Notes 37 -- 129 -- -- -- 129 Beneficial conversion feature on 5% Notes -- -- 962 -- -- -- 962 Issuance of common stock for interest on: Senior Exchangeable Notes 1,587 16 (16) -- -- -- -- 5% Notes 112 1 150 -- -- -- 151 Senior Convertible Notes 730 8 1,486 -- -- -- 1,494 Other, net 2 -- 5 -- 9 0 5 ------ --------- --------- --------- --- --------- --------- Balance at December 31, 1999 39,252 $ 393 $ 725,840 $(743,843) 579 $ (1,110) $ (18,720) ====== ========= ========= ========= === ========= =========
See accompanying notes. F-5 35 Sunshine Mining and Refining Company Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- (In Thousands) OPERATING ACTIVITIES Net loss $(10,843) $(64,845) $(19,308) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion, and amortization 1,328 4,944 5,817 Impairment of mining properties -- 50,425 -- Amortization of debt issuance costs and accretion of debt discount 3,806 2,480 2,300 Gains on sales of investments and other (1,138) (2,795) -- Common Stock issued for interest on Senior Convertible Notes and 5% Notes 1,645 750 -- Net (increase) decrease in: Silver bullion (430) 1,097 (1,625) Accounts receivable 124 -- (177) Inventories 1,410 (609) (1,104) Other assets 547 (947) (173) Net increase (decrease) in: Accounts payable and accrued expenses (585) 855 260 Accrued pension and other postretirement benefits (1,053) (174) (401) Other liabilities and deferred credits (623) (720) (691) -------- -------- -------- Net cash used in operating activities (5,812) (9,539) (15,102) -------- -------- -------- INVESTING ACTIVITIES Additions to property, plant, and equipment (4,183) (10,318) (1,997) Other, principally sale of investments 3,411 4,506 2,154 -------- -------- -------- Net cash provided by (used in) investing activities (772) (5,812) 157 -------- -------- -------- FINANCING ACTIVITIES Proceeds from issuance of long term debt, net of issuance costs $ 5,827 $ (7) $ 14,613 Proceeds from issuance of common stock upon exercise of warrants and other transactions (27) 785 -- -------- -------- -------- Net cash provided by financing activities 5,800 778 14,613 -------- -------- -------- Increase (decrease) in cash and cash investments (784) (14,573) (332) Cash and cash investments at beginning of year 1,412 15,985 16,317 -------- -------- -------- Cash and cash investments at end of year $ 628 $ 1,412 $ 15,985 ======== ======== ======== Supplemental cash flow information: Interest paid in cash $ 2,526 $ 3,367 $ 2,817 ======== ======== ========
See accompanying notes. F-6 36 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION Sunshine Mining and Refining Company (Sunshine or the Company) is a holding company whose principal subsidiaries are Sunshine Precious Metals, Inc. (SPMI) and Sunshine Argentina, Inc. and Sunshine Exploration, Inc. (SEI). SPMI mines, refines and markets concentrates containing silver and certain by-product metals to commercial customers. SPMI's principal operating property is the Sunshine Mine, located near Kellogg, Idaho. The Sunshine Mine accounted for all of the Company's operating revenues during 1999, 1998 and 1997. As a result, the Company has only one operating segment. SEI and SPMI are also engaged in exploration in other parts of the United States. Sunshine Argentina, Inc. owns the Pirquitas Mine, which is currently in the development stage. (See Note 12.) The consolidated financial statements include the accounts of Sunshine and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assessments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain previously reported amounts have been reclassified to conform to the 1999 presentation. CASH AND CASH INVESTMENTS Cash and cash investments include certificates of deposit and other highly liquid investments with maturities of three months or less when purchased. INVENTORIES AND SILVER BULLION Investment silver bullion is stated at estimated net realizable prices. Adjustments to the carrying value of investment silver bullion is included in revenues. Precious metals inventories, materials and supplies are carried at the lower of cost (principally average cost) or market. CONCENTRATION OF CREDIT RISK The Company currently markets its concentrates to a commercial smelter in the United States. Ninety percent of the estimated sales proceeds are due by the 15th of the month following shipment of the concentrates. Final payments are received by the 10th business day of the fourth month following shipment. The Company does not require collateral. Management periodically F-7 37 performs reviews as to the creditworthiness of its customer(s). The Company has not sustained any significant credit losses on sales of its products. SILVER FINANCIAL INSTRUMENTS The Company sells covered call options on silver bullion held for investment. The strike price of these agreements exceeds current market prices at the time they are entered into. Option premiums received are deferred. If the applicable market price exceeds the strike price and option premium, the differential is accrued and recognized as a reduction of revenues. Any remaining deferred option premiums are recognized as a component of revenues at the end of the option period. The fair values of the sold call options are not included in the financial statements. REVENUE RECOGNITION Sales of refined metals and concentrates are recognized as revenue at the time of shipment to the customer. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation on buildings, leasehold improvements, and equipment is provided by straight-line or declining-balance methods at rates based on the estimated lives of the respective assets. The principal lives range from 12 to 30 years for buildings and from 3 to 10 years for equipment (See Note 4). Depletion of precious metal mineral interests is computed using the unit-of-production method based on estimated ore reserves. Mine exploration costs are charged to expense as incurred. Costs of major mine improvements, including interest, are capitalized and amortized in relation to the production of estimated ore reserves. Whenever circumstances or events indicate, and at least annually, the Company evaluates its mining properties for impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, recoverable mineral reserves, and estimates of future reserve potential which management believes are reasonable, based on historical silver prices and production. If the sum of such cash flows is less than the carrying amount of the asset, the Company records an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. MINERAL EXPLORATION AND MINE DEVELOPMENT Exploration costs and development costs for projects not yet determined by management to be commercially feasible are charged to expense as incurred. Expenditures for new mine development are capitalized when the properties are determined to have development potential but are not yet producing. Development costs incurred to access reserves on existing producing mines are expensed as incurred. F-8 38 INCOME TAXES The Company uses the asset and liability method of accounting for income taxes, whereby, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize a future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. The effect on deferred taxes of a change in income tax rates is recognized in the period that includes the enactment date. ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current operations are either expensed or capitalized depending on the nature of the expenditure. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals will coincide with completion of a feasibility study or the Company's commitment to a formal plan of action. 2. LIQUIDITY MATTERS AND REALIZATION OF ASSETS The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. . These financial results are primarily attributable to depressed silver prices and lower by-product prices, resulting in margins insufficient to cover the Company's fixed expenses. In addition, the Company has used, rather than provided, cash in its operations and at 12/31/99 had a $25.7 million deficit in working capital. The $26.5 million of 8% Senior Exchangeable Notes (the "Eurobonds") are due on April 24, 2000 and the Company does not have the funds to retire this indebtedness. Although the Company is currently in negotiations to restructure its debt, as described below, and obtain additional financing, there is no assurance that such negotiations will be successful. If such negotiations are unsuccessful, the Company will become in default on the Eurobonds, which would create a default on the $14.9 million of 10% Senior Convertible Notes. Such events could require, among other things, the Company to seek further modifications in its existing debt agreements, seek protection under the bankruptcy laws or cease some or all operations altogether. In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, secure additional financing and to succeed in its future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. F-9 39 Management has taken the following steps to revise its operating and financial requirements, which it believes will enhance the Company's ability to continue in existence: o During the first quarter of 2000, the Company began discussions with holders of the Eurobonds to modify certain terms and extend the maturity date. At a March 27, 2000 meeting of the holders, the maturity date was extended from March 21, 2000 to April 24, 2000. (See Note 6.) o The Company is engaged in ongoing negotiations with holders of the Eurobonds and the 10% Senior Convertible Notes with regard to a comprehensive restructuring of its balance sheet. o The Company is also attempting to obtain additional funds. No assurance can be given that such funds will be raised or that any such funds raised will be sufficient to fund the Company's cash requirements. The Company will continue to explore alternatives for its Pirquitas Mine in Argentina, including project financing, aligning with a joint venture finance partner for development of the mine or sale of the property. 3. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS Inventories consist of the following at December 31:
1999 1998 ------ ------ (In Thousands) Precious metals inventories: Work in process $1,376 $2,831 Finished goods 107 49 Materials and supplies inventories 1,343 1,356 ------ ------ $2,826 $4,236 ====== ======
The Company held as an investment, $4.1 million and $5.2 million of silver bullion, in excess of normal operating requirements at December 31, 1999 and 1998, respectively. The Company sells covered call options on silver bullion held for investment. Total premiums earned from the sale of covered calls aggregated $246,500, $316,250, and $116,500 in 1999, 1998, and 1997, respectively. At December 31, 1999, the Company had covered call options outstanding for 300,000 ounces of silver with strike prices ranging from $5.25 to $5.35 and expiration dates of January 27, 2000 (100,000 ounces), February 25, 2000 (100,000 ounces) and March 28, 2000 (100,000 ounces). The fair value of the sold calls at December 31, 1999 approximates the $34,000 of premiums received when they were sold. At December 31, 1998, no sold covered call options were outstanding. At December 31, 1997, the Company had covered call options outstanding for 1.2 million ounces of silver with strike prices ranging from $5.75 to $7.00 and expiration dates of February 26, 1998 (200,000 ounces), March 27, 1998 (900,000 ounces), and December 27, 1998 (100,000 ounces). F-10 40 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following at December 31:
1999 1998 ------- ------- (In Thousands) Precious metals mineral interests $ 8,151 $ 8,095 Mine improvements 12,495 9,866 Buildings, leasehold improvements, and equipment 39,295 38,374 Land 779 779 ------- ------- 60,720 57,114 Less accumulated depreciation, depletion, and amortization 37,623 36,700 ------- ------- $23,097 $20,414 ======= =======
During the third quarter of 1998, drilling in the West Chance vein of the Sunshine Mine indicated that the size of the vein might be smaller than what was previously expected. Based on that information, the Company believed that production from the West Chance could decline to 4 million ounces in 1999. As a result, combined with low by-product prices and a decline in silver prices, the Company estimated that future cash flows from the mine would not be sufficient to recover the $59.4 million carrying amounts of the mine. The fair value of the mine determined by the discounted cash flow method was approximately $9 million and an impairment charge of $50.4 million was taken at the end of the third quarter of 1998. 5. ACCRUED EXPENSES Accrued expenses consist of the following at December 31:
1999 1998 ------ ------ (In Thousands) Compensation, vacation, and severance $1,119 $1,163 Interest 1,027 1,064 Taxes, other than income taxes 298 280 Environmental remediation (Note 11) 700 700 Insurance premiums 270 346 Other 148 815 ------ ------ $3,562 $4,368 ====== ======
F-11 41 6. LONG-TERM DEBT Long-term debt consists of the following at December 31:
1999 1998 ------- ------- (In Thousands) 8% Senior Exchangeable Notes due March 21, 2000 $26,518 $26,082 10% Senior Convertible Notes due November 24, 2002 14,871 15,000 9% Convertible Subordinated Debentures due July 15, 2008 1,515 1,515 Other 334 -- ------- ------- $43,238 $42,597 Less current portion 31,518 -- ------- ------- $11,720 $42,597 ======= =======
8% Senior Exchangeable Notes In March 1996, SPMI issued $30 million aggregate principal amount of 8% Senior Exchangeable Notes due 2000 (the "Eurobonds"). In 1999 and 1998, a total of $3.0 million of the Eurobonds were exchanged and canceled for 525 thousand shares of common stock. The Eurobonds bear interest at 8% per annum and were initially scheduled to mature March 21, 2000. The Eurobonds are exchangeable into a specified number of shares of Common Stock of the Company at an exchange price of $8.00 per share, subject to reset and adjustment in certain events. The Eurobonds may be exchanged at the option of the holder at any time prior to maturity, unless previously redeemed. SPMI may force the exchange of the Eurobonds, in whole or in part, subject to certain restrictions. SPMI may redeem the Eurobonds at any time at the principal amount if United States withholding taxes are imposed on payments in respect of the Eurobonds. The Eurobonds are guaranteed by Sunshine and the guarantee ranks senior to all of its unsecured and subordinated obligations. In March 1999, the Company issued 1.6 million shares to holders of the Eurobonds. Such shares were issuable in settlement of the additional amount to be paid if the Company's stock did not trade at a price 33% above the conversion price of the Eurobonds for a period of 45 consecutive trading days. Debt issuance costs are being amortized over the life of the Eurobonds. Unamortized debt issuance costs of $92 thousand and $935 thousand are included in Investments and other assets at December 31, 1999 and 1998, respectively. In the first quarter of 2000, the Company began discussions with holders of the Eurobonds to modify certain terms and extend the maturity date. At a meeting of the holders held on March 27, 2000, the maturity date was extended from March 21, 2000 to April 24, 2000. The $1.0 million interest payment due March 21, 2000 has not been made. Thus the Eurobonds could be declared to be in default by holders of at least 25% of the outstanding principal giving such notice to the F-12 42 trustee. The Company is engaged in ongoing negotiations with the holders of the Eurobonds and its other debt securities with regard to a comprehensive restructuring. 