10-K405 1 d85096e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000 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, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-10012 SUNSHINE MINING AND REFINING COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-2618333 (State or other jurisdiction (IRS Employer Identification of incorporation or organization) Number) 5956 SHERRY LANE, SUITE 1621 83702 DALLAS, TEXAS 75225 (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (214) 265-1377 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $0.01 par value OTC Bulletin Board SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] (Continued on next page) 2 (Continued from previous page) The aggregate market value of the shares of common stock held by non-affiliates of the registrant at March 15, 2001 was approximately $6,500,000. For purposes of this computation, all officers, directors and beneficial owners of 10% or more of the common stock of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are affiliates. Indicate the number of shares outstanding of the registrant's classes of common stock, as of the latest practicable date. TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AT MARCH 16, 2001 ------------------- ---------------------------- Common Stock, $0.01 par value 50,000,000 3 PART I 1. BUSINESS. GENERAL Sunshine Mining and Refining Company ("Sunshine" or the "Company") has primarily engaged in mining silver, and currently owns properties in Argentina, Mexico and the United States with significant silver reserves and silver resource potential. The Company owns the Sunshine Mine located in the Coeur d'Alene Mining District near Kellogg, Idaho and the Pirquitas Mine in the Jujuy Province of northwest Argentina. The Sunshine Mine produced 3.9 million and 5.2 million ounces of silver in 2000 and 1999, respectively. The mine's primary smelter customer announced on February 2, 2001 that it was closing and would no longer accept deliveries. As a result, Sunshine notified employees at the mine of a mass layoff effective February 16, 2001. The mine is being placed in a care and maintenance status. The Sunshine Mine has been the Company's only revenue source for the past eight years. As a result of its closure, the Company has no other sources of revenues at the present time. The Company's principal asset is the Pirquitas Mine. Pirquitas contains 129 million ounces of silver reserves, as well as significant tin and zinc by-products. The mine is planned as an open-pit operation to produce 11 million ounces of silver, 3,200 tonnes (metric tons) of tin, and 16,300 tonnes of zinc per year. A feasibility study on the economics of developing the property was initially completed in 1999, and enhancements to the initial study were completed in 2000. The studies forecast $133 million of capital cost to develop the property, and a net cash cost of production of $1.53 per ounce of silver. REORGANIZATION UNDER CHAPTER 11 On August 23, 2000 (the "Petition Date"), Sunshine and its wholly-owned subsidiaries, Sunshine Argentina, Inc. ("Argentina"), Sunshine Precious Metals, Inc. ("SPMI") and Sunshine Exploration, Inc. ("Exploration"), all filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Third Amended and Restated Joint Chapter 11 Plan of Reorganization as modified December 5, 2000, is referred to as the "Plan." The Plan was the subject of an Order Confirming the Third Amended and Restated Joint Chapter 11 Plan of Reorganization of Sunshine and its Debtor Subsidiaries (the "Confirmation Order") and the Plan Effective Date was February 5, 2001. The conditions precedent to the effectiveness of the Plan and Confirmation Order, all of which were satisfied, included designation by certain creditors of four (out of five) Directors, the New Consent Decree with Sunshine and SPMI shall have been entered and approved by the United States District Court for the District of Idaho in the case styled United States of America v. Asarco Incorporated, Case Nos. 96-0122-N-EJL and 91-0342-N-EJL, substantially in accordance with an agreement in principal annexed to the Plan and such new consent decree shall have been approved by final order of the Idaho District Court, and the so-called "Asarco Settlement" shall have been approved by the Bankruptcy Court. (See Note 14 of Notes to Consolidated Financial Statements and "Legal Proceedings - Environmental Matters.") Pursuant to the Plan and the Confirmation Order, on the Effective Date, all of the "old common stock" of Sunshine was canceled, retired and eliminated with no consideration paid therefor, and Sunshine was deemed to have issued the "New Mining Stock," which is shares of Common Stock, par value $0.01 per share. Under the Amended and Restated Certificate of Incorporation of Sunshine filed with the Secretary of State of Delaware on February 16, 2001, Sunshine's authorized common stock from and after the Effective Date consists of 200,000,000 shares of Common Stock, par value $0.01 per share. Of that class of stock, approximately 50,000,000 shares of Common Stock, par value $0.01 per share have been issued as the "New Mining Stock" under the terms of the Plan to those designated as recipients therefor under the Plan, which generally are certain creditors of Sunshine and others, who have in turn gifted a portion (approximately 3.4%) of such New Mining Stock to the former common stockholders on a pro-rata basis, but only to accounts holding in excess of 100 shares of "old Common Stock." Sunshine distributed certificates representing shares of "New Mining Stock" to holders during February 2001. The CUSIP number of the "New Mining Stock" is 867833-60-0 and its symbol on the OTC Bulletin Board is SSMR. 1 4 As more than 80% of the Company's operating revenues have been derived from the sale of silver, the Company's earnings are directly related to the price of silver, which has been depressed since 1985. As a result, the Company has reported operating losses and negative cash flow from operations since that time. The Company's strategy has been to add sufficient low cost silver production to be profitable at prices for silver which have prevailed in recent years, while also positioning the Company to benefit from an expected improvement in silver prices. Given continued low silver prices, the shutdown of the Sunshine Mine, and the Company's limited available liquidity, the Company is currently reviewing its strategic options, which may include a sale of some or all of its assets, a merger, or joint venture for the development of Pirquitas. SILVER SUPPLY, DEMAND, AND PRICES According to studies published by the Silver Institute in its World Silver Survey (prepared by Gold Fields Mineral Services Ltd.) and by CPM Group (precious metal industry consultants), since 1990 demand for silver has significantly exceeded silver production. The gap between new supply and demand has been bridged by the availability of a large surplus of silver inventories generated in the aftermath of the major increase in silver prices in 1979-1983. The availability of these inventories has kept silver prices at depressed levels. According to these same studies, silver inventories worldwide have been greatly diminished by the shortfall of new supply to demand. Also, according to the above cited industry reports, physical availability of silver should continue to tighten as available inventories are consumed. The Company has anticipated that such drawdowns of silver would eventually lead to a significant price increase, which has yet to happen. Sunshine was originally incorporated in 1918 and is currently incorporated under the laws of the state of Delaware. The Company maintains its principal executive offices at 5956 Sherry Lane, Suite 1621, Dallas, Texas 75225. For information regarding Sunshine's business, certain classes of products or services and sales to certain significant customers, see Notes 3, 4, 14, 15 and 16 of Notes to Consolidated Financial Statements included elsewhere herein. The accuracy of any forward looking statements and other similar statements contained herein regarding production, reserves, mineralized materials and cash costs will depend upon the actual grade, quantity and other qualities of recoverable reserves and resources, which may differ from current estimates. Actual results could differ materially from those currently anticipated in such statements, by reason of factors including without limitation, actual results of exploration, silver prices, by-product prices, imprecision of reserve estimates, future economic conditions, regulations, competition, and other circumstances affecting anticipated revenue and costs. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement. OPERATIONS ARGENTINA OPERATIONS The Company commenced operations in Argentina in 1994, and the Pirquitas property was acquired by the Company in November 1995. Pirquitas is located in the Puna de Atacama of northwestern Argentina in the province of Jujuy at an elevation of over 13,000 feet. The nearest major city is the provincial capital, San Salvador de Jujuy, which is about 220 miles southeast of Pirquitas. The Chilean and Bolivian borders lie about 31 miles west and 37 miles to the north, respectively. Pirquitas is the Company's principal asset at this time. The Company feels that recent political and economic changes in Argentina, designed to incentivize foreign investment, particularly in the mining industry, have made the country an extremely attractive target for mining investment. The country has privatized many state-owned enterprises, and has implemented reforms to many previously state-controlled activities, including mineral exploration and development. A program of fiscal stability has brought down inflation. Guarantees to foreign investors include parity of treatment with Argentine nationals, a freely-exchangeable currency, tax-stabilization programs and complete freedom to repatriate profits. 2 5 The Company has assigned proven and probable reserves to Pirquitas totaling 129.6 million ounces of silver, along with 59 thousand tons of tin and 273 thousand tons of zinc. The Company has invested a total of approximately $20 million in the acquisition and evaluation of the property. The Company is reviewing its strategic alternatives relative to development of the property, and in that regard will consider possible sales of some or all of the property, mergers, joint ventures, and other structures. The independent feasibility study of the property, prepared in large part by the firms of Jacobs Engineering, The Winters Company and Knight Piesold, estimates that the project will require approximately $133 million of capital investment to commence production. The study forecasts annual average production of 11 million ounces of silver, 3,200 tonnes of tin, and 16,300 tonnes of zinc over the nine-year mine life of its proven and probable reserves. It is believed that significant potential exists to expand reserves over those identified thus far. Net cash costs of silver production (net of tin and zinc credits) are estimated at $1.53 per ounce. The Company owns or controls a significant land package at the property. It holds title to 6,500 acres of mining concessions. It also owns approximately 18,500 acres of surface lands upon which all facilities will be built. Most of the property remains unexplored. Significant resources above and beyond those identified in the feasibility study are believed to exist at the property. Based on its own exploration, as well as a review of previous development work, the Company believes that it can substantially increase the mineral resources surrounding the identified reserve. Beyond these areas, the Company feels that the favorable geologic environment will continue and believes that new discoveries can be made. Given the property's excellent economics, the potential for additional mineralization, and the prospect for improved silver prices, the Company believes Pirquitas provides a very attractive development opportunity. THE SUNSHINE MINE AND REFINERY COMPLEX The Sunshine Mine and Refinery Complex, located in the Coeur d'Alene Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a 1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and associated facilities. The facility is an integrated operation which can produce refined silver with 99.99% purity. The silver refinery has a capacity to recover up to 8 million ounces of silver and 4 million pounds of copper annually. The Company's wholly owned subsidiary, SPMI, owns substantially all of the mining claims comprising the Sunshine Mine. Electrical power is supplied by a public utility from two sources. The facilities are in good and operable condition and access to the property is by paved roads maintained by the county. The Sunshine Mine's primary smelter customer announced on February 2, 2001 that it was closing and would no longer accept deliveries. As a result, Sunshine notified employees at the mine of a mass layoff effective February 16, 2001. The mine is being placed in a care and maintenance status. The Sunshine Mine is a primary silver-producing underground mine which began operations in 1884 and has produced over 350 million ounces of silver since that time. The underground workings consist of multiple levels developed off the Jewell shaft, the main production shaft. It extends from the surface to a depth of over 4,000 feet and is complemented by other interior shafts which develop levels as deep as 5,600 feet. The mine covers over 10 square miles at the surface, and contains more than 100 miles of underground workings. The introduction of new mining technologies and more aggressive exploration at the Sunshine Mine had substantially increased production in recent years, achieving full production in the fourth quarter of 1997 for the first time since 1990. This reduced unit costs as fixed costs were spread over a larger production figure. Recent production and unit cost history of the mine is as follows:
SUNSHINE MINE PRODUCTION ------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Ounces production (millions) 3.9 5.2 5.8 4.3 2.6 Net cash cost per ounce $4.75 $4.36 $4.43 $4.50 $6.12
3 6 Sunshine's share of silver reserves at the Sunshine Mine as of December 31, 2000 were estimated to be 1.1 million tons of ore with an average grade of 23.6 ounces of silver per ton (after adjustment for mining dilution), containing 25.9 million ounces of silver. Metallurgical recoveries at the Sunshine Mine have typically approximated 97% of the contained silver. The proven and probable reserves at the Sunshine Mine have historically totaled approximately 4 to 7 years of annual production. Over its history, exploration and development activities have maintained reserves by finding new ore to replace that which was produced each year. Due to cash constraints, planned exploration and development has been significantly curtailed since the end of 1999, resulting in a reduction in proven and probable reserves. If the mine is reopened and an adequate exploration and development funded in the future, management believes significant new reserves will be identified, as studies have delineated several areas of favorable geologic conditions that may host significant deposits. These areas are contiguous to delineated mineralization, and the ore-bearing structures project into favorable lithologic units. Further exploration is necessary to establish the existence of and quantify the additional mineralized material, but management believes it could exceed 100 million ounces. The 1995 acquisition of the ConSil property, on the eastern flank of the workings of the Sunshine Mine, was done to facilitate evaluation and development of these and other veins. A shaft on the ConSil property extends from the surface to a depth of 5,400 feet and connects to the Sunshine's eastern workings on the 3,100 level, serving as the Sunshine Mine's secondary escapeway. Access from this shaft to these exploration areas will be important in their future exploration and development. The ore extracted from the Sunshine Mine was processed by a 1,000-ton-per-day flotation concentrator, which produced two concentrates, a high-grade silver concentrate which was transferred to the antimony refinery for antimony removal, and a lead concentrate which was shipped directly to a smelter for further processing. After antimony removal, the silver concentrate can be either transferred to the Company's silver refinery for recovery of silver and copper, or sold to a commercial smelter. Factors which influence Sunshine's decision to refine its products internally or sell them to a smelter include levels of production, costs of reagents and available smelter contract terms. The refinery was designed and built to recover up to 8.0 million ounces of silver from concentrates annually. Sunshine suspended operations at the silver refinery in 1995 pending higher levels of available feed, and began shipping its silver concentrate to a smelter at that time. Prior to the closure of its main smelter customer, the Company's sales to the third party smelters have been under long-term contracts, generally for a period of at least one year, cancelable by either party after one year upon thirty days notice. The Company employs no sales force. Ore and metals produced at the Sunshine Mine during 2000, 1999 and 1998, respectively, were as follows:
2000 1999 1998 ---- ---- ---- Tons of Ore............................................... 169,036 217,601 247,866 Metals Recovered: Ounces of Silver..................................... 3,879,100 5,210,843 5,806,468 Pounds of Copper..................................... 1,019,305 1,235,368 1,273,318 Pounds of Antimony................................... 786,078 991,079 1,078,460 Pounds of Lead....................................... 4,839,538 6,966,645 12,001,080
These metals were recovered from ore containing an average of 23.81, 24.75 and 24.17 ounces of silver per ton, in 2000, 1999 and 1998, respectively. Metallurgical recoveries were approximately 96.38% of the contained silver, 97% of the contained copper and 92.5% of the contained lead. The Sunshine Mine's proven and probable ore reserves were estimated by the Company's technical personnel at January 1, 2001, to be 1.1 million tons of ore containing 26.8 million ounces of silver and 10.4 million pounds of copper. The weighted average ore grades, adjusted for mining dilution, but not adjusted for metallurgical recoveries, are 23.6 ounces per ton silver and 0.46 percent copper. 4 7 During the three years ended December 31, 2000, the Sunshine Mine accounted for all of the Company's silver production, and approximately 16% of the Company's silver reserves at December 31, 2000. (See Note 17 of Notes to Consolidated Financial Statements included elsewhere herein.) The hourly employees at the Sunshine Mine are represented by the United Steelworkers of America (the "USWA") (which represents the majority of the employees) and the International Brotherhood of Electrical Workers Union (the "IBEW") (collectively, the "Unions"). Effective May 1, 1994, the Unions and SPMI entered into new six-year labor agreements, which were extended until May 1, 2001. The Company has notified the Unions of its intent to allow the contracts to expire. MEXICAN OPERATIONS The Company acquired its first Mexican property, Juanicipio, in 1999. The property is located adjacent to the Fresnillo Mine, one of the most prolific and low cost silver mines in the world, in the state of Zacatecas. The district has reportedly produced more than one billion ounces of silver dating to colonial times. The Company believes that its recently completed mapping and geophysical work has demonstrated that structures similar to those containing mineralization at the Fresnillo Mine may exist at Juanicipio. The surface reflection of such structures appears to strike from Fresnillo into the Juanicipio property. The next logical step in the evaluation of the property would be a drilling program to quantify potential mineralization in these structures. The Company will be reviewing options to enable such a program to go forward. The Company's mining concession at the property is quite large, approximately 28,100 hectares (69,400 acres). Because of its proximity to the Fresnillo Mine, and the evidence of the structures that are present on the property, Juanicipio may present an attractive joint venture opportunity. OTHER EXPLORATION The Revenue-Virginius Mine is an underground silver mine located eight miles southwest of the town of Ouray in southwestern Colorado. It also contains significant gold and base metals. The mine has been largely inactive since a mill fire in 1912 resulted in the closure of the operation. Most production records on the property are missing; however, records which remain indicate production between 1895 and 1906 totaling 14.5 million ounces of silver, 123 thousand ounces of gold and 63 million pounds of lead from one series of veins. Sunshine controls the property under a mining lease calling for minimal property payments and work commitments. The property reserves are estimated to be approximately 6.2 million ounces of silver. MARKETING The Company's primary product at the Sunshine Mine can be either refined silver which is sold to industrial customers or precious metals dealers, or silver-copper and lead-silver concentrates which are sold to smelters. At the time of the mine shutdown, all of the concentrates were being sold to a smelter. Given the limited reserves economically accessible at the Sunshine Mine, upon the closure of its primary smelter customer, reactivation of the refinery was not economic. While the Company received offers for its concentrates from other smelters, the terms were less attractive than those it has been receiving from its primary customer. Prices received for the silver-copper concentrate from smelters were based on average prices for silver, copper and lead during a quotational period shortly after shipment. All lead-silver concentrates were sold to smelters, with prices for contained lead and silver based on a quotational period shortly after shipment. The Company's refined silver, antimony and copper products were generally marketed directly to metals dealers or industrial customers, with prices based on market prices at the time of shipment. (See Note 16 of Notes to Consolidated Financial Statements included elsewhere herein.) 5 8 OTHER BUSINESS AND REGULATORY FACTORS The Company's precious metals operations are intensely competitive and subject to risks and regulations inherent in and applicable to mining generally and the precious metals industry specifically. Competition in the precious metals mining industry, and particularly the silver mining industry, is very volatile. The market for gold and silver is international and there is no significant marketing advantage in domestic production versus international production. No single source of silver is significant to the world market, and many of the principal sources of silver as a primary metal have been forced to close as a result of continued low silver prices over the past several years. As a result, most new mine production of silver at the present time is from gold, copper, lead and zinc mines which produce silver as a by-product, and whose economics are not significantly related to the price of silver. Competition among mining companies is primarily for mineral rich properties which can be developed and produced economically; the technical expertise to find, develop and produce such properties; labor to operate the properties; and capital for the purpose of funding such operations. As the principal product sold is a commodity with its price dictated by world markets upon which any individual operator has very little influence, the competitive factors cited above give the competitive advantage to the low cost operator. ENVIRONMENTAL AND SAFETY MATTERS In connection with its operations and properties, the Company is subject to extensive and changing federal, state and local laws, regulations and ordinances governing health and safety and the protection of the environment, including, without limitation, laws and regulations relating to air and water quality, mine reclamation, waste handling and disposal, the protection of certain species and the preservation of certain lands. These environmental laws and regulations may require the acquisition of permits or other authorizations for certain activities. These laws and regulations may also limit or prohibit activities on certain lands lying within a wilderness area, wetland area, area providing habitat for certain species or other protected area. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue in the future. The operations and activities of the Company require compliance with such laws, regulations and ordinances. The Company cannot predict what environmental legislation or regulations will be enacted or adopted in the future or how future laws and regulations will be administered or interpreted. Compliance with more stringent laws and regulations, as well as potentially more vigorous enforcement policies of regulatory agencies or stricter interpretation of existing laws, may necessitate significant capital outlays, may materially affect the Company's operations, or may cause material changes or delays in the Company's intended activities. Currently, the Company does not expect to incur any material capital expenditures associated with environmental regulations (such as expenditures for relevant control facilities) during the fiscal year 2000. See Note 14 of Notes to Consolidated Financial Statements included elsewhere herein; and "Legal Proceedings - Environmental Matters." The Company also does not anticipate any material effect from compliance with environmental, health and safety laws, regulations and ordinances. EMPLOYEES At December 31, 2000, Sunshine and its subsidiaries, including SPMI, employed approximately 236 persons; 220 of whom are located at the Kellogg facilities. See "Item 1. Business. The Sunshine Mine and Refinery Complex." Substantially all the employees at the Kellogg facilities will be laid off as a result of the closure of the Sunshine Mine. 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 In connection with the confirmation and effectiveness of the Plan of Reorganization, a settlement of all environmental litigation was effected. The settlement between the Company, SPMI and the United States on behalf of the United States Environmental Protection Agency, United States Department of Interior and the United States Department of Agriculture (the "Government") and the Coeur d'Alene Indian Tribe (the "Tribe") was memorialized in a new Consent Decree in civil actions CIV96-0122-N-EJL and CIV91-0342-N-EJL pending in the United States District Court for the District of Idaho. By entry of the new Consent Decree all claims of the Government and the Tribe for natural resource damages and response costs to injuries allegedly caused by the Company and SPMI in the Coeur d'Alene Basin were dismissed by the Government and the Tribe. The new Consent Decree was approved by the United States District Court on January 18, 2001. In exchange for the dismissal the Company granted to the Government and the Tribe warrants to purchase 9.95% of Sunshine's new common stock (i) at an exercise price of $.66 per share, (ii) with a cashless exercise feature, (iii) that are exempt from registration pursuant to 11 USC Section 1145, (iv) that are fully transferable to any other entity at any time, and (v) are subject to ordinary terms and conditions including standard anti-dilution language for warrants of this nature. The Company and SPMI have also agreed to provide net smelter return royalty payments to the Government and the Tribe based on the revenues from all mining by SPMI anywhere in the United States and all mining by any Sunshine entity from the Sunshine Mine or within one mile of the current boundaries of the mine. The royalty adjusts on a sliding scale based on the average price of silver. No royalty must be paid until the average silver price exceeds $6.00 per ounce. Under the new Consent Decree, SPMI is required to convey the surface rights to timber lands it owns and uses for non-mining purposes, and to perform certain remediation and testwork at its ConSil mine site adjacent to the Sunshine Mine. In connection with the settlement, the Government also agreed to release the Company and SPMI from a 1994 Consent Decree which obligated them, with certain other mining companies, to remediate certain property in the Bunker Hill Superfund Site. The Company believes that all other environmental claims, both potential and threatened, were discharged by the effectiveness of the Plan of Reorganization on February 5, 2001. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of Sunshine's fiscal year ended December 31, 2000. 8 11 PART II 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The New Common Stock has had a very limited trading history since the Effective Date of the Plan. Since March 8, 2001, it has traded on the NASDAQ OTC Bulletin Board under the symbol "SSMR" at high and low sales prices as reported by NASDAQ of $2.15 and $1.00. There were approximately 5,000 stockholders of record at March 15, 2001; however, the number of beneficial owners is believed to exceed this number. The old common stock of Sunshine was, until February 28, 2001, traded on the NASDAQ OTC Bulletin Board under the symbols "SSCF" and "SSCFQ." Holders of 100 or more shares of the Company's old common stock received approximately one share of New Common Stock for every 28.4 shares of old common stock owned. The following table shows the high and low sales prices of the old common stock over recent periods (adjusted for the approximately one for 28.4 exchange pursuant to the Plan):
HIGH LOW ---- --- 2001 First Quarter (until February 28, 2001)..... 3.408 1.136 2000 Fourth Quarter.............................. 2.272 1.136 Third Quarter (from July 14, 2000).......... 7.952 1.420
By letter dated July 7, 2000, the New York Stock Exchange, Inc. ("NYSE") notified Sunshine that trading in the Sunshine old Common Stock would be suspended on July 14, 2000, and application would be made by the NYSE to the Securities and Exchange Commission to de-list the old Common Stock. A notice from the NYSE advised that the decision was reached based upon an amount of total stockholders' equity and the 30-day average share price being less than $1 per share for the old Common Stock. Sunshine did not appeal the determination. The following table sets forth the range of high and low sales prices for the old Common Stock as reported on the NYSE Composite for the periods indicated (adjusted for the approximately 1 for 28.4 exchange pursuant to the Plan and the one for eight reverse split on August 6, 1999). Such quotations represent inter-dealer prices without retail market, mark-down or commissions and may not necessarily represent actual transactions.
HIGH LOW ---- --- 2000 Third Quarter (until July 14, 2000)........ 10.65 7.10 Second Quarter............................. 21.30 7.10 First Quarter.............................. 49.70 17.75 1999 Fourth Quarter............................. 71.00 35.50 Third Quarter(*)........................... 92.30 56.80 Second Quarter............................. 120.70 85.20 First Quarter.............................. 170.40 99.40
TRANSFER AGENT American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10007 9 12 6. SELECTED FINANCIAL DATA. The following table sets forth summary historical financial information of Sunshine as of the dates and the periods indicated in the table below. All amounts are in thousands, except price and production statistics and per share amounts.
