-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KuU6rrbPrXwEyKs3nMeEmCxF3ZoN9nwvPUbL68ZDV+SU1eFkjCraoFZXDwJPQlGv NNGbwuYxT/Gy6hdhsV200Q== 0000950134-99-001616.txt : 19990315 0000950134-99-001616.hdr.sgml : 19990315 ACCESSION NUMBER: 0000950134-99-001616 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNSHINE MINING & REFINING CO CENTRAL INDEX KEY: 0000833376 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 752231378 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10012 FILM NUMBER: 99564442 BUSINESS ADDRESS: STREET 1: 877 WEST MAIN STREET STREET 2: SUITE 600 CITY: BOISES STATE: ID ZIP: 83702 BUSINESS PHONE: 2083450660 MAIL ADDRESS: STREET 1: 877 W MAIN STREET SUITE 600 CITY: BOISE STATE: ID ZIP: 83702 FORMER COMPANY: FORMER CONFORMED NAME: SUNSHINE MINING CO /DE DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUNSHINE HOLDINGS INC DATE OF NAME CHANGE: 19880915 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------------------- COMMISSION FILE NO. 1-10012 SUNSHINE MINING AND REFINING COMPANY (Exact name of registrant as specified in its charter) DELAWARE 75-2618333 (State or other jurisdiction (IRS Employer Identification of incorporation or organization) Number) 877 W. MAIN STREET, SUITE 600 83702 BOISE, IDAHO (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (208) 345-0660 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $0.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Warrants, expiring May 22, 2001, for the purchase of one share of Common Stock Warrants, expiring March 9, 1999, for the purchase of one share of Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the shares of common stock held by non-affiliates of the registrant at March 10, 1999 was $146,030,019. For purposes of this computation, all officers, directors and beneficial owners of 10% or more of the common stock of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are affiliates. Indicate the number of shares outstanding of the registrant's classes of common stock, as of the latest practicable date. TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING OF COMMON STOCK AT MARCH 10, 1999 --------------- ----------------- Common Stock, $0.01 par value 259,608,923 DOCUMENTS INCORPORATED BY REFERENCE Sunshine Mining and Refining Company's Definitive Proxy Statement for its Annual Meeting to be held May 24, 1999 (Part III). =========================== 2 PART I 1. BUSINESS. GENERAL Sunshine Mining and Refining Company ("Sunshine" or the "Company") is primarily engaged in mining silver. The Company owns the Sunshine Mine located in the Coeur d'Alene Mining District near Kellogg, Idaho and the Pirquitas Mine in the Ouray Province of northwest Argentina and leases the Revenue-Virginius Mine in the Ouray District of southwest Colorado. The Sunshine Mine produced 5.8 million ounces of silver in 1998, and is forecast to produce approximately 5.5 million ounces of silver in 1999. Pirquitas is in the final stage of a bankable feasibility study with proven and probable silver reserves presently estimated at 101 million ounces. The Revenue-Virginius is undergoing an internal feasibility study. Total proven and probable silver reserves at those three properties were estimated to be 144.6 million ounces at December 31, 1998. The Sunshine Mine began operations in 1884 and has produced in excess of 350 million ounces of silver since that time. The mine also produces significant amounts of copper, lead and antimony as by-products. The Sunshine Mine has substantially increased production in recent years, achieving full production in the fourth quarter of 1997 for the first time since 1990. This has resulted in a substantial reduction in unit costs as fixed costs have been spread over a larger production figure. Recent production history of the mine is as follows:
Sunshine Mine Production --------------------------------- 1998 1997 1996 1995 ------ ------ ------ ------ Ounces production (millions) 5.8 4.3 2.6 1.7 Net cash cost per ounce $ 4.43 $ 4.50 $ 6.12 $ 6.61
The decrease in net cash costs per ounce from 1997 to 1998 does not fully reflect the improvement in operating costs attained, due to significant declines in prices received for copper, lead and antimony by-products, whose sales are credited against production costs for purposes of calculating net cash cost per ounce. At the end of the third quarter of 1998, the Company wrote off a substantial amount of its investment ($50.4 million out of a total of $59.4 million) in the Sunshine Mine. The writedown was taken at that time due to continued low silver prices and the decline in prices for the Company's by-product metals, which effectively increased the net cash cost of production. Additionally, at that time, the Company had just reduced its production forecast for the years 1999 and 2000, due to limits on the updip extension of the West Chance Vein, which limits had just been identified in exploration and development work. Since that time, the Company's production forecast for those periods has been revised significantly upwards, as downdip extensions of the West Chance Vein have been identified as economic and other veins have been identified as containing economic ore which can be accessed in 1999 and 2000. Sunshine's share of silver reserves at the Sunshine Mine as of December 31, 1998 were estimated to be 1.55 million tons of ore with an average grade of 23.6 ounces of silver per ton (after adjustment for mining dilution), containing 36.6 million ounces of silver. Metallurgical recoveries at the Sunshine Mine typically approximate 97% of the contained silver. The proven and probable reserves at the Sunshine Mine have historically totaled approximately 4 to 7 years of annual production. Over its history, exploration and development activities have maintained reserves by finding new ore to replace that which was produced each year. Management believes this will continue for the foreseeable future, as studies have delineated several areas of favorable geologic conditions that may host significant deposits. These areas are contiguous to delineated mineralization, and the ore-bearing structures project into favorable lithologic units. Further exploration is necessary to quantify the contained ore, but the magnitude of the contained ore could approximate the historic production from the major veins. The mine plan at the Sunshine Mine for 1999 forecasts production of approximately 5.5 million ounces of silver, and a similar amount in 2000. The Company acquired the Pirquitas Mine in November 1995, and since that time has conducted an active exploration and metallurgical testwork program. The Company commissioned a bankable feasibility study of the property in early 1998, which is nearing completion at this time. Preliminarily, the study has estimated that the property can be developed for approximately $120 million, and would produce annually approximately 8.2 million ounces of silver and 7.1 million pounds of tin. The estimated net cash cost of production of an ounce of silver is projected to be approximately $2.00. Assuming a $5.50 silver price and a tin price of $2.54 per pound, proven and probable reserves are presently estimated to be 20 million tons of ore at an average grade of 5 ounces per ton silver (18 million tonnes at an average grade of 172 grams per tonne silver), 0.29% tin and 0.48% zinc. The Company estimates that contained metal in the proven and probable reserves totals 101 million ounces of silver, 116 million pounds of tin and 194 million pounds of zinc. The Company expects future development and exploration work at the site will expand these reserves. In January, 1999, the Company and its consultants began a process to optimize the feasibility study which is expected to examine options to increase production, reduce costs, and increase reserves. Upon completion of this work the Company will evaluate its alternatives with respect to financing the development of this property. Given current market conditions, including the price of silver, and the Company's financial resources, no assurance as to the availability of such financing can be given. As a result, the Company may consider a merger with a company with greater financial resources to develop the property, consider a sale of all or some portion of the property or defer development until silver prices improve. At the Revenue-Virginius Mine, the Company estimates reserves of 260 thousand tons of ore containing 6.2 million ounces of silver at a grade of 23.9 ounces per ton. The ore is also estimated to contain .06 ounces per 1 3 ton gold and 5.89% combined lead, zinc and copper. The property was operated from about 1880 until 1912, when it was closed due to a mill fire. Based on work to date, the Company believes that the property can be reopened at a production rate of approximately 2.5-3 million ounces per year following a $12-15 million capital investment. Net cash costs of production are estimated to be approximately $4 per ounce. Several veins carry the mineralized values, and many of the veins have been traced for long distances onto other properties. Therefore, the Company believes it reasonable to assume that a significant mineralized inventory in addition to the above reserves can be inferred. A drilling program to identify additional reserves is pending. As more than 80% of the Company's operating revenues is derived from the sale of silver, the Company's earnings are directly related to the price of silver, which has been depressed since 1985. As a result, the Company has reported operating losses and negative cash flow from operations since that time. The Company's strategy is to add sufficient low cost silver production to be profitable at prices for silver which have prevailed in recent years, while also positioning the Company to benefit from an expected improvement in silver prices. Should the Company not succeed in adding such low cost production and there is no substantial improvement in the silver price, the Company will continue to report operating losses and negative cash flow. The accuracy of any forward looking statements and other similar statements contained herein regarding production, reserves, mineralized materials and cash costs at the Pirquitas Mine, the Sunshine Mine and the Revenue-Virginius Mine will depend upon the actual grade, quantity and other qualities of recoverable reserves and resources, which may differ from current estimates. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors including without limitation, actual results of exploration, silver prices, by-product prices, imprecision of reserve estimates, future economic conditions, regulations, competition, and other circumstances affecting anticipated revenue and costs. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement. For information regarding Sunshine's business, certain classes of products or services and sales to certain significant customers, see Notes 1, 11 and 12 of Notes to Consolidated Financial Statements included elsewhere herein. Sunshine was originally incorporated in 1918 and is currently incorporated under the laws of the state of Delaware. The Company maintains its principal executive offices at 877 West Main Street, Suite 600, Boise, Idaho 83702. SILVER SUPPLY, DEMAND, AND PRICES According to studies published by the Silver Institute in its World Silver Survey (prepared by Gold Fields Mineral Services Ltd.) and by CPM Group (precious metal industry consultants), new silver production since 1990 has been far below total demand for silver. This gap between new supply and demand has been bridged by the availability of a large surplus of silver inventories generated in the aftermath of the major increase in silver prices in 1979-1983. The availability of these inventories has kept silver prices at depressed levels. According to these same studies, the silver inventories worldwide have now been greatly diminished. In the first quarter of 1998, silver prices increased to their highest levels in over 10 years in response to concerns about supply availability, as Berkshire Hathaway Incorporated announced an investment in 129.7 million ounces of silver bullion. However silver prices declined over the last three quarters of 1998, averaging $4.92 per ounce in the fourth quarter of 1998. Based on the above cited industry reports, the Company believes physical availability of silver will continue to tighten as available inventories are consumed and this will eventually have a major positive impact on the silver price. OPERATIONS THE SUNSHINE MINE AND REFINERY COMPLEX The Sunshine Mine and Refinery Complex, located in the Coeur d'Alene Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a 1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and associated facilities. The facility is an integrated operation which can produce refined silver with 99.99% purity. The silver refinery has a capacity to recover up to 8 million ounces of silver and 4 million pounds of copper annually. The Company's wholly owned subsidiary, Sunshine Precious Metals, Inc. ("SPMI"), owns substantially all of the mining claims comprising the Sunshine Mine. Electrical power is supplied by a public utility from two sources. The facilities are in good and operable condition and access to the property is by paved roads maintained by the county. The Sunshine Mine is a primary silver-producing underground mine which began operations in 1884 and has produced over 350 million ounces of silver since that time. The underground workings consist of multiple levels developed off the Jewell shaft, the main production shaft. It extends from the surface to a depth of over 4,000 feet and is complemented by other interior shafts which develop levels as deep as 5600 feet. The mine covers over 10 square miles at the surface, and contains more than 100 miles of underground workings. Mining operations are currently focused in the western area of the mine, in a vein called the West Chance, at depths from above the 2700-foot level (2700 feet below the collar of the Jewell shaft) to below the 3700-foot level. The ore extracted from the Sunshine Mine is introduced to the 1,000-ton-per-day flotation concentrator, which produces two concentrates, a high-grade silver concentrate which is transferred to the antimony refinery for antimony removal, and a lead concentrate which is shipped directly to a smelter for further processing. After antimony removal, the silver concentrate can be either transferred to the Company's silver refinery for recovery of silver and copper, or sold to a commercial smelter. Factors which influence Sunshine's decision to refine its products internally or sell them to a smelter include levels of production, costs of reagents and available 2 4 smelter contract terms. The refinery was designed and built to recover up to 8.0 million ounces of silver from concentrates annually. Sunshine suspended operations at the silver refinery in 1995 pending higher levels of available feed, and began shipping its silver concentrate to a smelter at that time. Until a decision is made to reopen the refinery, Sunshine will continue to sell its silver-copper concentrates to a nearby smelter for processing. The Company's sales to the third party smelters are under long-term contracts, generally for a period of at least one year, cancelable by either party after one year upon thirty days notice. The Company employs no sales force. Management believes that suspension of refinery operations has not had a material impact on Sunshine's results of operations or cash flows. Ore and metals produced at the Sunshine Mine during 1998, 1997 and 1996, respectively, were as follows:
1998 1997 1996 ---------- --------- --------- Tons of Ore............... 247,866 183,404 120,910 Metals Recovered: Ounces of Silver..... 5,806,468 4,253,315 2,577,895 Pounds of Copper..... 1,273,318 884,124 671,701 Pounds of Antimony... 1,078,460 785,897 534,013 Pounds of Lead....... 12,001,080 9,203,907 2,546,852
These metals were recovered from ore containing an average of 24.17, 23.95 and 22.04 ounces of silver per ton, in 1998, 1997 and 1996, respectively. Metallurgical recoveries were 97% of the contained silver, 97% of the contained copper and 92.5% of the contained lead. Production increased substantially in 1997 and again in 1998 as the Company completed development of the West Chance ore body. By the end of 1997, and substantially all of 1998, the mine was operating at or near its rated capacity of approximately 1,000 tons of ore per day. It is expected that most of the Company's production during 1999 and 2000 will be from the West Chance, with production being supplemented from other systems to the east. The Sunshine Mine's proven and probable ore reserves were estimated by the Company's technical personnel at January 1, 1999, to be 1.58 million tons of ore containing 37.4 million ounces of silver and 14.2 million pounds of copper. The weighted average ore grades, adjusted for mining dilution, but not adjusted for metallurgical recoveries, are 23.6 ounces per ton silver and 0.45 percent copper. Lead reserves are calculated only for the West Chance vein, and it contains 23.3 million pounds of lead at a grade of 2.17 percent. During the three years ended December 31, 1998, the Sunshine Mine accounted for all of the Company's silver production, and approximately 26% of the Company's silver reserves at December 31, 1998. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein. Exploration activity in the future will focus on a number of vein systems in the eastern area of the mine. In particular, a plan is being prepared to test the deep extension of three systems, the 101 Vein, the Yankee Girl Vein and the Chester Vein. The 1995 acquisition of the ConSil property, on the eastern flank of the workings of the Sunshine Mine, was done to facilitate evaluation and development of these and other veins. A shaft on the property extends from the surface to a depth of 5400 feet and connects to the Sunshine's eastern workings on the 3100 level serving as the Sunshine Mine's secondary escapeway. Access from this shaft to these exploration areas will be important in their future exploration and development The proven and probable reserves at the Sunshine Mine have historically totaled approximately 4 to 7 years of annual production. Over the mine's history, exploration and development activity have maintained reserves by finding new ore to replace that which was produced each year. Management believes this will continue for the foreseeable future as studies have delineated several areas of favorable geologic conditions that may host significant deposits. These areas are contiguous to delineated mineralization, and the ore-bearing structures project into favorable lithologic units. Further exploration is necessary to quantify the contained ore, but the magnitude of the contained ore could approximate the historic production from the major veins. The hourly employees at the Sunshine Mine are represented by the United Steelworkers of America (which represents the majority of the employees) and the International Brotherhood of Electrical Workers Union (the "Unions"). Effective May 1, 1994, the Unions and SPMI entered into new six-year labor agreements. The salient features of the agreements are (1) continuation of the flexible wage scale making wages variable with silver prices, with some increase in direct hourly wages; (2) the ability of either party to reopen negotiations on wages and benefits at the end of the third year, subject to mandatory interest arbitration if agreement is not reached; and (3) an increase in pension benefits in exchange for the elimination of Company provided retiree medical benefits for the current work force. In February 1997, the Unions notified SPMI that they were exercising their option to reopen negotiations on wages and benefits. The Company and the Unions arrived at an arbitrated agreement on wages and benefits, retroactive to May 1, 1997, in May 1998. The contract will expire on May 1, 2000. PIRQUITAS The Pirquitas property was acquired by the Company in November 1995. Pirquitas is located in the Puna de Atacama of northwestern Argentina in the province of Jujuy at an elevation of over 14,000 feet. The nearest major city is the provincial capital, San Salvador de Jujuy, which is about 355 km southeast of Pirquitas. The Chilean and Bolivian borders lie 50 km west and 60 km to the north, respectively. The Company feels that recent political and economic changes in Argentina, designed to incentivize foreign investment, particularly in the mining industry, have made the country an extremely attractive target for mining 3 5 investment. The country has privatized many state-owned