10% Senior Convertible Notes In November 1997, the Company completed a private placement of Senior Convertible Promissory Notes totaling $15 million aggregate principal amount due November 24, 2002 (the "Notes"). The Notes are currently convertible into a specific number of shares of Common Stock of the Company at $1.80 per share, subject to adjustment in certain events, and bear interest at 10% per annum. Pursuant to the terms of the Notes, the conversion price is subject to being reset in April and September 2000. Beginning in February 2000 and quarterly thereafter, $1.25 million principal amount is required to be redeemed by the Company. Principal and interest are payable either in cash or common stock of Sunshine at the Company's option. The Company was required to issue, as soon as practicable after March 21, 2000, approximately 1.5 million shares of Common Stock to the holder of the Notes as an additional interest payment. Pursuant to the terms of the Notes, the additional interest payment was due because the Eurobonds were not converted into Common Stock nor refinanced with junior debt prior to March 21, 2000. The Company has only issued 658 thousand shares of these shares. At the present time, the Company is in negotiations with the holders of these Notes with regards to a comprehensive restructuring and does not expect to issue any shares in the future for interest until such negotiations are completed. This could result in the Company being in default on the Notes. Also, if the Eurobonds are not restructured by April 25, 2000, the Company will be in default on the Notes. The purchaser of the Notes was issued 188 thousand warrants to purchase common stock of Sunshine at 110% of the conversion price of the Notes. The exercise price of these warrants was reduced to $3.92 in December 1998, at which time all 188 thousand warrants were exercised. 9% Convertible Subordinated Debentures The 9% Convertible Subordinated Reset Debentures due July 15, 2008 (the Debentures), are convertible at any time prior to maturity or redemption into shares of common stock of the Company (Common Stock) at a conversion price of $13.28 per share, subject to adjustment. The Debentures are currently redeemable, at the option of the Company, in whole or in part, at 100% of the principal amount, together with accrued and unpaid interest. The Debentures are unsecured and subordinated in right of payment to senior indebtedness (as defined). The indenture governing the Debentures contains certain covenants restricting the ability of the Company to declare or pay cash dividends and make certain distributions on its capital stock. Pursuant to these covenants, the Company is prohibited from paying cash dividends on shares of its common stock. F-13 43 5% Convertible Notes In January 1999, the Company completed a private placement of 5% Convertible Notes due January 28, 2001 (the "5% Notes") totaling $6 million. The notes were convertible into common stock of the Company at a per-share price based on the average of the lowest average high and low trading prices for five of the twenty consecutive trading days prior to conversion. The beneficial conversion feature resulted in a debt discount of $962 thousand, which was amortized over the five months ended June 1999. During 1999, the notes were converted into 3.6 million shares of common stock, the maximum number of shares that could be issued under the terms of the 5% Notes. Fair Value of Long-Term Debt The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Consequently, given the unique conversion and payment features present in each of the Company's debt issues, the Company believes the aggregate carrying value of its debt approximates fair value. 7. INCOME TAXES The Company has incurred losses during each of the three years in the period ended December 31, 1999, and accordingly, provisions for income taxes were not required. The computation of the net deferred tax asset (liability) at December 31 is as follows:
1999 1998 --------- --------- (In Thousands) Deferred tax assets: Property, plant, and equipment $ 9,031 $ 8,414 Accrued pension and other postretirement benefits 1,791 1,924 Net operating loss carryforward 99,750 96,250 --------- --------- 110,572 106,588 Less valuation allowance (110,572) (106,588) --------- --------- $ -- $ -- ========= =========