YEAR ENDED DECEMBER 31,(1) ----------------------------------------------------------------------- 2000(3) 1999 1998(3) 1997 1996(4) ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Operating revenues ................................. $ 23,094 $ 32,332 $ 34,668 $ 24,993 $ 15,315 Mark to market gains (losses) ...................... (167) 359 (2,588) 1,859 (1,101) ----------- ----------- ----------- ----------- ----------- Total revenues ................................. 22,927 32,691 32,080 26,852 14,214 Net loss ........................................... (20,890) (10,843) (64,845) (19,308) (25,902) Income (loss) applicable to common shares .......... (20,890) (10,843) (64,845) (19,308) 11,600 Basic and diluted income (loss) per common share ... (.48) (.31) (2.02) (.61) .42 Weighted average common shares ..................... 43,898 34,682 32,109 31,892 27,823 PRICE AND PRODUCTION STATISTICS: Average silver price received ...................... $ 4.93 $ 5.23 $ 5.47 $ 5.02 $ 5.11 Tons ........................................... 169,036 217,601 247,866 183,404 120,910 Silver grade (ounces per ton) ...................... 23.81 24.75 24.17 23.95 22.04 Silver ounces produced ......................... 3,879,100 5,210,843 5,806,468 4,253,315 2,577,895 Net cash cost per ounce(2) ......................... $ 4.75 $ 4.36 $ 4.43 $ 4.50 $ 6.12 BALANCE SHEET DATA: Cash and cash investments .......................... $ 291 $ 628 $ 1,412 $ 15,985 $ 16,317 Working capital (deficit) .......................... 2,824 (25,679) 9,716 26,959 25,559 Total assets ....................................... 22,592 37,020 39,897 101,601 105,486 Long-term debt and capital lease obligations ....... 1,530 38,238 42,597 42,265 25,780 Stockholders' equity (deficit) ..................... (36,276) (18,720) (17,466) 44,496 63,598 Book value per common share ........................ (.75) (.48) (.54) 1.39 2.00 Common shares outstanding ...................... 48,685 38,672 32,426 31,904 31,873
---------- (1) All share and per share amounts have been adjusted to reflect a 1 for 8 reverse stock split effective August 6, 1999. (2) Net cash cost per ounce includes all expenditures (other than exploration costs and capital expenditures) related to the operation of the Sunshine Mine and Refinery Complex, less any by-product revenues. Such costs include non-capital development costs, production and maintenance costs, ad valorem taxes, insurance, and postemployment benefit costs incurred on site. (3) During 2000 and 1998 the Company recorded a $7.2 million and a $50.4 million impairment of mining properties expense, respectively, to write down the value of the Company's investment in the Sunshine Mine. (4) During 1996 the Company recorded a gain applicable to common shares of $40 million due to the retirement of all of the Company's outstanding Preferred Stock. 10 13 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical fact, including without limitation those that are identified by the use of the words "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts" and similar expressions. Such statements address future plans, objectives, expectations and events or conditions concerning various matters such as mining exploration, capital expenditures, earnings, litigation, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors including without limitation, actual results of exploration, silver prices, imprecision of reserve estimates, future economic conditions, regulations, competition and other circumstances affecting anticipated revenue and costs. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement. Readers are cautioned not to place undue reliance on these forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. LIQUIDITY AND CAPITAL RESOURCES From 1988 through 2000, a period of 13 years, the price of silver, the Company's principal product, averaged approximately $5.00. In contrast, for the 10 year period prior to 1988, the price of silver averaged approximately $9.50 per ounce. While the Company significantly improved its production and unit costs from the Sunshine Mine in recent years, the continuing low price of silver resulted in ongoing operating losses. In addition, the Company invested relatively heavily in new projects, particularly Pirquitas. Management believed that establishing new, low cost production from Pirquitas and/or other properties would be key to establishing profitability in the low price of silver environment in which it found itself. The Company was able to fund its operating losses and investments with a variety of financings over this extended period, until it was unable to refinance the Eurobond indebtedness of $26.5 million which matured in March of 2000. The inability to repay this debt as it matured triggered cross-defaults in the Company's other indebtedness. The Company and its principal creditors discussed various means of restructuring the Company's indebtedness outside of bankruptcy, but ultimately determined that the best route to restructure the indebtedness would be through Chapter 11. As a result, the Company and three of its principal subsidiaries filed for protection under Chapter 11 on August 23, 2000. The Elliott Group and the Stonehill Group, whose affiliates were the Company's principal creditors, were co-proponents with the Company of the Plan of Reorganization which was filed contemporaneously with the bankruptcy filing. Highwood Partners, L.P. and Stonehill Capital Management, LLC, affiliates of the Elliott Group and the Stonehill Group, provided the Debtor-in-Possession (DIP) financing which was used by the Company and its affiliates as its principal source of funding during the bankruptcy. Upon the Effectiveness of the Plan, on February 5, 2001, approximately $2.7 million was borrowed under the DIP facility. The Stonehill and Elliott affiliates are also providing the Exit Financing Facility, which repaid advances under the DIP facility and will fund the Company upon its initial emergence from bankruptcy. The Exit Financing Facility bears interest at a fixed rate of 15% per annum in the maximum principal amount of $5,000,000. The facility is secured by substantially all of the assets of Sunshine and its subsidiaries, including the Pirquitas Mine. The proceeds of all advances under such facility are to be utilized solely (a) to provide funds necessary to the conduct of the business of Sunshine and its subsidiaries in the ordinary course in accordance with an approved budget, (b) to pay fees and disbursements paid to lenders and their professionals in accordance with the budget, and (c) as otherwise contemplated or permitted by the budget. The Exit Financing Facility is the Company's only source of working capital, other than asset disposals, at the present time. The remaining availability under the Exit Financing Facility is approximately $1.8 million as of March 15, 2001. The Company expects to have used all the availability under the Exit Financing Facility before the end of the third quarter of 2001. The Company is engaged in a review of its strategic options in order to address its financing 11 14 difficulties. Among these is the consideration of a sale of some or all of its assets, the merger of the Company with another company, or a joint venture arrangement on some of its properties, including Pirquitas. If the Company is unable to successfully negotiate and close any such alternative in advance of using all the availability under the Exit Financing Facility, the Company may be required to, among other things, seek modifications in the terms of the Exit Financing Facility, seek protection under the bankruptcy laws, or cease operations altogether. Any of these would be expected to have a significant negative effect on the price of the Company's common stock. Registration Rights Agreement. Under the Plan of Reorganization, Sunshine entered into a Registration Rights Agreement with members of the Stonehill Group and the Elliott Group under which the shares of new common stock issued to them are to be registered under federal securities laws. Such agreement provides for filing of a Registration Statement within a specified period of time covering only the securities issued to the Elliott Group and the Stonehill Group, the effectiveness of such Registration Statement within a certain period of time and other matters. In the event that certain of the commitments under such agreement are not satisfied, each of the holders has a right to provide Sunshine with written notice thereof (a "Put Notice") which would require Sunshine to pay to each such holder (in cash or shares of common stock at the option of the holder) a specified amount of funds and/or in certain instances, to repurchase the securities from the holder for a "Mandatory Repurchase Price" equal to 115% of the Market Price on the date the holder acquires the right to require Sunshine to repurchase such shares. Argentina Transaction; Call Option Agreement. Under the terms of the Plan and the Confirmation Order on the Effective Date, the capital stock of Argentina was cancelled and Argentina issued the "New Argentina Stock." Sunshine caused the incorporation and organization of Sunshine International Mining, Inc., a Delaware corporation ("International"), all of the issued and outstanding stock of which is owned by Sunshine. Sunshine contributed to the capital of International all of the New Argentina Stock such that Argentina became a wholly-owned subsidiary of International which in turn is a wholly-owned subsidiary of Sunshine. Simultaneously Sunshine, International and Argentina entered into a Call Option Agreement dated February 2001, with the Elliott Group and the Stonehill Group, pursuant to which International granted (i) a call option to each holder within the Elliott Group and the Stonehill Group to purchase, collectively, up to 100% of the shares of New Argentina Stock and (ii) a first priority perfected security interest in the New Argentina Stock. Such call option(s) was granted to purchase a maximum number of shares of New Argentina Stock at a specified purchase price which option is to be reduced proportionately in the event the Elliott Group holders and/or the Stonehill Group holders sell more than 50% of their shares of New Common Stock of Sunshine received. For example, if the Elliott Group holders were to sell 55% of their shares of Sunshine Common Stock initially received, then the maximum number of New Argentina Stock that the Elliott Group holders could purchase in the aggregate upon exercise of their Call Options would be reduced by a percentage equal to (55% - 50%) x 2, or 10%. The term of each Call Option expires at the time of exercise in full of such Call Option, or if the market capitalization of Sunshine shall exceed $150,000,000 for at least 60 consecutive days or on the tenth anniversary of the Effective Date of the Plan. The Call Option becomes exercisable upon the occurrence of any one or more of nine separate events, including (i) the de-listing of the Sunshine New Common Stock from an "Approved Market," (ii) suspension of the Sunshine New Common Stock from trading on an Approved Market for at least seven consecutive calendar days, (iii) reduction in the overall market capitalization of Sunshine to less than $15,000,000 for at least fifteen consecutive calendar days, (iv) a bankruptcy proceeding occurring with respect to Sunshine or one of its subsidiaries, (v) Sunshine fails to comply with its obligations in the Call Option Agreement, and (vi) other events, including any default under the "Exit Financing Facility." The Call Option, once exercisable, may be exercised at any time by any of the holders thereof. The effect of the Call Option(s) is to potentially allow the Elliott Group holders and the Stonehill Group holders (and certain of their successors and assigns) to acquire Sunshine Argentina which in turns owns the Pirquitas Mine and other assets. Should such an event occur, Sunshine's investment of approximately $20,400,000 in the acquisition and evaluation of that property can no longer be an asset of Sunshine, nor would the assigned proven and probable reserves totaling 129.6 million ounces of silver, along with 59,000 tons of tin and 273,000 tons of zinc. The New Argentina Stock has been pledged under the Call Option Agreement under a separate Pledge Agreement to the Elliott Group holders and the Stonehill Group holders and delivered to Wells Fargo Bank Minnesota, N.A. as administrative and pledge agent. Failure to comply with the terms of the Registration Rights Agreement or the Call Option Agreement would result in significant adverse impacts on the Company, including further impairing its limited available liquidity and the loss of its principal asset. These would be expected to adversely effect the ability of the Company to achieve any of the strategic options it intends to pursue, and could lead to a bankruptcy filing or the cessation of operations altogether. Such events would be expected to have a significant negative effect on the price of the common stock. 12 15 On February 2, 2001, Sunshine received Notice that the smelter to which the Sunshine Mine shipped concentrates was closing and would no longer accept any deliveries. Management sought alternatives for the production from the Sunshine Mine but has not been successful in securing an economically viable alternate arrangement. As a result, Sunshine notified employees that a mass lay-off of the majority of the Sunshine Mine employees would occur on February 16, 2001, and the mine was placed on a care and maintenance status. As a result of the closure of the Sunshine Mine, the Company will have no revenues from operations for the foreseeable future. It is expected that the reopening of the mine would require a substantial improvement in silver prices. However, due to lack of available funds, the Company has significantly cut back exploration and development since the end of 1999, including stopping the so-called ConSil ramp project. Therefore, access to economically recoverable reserves will be limited upon any reopening of the mine, and, before commercial operations can be restarted, a substantial exploration and development effort will be required. The opinion of the Company's independent certified public accountants covering the 2000 year expressed substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE Whenever circumstances or events indicate, and at least annually, the Company evaluates its mining properties for impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, recoverable reserves and estimates of future reserve potential which management believes are reasonable, based on historical silver prices and production. If the sum of such cash flows is less than the carrying amount of the asset, the Company would record an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the third quarter of 1998, drilling in the West Chance vein indicated that the size of the vein might be smaller than what was previously expected. Based on that information, along with low by-product prices and a decline in silver prices, the Company estimated that future cash flows from the mine would not be sufficient to recover the $59.4 million carrying amounts of the mine. The fair value of the mine as determined by the discounted cash flow method was approximately $9 million and an impairment charge of $50.4 million was taken at the end of the third quarter. A further similar review during the fourth quarter of 2000, in light of the shutdown of the mine, determined that the fair value of the equipment and real property at the mine was approximately $1.4 million and an impairment charge of $7.2 million was taken. Discussion of potential future increases in the price of silver and the presence of additional mineralized material and resources are forward-looking statements regarding matters over which the Company has no control. Actual future silver prices and the results of current exploration may differ from anticipated values. OPERATING, INVESTING AND FINANCING ACTIVITIES Cash used in operating activities for the year ended 2000 was $4.9 million compared to $5.8 million in 1999. The $900 thousand improvement was primarily due to changes in working capital items partially offset by a $2.6 million increase in cash operating loss. The cash operating loss increased primarily due to a $4.1 million decrease in cash operating income at the Sunshine Mine and $2.0 million in reorganization costs, partially offset by a $2.4 million decrease in cash interest expense and a $1.3 million decrease in general and administrative expense. Cash provided by investing activities during 2000 included proceeds of $3.9 million from the sale of investment silver bullion and $0.9 million from the sale of the La Joya Mine in Argentina. Cash used by investing activities was $1.6 million for additions to property, plant and equipment primarily consisting of $1.0 million for the development of 13 16 Pirquitas and $354 thousand in capital expenditures at the Sunshine Mine. Cash used by investing activities in 1999 was $0.8 million, including $4.2 million of additions to property, plant and equipment ($2.6 million for the development of Pirquitas, $1.4 million in capital expenditures at the Sunshine Mine and $200 thousand on other properties). These were offset by $1.9 million in proceeds from the sale of certain investments and $1.5 million from the sale of 300 thousand ounces of investment silver bullion. $5.8 million cash was used by investing activities during 1998, including $8.3 million for the development of the Pirquitas Mine in Argentina and $1.8 million at the Sunshine Mine, partially offset by $4.5 million of cash proceeds from the sale of certain investments, the sale of 300 thousand ounces of investment silver bullion, and proceeds from settlement of certain litigation. Cash provided by financing activities in 2000 consisted of $1.5 million of borrowings under the DIP Facility less a $150 thousand commitment fee. $5.8 million in cash was provided through the issuance of the 5% Notes in 1999. Cash provided by financing activities in 1998 includes $785 thousand from the exercise of stock options and warrants. RESULTS OF OPERATIONS 2000 COMPARED TO 1999 Consolidated operating revenues decreased approximately $9.2 million (28.6%) for the year ended 2000 compared to the year ended 1999, while mark-to-market losses on investment bullion totaled $167 thousand in 2000 compared to a $359 thousand gain in 1999. The decrease in operating revenues primarily resulted from a decrease in the average price received per ounce of silver sold and a decrease in ounces sold (4.2 million ounces of silver at an average of $4.93 per ounce in the 2000 period compared to 5.5 million ounces at an average of $5.23 per ounce in the 1999 period), a $734 thousand decrease in by-product revenue and a $213 thousand decrease in recognized premium income on the sale of covered calls on silver bullion held as an investment. Silver production totaled 3,879,100 ounces produced from 169,036 tons at 23.81 ounces per ton in 2000 versus 5,210,843 ounces from 217,601 tons at 24.75 ounces per ton in 1999. The decrease in production was primarily due to fewer productive stopes being available as mining proceeds to the outskirts of the West Chance area. By-product revenue decreased primarily because of decreased production of lead and copper. Cost of revenues decreased $5.1 million (18.4%) from $27.7 million in 1999 to $22.6 million in 2000, primarily due to lower smelter, mining, and metallurgical costs as a result of the lower production and sales, and also, due to reduction in tons and ounces of silver produced during the 2000 period. Net operating cash production costs increased $0.39 to $4.75 per ounce of silver. This increase was primarily due to fixed costs being spread over fewer ounces of silver produced. The 2000 period includes a $7.2 million charge as an impairment writedown of the Sunshine Mine. See "Liquidity and Capital Resources - Evaluation of Recoverability of Investment in Sunshine Mine." Exploration expense increased $359 thousand in 2000 compared to 1999 primarily due to expenditures on certain Argentina properties and Juanicipio in Mexico. Interest income decreased $112 thousand due to lower average invested cash balances. Selling, general and administrative expense declined $1.3 million due to a variety of cost reductions. Interest and debt expense decreased $1.3 million primarily due to the amortization in 1999 of 100% of the discount feature associated with the 5% Convertible Notes issued in January 1999, the amortization of debt discount and issuance costs for the Eurobonds for the full year in 1999 as compared to one quarter in 2000, the cessation of interest accruals as discussed in Note 8 of the Consolidated Financial Statements and lower outstanding balances on the Company's debt. These were partially offset by $1.4 million of additional interest on the 10% Notes. Other, net of $193 thousand for the 2000 period includes the gain from the sale of the La Joya Mine in Argentina, partially offset by the write down of certain other investments. Other, net of $297 thousand in 1999 was 14 17 primarily due to $1.5 million from gains on certain investments sold and recognition of actuarial gains on pension plans not previously recognized, partially offset by fees and expenses related to attempting certain debt offerings. Reorganization items - professional fees are primarily the costs of legal counsel and other professionals in the preparation and solicitation of approval of the Company's Chapter 11 Plan of Reorganization and the associated financing documents. These fees include pre-petition fees of counsel for the Cosponsoring Bondholders. 