enterprises, and has implemented reforms to many previously state-controlled activities, including mineral exploration and development. A program of fiscal stability has brought down inflation. Guarantees to foreign investors include parity of treatment with Argentine nationals, a freely-exchangeable currency, tax-stabilization programs and complete freedom to expatriate profits. Pirquitas is Argentina's largest historic producer of silver and tin, with 27 million ounces of silver production and 20 thousand tonnes (metric tons) of tin production from its underground workings between 1936 and 1990. Historic production was confined to a system of closely-spaced sheeted veins. The Company is developing the property to be a large, low-cost, open-pit silver, tin and zinc producer. The Company has only recently recognized the zinc potential of the property, and a zinc "halo" surrounding the core silver-tin minerals will be one of the factors addressed in the optimization review of the feasibility study currently underway. Pirquitas represents the southernmost known economic deposit associated with the Bolivian tin belt which extends in an arc from Peru to Argentina. The southernmost Bolivian tin deposits show an increase in silver content, whereas silver is negligible in the tin occurrences of northern Bolivia. Tin belt mineralization occurs in veins, stockworks, breccias, disseminations and mantos. The majority of deposits are associated with small stocks 1-2 km in diameter, exhibiting many characteristics of porphyry copper systems. The Company is currently finalizing a feasibility study regarding the projected financial and operating results of the property for purposes of financing its development. The feasibility study has estimated ore reserves at the property to be 18 million metric tonnes (20.1 million short tons) containing 171.6 grams of silver per tonne (5.01 ounces per short ton) containing 101 million ounces of silver. In addition, the ore grades 0.29% tin and 0.48% zinc, containing 116.4 million pounds of tin and 194 million pounds of zinc. The ore body is open to the east, west and at depth, and numerous old workings visible from the surface indicate other mineralized areas on the property may host additional reserves. The reserves have been adjusted for anticipated mine dilution. Metallurgical recoveries are estimated to be 80% for silver, 63% for tin and 45% for zinc. The total investment at the property to date is approximately $17.1 million, of which the $1.7 million purchase price has been capitalized, $7.1 million has been charged to exploration expense and $8.3 million has been capitalized as development costs. In addition, $1.7 million has been paid as recoverable Value Added Taxes, which are carried as other assets. The property has been considered in the development stage since January 1, 1998. The feasibility study is based on a mining rate of 5,000 metric tonnes (5,500 short tons) per day. The estimated capital cost for the processing facilities, pre-strip, haulage fleet, infrastructure and other capital items at that rate of production is estimated to be approximately $120 million. At that production rate, annual production over the mine life of the deposit to be developed amounts to approximately 8.2 million ounces of silver, 7.1 million pounds of tin and 8.5 million pounds of zinc. The net cash cost of producing an ounce of silver is projected to average approximately $2.00 per ounce. The feasibility study is currently being optimized and a higher production rate of 6,000 metric tonnes (6,600 short tons) per day is being evaluated. Also being examined are opportunities for adding reserves in areas previously considered to be waste, improving metallurgical recoveries and concentrate grades for silver and reducing capital costs by contract mining. Upon completion of the optimization of the feasibility study, the Company will review available options to finance development of the property. No assurance can be given at this time with regard to the availability of such financing. Therefore, the Company may consider other options including a merger with a company with greater financial resources, a sale of a portion or all of the property or a sale of a significant equity interest in the Company or the subsidiary that holds Pirquitas. It may also defer development of the property until silver prices improve. The availability of professional and skilled labor is limited in the regional market surrounding Pirquitas. It will be necessary to recruit these workers on a national and, in some cases, an international basis. The Company anticipates that it can fill much of its other labor requirements from the local workforce although a significant effort in training will be needed. Argentina requires all mine labor (non-professional) to be represented by the Argentine Mine Workers Association (a national union). Local labor agreements must meet minimum guidelines established through negotiation between the union and mine owners as represented by the Argentine Association of Mine Entrepreneurs and Argentine Chamber of Mining and Metallurgy. Sunshine has held preliminary discussions with the Argentine Association of Mine Workers (the National Union) and they have expressed a willingness to accommodate the special requirements imposed by a remote work location. There is good access to the Pirquitas mine site despite its relatively isolated location. The project is reached via an 80 mile improved gravel road from the town of Abra Pampa. This road is suitable for current activities but will require some upgrading during the construction and operation phases. It is anticipated that the 5.1 megawatt power demand at Pirquitas will be satisfied by six medium-speed diesel generating sets, with four of these operating at any given time. Housing for the 400-500 employees on site will be provided in dormitory type units, with a camp kitchen and dining room, clinic, laundry and recreational facilities also included. The Company currently believes the operation will produce an annual average of 17,000 tons of silver concentrate, 6,400 tons of tin concentrate and 8,000 tons of zinc concentrate over its 10-year mine life. A number of offshore smelters have expressed an interest in the concentrates, and favorable terms should be available. The preliminary capital cost estimate of $120 million to develop the project includes $80 million in direct equipment, materials and construction labor, $15 million in construction management and temporary facilities, $10 million in engineering, procurement, freight and insurance and $15 million in pre-stripping and other owner's costs. REVENUE-VIRGINIUS MINE The Revenue-Virginius Mine is an underground silver mine located eight miles southwest of the town of Ouray in southwestern Colorado. It also contains significant gold and base metals. The mine has been largely inactive since a mill fire in 1912 resulted in the closure of the operation. Most production records on the property are missing; however, records which remain indicate production between 1895 and 1906 totaling 14.5 million 4 6 ounces of silver, 123 thousand ounces of gold and 63 million pounds of lead from one series of veins. Sunshine controls the property under a mining lease calling for minimal property payments and work commitments. The property currently contains reserves estimated to be approximately 6.2 million ounces of silver. Several veins carry the mineralized values, and many of the veins have been traced for long distances onto other properties. Therefore, the Company believes it reasonable to assume that a significant mineralized inventory in addition to the above reserves can be inferred. Based on initial pre-feasibility work, the Company believes the property could produce 2.5-3.0 million ounces of silver annually at a net cash cost of approximately $4.00 per ounce, following a capital investment of $12-15 million. Repair work to access the underground veins for exploration and development was completed in 1998. A drilling program designed to increase the proven and probable reserves to a level which would justify the capital commitment is pending. OTHER EXPLORATION The Company controls approximately 81 thousand acres of exploration property in Argentina in addition to the above properties, and properties in the states of Washington and Nevada which it believes are prospective for silver. As budgets and personnel availability allow, the Company intends to do reconnaissance work on these properties in 1999. MARKETING The Company's primary product at the Sunshine Mine can be either refined silver which is sold to industrial customers or precious metals dealers, or silver-copper and lead-silver concentrates which are sold to smelters. Prices received for refined silver are based on market prices at the time of shipment. Prices received for the silver-copper concentrate are based on average prices for silver and copper during a quotational period shortly after shipment. The Company bases its decisions on whether to refine its silver-copper concentrates internally or sell them to a smelter based on internal production costs versus available smelter contract terms. All lead-silver concentrates are sold to smelters, with prices for contained lead and silver based on a quotational period shortly after shipment. The Company's refined silver, antimony and copper products are generally marketed directly to metals dealers or industrial customers. See Note 12 of Notes to Consolidated Financial Statements included elsewhere herein. OTHER BUSINESS AND REGULATORY FACTORS The Company's precious metals operations are intensely competitive and subject to risks and regulations inherent in and applicable to mining generally and the precious metals industry specifically. Competition in the precious metals mining industry, and particularly the silver mining industry, is very volatile. The market for gold and silver is international and there is no significant marketing advantage in domestic production versus international production. No single source of silver is significant to the world market, and many of the principal sources of silver as a primary metal have been forced to close as a result of continued low silver prices over the past several years. As a result, the largest sources of silver at the present time are gold, copper, lead and zinc mines which produce silver as a by-product, and whose economics are not significantly related to the price of silver. Competition among mining companies is primarily for mineral rich properties which can be developed and produced economically; the technical expertise to find, develop and produce such properties; labor to operate the properties; and capital for the purpose of funding such operations. As the principal product sold is a commodity with its price dictated by world markets upon which any individual operator has very little influence, the competitive factors cited above give the competitive advantage to the low cost operator. ENVIRONMENTAL AND SAFETY MATTERS In connection with its operations and properties, the Company is subject to extensive and changing federal, state and local laws, regulations and ordinances governing health and safety and the protection of the environment, including, without limitation, laws and regulations relating to air and water quality, mine reclamation, waste handling and disposal, the protection of certain species and the preservation of certain lands. These environmental laws and regulations may require the acquisition of permits or other authorizations for certain activities. These laws and regulations may also limit or prohibit activities on certain lands lying within a wilderness area, wetland area, area providing habitat for certain species or other protected area. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue in the future. The operations and activities of the Company require compliance with such laws, regulations and ordinances. The Company cannot predict what environmental legislation or regulations will be enacted or adopted in the future or how future laws and regulations will be administered or interpreted. Compliance with more stringent laws and regulations, as well as potentially more vigorous enforcement policies of regulatory agencies or stricter interpretation of existing laws, may necessitate significant capital outlays, may materially affect the Company's operations, or may cause material changes or delays in the Company's intended activities. Currently, the Company does not expect to incur any material capital expenditures associated with environmental regulations (such as expenditures for relevant control facilities) during the fiscal year 1999. See Note 10 of Notes to Consolidated Financial Statements included elsewhere herein; and "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." The Company also does not anticipate any material effect from compliance with environmental, health and safety laws, regulations and ordinances. EMPLOYEES At December 31, 1998, Sunshine and its subsidiaries, including SPMI, employed approximately 335 persons; 306 of whom are located at the Kellogg facilities. SEE "ITEM 1. BUSINESS. THE SUNSHINE MINE AND REFINERY COMPLEX." 5 7 GLOSSARY OF CERTAIN MINING TERMS ASSAY - To analyze the proportions of metals in ore, to test an ore or mineral for composition, purity, weight, or other properties of commercial interest. The word "assay" also refers to the test or analysis itself. CONCENTRATE - a product containing the valuable metal and from which most of the waste material in the ore has been eliminated. DILUTION - An estimate of the amount of waste or low-grade mineralized rock which will be mined with the ore as part of normal mining practices in extracting an ore body. DRIFT - An underground horizontal passage which provides access to a mineralized area. DRILL INTERCEPT - The distance from the initial contact by a drill hole of a mineralized zone or vein to the drill hole's exit from that zone or vein. EXPLORATION - Work involved in searching for ore, usually by drilling or driving a drift. FAULT - A fracture or a zone of fractures along which there has been displacement of the sides relative to one another parallel to the fracture. FOOTWALL - The underlying side of a fault, ore body, or mine working; esp. the wall rock beneath an inclined vein or fault. GRADE - The metal content of ore and drill samples. With precious metals, grade is expressed as troy ounces per ton of rock. MILL - A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to effect recovery of the pure metal. MINERALIZED MATERIAL/INVENTORY - A mineralized body which has been delineated by appropriately spaced drilling and/or underground sampling to support reasonable estimate of tonnage and average grade of metal(s). Such a deposit does not qualify as a reserve until a comprehensive evaluation based upon unit cost, grade, recoveries and other material factors conclude legal and economic feasibility. ORE BODY - An economically recoverable deposit of minerals, the extent and grade of which has been defined through exploration and development work. ORE RESERVE - That part of a mineral deposit which at the time of the reserve determination could be economically and legally extracted or produced. PROBABLE RESERVES - Resources for which tonnage and grade are computed primarily from specific measurements, samples or production data, and partly from projection for a reasonable distance on geologic evidence. The sites available for inspection, measurement and sampling are too widely or otherwise inappropriately spaced to permit the mineral bodies to be outlined completely, or the grade established throughout. PROVEN RESERVES - Resources for which tonnage is computed from dimensions revealed in workings and drill holes and for which the grade is computed from the results of detailed sampling. The sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape and mineral content are all established. The computed tonnage and grade are judged to be accurate, within limits which are stated, and no such limit is judged to be different from the computed tonnage or grade by more than 20%. STOPE - An opening or workplace in an underground mine excavated for the purpose of extracting ore. TON - A short ton of 2,000 pounds, dry weight basis. TONNE - Metric ton, equal to 2,204.62 pounds. TROY OUNCE - Unit of weight measurement used for all precious metals. The familiar 16-ounce avoirdupois pound equals 14.583 troy ounces. VEIN - An epigenetic mineral filling of a fault or other fracture in a host rock, in tabular or sheetlike form, often with associated replacement of the host rock; a mineral deposit of this form and origin. 2. PROPERTIES The information regarding the properties of Sunshine is set forth under ITEM 1. BUSINESS, above, and in the Notes to Consolidated Financial Statements included in Part II hereof. 3. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS The EPA has identified the Company and SPMI as Potentially Responsible Parties ("PRPs") at one site and SPMI as a PRP at another site under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI at one site and SPMI at the other site arranged for the disposal of hazardous substances. One of the sites is located in Kellogg, Idaho (the "Bunker Hill Superfund Site") and the other site is located in Spokane, Washington. At the Bunker Hill Superfund Site, the EPA, the State of Idaho and several of the PRPs, including the Company and SPMI, have agreed to a site-wide clean-up plan, separating the site into two distinct areas for remediation: the Bunker Hill Smelter Complex (the "Smelter Area") and the residential and certain commercial areas primarily in the cities of Kellogg, Smelterville and Pinehurst, Idaho encompassed by the Site (the "Residential Areas"). Without admitting liability, the Company and several PRPs have agreed to do the 6 8 remediation work in the Residential Areas pursuant to an EPA and State of Idaho approved work plan. In exchange therefor, EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Smelter Area, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation undertaken by the Company and the PRPs is expected to continue for another three to four years. The Company currently has accrued $2.4 million for its (including SPMI's) share (12.4%) of the estimated remaining remediation costs at December 31, 1998. On November 17, 1994, the United States District Court for the District of Idaho entered a Consent Decree containing the terms of this agreement. The liability for remediation costs under the consent decree is joint and several. Thus, if any other settling party (or parties) does not comply with the consent decree, the exposure for the Company and SPMI could increase proportionately. The parties have reserved their claims and defenses with respect to natural resource damages, except for the State of Idaho which has agreed that its claim has been settled. On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed an action in the United States District Court, District of Idaho against the Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory judgment that the Tribe has five years in which to file a natural resource damage claim under CERCLA against the PRPs and others or, alternatively, for damages in an unspecified amount resulting from the loss, destruction or injury to natural resources allegedly caused by the defendants. The Company believes that a settlement by SPMI of all natural resources claims with the State of Idaho in May 1986 bars the Tribe's action. On March 22, 1996, a complaint was filed in the United States District Court for the District of Idaho on behalf of the United States Department of the Interior, United States Department of Agriculture and the Environmental Protection Agency against Sunshine, SPMI and other identified PRPs for alleged natural resource damages in the Coeur d'Alene Basin. The complaint seeks to recover natural resource damages and response costs under CERCLA and the Clean Water Act, and does not identify the amount of damages sought to be recovered. The Company believes that the settlement by SPMI of all natural resource claims with the State of Idaho in May, 1986, bars these claims, and that the complaint is without merit. On September 30, 1998, the United States District Court for the District of Idaho granted the Company's Motion for Partial Summary Judgment limiting the United State's potential natural resource damage claims in the Coeur d'Alene River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site. The effect of the ruling substantially limits the government's claim for damages from a 1500 square mile site to the 21 square mile Bunker Hill Superfund Site, within which the Company has, pursuant to a Consent Decree with other defendants, been engaged in clean-up operations. The United States has been granted an interlocutory appeal of the order to the Ninth Circuit Court of Appeals. The second site where EPA has identified SPMI as a PRP under CERCLA is the Spokane Junkyard Site near Spokane, Washington. In November 1988, the EPA notified SPMI that it is a PRP at that site. The EPA has documented the threatened release of hazardous substances at the site and has initiated response actions under CERCLA. The Company does not believe that the designation of SPMI as a PRP at the Spokane Junkyard Site will have a material impact on the Company's results of operations and financial condition or on its liquidity or capital resources. SPMI does not believe it will be required to pay any clean-up costs at the Spokane Junkyard Site. No records of SPMI have been discovered by it or the EPA showing SPMI ever sent any material to the site. To date, the EPA has not filed any action against SPMI or the Company in relation to the Spokane Junkyard Site. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of Sunshine's fiscal year ended December 31, 1998. 7 9 PART II 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Sunshine's Common Stock is listed for trading on the New York Stock Exchange (symbol "SSC"). Sunshine currently does not pay cash dividends on its Common Stock and has not paid any since the third quarter of 1981. At March 10, 1999, Sunshine had approximately 30,000 holders of record of its Common Stock. On March 10, 1999, the closing price of the Common Stock price as reported on the New York Stock Exchange, Inc. ("NYSE") Composite Transactions was $0.5625. Presently, the Company does not intend to pay cash dividends. Also, pursuant to restrictions imposed by the Company's outstanding debt securities at December 31, 1998, the Company could not pay cash dividends on shares of its Common Stock. The following table sets forth the range of high and low sales prices for the Common Stock as reported on the NYSE composite tape for the periods indicated. Such quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