At December 31, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $285 million. The loss carryforwards expire principally in the years 2000 through 2019. 8. STOCKHOLDER'S EQUITY (DEFICIT) Effective August 6, 1999, the Company effected a one-for-eight reverse stock split of its Common Stock. All historical share and per share amounts reported in this filing have been adjusted to reflect the reverse stock split. F-14 44 The Company has authorized 20.0 million shares of preferred stock, of which no shares were issued and outstanding at December 31, 1999 or 1998. As part of the Eurobond issuance, 261 thousand warrants to purchase one share of common stock were issued. Approximately 60% of these warrants are exercisable at $3.75 per share. The balance are exercisable at $23.00 per share. These warrants expire on March 20, 2001. The Company also has 7.2 million warrants to purchase one-eighth of share of Common Stock at $1.38 through May 22, 2001. These warrants were issued in 1996 in connection with retirement of Preferred Stock. The Company has two stock option plans under which options may be or have been granted to members of management. The stock option plans cover a total of 1.6 million shares with 870 thousand options being available for grant at December 31, 1999. The option price may not be less than the market price of the common stock on the date granted. Payment of the exercise price may be made in cash or by delivery of shares of common stock, having a market value equal to the exercise price. The 1995 Employee Nonqualified Stock Option Plan (the 1995 Plan) provides for the granting of options to key employees or potential key employees and, on December 7 each year, automatic grants of 3,125 options to each non-employee director. The total number of shares available for issuance under the 1995 Plan is 807 thousand. Under the 1995 Plan, vesting of options is determined by the directors when granted. Options under the 1993 Incentive Stock Option Plan vest one year following date of grant. All options expire 10 years following date of grant. The Company has elected to follow APB 25, and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.42%, 4.47%, and 5.79%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of .617, .572 and .438; and a weighted-average expected life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly F-15 45 different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information) for the year ended December 31:
1999 1998 1997 ---------- ---------- ---------- Pro forma net loss applicable to common shares $ (10,854) $ (64,929) $ (19,412) Pro forma basic and diluted loss per share $ (0.31) $ (2.02) $ (0.61)
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1999 1998 1997 -------------------- ------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE ------- -------- ------- -------- ------- --------- Outstanding, beginning of year 605 $11.68 607 $11.92 622 $12.16 Granted 18 1.50 19 5.04 55 9.04 Exercised -- -- (6) 7.28 -- -- Forfeited (2) 12.00 (15) 12.08 (70) 12.00 ---- ------ ---- ------ ---- ------ Outstanding, end of year 621 $11.40 605 $11.68 607 $11.92 ==== ====== ==== ====== ==== ====== Exercisable at end of year 621 $11.40 605 $11.68 587 $12.00 Weighted-average fair value of options granted during the year $ 0.65 $ 2.08 $ 2.24
Exercise prices for options outstanding as of December 31, 1999, ranged from $1.50 to $23.00. The weighted-average remaining contractual life of those options is approximately six years. F-16 46 9. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
1999 1998 1997 -------- -------- -------- Numerator: Numerator for basic earnings per share to common shareholders $(10,843) $(64,845) $(19,308) Denominator: Denominator for basic and diluted earnings per share -- weighted-average shares 34,682 32,109 31,892 Basic and diluted loss per share $ (0.31) $ (2.02) $ (0.61)
All stock options and warrants were excluded from the calculation of diluted earnings (loss) per share because including them would have been antidilutive. 10. EMPLOYEE BENEFIT PLANS The pension plan for hourly employees covered by a collective bargaining agreement (the Negotiated Plan) is a trusteed defined benefit plan. Benefits under the plan are based on years of service and includes provisions that would apply in the event of the permanent shutdown of the Sunshine Mine for present employees who were also covered by a predecessor plan terminated in 1986. The Company's trusteed defined benefit pension plan for employees not covered by a collective bargaining agreement was amended to freeze all participant's benefits as of December 31, 1993. F-17 47 The following table sets forth the funded status of the Company's trusteed defined benefit plans and the related amounts included in accrued pension and other postretirement benefits at December 31 (in thousands):