1999 COMPARED TO 1998 The Company's net loss decreased $54.0 million in 1999 to $10.8 million compared to $64.8 million in 1998. The improvement is primarily due to the $50.4 million impairment writedown of the Sunshine Mine in 1998. Consolidated operating revenues decreased approximately $2.3 million (6.7%) for 1999 compared to 1998, while mark to market gains on investment bullion totaled $359 thousand in 1999 compared to a $2.6 million writedown in 1998. The decrease in operating revenues primarily resulted from a $0.24 decrease in the average price received per ounce of silver sold (5.5 million ounces of silver at an average of $5.23 per ounce in 1999 compared to 5.5 million ounces at an average of $5.47 per ounce in 1998), and a $742 thousand decrease in by-product revenue. By-product revenue decreased primarily because of a 4.5 million-pound reduction in lead sales, partially offset by a 125 thousand-pound increase in copper sold. The reduction in lead sales is due to the fact that mining began to move to areas of the Sunshine Mine that contain less lead. Cost of revenues decreased $692 thousand (2.4%) from $28.4 million in 1998 to $27.7 million in 1999 primarily due to lower per ounce operating cash cost which decreased $.07 (1.6%) to $4.36 per ounce of silver. This reduction was primarily due to a .58 ounce per ton (2.4%) increase in average grades from 1998 to 1999, reduced smelter costs and a reduction in development costs. Silver production totaled 5.2 million ounces produced from 217,601 tons at 24.75 ounces per ton in 1999 versus 5.8 million ounces from 247,866 tons at 24.17 ounces per ton in 1998. Depreciation, depletion and amortization decreased by approximately $3.6 million as a result of the writedown of the Sunshine Mine in the third quarter of 1998. Exploration expense decreased $2.5 million in 1999 compared to 1998 primarily due to a reduction of expenditures for the Sunshine Mine and other projects in Argentina and the U.S. Selling, general and administrative costs decreased $216 thousand (4.3%) due to a variety of cost reductions. Interest income decreased $370 thousand due to lower average invested cash balances. Interest and debt expense increased $1.2 million primarily due to the amortization of the beneficial conversion feature associated with the 5% Notes issued in January 1999, and higher amortization of debt discount for the outstanding Eurobonds. In 1999, income of $297 thousand in other, net was primarily due to $1.5 million from gains on certain investments sold and recognition of actuarial gains on pension plans not previously recognized, partially offset by fees and expenses related to attempting certain debt offerings. Other, net of $2.7 million in 1998 represented a $1.1 million net gain for proceeds received from settlement of certain litigation and a reduction of the valuation reserves previously recorded against certain investments. 7a. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES. COMMODITY PRICE RISK Substantially all of the Company's revenues are from sales of silver. Volatility in the price of silver causes substantial fluctuations in the Company's revenues and financial condition. There are many factors which 15 18 influence the volatility of silver prices. Changes in supply and demand, worldwide economic and political conditions, expectations as to inflation and speculative activity in the market all cause fluctuations in silver prices. As previously discussed, the price of silver in recent years has been depressed, averaging approximately $5.00 per ounce for the 13-year period ended in 2000. Over the prior ten year period the silver price averaged approximately $9.50 per ounce. During 1999 and 1998, the Company from time to time sold covered calls against its silver bullion inventory. Total premiums earned for the sale of covered calls aggregated $246,500 and $316,250 in 1999 and 1998, respectively. At December 31, 1999, the Company had covered call options outstanding for 300,000 ounces of silver with strike prices ranging from $5.25 to $5.35 and expiration dates of January 27, 2000 (100,000 ounces), February 25, 2000 (100,000 ounces) and March 28, 2000 (100,000 ounces). The fair value of the sold calls at December 31, 1999 approximates the premiums received when they were sold. No covered call options were sold during 2000. The Company's policy is not to sell any uncovered calls. (See Note 3 of Notes to Consolidated Financial Statements for information related to accounting policies for covered calls.) FOREIGN CURRENCY RISK The Company has operations in Argentina and Mexico. Therefore, the Company could be at risk for fluctuations in the relationship of U.S. dollar to the Argentine or Mexican peso exchange rates. However, Argentina maintains a 1:1 exchange ratio by limiting the amount of pesos that are issued to the amount of U.S. dollars held by the Argentine Central Bank. Also, it has been reported that Argentina is considering replacing the peso with the U.S. dollar. To date, the Company's activities in Mexico have not been significant. Thus at this time, the Company does not feel its foreign currency market risk is significant. At December 31, 2000, no debt was denominated in a foreign currency nor are there any firm purchase commitments denominated in a foreign currency. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements filed herewith begin on page F-1 hereof. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Ernst & Young, LLP (Sunshine's auditors for many years) abruptly resigned on May 27, 1999, immediately before the commencement of an offering to raise capital to refinance indebtedness and finance the equity requirement of the Pirquitas Mine. Representatives of Ernst & Young, LLP stated to representatives of Sunshine that their resignation was for internal business reasons of the auditing firm and was not due to concerns about the accuracy of Sunshine's financial statements or Management's integrity. The reports of Ernst & Young, LLP on Sunshine's financial statements for 1998 and 1997 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles. The reports of Ernst & Young LLP for 1998 and 1997 were not modified as to uncertainty regarding the ability of Sunshine to continue as a going concern. In connection with the audits of the financial statements of Sunshine for each of the two fiscal years ended December 31, 1998 and 1997, and in the subsequent interim periods, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to the satisfaction of Ernst & Young, LLP would have caused them to make reference to the matter in their report. On June 11, 1999, Grant Thornton, LLP was engaged by Sunshine's Board of Directors as the new independent accountant for Sunshine. On May 23, 2000, Sunshine filed its original petition against Ernst & Young, LLP in the case styled Sunshine Mining and Refining Company v. Ernst & Young, LLP, Cause No. CC-00-06081-A, in the County Court at Law No. 1 of Dallas County, Texas. Sunshine's complaint alleges that it has sustained substantial direct and consequential damages in addition to more than $1 million in out of pocket costs and expenses associated with the failed offering. These damages arose out of Ernst & Young, LLP's wrongful conduct connected to its cessation of the auditor-client relationship. Sunshine alleges that Ernst and Young's failure to earlier disclose its planned termination constituted fraud and/or negligent misrepresentation. In addition, it is alleged that the termination itself was an act of negligence, progessional 16 19 misconduct and breach of contract. Ernst and Young's abrupt resignation at the commencement of Sunshine's offering had the foreseeable effect of alarming the investment community about the integrity of Sunshine's management and of Sunshine's financial information. PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. At Sunshine's 1999 Annual Meeting of Stockholders seven individuals were each elected as a member of the Board of Directors of Sunshine, each of which has been a member of the Board of Directors of Sunshine for more than five calendar years. The directors were G. Chris Andersen (May 1983), V. Dale Babbitt (December 1992), George M. Elvin (June 1994), Daniel D. Jackson (May 1983), Oren G. Shaffer (June 1993), John S. Simko (December 1992) and Robert B. Smith (June 1993). On the Effective Date of the Plan, the operational management of Sunshine became the responsibility of "Reorganized Board of Directors" selected in accordance with the Plan. The directors listed above ceased to be Directors of Sunshine on the Effective Date of the Plan and were deemed removed (without cause) pursuant to the Confirmation Order. In accordance with the terms of the Plan, four "Creditor Directors" were selected and one "Management Director" was selected to comprise the Board of Directors of Sunshine from and after the Effective Date. John S. Simko continues as a Director as the Management Director, and George M. Elvin was selected as one of the Creditor Directors by Elliott International, L.P. The other three "Creditor Directors" selected are Arnold Kastenbaum (Designee of Stonehill Offshore Partners Limited), Keith McCandlish (Designee of Elliott International, L.P.), and Charles Reardon (Designee of Stonehill Institutional Partners, L.P.) DIRECTOR NAME, AGE, PRINCIPAL OCCUPATIONS, BUSINESS EXPERIENCE AND DIRECTORSHIPS
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION NAME AGE AND BUSINESS HISTORIES ---- --- ---------------------------------------------- John S. Simko 62 Director (since December 1992), Chief Executive Officer (December 1996 to January 2001), Chairman of the Board (since December 1996), President (December 1992 to January 2001); previously (since 1984) served the Company as Senior Vice President and General Counsel. George M. Elvin(1) 56 Director (since June 1994). Since 1998 he has been president and owner of Barrington Associates, LLC., a financial consulting business. From 1992 through 2000 he was the president and owner of Windsor IBC, Inc., a brokerage firm member of the NASD. Mr. Elvin is a designee of Elliott International, LP. Charles C. Reardon 44 Director (since January 2001). Since 1998, he has been Of Counsel to Westerman, Ball, Ederer & Miller LLP, and the firm of Goldburg & Smith, each a Long Island, New York law firm. During the five years prior thereto, Mr. Reardon also served as a business consultant and/or independent contractor for Karamar Publications, a privately-held publication firm, The Oxford Insurance Agency Group, a Long Island, New York based casualty insurance agency, and Allen & Company, a New York merchant banking firm. Since 1982, he has been a member of the New York State Bar Association and is a practicing attorney. Mr. Reardon is a Designee of Stonehill Institutional Partners, LP.
17 20
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION NAME AGE AND BUSINESS HISTORIES ---- --- ---------------------------------------------- Arnold Kastenbaum(1) 47 Director (since January 2001). Since 1999, he has been President of Chodan Advisors, Inc., a New York firm specializing in financial restructuring consulting. From 1997 through 1999, he was Director/Distress Securities/Special Situations (similar to a Vice President) of UBS Warburg; prior thereto, from 1994 until 1997, he was Director of Research/Senior Research Analyst of MJ Whitman, Inc. Mr. Kastenbaum is a member of the Board of Directors of Willcox & Gibbs, Inc., a publicly-held corporation which distributed machinery parts to the garment industry. Mr. Kastenbaum is a Designee of Stonehill Offshore Partners Ltd. Keith McCandlish 43 Director (since January 2001). He is a Canadian citizen and the Manager of Mineral Services at Associated Mining Consultants, Ltd., and has been employed by Associated Mining Consultants, Ltd. since 1988 in various capacities. Mr. McCandlish is a Registered Professional Geologist with over twenty years of consulting geological and engineering experience in minerals, oil, sands/heavy oil, precious stones, coal and industrial minerals. Mr. McCandlish is a Designee of Elliott International, LP.
Directors are normally elected annually to serve until the next annual meeting of stockholders or until their respective successors are elected. CERTAIN OTHER MATTERS No family relationships exist between any director or executive officer. Mr. Kastenbaum is a Director of Willcox & Gibbs, which has a class of securities registered pursuant to Section 12 of the Securities and Exchange Act of 1934. The following are the executive officers (the "Named Executive Officers") of the Company:
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION NAME AGE AND BUSINESS HISTORIES ---- --- ---------------------------------------------- John S. Simko 62 Director (since December 1992), Chief Executive Officer (December 1996 to January 2001), Chairman of the Board (since December 1996), President (December 1992 to January 2001); previously (since 1984) served the Company as Senior Vice President and General Counsel. William W. Davis 47 President and Chief Operating Officer (since February 2001) and Chief Financial Officer (since September 1992); Executive Vice President (December 1995 to January 2001), and Senior Vice President and Chief Financial Officer of the Company (September 1992 to November 1995); previously (from 1983) served in various capacities as an employee of the Company. Harry F. Cougher 58 Senior Vice President and Chief Operating Officer-Mining since January 1994. Previously, since 1984, served in various capacities as an employee of the Company.
18 21 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company believes based on its review of Forms 3, 4 and 5, furnished to the Company for the fiscal year ended December 31, 2000 and written representations that no other reports were required for such fiscal year that all Section 16(a) filing requirements applicable to its officers and directors were complied with. 11. EXECUTIVE COMPENSATION. The following table sets forth the total compensation paid by the Company, or accrued for the account of each of the "Named Executive Officers" for calendar years 2000, 1999 and 1998. There were no other executive officers whose salary and bonus for the year ended December 31, 2000, exceeded $100,000. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------------------------------------- ----------- ---------------------- (A) (B) (C) (D) (G) (H) (I) SECURITIES UNDERLYING LTIP ALL OTHER SALARY BONUS OPTIONS/SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)(1) --------------------------- ---- ------ ----- ------------ ------- ------------ John S. Simko, 2000 361,844 0 0 0 0 Chairman & Chief Executive 1999 361,843 0 0 0 11,439 Officer 1998 360,031 55,000 0 0 10,798 William W. Davis, 2000 242,548 0 0 0 0 Exec. Vice Pres. & Chief 1999 242,548 50,000 0 0 11,439 Financial Officer 1998 242,547 26,400 0 0 10,798 Harry F. Cougher 2000 145,026 0 0 0 0 Sr. Vice Pres. & 1999 145,026 0 0 0 10,369 Chief Operating Officer-Mining 1998 145,025 10,200 0 0 10,476
---------- (1) Includes income received pursuant to the Company's Employees Savings and Security Plan (the "Savings Plan") in which all employees of the Company, other than those covered by collective bargaining agreement, may participate, and the Sunshine Defined Contribution Plan (the "DC Plan"). Payments to Mr. Simko under the Savings Plan were $4,800 and $4,800 in 1999 and 1998, respectively; and under the DC Plan were $6,639 and $5,998 in 1999, and 1998, respectively. Payments to Mr. Davis under the Savings Plan were $4,800 and $4,800 in 1999 and 1998, respectively; and under the DC Plan were $6,639 and $5,998 in 1999 and 1998, respectively. Payments to Mr. Cougher under the Savings Plan were $4,351 and $4,657 for 1999 and 1998, respectively; and under the DC Plan were $6,018 and $5,819 for 1999 and 1998, respectively. The Savings Plan is an individual account plan which provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code and is subject to and complies with all of the principal protective provisions of Titles I and II of the Employee Retirement Income Security Act of 1974 ("ERISA"). The DC Plan replaced the Company's Defined Benefit Pension Plan as of January 1, 1994, and is subject to and complies with ERISA. OPTIONS GRANTS IN LAST FISCAL YEAR No stock options were granted to the Named Executive Officers in the year ended December 31, 2000. 19 22 AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES As of February 5, 2001, the Effective Date for the Plan, all outstanding options were cancelled. The following table provides information on option exercises in fiscal 2000 by the Named Executive Officers and the value of such officers' unexercised options at December 31, 2000.