1998 QUARTERS 1997 QUARTERS ------------------------------------------------- HIGH LOW HIGH LOW - -------------------------------------------------------------------------- 1st Quarter 1 11/16 7/8 1 1/4 3/4 - -------------------------------------------------------------------------- 2nd Quarter 1 7/16 7/8 15/16 5/8 - -------------------------------------------------------------------------- 3rd Quarter 1 5/8 1 1/8 5/8 - -------------------------------------------------------------------------- 4th Quarter 1 1/2 1 1/8 49/64 - --------------------------------------------------------------------------
CONTINUED NYSE LISTING As a result of the impairment write down of the Sunshine Mine in the third quarter (see Note 3 of Notes to Consolidated Financial Statements), the Company fell below the NYSE continued listing criteria. The NYSE has requested advice from the Company as to what definitive action it plans to take in order to bring the Company into compliance with original listing standards. The Company will present an action plan in April 1999 to bring it into compliance within eighteen months. The plan is subject to NYSE approval. WARRANTS The Company's March 9, 1999 and May 22, 2001 common stock purchase warrants are traded on the NASDAQ National Market System (symbols "SILVW"and "SILVZ") with high and low sales prices as reported by NASDAQ during 1998 of $0.75 and $0.016; and $0.8125 and $0.0625, respectively. The March 9, 1999 warrants have now expired. RECENT FINANCING On January 28, 1999, the Company completed a private placement of $6.0 million initial principal amount of its 5% Convertible Notes due January 28, 2001. The notes were sold to Elliott Associates, L.P. and Westgate International, L.P. in reliance upon Section 4(2) of the Securities Act of 1933, as amended, since the purchasers were sophisticated investors and there was no public offering. For additional information regarding the terms of the notes, see the discussion under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES -- RECENT FINANCINGS." 6. SELECTED FINANCIAL DATA. The following table sets forth summary historical financial information of Sunshine as of the dates and the periods indicated in the table below. All amounts are in thousands, except price and production statistics and per share amounts. 8 10
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1998(2) 1997 1996(3) 1995 1994(4) ------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Operating revenues ................................... $ 34,668 $ 24,993 $ 15,315 $ 15,623 $ 17,732 Mark to market gains (losses) ........................ (2,588) 1,859 (1,101) 911 (320) ------------ ------------ ------------ ------------ ------------ Total revenues ................................... 32,080 26,852 14,214 16,534 17,412 Net loss ............................................. (64,845) (19,308) (25,902) (15,483) (4,923) Income (loss) applicable to common shares ............ (64,845) (19,308) 11,600 (25,572) (15,383) Basic and diluted income (loss) per common share: Net income (loss) ................................ (.25) (.08) .05 (.13) (.08) Weighted average common shares ....................... 256,871 255,137 222,584 193,044 185,634 PRICE AND PRODUCTION STATISTICS: Average silver price received ........................ $ 5.47 $ 5.02 $ 5.11 $ 5.20 $ 5.29 Tons ................................................. 247,866 183,404 120,910 101,240 107,056 Silver grade (ounces per ton) ........................ 24.17 23.95 22.04 17.66 20.08 Silver ounces ........................................ 5,806,468 4,253,315 2,577,895 1,731,714 2,079,290 Cash cost per ounce(1) ............................... $ 4.43 $ 4.50 $ 6.12 $ 6.61 $ 5.83 BALANCE SHEET DATA: Cash and cash investments ............................ $ 1,412 $ 15,985 $ 16,317 $ 12,837 $ 26,581 Working capital ...................................... 9,716 26,959 25,559 23,550 38,537 Total assets ......................................... 39,897 101,601 105,486 101,134 116,657 Long-term debt and capital lease obligations ......... 42,597 42,265 25,780 1,519 1,519 Stockholders' equity (deficit): Preferred Stock .................................. -- -- -- 82,268 80,707 Other ............................................ (17,466) 44,496 63,598 2,814 19,701 Book value per common share .......................... (.07) .17 .25 (.22) (.10) Common shares outstanding ........................ 259,408 255,232 254,981 193,096 192,995
(1) Cash cost per ounce includes all expenditures (other than exploration costs and capital expenditures) related to the operation of the Sunshine Mine and Refinery Complex, less any by-product revenues. Such costs include non-capital development costs, production and maintenance costs, ad valorem taxes, insurance, and postemployment benefit costs incurred on site. (2) During 1998 the Company recorded a $50.4 million impairment of mining properties expense to write down the value of the Company's investment in the Sunshine Mine. (3) During 1996 the Company recorded a gain applicable to common shares of $40 million due to the retirement of all of the Company's outstanding Preferred Stock. See Note 7 of Notes to Consolidated Financial Statements. (4) In 1994, the Company recorded gains totaling $6.9 million due to the curtailment of postretirement medical benefits for certain of its employees and retirees. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements other than statements of historical fact, including without limitation those that are identified by the use of the words "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts" and similar expressions. Such statements address future plans, objectives, expectations and events or conditions concerning various matters such as mining exploration, capital expenditures, earnings, litigation, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors including without limitation, actual results of exploration, silver prices, imprecision of reserve estimates, future economic conditions, regulations, competition and other circumstances affecting anticipated revenue and costs. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement. Readers are cautioned not to place undue reliance on these forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have generated losses in each of the last three years, and a net use of cash from operations in the last three years. The decline in silver and by-products prices during the last half of 1998 caused the Company's operating cash flows to decline below the levels it had anticipated. The Company ended 1998 with working capital of $9.7 million, including cash and silver bullion held for investment of $6.6 million and a $17.5 million stockholders' deficit. The Company has taken specific actions in attempts to ensure its ability to continue operations. Specifically, the Company has reduced operations in Argentina primarily to the level required to complete the feasibility study for the Pirquitas Mine, implemented cost reduction and cash conservation plans and initiatives to reduce its work-in-process inventory. Also, in January 1999, the Company raised an additional $6 million in the form of 5% Convertible Notes, due January 28, 2001. With these funds, the Company considers its cash and working capital to be adequate for the foreseeable future. The Company's strategy to return to profitability is focused on finding additional low-cost silver reserves which can be economically developed and operated. During 1998, the Company invested a total of $12.8 million in exploration and development projects, principally at Pirquitas. Future spending on exploration projects is contingent on future cash flow from the Sunshine Mine and the Company's ability to raise new funding. The Company believes its past success in finding and developing new properties will assist it in raising the funds required to continue its exploration program as well as in funding the development of the 9 11 properties it has already identified. However, no assurance can be given that the necessary exploration and development funds can be obtained. The West Chance ore body was discovered in 1992 in the previously undeveloped western section of the Sunshine Mine. The Company has completed development of the West Chance, producing approximately 5.8 million ounces of silver from the area in 1998, a significant increase over prior years. The Company's cash production cost per ounce has been substantially reduced as production increased. The improvements did not restore the Company to profitability at silver prices which prevailed in 1998, as the cash operating margin from the Sunshine Mine does not exceed other expenses (depreciation, depletion, exploration, general and administrative and interest expenses). The Company expects production from the Sunshine Mine in 1999 and 2000 to continue at approximately 5.5 million ounces per year, most of which is anticipated to be from the West Chance area, but it will be supplemented by production from other reserve areas which are to be developed as the focus of mining operations shifts to the eastern portion of the Sunshine Mine. Absent an increase in silver or by-product prices, the cash flow from these operations will not cover all anticipated non-cash or administrative expenses. The Company is planning a major exploration and development project to access reserves in the eastern area of the mine. This project will provide a major exploration platform for evaluating a number of undeveloped areas in the eastern portion of the mine which are considered highly prospective. If successful in developing major new ore bodies, the total cost of the project is expected to be between $2 million and $4 million over two years. In addition to providing an exploration platform, the project will provide mechanized access to existing reserves for development and production, while allowing the abandonment of the internal 10-Shaft. The Company believes this project can be funded from available working capital. If reserves in sufficient quantities are established in the target areas, the Company will rehabilitate the ConSil Shaft, increasing production capacity of the mine by approximately 50%. The cost of this rehabilitation is estimated to be $2 million. Such an increase in capacity would be expected to further reduce unit operating costs. The Company's next major project is the development of the Pirquitas Mine in northwest Argentina. The Company invested $8.3 million at the property in 1998, and has projected approximately $2.0 million for general exploration and development in 1999 (prior to obtaining financing for mine construction). The Company has invested a total of $17.1 million in the property since its acquisition in November 1995, together with approximately $1.7 million in recoverable Value Added Taxes. The Pirquitas investment has allowed the Company to develop a major ore reserve, the economics of which are being confirmed by a feasibility study commissioned in 1997. Preliminarily, the study has estimated the property can be developed for approximately $120 million, and will produce annually approximately 8.2 million ounces of silver and 7.1 million pounds of tin. The estimated net cash cost of production of an ounce of silver is projected to be approximately $2.00 net of tin by-product credits. Assuming a $5.50 silver price and a tin price of $2.54 per pound, proven and probable reserves are presently estimated to be 20.1 million tons of ore at an average grade of 5.01 ounces per ton silver (18.3 million tonnes at an average grade of 171.6 grams per tonne silver), 0.29% tin, and 0.48% zinc. Contained metal in the proven and probable reserves totals 101 million ounces of silver, 116.4 million pounds of tin and 194 million pounds of zinc. The Company expects future development and exploration work at the site to expand reserves. In January 1999, the Company and its consultants began a process designed to optimize the feasibility study to examine options to increase production, reduce costs and increase reserves. Upon completion of this work, the Company will evaluate its alternatives with respect to financing the development of the property. Given current market conditions, including the price of silver and the Company's financial resources, no assurances can be given regarding the availability of such financing. As a result, the Company may consider other options, including a merger with a company with greater financial resources, a sale of a portion or all of the property or a sale of a significant equity interest in the Company or the subsidiary that holds Pirquitas. It may also defer development until silver prices improve. The Company has performed certain evaluation work on its Revenue-Virginius property which indicates it can be placed into production with a capital investment of approximately $12-15 million. The Company believes that the property could produce approximately 2.5 to 3 million ounces of silver annually at a net cash cost of approximately $4.00 per ounce. A drilling program to add sufficient proven and probable reserves to justify financing for the development of the Revenue-Virginius Mine is pending. No assurance can be given that adequate financing will be available to fund such development. RECENT FINANCINGS On January 28, 1999, the Company completed a private placement of $6.0 million initial principal amount of its 5% Convertible Notes due January 28, 2001. The interest will be paid by adding the amount of interest to the principal amount of the Notes. The Notes may generally be converted into common stock at a per share price based on the average of the lowest average high and low trading prices for five of the twenty consecutive trading days prior to conversion. The conversion price for one-half of the Notes has been fixed at a maximum of $0.6875. The funds were added to working capital. In November 1997, the Company completed a private placement of five-year convertible promissory notes for $15 million ("10% Notes"). The 10% Notes are convertible into 15.8 million shares of Common Stock at $.95 per share, and bear a 10% coupon with principal and interest payable in either cash or common stock at the Company's option. In certain events, the conversion price of the 10% Notes can be reset to a lower level. The funds were used principally to continue the Company's exploration and development program at the Pirquitas Mine in northwest Argentina and its exploration program in southern Argentina and for general corporate purposes. In March 1996, SPMI issued $30 million aggregate principal amount of Senior Exchangeable Notes due 2000 (the "Eurobonds"), which were offered in Europe only to non-U.S. persons pursuant to Regulation S of the Securities Act of 1933, as amended. The net proceeds, approximately $27 million, were used to fund development and exploration 10 12 opportunities and to fund general, administrative and other costs. During the first half of 1998, $1.5 million principal amount of Eurobonds was exchanged for 1.5 million shares of stock. The Eurobonds bear interest at 8% per annum and mature March 21, 2000. The remaining outstanding Eurobonds are exchangeable into an aggregate of 28.5 million common shares at an exercise price of $1.00 per share. The Eurobonds are guaranteed by Sunshine. If during the period May 1, 1996 to March 21, 1999 the Company's common stock does not trade at $1.33 or more (average of high and low prices) for 45 consecutive stock exchange trading days, the Company will be required to make a payment in cash or stock equal to 22.5% of the then outstanding principal amount. The Company currently intends to make this payment in stock. The Eurobonds are callable if the Company's average common stock high and low sales prices exceed $1.50 over 30 consecutive stock exchange trading days. EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE Whenever circumstances or events indicate, and at least annually, the Company evaluates its mining properties for impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, recoverable reserves and estimates of future reserve potential which management believes are reasonable, based on historical silver prices and production. If the sum of such cash flows was less than the carrying amount of the asset, the Company would record an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the third quarter of 1998, drilling in the West Chance vein indicated that the size of the vein might be smaller than what was previously expected. Based on that information, the Company felt that production from the West Chance could decline to 4 million ounces in 1999. As a result, combined with low by-product prices and a decline in silver prices, the Company estimated that future cash flows from the mine would not be sufficient to recover the $59.4 million carrying amounts of the mine. The fair value of the mine as determined by the discounted cash flow method was approximately $9 million and an impairment charge of $50.4 million was taken at the end of the third quarter. Since that time, the Company's production forecast for those periods has been revised significantly upwards, as downdip extensions of the West Chance Vein have been identified as economic and other veins have been identified as containing economic ore which can be accessed in 1999 and 2000. Future increases in the price of silver and the presence of additional mineralized material and resources are forward-looking statements regarding matters over which the Company has no control. Actual future silver prices and the results of current exploration may differ from anticipated values. OTHER The Company and SPMI have been identified by the EPA as a PRP at the Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane Junkyard Site. The Company believes that its status as a PRP will not have a material adverse effect on its consolidated financial position or results of operations. See "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS" and Note 10 of Notes to Consolidated Financial Statements. OPERATING, INVESTING AND FINANCING ACTIVITIES Cash used in operating activities was $9.5 million in 1998 compared with $15.1 million in 1997 and $22.2 million in 1996. The 1998 $5.6 million improvement was due to the $2.15 million decrease in cash operating loss and changes in other working capital items. The cash operating loss decreased in 1998 compared to 1997 due to a $4.3 million improvement in cash operating income at the Sunshine Mine (from $1.6 million in 1997 to $5.9 million