COMBINED -------------------- 1999 1998 ------- ------- Change in benefit obligation: Benefit obligation at beginning of year $ 6,104 $ 5,398 Service cost 238 227 Interest cost 417 380 Amendments -- 86 Actuarial (gains) losses (349) 256 Benefit payments (295) (243) ------- ------- Benefit obligation at end of year 6,115 6,104 Change in plan assets: Fair value of plan assets at beginning of year 5,842 4,945 Actual return on plan assets 1,036 744 Employer contributions 300 396 Benefit payments (295) (243) ------- ------- Fair value of plan assets at end of year 6,883 5,842 ------- ------- Funded (underfunded) status 768 (262) Unrecognized prior service cost 474 614 Unrecognized net (gains)/losses (1,189) (387) Unrecognized transition asset (28) (57) Additional minimum liability -- (477) ------- ------- Prepaid (accrued) benefit cost $ 25 $ (569) ======= =======
Net periodic pension costs relating to the Company's defined benefit plans consist of the following for the year ended December 31:
1999 1998 1997 ----- ----- ----- (In thousands) Service cost $ 238 $ 227 $ 236 Interest cost 417 380 358 Actual return on plan assets (531) (743) (807) Net amortization and deferrals 58 345 515 ----- ----- ----- Net periodic pension cost $ 182 $ 209 $ 302 ===== ===== =====
In the fourth quarter of 1999, the Company recognized a $475,000 reduction in its accrued pension costs, which related to actuarial gains not recognized in prior years. F-18 48 The benefit obligation and fair value of plan assets by plan at December 31, 1999 (in thousands):
NEGOTIATED FROZEN PLAN PLAN ------ ------ Benefit obligation $5,068 $1,047 Fair value of plan assets 5,273 $1,610
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:
1999 1998 1997 ---- ---- ---- Discount rate 7.00% 7.25% 7.50% Rate increase in compensation 0% 0% 0% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
The Company's funding policy, with respect to trusteed defined benefit plans, is to make contributions annually equal to, or in excess of, the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the plans consist of pooled fixed income securities, pooled equity securities, and cash or cash equivalents. The Company also has a defined contribution plan for employees not covered by a collective bargaining agreement. The Company's Board of Directors determines annually if a contribution will be made, and if so, in what amount. Contributions charged to operations during 1999, 1998 and 1997 were $157,000, $151,000 and $176,000, respectively. The Company also sponsors a plan under the provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all employees not covered by a collective bargaining agreement. Company contributions may range from 0% to 100% of employee contributions, up to a maximum 6% of eligible employee compensation, as defined. Employees may elect to contribute up to 10% of their eligible compensation on a pretax basis. Benefits under the 401(k) Plan are limited to the assets of the 401(k) Plan. Company contributions charged to operations during 1999, 1998 and 1997 were $108,000, $115,000 and $90,000, respectively. Postretirement medical and dental benefits are currently provided only to certain employees who retired before 1987. The Company's policy is to fund the cost of these plans as claims are incurred. F-19 49 The following table sets forth the computation of the accrued liability for postretirement medical, dental, and life insurance benefits at December 31 (in thousands):
COMBINED --------------------- 1999 1998 ------- ------- Change in benefit obligation: Benefit obligation at beginning of year $ 3,930 $ 4,626 Service cost 7 7 Interest cost 257 343 Participants' contributions 11 11 Amendments -- (862) Actuarial (gains) losses (189) 430 Benefit payments (426) (625) ------- ------- Benefit obligation at end of year $ 3,590 $ 3,930 Change in plan assets: Fair value of plan assets at beginning of year -- -- Employer contributions 426 614 Participants' contributions 11 11 Benefit payments (437) (625) ------- ------- Fair value of plan assets at end of year -- -- ------- ------- Funded (underfunded) status (3,590) (3,930) Unrecognized prior service cost (1,160) (1,259) Unrecognized net (gains)/losses 280 499 ------- ------- Prepaid (accrued) benefit cost $(4,470) $(4,690) ======= ======= Weighted average assumptions for end of year disclosure: Discount rate 8.00% 7.00% Initial trend rate 6.75% 7.25% Ultimate trend rate 5.00% 5.00% Number of years from initial to ultimate trend 2 3
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, changing the assumed health care cost trend rates by one percentage point each year would have the following effects on the latest actuarial calculations (in thousands):
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 17 $ (15) Effect on postretirement benefit obligation $215 $(198)
F-20 50 Net periodic postretirement benefit cost for these plans includes the following components for the year ended December 31 (in thousands):
1999 1998 1997 ----- ----- ----- Service cost $ 7 $ 7 $ 6 Interest cost 257 343 325 Net amortization (69) (6) (30) ----- ----- ----- Net periodic cost $ 195 $ 344 $ 301 ===== ===== =====