(A) (B) (C) (D) (E) NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS SHARES VALUE OPTIONS/SARS AT FY-END(#) AT FY-END($) ACQUIRED ON REALIZED ------------------------------ -------------------------- NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ -------- ----------- ------------- ----------- ------------- John S. Simko, CEO 0 0 108,125 0 0 0 William W. Davis 0 0 75,000 0 0 0 Harry F. Cougher 0 0 37,500 0 0 0
---------- PENSION PLANS On December 31, 1993, the Company froze its Defined Benefit Pension Plan (the "Pension Plan"), which was replaced as of January 1, 1994, by the Company's DC Plan. The Pension Plan was maintained for the benefit of employees, except those covered by a collective bargaining agreement. Benefits under the Pension Plan ceased to accrue after December 31, 1993. Annual benefits at age 65 for Messrs. Simko, Davis and Cougher under the Pension Plan are frozen at $36,186, $33,500 and $15,901, respectively. The years of credited service at December 31, 1993, for Mr. Simko, Mr. Davis and Mr. Cougher were ten, eleven and ten years, respectively. Employees who are age 55 and who have fifteen or more years of employment with the Company are eligible for early retirement, and will receive approximately 75% of the accrued benefits they would have received at age 65. COMPENSATION OF DIRECTORS Directors who are not employees receive an annual retainer of $25,000 and $1,250 per day for each board and committee meeting attended. Directors who so elect are covered by the Sunshine Mining Health Insurance Plan. During 2000, directors received compensation as follows in cash and/or health benefits: Messrs. Andersen $13,750, Babbitt $20,570, Elvin $20,570, Jackson $17,419, Shaffer $13,750 and Smith $20,570. EMPLOYMENT CONTRACTS Effective January 1, 1994, each of Messrs. Simko, Davis and Cougher entered into written employment agreements (the "Old Employment Agreements") with the Company for a term of three years. In December 1995, the Employment Agreements for Messrs. Simko, Davis and Cougher were amended to extend the term to December 31, 1999, and again in September 1998 to extend the term to December 31, 2002. Pursuant to the Plan and the Confirmation Order, each of such agreements was rejected by Sunshine and deemed terminated. Pursuant to the Plan and the Confirmation Order, Sunshine, effective as of February 5, 2001, intends to enter into new written employment agreements with Messrs. Simko and Davis (the "New Employment Agreements") covering a term of three years. In the event of disability or death, the New Employment Agreements will provide for the continued payment of the base compensation for the remaining term, subject to reduction for disability payments separately provided by the Company. The employees will receive such annual incentive compensation based on the performance of the Company or other criteria as may be awarded in the discretion of the Board of Directors, and will participate in any employee benefit, welfare, deferred compensation, stock option plan, or any other plan or arrangement of the Company now or hereafter adopted for the benefit of officers or employees generally. 20 23 If within three years of a "change of control" of the Company, employment of Messrs. Simko or Davis is voluntarily or involuntarily terminated, he will be entitled to receive in a single payment an amount from one-half to two times his base salary, dependent upon the total consideration involved in the change of control. All benefits under any employee benefit plan would immediately vest and continue for the balance of the term of his agreement. The maximum amount of compensation based on current base salaries which would be required to be paid to each individual if his employment was terminated upon a "change of control" of the Company would be $400,000 or $480,000 to Messrs. Simko, and/or Davis, respectively. Payments required upon a "change of control" of the Company may be considered to have certain anti-takeover effects in that they would make an acquisition of the Company more costly. Pursuant to the New Employment Agreements, the Company will indemnify each employee in the event that he is made, or threatened to be made, a party to any action or proceeding, including any action by or in the right of the Company by reason of the provision of services by him to the Company. Claims or controversies arising under the New Employment Agreements will be resolved through arbitration, and all resulting legal and accounting fees and other expenses will be paid by the Company. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. To the knowledge of the Company, the following persons own five percent (5%) or more of the Company's Common Stock:
(1) (2) (3) (4) TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF CLASS BENEFICIAL OWNER OF BENEFICIAL OWNER CLASS(a) -------- ------------------- --------------------- ---------- Common Stock The Liverpool Limited Partnership ) c/o Liverpool Associates, Ltd., General Partner ) ) 25,490,000 50.98% Elliott International, L.P. ) c/o Elliott International Capital Advisers, ) Inc., ) 712 Fifth Avenue, 36th Floor ) New York NY 10019 ) Stonehill Institutional Partners, L.P. c/o John Motulsky, General Partner 6,690,275 13.38% c/o Stonehill Capital Management 126 East 56th Street, 9th Floor New York NY 10022 Stonehill Offshore Partners Limited c/o Citco Fund Services (Cayman Islands) 12,814,725 25.63% Limited, Corporate Center West Bay Road, Box 31106SMB Grand Cayman Islands, B.W.I.
The following table presents certain information regarding the number of shares of Common Stock beneficially owned by each director, nominee, Named Executive Officer, and by all directors and officers as a group as of the Record Date. All individuals have sole voting and investment power with respect to the shares owned. 21 24
AMOUNT AND NATURE OF PERCENT NAME OF INDIVIDUAL TITLE OF CLASS BENEFICIAL OWNERSHIP OF CLASS ------------------ -------------- -------------------- -------- William W. Davis Common Stock 750,000(b) 1.5% George M. Elvin Common Stock -0- -0- Arnold Kastenbaum Common Stock -0- -0- Keith McCandlish Common Stock -0- -0- Charles C. Reardon Common Stock -0- -0- John S. Simko Common Stock 500,000(b) 1% All Directors and Executive Officers as a Group (seven individuals) Common Stock 1,250,000(b) 2.5%
---------- (a) Percentages are based upon estimated 50,000,000 shares of Common Stock outstanding at March 15, 2001. (b) Includes the following shares subject to purchase pursuant to stock options exercisable within 60 days - Messrs. Davis, 750,000 shares; Simko, 500,000 shares. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. The following documents are filed as a part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements. See Index to Financial Statements and Financial Statements Schedules on page F-1 hereof. 2. Consolidated Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits. EXHIBIT DESIGNATION EXHIBIT DESCRIPTION 2.1 Third Amended Joint Chapter 11 Plan of Reorganization dated as of December 4, 2000, bench-filed in the case styled In Re: Sunshine Mining and Refining Company, Chapter 11, Case No. 00-3409 (MWF), filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 2.2 Order confirming the Third Amended Joint Chapter 11 Plan of Reorganization of Sunshine Mining and Refining Company and its Debtor Subsidiaries as entered December 5, 2000, filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 22 25 EXHIBIT DESIGNATION EXHIBIT DESCRIPTION 2.3 Partial Consent Decree with Sunshine Mining and Refining Company and Sunshine Precious Metals, Inc. in the case styled United States of America v. Asarco Incorporated, et al., a Consolidated Case Nos. 96-0122-N-EJL and 91-0342-N-EJL in the United States District Court for the District of Idaho, filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 2.4 Notice of Effective Date of Third Amended Joint Chapter 11 Plan of Reorganization, filed as Exhibit 2.4 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 3.1 Amended and Restated Certificate of Incorporation filed with and approved by the Secretary of State of Delaware on February 23, 2001, filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 3.2 Amended and Restated Bylaws as adopted February 9, 2001, filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 10.1 Call Option Agreement dated February 5, 2001, among Sunshine International Mining, Inc., Sunshine Mining and Refining Company, Sunshine Argentina, Inc., Elliott International, L.P., The Liverpool Limited Partnership, Stonehill Institutional Partners, L.P. and Stonehill Offshore Partners Limited, filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 10.2 Registration Rights Agreement dated February 5, 2001, among Sunshine Mining and Refining Company, Stonehill Partners, L.P., Stonehill Offshore Partners Limited, Elliott International, L.P. and The Liverpool Limited Partnership, filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K for event report February 5, 2001. *21.0 Subsidiaries of Sunshine. 24.1 Power of Attorney (set forth on signature page hereof). * Filed herewith. Schedules other than those included in the Consolidated Financial Statements, if any, are omitted for the reason that they are either not required, not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto. (a) Reports on Form 8-K: On February 20, 2001, the Company filed a report on Form 8-K reporting that February 5, 2001 was the effective date of its Chapter 11 Plan of Reorganization and that a change of ownership occurred on that date. 23 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sunshine Mining and Refining Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED this 16th day of March, 2001. SUNSHINE MINING AND REFINING COMPANY By /s/ WILLIAM W. DAVIS ------------------------------------------ William W. Davis, Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Sunshine Mining and Refining Company (the "Company") hereby constitutes and appoints John S. Simko, William W. Davis, and Robert H. Peterson, or any of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file any and all documents relating to the Company's Form 10-K for the year ended December 31, 1999, including and all amendments and supplements hereto, with any regulatory authority granting said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 16th day of March, 2001.
NAME CAPACITIES ---- ---------- /s/ JOHN S. SIMKO Director and Chairman of the Board ---------------------------------- John S. Simko /s/ GEORGE M. ELVIN Director ---------------------------------- George M. Elvin /s/ ARNOLD KASTENBAUM Director ---------------------------------- Arnold Kastenbaum /s/ KEITH McCANDLISH Director ---------------------------------- Keith McCandlish /s/ CHARLES C. REARDON Director ---------------------------------- Charles C. Reardon /s/ WILLIAM W. DAVIS President, Chief Operating Officer ---------------------------------- and Chief Financial Officer William W. Davis
24 27 Consolidated Financial Statements Sunshine Mining and Refining Company Years ended December 31, 2000, 1999 and 1998 with Report of Independent Certified Public Accountants 28 Report of Independent Certified Public Accountants Board of Directors and Stockholders Sunshine Mining and Refining Company We have audited the accompanying consolidated balance sheets of Sunshine Mining and Refining Company and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunshine Mining and Refining Company and subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $20,890,000 and used $4,932,000 of cash in operating activities in the year ended December 31, 2000. As discussed in Note 4 to the consolidated financial statements, the Company closed the Sunshine Mine in February 2001 and will have no revenues from operations for the forseeable future. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the consolidated financial statements, the Company and three of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court of the District of Delaware on August 23, 2000. The Company emerged from bankruptcy on February 5, 2001. GRANT THORNTON LLP Dallas, Texas February 22, 2001 F-1 29 Sunshine Mining and Refining Company Consolidated Balance Sheets (in thousands, except per share amounts)
DECEMBER 31 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash investments $ 291 $ 628 Silver bullion 10 4,117 Accounts receivable 1,626 2,677 Inventories 1,500 2,826 Equipment held for sale 1,006 -- Other current assets 731 787 ------------ ------------ Total current assets 5,164 11,035 Property, plant, and equipment, at cost 40,933 60,720 Less accumulated depreciation, depletion, and amortization (26,262) (37,623) ------------ ------------ 14,671 23,097 Investments and other assets 2,757 2,888 ------------ ------------ Total assets $ 22,592 $ 37,020 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 697 $ 1,634 Accrued expenses 1,643 3,562 Current portion, long term debt -- 5,000 ------------ ------------ Total current liabilities 2,340 10,196 Long term debt 1,530 38,238 Accrued pension and other postretirement benefits 5,230 4,445 Other long-term liabilities and deferred credits 779 2,861 Liabilities subject to compromise 48,991 -- Stockholders' equity (deficit): Common stock, $0.01 par value: Authorized shares - 75,000 Issued shares - 49,264 in 2000; 39,252 in 1999 493 393 Paid-in capital 729,956 725,840 Accumulated other comprehensive loss (884) -- Accumulated deficit (764,733) (743,843) ------------ ------------ (35,168) (17,610) Less treasury stock: 579 shares in 2000 and 1999, at cost (1,110) (1,110) ------------ ------------ (36,278) (18,720) ------------ ------------ Total liabilities and stockholders' deficit $ 22,592 $ 37,020 ============ ============
See accompanying notes. F-2 30 Sunshine Mining and Refining Company Consolidated Statements of Operations (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31 2000 1999 1998 ------------ ------------ ------------ Operating revenues $ 23,094 $ 32,332 $ 34,668 Mark to market gain (loss) (167) 359 (2,588) ------------ ------------ ------------ 22,927 32,691 32,080 Costs and expenses: Cost of revenues (22,570) (27,673) (28,365) Depreciation, depletion, and amortization (1,198) (1,328) (4,944) Impairment of mining properties (7,245) -- (50,425) Exploration (2,373) (2,015) (4,512) Selling, general, and administrative expense (3,450) (4,800) (5,016) ------------ ------------ ------------ (36,836) (35,816) (93,262) Other income (expense): Interest income 85 198 567 Interest and debt expense (5,294) (8,213) (6,979) Other, net 193 297 2,749 ------------ ------------ ------------ (5,016) (7,718) (3,663) ------------ ------------ ------------ Loss before reorganization items (18,925) (10,843) (64,845) Reorganization items - professional fees (1,965) -- -- ------------ ------------ ------------ Net loss $ (20,890) $ (10,843) $ (64,845) ============ ============ ============ Basic and diluted loss per common share $ (0.48) $ (0.31) $ (2.02) ============ ============ ============
See accompanying notes. F-3 31 Sunshine Mining and Refining Company Consolidated Statements of Stockholders' Equity (Deficit)