in 1998), a $2.8 million decrease in exploration expense and $750 thousand of interest expense being paid in common stock. These were partially offset by a $2.6 million mark to market loss in 1998 compared to a $1.85 million gain in 1997 and a $1.3 million increase in interest costs in 1998 compared to 1997. Cash used by investing activities during 1998 was $5.8 million, including $8.3 million for the development of the Pirquitas Mine in Argentina and $1.8 million at the Sunshine Mine, partially offset by $4.5 million of cash proceeds from the sale of certain investments and 300 thousand ounces of investment silver bullion, and proceeds from settlement of certain litigation. In 1997, $2.2 million of proceeds from investments was partially offset by $2.0 million of additions to property, plant and equipment resulting in $0.2 million of cash provided by investing activities. One million of cash was used by investing activities during 1996, including $2.7 million for additions to property, plant and equipment, partially offset by proceeds from investments of $1.7 million. Cash provided by financing activities in 1998 includes $785 thousand from the exercise of stock options and warrants. Cash provided by financing activities was $14.6 million in 1997 resulting from the Company's issuance of the 10% Notes. Cash provided by financing activities was $26.7 million in 1996 resulting from the Company's Notes Offering, partially offset by the cost associated with the exchange of common stock for preferred stock. IMPACT OF YEAR 2000 The Company has completed its review of all hardware and software systems operated or licensed in the Company's business. Only one computer program was identified that would recognize a date using "00" as the year 2000, but "01" as the year 1901 rather than 2001. The Company has reviewed its options to remedy this problem and believes this can be accomplished timely and at a cost that is not material. The Company has contacted its significant vendors, suppliers, customers and other third parties as to their Year 2000 exposure and compliance. To date, the Company is not aware of any third parties with a Year 2000 issue that would materially affect the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of third parties to complete their Year 2000 11 13 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by third parties is not determinable. RESULTS OF OPERATIONS 1998 COMPARED TO 1997 The Company's net loss increased $45.5 million to $64.8 million compared to $19.3 million primarily due to the $50.4 million impairment writedown of the Sunshine Mine. Consolidated operating revenues increased approximately $9.7 million (38.7%) for 1998 compared to 1997 primarily due to an increase in sales volume and average price received per ounce of silver sold (5.5 million ounces of silver at an average of $5.47 per ounce in 1998 compared to 4.1 million ounces of silver at an average of $5.02 in 1997). The increase in sales volumes primarily resulted from a 1.6 million ounce (36.5%) increase in production in 1998 compared to 1997. Mark to market writedown of work-in-process silver inventories and silver bullion held for investment amounted to $2.6 million in 1998 compared to a $1.9 million gain in 1997. The writedown was due to declines in the per ounce silver price from $5.945 to $4.988 between December 31, 1997 and December 31, 1998. The 1997 gain was due to the increase from $4.74 to $5.945 per ounce of silver between December 31, 1996 and December 31, 1997. Cost of revenues increased $5.4 million (23.4%) (from $23.0 million in 1997 to $28.4 million in 1998) primarily due to the 36.5 % increase in production in 1998, partially offset by lower net unit operating costs. Net unit operating costs decreased $.07 (1.8%) to $4.43 per ounce of silver primarily due to the 36.5% increase in silver production (5.8 million ounces produced from 247,866 tons at 24.17 ounces per ton in 1998 versus 4.25 million ounces from 183,404 tons at 23.95 ounces per ton in 1997). Reduction in operating costs per ounce of silver was actually $0.57 but was partially offset by $0.50 reduction in by-product credits due to lower lead, copper and antimony prices during 1998. Depreciation, depletion and amortization decreased by approximately $873 thousand as a result of the impairment writedown of the Sunshine Mine in the third quarter which resulted in reduced depreciation, depletion and amortization in the fourth quarter, partially offset by increased production in the 1998 period. The 1998 period reflects a $50.4 million charge as an impairment writedown of the Sunshine Mine. See "LIQUIDITY AND CAPITAL RESOURCES--EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE." Exploration expense decreased $2.8 million in 1998 compared to 1997 primarily due to the fact that work carried out at the Pirquitas Mine in Argentina is largely being capitalized as the property is now considered to be in the development stage. As a result, approximately $8.3 million of development expenditures for Pirquitas during 1998 were capitalized. This was partially offset by increased exploration expenditures at the La Joya del Sol gold property in Argentina, at the Sunshine Mine and other exploration projects. Interest and debt expense increased $1.4 million due to the debt issued in November 1997. Other, net increased $2.65 million due to a $1.1 million net gain for proceeds received from settlement of certain litigation and the $1.6 million reduction of the valuation reserves previously recorded against certain investments as a result of performance of certain investments. 1997 COMPARED TO 1996 The Company's net loss decreased $6.6 million in 1997 to $19.3 million compared to $25.9 million in 1996. This decreased loss resulted primarily from a $4.8 million improvement in operating margin, a $2.9 million decrease in exploration expense, a $3 million improvement in mark-to-market gain (loss) and a $0.4 million decrease in general and administrative expense partially offset by a $1.5 million increase in depreciation, depletion and amortization, a $1.3 million increase in interest expense, a $0.7 million reduction in interest income and a $0.8 million reduction in other, net. Consolidated operating revenues increased approximately $9.7 million (63.2%) for 1997 compared to 1996 primarily due to an increase in sales volume (4.1 million ounces of silver in 1997 compared to 2.7 million ounces of silver in 1996) and the associated $2.4 million increase in by-product revenue, partially offset by lower average silver prices received ($5.02 in 1997 compared to $5.11 in 1996). The increase in sales volumes primarily resulted from a 1.7 million ounce (65%) increase in production in 1997 compared to 1996, and a 65 thousand ounce increase in sales volume of finished silver. Mark to market gains on work-in-process silver inventories and silver bullion held for investment amounted to $1.9 million in 1997 compared to a loss of $1.1 million in 1996. The gains in 1997 were due to increases in the per ounce silver price during the period, from $4.74 to $5.95 between December 31, 1996 and December 31, 1997 Cost of revenues increased $4.9 million (27.4%) (from $18.1 million in 1996 to $23.0 million in 1997) primarily due to the 65% increase in production in 1997, partially offset by lower unit production costs. Unit production costs decreased $1.62 (26%) to $4.50 per ounce of silver primarily due to the 65% increase in silver production (4.3 million ounces produced from 183,404 tons at 23.95 ounces per ton in 1997 versus 2.6 million ounces from 120,910 tons at 22.04 ounces per ton in 1996). Depreciation, depletion and amortization increased by approximately $1.5 million (35%) as a result of increased production figures in the 1997 period. Exploration expenditures declined $2.9 million primarily due to the completion of the required drilling for the pre-feasibility analysis at the Pirquitas mine in the second quarter of this year. Interest income decreased by $719 thousand due to lower average invested cash balances. Interest and debt expense increased $1.3 million due to the debt issued in March 1996. 12 14 7A. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES. COMMODITY PRICE RISK Substantially all of the Company's revenues are from sales of silver. Volatility in the price of silver causes substantial fluctuations in the Company's revenues and financial condition. There are many factors which influence the volatility of silver prices. Changes in supply and demand, worldwide economic and political conditions, expectations as to inflation and speculative activity in the market all cause fluctuations in silver prices. As previously discussed, the price of silver in recent years has been depressed, averaging approximately $5.00 per ounce for the 11-year period ended in 1998. The Company maintains an investment inventory of silver bullion which totaled approximately 1.0 million ounces at December 31, 1998. As a result, the Company's financial results are affected by changes in the price of silver. When silver prices decline, the decline in value of the investment bullion is recorded as a mark to market loss on the Company's statement of operations. Conversely, an increase in silver prices is recorded as a mark to market gain. A 10% decrease ($0.50) in the per ounce price of silver during 1999 would result in a $500 thousand mark to market loss for the year. To earn current income on this investment and to mitigate a portion of its exposure to a decline in silver prices, the Company from time to time will sell covered calls against its silver bullion inventory. Total premiums earned for the sale of covered calls aggregated $316,000, $116,000, and $165,000 in 1998, 1997 and 1996, respectively. At December 31, 1998, no covered call options were outstanding. At December 31, 1997, the Company had covered call options outstanding for 1.2 million ounces of silver with strike prices ranging from $5.75 to $7.00 and expiration dates of February 26, 1998 (200,000 ounces), March 27, 1998 (900,000 ounces), and December 27, 1998 (100,000 ounces). The fair value of the sold call options at December 31, 1997 would not materially exceed the $202,000 of premiums received when they were sold. The Company's policy is not to sell any uncovered calls. (See Note 1 of Notes to Consolidated Financial Statements for information related to accounting policies for covered calls.) INTEREST RATE RISK The Company has outstanding debt with fixed interest rates. Therefore, should market interest rates decline, the Company could make payments in excess of what would be made under the reduced rates. The following table presents the principal cash payments and related weighted-average interest rates by expected maturity date for its debt obligations. Interest Rate Sensitivity Principal Amount by Expected Maturity Average Interest Rate
Fair There- Value at (dollars in millions) 1999 2000 2001 2002 after Total 12/31/98 - ------------------------------------------------------------------------------------------------ Long-term Debt Fixed Rate $ 0 $ 33.5 $ 5 $ 5 $1.5 $45.0 $45.0 Avg. Interest Rate 8.7% 9.3% 9.8% 9.6% 9.0%
FOREIGN CURRENCY RISK The Company is developing the Pirquitas Mine in Argentina. Therefore, the Company could be at risk for fluctuations in the U.S. dollar/Argentine peso exchange rate. However, Argentina maintains a 1:1 exchange ratio by limiting the amount of pesos that are issued to the amount of U.S. dollars held by the Argentine Central Bank. Also, it has been reported that Argentina is considering replacing the peso with the U.S. dollar. Thus at this time, the Company does not feel its foreign currency market risk is significant. At December 31, 1998, no debt was denominated in a foreign currency nor are there any firm purchase commitments denominated in a foreign currency. STOCK PRICE RISK The provisions of one of the Company's debt agreements includes a requirement to pay additional interest if the Company's stock price does not trade at more than $1.33 for a specified time. As the Company's stock has not traded above $1.33 for the specified time, the Company intends to issue additional shares of Common Stock to make the required payment. An increase of 10% from the year-end closing per share price of $0.50 would reduce the number of shares to be issued by 1.2 million. A 10% decline would increase the number of shares to be issued by 1.4 million. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements filed herewith begin on page F-1 hereof. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 15 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to the Company's directors and nominees for election as directors and information relating to the executive officers of the Company is incorporated herein by reference from the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders to be held on May 24, 1999 (the "Proxy Statement"). 11. EXECUTIVE COMPENSATION. The discussion under "Management Remuneration and Transactions" in the Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated herein by reference. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The discussion under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated herein by reference. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The discussion under "Management Remuneration and Transactions - Employment Contracts" in the Company's Proxy Statement for its Annual Meeting of Stockholders is incorporated herein by reference. PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. The following documents are filed as a part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements. See Index to Financial Statements and Financial Statements Schedules on page F-1 hereof. 2. Consolidated Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits. EXHIBIT NO. EXHIBIT ------- ------- 3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 3.2 Amendment to Certificate of Incorporation of Sunshine filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. *3.3 Bylaws of Sunshine. 4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.2 Amendment to Certificate of Incorporation of Sunshine, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. 4.3 Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.4 Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.5 Form of Supplemental Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 14 16 4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1 Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.8 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine filed as Exhibit 4.2 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446 as amended, which exhibit is incorporated herein by reference. 4.9 Form of Indenture, dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008 filed as Exhibit 4.25 to Sunshine's Registration Statement on Form S-3, Registration No. 33-21159, which exhibit is incorporated herein by reference. 4.10 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture, dated as of November 10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, between the Company and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of the Convertible Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, which exhibit is incorporated herein by reference. 4.11 Form of Fourth Supplemental Indenture, between the Company and Texas Commerce Bank National Association, as successor to Ameritrust Texas, National Association, formerly known as MTrust Corp., National Association, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine Midland Bank and Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC Investment Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.14 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 4.15 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. *4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. 4.17 Specimen form of 5% Convertible Promissory Note, due January 28, 2001, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. *4.18 Bylaws of Sunshine, filed herein as Exhibit 3.3. o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, which exhibit is incorporated herein by reference. o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, which exhibit is incorporated herein by reference. o10.4 1993 Incentive Stock Option Plan of Sunshine filed as Exhibit 10.18 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. 15 17 o10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, which exhibit is incorporated herein by reference. 10.9 Mining Lease, dated as of March 15, 1994, between Revenue-Virginius Mines Corporation, a Colorado corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, which exhibit is incorporated herein by reference. 10.10 Agreement, dated as of July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals, Inc., as purchaser, for the purchase of a certain mining property filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 10, 1995, which exhibit is incorporated herein by reference. 10.11 Registration Rights Agreement, dated as of November 24, 1997, between the Company and Stonehill Partners, L.P., GRS Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited filed as Exhibit 10.11 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. *10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp., filed herewith as Exhibit 4.16 10.14 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.15 Registration Rights Agreement, dated as of January 28, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit 4.2 to Sunshine's Current Report on Form 8-K dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. 10.17 Convertible Note Investment Agreement, dated as of January 27, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 21.1 Subsidiaries of Sunshine filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, which exhibit is incorporated herein by reference. *23.1 Consent of Ernst & Young LLP. *24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. *27.1 Financial Data Schedules - ---------- * Filed herewith o Management contract or compensatory plan or arrangement. Schedules other than those included in the Consolidated Financial Statements, if any, are omitted for the reason that they are either not required, not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto. (a) Reports on Form 8-K: On February 4, 1999, the Company filed a Form 8-K reporting the completion of a $6,000,000 private placement of 5% Convertible Notes due January 8, 2001. 16 18 Consolidated Financial Statements Sunshine Mining and Refining Company Years ended December 31, 1998 and 1997 with Report of Independent Auditors 19 Sunshine Mining and Refining Company Consolidated Financial Statements Years ended December 31, 1998 and 1997 CONTENTS Report of Independent Auditors......................................... 1 Consolidated Financial Statements Consolidated Balance Sheets............................................ 2 Consolidated Statements of Operations.................................. 3 Consolidated Statements of Stockholders' Equity (Deficit).............. 4 Consolidated Statements of Cash Flows.................................. 5 Notes to Consolidated Financial Statements............................. 7
20 Report of Independent Auditors The Board of Directors and Stockholders Sunshine Mining and Refining Company We have audited the accompanying consolidated balance sheets of Sunshine Mining and Refining Company (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunshine Mining and Refining Company at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Dallas, Texas February 26, 1999 F-1 21 Sunshine Mining and Refining Company Consolidated Balance Sheets
DECEMBER 31 1998 1997 ------------ ------------ (In Thousands) ASSETS Current assets: Cash and cash investments $ 1,412 $ 15,985 Silver bullion (Note 2) 5,203 7,739 Accounts receivable 2,801 2,801 Inventories (Note 2) 4,236 3,627 Other current assets 1,845 1,739 ------------ ------------ Total current assets 15,497 31,891 Property, plant, and equipment, at cost (Note 3) 57,114 143,192 Less accumulated depreciation, depletion, and amortization (36,700) (77,727) ------------ ------------ 20,414 65,465 Investments and other assets 3,986 4,245 ------------ ------------ Total assets $ 39,897 $ 101,601 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 1,413 $ 1,351 Accrued expenses (Note 4) 4,368 3,581 ------------ ------------ Total current liabilities 5,781 4,932 Long term debt (Note 5) 42,597 42,265 Accrued pension and other postretirement benefits (Note 9) 5,498 5,672 Other long-term liabilities and deferred credits (Note 10) 3,487 4,236 Commitments and contingencies (Notes 2, 10 and 11) -- -- Stockholders' equity (deficit)(Notes 5 and 7): Common stock, $0.01 par value: Authorized shares - 600,000 Issued shares - 263,971 in 1998; 259,818 in 1997 2,640 2,598 Paid-in capital 714,004 711,192 Deficit (733,000) (668,155) ------------ ------------ (16,356) 45,635 Less treasury stock: 4,563 in 1998; 4,586 shares in 1997, at cost (1,110) (1,139) ------------ ------------ (17,466) 44,496 ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 39,897 $ 101,601 ============ ============