Interest costs on the projected benefit obligations and the actual returns on plan assets of the postretirement benefit plans are included in interest expense and other income, respectively, in the accompanying consolidated statements of operations. 11. COMMITMENTS AND CONTINGENCIES The EPA has identified the Company and SPMI as Potentially Responsible Parties (PRPs) at one site and SPMI as a PRP at another site under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), alleging that the Company and SPMI at one site and SPMI at the other site arranged for the disposal of hazardous substances. One of the sites is located in Kellogg, Idaho, and the other site is located in Spokane, Washington. At the first site, the EPA, the State of Idaho and several of the PRPs, including the Company and SPMI, have agreed to a site-wide clean-up plan, separating the site into two distinct areas for remediation: the Bunker Hill Smelter Complex (the Smelter Area) and the residential and certain commercial areas primarily in the cities of Kellogg, Smelterville, and Pinehurst, Idaho, encompassed by the Site (the Residential Areas). Without admitting liability, the Company and several PRPs have agreed to do the remediation work in the Residential Areas pursuant to an EPA and State of Idaho approved work plan. In exchange therefor, EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Smelter Area, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation undertaken by the Company and the PRPs is expected to continue for another three to four years, and the Company has accrued $1.9 million for its (including SPMI's) share (12.4%) of the estimated remaining remediation costs at December 31, 1999. On November 17, 1994, the United States District Court for the District of Idaho entered a Consent Decree containing the terms of this agreement. The liability for remediation costs under the consent decree is joint and several. Thus, if any other settling party or parties does not comply with the consent decree, the exposure for the Company and SPMI could increase proportionately. The parties have reserved their claims and defenses with respect to natural resource damages, except for the State of Idaho which has agreed that its claim has been settled. F-21 51 On July 31, 1991, the Coeur d'Alene Indian Tribe (the Tribe) filed an action in the United States District Court, District of Idaho against the Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory judgment that the Tribe has five years in which to file a natural resource damage claim under CERCLA against the PRPs and others or, alternatively, for damages in an unspecified amount resulting from the loss, destruction or injury to natural resources allegedly caused by the defendants. The Company believes that a settlement by SPMI of all natural resources claims with the State of Idaho in May 1986 bars the Tribe's action. On March 22, 1996, a complaint was filed in the United States District Court for the District of Idaho on behalf of the United States Department of the Interior, United States Department of Agriculture, and the Environmental Protection Agency against Sunshine, SPMI, and other identified PRPs for alleged natural resource damages in the Coeur d'Alene Basin. The complaint seeks to recover natural resource damages and response costs under CERCLA and the Clean Water Act, and does not identify the amount of damages sought to be recovered. The Tribe's action was consolidated with this proceeding. The Company believes that the settlement by SPMI of all natural resource claims with the State of Idaho in May 1986 bars these claims, and that the complaints are without merit. On September 30, 1998, the United States District Court for the District of Idaho granted the Company's Motion for Partial Summary Judgment limiting the United State's potential natural resource damage claims in the Coeur d'Alene River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site. The effect of the ruling substantially limits the government's claim for damages from a 1500 square mile site to the 21 square mile Bunker Hill Superfund Site, within which the Company has, pursuant to a Consent Decree with other defendants, been engaged in clean-up operations. The United States has been granted an interlocutory appeal of the order to the Ninth Circuit Court of Appeals. The second site where EPA has identified SPMI as a PRP under CERCLA is the Spokane Junkyard Site near Spokane, Washington. No records of SPMI have been discovered by it or the EPA showing SPMI ever sent any material to the site. SPMI does not believe it will be required to pay any clean-up costs at the Spokane Junkyard Site. The Company does not believe that the designation of SPMI as a PRP at the Spokane Junkyard Site will have a material impact on the Company's results of operations, financial condition or on its liquidity or capital resources. The Company is subject to certain other legal proceedings and claims that arise in the conduct of its business. Although it is not possible to predict the outcome of such matters, in the opinion of management, the ultimate outcomes of these matters will not have a material adverse effect on the Company's consolidated financial position, consolidated results of operations or cash flows. 