COMMON STOCK ACCUMULATED ------------------------- PAID-IN OTHER COMPRE- ACCUMULATED SHARES AMOUNT CAPITAL HENSIVE LOSS DEFICIT ---------- ---------- ---------- -------------- ---------- (In Thousands) Balance at December 31, 1997 32,477 $ 325 $ 713,465 $ -- $ (668,155) Net loss -- -- -- -- (64,845) Issuance of common stock upon conversion of Eurobonds 191 2 1,317 -- -- Issuance of common stock for interest on 10% Notes 134 1 749 -- -- Issuance of common stock upon exercise of stock options and warrants 194 2 783 -- -- Other, net -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 32,996 $ 330 $ 716,314 $ -- $ (733,000) Net loss -- -- -- -- (10,843) Issuance of common stock upon conversion of: Eurobonds 337 3 1,178 -- -- 5% Notes 3,451 35 5,632 -- -- 10% Notes 37 -- 129 -- -- Beneficial conversion feature on 5% Notes -- -- 962 -- -- Issuance of common stock for interest on: Eurobonds 1,587 16 (16) -- -- 5% Notes 112 1 150 -- -- 10% Notes 730 8 1,486 -- -- Other, net 2 -- 5 -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1999 39,252 $ 393 $ 725,840 $ -- $ (743,843) Comprehensive loss: Net loss -- -- -- -- (20,890) Minimum pension liability adjustment -- -- -- (884) -- ---------- ---------- ---------- ---------- ---------- Total comprehensive loss -- -- -- (884) (20,890) Issuance of common stock upon exercise of warrants 5,611 56 (52) -- -- Issuance of common stock: Conversion of Eurobonds 756 8 1,023 -- -- Conversion of 10% Notes 1,937 19 1,288 -- -- Interest payment on 10% Notes 698 7 617 -- -- Mandatory prepayment on 10% Notes 1,010 10 1,240 -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 49,264 $ 493 $ 729,956 $ (884) $ (764,733) ========== ========== ========== ========== ========== TREASURY STOCK ------------------------------------------ SHARES AMOUNT TOTAL ---------- ---------- ---------- (In Thousands) Balance at December 31, 1997 573 $ (1,139) $ 44,496 Net loss -- -- (64,845) Issuance of common stock upon conversion of Eurobonds -- -- 1,319 Issuance of common stock for interest on 10% Notes -- -- 750 Issuance of common stock upon exercise of stock options and warrants -- -- 785 Other, net (3) 29 29 ---------- ---------- ---------- Balance at December 31, 1998 570 $ (1,110) $ (17,466) Net loss -- -- (10,843) Issuance of common stock upon conversion of: Eurobonds -- -- 1,181 5% Notes -- -- 5,667 10% Notes -- -- 129 Beneficial conversion feature on 5% Notes -- -- 962 Issuance of common stock for interest on: Eurobonds -- -- -- 5% Notes -- -- 151 10% Notes -- -- 1,494 Other, net 9 0 5 ---------- ---------- ---------- Balance at December 31, 1999 579 $ (1,110) $ (18,720) Comprehensive loss: Net loss -- -- (20,890) Minimum pension liability adjustment -- -- (884) ---------- ---------- ---------- Total comprehensive loss -- -- 21,774 Issuance of common stock upon exercise of warrants -- -- 4 Issuance of common stock: Conversion of Eurobonds -- -- 1,031 Conversion of 10% Notes -- -- 1,307 Interest payment on 10% Notes -- -- 624 Mandatory prepayment on 10% Notes -- -- 1,250 ---------- ---------- ---------- Balance at December 31, 2000 579 $ (1,110) $ (36,278) ========== ========== ==========
See accompanying notes. F-4 32 Sunshine Mining and Refining Company Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 2000 1999 1998 ------------ ------------ ------------ (In Thousands) OPERATING ACTIVITIES Net loss $ (20,890) $ (10,843) $ (64,845) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion, and amortization 1,198 1,328 4,944 Impairment of mining properties 7,245 -- 50,425 Amortization of debt issuance costs and accretion of debt discount 730 3,806 2,480 Gains on sales of investments and other (345) (1,138) (2,795) Interest on Eurobonds and 10% Notes paid or payable in common stock 2,881 1,645 750 Net (increase) decrease in: Silver bullion 171 (430) 1,097 Accounts receivable 1,051 124 -- Inventories 1,326 1,410 (609) Other assets 421 547 (947) Net increase (decrease) in: Accounts payable and accrued expenses 3,795 (585) 855 Accrued pension and other postretirement benefits (433) (1,053) (174) Other liabilities and deferred credits (2,082) (623) (720) ------------ ------------ ------------ Net cash used in operating activities (4,932) (5,812) (9,539) ------------ ------------ ------------ INVESTING ACTIVITIES Additions to property, plant, and equipment (1,646) (4,183) (10,318) Other, principally sale of silver bullion 4,861 3,411 4,506 ------------ ------------ ------------ Net cash provided by (used in) investing activities 3,215 (772) (5,812) ------------ ------------ ------------ FINANCING ACTIVITIES Proceeds from issuance of long term debt, net of issuance costs 1,380 5,827 (7) Proceeds from issuance of common stock upon exercise of warrants and other transactions -- (27) 785 ------------ ------------ ------------ Net cash provided by financing activities 1,380 5,800 778 ------------ ------------ ------------ Decrease in cash and cash investments (337) (784) (14,573) Cash and cash investments at beginning of year 628 1,412 15,985 ------------ ------------ ------------ Cash and cash investments at end of year $ 291 $ 628 $ 1,412 ============ ============ ============ Supplemental cash flow information: Interest paid in cash $ 265 $ 2,526 $ 3,367 ============ ============ ============
See accompanying notes. F-5 33 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements 1. VOLUNTARY FILING UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE Sunshine's business and profitability have been negatively affected by an extremely lengthy period of low silver prices. Since 1988, the price of silver has averaged less than $5.00 per ounce compared to an average price of approximately $9.50 per ounce over the prior 10 years. Given the depressed price of silver compared to the Company's cash production costs, the Company's operations have generated a negative cash flow for several years. On August 23, 2000 (the "Petition Date") Sunshine Mining and Refining Company ("Sunshine" or the "Company") and three of its subsidiaries (the "Debtor Subsidiaries" and together with the Company, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the District of Delaware (Case No. 00-3409 (MFW)). Under Chapter 11, certain claims against the Debtors in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtors continue business operations as Debtors-in-possession. These claims are reflected in the December 31, 2000 balance sheet as "liabilities subject to compromise." Claims secured by the Debtors' assets ("secured claims") also are stayed, although the holders of such claims have the right to move the court for relief from the stay. The Debtors received approval from the Bankruptcy Court to pay or otherwise honor certain of its prepetition obligations, including employee wages and retirement benefits and certain prepetition claims of certain critical suppliers of goods and services. The Third Amended and Restated Joint Chapter 11 Plan of Reorganization as modified December 5, 2000 (the "Plan") was confirmed on December 5, 2000 (the "Confirmation Order"). Under the terms of the Confirmation Order, certain conditions precedent existed to the effectiveness of the Plan set forth in the Plan and the Confirmation Order. The effective date of the Plan was February 5, 2001 (the "Effective Date"). (See Note 2 for discussion of the Plan.) To fund continuing operations, the Company procured a $5 million Debtor-in-possession credit facility (the "DIP Facility"). (See Note 9.) 2. PLAN OF REORGANIZATION The Plan, cosponsored by four of the Company's major bondholders holding more than 70% of the Company's outstanding indebtedness (the "Cosponsoring Bondholders"), became effective on February 5, 2001 and provided that: o The "old common stock" of Sunshine was canceled (as were all existing issues of warrants and options). Common stockholders with 100 or more shares of common stock as of the Effective Date received a pro rata distribution of approximately 3.4% of the "new common stock." Of the total new shares of stock outstanding (50 million shares) existing common stock holders received approximately 1.7 million shares. F-6 34 o All of the Company's pre-bankruptcy funded debt and certain other liabilities (totaling approximately $49 million) was canceled and converted to equity. o Approximately 90% of the new common stock is held by affiliates of Elliott Associates, L.P. and Stonehill Capital Management LLC (the "Principal Shareholders"). They have appointed four members to the Company's five-member Board of Directors. In addition, the Principal Shareholders have a Call Option which allows them, upon the occurrence of certain adverse events, to acquire Sunshine Argentina, the owner of the Pirquitas Mine in Argentina, the Company's principal asset. o The Confirmation Order required that, prior to the Effective Date, the Company obtain approval of a new consent decree from the Idaho District Court releasing the Company from a 1994 Consent Decree which obligated it to remediate certain property in the Bunker Hill Superfund Site. The new Consent Decree was entered on January 22, 2001. The Confirmation Order also required the incorporation of the agreement reached with certain agencies of the United States and the Coeur d'Alene Indian Tribe regarding certain covenants not to sue the Company for potentially significant environmental claims. In consideration for the releases and agreement not to sue, the Company agreed to issue the plaintiffs ten-year warrants to acquire up to 4.975 million shares of the Company's New Common stock at an exercise price of $.66 per share; to deed to the plaintiffs certain timberland it owns in North Idaho; to pay a sliding scale royalty commencing at silver prices in excess of $6.00 per ounce on production from the Sunshine Mine; and to perform certain test work and remediation at the Con Sil mine site. (See Note 14.) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION Sunshine Mining and Refining Company (Sunshine or the Company) is a holding company whose principal subsidiaries are Sunshine Precious Metals, Inc. (SPMI) and Sunshine Argentina, Inc. and Sunshine Exploration, Inc. (SEI). SPMI mines, refines and markets concentrates containing silver and certain by-product metals to commercial customers. SPMI's principal operating property is the Sunshine Mine, located near Kellogg, Idaho. The Sunshine Mine accounted for all of the Company's operating revenues during 2000, 1999 and 1998. As a result, the Company has only one operating segment. SEI and SPMI are also engaged in exploration in other parts of the United States. Sunshine Argentina, Inc. owns the Pirquitas Mine, which is currently in the development stage. (See Note 15.) The consolidated financial statements include the accounts of Sunshine and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements for the year ended December 31, 2000 reflect accounting principles and practices set forth in AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under The Bankruptcy Code" ("SOP 90-7"). Pursuant to the guidance of SOP 90-7, the Company will adopt "fresh start" reporting as of February 5, 2001. Under "fresh start" reporting, the reorganization value of the entity is allocated to the entity's assets. As a result of adopting "fresh start" reporting upon emerging from Chapter 11 status, the Company's financial statements will not be comparable with those prepared before the Plan was effective, including the historical financial statements included in this annual report. F-7 35 The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assessments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain previously reported amounts have been reclassified to conform to the 2000 presentation. CASH AND CASH INVESTMENTS Cash and cash investments include certificates of deposit and other highly liquid investments with maturities of three months or less when purchased. INVENTORIES AND SILVER BULLION Investment silver bullion is stated at estimated net realizable prices. Adjustments to the carrying value of investment silver bullion is included in revenues. Precious metals inventories, materials and supplies are carried at the lower of cost (principally average cost) or market. EQUIPMENT HELD FOR SALE Management reviewed all the equipment and property located at the Sunshine Mine in Kellogg, Idaho and determined what equipment could be sold after the mine was placed on care and maintenance in February 2001. After an evaluation of the equipment that would be held for sale, the Company determined that the fair value of the equipment held for sale was approximately $1 million. (See Note 6.) CONCENTRATION OF CREDIT RISK During 2000, the Company marketed its concentrates to a commercial smelter in the United States. Ninety percent of the estimated sales proceeds are due by the 15th of the month following shipment of the concentrates. Final payments are received by the 10th business day of the fourth month following shipment. The Company did not require collateral. Management periodically performs reviews as to the creditworthiness of its customer(s). The Company has not sustained any significant credit losses on sales of its products. In February 2001, the Company was notified by the smelter that they were temporarily closing their operations and would no longer accept deliveries. SILVER FINANCIAL INSTRUMENTS The Company sold covered call options on silver bullion held for investment during 1999 and 1998. The strike price of these agreements exceeded current market prices at the time they were entered into. Option premiums received were deferred. If the applicable market price exceeded the strike price and option premium, the differential was accrued and recognized as a reduction of revenues. Any remaining deferred option premiums were recognized as a component of revenues at the end of the option period. No covered call options were sold during 2000 and $34 thousand of option premiums were recognized as income during 2000. The fair values of the sold call options are not included in the financial statements. F-8 36 REVENUE RECOGNITION Sales of refined metals and concentrates are recognized as revenue at the time of shipment to the customer. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation on buildings, leasehold improvements, and equipment is provided by straight-line or declining-balance methods at rates based on the estimated lives of the respective assets. The principal lives range from 12 to 30 years for buildings and from 3 to 10 years for equipment (See Note 6). Depletion of precious metal mineral interests is computed using the unit-of-production method based on estimated ore reserves. Mine exploration costs are charged to expense as incurred. Costs of major mine improvements, including interest, are capitalized and amortized in relation to the production of estimated ore reserves. Whenever circumstances or events indicate, and at least annually, the Company evaluates its mining properties for impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, recoverable mineral reserves, and estimates of future reserve potential which management believes are reasonable, based on historical silver prices and production. If the sum of such cash flows is less than the carrying amount of the asset, the Company records an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. MINERAL EXPLORATION AND MINE DEVELOPMENT Exploration costs and development costs for projects not yet determined by management to be commercially feasible are charged to expense as incurred. Expenditures for new mine development are capitalized when the properties are determined to have development potential but are not yet producing. Development costs incurred to access reserves on existing producing mines are expensed as incurred. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes, whereby, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize a future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. The effect on deferred taxes of a change in income tax rates is recognized in the period that includes the enactment date. ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current operations are either expensed or capitalized depending on the nature of the expenditure. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when F-9 37 environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals will coincide with completion of a feasibility study or the Company's commitment to a formal plan of action. 4. LIQUIDITY MATTERS AND REALIZATION OF ASSETS The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than provided, cash in its operations. These financial results are primarily attributable to depressed silver prices and lower by-product prices, resulting in margins insufficient to cover the Company's fixed expenses. In February 2001, the Company placed the Sunshine Mine on care and maintenance status after being notified that the smelter to which the Sunshine Mine shipped its concentrates was temporarily closing their operations and would no longer accept any deliveries. As a result of the closure of the Sunshine Mine, the Company will have no revenues from operations for the foreseeable future. Recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is dependent upon continued operations of the Company. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Management has taken the following steps to revise its operating and financial requirements, which it believes will enhance the Company's ability to continue in existence: o On February 5, 2001, the Company emerged from Chapter 11 Bankruptcy. Pursuant to the terms of the Plan, all of the claims of the Eurobonds, the 10% Notes, the 9% Notes and certain other unsecured creditors was eliminated in exchange for approximately 96.6% of the 50 million shares of new Common Stock. o During the bankruptcy reorganization, the Company was released as a defendant in certain environmental litigation and settled certain environmental liabilities associated with a 1994 Consent Decree at the Bunker Hill Superfund Site. (See Note 14.) o The Company is currently reviewing its strategic options, which may include a sale of some or all of its assets, a merger or a joint venture for the development of Pirquitas. 5. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS Inventories consist of the following at December 31:
2000 1999 -------- -------- (In Thousands) Precious metals inventories: Work in process $ 187 $ 1,376 Finished goods 28 107 Materials and supplies inventories 1,285 1,343 -------- -------- $ 1,500 $ 2,826 ======== ========
F-10 38 The Company held as an investment, $4.1 million of silver bullion, in excess of normal operating requirements at December 31, 1999, which was sold during 2000. The Company sold covered call options on silver bullion held for investment. Total premiums earned from the sale of covered calls aggregated $34,000, $246,500 and $316,250 in 2000, 1999 and 1998, respectively. At December 31, 2000, no sold covered call options were outstanding. At December 31, 1999, the Company had covered call options outstanding for 300,000 ounces of silver with strike prices ranging from $5.25 to $5.35 and expiration dates of January 27, 2000 (100,000 ounces), February 25, 2000 (100,000 ounces) and March 28, 2000 (100,000 ounces). The fair value of the sold calls at December 31, 1999 approximates the $34,000 of premiums received when they were sold. At December 31, 1998, no sold covered call options were outstanding. 6. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following at December 31:
2000 1999 ---------- ---------- (In Thousands) Precious metals mineral interests $ 2,207 $ 8,151 Mine improvements 13,398 12,495 Buildings, leasehold improvements, and equipment 24,948 39,295 Land 380 779 ---------- ---------- 40,933 60,720 Less accumulated depreciation, depletion, and amortization 26,262 37,623 ---------- ---------- $ 14,671 $ 23,097 ========== ==========
As a result of the Sunshine Mine being placed on care and maintenance status, an extensive review of all the equipment and property at the Sunshine Mine was made by mine management to determine their respective fair values. This review resulted in an impairment charge of $7.2 million in the fourth quarter of 2000. The Company intends to sell certain of the assets at the Sunshine Mine and has classified them as "Assets held for sale" at their estimated selling price of $1 million. 7. ACCRUED EXPENSES Accrued expenses consist of the following at December 31:
2000 1999 -------- -------- (In Thousands) Compensation, vacation, and severance $ 772 $ 1,119 Interest 28 1,027 Taxes, other than income taxes -- 298 Reorganization fees and expenses 500 -- Environmental remediation -- 700 Insurance premiums 42 270 Other 301 148 -------- -------- $ 1,643 $ 3,562 ======== ========
F-11 39 8. LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise on the accompanying December 31, 2000 balance sheet consist of the following (in thousands): Principal balance of 8% Senior Exchangeable Notes (the "Eurobonds") $25,975 Interest due on Eurobonds 1,951 Principal balance of 10% Senior Convertible Notes (the 10% Notes) 12,313 Interest due on 10% Notes 2,583 Principal balance of 9% Convertible Subordinated Debentures (the "Debentures") 1,515 Interest due on Debentures 82 Principal and interest due on 5% Convertible Notes (the "5% Notes") 345 Deferred financing costs of 10% Notes (92) Liabilities for unsecured nonpriority claims and provisions for environmental liability 4,319 ------- Liabilities subject to compromise $48,991 =======
As discussed in Note 2, these liabilities were canceled and converted to equity pursuant to the Plan as of the Effective Date. The amounts above may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to potential contingent and/or disputed claims or other events. As a result of the Chapter 11 filing, the Debtors discontinued accruing interest as of the Petition Date on the liabilities subject to compromise. Contractual interest on these liabilities totaled approximately $5.8 million for 2000, which is approximately $1.6 million in excess of amounts expensed in the accompanying financial statements. The contractual interest on the 10% Notes includes approximately $1.4 million of additional interest that became due on March 21, 2000 and an 18% default interest rate from that date. 9. LONG-TERM DEBT Long-term debt consists of the following at December 31:
2000 1999 ------------ ------------ (In Thousands) Debtor in Possession Financing $ 1,530 $ -- Eurobonds 25,975 26,518 10% Notes 12,313 14,871 Debentures 1,515 1,515 Other 345 334 ------------ ------------ 41,678 43,238 Less: Current portion -- 5,000 Liabilities subject to compromise 40,148 -- ------------ ------------ $ 1,530 $ 38,238 ============ ============
F-12 40 Defaults Upon Senior Securities The Chapter 11 filing constituted a default under the terms of the Eurobonds, the 10% Notes and the Debentures. Pursuant to the terms of the Plan all of the claims of the Eurobonds, the 10% Notes, the Debentures, and certain other unsecured creditors were eliminated in exchange for approximately 96.6% of the Company's new Common Stock as of the Effective Date. For a discussion of the Company's financial reorganization plans, see Notes 1, 2 and 4 to the Financial Statements. Debtor in Possession Financing/Exit Financing Facility The Company obtained a $5 million post-petition debtor-in-possession financing facility (the "DIP Facility") with affiliates of the Cosponsoring Bondholders. Sunshine Argentina, Inc., a wholly-owned subsidiary, is the borrower under the DIP Facility. The base rate of interest under the DIP Facility is 15% per annum with a $150 thousand commitment fee which was expensed in the accompanying financials. Borrowings under the DIP Facility are secured by substantially all of the Company's assets. After the Plan became effective on February 5, 2001, the outstanding balance under the DIP facility of approximately $2.7 million was rolled into an Exit Financing Facility with the same lenders with repayment due within eighteen months. The Exit Financing Facility has a maximum commitment of $5 million, an interest rate of 15% and a commitment fee of $150 thousand. Eurobonds In March 1996, SPMI issued $30 million aggregate principal amount of the Eurobonds. The Eurobonds bore interest at 8% per annum and were initially scheduled to mature March 21, 2000. In 2000, 1999 and 1998, a total of $4.0 million of the Eurobonds were exchanged and canceled for approximately 1.3 million shares of common stock. In March 1999, the Company issued 1.6 million shares to holders of the Eurobonds. Such shares were issuable in settlement of the additional amount to be paid if the Company's stock did not trade at a price 33% above the conversion price of the Eurobonds for a period of 45 consecutive trading days. Debt issuance costs were amortized over the life of the Eurobonds. Unamortized debt issuance costs of $92 thousand is included in "Investments and other assets" at December 31, 1999. 10% Notes In November 1997, the Company completed a private placement of the 10% Notes totaling $15 million aggregate principal amount due November 24, 2002. Beginning in February 2000 and quarterly thereafter, $1.25 million principal amount was required to be redeemed by the Company. Principal and interest were payable either in cash or common stock of Sunshine at the Company's option. In February 2000, $1.25 million of the 10% Notes were prepaid and retired by the issuance of approximately 1 million shares of common stock. During 1999 and 2000, approximately $1.4 million of the 10% Notes were converted and canceled for approximately 2.0 million shares of common stock. F-13 41 In March 2000, the Company issued approximately 700 thousand shares of Common Stock to the holder of the 10% Notes as partial payment of the quarterly interest due. Pursuant to the terms of the Notes, a $1.4 million additional interest payment was due because the Eurobonds were not converted into Common Stock nor refinanced with junior debt prior to March 21, 2000. This was not paid. Approximately 134 thousand and 730 thousand shares of common stock were issued for interest payments in 1998 and 1999, respectively. In connection with the issuance of the 10% notes, the purchaser was issued 188 thousand warrants to purchase common stock of Sunshine at 110% of the conversion price of the 10% Notes. The exercise price of these warrants was reduced to $3.92 in December 1998, at which time all 188 thousand warrants were exercised. Debentures The Debentures were due July 15, 2008 and were convertible at any time prior to maturity or redemption into shares of Common Stock of the Company at a conversion price of $13.28 per share, subject to adjustment. The Debentures were unsecured and subordinated in right of payment to senior indebtedness (as defined). 5% Notes In January 1999, the Company completed a private placement of 5% Notes due January 28, 2001 totaling $6 million. The beneficial conversion feature resulted in a debt discount of $962 thousand, which was amortized over the five months ended June 1999. During 1999, the notes were converted into 3.6 million shares of common stock, the maximum number of shares that could be issued under the terms of the 5% Notes. 10. INCOME TAXES The Company has incurred losses during each of the three years in the period ended December 31, 2000, and no tax benefit was recorded because of the uncertainty of realization of the net deferred tax asset. The computation of the net deferred tax asset at December 31 is as follows:
2000 1999 ------------ ------------ (In Thousands) Deferred tax assets: Property, plant, and equipment $ 11,041 $ 9,031 Accrued pension and other postretirement benefits 1,482 1,556 Net operating loss carryforward 87,500 99,750 ------------ ------------ 100,023 110,377 Less valuation allowance 100,023 (110,377) ------------ ------------ $ -- $ -- ============ ============
At December 31, 2000, the Company had net operating loss carryforwards ("NOL's) for federal income tax purposes of approximately $250 million. The loss carryforwards expire principally in the F-14 42 years 2001 through 2020. As a result of the bankruptcy, the Company's NOL's will be reduced by any cancellation of indebtedness income and all interest paid or accrued in the last three years on debt that was cancelled pursuant to the Plan. This will still leave the Company with more than $200 million of NOL's. The Company has two options regarding its NOL's after the effective date of the Plan. The first option is to take the bankruptcy exception so that there would be no limitations on future utilization of NOL's as a result of the ownership change pursuant to the Plan. However, if there is a 50% change in ownership within the next 2 years, the NOL's will be extinguished. Alternatively, the Company may elect to recognize the ownership change pursuant to the Plan which would limit the future utilization of the NOL's to an annual amount equal to approximately 5.5% of the Company's market capitalization on February 5, 2001. The Company is reviewing these alternatives and has not determined which option will be chosen. 11. STOCKHOLDER'S EQUITY (DEFICIT) Pursuant to the terms of the Plan, effective as of February 5, 2001, all outstanding shares of stock, warrants and options were canceled and 50 million shares of new Common Stock were issued. In August 2000, the Company issued 8.3 million warrants to purchase common stock of the Company to the holders of its 8% Senior Exchangeable Notes and its 10% Senior Convertible Notes for extensions of maturity and for agreements to exchange debt for equity in the reorganization. The warrants represented the right to acquire one new share of the Company's common stock at its par value, and had a cashless exercise feature. Prior to their cancellation, 6.1 million warrants were exercised primarily pursuant to the cashless exercise feature. Effective August 6, 1999, the Company effected a one-for-eight reverse stock split of its Common Stock. All historical share and per share amounts reported in this filing have been adjusted to reflect the reverse stock split. The Company had authorized 20.0 million shares of preferred stock, of which no shares were issued and outstanding at December 31, 2000 or 1999. The Company had two stock option plans under which options had been granted to members of management. The stock option plans covered a total of 1.6 million shares with 907 thousand options available for grant at December 31, 2000. The option price could not be less than the market price of the common stock on the date granted. Payment of the exercise price may be made in cash or by delivery of shares of common stock, having a market value equal to the exercise price. No stock options were granted in 2000. Pursuant to the Plan, as of February 5, 2001, all outstanding stock options and the two stock option plans were canceled. The Company has elected to follow APB 25 and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-15 43 Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999 and 1998, respectively: risk-free interest rates of 6.42% and 4.47%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of .617 and .572; and a weighted-average expected life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information) for the year ended December 31:
2000 1999 1998 -------- -------- --------- Pro forma net loss applicable to common shares $(20,890) $(10,854) $ (64,929) Pro forma basic and diluted loss per share $ (0.48) $ (0.31) $ (2.02)
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2000 1999 1998 ------------------------- -------------------------- -------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE ---------- ---------- ---------- ---------- ---------- ---------- Outstanding, beginning of year 621 $ 11.40 605 $ 11.68 607 $ 11.92 Granted -- -- 18 1.50 19 5.04 Exercised -- -- -- -- (6) 7.28 Forfeited (38) 11.92 (2) 12.00 (15) 12.08 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding, end of year 583 $ 11.00 621 $ 11.40 605 $ 11.68 ========== ========== ========== ========== ========== ========== Exercisable at end of year 583 $ 11.00 621 $ 11.40 605 $ 11.68 Weighted-average fair value of options granted during the year -- $ 0.65 $ 2.08
Exercise prices for options outstanding as of December 31, 2000, ranged from $1.50 to $23.00. F-16 44 12. LOSS PER SHARE The following table sets forth the computation of basic and diluted loss per share:
2000 1999 1998 --------- -------- --------- (In thousands, except per share amounts) Numerator: Numerator for basic loss per share -loss available to common shareholders $ (20,890) $(10,843) $ (64,845) Denominator: Denominator for basic and diluted loss per share - weighted-average shares 43,898 34,682 32,109 Basic and diluted loss per share $ (0.48) $ (0.31) $ (2.02)
All stock options and warrants were excluded from the calculation of diluted loss per share because including them would have been antidilutive. 13. EMPLOYEE BENEFIT PLANS The pension plan for hourly employees covered by a collective bargaining agreement (the Negotiated Plan) is a trusteed defined benefit plan. Benefits under the plan are based on years of service and include provisions that would apply in the event of a permanent shutdown of the Sunshine Mine for present employees who were also covered by a predecessor plan terminated in 1986. The Company's trusteed defined benefit pension plan for employees not covered by a collective bargaining agreement was amended to freeze all participant's benefits as of December 31, 1993. The following table sets forth the funded status of the Company's trusteed defined benefit plans and the related amounts included in accrued pension and other postretirement benefits at December 31 (in thousands):
COMBINED -------------------------- 2000 1999 ---------- ---------- Change in benefit obligation: Benefit obligation at beginning of year $ 6,115 $ 6,104 Service cost 246 238 Interest cost 477 417 Actuarial (gains) losses 864 (349) Benefit payments (650) (295) ---------- ---------- Benefit obligation at end of year 7,052 6,115 Change in plan assets: Fair value of plan assets at beginning of year 6,883 5,842 Actual return on plan assets (168) 1,036 Employer contributions 305 300 Benefit payments (650) (295) ---------- ---------- Fair value of plan assets at end of year 6,370 6,883 ---------- ---------- Funded (underfunded) status (682) 768 Unrecognized prior service cost 334 474 Unrecognized net (gains)/losses 544 (1,189) Unrecognized transition asset -- (28) Additional minimum liability (1,218) -- ---------- ---------- Prepaid (accrued) benefit cost $ (1,022) $ 25 ========== ==========