See accompanying notes. F-2 22 Sunshine Mining and Refining Company Consolidated Statements of Operations
YEAR ENDED DECEMBER 31 1998 1997 1996 ------------ ------------ ------------ (In Thousands, except per share amounts) Operating revenues (Note 12) $ 34,668 $ 24,993 $ 15,315 Mark to market gain (loss) (2,588) 1,859 (1,101) ------------ ------------ ------------ 32,080 26,852 14,214 Costs and expenses: Cost of revenues (28,365) (22,989) (18,041) Depreciation, depletion, and amortization (4,944) (5,817) (4,325) Impairment of mining properties (Note 3) (50,425) -- -- Exploration (4,512) (7,352) (10,240) Selling, general, and administrative expense (5,016) (5,072) (5,452) ------------ ------------ ------------ (93,262) (41,230) (38,058) Other income (expense): Interest income 567 594 1,313 Interest and debt expense (6,979) (5,628) (4,328) Other, net 2,749 104 957 ------------ ------------ ------------ (3,663) (4,930) (2,058) ------------ ------------ ------------ Net loss (64,845) (19,308) (25,902) Gain on retirement and exchange of preferred stock (Note 7) -- -- 40,124 Preferred dividend requirements (Note 7) -- -- (2,622) ------------ ------------ ------------ Income (loss) applicable to common shares $ (64,845) $ (19,308) $ 11,600 ============ ============ ============ Basic and diluted income (loss) per common share (Note 8) $ (0.25) $ (0.08) $ 0.05 ============ ============ ============
See accompanying notes. F-3 23 Sunshine Mining and Refining Company Consolidated Statements of Stockholders' Equity (Deficit)
CUMULATIVE REDEEMABLE PREFERRED STOCK COMMON STOCK --------------------------------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ---------------------------------------------------------------- (In Thousands) Balance at December 31, 1995 7,166 $ 82,268 196,760 $ 1,968 $ 623,337 Net loss -- -- -- -- -- Amortization of difference between carrying amount and redemption value of preferred stock -- 490 -- -- -- Additional capital resulting from issuance of Senior Exchangeable Notes -- -- -- -- 6,750 Reversion of Old Silver Index Bond (SIB) shares -- -- -- -- -- Preferred stock exchange (7,166) (82,758) 62,847 628 80,790 Issuance of warrants -- -- -- -- 209 Other, net -- -- 45 1 7 ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 -- -- 259,652 2,597 711,093 Net loss -- -- -- -- -- Issuance of Warrants -- -- -- -- 100 Other, net -- -- 166 1 (1) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 -- -- 259,818 2,598 711,192 Net loss Issuance of common stock upon conversion of Senior Exchangeable Notes 1,525 15 1,304 Issuance of common stock for interest on Senior Convertible Notes 1,076 11 739 Issuance of common stock upon exercise of stock options and warrants 1,552 16 769 Other, net -- -- -- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 -- $ -- 263,971 $ 2,640 $ 714,004 ========== ========== ========== ========== ========== TREASURY STOCK ------------------- DEFICIT SHARES AMOUNT TOTAL ----------------------------------------------------- (In Thousands) Balance at December 31, 1995 $ (622,454) 3,664 $ (37) $ 85,082 Net loss (25,903) -- -- (25,903) Amortization of difference between carrying amount and redemption value of preferred stock (490) -- -- -- Additional capital resulting from issuance of Senior Exchangeable Notes -- -- -- 6,750 Reversion of Old Silver Index Bond (SIB) shares -- 1,007 (1,208) (1,208) Preferred stock exchange -- -- -- (1,340) Issuance of warrants -- -- -- 209 Other, net -- -- -- 8 ---------- ---------- ---------- ---------- Balance at December 31, 1996 (648,847) 4,671 (1,245) 63,598 Net loss (19,308) -- -- (19,308) Issuance of Warrants -- -- -- 100 Other, net -- (85) 106 106 ---------- ---------- ---------- ---------- Balance at December 31, 1997 (668,155) 4,586 (1,139) 44,496 Net loss (64,845) -- -- (64,845) Issuance of common stock upon conversion of Senior Exchangeable Notes -- -- -- 1,319 Issuance of common stock for interest on Senior Convertible Notes -- -- -- 750 Issuance of common stock upon exercise of stock options and warrants -- -- -- 785 Other, net -- (23) 29 29 ---------- ---------- ---------- ---------- Balance at December 31, 1998 $ (733,000) 4,563 $ (1,110) $ (17,466) ========== ========== ========== ==========
See accompanying notes. F-4 24 Sunshine Mining and Refining Company Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1998 1997 1996 ------------ ------------ ------------ (In Thousands) OPERATING ACTIVITIES Net loss $ (64,845) $ (19,308) $ (25,902) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion, and amortization 4,944 5,817 4,325 Impairment of mining properties 50,425 -- -- Amortization of debt issuance costs and accretion of debt discount 2,480 2,300 1,692 Gains on sales of investments (2,795) -- (60) Common Stock issued for interest on Senior Convertible Notes 750 -- -- Net (increase) decrease in: Silver bullion 1,097 (1,625) 987 Accounts receivable -- (177) (1,041) Inventories (609) (1,104) (1,046) Other assets (947) (173) (835) Net increase (decrease) in: Accounts payable and accrued expenses 855 260 1,505 Accrued pension and other postretirement benefits (174) (401) (313) Other liabilities and deferred credits (720) (691) (1,486) ------------ ------------ ------------ Net cash used in operating activities (9,539) (15,102) (22,174) ------------ ------------ ------------ INVESTING ACTIVITIES Additions to property, plant, and equipment (10,318) (1,997) (2,690) Other, principally sale of investments 4,506 2,154 1,670 ------------ ------------ ------------ Net cash provided by (used in) investing activities (5,812) 157 (1,020) ------------ ------------ ------------
F-5 25 Sunshine Mining and Refining Company Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31 1998 1997 1996 ------------ ------------ ------------ (In Thousands) FINANCING ACTIVITIES Proceeds from issuance of long term debt, net of issuance costs $ (7) $ 14,613 $ 27,537 Costs associated with conversion of preferred stock into common stock -- -- (864) Proceeds from issuance of common stock upon exercise of stock options and warrants 785 -- 1 ------------ ------------ ------------ Net cash provided by financing activities 778 14,613 26,674 ------------ ------------ ------------ Increase (decrease) in cash and cash investments (14,573) (332) 3,480 Cash and cash investments at beginning of year 15,985 16,317 12,837 ------------ ------------ ------------ Cash and cash investments at end of year $ 1,412 $ 15,985 $ 16,317 ============ ============ ============ Supplemental cash flow information: Interest paid in cash $ 3,367 $ 2,817 $ 2,283 ============ ============ ============
See accompanying notes. F-6 26 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION Sunshine Mining and Refining Company (Sunshine or the Company) is a holding company whose principal subsidiaries are Sunshine Precious Metals, Inc. (SPMI) and Sunshine Argentina, Inc. SPMI mines, refines, and markets silver and certain by-product metals to commercial customers. SPMI's principal operating property is the Sunshine Mine, located near Kellogg, Idaho. The Sunshine Mine accounted for all of the Company's operating revenues during 1998, 1997 and 1996. As a result, the Company has only one operating segment. SPMI is also engaged in exploration in other parts of the United States. Sunshine Argentina, Inc. owns the Pirquitas Mine, which is currently in the development stage. (See Note 11.) The consolidated financial statements include the accounts of Sunshine and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assessments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain previously reported amounts have been reclassified to conform to the 1998 presentation. OPERATIONS The Company's operations have generated losses and a net use of cash from operations in each of the last three years. The Company ended 1998 with working capital of $9.7 million, including cash and silver bullion held for investment of $6.6 million and a $17.5 million stockholders' deficit. These financial results are primarily a result of continued depressed silver prices and lower by-product prices resulting in margins that are insufficient to cover the Company's other expenses. F-7 27 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OPERATIONS (CONTINUED) The Company has taken specific actions in attempts to ensure its ability to continue operations at least through December 31, 1999. Specifically, the Company has reduced exploration and development expenditures at its Argentina subsidiary primarily to the level required to complete the feasibility study for the Pirquitas Mine (See Note 11), implemented cost reduction and cash conservation plans and initiatives to reduce its work-in-process inventory. Furthermore, in January 1999, the Company raised an additional $6 million in the form of 5% Convertible Notes, due January 28, 2001 (See Note 5). The Company expects that the above-described steps should be sufficient to fund operations at least through December 31, 1999. However, the Company's inability to successfully implement the above described actions or a further decrease in the price of silver could materially adversely impact the Company's ability to continue operating through December 31, 1999. CASH AND CASH INVESTMENTS Cash and cash investments include certificates of deposit and other highly liquid investments with maturities of three months or less when purchased. INVENTORIES AND SILVER BULLION Precious metals inventories and silver bullion are stated at estimated net realizable prices. Materials and supplies are carried at the lower of cost (principally average cost) or market. CONCENTRATION OF CREDIT RISK The Company currently markets its concentrates to a commercial smelter in the United States. Ninety percent of the estimated sales proceeds are due by the 15th of the month following shipment of the concentrates. Final payments are received by the 10th business day of the fourth month following shipment. The Company does not require collateral. Management periodically performs reviews as to the creditworthiness of its customer(s). The Company has not sustained any significant credit losses on sales of its products. F-8 28 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SILVER FINANCIAL INSTRUMENTS The Company sells covered call options on silver bullion held for investment. The strike price of these agreements exceeds current market prices at the time they are entered into. Option premiums received are deferred. If the applicable market price exceeds the strike price and option premium, the differential is accrued and recognized as a reduction of revenues. Any remaining deferred option premiums are recognized as a component of revenues at the end of the option period. The fair values of the sold call options are not included in the financial statements. REVENUE RECOGNITION Sales of refined metals and concentrates are recognized as revenue at the time of shipment to the customer. Adjustments to the carrying value of inventories held for sale or investment are included in revenues. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation on buildings, leasehold improvements, and equipment is provided by straight-line or declining-balance methods at rates based on the estimated lives of the respective assets. The principal lives range from 12 to 30 years for buildings and from 3 to 10 years for equipment (see Note 3). Depletion of precious metal mineral interests is computed using the unit-of-production method based on estimated ore reserves. Mine exploration costs are charged to expense as incurred. Costs of major mine improvements, including interest, are capitalized and amortized in relation to the production of estimated ore reserves. Whenever circumstances or events indicate, and at least annually, the Company evaluates its mining properties for impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, recoverable reserves, and estimates of future reserve potential which management believes are reasonable, based on historical silver prices and production. If the sum of such cash flows is less than the carrying amount of the asset, the Company records an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. F-9 29 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MINERAL EXPLORATION AND MINE DEVELOPMENT Exploration costs and development costs for projects not yet determined by management to be commercially feasible are charged to expense as incurred. Expenditures for new mine development are capitalized when the properties are determined to have development potential but are not yet producing. Development costs incurred to access reserves on existing producing mines are expensed as incurred. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes, whereby, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize a future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. The effect on deferred taxes of a change in income tax rates is recognized in the period that includes the enactment date. ENVIRONMENTAL EXPENDITURES Environmental expenditures that relate to current operations are either expensed or capitalized depending on the nature of the expenditure. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals will coincide with completion of a feasibility study or the Company's commitment to a formal plan of action. F-10 30 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 2. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS Inventories consist of the following at December 31:
1998 1997 ---------- ---------- (In Thousands) Precious metals inventories: Work in process $ 2,831 $ 2,171 Finished goods 49 264 Materials and supplies inventories 1,356 1,192 ========== ========== $ 4,236 $ 3,627 ========== ==========
The Company held as an investment, $5.2 million and $7.7 million of silver bullion, in excess of normal operating requirements at December 31, 1998 and 1997, respectively. The Company sells covered call options on silver bullion held for investment. Total premiums earned from the sale of covered calls aggregated $316,000, $116,000, and $165,000 in 1998, 1997, and 1996, respectively. At December 31, 1998, no sold covered call options were outstanding. At December 31, 1997, the Company had covered call options outstanding for 1.2 million ounces of silver with strike prices ranging from $5.75 to $7.00 and expiration dates of February 26, 1998 (200,000 ounces), March 27, 1998 (900,000 ounces), and December 27, 1998 (100,000 ounces). The fair value of the sold call options at December 31, 1997, would not exceed the $202,000 of premiums received when they were sold. All of these sold call options either expired unexercised or were exchanged for calls with a later expiration date that also expired unexercised. The Company had no sold covered call options outstanding at December 31, 1996. F-11 31 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 3. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following at December 31:
1998 1997 -------- -------- (In Thousands) Precious metals mineral interests $ 2,394 $ 83,041 Mine improvements 10,641 17,701 Buildings, leasehold improvements, and equipment 43,300 41,390 Land 779 1,060 -------- -------- 57,114 143,192 Less accumulated depreciation, depletion, and amortization 36,700 77,727 ======== ======== $ 20,414 $ 65,465 ======== ========
During the third quarter of 1998, drilling in the West Chance vein of the Sunshine Mine indicated that the size of the vein might be smaller than what was previously expected. Based on that information, the Company believed that production from the West Chance could decline to 4 million ounces in 1999. As a result, combined with low by-product prices and a decline in silver prices, the Company estimated that future cash flows from the mine would not be sufficient to recover the $59.4 million carrying amounts of the mine. The fair value of the mine determined by the discounted cash flow method was approximately $9 million and an impairment charge of $50.4 million was taken at the end of the third quarter of 1998. F-12 32 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 4. ACCRUED EXPENSES Accrued expenses consist of the following at December 31:
1998 1997 ---------- ---------- (In Thousands) Compensation, vacation, and severance $ 1,163 $ 1,404 Interest 1,064 873 Taxes, other than income taxes 280 2 Environmental remediation (Note 10) 700 496 Insurance premiums 346 401 Other 815 405 ---------- ---------- $ 4,368 $ 3,581 ========== ==========
5. LONG-TERM DEBT Long-term debt consists of the following at December 31:
1998 1997 ---------- ---------- (In Thousands) 8% Senior Exchangeable Notes due March 21, 2000 $ 26,082 $ 25,750 10% Senior Convertible Notes due November 24, 2002 15,000 15,000 9% Convertible Subordinated Debentures due July 15, 2008 1,515 1,515 ---------- ---------- $ 42,597 $ 42,265 ========== ==========
In March 1996, SPMI issued $30 million aggregate principal amount of Senior Exchangeable Notes due 2000 (the "Eurobonds"). In 1998, $1.5 million of the Eurobonds were exchanged and canceled for 1.5 million shares of common stock. The Eurobonds bear interest at 8% per annum and mature March 21, 2000. The Eurobonds are exchangeable into a specified number of shares of Common Stock of the Company at an exchange price of $1.00 per share, subject to reset and adjustment in certain events. The Eurobonds may be exchanged at the option of the holder at any time prior to maturity, unless previously redeemed. At any time after March 21, 1997, and prior to maturity, SPMI may force the exchange of the Eurobonds, in whole or in part, subject to certain restrictions. F-13 33 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 5. LONG-TERM DEBT (CONTINUED) SPMI may redeem the Eurobonds at any time at the principal amount if United States withholding taxes are imposed on payments in respect of the Eurobonds. The Eurobonds are guaranteed by Sunshine and the guarantee ranks senior to all of its unsecured and subordinated obligations. If during the period between May 1, 1996 and March 21, 1999, the Company's common stock does not trade at $1.33 or more for 45 consecutive stock exchange trading days, the Company shall, at its option: (i) pay each Eurobond holder a one-time additional payment equal to 22.5% (the "Additional Amount") of the principal amount of the Eurobonds held by such Eurobond holder; or (ii) Issue to such Eurobond holder a number of Shares at the average market price per share for the previous ten stock exchange days equal to the Additional Amount. As the Company's Common Stock has not traded at more than $1.33 for 45 consecutive trading days, the Company intends to issue shares as provided for in (ii) above. Debt issuance costs are being amortized over the life of the Eurobonds. Unamortized debt issuance costs of $0.9 and $1.8 million are included in Investments and other assets at December 31, 1998 and 1997, respectively. In November 1997, the Company completed a private placement of Senior Convertible Promissory Notes totaling $15 million aggregate principal amount due November 24, 2002 (Notes). The Notes are convertible into a specific number of shares of Common Stock of the Company at $.95 per share, subject to adjustment in certain events, and bear interest at 10% per annum. Principal and interest are payable either in cash or common stock of Sunshine at the Company's option. The purchaser of the Notes was issued 1.5 million warrants to purchase common stock of Sunshine at 110% of the conversion price of the Notes. The exercise price of these warrants was reduced to $0.49 in December 1998, at which time all 1.5 million warrants were exercised. F-14 34 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 5. LONG-TERM DEBT (CONTINUED) The 9% Convertible Subordinated Reset Debentures due July 15, 2008 (the Debentures), are convertible at any time prior to maturity or redemption into shares of common stock of the Company (Common Stock) at a conversion price of $1.66 per share, subject to adjustment. The Debentures are currently redeemable, at the option of the Company, in whole or in part, at 100% of the principal amount, together with accrued and unpaid interest. The Debentures are unsecured and subordinated in right of payment to senior indebtedness (as defined). The indenture governing the Debentures contains certain covenants restricting the ability of the Company to declare or pay cash dividends and make certain distributions on its capital stock. Pursuant to these covenants, the Company is prohibited from paying cash dividends on shares of its common stock. Based on recent borrowings and negotiating terms of proposed financing, the Company believes that the aggregate fair value of its debt approximates the carrying value. On January 28, 1999, the Company completed a private placement of $6.0 million initial principal amount of its 5% Convertible Notes due January 28, 2001. The interest will be added to the principal amount of the Notes. The Notes may generally be converted into common stock at a per share price based on the average of the lowest average high and low trading prices for five of the twenty consecutive trading days prior to conversion. The conversion price for one-half of the Notes has been fixed at a maximum of $0.6875. The funds were added to working capital. F-15 35 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES The Company has incurred losses during each of the three years in the period ended December 31, 1998, and accordingly, provisions for income taxes were not required. The computation of the net deferred tax asset (liability) at December 31 is as follows:
1998 1997 ---------- ---------- (In Thousands) Deferred tax liabilities: Property, plant, and equipment $ -- $ (17,260) Deferred tax assets: Property, plant, and equipment 1,414 -- Accrued pension and other postretirement benefits 1,924 1,985 Net operating loss carryforward 96,250 98,000 ---------- ---------- 99,588 82,725 Less valuation allowance (99,588) (82,725) ---------- ---------- $ -- $ -- ========== ==========
At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $275 million. The loss carryforwards expire principally in the years 2000 through 2018. F-16 36 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 7. STOCKHOLDER'S EQUITY (DEFICIT) The Company has authorized 20.0 million shares of preferred stock, of which no shares were issued and outstanding at December 31, 1998 or 1997. Effective May 22, 1996, Common and Preferred stockholders of Sunshine approved the merger (the Merger) of Sunshine with and into its wholly-owned subsidiary, Sunshine Merger Company, pursuant to which Sunshine Merger Company was the surviving entity and was renamed Sunshine Mining and Refining Company, resulting in the retirement of all of Sunshine's outstanding Preferred Stock in exchange for approximately 63 million shares of Common Stock and 7.3 million warrants to purchase one share of Common Stock at $1.38 through May 22, 2001. As a result, the Company recognized a $40 million gain applicable to Common Shares representing the excess of the aggregate redemption value of the Preferred Stock (approximately $130 million including cumulative dividends in arrears of $44.8 million) over the sum of the value of securities issued and related transaction costs. The difference between the carrying amount and the stated value of the Preferred Stock was being accrued ratably over the period the Preferred Stock was expected to be outstanding under the provisions of the mandatory redemption requirements. Accordingly, $0.5 million was charged to the deficit for the year ended December 31, 1996 and added to the carrying amount of the Preferred Stock. As part of the Eurobond issuance, 2.1 million warrants to purchase one share of common stock at $2.875 were issued. These warrants expire on March 20, 2001. The Company has 10.1 million warrants outstanding which were issued in a rights offering to stockholders in July 1994. The exercise price of the warrants is $2.12 per share subject to antidilution adjustments. The warrants expire on March 9, 1999, and may be redeemed at the option of the Company, in whole or in part, at any time on or after March 9, 1996, at a redemption price of $0.50 per warrant. The Company has three stock option plans under which options may be or have been granted to members of management. The stock option plans cover a total of 13.0 million shares with 7.2 million options being available for grant at December 31, 1998. The option price may not be less than the market price of the common stock on the date granted. Payment of the exercise price may be made in cash or by delivery of shares of common stock, having a market value equal to the exercise price. F-17 37 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 7. STOCKHOLDER'S EQUITY (DEFICIT)(CONTINUED) The 1995 Employee Nonqualified Stock Option Plan (the 1995 Plan) provides for the granting of options to key employees or potential key employees and, on December 7 each year, automatic grants of 25,000 options to each non-employee director. The total number of shares available for issuance under the 1995 Plan is 10,000,000. Under the 1995 Plan, vesting of options is determined by the directors when granted. Options under the 1993 Incentive Stock Option Plan vest one year following date of grant. All options expire 10 years following date of grant. The Company has elected to follow APB 25, and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 4.47%, 5.79% and 6.43%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of .572, .438 and .366; and a weighted-average expected life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-18 38 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 7. STOCKHOLDER'S EQUITY (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information) for the year ended December 31:
1998 1997 1996 -------- -------- ------- Pro forma net income (loss) applicable to common shares $(64,929) $(19,412) $10,667 Pro forma basic and diluted earnings (loss) per share $ (0.25) $ (0.08) $ 0.05
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1998 1997 1996 ------------------------ ------------------------ ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE ---------- ---------- ---------- ---------- ---------- ---------- Outstanding, beginning of year 4,854 $ 1.49 4,972 $ 1.52 2,445 $ 1.58 Granted 150 0.63 442 1.13 3,390 1.47 Exercised (50) 0.91 -- -- -- -- Forfeited (115) 1.51 (560) 1.50 (863) 1.51 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding, end of year 4,839 1.46 4,854 $ 1.49 4,972 $ 1.52 ========== ========== ========== ========== ========== ========== Exercisable at end of year 4,839 1.46 4,697 $ 1.50 4,892 $ 1.52 Weighted-average fair value of options granted during the year $ 0.26 $ 0.28 $ 0.28
F-19 39 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 7. STOCKHOLDER'S EQUITY (CONTINUED) Exercise prices for options outstanding as of December 31, 1998, ranged from $0.625 to $2.875. The weighted-average remaining contractual life of those options is approximately seven years. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 -------- --------- --------- (In thousands, except per share amounts) Numerator: Net loss $(64,845) $ (19,308) $ (25,902) Gain on retirement and exchange of preferred stock - - 40,124 Preferred stock dividends - - (2,622) -------- --------- --------- Numerator for basic earnings per share - income (loss) available to common shareholders (64,845) (19,308) 11,600 Denominator: Denominator for basic and diluted earnings per share -weighted-average shares 256,871 255,137 222,584 Basic and diluted earnings (loss) per share $ (0.25) $ (0.08) $ 0.05 -------- --------- ---------
All stock options and warrants were excluded from the calculation of diluted earnings (loss) per share because including them would have been antidilutive. 9. EMPLOYEE BENEFIT PLANS The pension plan for hourly employees covered by a collective bargaining agreement (the Negotiated Plan) is a trusteed defined benefit plan. Benefits under the plan are based on years of service and includes provisions that would apply in the event of the permanent shutdown of the Sunshine Mine for present employees who were also covered by a predecessor plan terminated in 1986. The Company's trusteed defined benefit pension plan for employees not covered by a collective bargaining agreement (the Frozen Plan) was amended to freeze all participant's benefits as of December 31, 1993. F-20 40 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth the funded status of the Company's trusteed defined benefit plans and the related amounts included in accrued pension and other postretirement benefits at December 31:
COMBINED ------------------------ 1998 1997 ---------- ---------- (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 5,398 $ 4,961 Service cost 227 236 Interest cost 380 358 Amendments 86 -- Actuarial (gains) losses 256 72 Benefit payments (243) (229) ---------- ---------- Benefit obligation at end of year 6,104 5,398 Change in plan assets: Fair value of plan assets at beginning of year 4,945 3,710 Actual return on plan assets 744 807 Employer contributions 396 657 Benefit payments (243) (229) ---------- ---------- Fair value of plan assets at end of year 5,842 4,945 ---------- ---------- Funded (underfunded) status (262) (453) Unrecognized prior service cost 614 660 Unrecognized net (gains)/losses (387) (402) Unrecognized transition asset (57) (85) Additional minimum liability (477) (367) ---------- ---------- Prepaid (accrued) benefit cost $ (569) $ (647) ========== ==========
F-21 41 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) Net periodic pension costs relating to the Company's defined benefit plans consist of the following for the year ended December 31:
1998 1997 1996 ---------- ---------- ---------- (In thousands) Service cost $ 227 $ 236 $ 214 Interest cost 380 358 334 Actual return on plan assets (743) (807) (427) Net amortization and deferrals 345 515 274 ---------- ---------- ---------- Net periodic pension cost $ 209 $ 302 $ 395 ========== ========== ==========
The benefit obligation and fair value of plan assets by plan at December 31, 1998 (in thousands):
NEGOTIABLE FROZEN PLAN PLAN ----------- ---------- Benefit obligation $ 4,931 $ 1,173 Fair value of plan assets $ 4,378 $ 1,464
The following weighted average assumptions were used in computing pension costs for the Company's trusteed defined benefit plans for the year ended December 31:
1998 1997 1996 ---- ---- ---- Discount rate 7.00% 7.50% 7.00% Rate increase in compensation 0% 0% 0% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
The Company's funding policy, with respect to trusteed defined benefit plans, is to make contributions annually equal to, or in excess of, the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Assets of the plans consist of pooled fixed income securities, pooled equity securities, and cash or cash equivalents. F-22 42 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The Company also has a defined contribution plan for employees not covered by a collective bargaining agreement. The Company's Board of Directors determines annually if a contribution will be made, and if so, in what amount. Contributions charged to operations during 1998, 1997, and 1996 were $151,000, $176,000, and $183,000, respectively. The Company also sponsors a plan under the provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan) for all employees not covered by a collective bargaining agreement. Company contributions may range from 0% to 100% of employee contributions, up to a maximum 6% of eligible employee compensation, as defined. Employees may elect to contribute up to 10% of their eligible compensation on a pretax basis. Benefits under the 401(k) Plan are limited to the assets of the 401(k) Plan. Company contributions charged to operations during 1998, 1997, and 1996 were $115,000, $90,000, and $84,000, respectively. Postretirement medical and dental benefits are currently provided only to certain employees who retired before 1987. The Company's policy is to fund the cost of these plans as claims are incurred. F-23 43 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth the computation of the accrued liability for postretirement medical, dental, and life insurance benefits at December 31:
COMBINED ------------------- 1998 1997 ------- ------- (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 4,626 $ 4,611 Service cost 7 6 Interest cost 343 325 Participants' contributions 11 -- Amendments (862) -- Actuarial (gains) losses 430 193 Benefit payments (625) (509) ------- ------- Benefit obligation at end of year $ 3,930 $ 4,626 Change in plan assets: Fair value of plan assets at beginning of year -- -- Employer contributions 614 509 Participants' contributions 11 -- Benefit payments (625) (509) ------- ------- Fair value of plan assets at end of year -- -- ------- ------- Funded (underfunded) status (3,930) (4,626) Unrecognized prior service cost (1,259) (429) Unrecognized net (gains)/losses 499 94 ------- ------- Prepaid (accrued) benefit cost $(4,690) $(4,961) ======= ======= Weighted average assumptions for end of year disclosure: Discount rate 7.00% 7.25% Initial trend rate 7.25% 7.75% Ultimate trend rate 5.00% 5.00% Number of years from initial to ultimate trend 3 4
F-24 44 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The health care cost trend rate assumption has a significant effect on the amounts reported. For example, changing the assumed health care cost trend rates by one percentage point each year would have the following effects on the latest actuarial calculations:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 21 $ (18) Effect on postretirement benefit obligation $ 217 $ (192)
Net periodic postretirement benefit cost for these plans includes the following components for the year ended December 31:
1998 1997 1996 -------- -------- -------- (In Thousands) Service cost $ 7 $ 6 $ 7 Interest cost 343 325 340 Net amortization (6) (30) -- -------- -------- -------- Net periodic cost $ 344 $ 301 $ 347 ======== ======== ========
Interest costs on the projected benefit obligations and the actual returns on plan assets of the postretirement benefit plans are included in interest expense and other income, respectively, in the accompanying consolidated statements of operations. 10. COMMITMENTS AND CONTINGENCIES The EPA has identified the Company and SPMI as Potentially Responsible Parties (PRPs) at one site and SPMI as a PRP at another site under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), alleging that the Company and SPMI at one site and SPMI at the other site arranged for the disposal of hazardous substances. One of the sites is located in Kellogg, Idaho, and the other site is located in Spokane, Washington. F-25 45 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) At the first site, the EPA, the State of Idaho and several of the PRPs, including the Company and SPMI, have agreed to a site-wide clean-up plan, separating the site into two distinct areas for remediation: the Bunker Hill Smelter Complex (the Smelter Area) and the residential and certain commercial areas primarily in the cities of Kellogg, Smelterville, and Pinehurst, Idaho, encompassed by the Site (the Residential Areas). Without admitting liability, the Company and several PRPs have agreed to do the remediation work in the Residential Areas pursuant to an EPA and State of Idaho approved work plan. In exchange therefor, EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Smelter Area, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation undertaken by the Company and the PRPs is expected to continue for another three to four years, and the Company has accrued $2.4 million for its (including SPMI's) share (12.4%) of the estimated remaining remediation costs at December 31, 1998. On November 17, 1994, the United States District Court for the District of Idaho entered a Consent Decree containing the terms of this agreement. The liability for remediation costs under the consent decree is joint and several. Thus, if any other settling party or parties does not comply with the consent decree, the exposure for the Company and SPMI could increase proportionately. The parties have reserved their claims and defenses with respect to natural resource damages, except for the State of Idaho which has agreed that its claim has been settled. On July 31, 1991, the Coeur d'Alene Indian Tribe (the Tribe) filed an action in the United States District Court, District of Idaho against the Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory judgment that the Tribe has five years in which to file a natural resource damage claim under CERCLA against the PRPs and others or, alternatively, for damages in an unspecified amount resulting from the loss, destruction or injury to natural resources allegedly caused by the defendants. The Company believes that a settlement by SPMI of all natural resources claims with the State of Idaho in May 1986 bars the Tribe's action. F-26 46 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) On March 22, 1996, a complaint was filed in the United States District Court for the District of Idaho on behalf of the United States Department of the Interior, United States Department of Agriculture, and the Environmental Protection Agency against Sunshine, SPMI, and other identified PRPs for alleged natural resource damages in the Coeur d'Alene Basin. The complaint seeks to recover natural resource damages and response costs under CERCLA and the Clean Water Act, and does not identify the amount of damages sought to be recovered. The Tribe's action was consolidated with this proceeding. The Company believes that the settlement by SPMI of all natural resource claims with the State of Idaho in May 1986 bars these claims, and that the complaints are without merit. On September 30, 1998, the United States District Court for the District of Idaho granted the Company's Motion for Partial Summary Judgment limiting the United State's potential natural resource damage claims in the Coeur d'Alene River Basin of Northern Idaho to the 21 square mile Bunker Hill Superfund Site. The effect of the ruling substantially limits the government's claim for damages from a 1500 square mile site to the 21 square mile Bunker Hill Superfund Site, within which the Company has, pursuant to a Consent Decree with other defendants, been engaged in clean-up operations. The United States has been granted an interlocutory appeal of the order to the Ninth Circuit Court of Appeals. The second site where EPA has identified SPMI as a PRP under CERCLA is the Spokane Junkyard Site near Spokane, Washington. No records of SPMI have been discovered by it or the EPA showing SPMI ever sent any material to the site. SPMI does not believe it will be required to pay any clean-up costs at the Spokane Junkyard Site. The Company does not believe that the designation of SPMI as a PRP at the Spokane Junkyard Site will have a material impact on the Company's results of operations, financial condition or on its liquidity or capital resources. The Company is subject to certain other legal proceedings and claims that arise in the conduct of its business. Although it is not possible to predict the outcome of such matters, in the opinion of management, the ultimate outcomes of these matters will not have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. F-27 47 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 11. FOREIGN OPERATIONS The Company has mining projects in Argentina, primarily the Pirquitas Mine which is in the development stage. The Company began to capitalize development expenditures at the Pirquitas Mine in 1998 after proven and probable reserves were established at the end of 1997. Exploration expense for the Company's Argentina operations totaled $1.6 million, $4.4 million and $5.3 million for years ended December 31, 1998, 1997, and 1996, respectively. At December 31, 1998, amounts capitalized as property, plant, and equipment totaled $10.4 million. Approximately $2.1 million for Value Added Taxes paid in Argentina are included in other assets. These taxes are recoverable from future exports of products produced from Argentina. The recoverability of these amounts is dependent upon the ability of the Company to: (a) raise sufficient funding for development of the Pirquitas property, or (b) sell all or a portion of the Company's interest in the property, or (c) merge with or form a joint venture with a company with greater financial resources to develop the properties. The Company has engaged a professional engineering firm to conduct a bankable feasibility study on the Pirquitas property. The firm is in the process of completing a final optimization of the feasibility study, which will be used by the Company to attempt to raise funds for development of the property. Should the Company be unsuccessful in raising the necessary funds, it believes that Pirquitas could be sold for an amount in excess of the carrying value of the property and the tax receivable 12. SIGNIFICANT CUSTOMER In 1998, 1997, and 1996, one customer accounted for sales of concentrate aggregating approximately $30.7 million, $24.2 million, and $13.8 million, respectively. Management believes that the loss of this purchaser would not have a material impact on the Company's consolidated financial condition or consolidated results of operations. F-28 48 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 13. PRECIOUS METALS RESERVES (UNAUDITED) The table below presents data on proven and probable ore reserves, production and average prices for each of the years in the five-year period ended December 31, 1998 (in thousands, except average prices):