12. FOREIGN OPERATIONS The Company has mining projects in Argentina, primarily the Pirquitas Mine which is in the development stage. The Company began to capitalize development expenditures at the Pirquitas Mine in 1998 after proven and probable reserves were established at the end of 1997. Exploration expense for the Company's Argentina operations totaled $0.7 million, $1.6 million and $4.4 F-22 52 million for years ended December 31, 1999, 1998, and 1997, respectively. At December 31, 1999, amounts capitalized as property, plant, and equipment totaled $10.9 million. Approximately $2.2 million for Value Added Taxes paid in Argentina are included in other assets. These taxes are recoverable from future exports of products produced from Argentina. The recoverability of the assets related to the Pirquitas Mine is dependent upon the ability of the Company to: (a) raise sufficient funding for development of the Pirquitas property, or (b) sell all or a portion of the Company's interest in the property, or (c) merge with or form a joint venture with a company with greater financial resources to develop the properties. 13. SIGNIFICANT CUSTOMER In 1999, 1998, and 1997, one customer accounted for sales of concentrate aggregating approximately $31.5 million, $30.7 million, and $24.2 million, respectively. Management believes that the loss of this purchaser would not have a material impact on the Company's consolidated financial condition or consolidated results of operations. 14. PRECIOUS METALS RESERVES (UNAUDITED) The table below presents data on proven and probable ore reserves, production and average prices for each of the years in the five-year period ended December 31, 1999 (in thousands, except average prices):
1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- SUNSHINE MINE Reserves at December 31: Ounces of silver 29,992 37,383 39,808 36,241 30,810 Production: Tons of ore 218 248 183 121 101 Ounces of silver 5,211 5,806 4,253 2,578 1,731 PIRQUITAS MINE Reserves at December 31: Ounces of silver 129,333 101,000 72,800 -- -- REVENUE - VIRGINIUS MINE Reserves at December 31: Ounces of silver 6,208 6,208 6,208 6,208 5,098 AVERAGE PRICES: Ounce of silver $ 5.23 $ 5.47 $ 5.02 $ 5.11 $ 5.20
The ore reserve estimates presented in the table are estimates of proven and probable reserves by the Company's geologic personnel. No assurance can be given that the indicated quantity of in situ silver will be realized. Reserve estimates are expressions of judgment based largely on data F-23 53 from diamond drill holes and underground openings, such as drifts or raises, which expose the mineralization on one, two or three sides, sampling and similar examinations. Reserve estimates may change as ore bodies are mined and additional data is derived. 15. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands except per share data)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 1999: Operating revenues $ 9,651 $ 7,957 $ 8,106 $ 6,618 Cost of revenues 8,693 6,564 6,649 5,767 Loss applicable to common shares (2,866) (2,125) (2,022) (3,830) Basic and diluted loss per common share $ (.09) $ (.06) $ (.06) $ (.10) 1998: Operating revenues $ 9,740 $ 8,553 $ 8,186 $ 8,189 Cost of revenues 6,950 7,455 7,130 6,830 Income (loss) applicable to common shares 71 (6,612) (54,494)(a) (3,810) Basic and diluted loss per common share $ (.00) $ (.21) $ (1.70) $ (.11)
(a) includes an impairment charge of $50,425 F-24 EX-23.1 2 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-16342, 33-18435 and 333-09475; Form S-3 Nos. 333-06537, 33-98876, 333-41641, 333-74437, 333-86327, 333-88293 and 333-94193) of Sunshine Mining and Refining Company and in the related Prospectuses of our report dated February 26, 1999, with respect to the 1997 and 1998 consolidated financial statements included in this Annual Report (Form 10-K) for the year ended December 31, 1999. ERNST & YOUNG LLP Dallas, Texas March 31, 2000 EX-23.2 3 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We have issued our report dated February 25, 2000 (March 27, 2000 with respect to Notes 2 and 6), accompanying the 1999 consolidated financial statements included in the Annual Report of Sunshine Mining and Refining Company on Form 10-K for the year ended December 31, 1999. We hereby consent to the incorporation by reference of said report in the Registration Statements of Sunshine Mining and Refining Company on Forms S-3 (File Nos. 333-06537, 33-98876, 333-41641, 333-74437, 333-86327, 333-88293 and 333-94193) and on Forms S-8 (File Nos. 33-16342, 33-18435 and 333-09475). GRANT THORNTON LLP Dallas, Texas March 31, 2000 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DEC. 31, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DEC. 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 628 0 2,677 0 6,943 11,034 60,720 37,623 37,020 36,714 11,720 393 0 0 (19,113) 37,020 32,332 32,691 27,623 33,801 2,015 0 8,213 (10,843) 0 (10,843) 0 0 0 (10,843) (.31) (.31)
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