F-17 45 Net periodic pension costs relating to the Company's defined benefit plans consist of the following for the year ended December 31:
2000 1999 1998 ---------- ---------- ---------- (In thousands) Service cost $ 246 $ 238 $ 227 Interest cost 477 417 380 Expected return on plan assets (622) (531) (743) Net amortization and deferrals 33 58 345 ---------- ---------- ---------- Net periodic pension cost $ 134 $ 182 $ 209 ========== ========== ==========
In the fourth quarter of 1999, the Company recognized a $475,000 reduction in its accrued pension costs, which related to actuarial gains not recognized in prior years. The benefit obligation and fair value of plan assets by plan at December 31, 2000 (in thousands):
NEGOTIATED FROZEN PLAN PLAN TOTAL ------------ ------------ ------------ Benefit obligation $ 6,167 $ 885 $ 7,052 Fair value of plan assets $ 5,174 $ 1,195 $ 6,370
The following weighted average assumptions were used in computing pension costs for the Company's trusteed defined benefit plans for the year ended December 31:
2000 1999 1998 ------- ------- ------- Discount rate 8.00% 7.00% 7.25% Rate increase in compensation 0% 0% 0% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
The Company's funding policy, with respect to trusteed defined benefit plans, is to make contributions annually equal to, or in excess of, the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the plans consist of pooled fixed income securities, pooled equity securities, and cash or cash equivalents. The Company also has a defined contribution plan for employees not covered by a collective bargaining agreement. The Company's Board of Directors determines annually if a contribution will be made, and if so, in what amount. The Company's Board has not determined if a contribution for 2000 will be made. Contributions made for 1999 and 1998 were $157,000 and $151,000, respectively. F-18 46 The Company also sponsors a plan under the provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all employees not covered by a collective bargaining agreement. Company contributions may range from 0% to 100% of employee contributions, up to a maximum 6% of eligible employee compensation, as defined. Employees may elect to contribute up to 10% of their eligible compensation on a pretax basis. Benefits under the 401(k) Plan are limited to the assets of the 401(k) Plan. The Company's Board has not determined if a matching contribution for 2000 will be made. Company contributions made for 1999 and 1998 were $108,000 and $115,000, respectively. Postretirement medical and dental benefits are currently provided only to certain employees who retired before 1987. The Company's policy is to fund the cost of these plans as claims are incurred. The following table sets forth the computation of the accrued liability for postretirement medical, dental, and life insurance benefits at December 31 (in thousands):
COMBINED ------------------------------- 2000 1999 ------------ ------------ Change in benefit obligation: Benefit obligation at beginning of year $ 3,590 $ 3,930 Service cost 7 7 Interest cost 286 257 Participants' contributions -- 11 Actuarial (gains) losses 862 (189) Benefit payments (456) (426) ------------ ------------ Benefit obligation at end of year $ 4,289 $ 3,590 Change in plan assets: Fair value of plan assets at beginning of year -- -- Employer contributions 457 426 Participants' contributions -- 11 Benefit payments (457) (437) ------------ ------------ Fair value of plan assets at end of year -- -- ------------ ------------ Underfunded status (4,289) (3,590) Unrecognized prior service cost (1,081) (1,160) Unrecognized net losses 1,142 280 ------------ ------------ Accrued benefit cost $ (4,208) $ (4,470) ============ ============ Weighted average assumptions for end of year disclosure: Discount rate 8.00% 8.00% Initial trend rate 9.0% 6.75% Ultimate trend rate 5.00% 5.00% Number of years from initial to ultimate trend 10 2
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, changing the assumed health care cost trend rates by one percentage point each year would have the following effects on the latest actuarial calculations (in thousands): F-19 47
1-PERCENTAGE 1-PERCENTAGE POINT INCREASE POINT DECREASE -------------- --------------- Effect on total of service and interest cost components $ 17 $ (17) Effect on postretirement benefit obligation $ 249 $ (215)
Net periodic postretirement benefit cost for these plans includes the following components for the year ended December 31 (in thousands):
2000 1999 1998 -------- -------- -------- Service cost $ 7 $ 7 $ 7 Interest cost 286 257 343 Net amortization (99) (69) (6) -------- -------- -------- Net periodic cost $ 194 $ 195 $ 344 ======== ======== ========
Interest costs on the projected benefit obligations and the actual returns on plan assets of the postretirement benefit plans are included in interest expense and other income, respectively, in the accompanying consolidated statements of operations. 14. COMMITMENTS AND CONTINGENCIES In connection with the confirmation and effectiveness of the Plan, a settlement of all environmental litigation was effected. The settlement between the Company, SPMI and the United States on behalf of the United States Environmental Protection Agency, United States Department of Interior and the United States Department of Agriculture (the Government) and the Coeur d'Alene Indian Tribe (the Tribe) was memorialized in a new Consent Decree in civil actions CIV96-0122-N-EJL and CIV91-0342-N-EJL pending in the United States District Court for the District of Idaho. By entry of the new Consent Decree all claims of the Government and the Tribe for natural resource damages and response costs to injuries allegedly caused by the Company and SPMI in the Coeur d'Alene Basin were dismissed by the Government and the Tribe. The new Consent Decree was approved by the United States District Court and entered on January 22, 2001. In exchange for the dismissal, the Company granted warrants to purchase 9.95% of Sunshine's new common stock (i) at an exercise price of $.66 per share, (ii) with a cashless exercise feature, (iii) that are exempt from registration pursuant to 11 USC Section 1145, (iv) that are fully transferable to any other entity at any time, and (v) are subject to ordinary terms and conditions including anti-dilution provisions. The Company and SPMI have also agreed to provide net smelter return royalty payments to the Government and the Tribe based on revenues from all mining by SPMI anywhere in the United States and all mining by any Sunshine entity from the Sunshine Mine or within one mile of the current boundaries of the mine. The royalty adjusts on a sliding scale based on the average price of silver. No royalty must be paid until the average silver price exceeds $6.00 per ounce. Under the new Consent Decree, SPMI is required to convey the surface rights to timber lands it owns and uses for non-mining purposes, and to perform certain remediation and testwork at its ConSil mine site adjacent to the Sunshine Mine. F-20 48 In connection with the settlement, the Government also agreed to release the Company and SPMI from a 1994 Consent Decree which obligated them among others to remediate certain property in the Bunker Hill Superfund Site. The Company believes that all other environmental claims, both potential and threatened, were discharged by the effectiveness of the Plan of Reorganization on February 5, 2001. The Company is subject to certain other legal proceedings and claims that arise in the conduct of its business. Although it is not possible to predict the outcome of such matters, in the opinion of management, the ultimate outcomes of these matters will not have a material adverse effect on the Company's consolidated financial position, consolidated results of operations or cash flows. 15. FOREIGN OPERATIONS The Company has mining projects in Argentina and Mexico, including the Pirquitas Mine which is in the development stage. The Company began to capitalize development expenditures at the Pirquitas Mine in 1998 after proven and probable reserves were established at the end of 1997. Exploration expense for the Company's foreign operations totaled approximately $1.3 million, $0.7 million and $1.6 million for years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, amounts capitalized as property, plant, and equipment for foreign operations totaled $13.9 million, net of depreciation. Approximately $2.3 million for Value Added Taxes paid in Argentina are included in other assets. These taxes are recoverable from future exports of products produced from Argentina. The recoverability of the assets related to the Pirquitas Mine is dependent upon the ability of the Company to: (a) raise sufficient funding for development of the Pirquitas property, or (b) sell all or a portion of the Company's interest in the property, or (c) merge with or form a joint venture with a company with greater financial resources to develop the properties. 16. SIGNIFICANT CUSTOMER In 2000, 1999 and 1998, one customer accounted for sales of concentrate aggregating approximately $22.5 million, $31.5 million and $30.7 million, respectively. In February 2001, this customer notified the Company that it was temporarily closing the smelter to which the Sunshine Mine shipped concentrates and that the smelter would no longer accept deliveries. 17. PRECIOUS METALS RESERVES (UNAUDITED) The table below presents data on proven and probable ore reserves, production and average prices for each of the years in the five-year period ended December 31, 2000 (in thousands, except average prices): F-21 49
2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- SUNSHINE MINE Reserves at December 31: Ounces of silver 25,937 29,992 37,383 39,808 36,241 Production: Tons of ore 169 218 248 183 121 Ounces of silver 3,879 5,211 5,806 4,253 2,578 PIRQUITAS MINE Reserves at December 31: Ounces of silver 129,333 129,333 101,000 72,800 -- REVENUE - VIRGINIUS MINE Reserves at December 31: Ounces of silver 6,208 6,208 6,208 6,208 6,208 AVERAGE PRICES: Ounce of silver $ 4.93 $ 5.23 $ 5.47 $ 5.02 $ 5.11
The ore reserve estimates presented in the table are estimates of proven and probable reserves by the Company's geologic personnel. No assurance can be given that the indicated quantity of in situ silver will be realized. Reserve estimates are expressions of judgment based largely on data from diamond drill holes and underground openings, such as drifts or raises, which expose the mineralization on one, two or three sides, sampling and similar examinations. Reserve estimates may change as ore bodies are mined and additional data is derived. 18. FRESH START REPORTING PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED) The unaudited Pro Forma Consolidated Balance Sheet is presented to give effect to the consummation of the Plan as though it had taken place on December 31, 2000. The Company will adopt "fresh start" reporting as of February 5, 2001, the date the Plan was confirmed. In general, pursuant to SOP 90-7, the Company's assets and liabilities will be revalued to fair market value. The fair market value of Pirquitas and the Sunshine Mine, the Company's principal assets as well as the fair market value of the Liability for the Call Option on Sunshine Argentina, Inc. were based on, among other things, appraisals performed in conjunction with the bankruptcy reorganization. F-22 50
Predecessor Reorganization and Reorganized Company Fresh Start Adjustments Company ----------- ------------------------- ------------ December December (In thousands) 31, 2000 Debit Credit 31, 2000 --------- --------- ----------- --------- ASSETS Total current assets $ 5,164 $ -- $ -- $ 5,164 Property, plant and equipment, net 14,671 10,792 (a) 25,463 Other assets 2,757 -- 1,165 (a) 1,592 --------- --------- ----------- --------- $ 22,592 $ 10,792 $ 1,165 $ 32,219 ========= ========= =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Total current liabilities $ 2,340 $ -- $ -- $ 2,340 Noncurrent liabilities 56,528 48,991 (b) -- 7,537 Liability for call option on Sunshine Argentina, Inc. -- -- 2,740 (c) 2,740 --------- --------- ----------- --------- Total Liabilities 58,868 48,991 2,740 12,617 Redeemable common stock -- -- 17,640 (d) 17,640 Stockholders' equity (deficit): Common stock 493 493 (e) 50 (f) 50 Paid in capital 729,957 729,957 (e) 1,912 (f) 1,912 Accumulated other comprehensive loss (884) -- 884 (e) -- Accumulated deficit (764,732) -- 764,732 (e) -- Less treasury stock at cost (1,110) -- 1,110 (e) -- --------- --------- ----------- --------- (36,276) 730,450 767,893 1,962 --------- --------- ----------- --------- $ 22,592 $ 779,441 $ 789,068 $ 32,219 ========= ========= =========== =========
Explanations of reorganization and fresh start adjustment columns of the balance sheet are as follows: (a) To adjust property, plant and equipment and other assets to estimated current market value. Further adjustments may be required, but are not expected to be material. (b) To reflect the cancellation of debt and other liabilities pursuant to the Plan. (c) To record the estimated fair value of the liability for the Call Option issued pursuant to the Plan. (See Note 2.) (d) To reflect the new common stock issued to the Principal Shareholders which, in certain instances, the Company would be required to repurchase from the Principal Shareholders. (e) To eliminate the old stockholders' equity (deficit). (f) To reflect the issuance of new common stock to other than Principal Shareholders. 19. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 2000: Operating revenues $ 7,177 $ 6,596 $ 5,139 $ 4,181 Cost of revenues 6,369 6,335 5,440 4,425 Loss applicable to common shares (4,072) (2,741) (3,778) (10,178) Basic and diluted loss per common share $ (0.10) $ (0.06) $ (0.08) $ (0.21) 1999: Operating revenues $ 9,651 $ 7,957 $ 8,106 $ 6,618 Cost of revenues 8,693 6,564 6,649 5,767 Loss applicable to common shares (2,866) (2,125) (2,022) (3,830) Basic and diluted loss per common share $ (.09) $ (.06) $ (.06) $ (.10)
During the fourth quarter of 2000, an impairment charge of $7.2 million was taken. (See Note 6.) F-23 51 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- [S] [C] 2.1 Third Amended Joint Chapter 11 Plan of Reorganization dated as of December 4, 2000, bench-filed in the case styled In Re: Sunshine Mining and Refining Company, Chapter 11, Case No. 00-3409 (MWF), filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 2.2 Order confirming the Third Amended Joint Chapter 11 Plan of Reorganization of Sunshine Mining and Refining Company and its Debtor Subsidiaries as entered December 5, 2000, filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 2.3 Partial Consent Decree with Sunshine Mining and Refining Company and Sunshine Precious Metals, Inc. in the case styled United States of America v. Asarco Incorporated, et al., a Consolidated Case Nos. 96-0122-N-EJL and 91-0342-N-EJL in the United States District Court for the District of Idaho, filed as Exhibit 2.3 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 2.4 Notice of Effective Date of Third Amended Joint Chapter 11 Plan of Reorganization, filed as Exhibit 2.4 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 3.1 Amended and Restated Certificate of Incorporation filed with and approved by the Secretary of State of Delaware on February 23, 2001, filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 3.2 Amended and Restated Bylaws as adopted February 9, 2001, filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 10.1 Call Option Agreement dated February 5, 2001, among Sunshine International Mining, Inc., Sunshine Mining and Refining Company, Sunshine Argentina, Inc., Elliott International, L.P., The Liverpool Limited Partnership, Stonehill Institutional Partners, L.P. and Stonehill Offshore Partners Limited, filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K for event reported February 5, 2001. 10.2 Registration Rights Agreement dated February 5, 2001, among Sunshine Mining and Refining Company, Stonehill Partners, L.P., Stonehill Offshore Partners Limited, Elliott International, L.P. and The Liverpool Limited Partnership, filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K for event report February 5, 2001. *21.0 Subsidiaries of Sunshine. 24.1 Power of Attorney (set forth on signature page hereof). * Filed herewith.