1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- SUNSHINE MINE Reserves at December 31: Ounces of silver 37,383 39,808 36,241 30,810 27,908 Production: Tons of ore 248 183 121 101 107 Ounces of silver 5,806 4,253 2,578 1,731 2,079 PIRQUITAS MINE Reserves at December 31 101,000 72,800 -- -- -- REVENUE - VIRGINIUS MINE Reserves at December 31: Ounces of silver 6,208 6,208 6,208 5,098 5,098 AVERAGE PRICES: Ounce of silver $ 5.47 $ 5.02 $ 5.11 $ 5.20 $ 5.29
The ore reserve estimates presented in the table are estimates of proven and probable reserves by the Company's geologic personnel. No assurance can be given that the indicated quantity of in situ silver will be realized. Reserve estimates are expressions of judgment based largely on data from diamond drill holes and underground openings, such as drifts or raises, which expose the mineralization on one, two or three sides, sampling and similar examinations. Reserve estimates may change as ore bodies are mined and additional data is derived. F-29 49 Sunshine Mining and Refining Company Notes to Consolidated Financial Statements (continued) 14. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 ---------- ---------- ---------- ---------- 1998: Operating revenues $ 9,740 $ 8,553 $ 8,484 $ 8,189 Cost of revenues 6,950 7,455 7,130 6,830 Income (loss) applicable to common shares 71 (6,612) (54,494)(a) (3,810) Basic income (loss) per common share $ (.00) $ (.03) $ (.21) $ (.01) Diluted income (loss) per common and common equivalent share $ (.00) $ (.03) $ (.21) $ (.01) 1997: Operating revenues $ 5,732 $ 4,320 $ 7,626 $ 7,315 Cost of revenues 5,756 5,101 6,663 5,469 Loss applicable to common shares (5,933) (6,980) (3,328) (3,067) Basic loss per common share $ (.02) $ (.03) $ (.01) $ (.01) Diluted loss per common and common equivalent share $ (.02) $ (.03) $ (.01) $ (.01)
(a) Includes an impairment charge of $50,425 F-30 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sunshine Mining and Refining Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED this 12th day of March, 1999. SUNSHINE MINING AND REFINING COMPANY By /s/ WILLIAM W. DAVIS ------------------------------------------ William W. Davis, Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of Sunshine Mining and Refining Company (the "Company") hereby constitutes and appoints John S. Simko, William W. Davis, and Robert H. Peterson, or any of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file any and all documents relating to the Company's Form 10-K for the year ended December 31, 1998, including and all amendments and supplements hereto, with any regulatory authority granting said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. 51 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 4th day of March, 1999.
NAME CAPACITIES - ---- ---------- /s/ JOHN S. SIMKO Director, Chairman of the Board, and - ------------------------------------ Chief Executive Officer John S. Simko /s/ G. CHRIS ANDERSEN Director - ------------------------------------ G. Chris Andersen /s/ DANIEL D. JACKSON Director - ------------------------------------ Daniel D. Jackson /s/ V. DALE BABBITT Director - ------------------------------------ V. Dale Babbitt /s/ WILLIAM W. DAVIS Executive Vice President - ------------------------------------ and Chief Financial Officer William W. Davis /s/ ROBERT B. SMITH, JR. Director - ------------------------------------ Robert B. Smith, Jr. /s/ OREN G. SHAFFER Director - ------------------------------------ Oren G. Shaffer /s/ GEORGE M. ELVIN Director - ------------------------------------ George M. Elvin
52 INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT ------- ------- 3.1 Certificate of Incorporation of Sunshine filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 3.2 Amendment to Certificate of Incorporation of Sunshine filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. *3.3 Bylaws of Sunshine. 4.1 Certificate of Incorporation of Sunshine, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.2 Amendment to Certificate of Incorporation of Sunshine, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated May 22, 1996 (File No. 001-10012), which exhibit is incorporated herein by reference. 4.3 Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.4 Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.5 Form of Supplemental Warrant Agreement, dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.6 Warrant Certificate, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.7 Form of Warrant Certificate filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1 Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. 4.8 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine filed as Exhibit 4.2 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446 as amended, which exhibit is incorporated herein by reference. 4.9 Form of Indenture, dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008 filed as Exhibit 4.25 to Sunshine's Registration Statement on Form S-3, Registration No. 33-21159, which exhibit is incorporated herein by reference. 4.10 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture, dated as of November 10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, between the Company and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of the Convertible Subordinated Debentures filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, which exhibit is incorporated herein by reference. 4.11 Form of Fourth Supplemental Indenture, between the Company and Texas Commerce Bank National Association, as successor to Ameritrust Texas, National Association, formerly known as MTrust Corp., National Association, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4, Registration No. 33-98876, which exhibit is incorporated herein by reference. 4.12 Trust Deed, dated as of March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine Midland Bank and Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference. 4.13 Warrant Agreement, dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC Investment Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to Sunshine's Registration Statement on Form S-3, Registration No. 333-06537, which exhibits are incorporated herein by reference.
53 4.14 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 4.15 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. *4.16 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. 4.17 Specimen form of 5% Convertible Promissory Note, due January 28, 2001, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. *4.18 Bylaws of Sunshine, filed herein as Exhibit 3.3. o10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, which exhibit is incorporated herein by reference. o10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, which exhibit is incorporated herein by reference. o10.4 1993 Incentive Stock Option Plan of Sunshine filed as Exhibit 10.18 to Sunshine's Registration Statement on Form S-1, Registration No. 33-63446, as amended, which exhibit is incorporated herein by reference. o10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine filed as Exhibit 10.5 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by reference. o10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1, Registration No. 33-73608, as amended, which exhibit is incorporated herein by reference. o10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, which exhibit is incorporated herein by reference. 10.9 Mining Lease, dated as of March 15, 1994, between Revenue-Virginius Mines Corporation, a Colorado corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, which exhibit is incorporated herein by reference. 10.10 Agreement, dated as of July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals, Inc., as purchaser, for the purchase of a certain mining property filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 10, 1995, which exhibit is incorporated herein by reference. 10.11 Registration Rights Agreement, dated as of November 24, 1997, between the Company and Stonehill Partners, L.P., GRS Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited filed as Exhibit 10.11 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. *10.13 Amendment, dated December 11, 1998, to Warrants to Purchase Common Stock issued on November 24, 1997 to affiliates of Stonehill Investment Corp., filed herewith as Exhibit 4.16
54 10.14 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997 to affiliates of Stonehill Investment Corp. filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3, Registration No. 333-41641, which exhibit is incorporated herein by reference. 10.15 Registration Rights Agreement, dated as of January 28, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 4.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 10.16 Form of 5% Convertible Note due January 28, 2001 filed as Exhibit 4.2 to Sunshine's Current Report on Form 8-K dated January 28, 1999 (File No. 001-10012), which exhibit is incorporated herein by reference. 10.17 Convertible Note Investment Agreement, dated as of January 27, 1999, between the Company, Westgate International, L.P. and Elliott Associates, L.P. filed as Exhibit 10.1 to Sunshine's Current Report on Form 8-K (File No. 001-10012), which exhibit is incorporated herein by reference. 21.1 Subsidiaries of Sunshine filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, which exhibit is incorporated herein by reference. *23.1 Consent of Ernst & Young LLP. *24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. *27.1 Financial Data Schedules
- ---------- * Filed herewith o Management contract or compensatory plan or arrangement. EX-3.3 2 BYLAWS OF SUNSHINE 1 EXHIBIT 3.3 BYLAWS OF SUNSHINE MINING AND REFINING COMPANY ARTICLE I OFFICES Section 1.1 Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, and the name of its registered agent shall be The Corporation Trust Company. Section 1.2 Other offices. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1 Place of Meeting. All meetings of stockholders for the election of directors shall be held at such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2.2 Annual Meeting. The annual meeting of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2.3 Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section 2.3 or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. Section 2.4 Special Meeting. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board, the President or by the Board of Directors or by written order of a majority of the directors. The President or directors so calling any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. Section 2.5 Notice of Meeting. Written notice of each meeting of stockholders, stating the place, date and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder BYLAWS - 1 2 entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the meeting. Section 2.6 Quorum. The holders of a majority of the shares of capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. Notwithstanding the other provisions of these bylaws, the holders of a majority of the shares of capital stock entitled to vote thereat, present in person or represented by proxy, whether or not a quorum is present, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the original meeting. Section 2.7 Voting. When a quorum is present at any meeting of the stockholders, the vote of the holders of a majority of the shares of capital stock entitled to vote thereon, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes, of the Certificate of Incorporation or of these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder, bearing a date not more than three years prior to voting, unless such instrument provides for a longer period, and filed with the Secretary of the corporation before, or at the time of, the meeting. If such instrument shall designate two or more persons to act as proxies, unless such instrument shall provide to the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one, or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of the shares proportionately. Section 2.8 Consent of Stockholders. Any action required by statute to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be required by statute, the Certificate of Incorporation or these bylaws to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 2.9 Voting of Stock of Certain Holders. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or in the absence of such provision, as the Board of Directors or a duly authorized managing director of such corporation may determine. Shares standing in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no such fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares standing BYLAWS - 2 3 in the name of a receiver may be voted by such receiver. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent the stock and vote thereon. Section 2.10 Treasury Stock. The corporation shall not vote, directly or indirectly, shares of its own stock owned by it; and such shares shall not be counted in determining the total number of issued and outstanding shares for the purposes of determining the presence of a quorum at any meeting of stockholders. Section 2.11 Fixing Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting no more than sixty (60) days prior to any other action, for the determination of the stockholders entitled to notice of, and to vote at, any such meeting or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. If the Board of Directors fix, in advance, a record date as herein provided, then, in such case, such stockholders, and only such stockholders, as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, any such meeting or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date is fixed as aforesaid. ARTICLE III BOARD OF DIRECTORS Section 3.1 Powers. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these bylaws directed or required to be exercised or done by the stockholders. Section 3.2 Number, Selection and Term. The number of directors which shall constitute the whole Board shall from time to time be fixed and determined by resolution adopted by the Board of Directors. The number to be elected at any meeting of stockholders shall be set forth in the notice of any meeting of stockholders held for such purpose. The directors shall be elected at the annual meeting of stockholders, except as provided in Section 3.3, and each director elected shall hold office until his successor shall be elected and shall qualify, or until his earlier death, resignation, retirement, disqualification or removal. Directors need not be residents of Delaware or stockholders of the corporation. Section 3.3 Vacancies, Additional Directors and Removal From Office. If any vacancy occurs in the Board of Directors caused by the death, resignation, retirement, disqualification or removal from office of any director, or otherwise, or if any new directorship is created by an increase in the authorized number of directors, a majority of the BYLAWS - 3 4 directors then in office, though less than a quorum, or a sole remaining director, may choose a successor to fill such vacancy or the newly created directorship, and a director so chosen shall hold office for a term that shall coincide with the term of the class, if any, to which such director shall have been elected and until his successor is duly elected and qualified, or until his earlier resignation or removal. Any director may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors at any special meeting of stockholders duly called and held for such purpose. Section 3.4 Resignation. Any director may resign at any time by written notice to the corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any director who does not, for any reason whatsoever, stand for election at any meeting of stockholders called for such purpose shall be conclusively deemed to have resigned, effective as of the date of such meeting, for the purposes of these bylaws, and the corporation need not receive any written notice to evidence such resignation. Section 3.5 Regular Meeting. A regular meeting of the Board of Directors shall be held each year, without other notice then this bylaw, at the place of, and immediately following, the annual meeting of stockholders, and other regular meetings of the Board of Directors shall be held each year, at such time and place as the Board of Directors may provide, by resolution, either within or without the State of Delaware, without other notice than such resolution. Section 3.6 Special Meeting. A special meeting of the Board of Directors may be called by the Chairman of the Board or by the President. The Chairman or President so calling any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. Section 3.7 Notice of Special Meeting. Written notice of special meetings of the Board of Directors shall be given to each director at least forty-eight (48) hours prior to the time of such meeting. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting solely for the purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting, except that notice shall be given with respect to any matter to be acted upon at such special meeting where notice is required by statute. Section 3.8 Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these bylaws. If a quorum shall not be present at any meeting of the Board of Directors, a majority of the directors present thereat, though less than a quorum, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.9 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof as provided in Article IV of these bylaws, may be taken without a meeting, if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. BYLAWS - 4 5 Section 3.10 Compensation. Directors, as such, shall not be entitled to any stated salary for their services unless voted by the stockholders or the Board of Directors; but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors or any meeting of a committee of directors. No provision of these bylaws shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV COMMITTEE OF DIRECTORS Section 4.1 Designation, Powers and Name. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, including, if they shall so determine, an Executive Committee, each such committee to consist of two or more of the directors of the corporation. The committee shall have and may exercise such of the powers of the Board of Directors in the management of the business and affairs of the corporation as may be provided in such resolution, provided, however, that no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, provided further, that, unless the resolution establishing the committee expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. The committee may authorize the seal of the corporation to be affixed to all papers which may require it. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting. Section 4.2 Minutes. Each committee of directors shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Section 4.3 Compensation. Members of special or standing committees may be allowed compensation for attending committee meetings, if the Board of Directors shall so determine. ARTICLE V NOTICE Section 5.1 Methods of Giving Notice. Whenever under the provisions of any statute, the Certificate of Incorporation or these bylaws notice is required to be given to any director, member of any committee or stockholder, such notice shall be in writing and delivered personally or mailed to such director, member or stockholder; provided, however, that in the case of a director or a member of any committee, such notice, unless required by statute, the Certificate of Incorporation or these bylaws to be in writing, may be given orally or by telephone or telegram. If mailed, notice to a director, member of a committee or stockholder shall be deemed to be given when deposited in the United States mail first class in a sealed envelope, with postage thereon prepaid, addressed, in the case of a stockholder, BYLAWS - 5 6 to the stockholder at the stockholder's address as it appears on the records of the corporation or, in the case of a director or a member of a committee, to such person at his business address. If sent by telegraph, notice to a director or member of a committee shall be deemed to be given when the telegram, so addressed, is delivered to the telegraph company. Section 5.2 Written Waiver. Whenever any notice is required to be given under the provisions of any statute, the Certificate of Incorporation or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI OFFICERS Section 6.1 Officers. The officers of the corporation shall be a Chairman of the Board (who may be designated the Chief Executive Officer or the Chief Operating Officer) and a Vice Chairman of the Board (if such office be created by resolution adopted by the Board), a President (who may also be designated the Chief Executive Officer or the Chief Operating Officer), one or more Vice Presidents (any one or more of whom may be designated Executive Vice President or the Senior Vice President and any one of whom may also be designated as the Chief Operating Officer or the Chief Financial Officer), a Secretary and a Treasurer. The Board of Directors may by resolution create the office of Vice Chairman of the Board and define the duties of such office. The Board of Directors may appoint such other officers and agents, including Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined by the Board. Any two or more offices, other than the offices of President and Secretary, may be held by the same person. No officer shall execute, acknowledge, verify or countersign any instrument on behalf of the corporation in more than one capacity, if such instrument is required by law, by these bylaws or by any act of the corporation to be executed, acknowledged, verified or countersigned by two or more officers. The Chairman and Vice Chairman of the Board and the President shall be elected from among the directors. With the foregoing exceptions, none of the other officers need be a director, and none of the officers need be a stockholder of the corporation. Section 6.2 Election and Term of Office. The officers of the corporation shall be elected annually by the Board of Directors at its first regular meeting held after the annual meeting of stockholders or as soon thereafter as conveniently practicable. Each officer shall hold office until his successor shall have been elected or appointed and shall have qualified or until his death or the effective date of his resignation or removal, or until he shall cease to be a director in the case of the Chairman and Vice Chairman of the Board or the President. Section 6.3 Removal and Resignation. Any officer or agent elected or appointed by the Board of Directors may be removed without cause by the affirmative vote of a majority of the Board of Directors whenever, in its judgment, the best interests of the corporation shall be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6.4 Vacancies. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. BYLAWS - 6 7 Section 6.5 Salaries. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors or pursuant to its direction; and no officer shall be prevented from receiving such salary by reason of his also being a director. Section 6.6 Chairman of the Board. The Chairman of the Board (who may also hold the office of President or other offices) shall preside at all meetings of the Board of Directors or of the stockholders of the corporation. In the Chairman's absence, such duties shall be attended to by the Vice Chairman of the Board or the President. The Chairman shall formulate and submit to the Board of Directors or the Executive Committee matters of general policy for the corporation and shall perform such other duties as usually appertain to the office and such other duties as may be prescribed by the stockholders, the Board of Directors or the Executive Committee from time to time. If the Chairman be so designated, he shall also serve as the Chief Executive Officer of the corporation and shall perform such other duties exercise such other powers as usually appertain to such title, including, without limitation, the power to appoint and remove subordinate officers, agents and employees, including Assistant Secretaries and Assistant Treasurers, except that the Chairman may not remove those elected or appointed by the Board of Directors. The Chairman of the Board may sign, with the Secretary or any other officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation and any deed, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. Section 6.7 President. In the absence of the Chairman of the Board or the Vice Chairman of the Board (if such office be created by the Board), or in the event of their inability or refusal to act, the President shall preside at all meetings of the Board of Directors and of the stockholders. The President may also preside at any such meeting attended by the Chairman or Vice Chairman of the Board if so designated by the Chairman, or in the Chairman's absence, by the Vice Chairman. If the President be designated as the Chief Executive Officer of the corporation, the President shall perform such duties and exercise such powers as usually appertain to such title and such other duties as may be prescribed by the stockholders, the Board of Directors or the Executive Committee from time to time. The President, if designated as the Chief Executive Officer of the corporation, shall have the power to appoint and remove subordinate officers, agents and employees, including Assistant Secretaries and Assistant Treasurers, except that the President may not remove those elected or appointed by the Board of Directors. The President shall keep the Board of Directors and the Executive Committee fully informed and shall consult them concerning the business of the corporation. The President may sign, with the Secretary or any other officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. The President shall vote, or give a proxy to any other officer of the corporation to vote, all shares of stock of any other corporation standing in the name of the corporation. In general, the President shall perform all other duties normally incident to or as usually appertain to the office of the President and such other duties as may be prescribed by the stockholders, the Board of Directors of the Executive Committee from time to time. Section 6.8 Vice Presidents. In the absence of the President, or in the event of his inability or refusal to act, the Executive Vice President (or in the event there shall be no Vice President designated Executive Vice President, any Vice President designated by the Board) BYLAWS - 7 8 shall perform the duties and exercise the powers of the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. The Vice Presidents shall perform such other duties as from time to time may be assigned to them by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. Section 6.9 Secretary. The Secretary shall (a) record the proceedings of the meetings of the stockholders, the Board of Directors and committees of directors in the permanent minute books of the corporation kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the corporation, and see that the seal of the corporation or a facsimile thereof is affixed to all certificates for shares of the corporation prior to the issue thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) keep or cause to be kept a register of the post office address of each stockholder which shall be furnished by such stockholder; (e) sign with the Chairman of the Board, the President, or an Executive Vice President or Vice President, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed; (f) have general charge of the stock transfer books of the corporation; and (g) in general, perform all duties normally incident to the office of Secretary and such other duties as from time to time may be assigned by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. Section 6.10 Treasurer. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. The Treasurer shall (a) have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for moneys due and payable to the corporation from any source whatsoever and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Section 7.3 of these bylaws; (b) prepare, or cause to be prepared, for submission at each regular meeting of the Board of Directors, at each annual meeting of the stockholders, and at such other times as may be required by the Board of Directors, the Chairman of the Board, the President or the Executive Committee, a statement of financial condition of the corporation in such detail as may be required; (c) sign with the Chairman of the Board, the President, or an Executive Vice President or Vice President, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed, and (d) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. BYLAWS - 8 9 Section 6.11 Assistant Secretary or Treasurer. The Assistant Secretaries and Assistant Treasurers shall, in general, perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. The Assistant Secretaries and Assistant Treasurers shall, in the absence of the Secretary or Treasurer, respectively, or in their respective inability or refusal to act, perform all functions and duties which such absent officers may delegate, but such delegation shall not relieve the absent officer from the responsibilities and liabilities of their office. The Assistant Secretaries may sign, with the Chairman of the Board, the President or Executive Vice President, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by a resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. The Assistant Treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. Section 6.12 General Counsel. The General Counsel shall be the chief legal officer of the corporation; shall advise the Board of Directors and officers on all legal matters, and shall perform such other additional duties as may be assigned to him by the Board of Directors, Chairman or Chief Executive Officer. ARTICLE VII CONTRACTS, CHECKS AND DEPOSITS Section 7.1 Contracts. Subject to the provisions of Section 6.1, the Board of Directors may authorize any officer, officers, agent or agents, to enter into any contract or execute and deliver any instrument for and in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 7.2 Checks, etc. All checks, demands, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers or such agent or agents of the corporation, and in such manner, as shall be determined by the Board of Directors. Section 7.3 Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select. ARTICLE VIII CERTIFICATES OF STOCK Section 8.1 Insurance. Each stockholder of this corporation shall be entitled to a certificate or certificates showing the number of shares of stock registered in such stockholder's name on the books of the corporation. The certificates shall be in such form as may be determined by the Board of Directors, shall be issued in numerical order and shall be entered in the books of the corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary. Any or all the signatures on the certificate may be a facsimile. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock BYLAWS - 9 10 or series thereof and the qualifications, limitations or restrictions of such preferences and rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in the case of a lost, stolen, destroyed or mutilated certificate a new one may be issued therefor upon such terms and with such indemnity, if any, to the corporation as the Board of Directors may prescribe. Certificates shall not be issued representing fractional shares of stock. Section 8.2 Lost Certificates. The corporation may issue a new certificate or certificates in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The corporation may in its discretion and a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a bond sufficient to indemnify it against any claim that may be made against the corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed or the issuance of such new certificate. Section 8.3 Transfers. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the corporation by the registered holder thereof, or by such holder's attorney thereunto authorized by power of attorney and filed with the Secretary of the corporation or the transfer agent. Section 8.4 Registered Stockholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE IX DIVIDENDS Section 9.1 Declaration. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Certificate of Incorporation. Section 9.2 Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies or for equalizing dividends, or for repairing or maintaining any BYLAWS - 10 11 property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INDEMNIFICATION Section 10.1 Third Party Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. Section 10.2 Derivative Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in the corporation's favor by reason of the fact that such person is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to amounts paid in settlement, the settlement of the suit or action was in the best interests of the corporation, provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or willful misconduct in the performance of such person's duty to the corporation unless and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. The termination of any action or suit by judgment or settlement shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation. Section 10.3 Successful Defense. To the extent that a director, trustee, officer, employee or agent of the corporation has been successful on the merits or otherwise, in whole or in part, in defense of any action, suit or proceeding referred to in Sections (1) and (2) of this Article X, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. BYLAWS - 12 12 Section 10.4. Authorization. Any indemnification under Sections (1) and (2) of this Article X (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth above in Sections (1) and (2) of this Article X. Such determination shall be made (a) by the Board of Directors of the corporation by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, by a majority vote of directors who were not parties to such action, suit or proceeding, or (c) by independent legal counsel (selected by one or more of the directors, whether or not a quorum and whether or not disinterested) in a written opinion, or (d) by the shareholders. Anyone making such a determination under this Section (4) may determine that a person has met the standard therein set forth as to some claims, issues or matters but not as to others, and may reasonably prorate amounts to be paid as indemnification. Section 10.5 Advances. Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation, at any time or from time to time in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Section 10.4 of this Article X upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article X. Section 10.6 Non-Exclusivity. The indemnification provided by this Article X shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 10.7 Insurance. The corporation shall have the powers to purchase and maintain insurance on behalf of any person who is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability. Section 10.8 "Corporation" Defined. For purposes of this Article X, references to the "corporation" shall include, in addition to the corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, trustees, officers, employees or agents, so that any person who is or was a director, trustee, officer, employee or agent of such constituent corporation or of any entity a majority of the voting stock of which is owned by such constituent corporation, or is or was serving at the request of such constituent corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article X with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. BYLAWS - 12 13 ARTICLE XI MISCELLANEOUS Section 11.1 Seal. The corporate seal shall have inscribed thereon the name of the corporation, and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. Section 11.2 Books. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at the offices of the corporation at Dallas, Texas, or at such other place or places as may be designated from time to time by the Board of Directors. ARTICLE XII AMENDMENT These, bylaws may be altered, amended or repealed at any regular or special meeting of the Board of Directors, without prior notice, by resolution adopted thereat. BYLAWS - 13 EX-4.16 3 AMENDMENT TO WARRANTS TO PURCHASE COMMON STOCK 1 EXHIBIT 4.16 December 11, 1998 Stonehill Partners, L.P. Stonehill Offshore Partners Limited Stonehill International Partners, L.P. c/o Stonehill Investment Corp. 110 E. 59th Street, 30th Floor New York, New York 10022 Re: Warrants to Purchase Shares of Common Stock of Sunshine Mining and Refining Company Gentlemen: Reference is made to (i) that certain warrant dated November 24, 1997, to purchase 795,000 shares of common stock, par value $0.01 per share (?Common Stock?), of Sunshine Mining and Refining Company (the ?Company?), issued to Neuberger & Berman, LLC (?N&B?), as nominee, (ii) that certain warrant dated November 24, 1997, to purchase 480,000 shares of the Company?s Common Stock, issued to N&B, as nominee; (iii) that certain warrant dated November 24, 1997, to purchase 135,000 shares of the Company?s Common Stock, issued to N&B, as nominee; and (iv) that certain warrant dated November 24, 1997, to purchase 90,000 shares of the Company?s Common Stock, issued to N&B, as nominee (collectively, the ?Warrants?). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Warrants. Stonehill Partners, L.P., Stonehill Offshore Partners Limited and Stonehill Institutional Partners, L.P. (collectively, the ?Stonehill Parties?) collectively hold the Warrants. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is understood and agreed as follows: 1. The Warrants are exercisable at any time or from time to time on or after the date of this letter but not later than 5:00 p.m. (New York City time) on January 31, 1999 (the ?Termination Date?). 2. The Stock Purchase Price shall be equal to $0.49, and will not be subject to adjustment based on any adjustment to the Conversion Price of the Notes. 3. The Stonehill Parties agree to exercise the Warrants in full and pay to the Company in immediately available funds the aggregate Stock Purchase Price in full prior to 5:00 p.m. (New York City time) on the Termination Date. 4. At 5:01 p.m. (New York City time) on the Termination Date, the Warrants will terminate and have no further force and effect, except for the right to receive the Common Stock issuable upon exercise of the Warrants; provided that such exercise occurred prior to 5:00 p.m. (New York City time) on the Termination Date. 5. Except as modified by this letter, all other terms of the Warrants shall remain in full force and effect. 2 Stonehill Partners, L.P. Stonehill Offshore Partners Limited Stonehill International Partners, L.P December 11, 1998 Page 2 6. This letter shall be construed and enforced in accordance with, and the rights of the parties hereto shall be governed by, the laws of the State of New York, without giving effect to rules governing conflicts of laws. Please execute this letter in the spaces provided below to acknowledge your agreement to and acceptance of the terms of this letter. Very truly yours, SUNSHINE MINING AND REFINING COMPANY By: --------------------------------- Name: ---------------------------- Title: --------------------------- ACKNOWLEDGED AND ACCEPTED: STONEHILL PARTNERS, L.P. By: ---------------------------- John Motulsky General Partner STONEHILL OFFSHORE PARTNERS LIMITED By: STONEHILL ADVISORS, LLC, Its General Partner By: --------------------------- John Motulsky Managing Member STONEHILL INSTITUTIONAL PARTNERS, L.P. By: ---------------------------- John Motulsky General Partner EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-16342 and 33-18435; Form S-3 Nos. 333-06537, 33-98876 and 333-41641 of Sunshine Mining and Refining Company and in the related Prospectuses of our report dated February 26, 1999, with respect to the consolidated financial statements of Sunshine Mining and Refining Company included in the Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP Dallas, Texas March 11, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DEC. 31, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DEC. 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,412 0 2,801 0 4,236 15,497 57,114 36,700 39,897 5,781 42,597 0 0 2,640 (20,106) 39,897 34,668 32,080 28,365 83,734 4,512 0 6,979 (64,845) 0 (64,845) 0 0 0 (64,845) (.25) (.25)
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